[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]





                   THE NEED FOR PRO-GROWTH TAX REFORM

=======================================================================

                                HEARING

                               before the

                        COMMITTEE ON THE BUDGET
                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED TWELFTH CONGRESS

                             FIRST SESSION

                               __________

           HEARING HELD IN WASHINGTON, DC, SEPTEMBER 14, 2011

                               __________

                           Serial No. 112-14

                               __________

           Printed for the use of the Committee on the Budget








                       Available on the Internet:
                       www.gpo.gov/fdsys/browse/
            committee.action?chamber=house&committee=budget

                                _____

                  U.S. GOVERNMENT PRINTING OFFICE
 68-156 PDF               WASHINGTON : 2012
-----------------------------------------------------------------------
For sale by the Superintendent of Documents, U.S. Government Printing 
Office Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; DC 
area (202) 512-1800 Fax: (202) 512-2104  Mail: Stop IDCC, Washington, DC 
20402-0001













                        COMMITTEE ON THE BUDGET

                     PAUL RYAN, Wisconsin, Chairman
SCOTT GARRETT, New Jersey            CHRIS VAN HOLLEN, Maryland,
MICHAEL K. SIMPSON, Idaho              Ranking Minority Member
JOHN CAMPBELL, California            ALLYSON Y. SCHWARTZ, Pennsylvania
KEN CALVERT, California              MARCY KAPTUR, Ohio
W. TODD AKIN, Missouri               LLOYD DOGGETT, Texas
TOM COLE, Oklahoma                   EARL BLUMENAUER, Oregon
TOM PRICE, Georgia                   BETTY McCOLLUM, Minnesota
TOM McCLINTOCK, California           JOHN A. YARMUTH, Kentucky
JASON CHAFFETZ, Utah                 BILL PASCRELL, Jr., New Jersey
MARLIN A. STUTZMAN, Indiana          MICHAEL M. HONDA, California
JAMES LANKFORD, Oklahoma             TIM RYAN, Ohio
DIANE BLACK, Tennessee               DEBBIE WASSERMAN SCHULTZ, Florida
REID J. RIBBLE, Wisconsin            GWEN MOORE, Wisconsin
BILL FLORES, Texas                   KATHY CASTOR, Florida
MICK MULVANEY, South Carolina        HEATH SHULER, North Carolina
TIM HUELSKAMP, Kansas                PAUL TONKO, New York
TODD C. YOUNG, Indiana               KAREN BASS, California
JUSTIN AMASH, Michigan
TODD ROKITA, Indiana
FRANK C. GUINTA, New Hampshire
ROB WOODALL, Georgia

                           Professional Staff

                     Austin Smythe, Staff Director
                Thomas S. Kahn, Minority Staff Director











                            C O N T E N T S

                                                                   Page
Hearing held in Washington, DC, September 14, 2011...............     1

    Hon. Paul Ryan, Chairman, Committee on the Budget............     1
        Prepared statement of....................................     2
    Hon. Chris Van Hollen, ranking minority member, Committee on 
      the Budget.................................................     3
    Michael G. Wall, vice president of corporate tax, Case New 
      Holland Inc................................................     5
        Prepared statement of....................................     6
        Additional information supplied to Ms. Kaptur for the 
          record.................................................    72
    Scott A. Hodge, president, Tax Foundation....................    12
        Prepared statement of....................................    14
    Diane Lim Rogers, chief economist, the Concord Coalition.....    23
        Prepared statement of....................................    25
        Response to question submitted for the record............    74
    Hon. Mick Mulvaney, a Representative in Congress from the 
      State of South Carolina, question submitted for the record.    74

 
                   THE NEED FOR PRO-GROWTH TAX REFORM

                              ----------                              


                     WEDNESDAY, SEPTEMBER 14, 2011

                          House of Representatives,
                                   Committee on the Budget,
                                                    Washington, DC.
    The Committee met, pursuant to call, at 10:00 a.m., in room 
210, Cannon House Office Building, Hon. Paul Ryan, [Chairman of 
the Committee] presiding.
    Present: Representatives Ryan, Garrett, Campbell, Calvert, 
Price, McClintock, Stutzman Lankford, Black, Ribble, Mulvaney, 
Huelskamp, Young, Amash, Woodall, Van Hollen, Schwartz, Kaptur, 
Doggett, Blumenauer, McCollum, Yarmuth, Pascrell, Honda, Ryan 
of Ohio, Wasserman Schultz, Moore, and Castor.
    Chairman Ryan. The hearing will come to order. Welcome all 
to an important hearing. Thank you. I will start with a brief 
opening statement and then turn it over to my friend, Mr. Van 
Hollen. And then we will listen to our witnesses.
    The purpose of today's hearing, in conjunction with the 
conversation we had with Mr. Van Hollen, is to highlight the 
need for pro-growth tax reform. Our economy is currently 
suffering from the reluctance of job creators to invest, 
expand, and hire workers in the United States. For several 
years, Washington has filed a now discredited playbook. If 
businesses will not invest, then the government should expand 
its reach. But letting the government pick winners and losers 
and the market only adds to the debt, wastes taxpayer dollars, 
promotes crony capitalism and ultimately fails at sustainable 
job creation.
    For evidence, look no further than Solyndra, a solar panel 
company that received $500 million in stimulus-funded loan 
guarantees. Last month, Solyndra filed for bankruptcy and laid 
off its employees. Another idea we have been trying for the 
last three years under first President Bush and then President 
Obama is short-term tax rebates on the theory that these 
temporary windfalls will encourage people to go out and spend 
more money.
    Look, I do not object to letting people keep more of their 
own money. I clearly think that is a great idea. But one-time 
rebates and short-term tax policies do not give businesses the 
confidence that they need to make the kinds of long-term 
investments to create jobs. That is why, of all the proposals 
the president has put forward in his latest speech, the most 
encouraging was his support for making the corporate tax code 
fairer, simpler, and more competitive. This is a sign of 
encouragement. We should extend these reforms to the entire 
U.S. tax code. A world-class tax system should be fair, simple, 
and competitive. And right now, the U.S. tax code fails 
miserably on all three counts. The World Economic Forum 
recently downgraded the United States from fourth to fifth in 
its annual competitiveness rankings. The reason? Under the 
section titled, Most Problematic Factors for Doing Business, 
our unfair, complex, and uncompetitive tax code was right there 
at the very top. We need to close loopholes that distort 
economic activity and those loopholes that also reward 
politically well-connected at the expense of the hard-working 
small businessmen and women of America. We need to simplify the 
tax code by reducing the number of brackets so that people 
spend less time and money figuring out how to comply with the 
tax code. And we need to lower rates to encourage economic 
activity, to allow our businesses to compete on a level playing 
field against those in countries where the corporate rates are 
much lower. Unfortunately that list includes every developed 
country except for Japan.
    There is a growing bipartisan consensus for this kind of 
common sense tax reform. The president's bipartisan fiscal 
commission made very clear that a revamped tax code with a 
broader base and lower rates was critical to economic growth. 
That is one reason why House Republicans included in our budget 
these reforms in the path to prosperity: lower rates in a 
broader base to help get our economy growing again. Unlike the 
high-cost government spending proposals now circulating in 
Washington, fundamental tax reform could be done with no 
budgetary cost and it would provide many immediate and long-
lasting economic benefits.
    In today's hearing on the need for such a reform, we will 
hear from three terrific witnesses. In addition to experts 
Scott Hodge of the Tax Foundation and Diane Lim Rogers of The 
Concord Coalition, we have a witness today from the world of 
business, Michael Wall of Case New Holland, which is 
headquartered in Racine, Wisconsin. Mr. Wall can speak first-
hand about the effects of tax policy on business decisions and 
job creation in the United States. I am looking forward to 
hearing from all of you on a topic that is critical to laying 
the foundation for sustained economic growth and job creation. 
With that, I yield to the ranking member, Mr. Van Hollen.
    [The prepared statement of Chairman Paul Ryan follows:]

Prepared Statement of Hon. Paul Ryan, Chairman, Committee on the Budget

    Welcome all, to this important hearing.
    The purpose of today's hearing is to highlight the need for pro-
growth tax reform.
    Our economy is currently suffering from the reluctance of job 
creators to invest, expand, and hire workers in the United States.
    For several years, Washington has followed a now-discredited 
playbook: If businesses won't invest, then the government should expand 
its reach.
    But letting the government pick winners and losers in the market 
only adds to the debt, wastes taxpayer dollars, promotes crony 
capitalism, and ultimately fails at sustainable job creation.
    For evidence, look no further than Solyndra, a solar-panel company 
that received $500 million in stimulus-funded loan guarantees. Last 
month, Solyndra filed for bankruptcy and laid off its employees.
    Another idea we've been trying for the last three years, under 
Presidents Bush and Obama, is short-term tax rebates, on the theory 
that these temporary windfalls will encourage people to go out and 
spend more money.
    I don't object to letting people keep more of the money they've 
earned. But one-time rebates and short-term tax policies do not give 
businesses the confidence they need to make the kinds of long-term 
investments that create jobs.
    That is why, of all the proposals the President put forward in his 
latest speech, the most encouraging was his support for making the 
corporate tax code fairer, simpler, and more competitive.
    We should extend these reforms to the entire U.S. tax code. A 
world-class tax system should be fair, simple, and competitive--and 
right now, the U.S. tax code fails miserably on all three counts.
    The World Economic Forum recently downgraded the United States from 
fourth to fifth in its annual competitiveness rankings. The reason? 
Under the section titled, ``Most problematic factors for doing 
business,'' our unfair, complex, and uncompetitive tax code was right 
at the very top.
    We need to close loopholes that distort economic activity--and that 
reward the politically well-connected at the expense of the hard-
working small businessman.
    We need to simplify the code by reducing the number of brackets, so 
that people spend less time and money figuring out how to comply with 
the code.
    And we need to lower tax rates, to encourage economic activity--and 
to allow our businesses to compete on a level playing field against 
those in countries where corporate tax rates are much lower. 
Unfortunately, that list includes every developed country except for 
Japan.
    There is a growing bipartisan consensus for this kind of common-
sense tax reform. The President's bipartisan Fiscal Commission made 
clear that a revamped tax code with a broader base and lower rates was 
critical to economic growth.
    That's one reason House Republicans included similar reforms in our 
budget, The Path to Prosperity--lower rates and a broader base to help 
get our economy growing again.
    Unlike the high-cost government spending proposals now circulating 
in Washington, fundamental tax reform could be done with no budgetary 
cost, but would provide many immediate and long-lasting economic 
benefits.
    At today's hearing on the need for such reform, we will hear from 
three terrific witnesses.
    In addition to tax experts Scott Hodge of the Tax Foundation and 
Diane Lim Rogers of the Concord Coalition, we have a witness today from 
the world of business, Michael Wall of Case New Holland, headquartered 
in Southern Wisconsin.
    Mr. Wall can speak first-hand about the effects of tax policy on 
business decisions and job creation in the United States.
    I am looking forward to hearing from all of you on a topic that is 
critical to laying the foundation for sustained economic growth and job 
creation.
    With that, I yield to the Ranking Member, Mr. Van Hollen.

    Mr. Van Hollen. Thank you, Mr. Chairman. And thank you for 
bringing us together in this hearing. I want to thank all of 
our witnesses. You know, there are a lot of committees in 
Congress that just look at one subject matter area or several 
subject matter areas. You have got The Transportation 
Committee, you have got The Education Committee. The advantage 
of The Budget Committee is it allows us an overview of the 
budget. And we had a number of hearings in this committee, very 
important hearings that looked at some of the impact on the 
budget of the rising costs of some of the programs, health care 
programs in the country, Medicare, Medicaid, others due to 
changing demographics and other factors including the high cost 
of health care. And we have looked at a number of other parts 
of the budget.
    I think also as we look at the deficit situation that we 
are confronting, especially as it grows in the out-years, we 
have to look at the role of revenue and figure out what is the 
best way to raise and generate that kind of revenue as we 
approach a budget that deals with both the spending side as 
well as the revenue side of the picture. And I am glad the 
chairman mentioned the Simpson-Bowles Commission because I 
think they did put a lot of ideas on the table for how we can 
simplify our tax code. I would point out that at the same time 
they used a considerable part of the savings they generated 
through their tax reform to reduce the deficit which is 
obviously a very important component of our overall economic 
strategy.
    Now, we had the first hearing of the so-called Joint 
Committee yesterday, and Dr. Elmendorf, the head of CBO, 
testified and he made two really important points. One was he 
reinforced the point of earlier hearings in this committee 
about the rising out-year costs that we face. He also made the 
point that if this Congress were to adjourn right now for 10 
years and just let current law kick in, you would actually 
reduce the deficit by over $4.5 trillion simply by allowing the 
old Clinton tax rates to go into effect and a couple of other 
changes. And, you know, people talk about going big, let's do 
something big, I just want emphasize the point if Congress 
packed its back and went into hibernation for 10 years, you 
would exceed the target of those bipartisan commissions.
    Now, I am not advocating that we do that, and I do not 
think anybody is. And Simpson-Bowles and Rivlin-Domenici did 
not. But I am advocating the fact that we need more revenue if 
we are going to avoid very deep cuts to things like Medicare. I 
mean, we have seen proposals that make dramatic impacts on 
Medicare beneficiaries. And I think that those are frankly 
asking Medicare beneficiaries to pay too big of a burden for 
things that they have already invested in. So the trick is to 
devise a tax system through tax reform that both encourages 
growth but also deals with the revenue piece and is done in a 
fair way and a balanced way. There is no doubt that the tax 
system is chockfull of special interest provisions, many on the 
corporate side. A lot of us do not think, for example, that 
some of the big oil companies should be getting big taxpayer 
subsidies at a time they are doing just fine and why do they 
need that extra handout from the taxpayer. You have a lot of 
other provisions in the tax code that are absolutely 
unnecessary and especially on the corporate tax side, there is 
a very strong argument to be made obviously in reducing the 
overall rate and somehow doing it in a way that expands the 
base. And I think there is room for common ground.
    On the individual side of the tax code, there is also room 
to look at those areas; Simpson-Bowles did. It gets even a 
little trickier on the individual side but some of the same 
arguments can certainly be made. So I hope this is actually an 
opportunity to try and find some common ground as we go 
forward, recognizing, again, that Simpson-Bowles, Rivlin-
Domenici, Gang of Six, all these other bipartisan groups found 
a way to both reform the tax code that made it, I think, more 
efficient in many ways, but also recognized the role that the 
revenues play as part of a balanced approach to reducing our 
deficit. And after all, that is what this committee has spent a 
lot of time looking at is the out-year deficit situation.
    In closing, I would just point out that yesterday Dr. 
Elmendorf pointed out that there is absolutely no contradiction 
between trying to take measures in the short term to try and 
boost a very fragile economy and try and reduce the deficit 
over a longer period of time. And he specifically pointed out 
that a CBO study had found that if you look at different tax 
policy provisions, that providing relief at this point on the 
payroll tax holiday, on the employee side especially, would 
provide obviously a little bit more money in the pockets of 
consumers. And one of the main reasons businesses are not 
hiring is they do not have people out there purchasing their 
goods and services. So to the extent that people now have a 
little bit extra cash in their pocket, that would help boost 
the economy along with other measure like the infrastructure 
investment. And again, that is not my testimony alone. That was 
also a point made by Dr. Elmendorf.
    So, Mr. Chairman, I am actually hoping that this discussion 
can actually steer us in the direction ultimately of some 
common ground on these issues.
    Chairman Ryan. Great. Thank you, Mr. Van Hollen. We will 
start with Mr. Wall, then Mr. Hodge, then Ms. Rogers. Mr. Wall?

  STATEMENTS OF MICHAEL WALL, VICE PRESIDENT OF TAX CASE NEW 
  HOLLAND; SCOTT HODGE, PRESIDENT, TAX FOUNDATION; DIANE LIM 
         ROGERS, CHIEF ECONOMIST, THE CONCORD COALITION

                   STATEMENT OF MICHAEL WALL

    Mr. Wall. Good morning, Chairman Ryan, Ranking Member Van 
Hollen, and distinguished members of the committee. My name is 
Michael Wall. I am vice president of Corporate Tax for Case New 
Holland. I would like to thank you for this opportunity today 
to testify on behalf of CNH. I applaud your leadership in 
holding this timely hearing on the need for pro-growth tax 
reform that will increase the nation's international 
competitiveness and be a driving force for job creation in 
America.
    CNH manufactures the tools used to shape the world, from 
machinery for building roads, and schools, for equipment for 
growing and harvesting food. CNH is perhaps the most 
geographically diversified manufacturer and distributor of 
agricultural and construction equipment in the world. We are 
present in approximately 170 countries with significant 
operations in the United States.
    In 2010, CNH's manufacturing in the United States accounted 
for over $7 billion in annual revenues. And CNH exported 34 
percent of our U.S. production to global markets. CNH employs 
10,800 people in the United States, and we are a majority-owned 
subsidiary of FIAT Industrial.
    Given CNH's unique perspective of having manufacturing, 
distribution, and research facilities across the world, we 
believe that substantially lowering the U.S. corporate tax 
rate, while preserving essential business growth incentives, 
will significantly improving American business competitiveness 
and incentivize foreign investment in the United States.
    Unfortunately, there is effectively a 14 percent 
incremental tax burden between combined 39.2 percent U.S. 
federal and state tax rate versus the 25 percent average tax 
rate for the OECD countries. In fact, virtually every 
industrialized country except the United States has lowered its 
corporate tax rate over the last 20 years. These countries 
chose to lower their corporate tax rate to attract and retain 
capital and prove the competitiveness of its economies and 
provide pro-growth environment for job creation.
    CNH's summary view is that the U.S. corporate tax reform 
should include the following key aspects. First, significantly 
lower the U.S. corporate tax rate. Second, consider appropriate 
modifications to certain corporate tax expenditures in a 
fiscally responsible manner. Third, adopt the territorial tax 
system for the United States. In pursuing fundamental corporate 
tax reform, CNH believes it is imperative that corporate tax 
reform does not discriminate against U.S. subsidiaries or 
foreign-domiciled companies. Recognizing that foreign 
investment is an engine for job growth and economic recovery, 
President Obama recently issued a statement in June 
highlighting the importance of foreign investment in the United 
States and reaffirmed the United States longstanding commitment 
to open investment policies.
    CNH believes that the U.S. corporate tax rates should 
reduce to 25 percent or lower to grow the U.S. economy and 
achieve a competitive corporate tax rate with our international 
trading partners. CNH greatly commends this committee for 
including a 25 percent corporate tax rate in its fiscal year 
2012 budget legislation. I note that a 20 percent federal 
corporate tax rate combined with the average state tax rate 
would result in a U.S. corporate tax rate equal to the 25 
percent average corporate tax rate in the OECD.
    CNH recognizes that a fundamental corporate tax reform 
providing for a reduced corporate tax rate may be coupled with 
modification of certain corporate tax expenditures in a 
fiscally responsible manner. As Congress considers specific 
corporate tax reforms, CNH believes that the retention of an 
accelerated tax depreciation and the tax credit for increase in 
research activities are vitally important for the sustainable 
U.S. economic growth and should be retained in any final 
corporate tax reform legislation.
    The United States is one of only eight remaining OECD 
countries and the only G-7 country that maintains a worldwide 
tax system that taxes U.S. companies on income earned and 
foreign countries on the repatriation of those earnings to the 
United States. The other seven OECD countries with a worldwide 
tax system have an average corporate tax rate of 21 percent, 
which is substantially lower than the U.S. corporate tax rate. 
CNH's view is that the United States should adopt a territorial 
tax system with an exemption for dividends paid from active, 
foreign-source income to ensure the competitive tax system in 
line with our trading partners.
    In conclusion, CNH believes that significantly reducing the 
U.S. corporate tax rate in conjunction with the adoption of a 
territorial tax system will make the United States more 
competitive with other countries, significantly increase 
investment in the United States, and lead to much needed job 
growth for the American people. On behalf of CNH, I again thank 
you for providing this opportunity to share CNH's view on 
fundamental corporate tax reform. CNH looks forward to working 
with this committee and the Congress in considering these 
vitally important issues. I am pleased to answer any questions 
the committee may have. Thank you very much.
    [The prepared statement of Michael Wall follows:]

Prepared Statement of Michael G. Wall, Vice President of Corporate Tax, 
                         Case New Holland Inc.

    Good morning, Chairman Ryan, Ranking Member Van Hollen, and 
distinguished Members of the Committee. My name is Michael Wall and I 
am Vice President of Corporate Tax for Case New Holland Inc. (``CNH''). 
I want to thank you for the opportunity to testify on behalf of CNH 
this morning. I applaud your leadership in holding this timely hearing 
on the necessity of fundamental U.S. corporate tax reform that will 
increase the competitiveness of the U.S. corporate tax system to 
attract investment in a competitive global market and be a driving 
force for job creation in America.
    CNH manufactures the tools used to shape the world, from machinery 
for building roads, bridges, schools and hospitals, to equipment for 
growing and harvesting food. Formed in 1999 through the merger of New 
Holland and Case Corporation, CNH unites two renowned international 
companies with roots dating back to the 1800s. Today, CNH is one of the 
world's leading manufacturers of agricultural combines and tractors as 
well as a leader in the markets for hay and forage and specialty 
harvesting equipment. In the construction industry, CNH maintains a top 
position in backhoe loaders and a strong position in skid steer loaders 
in North America and crawler excavators in Western Europe. CNH 
comprises the heritage and expertise of three agricultural brands: Case 
IH; New Holland Ag; and Steyr and three construction equipment brands: 
Case Construction Equipment; New Holland Construction; and Kobelco.
    CNH is perhaps the most geographically diversified manufacturer and 
distributor of agricultural and construction equipment in the world. 
CNH is present on six continents and in approximately 170 countries 
with a network of approximately 11,300 dealers, including more than 
2,000 dealers in the United States, as well as 40 manufacturing 
facilities located throughout Europe, North America, Latin America, and 
Asia. CNH has manufacturing, distribution, and research facilities in 
32 countries, including the United States with locations in Arizona, 
California, Georgia, Illinois, Indiana, Iowa, Kansas, Minnesota, 
Missouri, Nebraska, North Dakota, Oregon, Pennsylvania, Texas, and 
Wisconsin. CNH had global revenues of over $15.6 billion in 2010. CNH 
employs over 10,800 people in the United States; however, this number 
does not include the significant number of employees of our 1,300 plus 
U.S. suppliers and dealer network. CNH is a majority-owned subsidiary 
of FIAT Industrial S.p.A., a public company whose capital stock is 
listed on the Italian Stock Exchange (FI.IM).
    As an American subsidiary of a foreign domiciled company, CNH is 
representative of a large group of inbound corporations making 
substantial direct investments in the United States. However, because 
of our historic tax structure in the United States, we share many of 
the same policy goals and concerns as U.S. based multinational 
corporations. This hearing comes at a critical time when the United 
States is at an economic crossroads, facing serious fiscal challenges 
at home, historically-high levels of annual federal deficits, excessive 
federal debt, and an increasingly competitive global landscape for 
attracting and retaining investment. As CNH and other American 
businesses make plans to invest and hire, we look to the United States 
to adopt sound economic and tax policies that will drive economic 
growth. To grow the United States economy, there must be comprehensive 
reform of the U.S. corporate tax system to make it more competitive 
with our international trading partners.
    This Congress's work on fundamental tax reform is vital to ensure 
that the United States adopts a competitive corporate tax system to 
attract and retain capital in a global marketplace. While many of the 
United States international trading partners have substantially lowered 
their corporate tax rates to encourage business investment and job 
growth, the United States has the second highest corporate tax rate 
among the Organization for Economic Cooperation and Development 
(``OECD'') countries.
                    cnh's unique global perspective
    Given CNH's unique perspective of having manufacturing, 
distribution, and research facilities in 32 different countries, we 
believe that substantially lowering the U.S. corporate tax rate, while 
preserving essential business growth incentives, will significantly 
improve American business competitiveness and incentivize foreign 
investment in the United States. In 2010, CNH's operations in the 
United States accounted for over $7 billion in annual revenues and CNH 
exported 34% of our U.S. production to global markets. CNH's U.S. 
operations are helping the United States reach the National Export 
Initiative goal of doubling exports by the year 2015. For example, our 
tractor plant in Racine, Wisconsin, exported 40% of its production so 
far this year.
    As CNH seeks to expand its global operations, the relative 
competitiveness of a country's corporate tax system is a key financial 
consideration. Unfortunately, there is effectively a 14% incremental 
tax burden between the 39.2% combined U.S. federal tax rate of 35% and 
the additional 4.2% average state applicable tax rate, and the 25% 
average corporate tax rate for the OECD countries, which negatively 
impacts America's ability to attract and retain capital in a 
competitive global marketplace.
    Unlike the 1960s and 1970s, the United States is no longer the sole 
dominant global player and American businesses operate in a fiercely 
competitive global marketplace. While many of the U.S. international 
trading partners have substantially lowered their statutory corporate 
tax rates as an incentive to encourage business investment and job 
growth, the United States is burdened with an uncompetitive corporate 
tax system in this increasingly competitive global landscape. In fact, 
virtually every industrialized country except the United States has 
lowered its corporate tax rate over the past 20 years, but the United 
States has resisted this trend and actually increased its corporate tax 
rate, creating a less-hospitable environment for business and job 
creation.
    Although the United States has a vibrant commercial market and an 
exceptional labor force, an uncompetitive corporate tax system and the 
increasingly unpredictable regulatory environment are strong negatives 
that companies take into account when looking to expand their global 
operations. An indisputable fact is that the U.S. manufacturing base 
and jobs have been steadily decreasing over the last three decades due 
to a variety of reasons, which include extraordinarily high corporate 
income taxes. International trading partners have dramatically lowered 
their corporate tax rates in recent years, and these countries are 
winning the global competition to attract business investment and jobs. 
For example, the United Kingdom lowered its corporate tax rate from 28% 
to 26% in 2011, and over the next three years, the United Kingdom will 
further reduce its corporate tax rate by 1% each year until it reaches 
23% in 2014. The United Kingdom explicitly chose to lower its corporate 
tax rate to improve the competiveness of its economy and provide jobs 
for its workers.
    While there is a general consensus in Congress to level the playing 
field and use the savings to lower the corporate tax rate, as expressed 
by President Obama in his 2011 State of the Union address, there is a 
divergence of views as to the specific details to achieve this 
objective. CNH's summary view is that U.S. corporate tax reform should 
include the following key aspects to stimulate Gross Domestic Product 
(``GDP'') growth and create jobs in the United States:
    Lower the U.S. corporate tax rate;
    Consider appropriate modifications of certain corporate tax 
expenditures to broaden the base; and,
    Adopt a U.S. territorial tax system.
    Recognizing that foreign investment is an important engine for U.S. 
job growth and economic recovery, President Obama recently issued a 
statement highlighting the importance of foreign investment in the U.S. 
economy and reaffirmed the United States' longstanding commitment to 
open investment policies. This statement and the subsequent Executive 
Order to establish the SelectUSA initiative to attract greater business 
investment is a good first step in making the United States a better 
place for global companies to do business, but much more is left to be 
done, including fundamental reform of the U.S. corporate tax system. In 
pursuing reform of the U.S. corporate tax system, CNH believes it is 
imperative that the reformed corporate tax system not discriminate 
against U.S. subsidiaries of foreign domiciled companies, which would 
further reduce the levels of investment in the United States that might 
otherwise be available to enhance job creation.
               need to lower the u.s. corporate tax rate
    The United States has an extremely uncompetitive combined federal 
and state applicable tax rate of 39.2%, which is the second highest 
among the OECD countries. Japan is the only OECD country with a 
slightly higher corporate tax rate (39.5%) than the United States, 
although Japanese officials had announced Japan's intention to drop its 
statutory corporate tax rate by 4.5% before the March 2011 earthquake 
caused the reduction to be deferred. Please see Exhibit A titled ``OECD 
Corporate Tax Rates'' for the combined corporate tax rates for OECD 
countries for the 2010 tax year.
    The National Commission on Fiscal Responsibility and Reform 
narrative recommended lowering the U.S. corporate tax rate to a range 
of 23% to 29%. CNH believes that the U.S. corporate tax rate should be 
reduced to 25% or lower to achieve a competitive U.S. corporate tax 
system consistent with the 25% OECD average tax rate. In our view, the 
25% U.S. corporate tax rate included in the House Budget Committee 
Fiscal Year 2012 Budget is necessary to achieve a competitive U.S. 
corporate tax system that will stimulate the U.S. economy and create 
jobs. An analysis by the Milken Institute in 2010, Jobs for America, 
concluded that reducing the U.S. combined federal and state corporate 
income tax rates to the average of OECD countries would increase real 
GDP by 2.2% (or $376 billion) and create 2.1 million private sector 
jobs by 2019.
    CNH has substantial business operations in the United States, 
Australia, Brazil, Canada, India, and many countries in the European 
Union, including Austria, Belgium, France, Germany, Italy, Poland, and 
the United Kingdom. As CNH looks to expand its capacity to meet growing 
demand and create jobs, the after-tax earnings and cash flow from 
operations is a major factor in considering locations to expand 
operations. A comparative view of the combined national and sub-
national corporate tax rates for 2010 for the major countries that CNH 
operates illuminates the significant lack of competitiveness of the 
U.S. corporate tax rate and highlights the inability of the United 
States to keep pace with its international trading partners to lower 
its corporate tax rate over the last twenty years.

 COMPARATIVE ANALYSIS OF OECD COMBINED NATIONAL AND SUB-NATIONAL CORPORATE TAX RATES FOR 2010 IN MAJOR COUNTRIES
                                               WHERE CNH OPERATES
----------------------------------------------------------------------------------------------------------------
                            Country                                  1990            2010        Change in rate
----------------------------------------------------------------------------------------------------------------
United States.................................................           38.7%           39.2%              0.5%
Australia.....................................................             39%             30%              (9%)
Austria.......................................................             30%             25%              (5%)
Belgium.......................................................             41%             34%              (7%)
Brazil........................................................             42%             34%          \1\ (8%)
Canada........................................................           41.5%           29.5%             (12%)
France........................................................             42%           34.4%            (7.6%)
Germany.......................................................           54.5%           30.2%           (24.3%)
India.........................................................             63%             34%         \1\ (29%)
Italy.........................................................           46.4%           27.5%           (18.9%)
Poland........................................................             n/a             19%  ................
United Kingdom................................................             34%             28%              (6%)
----------------------------------------------------------------------------------------------------------------
\1\ Non-OECD country.

    The OECD average corporate tax rate has dropped by nearly 16 
percentage points from 41% in 1990 to 25% in 2010. Whereas, the United 
States has actually increased its tax rate by 0.5% during this 
timeframe, principally from a one percentage point increase in the 
federal corporate tax rate in 1993 offset by a change to the average 
state applicable tax rate. It is important to note that even by 
lowering the U.S. corporate federal tax rate to 25%, the combined 
federal and state applicable tax rate would still be higher than the 
25% OECD average tax rate, but within the range of a competitive 
corporate tax rate.
    As the Joint Committee on Taxation (``JCT'') staff has recently 
stated, ``the best way to encourage increased investment in the United 
States (by foreign or domestic investors) is to increase the after-tax 
return to investment, and that outcome is more efficiently achieved by, 
for example, lowering the U.S. corporate income tax rate than by 
narrower policies such as the facilitation of earnings stripping.'' 
Source: JCT, Present Law and Issues in U.S. Taxation of Cross-Border 
Income, September 6, 2011, JCX-42-11, page 59. In a 2005 study, the JCT 
compared individual income tax reductions and corporate income tax 
reductions and concluded that a reduction in the corporate income tax 
had the greatest impact on increasing long-term economic growth, due to 
increased capital investment, and increased labor productivity. 
Further, recent research by the OECD concludes that the corporate 
income tax has the most adverse impact on economic growth than any 
other tax.
    CNH is equally concerned about the tax rates imposed on our 
suppliers, dealers, and customers. Although CNH is a Subchapter C 
corporation, many of our suppliers, dealers, and customers operate as 
Subchapter S corporations, partnerships, and limited liability 
companies, so that these pass-through entities pay U.S. taxes on their 
owners' individual income tax returns. While some commentators advocate 
taxing large pass-through entities as Subchapter C corporations, CNH 
opposes subjecting pass-through entities to the ``double-taxation'' 
regime of Subchapter C corporations because this would be tantamount to 
a large business tax increase on an important segment of entrepreneurs 
that fuel U.S. economic growth. CNH's view is that Congress should also 
lower U.S. individual tax rates and broaden the tax base as part of 
fundamental U.S. tax reform consistent with the general principles of 
the National Commission on Fiscal Responsibility and Reform report.
     elimination or modification of u.s. corporate tax expenditures
    CNH recognizes that fundamental corporate tax reform providing for 
a reduced corporate tax rate may be coupled in the legislative process 
with the elimination or modification of certain corporate tax 
expenditures in a fiscally responsible manner. CNH, like many 
corporations, can accept the elimination or modification of certain 
corporate tax expenditures if necessary to effectuate a fundamental and 
fair corporate tax reform, but only to facilitate a 10 percentage point 
or more reduction of the U.S. corporate rate. Naturally, there is a 
divergence of views within the business community over which corporate 
tax expenditures should be modified. While Congress may be forced to 
make difficult choices in this process, it is of vital importance that 
the corporate federal tax rate be reduced to 25% or less. CNH strongly 
believes that the stimulus provided by a significant reduction of the 
U.S. corporate tax rate would spur U.S. business activity across all 
sectors of the economy, increase GDP growth, and have a significant 
beneficial impact on all aspects of the Nation's economy.
    As Congress deliberates on fundamental corporate tax reform, CNH 
believes that retention of accelerated tax depreciation of property and 
the tax credit for increasing research activities are vital corporate 
tax expenditures that promote sustainable U.S. economic growth. It is 
important to note that many of our international trading partners' tax 
systems also employ the accelerated depreciation and research tax 
credit incentives. CNH's view is that maintaining accelerated tax 
depreciation encourages capital expenditures and demand for durable 
goods, which has been embraced by Congressional policymakers as sound 
pro-growth business tax provisions. Once a leader in promoting 
innovation, the United States now ranks 24th out of 38 OECD countries 
in terms of the competitiveness of its research and development tax 
incentives. CNH's view is that the permanent extension of the research 
and development tax credit is essential to encouraging domestic 
investment in cutting edge technology to keep the United States 
competitive in a global economy. According to the Milken Institute 
report, Jobs for America, if the research and development credit were 
strengthened and made permanent, total manufacturing employment would 
increase by 270,000 by 2019.
               adoption of a u.s. territorial tax system
    The United States is one of the eight remaining countries in the 
OECD that maintains a worldwide system of taxation that taxes U.S. 
companies on the income they earn in foreign countries upon 
repatriation of the earnings to the United States. Under current tax 
law, U.S. companies must factor in the higher rate of U.S. tax it will 
pay on its foreign earnings when these earnings are repatriated to the 
United States, which makes U.S. companies less competitive relative to 
the global competition. This can be exacerbated because although the 
United States allows a foreign tax credit, such that these repatriated 
earnings are not subject to ``double taxation,'' often times U.S. 
companies are unable to fully credit the foreign taxes due to the 
intricacies of the foreign tax credit calculation. A territorial system 
would tax U.S. companies only on the income they earn in the United 
States with an exemption for dividends received from foreign 
subsidiaries.
    CNH's view is that the United States should adopt a territorial tax 
system with an exemption for dividends paid from active foreign-source 
income to achieve a competitive U.S. corporate tax system that is in 
line with our international trading partners and consistent with the 
recommendations of the National Commission on Fiscal Responsibility and 
Reform report. All other G-7 countries and 26 of the 34 OECD countries 
have adopted a territorial tax system that largely exempts active 
earnings from home country taxation. The eight OECD countries that do 
not have a territorial tax system are Chile, Greece, Ireland, Israel, 
Korea, Mexico, Poland, and the United States. Excluding the United 
States, the other OECD countries that have a worldwide tax system with 
a foreign tax credit regime have an average corporate tax rate of 21%. 
In just the past two years, both the United Kingdom and Japan have 
switched to territorial tax systems to improve the competitiveness of 
their tax systems and provide more jobs for their economies. Please see 
Exhibit B titled ``OECD Countries with Territorial Tax Systems'' for 
the home country tax treatment of foreign-source dividend income 
received by resident corporations.
    Some commentators have expressed concerns that the implementation 
of a territorial system may create new incentives to move certain U.S. 
operations offshore. Based upon our considerable experience as an 
internationally based company with very extensive U.S. operations, CNH 
disagrees. We strongly believe that a territorial system coupled with a 
substantially lower U.S. corporate tax rate would provide tremendous 
incentives for increasing operations in the United States for both U.S. 
based and foreign based companies.
                           concluding remarks
    Many countries have aggressively reduced their corporate income tax 
rates in an effort to attract and retain high-quality job-creating 
investment, which U.S. policymakers should keep in mind as they 
consider fundamental corporate tax reform to enhance American 
competitiveness and attract investment in the United States. CNH 
believes that reducing the U.S. statutory corporate tax rate to 25% or 
lower, in conjunction with the adoption of a territorial tax system, 
would make the United States more competitive with other countries, 
which would significantly increase investment in the United States and 
lead to much needed job growth.
    The broad uncertainty faced by American businesses today includes 
tax policy in need of reform and an increasingly unpredictable 
regulatory environment, which has led to a general lack of corporate 
confidence. Reforming corporate tax policy and removing regulatory 
uncertainty is necessary for long-term financial planning and capital 
investments, which are critical for job creation in the United States.
    I am pleased to answer any questions you may have, and thank you 
for this opportunity to share CNH's views on fundamental corporate tax 
reform. CNH looks forward to working with this Committee and the 
Congress in considering fundamental corporate tax reform proposals that 
will increase America's competitiveness, attract and retain capital in 
a competitive global market, and be a driving force for job creation in 
the United States.


    Chairman Ryan. Thank you, Mr. Wall. Mr. Hodge?

                    STATEMENT OF SCOTT HODGE

    Mr. Hodge. Thank you, Mr. Chairman, Mr. Van Hollen. I 
appreciate the opportunity to talk to you today about how 
fundamental tax reform can improve America's long-term economic 
growth and our global competitiveness.
    Since 1937, the Tax Foundation has stood for the immutable 
principles of sound tax policies. Now taxes should be neutral 
to economic decision-making. They should be simple, 
transparent, stable, and they should promote economic growth. 
In other words, they ideal tax system should do only one thing, 
and that is to raise a sufficient amount of revenues to fund 
government activities with the least amount of harm to the 
economy. And by all accounts, the U.S. tax system is far from 
that ideal. In fact, Mr. Chairman, the economic research 
suggests that the U.S. corporate and individual tax systems are 
undermining the nation's long-term economic growth.
    OECD economists have studied the impact of taxes on 
economic growth for the largest capitalist nations, and they 
have determined that high corporate income taxes and high 
personal income taxes are the most harmful taxes for long-term 
economic growth, followed by consumption taxes and property 
taxes. And this should be a red flag to all of us, because when 
it comes to corporate taxes, the U.S. has a Neiman-Marcus tax 
system while the rest of the world has moved toward a Wal-Mart 
model of corporate taxation. Not only do we have the second 
highest overall corporate tax rate among the leading 
industrialized countries at over 39 percent, but we were one of 
the few remaining countries, as Mr. Wall mentioned, that has a 
worldwide tax system. And the economic research tells us that 
cutting the corporate tax rate will not only help the country 
on a long-term growth path, but it will lead to higher wages 
and higher living standards.
    One of the reasons the Japanese moved to a territorial tax 
system is because they found out that a high corporate tax rate 
combined with a worldwide tax system creates a lockout effect 
that discourages the repatriation of foreign earnings. And so 
moving to a territorial system will break down the Berlin Wall 
that is keeping more than a trillion dollars in foreign profits 
abroad.
    Now, with all deference to Warren Buffet, OECD research has 
also found that the U.S. has the most progressive income tax 
burden among all the leading industrialized nations. The top 10 
percent of taxpayers in the United States pays a greater share 
of the income tax burden than their counterparts in any other 
industrialized country. And our low-income Americans have the 
lowest income tax burden of any industrialized country. And I 
think it is also pretty well known that about half of all 
American households now pay no income taxes because of the 
generosity of credits and deductions in the code.
    And the research shows that the more a country tries to 
make an income tax system progressive, the more it undermines 
the factors that contribute most to economic growth. And that 
is such things as investment, risk taking, entrepreneurship, 
and productivity.
    And while it is easy to cartoon the richest fat cats, 
America's rich are actually are successful entrepreneurs and 
business owners. And because of the growth in entrepreneurship 
over the past 30 years, there is actually more business income 
that is being taxed under the individual tax code than under 
the traditional corporate tax system. And so what that tells us 
is that cutting the top individual income tax rates for these 
dynamic individuals and entrepreneurs will lead to higher 
productivity gains, which then translate into higher economic 
growth.
    Let me wrap up by saying that with deficit now at $1.5 
trillion, it is tempting to look at closing loopholes and tax 
reform as an opportunity to raise more revenues for the 
government. But the primary goal of tax reform should be to 
promote long-term economic growth and to increase the living 
standards for all Americans, not just to raise tax revenues for 
the government. And if the byproduct of increased economic 
growth is more tax revenues, then that is a win-win.
    Now I understand there is clearly a tension in the United 
States between the desire for a simpler tax code and one that 
also ensures fairness and equity. So I would suggest that we 
develop a new way of thinking about equity and the tax code. We 
should strive to build a consensus around three basic concepts. 
First, an equitable tax system should be free of most of the 
credits and deductions, and it should not micromanage 
individual or business behavior.
    Secondly, an equitable tax system should apply a single 
flat rate on most everyone equally. And that way every citizen 
pays at least something to the basic cost of government.
    And lastly, an equitable tax code should be simple, and it 
should have dramatically lower rates than what we have today, 
in the low 20s, I think, by most accounts. And the government 
could raise about the same amount of revenue that it does 
today.
    I believe that such a tax code would actually generate a 
more predictable and stable revenue stream to fund government 
programs as opposed to the roller coaster system that we have 
today. And, most importantly, such a tax code would be 
conducive to long-term economic growth and higher living 
standards for all Americans. And that is one of the keys of 
fixing the long-term fiscal crisis that is facing America 
today.
    And thank you very much. I appreciate the opportunity and 
would answer any questions that you have.
    [The prepared statement of Scott Hodge follows:]

    Prepared Statement of Scott A. Hodge, President, Tax Foundation

    I am Scott Hodge, president of the Tax Foundation. Thank you for 
the opportunity to speak to you today about how comprehensive tax 
reform can boost America's long-term economic growth and improve our 
global competitiveness.
    Founded in 1937, the Tax Foundation is the nation's oldest non-
partisan, non-profit organization dedicated to promoting economically 
sound tax policy at all levels of government.
    We are guided by the immutable principles of economically sound tax 
policy which say that: Taxes should be neutral to economic decision 
making, they should be simple, transparent, stable, and they should 
promote economic growth.
    In other words, the ideal tax system should do only one thing--
raise a sufficient amount of revenues to fund government activities 
with the least amount of harm to the economy.
    By all accounts, the U.S. tax system is far from that ideal.
                              introduction
    The U.S. tax system is in desperate need of simplification and 
reform. Over the past two decades, lawmakers have increasingly asked 
the tax code to direct all manner of social and economic objectives, 
such as encouraging people to buy hybrid vehicles, turn corn into 
gasoline, save more for retirement, purchase health insurance, buy a 
home, replace the home's windows, adopt children, put them in daycare, 
take care of Grandma, buy bonds, spend more on research, purchase 
school supplies, go to college, invest in historic buildings, and the 
list goes on.
    The relentless growth of credits and deductions over the past 20 
years has not only knocked half of all American households off the tax 
rolls, it has made the IRS a super-agency, engaged in policies as 
unrelated as delivering welfare benefits to subsidizing the manufacture 
of energy efficient refrigerators. I would argue that were we starting 
from scratch, these would not be the functions we would want a tax 
collection agency to perform.
    Ironically, but perhaps not surprisingly, the sectors suffering the 
biggest financial crises today--health care, housing, and state and 
local governments--all receive the most subsidies through the tax code. 
The cure for what ails these parties is to be weaned off the tax code, 
not given more subsidies through such things as the First Time 
Homebuyer's Credit, Premium Assistance credits, or more tax free bonds.
    While tax cuts will always curry more favor with voters than 
creating new spending programs, Washington needs to call a truce to 
using the tax code for social or economic goals. Indeed, the tax base 
has become so narrow that trying to accomplish more social goals via 
the tax code is like pushing on a string.
    Washington can actually do more for the American people by doing 
less. The solution lies in fundamental tax reform--as has been 
suggested by parties as diverse as Chairman Ryan and President Obama's 
National Commission on Fiscal Responsibility and Reform, chaired by 
Erskine Bowles and Alan Simpson. As many studies have shown, Americans 
could be taxed at lower rates--and the government could raise the same 
amount of revenue--if the majority of tax expenditures were eliminated.
    That said, the primary goal of fundamental tax reform should not be 
raising more money for government. The primary goal should be improving 
the nation's long-term economic growth and lifting American's living 
standards.
    Path breaking research by economists at the OECD suggests that the 
U.S. corporate and individual tax systems are a major detriment to our 
nation's long-term economic growth. In a major study analyzing the 
impact of various taxes on long-term economic growth, they determined 
that high corporate and personal income tax rates are the most harmful 
taxes for long-term economic growth, followed by consumption taxes and 
property taxes.
    Unfortunately, as many of you many know, the U.S. has the 2nd 
highest corporate income tax rate among industrialized nations and, 
this may surprise you, the U.S. has the most progressive personal 
income tax systems among industrialized nations.
    The economic evidence suggests that cutting our corporate and 
personal income tax rates while broadening the tax base would greatly 
improve the nation's prospects for long-term GDP growth while helping 
to restore Uncle Sam's fiscal health. More importantly, these measures 
will lead to higher wages and better living standards for American 
citizens. And that should be the number one priority of any tax policy.
    Let's consider corporate and individual tax reform one at a time.
   corporate tax reform can improve u.s. competitiveness and living 
                               standards
    When it comes to corporate taxes, the U.S. has a Neiman Marcus tax 
system while the rest of the world has moved toward a Walmart model of 
corporate taxation. In contrast to our high-rate, narrow base, and 
worldwide model of corporate taxations, the basic tenets of this new 
model are lower tax rates, a broader base, and the exemption of foreign 
earnings.
    In just the past four years alone, 75 countries have cut their 
corporate tax rates to make themselves more competitive. And, reports 
the OECD, ``there has been a gradual movement of countries moving from 
a credit [worldwide] to an exemption [territorial] system, at least in 
part because of the competitive edge that this can give to their 
resident multinational firms.'' \1\
    The U.S. remains far behind on both of these trends. Not only do we 
have the second-highest overall corporate tax rate among the leading 
industrialized nations at over 39 percent--only Japan has a higher 
overall rate--but we are one of the few remaining countries to tax on a 
worldwide basis.


    Our largest trading partners--Canada, Great Britain, and Japan--
have already taken steps to make themselves more competitive. For 
example, Great Britain lowered its corporate tax rate on April 1st of 
this year, from 28 percent to 26 percent as a first step toward the 
goal of having a 23 percent rate in 2014. On January 1st, Canada 
lowered its federal corporate tax rate from 18 percent to 16.5 percent. 
Next year the rate will fall to 15 percent. Japan was scheduled to cut 
its overall corporate rate by 5 percent until the tragic earthquake 
derailed the government's legislative agenda. Japan's move would have 
left the U.S. with the highest overall corporate tax rate in the 
industrialized world.
    As important as are differences in tax rates, however, all three of 
these countries have effectively moved toward a territorial or 
exemption form of taxing the foreign profits of their multination 
firms. Indeed, of the 34 OECD member nations, 26 have either a full 
territorial system or exempt at least 95 percent of foreign earnings 
from repatriation taxes. The U.S. remains the only country in the OECD 
with a world-wide system and a corporate rate above 30 percent.
    While some critics charge that U.S. corporations pay far less than 
the statutory tax rate because of the plethora of credits and 
deductions, a review of IRS data shows that the effective U.S. tax rate 
for all corporations averaged 26 percent between 1994 \2\ and 2008. The 
effective U.S. tax rate varied across years, ranging from 27.5 percent 
in 1999 to 22.8 percent in 2008.\3\
    However, these figures only account for U.S. income taxes paid on 
domestic profits and repatriated foreign earnings. When foreign taxes 
are included--U.S. corporations pay $100 billion annually in income 
taxes to other governments on their foreign profits--the overall tax 
rate on large multinationals is close to the U.S. statutory rate of 35 
percent. Averaged for all corporations, the overall effective corporate 
tax rate is between 32.1 and 33 percent.


    The benefits of making our corporate tax system on-par with the 
rest of the world's systems cannot be understated.
    Here are just a few of the benefits of corporate tax reform:
    Cutting the U.S. corporate tax rate will help put the country on a 
long-term growth path. Economists at the OECD determined that the 
``corporate income tax is the most harmful tax for long-term economic 
growth'' (emphasis added), not only because it increases the cost of 
domestic investment, but also because capital is the most mobile factor 
in the global economy, and thus the most sensitive to high tax rates.
    Indeed, the report found that ``Corporate income taxes appear to 
have a particularly negative impact on GDP per capita.'' \4\ Lowering 
statutory corporate tax rates, they determined, ``can lead to 
particularly large productivity gains in firms that are dynamic and 
profitable, i.e. those that can make the largest contribution to GDP 
growth.'' \5\ OECD economists speculate that this could be because 
these are the firms that rely most heavily on retained earnings to 
finances their growth.\6\ Higher taxes mean fewer retained earnings, 
which means less growth.
    Cutting the corporate tax rate will lead to higher wages and living 
standards. In a world in which capital is extremely mobile but workers 
are not, most studies find that workers bear 45 percent to 75 percent 
of the economic burden of corporate taxes. In one such study, an 
economist at the Federal Reserve Bank of Kansas City used cross-country 
data to study the effect of corporate taxes and their interaction on 
the gross wages of workers. She found that ``labor's burden is more 
than four times the magnitude of the corporate tax revenue collected in 
the U.S.'' \7\
    According to her model, a one percentage point increase in the 
average corporate tax rate decreases annual gross wages by 0.9 percent. 
Translated to U.S. corporate tax collections and wages, this means that 
a $10.4 billion increase in corporate tax collections would lower 
overall wages by $43.5 billion.\8\
    The overwhelming body of economic evidence suggests that cutting 
the U.S. corporate tax rate will benefit U.S. workers through higher 
wages, which translate into higher living standards.
    Cutting the corporate tax rate will boost entrepreneurship, 
investment and productivity. Studies show that the corporate income tax 
hinders entrepreneurship, risk, and investment. Indeed, a study by Jens 
Arnold and Cyrille Schwellnus supports the notion that corporate taxes 
are ``success taxes'' which ``fall disproportionately on firms that are 
contributing positively to aggregate productivity growth.'' \9\
    Perhaps a worrisome sign for the U.S., they found that firms in 
relatively profitable industries ``have disproportionately lower 
productivity growth rates in countries with high statutory corporate 
tax rates.'' \10\ The corporate tax has the biggest impact on firms 
that are on the way up as opposed to those that have plateaued or are 
on the way down. In other words, companies that are ``in the process of 
catching up with the technological frontier are particularly affected 
by corporate taxes.'' \11\
    A key factor for the health of the overall economy is the extent in 
which investment leads to new technology which, in turn, improves 
productivity. But, ``high corporate taxes may reduce incentives for 
productivity-enhancing innovations by reducing their post-tax 
returns.'' \12\ Thus, if U.S. lawmakers want to increase the amount of 
innovation in the country, a good first step would be to cut the 
corporate tax rate.
    Moving to a territorial system will eliminate the ``lock-out'' 
effect. A significant amount of economic research has shown that the 
willingness of multinational firms to bring home foreign profits is 
highly sensitive to the level of repatriation tax rates. A 2007 study 
by Foley et al., found that repatriation tax burdens induce firms to 
hold more cash abroad.\13\ They determined that ``the median firm 
facing above average [repatriation] rates holds 47% of its cash abroad, 
but the median firm facing below average rates holds only 26% of its 
cash abroad. This figure suggests that repatriation tax burdens 
increase foreign cash holdings relative to domestic cash holdings.'' 
\14\ It should be no surprise, thus, that by most accounts U.S. 
multinational firms are holding as much as $1 trillion in foreign 
earnings abroad, in part because of the high toll charge to bring the 
money back to the U.S.
    But in a finding that should particularly worry U.S. lawmakers, 
Foley et al. found that ``technology intensive firms appear to be 
particularly sensitive to repatriation tax burdens,'' as well as those 
with ``strong growth opportunities,'' and those with high levels of R&D 
expenditures.\15\ Thus, the ``new economy'' firms that contribute 
substantially to economic growth are those that are the most dissuaded 
from reinvesting their foreign profits back into the U.S.
  individual tax reform can boost entrepreneurship, productivity and 
                                 growth
    President Obama has consistently called for higher tax rates on 
upper-income taxpayers. But the economic evidence suggests that this 
would be very detrimental to the country's long-term economic growth. 
Indeed, OECD economists determined that high personal income taxes are 
second only to corporate income taxes in their harmful effects on long-
term economic growth. And it will shock many Americans to learn that we 
already have the most progressive income tax burden among the leading 
industrialized nations.
    What that means is that the top 10 percent of U.S. taxpayers pay a 
larger share of the income tax burden than do their counterparts in any 
other industrialized country, including traditionally ``high-tax'' 
countries such as France, Italy, and Sweden.\16\ Meanwhile, because of 
the generosity of such preferences as the EITC and child credit, low-
income Americans have the lowest income tax burden of any OECD nation.


    Indeed, the study reports that while most countries rely more on 
cash transfers than taxes to redistribute income, the U.S. stands out 
as ``achieving greater redistribution through the tax system than 
through cash transfers.'' \17\ Remarkably, the most recent IRS data for 
2009 indicates that nearly 59 million tax filers--42 percent of all 
filers--had no income tax liability because of the credits and 
deductions in the tax code.
    With deference to Warren Buffett, the share of the income tax 
burden borne by America's wealthiest taxpayers has been growing 
steadily for more than two decades. Figure 2 compares the share of 
income taxes paid by the top 1 percent of taxpayers to the share paid 
by the bottom 90 percent of taxpayers.
    The chart shows that, as of 2008, the top 1 percent of taxpayers 
paid 38 percent of all income taxes, while the bottom 90 percent of 
taxpayers paid just 30 percent of the income tax burden. By any 
measure, this is the sign of a very progressive tax system.
    What are the harmful effects of progressivity? The economic 
evidence is quite clear that there is a ``non-trivial tradeoff between 
tax policies that enhance GDP per-capita and equity.'' \18\ Meaning, 
the more we try to make an income tax system progressive, the more we 
undermine the factors that contribute most to economic growth--
investment, risk taking, entrepreneurship, and productivity.
    Individual Tax Reform Must Go Hand-in-Hand with Corporate Reform. 
It may surprise people to learn that the corporate tax system is no 
longer the primary tool for which we tax businesses in America. As 
Figure 4 below shows, more business income is currently taxed under the 
individual tax system than under the traditional corporate income tax 
system. It is also interesting to note that for the first time in the 
history of the tax code the top corporate tax rate and the top 
individual rate are the same (35 percent). These are key reasons why 
the individual and corporate tax systems should be reformed together. 
The neutrality principle dictates that the tax code not bias the way 
corporate and non-corporate businesses are taxed.


    There has been a tremendous growth in ``flow-through'' private 
businesses such as sole proprietors, S-corporations, LLCs, and 
partnerships over the past thirty years. Between 1980 and 2007, for 
example, the number of sole proprietors grew from 8.9 million to more 
than 23 million, and the number of S-corporations and partnerships 
(which include LLCs) grew at a faster rate from 1.9 million to more 
than 7 million. There are now three and one-half times as many pass-
through firms as traditional C-corporations.\19\
    America's ``rich'' are our successful entrepreneurs and business 
owners. While some people dismiss the effect of high tax rates on 
business by citing the fact that only 2 or 3 percent of business owners 
pay tax in the top two brackets, the more economically relevant 
question is how much business income is earned by those in the top tax 
brackets.
    While there are millions of small businesses in America, Figure 5 
shows that only about 16 percent of all private business income is 
earned by taxpayers with adjusted gross income (AGI) below $100,000. 
Another 16 percent of private business income is earned by taxpayers 
with AGI between $100,000 and $200,000.
    However, fully 68 percent of private business income is earned by 
taxpayers with AGI above $200,000--the target range of President 
Obama's proposed tax rate increases. Some 35 percent of all private 
business income is earned by taxpayers with AGIs above $1 million.


    Another way of looking at the distribution of business income is to 
see how many taxpayers at the highest tax brackets have business 
income. According to Tax Policy Center estimates, more than 74 percent 
of tax filers in the highest tax bracket report business income, 
compare to 20 percent of those at the lowest bracket. As Table 1 below 
indicates, more than 40 percent of private business income is earned by 
taxpayers paying the top marginal rate.
    While these high-income business owners may be relatively few in 
number, the data makes it very clear that increasing top individual tax 
rates would directly impact America's successful private business 
owners and entrepreneurs.


    Cutting Individual Tax Rates Can Boost Productivity and Economic 
Growth. After extensive study of the impact of tax reforms on economic 
growth across the largest capitalist nations, OECD researchers 
determined that ``a reduction in the top marginal [individual] tax rate 
is found to raise productivity in industries with potentially high 
rates of enterprise creation. Thus reducing top marginal tax rates may 
help to enhance economy-wide productivity in OECD countries with a 
large share of such industries * * *'' \20\
    Indeed, OECD researchers find that lower tax rates and higher 
productivity gains translate into higher economic growth:
    For example, consider the average OECD country in 2004, which had 
an average personal income tax rate of 14.3% and a marginal income tax 
rate of 26.5%. If the marginal tax rate were to decrease by 5 
percentage points in this situation, thus decreasing the progressivity 
of income taxes, the estimated increase in GDP per capita in the long 
run would be around 1%.\21\
    With our large entrepreneurial and non-corporate sector, such 
studies suggest that the U.S. could see substantial productivity and 
GDP gains from lower personal income tax rates.
    Tax reform will also reduce complexity and dead-weight costs to the 
economy. In its 2010 Annual Report to Congress, the National Taxpayer 
Advocate identified tax complexity as the most serious problem facing 
taxpayers and the IRS, and urged lawmakers to simplify the system.\22\ 
It is estimated that tax compliance costs taxpayers an estimate $163 
billion each year. The corporate tax system alone costs American 
businesses about $40 billion per year--roughly equal to the cost of 
hiring 80,000 workers at $50,000 each.
    According to a recent Tax Foundation study, the ``deadweight'' 
costs, or excess burden, of the current individual income tax is not 
inconsequential, amounting to roughly 11 to 15 percent of total income 
tax revenues. This means that in the course of raising roughly $1 
trillion in revenue through the individual income tax, an additional 
burden of $110 to $150 billion is imposed on taxpayers and the 
economy.\23\
    One of the other ways that tax reform can lead to greater economic 
growth is by liberating taxpayers, businesses, and investors from these 
burdensome compliance and deadweight costs.
                               conclusion
    The U.S. tax system is in desperate need of simplification and 
reform. To be sure, with the deficit now topping $1.5 trillion, many 
lawmakers may look at eliminating tax ``loopholes'' and simplifying the 
tax code as an opportunity to raise more revenues. But increasing the 
share of the economy going to tax collections should not be the primary 
goal of tax reform. The primary goal should be to promote long-term 
economic growth and better living standards for the American people. If 
the byproduct of increased economic growth is more tax revenues, then 
that is a win-win.
    But there is a real tension in the U.S. between the desire for a 
simpler tax code and one that insures fairness and equity. To be sure, 
tax reform that broadens the base while lowering marginal tax rates 
could create the appearance of giving ``tax cuts for the rich,'' an 
anathema to many.
    As we move forward to overhaul the tax system, I suggest that we 
develop a new way of thinking about equity in the tax code. We should 
strive to build consensus around these basic concepts:
     An equitable tax system should be free of most credits or 
deductions and not micromanage individual or business behavior.
     An equitable tax system should apply a single, flat rate 
on most everyone equally. That way, every citizen pays at least 
something toward the basic cost of government.
     An equitable tax code should be simple--which would save 
all of us time, money and headache and would save the economy the 
deadweight loss of the current system.
     An equitable tax code should have dramatically lower rates 
than we have today--in the mid-20s by most accounts--and the government 
could still raise the same amount of revenues.
    I believe that such a tax code would actually generate a more 
predictable and stable revenue stream to fund government programs as 
opposed to the roller coaster revenues we have today.
    And, most importantly, such a tax code would be conducive to long-
term economic growth, which is one of the keys to fixing the long-term 
fiscal crisis facing the country.
    Thank you, I'm happy to answer any questions you may have.
                                endnotes
    \1\ Tax Policy Reform and Economic Growth, OECD Tax Policy Studies, 
No. 20, OECD Publishing (2010), p. 138.
    \2\ This is the year the top corporate tax rate was raised from 34 
percent to 35 percent.
    \3\ William McBride, ``Beyond the Headlines: What Do Corporations 
Pay in Income Tax?'' Tax Foundation Special Report No. 194, September 
2011, p. 2.
    \4\ Asa Johansson, Christopher Heady, Jens Arnold, Bert Brys and 
Laura Vartia, ``Tax and Economic Growth,'' Organization for Economic 
Cooperation and Development, OECD Economics Working Paper No. 620., 
July 11, 2008. p. 43.
    \5\ Ibid. p. 9.
    \6\ Tax Policy Reform and Economic Growth, OECD Tax Policy Studies, 
No. 20, OECD Publishing (2010), p. 135.
    \7\ R. Alison Felix, ``Passing the Burden: Corporate Tax Incidence 
in Open Economies,'' October 2007, p. 2.
    \8\ Ibid. p. 20.
    \9\ Jens Arnold and Cyrille Schwellnus, ``Do Corporate Taxes Reduce 
Productivity and Investment at the Firm Level? Cross-Country Evidence 
for the Amadeus Dataset,'' CEPII, Working Paper No. 2008--19, September 
2008, p. 31. The concept of ``success taxes'' was first suggested by 
Gentry and Hubbard (2004).
    \10\ Arnold and Schwellnus, p. 4.
    \11\ Ibid. p. 10.
    \12\ Ibid. p. 9.
    \13\ C. Fritz Foley, Jay C. Hartzell, Sheridan Titman, Garry Twite, 
``Why Do Firms Hold So Much Cash? A Tax-Based Explanation,'' February 
2007, p. 3.
    \14\ Ibid. p. 19.
    \15\ Ibid. p. 16.
    \16\ ``Growing Unequal? Income Distribution and Poverty in OECD 
Countries,'' Organization for Economic Cooperation and Development, 
2008. p. 112. http://dx.doi.org/10.1787/422013187855. Here income taxes 
refer to both personal and social insurance taxes.
    \17\ Ibid.
    \18\ Tax Policy Reform and Economic Growth, p. 22.
    \19\ Scott A. Hodge, ``Over One-Third of New Tax Revenue Would Come 
from Business Income if High-Income Personal Tax Cuts Expire,'' Tax 
Foundation Special Report No. 185, September 2010, p. 4.
    \20\ ``Tax and Economic Growth,'' p. 9.
    \21\ Ibid. p. 25.
    \22\ National Taxpayer Advocate's 2010 Annual Report to Congress. 
http://www.irs.gov/advocate/article/0,,id=233846,00.html
    \23\ Robert C. Carroll, ``The Excess Burden of Taxes and the 
Economic Cost of High Tax Rates,'' Tax Foundation Special Report No. 
170, August 14, 2009.

    Chairman Ryan. Thank you. Welcome back, Diane, a good 
friend and familiar face of the committee. The microphone is 
yours.

                 STATEMENT OF DIANE LIM ROGERS

    Ms. Rogers. Chairman Ryan, Mr. Van Hollen, members of the 
committee, thank you for giving me the opportunity to testify 
before you today on the issue of pro-growth tax reform. I work 
for The Concord Coalition, a group that is been dedicated to 
the cause of fiscal responsibility for two decades now. As 
such, I feel that we cannot consider tax reform in isolation 
from the rest of the federal budget, especially within this 
committee. That being said, the views that I express today are 
my own and not necessarily the official position of the Concord 
Coalition.
    This hearing is titled The Case for Pro-Growth Tax Reform. 
Well, I think that is un-controversial. I am for pro-growth tax 
reform as well as my other two colleagues here today. The 
issue, I think, is what exactly does a pro-growth tax reform 
look like. And it is not so simple. I think that we are used to 
hearing that all we have to do to fix our fiscal situation is 
grow the economy and what it takes to grow the economy is lower 
taxes. But there is some causation that runs the other way, 
too. And unfortunately that makes the challenge of creating a 
tax reform that is good for the budget a little more difficult.
    Tax cuts all have benefits. Everyone loves tax cuts. Tax 
cuts are going to benefit some businesses, some households. The 
problem is that when times are tight like they are for us in 
terms of finding funds for the government to be able to conduct 
its business, when times are tough we have to weigh costs 
against benefits. So just having benefits from tax cuts is not 
enough. We have to know that it passes a cost-benefit test.
    Here are a few reasons, a few basic reasons, why it is not 
so easy to grow the economy by just cutting taxes and reducing 
revenues. The number one reason is because deficit financed tax 
cuts, they sort of like dig a hole into the ground first and 
with the hope that we will leap out of the hole from the growth 
that it produces from private sector activity. The hole that I 
am talking about is the decrease in public saving. National 
saving is the sum of public plus private saving. So if you 
deficit finance the tax cut, you start with a negative change 
to public saving, so you have to hope that there is enough of a 
positive change in private saving to more than offset that in 
order to get a net increase in national saving. National saving 
is the key to supply-side longer-term economic growth. So that 
is why, unfortunately, you start from a little hole, or a 
pretty big hole, because it is a dollar-for-dollar decrease in 
public saving as soon as you deficit finance a tax cut.
    Second, how the taxes are cut matters. What matters for 
supply-side incentive affects are marginal tax rates. So the 
structure of the tax change we are contemplating really matters 
in terms of how much economic growth over the longer term in 
terms of aggregate supply in the economy can you expect. The 
problem is that a lot of our tax cuts have more of a cut in 
average tax rates rather than tax rates at the margin. If we 
cut taxes at the margin, we have to ask the question, How big 
are the incentive affects likely to be? There is a lot of 
uncertainty about that. A lot of households and businesses do 
not even react to marginal tax rates as much as they react to 
cash flow. And yet, marginal tax rates and those incentive 
affects on labor supply and savings are what matters for the 
kind of growth that I think we are all hoping for.
    Third, in an economy recovering from recession, the binding 
constraint in the economy in terms of making it bigger is not 
the supply-side of the economy because we have plenty of 
productive capacity right now. The binding constraint is that 
we are not putting enough of that productive capacity to work. 
So it is a demand side constraint. So unfortunately, right now, 
we have to figure out how to increase the demand for goods and 
services first before we can start to worry about how the tax 
code can encourage labor supply and saving.
    Our experience with the Bush tax cuts unfortunately has 
demonstrated each of these challenges well. Because we deficit-
financed all of the Bush tax cuts, we have seen a huge decrease 
in national saving. Private saving did not increase 
dramatically to help offset that drop in public saving.
    Secondly, they have not been very effective at increasing 
the supply side of the economy. We have not seen big increases 
in the incentive for people to work or increase their personal 
saving.
    And third, the Bush tax cuts are really not a very good 
kind of tax cut in terms of short-term stimulus, in terms of 
providing a lot of increase and demand for goods and services. 
They do not have high bang for buck, as economists say. So if 
you look at CBO's list of the kinds of tax cuts that are most 
stimulative to demand, you will find the Bush tax cuts are at 
the bottom of the list of tax cuts.
    Economists agree that the federal budget is on an 
unsustainable path and that for the continued health of the 
economy, deficits must eventually come down. Even if we do not 
reduce deficits right away in the next couple years as we are 
still recovering, a credible plan to reduce deficits over the 
next 10 years is really essential, not just to long-term 
economic growth, but for the short-term stability of the 
economy, the confidence of our global investors.
    Tax policy has to be part of the solution. It is true that 
the greatest pressures on the federal budget over the next 
several decades are certainly in the entitlement programs. That 
is very easy to see. It is very easy to understand. Medicare 
and Social Security are programs that go largely to the 
retirement age population. The retirement age population is 
growing, and on top of that, per capita health costs are 
growing. So we all know that story. We all know that is the 
driver of the long-term outlook.
    Unfortunately, it does not mean that we cannot bring taxes 
into the solution just because they are not responsible for the 
bulk of the problems going forward. It is very difficult for me 
to imagine that our society would actually be willing to cut 
spending enough to keep taxes at as low of a level as they are 
at currently or even historically over the past 40 years.
    The historical average level of revenues to GDP has very 
little bearing on what the right level of revenues is going 
forward. And those who oppose raising revenues as shared GDP 
are often convinced that this will increase the size of 
government. But I would urge you to look at the myriad of tax 
expenditures in our tax code that amount to over $1 trillion a 
year. And consider that unfortunately they are not just tax 
loopholes, but they are probably more appropriately considered 
tax entitlements.
    There are many policies. I am going to urge you to stick to 
the current law baseline for revenue levels as a goal. As Mr. 
Van Hollen mentioned, that is way bigger than even a grand 
bargain would call for in the task of the super committee, but 
I urge you to set that as a goal because it would allow us to 
have some impetus for tax reform for a revenue-neutral type of 
tax reform relative to current law. If we wish to extend 
expiring tax rates, we can choose to extend that, but let's try 
to pay for it by base-broadening or by finding spending cuts or 
revenue increases elsewhere. There are ways we can do it other 
than doing nothing. We can go the big route which is 
fundamental tax reform. We can go the do it to the rich route, 
which is raise taxes only on the right, but I think for the 
purpose of this committee concerned with pro-growth tax reform, 
what you want to do is focus on base-broadening tax reform that 
can keep rates low and stick to something closer to current law 
revenue baseline.
    So I elaborate on these points in my written testimony. And 
I thank you for the opportunity, and I am happy to take your 
questions.
    [The prepared statement of Diane Lim Rogers follows:]

        Prepared Statement of Diane Lim Rogers, Chief Economist,
                         the Concord Coalition

    Chairman Ryan, Mr. Van Hollen, and Members of the Committee: Thank 
you for giving me this opportunity to testify before you today on the 
issue of ``pro-growth tax reform.''
    I work for the Concord Coalition, a group that's been dedicated to 
the cause of fiscal responsibility for two decades now--through both 
the ``thick'' and ``thin'' of federal deficits! As such, I think tax 
reform should never be considered in isolation of the rest of federal 
budget policy, and that bias will be clear in my testimony. 
Nevertheless, the views I express here are my own and do not 
necessarily represent the official position of the Concord Coalition.
    This hearing is titled ``The Case for Pro-Growth Tax Reform.'' 
Well, the ``case'' for pro-growth tax reform is easy and non-
controversial--as achieving a stronger economy makes pursuing any other 
social goals easier (deficit reduction, higher and fairer standards of 
living, greater investment in higher quality public goods and services, 
etc).
    The disagreement is over what makes a given tax reform ``pro-
growth.''
    Growing the economy through tax policy isn't as simple as ``cutting 
taxes'' to reduce overall tax burdens. Tax cuts all have benefits, but 
the first thing one learns in an economics class is in a world of 
scarce resources, we maximize well being by weighing costs against 
benefits, and at the margin starting from where we are right now. Tax 
cuts that might benefit particular households and businesses don't 
necessarily pass society's cost-benefit test, even based on a narrower 
and naive goal of maximizing GDP because:
    (i) If deficit financed, the direct reduction in public saving will 
typically outweigh any positive response from private saving, so 
national saving and economic growth falls. This is the biggest factor 
preventing simple cuts in overall tax rates from being ``pro growth'' 
over the longer term.
    (ii) How taxes are cut matters: marginal tax rates are what matters 
for supply-side growth effects (increases in incentives to work and 
save), and those responses depend on how large the change in marginal 
rates (we're starting from relatively low rates), how large the 
responsiveness (``substitution effects'') of households and businesses 
to those rates (often pretty small), and how other factors (such as 
``income effects'') may swamp those responses to price changes.
    (iii) In an economy still recovering from recession, we have to 
worry about getting back to ``full employment'' (where we are putting 
all of our productive capacity to use) before turning to growing the 
productive capacity of the economy over the longer term. Tax policies 
that help increase demand for goods and services (and hence businesses' 
demand for workers) can be quite different from those that increase the 
supply of labor and capital.
    Our experience with the Bush tax cuts has demonstrated each of 
these challenges, as their major contribution to record-high deficits 
clearly reduced national saving and economic growth, were not very 
effective at growing the supply side of the economy (even according to 
the Bush Administration's own Treasury Department), and are not the 
kind of tax cuts that provide high ``bang per buck'' in a recessionary 
economy.
    Economists agree that the federal budget is on an unsustainable 
path and that for the continued health of the economy, deficits must 
eventually come down to levels lower than the growth rate of the 
economy (allowing the debt/GDP ratio to be stabilized). Even though a 
sizeable level of deficit spending over the next one or two years can 
be justified to support the economic recovery, a commitment to bring 
down deficits to lower, more sustainable levels over the next decade is 
essential not just for longer-term economic growth but for shorter-term 
economic stability (via the confidence of global investors in the U.S. 
economy).
    Tax policy has to be part of the solution. It is true that the 
greatest pressures on the federal budget in the decades to come are in 
the entitlement programs because of the aging of the population coupled 
with rising per-capita health costs. But it is hard to see how our 
society would choose cuts in real, per-capita benefits of the magnitude 
necessary to both achieve sustainable deficits and keep revenues at the 
historical average. And even if we would choose to do so, we would 
never do it very soon; entitlement reforms would have to be phased in 
much more slowly than tax reforms could take effect.
    The historical average level of revenues/GDP has very little 
bearing on what the right level of revenues is going forward. The right 
level of revenues is that which is adequate to pay for the government 
we desire. (And the right size of government is that which we are 
willing to pay for.) Given the dramatic changes in the structure of our 
population and the continued growth and evolution of our economy, it is 
difficult to see how what was right over the past 40 years--and it 
wasn't even quite adequate then--could be right over the next 40 years.
    Those who oppose raising revenue usually assume higher revenues 
will lead to larger government. But the holes in our income tax base--
the special exemptions, deductions, credits, and preferential rates--
amount to over $1 trillion/year (about 90 percent of this in the 
individual income tax and 10 percent in the corporate), nearly as much 
as all of discretionary spending combined.\1\ ``Filling out'' the tax 
base by reducing these tax expenditures would level out and support 
lower marginal tax rates (reducing the economic distortions caused by 
taxes), and reduce both the deficit and the effective size of 
government, all in a progressive as well as more generally ``fair'' 
manner. Thus, this type of tax reform--broadly applicable to both the 
individual and corporate income tax systems--is consistent with the 
goals of both Republicans and Democrats and ought to be the easiest 
area to find bipartisan agreement on policies to reduce the deficit.
---------------------------------------------------------------------------
    \1\ Donald B. Marron, ``How Large Are Tax Expenditures?'', Tax 
Notes, March 28, 2011 (http://www.urban.org/uploadedpdf/1001526-
Expenditure-Estimates.pdf).
---------------------------------------------------------------------------
    Adjusting the CBO current-law baseline to construct the Concord 
Coalition's ``plausible baseline'' (a ``business as usual'' projection) 
triples the ten-year deficit from $3.5 trillion to $10.4 trillion--with 
$5.7 trillion of the $6.9 trillion difference due to tax policy and the 
plethora of expiring, deficit-financed tax cuts in current law.\2\ The 
current-law baseline level of revenues achieves an economically-
sustainable level of deficits over the next 10-20 years according to 
CBO. So whatever we do on the tax policy front, we should commit to 
achieving current-law revenue levels.
---------------------------------------------------------------------------
    \2\ See ``The Concord Coalition Plausible Baseline,'' updated 
August 2011: http://www.concordcoalition.org/concord-coalition-
plausible-baseline.
---------------------------------------------------------------------------
    There are many tax policies that would be consistent with the 
current-law baseline level of revenues. I have characterized the three 
main approaches as: ``do nothing'' (let the Bush tax cuts expire as 
scheduled at the end of 2012), ``do it big'' (broaden the tax base by 
reducing tax expenditures, paying for lower tax rates), and ``do it to 
the rich'' (such as via a surtax on millionaires and/or large 
corporations). Each approach has different relative advantages 
regarding their economic effects and political attractiveness. The best 
economic effects would come from increases in revenue accomplished 
through progressive base broadening/reduced tax expenditures. We could 
do any combination of the approaches, and all would be encouraged in 
practice with a commitment to strict, no-exceptions, pay-as-you-go 
rules--on new or extended tax cuts and not just spending increases. 
This commitment is something the debt limit deal's ``super committee'' 
could propose right away to get us on the path to sustainable deficits.
    I elaborate on some of these points in the sections that follow, 
which draw largely from the recurring column I write for Tax Notes 
magazine, published by Tax Analysts.
              the nitty-gritty on tax cuts and the economy
    Constructing smart tax policy within the broader context of fiscal 
responsibility requires recognizing the connections and tradeoffs 
between tax rates, tax bases, revenues, public and private saving, and 
economic growth. The theory behind supply-side tax policy suggests that 
reducing tax rates encourages taxpayers to work and save and thus is 
good for the size of the tax base and for revenues. But in practice, 
tax cuts rarely pay for themselves, as the more extreme Laffer curve 
version of supply-side economics would suggest. We experienced higher 
revenues and budget surpluses following the tax rate increases enacted 
under the Clinton administration and lower revenues and high deficits 
following the tax cuts under the George W. Bush administration. In 
looking for economically efficient ways to raise revenue, there's room 
to improve the existing income tax base before we play around with the 
rate structure or add new tax bases. A tax cut needs to do more than 
provide just some marginal benefit; there must be enough benefit to 
make the cut worth its cost, relative to competing demands. If reducing 
tax rates encourages economic activity but doesn't pay for itself (such 
as with a rate cut that increases the deficit more than it encourages 
private saving), it's not necessarily good for the economy.
    There is no policy area where conservatives and liberals are 
further apart than tax policy. Conservatives argue that tax cuts that 
raise returns to saving and investment, or increase the rewards for 
work, are always good for the economy, in good times and in bad. 
Liberals argue that tax cuts primarily raise the incomes of the rich 
and squeeze out benefits for the poor, and are the worst type of fiscal 
policy when the economy is in a recession. Both sides neglect the 
adverse long-term economic effects of any type of tax cut that is 
deficit financed.
    The debate is confusing because not all tax cuts are created equal, 
and the economic effects of those tax cuts differ across three 
dimensions: (1) the condition of the economy; (2) how the policy 
affects relative prices (substitution or incentive effects) versus real 
incomes (income or distributional effects); and (3) how the cost of the 
policy is paid for. When evaluating the effects of any particular tax 
cut on the economy, one should ask the following questions.
                   a. where's the binding constraint?
    In a cyclical downturn, increasing aggregate supply (the productive 
capacity of our economy) won't do any good, because the problem isn't 
too little capacity, but too much idle capacity. To increase the level 
of economic activity, or GDP, we need to increase demand for goods and 
services so that more of current supply is used. Think of the uses or 
demand side of the GDP equation--C + I + G + (X-M)--and contemplate 
what the government's fiscal policy can do to increase consumption (C), 
investment (I), or net exports (X-M) indirectly via tax cuts and other 
subsidies, versus increasing direct government purchases of goods and 
services (G). In terms of the boost to GDP, tax cuts and subsidies are 
automatically handicapped relative to direct spending, and unless they 
produce multipliers of greater than 1, they will fall short of the 
success of dollar-for-dollar direct government purchases.
    But in a full-employment economy, fiscal policy is ineffective in 
increasing demand-side GDP because supply is the limiting factor. GDP 
can be increased only by encouraging growth in the stock of those 
productive resources--the supply side of the economy. In this case, we 
need to ask how we can use fiscal policy to increase incentives to work 
or to save. How can fiscal policy be reformed to reduce any of the 
preexisting disincentives and distortions to economic decisions created 
by current policy?
                     b. what kind of tax cut is it?
    Tax cuts typically generate two types of effects on the 
microeconomic decisions of households and businesses: a substitution 
effect whereby relative prices are changed to encourage substitution 
into more lightly taxed activities and away from highly taxed ones, and 
an income effect whereby the higher cash flow to those receiving the 
benefits of the tax cut generates a change in their economic activity.
    1. Substitution effects and supply-side tax policy. In a full-
employment economy, tax policy's effect on relative prices is more 
important than it is in a recessionary economy. Marginal tax rates are 
what affect choices concerning the sources and uses of income. Tax cuts 
that reduce the marginal tax rates on labor or capital income will 
encourage substitution into greater labor supply or saving, boosting 
incomes and GDP. Tax cuts without any effect on marginal tax rates, in 
contrast, do not improve incentives at the margin. An example of a tax 
cut that reduces average tax rates and boosts average after-tax returns 
without reducing the marginal tax rate is that of raising the 
contribution or income limits on tax-preferred savings accounts. 
Because many higher-income taxpayers are already maxed out on the tax-
preferred options, and might continue to be even after the higher 
limits, increasing the availability of the tax subsidy for those 
households can cause shifting of existing savings (moving money out of 
taxable accounts into tax-free ones) without necessarily creating any 
new savings. The policy would generate positive income effects for 
these taxpayers even without any substitution effects.
    Empirical research on the significance of substitution effects 
shows that higher-income households are more responsive to changes in 
marginal tax rates than lower-income households, probably because they 
can fine-tune their work hours more easily, and because the relative 
price change itself is usually larger at higher income levels given the 
progressive, graduated rate structure of the federal income tax. In 
fact, many lower-income households are entirely exempt from the federal 
income tax and so are completely unaffected by changes in marginal 
income tax rates. This has encouraged economists to suggest that flat 
rate tax systems (with a single marginal tax rate above some exemption 
level of income) would generate positive and sizable supply-side 
effects on labor supply and saving. But hold that thought, because how 
much the tax cut would cost in terms of lost revenue and the deficit 
would affect the supply side of the economy as well.
    Increased supply-side incentives can also be achieved by reducing 
differences across marginal tax rates on different sources and uses of 
income. Broadening the income tax base by reducing tax expenditures 
would raise the overall average tax rate but would do so by raising 
marginal tax rates only on those sources and uses of income that are 
currently undertaxed in the definition of taxable income. By reducing 
the tax advantage to those currently undertaxed forms of income, the 
substitution effects away from higher-taxed income would actually be 
reduced and that type of income would be encouraged, even as the 
economy-wide average tax rate rises.
    Must one be a supply-side economist to believe in the existence of 
these supply-side types of responses? No. Economists of all stripes 
broadly agree in the theory that households and businesses respond to 
relative price changes when those agents are given the opportunity and 
have the capacity to do so. Economists also agree that marginal tax 
rates matter in terms of their incentive effects. The debate over how 
valuable to the economy supply-side tax policy can be is largely over 
how large those substitution/incentive effects are in the real world, 
relative to the other economic effects of tax policy.
    2. Income effects and demand-side tax policy. In a recessionary 
economy, the income effects of tax policy matter more. The distribution 
of the dollar benefits of a tax cut will affect how much the demand for 
goods and services is stimulated. Tax cuts focused on the top marginal 
tax rates don't deliver anymore dollars to lower-income households who 
have the highest propensities to consume. The effect on relative prices 
matters less than the effect on the levels and distribution of after-
tax income. In fact, an economy-wide tax cut isn't a prerequisite of a 
successful demand-side tax cut. Consider a purely hypothetical and 
purely redistributive (income-effects-only) Robin Hood policy that 
increases taxes on the rich and gives the proceeds to the poor. This 
would increase aggregate demand in the economy by simply shifting 
income away from savers toward non-savers. Note that this is quite 
contrary to the optimal strategy in a supply-side tax cut designed to 
increase labor supply and saving.
    Perhaps even more curious, fiscal policies that might seem 
ineffective or unjustified in terms of incentive effects (such as 
Social Security cost of living adjustment makeups for seniors, tax 
breaks for new homeowners, and the ``Cash for Clunkers'' program) might 
nonetheless have a high bang per buck in terms of stimulating aggregate 
demand in a recessionary economy. Even if those policies actually do 
nothing to encourage the economic activity they're ostensibly designed 
to, as long as they steer dollars to households with high marginal 
propensities to consume, they can nevertheless turn out to be pretty 
effective in stimulating demand.
    On the flip side, we shouldn't worry much about higher taxes having 
large dampening effects on demand if those tax increases are mostly on 
higher-income households with low marginal propensities to consume. We 
also shouldn't be too concerned about the potential recessionary 
effects from tax increases that would take effect only after the 
economy is back to full employment.
    The timing of tax cuts matters. At either the business level or 
household level, temporary tax cuts are likely to have a greater 
stimulative effect on the demand for goods and services than permanent 
tax cuts, because the timing of transactions is relatively easy to 
change--according to University of Michigan economist Joel Slemrod's 
hierarchy of responses.\3\ A temporary tax cut will generate a large 
effect as the qualified activity is shifted forward whenever a tax cut 
has a deadline, even if the same tax cut, because it is only temporary, 
has a much smaller or negligible long-term effect on the components of 
aggregate supply.
---------------------------------------------------------------------------
    \3\ Joel Slemrod, ``Tax Systems'' in NBER Reporter, Summer 2002 
(http://www.nber.org/reporter/summer02/slemrod.html) and ``Income 
Creation or Income Shifting? Behavioral Responses to the Tax Reform Act 
of 1986,'' American Economic Review, 85(2), May 1995 (http://
www.jstor.org/pss/2117914).
---------------------------------------------------------------------------
                 c. how is the tax cut being financed?
    1. Deficit financing sometimes helps and sometimes hurts. In a 
recessionary economy, deficit financing will increase the 
countercyclical stimulative effect of any particular tax cut on 
aggregate demand by promoting consumption of goods and services in 
excess of personal incomes. But that doesn't mean any deficit-financed 
tax cut (or spending) makes for the best stimulus, because there are 
longer-term economic costs still associated with the deficit--the debt 
has to eventually be repaid in higher taxes or reduced spending in the 
future. That puts limits on the amount of deficit-financed stimulus 
that's economically justified. We want to maximize the economic bang 
for the buck in deficit-financed stimulus, so fiscal responsibility 
requires that we determine a level of deficit spending we deem worth 
it, put high bang-per-buck spending or tax cuts at the front of the 
line (ranking fiscal policies from most effective to least), and draw 
the line at the credit limit we've implicitly established.
    In a full-employment economy, however, deficit financing represents 
a dollar-for-dollar decrease in public saving, making it harder for the 
tax cut to increase national saving unless private saving is encouraged 
by more than the cost of the tax cut. This is not quite as high a 
standard as the tax cut paying for itself (as proposed by the Laffer 
curve)--which is 1/t times as hard (t being marginal tax rate on 
private returns to saving). This is why the Bush tax cuts have been 
evaluated as a net negative for economic growth by William Gale and 
Peter Orszag within the first few years of the Bush tax cuts, and by 
Gale more recently.\4\ It also explains why increased tax rates during 
the Clinton administration coincided with higher, not lower, economic 
growth.
---------------------------------------------------------------------------
    \4\ William G. Gale and Peter R. Orszag, ``Bush Administration Tax 
Policy: Effects on Long-Term Growth,'' Tax Notes, October 18, 2004 
(http://www.taxpolicycenter.org/UploadedPDF/1000698--Tax--Break--10-18-
04.pdf) and William G. Gale, ``Five Myths about the Bush Tax Cuts,'' 
Washington Post, August 1, 2010 (http://www.washingtonpost.com/wp-dyn/
content/article/2010/07/30/AR2010073002671.html).
---------------------------------------------------------------------------
    The choice to deficit finance now does not permanently avoid a 
tougher choice. Deficit-financed tax cuts do not pay for themselves, 
and they imply inevitably higher taxes or lower spending in the future. 
This intergenerational redistribution is another economic effect of the 
tax cut.
    2. On the other hand, paying for the tax cut sometimes hurts and 
sometimes helps. In a recessionary economy when the goal is increasing 
current consumption, offsetting the cost of the tax cut with spending 
cuts or tax increases will reduce the net stimulative effect on 
aggregate demand for goods and services. The more the offset affects 
lower-income households (those most constrained), the larger the 
negative effect. Paying for a tax cut going to primarily high-income 
households with a cut in spending that benefits primarily low-income 
households would likely be contractionary, not stimulative.
    In a full-employment economy, however, finding budgetary offsets to 
the cost of a tax rate reduction is likely to be better for encouraging 
aggregate supply and boosting GDP than deficit financing. That's 
because the deficit reduces public saving dollar for dollar, while 
empirical evidence has shown that the adverse effect of the offsetting 
policy on private saving is likely to be something less than dollar for 
dollar.
            d. tax cuts matter, but aren't one size fits all
    So are tax cuts good for the economy? It depends. As 
countercyclical policy during a recession, deficit-financed tax cuts 
can help stimulate demand, but deficit-financed spending is likely to 
be even more effective if it is deliberatively targeted toward lower-
income households. As supply-side policy during periods of full 
employment, tax cuts are most effective if they increase incentives at 
the margin to work and save--that is, by reducing marginal tax rates or 
leveling rates across different forms of income--but any deficit 
financing is likely to produce a net negative effect on national 
saving.
    That's why a revenue-raising (relative to current policy) tax 
reform that reduces or levels out effective marginal tax rates and 
broadens the tax base at the same time is such a win-win-win formula:
    Win #1: It attends to the economy's needs. In a full-employment 
setting, revenue-raising tax reform encourages supply-side private-
sector economic activity without generating offsetting reductions in 
public saving. In a recessionary economy, raising revenue primarily 
from higher-income households minimizes any dampening effect on short-
term demand for goods and services, while supporting greater levels of 
high bang-per-buck fiscal stimulus.
    Win #2: It creates the right price incentives and distribution of 
income. By focusing on lower marginal tax rates and a broader, more 
neutral tax base achieved through reducing tax expenditures, it reduces 
the distortionary effects of tax policy on economic decisions, creating 
the right kind of substitution/relative price effects to maximize its 
economic effectiveness, while also generating income effects that can 
be helpful as countercyclical policy.
    Win #3: It doesn't increase the deficit. As a deficit-neutral tax 
cut, it avoids the direct decrease in public saving that is harmful in 
a full-employment economy, without requiring alternative budgetary 
offsets that would reduce other and perhaps more stimulative forms of 
deficit spending when the economy is still recovering from a recession.
    Tax cuts are always an attractive option in the political world 
where budget constraints are often ignored. But in the real world and 
in real time--where budget constraints bind and opportunity costs 
matter--policymakers must be mindful of the fact that the effectiveness 
of any particular tax cut depends on our economic circumstances and 
goals and how those mesh with the structure of the tax policy.
             how reducing tax expenditures would make for a
                    ``grand bargain'' on tax reform
    The most basic role of taxation is to collect funds to pay for 
publicly provided goods and services, including subsidies for private-
sector activities. But we also spend much of those public funds through 
the tax system via tax expenditures. The special provisions in our 
federal income tax code--exemptions, deductions, credits, or 
preferential tax rates--that reduce tax burdens on specific groups are 
economically analogous to direct spending and have a total cost of 
about $1 trillion per year--as much as all discretionary spending 
combined. If we are to bring greater fiscal discipline to the federal 
budget, we'll need to carefully evaluate the structure of our tax 
system in terms of the economic merits of the various provisions, 
weighing costs against benefits, just as we do when evaluating 
spending-side programs. Are the tax expenditures justified as having 
higher net benefits than other spending programs that are being cut? In 
some cases, are we actually promoting specific activities via tax 
expenditures that run counter to other fiscal policy goals? If budget 
analysts started accounting for the longer-term growth of different 
types of tax entitlements just as we project the growth of different 
categories of more traditionally defined discretionary and mandatory 
spending, we would likely find these tax preferences are some of the 
fastest-growing components of federal spending. And because tax 
expenditures are created by cutting holes out of a progressive income 
tax base, their benefits go disproportionately to higher-income 
households, making them a more palatable target for cuts than most 
other forms of spending.
    Thus, reducing tax expenditures is a strategy that I believe is an 
essential component of any bipartisan solution to the deficit problem.
    Make a Venn diagram of all the specific proposals that the various 
deficit reduction commissions, study groups, and task forces came up 
with, regardless of their political leanings, and what does the 
intersection of the proposals look like? It's big, fundamental, and 
worth lots of money. That intersection is the proposal to raise more 
revenue by broadening the tax base. Of all the ways to significantly 
reduce the budget deficit, base-broadening tax reform has the qualities 
most likely to appeal to Democrats and Republicans alike.
    Reducing tax expenditures is like the fiscal policy version of the 
old Miller Lite beer commercial: It tastes great and it's less filling. 
Here's why:
    Spending-side blame shouldn't rule out tax-side solutions. Although 
the largest projected changes to the federal budget come from rapidly 
increasing spending on federal entitlement programs, once we consider 
the reasons for that increase it's unreasonable to think the solution 
is to just stop it. Given the demographic pressures of an aging 
population (which we cannot change) and rising per capita healthcare 
costs (which we don't yet fully understand how to change), a spending-
side-only strategy would mean drastic cuts in real, per capita 
benefits, which I don't believe either political party really wants. 
Given the level of real entitlement benefits that our society wants to 
maintain, the problem is as much that revenues can't keep up as it is 
that spending is growing too fast. That means our historical experience 
with the level of revenues as a share of our economy (averaging 18 to 
19 percent of GDP) is not a guide for what we will need in the future, 
especially considering that those past levels of revenues haven't even 
proved adequate to cover spending and have recently sunk to historic 
lows of just 15 percent of GDP.
    Raising revenue by reducing tax expenditures would shrink, not 
expand, government. The Republican pledge on taxes has always been 
touted as a small-government stance. But some of the most fiscally 
conservative members of the Republican Party--including Senator Tom 
Coburn of Oklahoma--now recognize that there's no simple correlation 
between the level of revenues and the size and reach of government, 
given the prevalence of tax expenditures. Federal tax expenditures 
currently total $1.3 trillion annually--almost exactly as much as all 
discretionary spending combined.\5\ While it's not realistic to imagine 
eliminating all tax expenditures--or raising that $1 trillion-plus even 
if we could because of behavioral responses and the likelihood we'd see 
some eliminated tax expenditures appear on the direct spending side of 
the budget--the potential to cut significant levels of subsidies on the 
tax side of the budget is still huge. President Obama's fiscal 
commission made that point when it proposed a ``modified zero'' 
approach to deficit-reducing tax reform, illustrating the trade-off 
between a broader tax base (the broadest of which would zero out all 
tax expenditures) and the marginal tax rates needed to achieve a 
specified level of deficit reduction.\6\
---------------------------------------------------------------------------
    \5\ Marron, ``How Large Are Tax Expenditures?'', op. cit.
    \6\ ``The Moment of Truth,'' report of the National Commission on 
Fiscal Responsibility and Reform, December 2010 (http://
www.fiscalcommission.gov/sites/fiscalcommission.gov/files/documents/
TheMomentofTruth12--1--2010.pdf).

                                         Reducing Tax Expenditures Both:
----------------------------------------------------------------------------------------------------------------
                                                              ``Less Filling'' (Republicans like) because it . .
         ``Tastes Great'' (Democrats like)             and                            .
----------------------------------------------------------------------------------------------------------------
Reduces deficit on tax side                            and   Cuts government subsidies/``tax entitlements''
Raises revenue                                         and   Reduces size of government
Enhances progressivity                                 and   Increases economic efficiency
Avoids cuts in high bang-per-buck, short-term          and   Reduces longer-term deficit to encourage higher
 stimulus spending                                            saving and economic growth
----------------------------------------------------------------------------------------------------------------

    And tax expenditures don't just imply larger government because of 
the higher tax rates required to finance the rest of government; they 
expand government's influence on the economy. Tax expenditures 
subsidize some economic activities over others. In recasting those tax 
subsidies in terms of what they would look like if they were run 
through the spending side of the budget, Donald Marron and Eric Toder 
of the Tax Policy Center (TPC) estimate that the implied level of 
government spending rises from roughly 18 percent of GDP to 24 
percent.\7\ Republicans who continue to claim that any type of revenue 
increase would expand government are obviously missing this point.
---------------------------------------------------------------------------
    \7\ Donald Marron and Eric Toder, ``Measuring Leviathan: How Big Is 
the Federal Government?'', presentation for Loyola Law School 
conference on tax expenditure reform, January 2011 (http://
events.lls.edu/taxpolicy/documents/PANEL2MarronToderSizeofGovernment-
presentationFinal01-06-11.pdf).
---------------------------------------------------------------------------
    Reducing tax expenditures is a progressive solution that defies the 
equity-efficiency trade-off. Raising taxes progressively (a Democratic 
priority) does not have to mean raising marginal tax rates on the rich 
and increasing the distortionary effects of taxes on economic decisions 
(a Republican concern). A TPC analysis has shown that raising the 
needed additional revenues to achieve fiscal sustainability from only 
the top 2 to 3 percent of the population, without any base broadening, 
would mean that increases in the top federal income tax rates would 
have to be prohibitively large--getting to Laffer curve levels in 
excess of 75 percent.\8\
---------------------------------------------------------------------------
    \8\ Rosanne Altshuler, Katherine Lim, and Roberton Williams, 
``Desperately Seeking Revenue,'' Tax Policy Center, January 2010 
(http://www.taxpolicycenter.org/publications/url.cfm?ID=412018).
---------------------------------------------------------------------------
    Because tax expenditures poke holes in a progressively structured 
income tax system (with graduated marginal tax rates), filling in at 
least a portion of those holes would raise revenue (and cut subsidies) 
progressively, while smoothing out, instead of exacerbating, the dips 
and bumps in the tax policy playing field. By reducing tax 
expenditures, we can achieve a progressive change in tax policy that 
would avoid the trade-off with economic incentives and growth. 
Moreover, the progressive rate structure that causes tax expenditures 
to disproportionately benefit the rich also explains why these tax-side 
subsidies will grow dramatically in real costs over time as real 
incomes grow. Just as real bracket creep pushes more and more income 
into higher marginal tax brackets over time, it will push more and more 
economic activity into more-tax-preferred status. The single largest 
tax expenditure in the federal budget, the exclusion of employer-
provided healthcare, will grow especially dramatically in cost over 
time--and the benefits will get more skewed toward higher-income 
households--as its value rises with the rise in per-capita healthcare 
costs as well as the growth in real incomes.
    Reducing tax expenditures is an inherently progressive policy 
strategy and can be made as progressive as we want it to be through the 
use of caps and phaseouts, such as in Obama's proposal to limit the 
value of itemized deductions to a maximum 28 percent rate. That makes 
it clear that reductions in tax expenditures are more easily tailored 
to the progressivity goal if they are modified via the personal income 
tax, a direct tax on households based on their directly observable 
levels of income. The healthcare reform bill's approach to paring back 
the tax expenditure subsidizing employer-provided healthcare--by 
imposing an excise tax on high-end insurance plans to be paid by the 
insurance companies (but whose ultimate burden will be felt by 
households that purchase expensive insurance plans regardless of their 
income level)--is a prime example of how political concerns can turn 
good intentions into suboptimal policy.
    Reducing tax expenditures would address both near- and longer-term 
economic concerns. There are two sides to achieving fiscal 
sustainability: the ways we spend, and the means to pay for it. Just 
mechanically reducing the deficit by cutting spending or raising taxes 
in any old way is not enough. The policies that reduce the deficit must 
be thoughtfully crafted to promote a strong economy, both in the short 
term as we continue to need demand-side stimulus to speed the recovery 
from an unusually severe recession, and over the longer term, when we 
should focus on increasing our productive capacity, or the ``supply 
side'' of our economy.
    It's difficult to find a deficit reduction strategy better suited 
to addressing both types of economic concerns than reducing tax 
expenditures. Because tax expenditures disproportionately benefit 
higher-income households, who are much less constrained and save large 
fractions of their income, paring back those benefits would be far less 
damaging to the short-term demand for goods and services than cutting 
other forms of government spending, which disproportionately benefit 
lower-income households. And because of the efficiency gains and 
reduced distortions that come from a broader tax base, reducing tax 
expenditures is a far better way to raise revenue and reduce the budget 
deficit (increasing public saving) while minimizing any adverse effects 
on private sector economic activity (which could come from the 
alternative of raising marginal tax rates). A base-broadening, tax-
rate-leveling, revenue-raising tax reform is a sure thing in terms of 
boosting national saving and longer-term economic growth through 
increases in both public and private saving.
    Cutting tax expenditures is the `tastes great and less filling' 
approach to solving our fiscal problems. Even though achieving deficit 
reduction is naturally unpleasant business, there's something for both 
sides of the aisle to like about doing it by cutting tax expenditures. 
Bottoms up!
    sticking to pay-as-you-go rules to achieve sustainable deficits
    For revenues to play any meaningful role in deficit reduction, 
policymakers will have to set a revenue target somewhere far closer 
to--ideally, precisely at--current law. The best outcome would be if 
policymakers agree to strict, no-exceptions, pay-as-you-go rules on 
expiring tax cuts, which by definition would require current-law levels 
of revenue. That would allow enough deficit reduction to achieve fiscal 
sustainability over the medium term of the next 10 to 20 years--long 
before any entitlement reforms would significantly affect spending 
levels.
    Achieving current-law levels of revenue does not necessarily 
require letting current law play out--which would be easy, by the way, 
because Congress and the administration could just go home and do 
nothing. Here are three broadly different tax policy strategies that 
could each be consistent with the current-law baseline:
    1. Do Nothing. Allow all expiring tax cuts to expire as specified 
under current law. That would mean reverting to Clinton-era marginal 
tax rates.
    2. Do It Big. Extend some or all of the marginal tax rates under 
the Bush tax cuts, but fully offset the costs of extending the low 
rates by broadening the tax base and reducing some tax expenditures 
(for example, limiting itemized deductions or reducing the exclusion of 
employer-provided health benefits). This is the fundamental tax reform 
approach.
    3. Do It to the Rich. Extend some or all of the Bush tax cuts--
particularly those that affect middle-income taxpayers (lower tax 
rates, child tax credit, marriage penalty relief)--and fully offset the 
costs by imposing an extra tax on the very rich, such as a surtax on 
households with incomes in excess of $1 million.
    How do the three strategies compare in terms of economic effects? 
Theoretically it seems they would not be as different in their effects 
on the shorter-term, demand-driven recovery as on longer-term, supply-
side growth. Pursuing the second or third option might do less damage 
to near-term demand than the do-nothing approach. But none of those 
income tax increases would threaten the recovery as much as the 
alternatives of spending cuts or letting the payroll tax cut expire.
    All three tax policies would achieve the same amount of deficit 
reduction based on static revenue estimates. But are there potential 
differences in their dynamic effects on the economy's productive 
capacity? The higher marginal tax rates under the do-nothing approach 
are not likely to have much of a disincentive effect on labor supply or 
saving--as we learned the last time we lived through the Clinton tax 
rate increases. Those marginal income tax rates, peaking at 39.6 
percent, are still relatively low by historical and international 
standards.
    Option 2's fundamental tax reform approach of keeping much of the 
marginal rate structure while broadening the tax base is best for 
supply-side effects and overall economic efficiency, because the 
distortionary effects of taxes on economic decisions would be 
minimized. Option 3's strategy of raising rates just at the very high 
end of the income distribution means marginal rates at the top would 
have to go up substantially more, but it's unclear that the economic 
incentives of the rich to earn more income would be changed that much 
as long as their marginal tax rate were still far from 100 percent. 
Warren Buffett certainly disputes this worry.\9\
---------------------------------------------------------------------------
    \9\ Warren Buffett, ``Stop Coddling the Super-Rich,'' New York 
Times, August 14, 2011 (http://www.nytimes.com/2011/08/15/opinion/stop-
coddling-the-super-rich.html).
---------------------------------------------------------------------------
    Combining all three approaches is possible, too, and makes the 
revenue target easier to achieve without having to take any one option 
to an extreme. For example, we could let the top tax rates expire or at 
least come up a bit (rather than letting all rates expire), reduce some 
tax expenditures in progressive ways (without eliminating them), and 
even add a new top bracket around the millionaire level, as suggested 
by Bruce Bartlett,\10\ without having to raise the top rate to the 
problematic levels suggested by the Tax Policy Center's ``Desperately 
Seeking Revenue'' analysis.\11\ Increasing the capital gains tax rate 
to something closer to that on ordinary taxable income could represent 
a combination of options 2 and 3--reducing a tax expenditure (the 
preferential rate) that disproportionately benefits the rich. In fact, 
various bipartisan deficit reduction groups, including both the Bowles-
Simpson (President's) commission and the Rivlin-Domenici (Bipartisan 
Policy Center) task force, have suggested raising capital gains and 
dividend tax rates under the individual income tax as a way of paying 
for lower marginal rates under the corporate income tax.\12\ This 
sounds like raising some tax rates to lower other tax rates, but in 
fact, it's another application of the guiding principle of 
economically-efficient, fundamental tax reform: broadening the tax 
base--in this case by bringing more capital gains and dividend income 
into the definition of ``ordinary'' taxable income--to allow reductions 
in the highest marginal tax rates (here, the top corporate rate, now at 
35 percent).
---------------------------------------------------------------------------
    \10\ Bruce Bartlett, ``Buffett May Be Right But the Top Tax Rate Is 
Wrong,'' The Fiscal Times, August 19, 2011 (http://
www.thefiscaltimes.com/Columns/2011/08/19/Buffett-May-Be-Right-but-the-
Top-Tax-Rate-is-Wrong#page1).
    \11\ Altshuler, Lim, and Williams, op. cit.
    \12\ Howard Gleckman, ``Should We Cut Corporate Taxes By Raising 
Rates on Investors?'' Tax Policy Center, TaxVox blog, March 29, 2011 
(http://taxvox.taxpolicycenter.org/2011/03/29/should-we-cut-corporate-
taxes-by-raising-rates-on-investors/).
---------------------------------------------------------------------------
    What are the potential differences among those paths politically? 
Of course, option 1 emphasizes a do-nothing Congress (so why bother 
keeping them on their job?); option 2 (fundamental tax reform) means 
policymakers will have to work much harder at actual policymaking and 
requires more public education, engagement, and support of those 
efforts; and option 3 is susceptible to the class warfare and 
redistribution criticisms and partisan battles. I think the politics 
suggests that some combination of all three ways of getting to current-
law baseline revenue levels is probably best.
    Must we go all the way to the current-law revenue baseline? 
Achieving the grand bargain on deficit reduction and going bigger than 
required with revenues would give us more of a cushion to allow for 
future waivers of pay-as-you-go rules for truly stimulative tax 
policies (or spending) that would better qualify as emergency spending. 
We need to change the question from, ``Do we want the Bush tax cuts?'' 
to, ``Are the Bush tax cuts the best way to spend $2.5 trillion over 10 
years--for any purpose, be it short-term stimulus or to encourage 
longer-term economic growth?''
    Whichever way we get there, setting our revenue standards to the 
current-law baseline would get us the more balanced approach to deficit 
reduction that Americans desire, bring revenues high enough to keep 
deficits at an economically sustainable level over the medium term 
(while we continue to work on gradual entitlement reforms), and leave 
us more flexibility in tax and spending policy to better address and 
not worsen the ailments in the near-term economy.
    Note that revenue levels have huge potential in deficit reduction 
but aren't the most important factor in determining tax policy's role 
in stimulating (or contracting) the economy. Big overall revenue losses 
don't necessarily translate into big increases in the demand for goods 
and services (and hence the creation or maintenance of jobs in a 
recessionary economy), if the tax cuts go disproportionately to high-
income households and businesses that are least likely to immediately 
spend their tax cuts. Setting a goal of boosting revenues to current-
law levels to be achieved by increasing the overall progressivity of 
the tax system is therefore likely to both reduce the deficit and 
provide more effective support for the still-fragile economy. In fact, 
if some combination of the different approaches to getting to the 
current-law baseline were taken, we could easily gain enough revenue to 
be able to apply it to both reducing deficits to economically 
sustainable levels and temporarily providing more stimulative deficit-
financed tax cuts or spending.
    Thus, sticking to the current-law revenue baseline really isn't 
that hard to do, and there are lots of opportunities for our 
policymakers to actually make better tax policy while doing it. It 
starts with a simple commitment to strict pay-as-you-go rules on 
expiring tax cuts, something very easy for members of the debt deal's 
``super committee'' to do right away.
  conclusion: improving tax policy and the fiscal outlook at the same 
                                  time
    Politically arbitrary labels such as the choice of budget baselines 
matter a lot, because politicians need these simple metrics to 
demonstrate their success as policymakers. Republicans will always want 
to be known as the tax cutters, while Democrats will always push for 
more progressive taxation. Setting a goal of sticking to the current-
law revenue baseline, which is achieved by base broadening rather than 
higher rates, is a way of honoring the seemingly inconsistent tax 
policy goals of both parties. It seems reasonable that policymakers 
should start from a current-law standard, because making changes 
relative to current law is their legislative responsibility, after all, 
even if the policy-extended baseline is a more accurate reflection of 
``business as usual.''
    Economically, however, it doesn't matter if we view such tax policy 
as raising revenue relative to a current-policy baseline or as keeping 
revenue constant relative to a current-law baseline. All that matters 
is that the policy raises enough revenue to keep deficits at an 
economically sustainable level--where the economy's growth has a chance 
to keep up with the growth of the debt--while minimizing the 
distortionary effects of taxation.
    No matter how one might choose to interpret it--as a policy change 
consistent with Republican goals of reducing tax rates and government's 
interference with market decisions, or as one consistent with 
Democratic goals of reducing the deficit by progressively raising 
revenue as a share of our economy--this type of bipartisan tax reform 
will be crucial to achieving fiscal sustainability. Admittedly, a 
couple decades from now when the results of any entitlement reforms 
begin to materialize, we might discover that revenue neutral relative 
to current law still won't be enough revenue for the long term. But for 
now I think it's a big enough goal for the tax side of the budget to 
aspire to, while holding the spending side of the budget to a tight 
enough constraint to require and inspire some significant progress 
there, too.

    Chairman Ryan. Thank you, Diane. I appreciate it.
    If you could bring up Chart 1 for me, please.
    
    
    In thinking about all of this, I think it is interesting to 
just look at some of the economic data. I think we are 
beginning to achieve a consensus that lower rates are conducive 
to economic growth. Here is where we are headed in 2013 under 
current law, current law as has been proposed by the president 
and passed by the president. So our top rate, on the individual 
side, is going from 35 up to effectively 44.8 percent. So we 
are seeing a steep increase and, as Mr. Hodge mentioned, the 
pass-through entities: sub's s, LOC s, they are going to see a 
steep increase in their rates.
    Go to Chart 2, please.
    
    
    And the thinking behind this is that the wealthy should pay 
their fair share, meaning pay more. Well, I think the evidence 
is pretty interesting here, which is take a look at the 
distribution of the tax burden before and after the 2001 tax 
cuts. In 2001, the top one percent, the top five percent paid 
less of the income tax burden than they do after those tax 
cuts. So looking at data from as a share of the tax burden with 
lower top margin rates, the top 5 percent, the top 25 percent, 
the top 15 percent, the top 1 percent, pay a larger portion of 
the tax burden than they did with higher income tax rates 
before those rates were reduced in 2001. I think that is just 
interesting data.
    Go to Chart 3, please.
    
    
    When we take a look at the data from post-World War II on, 
what we find is our revenues as a percent of GDP are remarkably 
stable. It is income tax revenues as a percentage of GDP, total 
tax revenues percent of GDP have been pretty much level. But 
take a look at our top income tax brackets, our top income tax 
rates. So those income tax rates do not dramatically call for 
the change in revenues.
    Go to Chart 4, please.
    
    
    What really drives it is economic growth. If the economy's 
growing, revenues are growing even at these lower income tax 
rates. And what we have learned is lower income tax rates is 
conducive to higher growth and therefore higher revenues. We 
are not saying everything pays for itself. That is not the 
case. What we are also showing is the higher income earners 
actually bear a larger proportion of the tax burden when we go 
down that path.
    If you could go to Chart 8.
    
    
    This is the one where I think there has got to be some area 
of bipartisan consensus here. This is the individual's side. 
Who benefits from the, quote, unquote, loopholes or the tax 
shelters? Well obviously it is disproportionately to the side 
of the top one percent. The average is about $300,000 of those 
who are able to claim and benefit from shelters. So for every 
dollar that is parked in an income tax shelter, that is a 
dollar that is taxed at zero. If you take away the tax shelter 
but keep the rate really high, then we are hurting our economy 
from a competitiveness standpoint. But if you lower the rate 
and take away the loophole, that dollar that was parked in 
shelter taxed at zero is now taxed at something and you get 
more income from that income source, or from that taxpayer. So 
I think these are just interesting facts that ought to be worth 
considering.
    And so, let me ask you, Mr. Wall, on the corporate side of 
things, from the perspective of job creators, which is more 
beneficial? Temporary measures that attempt to stimulate demand 
over the short term or permanent reforms to incentivize and 
boost returns and job creation in places like Racine, 
Wisconsin, and throughout the U.S.? What do you think is better 
for your planning purposes as to whether or not to hire or not 
workers in Racine?
    Mr. Wall. Thank you, Chairman. From our perspective as a 
business, we are looking for stable, permanent, pro-growth tax 
reform. Temporary incentives are temporary as the name implies. 
When we look to make capital investments, we look at that 
return on investment, a five-year cash flow analysis. Right now 
there is so much uncertainty with the tax code, there is not a 
permanent structure to really make us make intelligent 
decisions on where we expand our operations. So, to answer your 
question, temporary is not helpful for us. We are looking for 
permanent, stable, fundamental reform.
    Chairman Ryan. If we did such as you suggest, bring our 
effective rate down to 25 percent, go territorial, would that 
encourage you to add jobs in your U.S. operations?
    Mr. Wall. Absolutely. If you saw my written testimony, for 
CNH we operate in 32 countries, and you see the comparative 
rates in my written testimony, companies choose to expand 
operations for a myriad of reasons or factors. Taxes are a 
significant component. The after-tax return on the earnings and 
the cash flow is an important consideration. So, to your point, 
if the U.S. were to lower the rate to 25 percent and go 
territorial, it would be incentive for us to expand capacity in 
the United States and add jobs.
    Chairman Ryan. Ms. Rogers, let me ask you, because we are 
talking about distribution so much these days, those calling 
for higher tax rates often stress the need to make the wealthy 
pay more, pay their fair share is how it usually is said. Well, 
first of all, for instance, under the president's policies, 
deficits are set to rise by $9.5 trillion over the next 10 
years, and that is the baseline. The top three percent of 
Americans by income, those earning $250,000 or more which we 
know more than half are these business, they have a total 
annual income of about $2.3 trillion. Even if the government 
confiscated 100 percent of that income, it would only fund the 
government for about six months this year. So, mathematically, 
is there any way to keep pace with the current spending 
promises by just raising taxes on this group of taxpayers?
    Ms. Rogers. Mathematically, possibly. I do not know. 
Economically, that would not be a wise strategy. There is a tax 
policy center analysis that was very useful, done about a year 
or two ago, called Desperately Seeking Revenue. And in that 
analysis, the Tax Policy Center asks the question, What if we 
tried to reduce the deficit to economically sustainable levels 
by just raising taxes on the rich? Okay, so you can take a look 
at that analysis, and what troubled me about that analysis was 
that if you just raised tax rates, if you were stuck with our 
tax base that is full of holes, which is a big qualification; I 
hope we do not have to be stuck with it. But if you were stuck 
with our tax code that is full of tax expenditures, loopholes, 
preferences, you would have to raise marginal tax rates in the 
upper brackets to the 70 to 80 to 90 percent marginal tax rate 
level. Now should we do that? No, I think all economists would 
say that is getting into dangerous territory. Even economists 
like me who do not consider myself a supply-side economist, but 
we are all supply-side economists to some extent in that we 
believe that incentives at the margin matter. When you get to 
rates that high, the disincentive affects start to outweigh the 
positive benefits of getting more revenue and reducing the 
deficit. So I do not suggest that you through it in that 
strategy.
    Chairman Ryan. What I am trying to get at, for instance, 
Dr. Orszag and Dr. Romor, after leaving the White House, said 
that higher taxes in the middle class are inevitable. And so, 
what I am trying to get at is are people being honest when they 
say we can keep pace with the current spending promises just by 
raising taxes on the rich?
    Ms. Rogers. In my opinion, I do not think they are being 
smart. I think that mathematically it is possible to raise 
taxes just on those people above $250,000 by just raising 
marginal tax rates. Do I think that that is the best way to do 
it? No.
    Chairman Ryan. Mr. Hodge, real quick. Mr. Van Hollen and I 
are trying to keep our time limits so other members have time. 
Modeling: The rule of thumb around here with joint taxes, for 
every percentage point decrease in the corporate rate is about 
$10 billion a year on an annual scoring basis; so, on a 10-year 
number, $100 billion per point. What do you think is more 
accurate from more of a reality-based, macroeconomic feedback 
models, what do you think the actual costs, assume the base 
stays the same for the sake of this, what do you think is more 
on the mark?
    Mr. Hodge. Far less, Mr. Chairman, I think that we are on 
the wrong side of the Laffer curve on the corporate tax rate 
and that even if we were to bring the federal rate down to 
around 25 percent, which would still, when you add state taxes, 
be higher than the OECD average, I think it would be a net gain 
for the United States Treasury.
    Chairman Ryan. Okay, thank you. Mr. Van Hollen.
    Mr. Van Hollen. Thank you, Mr. Chairman. Just to the point 
you raised about the share that upper income earners pay, I 
would point out that the reason for that, the principal driving 
factor is the huge growth in incomes of the folks at the very 
top relative to the stagnant wages in the middle class. That is 
what is driving the fact that folks at the very high end are 
paying proportionately more now. And if you look at the charts, 
it is almost off the charts. And that is an issue that I think 
we need to deal with from an economic point of view, because I 
think it actually has economic growth consequences as well as 
questions of tax fairness.
    Mr. Hodges, have you had a chance to look at the Simpson-
Bowles tax reform proposal? I assume you have.
    Mr. Hodge. Yes. Yes, I have.
    Mr. Van Hollen. And what is--what is your reaction to that?
    Mr. Hodge. Well, I think it was a great document for moving 
the ball forward on both reforming some of our major 
entitlement programs as well as the tax system. I can pick nits 
with many of the specific proposals in there. I do not think 
that setting aside $80 billion a year in revenues from tax 
reform is the way to go, but I think in general principles, 
they did a fantastic job in moving the agenda forward in 
fundamental tax reform and entitlement reform.
    Mr. Van Hollen. Okay, now with respect to their proposal on 
tax reform, one of the recommendations they made as part of 
bringing down the rates was also to harmonize the rates for 
capital gains and ordinary income. I assume you are agreeing 
with that as part of an effort to bring down the rates as well.
    Mr. Hodge. I would not, Mr. Van Hollen. I believe that 
capital gains and dividends are a double taxation on corporate 
income. In fact, if you look at OECD data specifically on 
dividend taxation, the United States has the fourth highest 
overall tax rate on dividends of OECD nations. And that is even 
after we have reduced individual rates over time. So I would 
prefer to keep taxes on capital lower and bring down those 
individual rates.
    Mr. Van Hollen. That is interesting because the chairman 
made the point that the very wealthy benefit the most from 
these tax preferences and deductions. The primary reason that 
the wealthy benefit most is because of the capital gains 
treatment right now. In fact, if you look at the others, you 
have a lot greater impact on middle income taxpayers. So if you 
take that off the table as part of tax reform and harmonizing 
the rates, you do not get one of the major benefits that the 
chairman just talked about with respect to tax reform.
    Let me, Mr. Wall, if I could ask you what is the effective 
corporate rate that your company pays right now?
    Mr. Wall. The effective tax rate for Case New Holland in 
the United States is 39 percent. We generally are in the range 
of the high 30s.
    Mr. Van Hollen. Okay. Are you organized as an's 
corporation?
    Mr. Wall. No. We are a subchapter C corporation.
    Mr. Van Hollen. Okay. Now, because I think there is a 
general agreement that the corporate tax rate in the United 
States at 35 percent needs to come back down in order to be 
competitive, but I was also interested in your testimony, you 
talked about the importance of the number of the current 
deductions that are available, for example, the R&D tax credit 
and accelerated depreciation. So my question is have you looked 
at the Simpson-Bowles proposals with respect to corporate tax 
rates? And what, if any, of the deductions in the tax code 
would you be willing to give up as part of an effort to do this 
in a revenue neutral way? Or maybe you think we should do it by 
adding to the deficit?
    Mr. Wall. With respect to the Bowles-Simpson report, I have 
looked at it. The 23, 29 percent rate that they are advocating, 
I think the 25 is the appropriate rate, as with my testimony. 
With respect to your question, which corporate tax expenditures 
should be modified in order to facilitate a 10 percent 
reduction in the rate, as I indicated in my written testimony, 
I think it should be done in a fiscally responsible manner. I 
have not seen a legislation package so it is very difficult for 
me to answer that question without seeing the totality of which 
corporate expenditures may be modified.
    Mr. Van Hollen. Right. See, this is always the rub. I mean, 
this is the rub. Everyone wants to talk about this in general 
concept both on the corporate side and the individual side 
about lowering the rates and expanding the base. But I am just 
asking you as a businessman, since we should lower the rates 
which I agree with, but I am assuming you do not want to add to 
the deficits given where we are. Given your operations, which 
of the deductions would you be willing to get rid of? And if 
the answer is you need more time to look at it, I understand 
that. But that is what the Congress has to grapple with, and 
there are winners and losers in that. As we all know, GE, with 
huge profits, actually got tax rebates. So maybe Mr. Hodge, 
have you looked at the corporate tax proposals in Simpson-
Bowles and which deductions if any would you be willing to 
eliminate or preference?
    Mr. Hodge. Well, the Treasury did a sort of a thought 
experiment a few years ago. And in their thought experiment 
eliminated all the corporate tax loopholes, and they are only 
about $100 billion a year in so-called loopholes for the 
corporate community, by the way. And the individual tax code 
has nine times as much. So we are talking about a pretty small 
amount. And they found that you could only reduce the corporate 
tax rate from 35 percent to maybe about 28 or 29 percent, which 
takes the United States from having the second highest overall 
corporate tax rate down to about the fourth. So that is a lot 
of pain for very little gain. We need to go much further if we 
are going to cut the corporate rate down to a competitive 
level. That means thinking outside of the box and moving away 
from a revenue-neutral concept here and think more broadly.
    There are a number of provisions in the corporate tax code 
that should be eliminated, and whether it is subsidies for 
windmills and so forth, but I should say that if you look at 
the IRS data, the effective corporate tax rate in the United 
States on average over the last 18 years has been about 26 
percent on domestic and foreign repatriated earnings. And that 
does not include the taxes that corporations pay abroad which 
is about $100 billion a year. So the average overall effective 
tax rate is around 33 percent on average.
    Mr. Van Hollen. Another question. First of all, I thought 
your testimony was very useful in making the point that when we 
are talking about's corporations, not C corporations, that you 
mentioned two facts. One is the Joint Tax Committee data, which 
shows that only three percent of taxpayers are in the category, 
Over $250,000, right. And you do not dispute that figure?
    Mr. Hodge. No, there are only two percent of all taxpayers 
that have incomes above that amount.
    Mr. Van Hollen. Exactly. And you pointed out that despite 
the fact that there are only about two to three percent 
taxpayers in that category, it does account for a huge amount 
of the income.
    Mr. Hodge. Yes. That is our most successful private 
businesses.
    Mr. Van Hollen. But, but most of them are not what we would 
consider small businesses or mom and pop s, right?
    Mr. Hodge. Nope.
    Mr. Van Hollen. Okay. I just think it is an important point 
because we often hear in this Congress that changes in those 
rates, 35 to say 39 percent, going back to 39 percent which is 
what it was during the Clinton administration, would somehow be 
hurting all these mom and pop small businesses. But, in fact, 
they include any businesses organized as's corporations, which 
includes businesses like Pricewaterhouse, KBR, Bechtel, right?
    Mr. Hodge. Many of those are organized's corps, yes.
    Mr. Van Hollen. Right. I just hope we will put that aside 
and then we will discuss it based on those. Now, it is also a 
fact that the 39 percent rate was in place during the Clinton 
administration, beginning in the early 1990s. And we obviously 
saw a booming economic period. I am not saying increasing 
marginal tax rates somehow generates economic activity. Of 
course, it does not. Of course, it does not. But the fact is 
there are a whole slew of factors that people take into 
consideration when they are making their decisions. And, as the 
other testimony you heard suggests, and the evidence of history 
suggests that small changes in those tax rates do not make a 
big difference. Now, here is what I want to just ask you in 
closing. The territorial issue: I am going to read to you just 
an article from somebody who worked at Disney as a top 
executive. And maybe the two gentlemen could respond to this, 
being from the perspective of somebody who is in the business. 
Actually, if I could ask all three of our witnesses to respond. 
It says:
    I am a card-carrying Republican who thinks that the 
deferral tax loophole is bad policy for two reasons. It rewards 
companies for moving property and jobs overseas, and it is 
unfair to corporations that keep jobs in the United States and 
then must shoulder a disproportionate share of the cost of 
government.
    It goes on to point out that GE's effective rate was 7.4 
percent well below the U.S. rate of 35 percent, largely because 
of shifting around with their foreign operations. And then I am 
just going to read this paragraph and then ask you to respond.
    Now let's compare the Walt Disney Company from which I 
retired in January. Disney, their most recent Form K shows an 
effective tax rate of 34.9 percent, dramatically higher than GE 
s. The reason is that unlike GE, Disney has kept its income-
producing property and its jobs in the United States. Is not 
one of the dangers of going to a sort of pure territorial 
system that a U.S. company, rather than investing here in the 
United States, would choose to take that same operation 
overseas at a much lower tax rate?
    Mr. Hodge. No. In fact, the global trends have been in just 
the opposite direction. The reason actually that the United 
Kingdom moved to a territorial system is because companies were 
moving out of their country. And when they started moving 
toward a territorial system, those companies started coming 
back. And Japanese have found, as I mentioned in my testimony, 
that their worldwide system created this lockout effect, 
trillions of dollars worth of yen were being locked out of 
their country. When they moved to a territorial system, those 
yen started flowing back. And the reason that we have more than 
$1 trillion sitting offshore in corporate profits is because we 
have this Berlin Wall that has been created by the worldwide 
system.
    Mr. Van Hollen. I know my time is up, but the point that he 
was making was that you can address that issue by getting rid 
of the relaxed deferral agreement, but that is his point. I 
know my time is up.
    Mr. Hodge. Or it will put U.S. companies at a disadvantage 
and then a harmful effect on U.S. jobs will be immediate.
    Mr. Van Hollen. I guess in the interest of time, I am going 
to ask the others. I will talk to you afterwards. Thank you.
    Chairman Ryan. Mr. Garrett?
    Mr. Garrett. Thank you. Mr. Hodge, with regard to your 
corporate tax code, currently you said we are at number one or 
number two as far as corporate tax rates; corporate tax rates 
or tax burden?
    Mr. Hodge. Tax rates.
    Mr. Garrett. Tax rates. Okay.
    Mr. Hodge. The top margin rate of 35 percent added to the 
state rate puts us over 39 percent, which is the second 
highest.
    Mr. Garrett. So the pushback to that often is while we may 
be at the first or second in the top's rate, but we are not 
necessarily be at the top tax burden because of all the 
corporate loopholes that are out there. So how do we compare, 
vis-a-vis the other countries as far as our overall corporate 
burden when you consider the fact you have $100 billion worth 
of corporate loopholes?
    Mr. Hodge. Well, the $100 billion actually does not lower 
the effective rate all that much. As I mentioned over the last 
18 years, the average effective rate for all U.S. corporations 
has been about 26 percent. And then when you add the taxes they 
pay abroad which is about $100 billion a year, their global 
effective tax rate is about 33 percent. So they are paying 
close to the U.S. statutory rate.
    Mr. Garrett. Well, did you say if you did away with them, 
it would go all the way down to what?
    Mr. Hodge. You can only lower the rate maybe to about 28 or 
29 percent, and that includes bonus depreciation, which we 
would not want to eliminate.
    Mr. Garrett. Okay. And so if we did that, our standing in 
the world would be approximately what?
    Mr. Hodge. We would be fourth highest in the OECD.
    Mr. Garrett. Okay. As far as rates are concerned, but 
burden level basically remains the same because it is one shift 
to the other.
    Mr. Hodge. Right. I mean, the U.S. is collecting about 
three percent or about four percent of GDP is in corporate tax 
collections is below the OECD average; that is true. And so we 
have a high rate and low collections, which makes a lot of 
sense. That is why we have this Neiman-Marcus system. You know, 
Neiman-Marcus is very small. Wal-Mart is very big. And then 
they are doing it on volume, whereas Neiman-Marcus is trying to 
do it on price. And you can see who won.
    Mr. Garrett. Okay, thank you. Going to one of the 
chairman's initially comments. He was commenting on what the 
president said that we do need to do corporate tax code reform, 
which is a good thing. The president spoke of, I think you 
said, fairness, simpler, and more competitive. And there was an 
article I think a week or two ago in National Review on this 
topic of competition and competitiveness, that there is too 
much focus on competitiveness. And I may not be saying it 
exactly correctly, but the focus should not be to try to make 
our economy more competitive, rather more productive. Because 
you can have a more competitive system simply by switching the 
tax code around to say that Mr. Wall's business is more 
competitive vis-a-vis international trade by giving you 
additional corporate benefits or tax cuts, what have you. You 
are now more competitive versus your trading outside this 
country. But that is really not what we are trying to do here, 
right. We really need to not have competition, but increase of 
productivity for your company. Right?
    Mr. Hodge. Well, I think that by lowering the rate we will 
increase productivity. And so, by making the U.S. more 
competitive, U.S. companies will become more productive and 
more competitive as well. So what is good for the economy will 
be good for them as well.
    Mr. Garrett. Okay. And Ms. Rogers, you were making the 
comment as far as what we need overall as far as our budget is 
concerned is some certainty even if not to be made now with 
regard to cost savings because of the economic morass that we 
are in but over the long period of time. And if you provide 
that certainty over the long period of time that that will 
provide what? More productivity and investment in the economy 
now?
    Ms. Rogers. Well, I think it is important to get our budget 
outlook in control or the short term just because it increases 
the confidence of global investors in the U.S. economy and 
keeps interest rates low.
    Mr. Garrett. I thought you said something about that maybe 
not making those cuts right now but rather as long as you have 
a plan in place, that over a period of time, so that provides 
the certainty. Maybe I heard you wrong.
    Ms. Rogers. No, that is right. I mean, you might be 
surprised that The Concord Coalition, the deficit hawk 
organization is not demanding that deficits be cut right now, 
but we are not. We are demanding fiscal responsibility right 
now which might mean whatever deficit spending we are doing at 
the moment, that we make sure it has high productivity, high 
bang per buck in terms of the stimulus. And over the longer 
term, that we have got a plan in place to get to more 
economically sustainable deficits.
    Mr. Garrett. Well, so two quick questions. One is there any 
history to show that if we make any projections now for the 
future as far as not making the cuts today but plan to do them 
in the future that they actually get implemented?
    Ms. Rogers. No, we do not have a good track record on that. 
And that is why I am hoping that The Budget Committee can 
commit to some serious budget discipline rules such as strict 
pay-as-you-go.
    Mr. Garrett. And the second thing is as far as the short-
term fixes that we do right now, both parties have done this. 
President Bush did this with tax package where we got what? 
Sent out checks basically of $250 or something like that to a 
family. The new administration is saying the same thing. Let's 
do some short-term tax fixes as far as payroll taxes, what have 
you. What is the history? Whether Republicans or Democrats 
tried to do this, do you see long-term results from this or are 
they just really blips in the economy of that period?
    Ms. Rogers. No, I do not think that the payroll tax 
holiday, the payroll tax cut, is designed to be a long-term 
growth tax cut. It is designed to stimulate demand. So the 
reason why CBO lists payroll tax cuts as one of the more 
effective tax cuts to increase demand is because it tends to go 
to lower and middle income households who are most cash-
constrained. So if you are trying to get more spending on goods 
and services immediately, you are best giving the cash to 
people who are constrained and will spend it all when they get 
it.
    Chairman Ryan. Mr. Blumenauer?
    Mr. Blumenauer. Thank you, Mr. Chairman. I always find 
these conversations interesting how they shift over time. I am 
not persuaded that the tax rates are the drivers when we look 
at how the economy performed so much better in era of higher 
taxes on business and, in fact, on individual rates. I think we 
would lust after economic productivity improvements that we 
saw, and we were involved with the 10-year experiment when 
Ronald Reagan harmonized capital gains. We have been involved 
in a 10-year experiment, and it has not produced stellar 
economic results, but I want to focus just on three items.
    One, dealing with the complexity; we talk about the tax 
loophole as only being $100 billion, but it seems to me that 
they contribute to a much higher cost. We have been told by 
this committee; we have been told before Ways and Means. It is 
$162 billion a year to comply with the tax system that we have 
now. And the leakage through evasion or purposeful forgetting 
or just that complexity is a couple hundred billion dollars 
every year. So those two numbers combined far exceed what our 
super committee friends are arm wrestling over for the next 10 
years; $3.5 trillion, you would be happy people. And we would 
be breathing easier, and the economy would be working better.
    I am looking at two items that may get us a little faster, 
would look for brief response, because I do not have much time. 
The first deals with the value added tax, because those 
countries you are talking about that have lower statutory rates 
collect a lot of business income through a value added tax, 
and, in fact, pay more in overall tax than business in the 
United States in all but I think one of those countries. What 
is your reaction to a value added tax to kind of level the 
playing field and maybe buy some corporate tax reform? Any 
interest on any of the three of you?
    Ms. Rogers. I will take that one first. I think eventually 
we are headed toward needing to consider new tax bases, 
including an add on value added tax, maybe carbon based 
taxation, but I think that the first step in leveling the 
playing field of taxation is to look at the existing income tax 
code, so I think there is plenty of room to broaden the tax 
base.
    Mr. Blumenauer. I wanted to zero in on the other two 
gentlemen very briefly. Any interest in exploring a value added 
tax as a way to buy it down?
    Mr. Hodge. If the corporate income tax could be eliminated 
altogether, lye poured on it so it did not grow back up, then I 
would consider value added tax.
    Mr. Wall. Congressman, my comments on it would be as you 
can see where we operate, most of the jurisdictions we operate 
do have a VAT. I think it is important to note the United 
States has a consumption based tax at the state level, the 
sales and use tax. We would be happy to look at any type of 
reform proposal that may include that in order to achieve 
fundamental corporate tax reform.
    Mr. Blumenauer. Thank you. Let me put one other item on the 
table because there is one area in terms of user fees that 
would make a huge difference. Right now, we are beefing up our 
transportation trust fund. We have transferred $35 billion of 
general fund into it because it is in a downward spiral, and it 
is about to really collapse with electric vehicles, with hyper-
efficient diesel. Simpson-Bowles suggested raising the gas tax. 
A gas tax has been part of the Ronald Reagan; he actually 
signed a nickel a gallon in 1982. The Clinton 1993 had a gas 
tax. We have had the petrochemical tax on Superfund expire, and 
so that cost has been shifted to private business. Any interest 
in looking at user fees to try and fill some of this gap?
    Ms. Rogers. Sure.
    Mr. Hodge. I prefer to see the Highway Trust Fund to turned 
back over to the states, along with the taxing authority to be 
able to fund it.
    Mr. Wall. The scope of my testimony is on corporate tax 
reform, so on a user fee at the individual; it is beyond the 
scope of what I will comment on.
    Mr. Blumenauer. Mr. Chairman, in fact, you have received a 
request to you and Mr. Van Hollen from Mr. Simpson and myself 
to perhaps have a little attention to user fees, the Highway 
Trust Fund. That is a deficit that is yawning and is going to 
create bigger problems in the future.
    Chairman Ryan. Happy to work with you. We have got a pretty 
busy fall schedule, but we would definitely be happy to work 
with you, just like this hearing was originated with the 
request from Mr. Van Hollen.
    Mr. Blumenauer. Super. Thank you, Mr. Chairman.
    Chairman Ryan. Mr. Calvert.
    Mr. Calvert. Thank you, Mr. Chairman. I would like to focus 
a little bit on the backbone of America's economy, our small 
business community or what exists of it today. As you know, 
small businesses provide 55 percent of all jobs in the private 
sector, produce roughly half of the privately generated GDP of 
this country. It does not take rocket science to understand 
that when small businesses grow and succeed, the entire economy 
as a whole benefits, including revenue.
    As a person who was actually in small business, whatever, 
how you define small business in this country, I can tell you 
any smart business plan takes into account the current economic 
outlook, tax and regulation policy when you guide your decision 
process about how you are going to invest, how you are going to 
spend, and how many people you are going to hire.
    As we all know, the current outlook in the country on 
business is dismal, especially in California, where I come 
from. And I believe the administration's tax policies are in 
effect contributing to a lack of confidence in the small 
business community because you cannot make long term decisions 
based upon knowing that taxes are going to be increasing in 
2013 and other costs. In fact, according to the National 
Federation of Independent Businesses, their August report, the 
Small Business Optimism Index fell the sixth month in a row, 
and only 11 percent, 11 percent, of small businesses plan on 
hiring new workers over the next three months. I think that is 
about as low as it has ever been historically.
    Nearly 75 percent of small businesses pay taxes under, as 
you know, under the individual income tax system. Tax hikes 
aimed supposedly at the rich, as proposed by the Obama 
administration, would end up hurting successful small 
businesses because roughly 50 percent of these small business 
profits are taxed at the top two individual tax rates. These 
questions are for everybody. Do you think raising taxes on 
these small businesses is the right strategy in a slow growth, 
high unemployment economy? And secondly, what are some of the 
best ways we can provide confidence and certainty to the small 
business community through tax reform?
    And I look at regulations as a form of tax also. We look at 
these increasing regulations taxing these small businesses in 
order to comply to these oncoming regulations, so we will start 
off with the gentleman from Case.
    Mr. Wall. Thank you, Congressman. With respect to your 
specific question on pass-throughs, subchapter S corporations 
partnerships, as you can see from our written testimony, we 
have 1,300 suppliers and dealers that do operate as pass-
throughs. From our perspective, we would not want to see more 
stress on our suppliers. My testimony also talks about there is 
some discussion on whether or not we should treat pass-through 
entities as subchapter C corporations, subject under the double 
taxation regime. We would not think that is advisable.
    Mr. Calvert. Can I ask a question to you gentlemen on your 
suppliers? How many of your suppliers have gone bankrupt in the 
last two years?
    Mr. Wall. Congressman, I do not have the exact number, but 
we have suffered suppliers going bankrupt. There has been a 
number. I think you had two questions, right? One was in terms 
of confidence, I would say in my testimony, in terms of small 
business, I think tax reform; that certainty is really what we 
need. Some stable, certain, fundamental tax reform, and in 
terms of regulation, I will read the paper, look at the 
National Labor Relations Board, EPA. I do commend the Congress 
administration for looking closer at the regulatory burden, but 
that is, I believe, creating a crisis of confidence in the 
corporate community.
    Chairman Ryan. Mr. Hodge.
    Mr. Hodge. Congressman, one of the things that sets our 
economy apart and our country apart from every other country is 
the dynamism of our non-corporate or pass-through sector, all 
of these private business owners. And as I mentioned in my 
testimony, more than half of all business income in America is 
now being taxed under the individual tax code, and as you 
mentioned, a lot of that is at the top marginal rate, and so by 
increasing taxes on those more dynamic entrepreneurs and 
businesses, I think would have a chilling effect on the economy 
for the long term.
    And it is just the opposite of what we should be doing. And 
according to all the economic research, including that of the 
OECD, looking across all countries, cutting those rates is the 
way to go right now and the way to spur those dynamic companies 
and to improve the overall dynamism of the country.
    Ms. Rogers. I would just caution that while cash flow is 
needed by everyone in the economy right now, it has got to come 
from somewhere, and if we deficit finance tax cuts right now, 
it does not remove its cost. So the immediate cost is the drop 
in public saving, the increase in the deficit. If you care 
about long term growth, that is going to offset any benefit you 
get from increased private sector activity over the longer 
term.
    Mr. Calvert. I would just make a point, Mr. Chairman, that 
cash flow is a nice concept, but I know a lot of businesses 
today that have a negative cash flow. They are going out of 
business as the gentlemen from Case pointed out. Bankruptcies 
are record high in this country.
    Chairman Ryan. Thank you. Mr. Honda.
    Mr. Honda. Thank you, Mr. Chairman and Ranking Member Van 
Hollen. Thank you to our witnesses also for being here today. 
The irony of the challenges posed by our debt and deficits is 
that if Congress did nothing and allowed the current law to run 
its course, the deficit would be reduced by over $4 trillion. 
This would mean bringing rates roughly back to where they were 
during the Clinton presidency, a period when the economy added 
over 20 million jobs and we created a budget surplus.
    My question to Ms. Rogers is that it has been argued by my 
Republican colleagues that the only way to grow the economy is 
to cut rates even further. If this is true, then why is it that 
the country prospered under Clinton's rates and then how would 
you explain that?
    Ms. Rogers. I was actually on the Council of Economic 
Advisers the last year of the Clinton administration, and I 
wrote the section of his economic report that talked about the 
merits of fiscal responsibility. One thing we learned about the 
Clinton era tax increases is that while we were a little bit 
worried that that might have some adverse effect on private 
incentives to work and save, in the end, the increase in public 
saving far outweighed any slight decrease in private saving. It 
was very minimal, the adverse effect on the private sector.
    So the net result was an increase in national saving, and 
national saving is the key driver to longer term economic 
growth. So that is the simple reason why even though marginal 
tax rate increases do have a dampening effect on labor supply 
and saving, we did not see very much. Empirically, it turned 
out that that effect was very small, relative to the increase 
in public saving, the reduction of deficits that turned to 
surpluses. That was very good for the economy.
    Mr. Honda. So following up on that, the term of ``fiscal 
responsibilities'' seems to have been said by each of the 
witnesses. In your definition, how would you define fiscal 
responsibility?
    Ms. Rogers. My definition of fiscal responsibility is 
getting the most we can out of the resources that we have in 
our economy, both publicly and privately, and so fiscal 
responsibility in the short term, in terms of the government 
sector, means that while we are trying to support the still-
recovering economy, we are trying to get the most out of our 
money so that we are devoting our resources toward policies 
that will increase demand by a lot relative to their cost. Over 
the longer term, we need to come up with policies that reduce 
the deficit but are also favorable to economic incentives, so 
keeping marginal rates low by broadening the base. You can 
still raise revenue without hurting incentives for the economy 
to grow.
    Mr. Honda. So following up on that, if you were out to 
allow the current law to run its course, to restart on that 
path again?
    Ms. Rogers. That is an option. I have said that there are 
three ways to stick to the current law revenue baseline. One, 
do nothing. Two, do it big. Do fundamental tax reform that 
broadens the base if you want to pay to retain some of the Bush 
tax rates. And three, do it just to the rich. You know, raise 
marginal tax rates only on the rich. Those are three options, 
or any combination, and it is up to Congress to figure out what 
you can tolerate. All of them are taxing revenue increases is 
the point.
    Mr. Honda. Thank you.
    Chairman Ryan. You left some time. Mr. Price.
    Mr. Price. Thank you, Mr. Chairman.
    Chairman Ryan. Dr. Price.
    Mr. Price. Thank you, and I want to thank the panelists as 
well. I think this is a helpful conversation and discussion. We 
are all interested in pro-growth policies. We have a difference 
of opinion about what results in growth in the economy. Ms. 
Rogers, I am struggling a bit with this payroll tax notion. You 
voice support for decreasing the payroll tax, supporting the 
president's proposal for decreasing it on employers and 
employees, I understand. Is that right?
    Ms. Rogers. I label it a relatively effective tax cut for 
increasing demand for goods and services.
    Mr. Price. And the payroll tax that is being paid by 
employers and employees that is referred to in these 
discussions, what is that money used for?
    Ms. Rogers. Well, it goes to the Social Security Trust 
Fund.
    Mr. Price. Social Security Trust Fund
    Ms. Rogers. But this is a transfer. If the payroll tax cut 
would be financed with the rest of the budget, so it is a 
deficit finance tax cut.
    Mr. Price. And I just heard you say that you do not support 
deficit financing for tax cuts.
    Ms. Rogers. That is right. So I like the president's 
proposal to offset the cost by broadening the tax base.
    Mr. Price. By increasing taxes.
    Ms. Rogers. By broadening the tax base, and increasing 
effect of tax rates but without increasing marginal tax rates.
    Mr. Price. Okay. I think it is important to point out that 
this payroll tax cut that is being talked about by the 
president and others is actually a shift. It is just a shift in 
who is paying for the Social Security benefits.
    Ms. Rogers. Well, it is a shift in the tax burden, you are 
right, temporary shift in the tax burden, but actually, we 
could do a revenue-neutral shift in the tax burden. Not that I 
am proposing this, but if you raised taxes on the rich and cut 
taxes on the poor, that would actually be stimulative to the 
economy. That is not what I am proposing to do, but I am just 
illustrating the fact that you can keep average tax rates 
constant, and redistribute the tax burden and actually achieve 
one result in the short term, maybe a different result in the 
longer term.
    Mr. Price. Actually, that is more consistent with our 
budget did that we passed through this committee and through 
the House is we broadened the base and lowered the rates. I 
want to move on to the issue of territorial taxation because I 
think this is incredibly important and Mr. Wall, you mentioned 
that you are in Wisconsin. So overseas to you is not overseas, 
is it? Is it just over the border?
    Mr. Wall. Correct.
    Mr. Price. So competition that businesses see in states 
such as yours have to look to what the rate is in Canada and 
decide whether or not you are going to house a facility in 
Wisconsin or Canada, correct?
    Mr. Wall. That is an excellent point, Congressman. In my 
testimony, the countries that we operate in, as I mentioned 
before, when we look to expand capacity, it is a myriad of 
factors. Taxes is one of them. Logistical cost is another. When 
you are shipping large truckers and combines halfway across the 
ocean, you can imagine logistical costs are very high, but with 
respect to your specific point, you could put capacity in 
Canada and shipping southbound would not eat you up on 
logistical cost.
    Mr. Price. Right, and it is a whole lot easier, and their 
tax rate is about 10 percent less than ours.
    Mr. Wall. That is exactly right.
    Mr. Price. Yes. Mr. Hodge, I was interested in your 
comments about the consumption tax, and you appended your 
statement to say that if we did away with corporate income tax, 
that you would supportive of a VAT tax. Is a consumption tax 
not like a national retail sales tax? If we do away with all 
income tax for both individuals and corporations, is that not a 
way to truly invigorate the economy by aligning our taxation 
with our form of commerce?
    Mr. Hodge. Well, most economists would agree that we want 
to move toward a consumption base in our tax system, and there 
are many ways that we can do that. You can do it through an end 
stage retail sales tax, you can do it with a value added tax, 
but also, a flat tax, like a Steve Forbes style flat tax, is 
also a consumption tax because it has removed savings and 
investment from the tax base. So there are many ways you can 
sort of skin the consumption tax cat and get there.
    I would be more preferential to a flat tax than moving 
toward a VAT because I think that there as many problems with 
that as we see in sales taxes at the state level, but we should 
certainly be moving away from income-based taxes toward a 
consumption base.
    Mr. Price. And let me revisit the territorial issue with 
you as well, because you said that actually having a 
territorial system of taxation increases business activity 
here, and can you expand on that and why that is?
    Mr. Hodge. I am sorry, say that again?
    Mr. Price. That having a territorial taxation would 
increase business activity in the United States.
    Mr. Hodge. Well, it would lead first and foremost to a 
great deal of repatriation of foreign profits that are now 
trapped abroad, and that companies are reluctant to bring back 
to the United States to pay this enormous toll charge that we 
have set up to bring their own money back and invest in the 
United States. So I think that moving toward a territorial 
system would bring a flood of dollars back to the United 
States. They could be invested here, creating jobs, and R and 
D, and what have you. It is their money, but we have set up 
such a toll system for them to bring it back that the 
incentives are just simply in the wrong direction.
    Mr. Price. Thank you. Thank you, Mr. Chairman.
    Chairman Ryan. Thank you, Dr. Price. And like we often say 
in Wisconsin: overseas, we refer to Lake Superior. It is 
Illinois. Ms. Schwartz.
    Ms. Schwartz. Okay. Thank you. I appreciate this 
conversation. I wanted to bring it back to what I think is in 
some ways a bit of a broader view about tax policies. As we go 
forward, I think it was said by each of you that we are pro-
growth. We think that economic growth is certainly very 
important to get ourselves out of where we are right now, but 
we need to understand what that takes. And to understand that, 
I think that the context within other issues we are dealing 
with, I think it was as Lim Rogers actually talked about the 
deficit reduction and the need for fiscal responsibility, so I 
would say we cannot really not talk about corporate taxes or 
even individual tax reform without an understanding of this 
broader context of the need for revenue and then the need to 
reduce the deficit.
    Certainly, the concept that if we just lower taxes for the 
wealthy, particularly for wealthy corporations, that will in 
fact create jobs, which is a point, very clearly. If in fact 
that had worked, we would not be in this situation we are in. 
And so the concerns that I would have about the notion that the 
unpaid for tax breaks that were given during the last decade, 
the Bush tax cuts as we refer to them. Tax cuts for the 
wealthy, tax breaks for corporations that they would produce 
jobs. This failed to materialize. The fact that there are large 
unpaid for tax cuts did not lead to jobs creation the last 
decade has given us a staggering wage stagnation, which has 
made a very big difference to consumer demand, which of course 
industry needs because if consumers are not buying your 
products, you do not make them. So that has had huge 
consequences.
    The lack of consumer spending and now, of course, the 
excessive borrowing that consumers are now saying, I cannot do 
anymore, which is a good thing, has actually created incredible 
stagnation in the economy. You could add to that the political 
uncertainty, the almost default on our debts created 
uncertainty in the investor community. Investor confidence went 
to essentially zero. In August we had a stunning turnaround 
from what we had seen as job growth over the last year and a 
half. New jobs every month to zero jobs because the investor 
community, the corporate Americans, the people whose jobs said, 
We cannot risk it, we do not know what is going to happen, if 
in fact we are going to potentially see government default on 
our international loans.
    So, my question, particularly given what I have just heard 
from particularly Mr. Hodge and Mr. Ryan, is that the answer to 
this is to reduce corporate taxes and in fact, Mr. Ryan 
suggested quite deliberately and I think that Mr. Hodge did as 
well, the answer is to increase taxes for the middle class, 
that individual tax rates, eliminating tax provisions of 
deductions, for example. I think Mr. Ryan suggested that we 
reduce tax benefits for saving, retirement savings, that would 
be a way to pay for the lowering of the corporate tax rate. It 
seems that that would be the wrong way to go. And I support 
lowering the corporate tax rate and broadening it, getting rid 
of the special interest loopholes that in fact may do no good 
anymore and are certainly not stimulating the economy.
    So, my question is, in fact, and I will address this to Ms. 
Rogers, is it important for us to look at tax reform in the 
context of deficit reduction, in the context of how do we give 
middle class Americans more dollars to create that consumer 
demand so you can actually make products and sell it to them. 
And even as we look at corporate tax rates and international 
competitiveness, that we do that again in the context of what 
creates jobs in the short term. There was a great New York 
Times article this morning about the president's jobs package, 
leading to potentially two percent additional economic growth 
and a couple million jobs. That is not something to put aside, 
so what can we do both in looking at the short term demands for 
job creation, the requirements for fiscal responsibility and 
the requirement of additional revenue is part of how we get out 
of the debt we are in. If you could in just a little less than 
in a minute, give us your opinion about whether that is the 
right context to be looking at this.
    Ms. Rogers. Well, I think we absolutely have to be talking 
about the deficit effects on the deficit, even the short-term. 
I think that it is possible to broaden the tax base without 
overly burdening middle class households. Just because we are 
talking about looking at the tax expenditures within the 
individual income tax and those benefit all income tax payers, 
not just the rich. It does not mean we have to eliminate those 
tax expenditures, there are ways of limiting those tax 
expenditures in ways that are very progressive. So the 
president's proposal to limit itemized items to 20 percent is 
an example of how you could pare back on some tax expenditures 
without burdening the middle class.
    Ms. Schwartz. Thank you.
    Chairman Ryan. Thank you. Mr. Lankford.
    Mr. Lankford. Thank you. Witnesses, thank you all for being 
here. This is very helpful and this is a good conversation for 
us to have in a bipartisan manner, to be able to talk through 
the issues. This is something we kick around a lot on the 
floor, a lot in the hallways, and we need to be able to 
determine what does that mean by dealing with tax code and tax 
policy and broadening the base and lowering the rates and all 
these things are great terms, but getting a chance to walk 
through some of the dynamics of that with you all is very 
helpful. So I appreciate the time that you all put into doing 
this.
    So let me continue on a conversation that has already 
started on the issue of repatriation. I have multiple questions 
on this and I have not had the opportunity to hear your 
comments on that. What are your initial comments on the 
territorial versus global system? And two issues, and I am 
going to come back to everyone on this, one is that one-year, 
two-year repatriation or just wiping it out completely and just 
moving to a completely territorial system versus global system 
on how we handle international business earnings.
    Ms. Rogers. So, on international and corporate tax reform, 
I think it follows the same principles as the rest of the tax 
system in that if we are talking about ways to reduce the 
effective rates of taxation on businesses, we have to worry 
about what is happening to revenue levels. We cannot just count 
on the growth to make up for the loss of revenue.
    Mr. Lankford. Let me just clarify, because I do want to 
have a conversation with this, back and forth. That is assuming 
that companies are going to bring those assets back at some 
point and they will be taxed at the 35 percent rate or whatever 
rate it is. So, is that what you are counting as a loss? Is the 
assumption that they will eventually bring it back or is the 
assumption they made that money in Canada, they are going to 
leave it in Canada, it is never coming back? Which one is your 
assumption on that?
    Ms. Rogers. Well, probably somewhere in between. I mean 
whenever we give a tax break to do anything, there is some 
incentive for the business to do what it is we are encouraging 
them to do. We do not know what their response will be and part 
of that lower tax receipt is a response to businesses shifting 
activity to lower tax activities. So, some of that tax cut is 
going to take effect in the form of lower revenue and we have 
to worry about that.
    Mr. Lankford. So would it be better to leave the higher 
rate and just let it play out and allow companies that have 
investments overseas to leave it overseas, maybe they will 
bring it back, maybe they will leave it there, but just allow 
it at the same rate, is that your recommendation?
    Ms. Rogers. I do not know. I do not want to make a 
recommendation on that proposal. I just want to caution that it 
sounds to me like that is narrowing the tax base or reducing 
taxes and we have to worry about whether it is worth it is 
cost.
    Mr. Lankford. Thank you, that is fair enough, Mr. Hodge.
    Mr. Hodge. Well, I think we can learn some experience here 
from both Great Britain and Japan, which are the two largest 
and most recent countries to move to a territorial system, and 
for two very different reasons. One, Great Britain was actually 
seeing the flight of companies leaving Great Britain because 
they had a high corporate rate and a world-wide system. So they 
left to Ireland and Switzerland and Netherlands to seek some 
relief from that. And the minute that they moved towards a 
territorial system, they saw some of those companies intending 
to come back to Great Britain.
    Japan had a very different experience, as I mentioned 
earlier. They saw this locking out effect, of which their 
world-wide system was keeping profits abroad, largely in Asia, 
some here in the Unites States, and when they moved to a 
territorial system, they saw some of those profits starting to 
come back to Japan. I think we suffer many of the same 
consequences that both of those countries are seeing and that 
is the reason we ought to move very, very swiftly to a 
territorial system. So that we can unlock that locking in 
effect that is trapping all of those profits abroad that should 
be here and invested in the United States.
    Mr. Lankford. Okay, let me make a follow-up, just take this 
back and forth. Several months ago Timothy Geithner was 
actually seated in that same seat, we had this same 
conversation. I know you are sitting in the secretary's chair. 
We had the same conversation about territorial taxation or 
global taxation. The president was very impassioned in his 
state of the union address and dealt with corporate taxes, 
about lowering the rate and broadening the base, but had not 
talked about territorial versus global. I had asked the 
secretary about that. He did not give me an answer one 
direction or another on a preference on that. That was an 
interesting dialogue to me and I have still yet to be able to 
hear from the administration's perspective on that. I do not 
know if anyone has heard the administration be able to state a 
perspective on this other than just lowering the rate and 
broadening the base. The issue comes down to what we were just 
talking about before. Is it a loss of tax revenues to be able 
to deal with repatriation issue, number one? And let me go 
ahead and skip to number two on that, is it better to do just 
permanent, or is it better to say until we can get to one or 
two year repatriation, just exemption?
    Mr. Hodge. Well, I am always reluctant to support any sort 
of temporary measures because I think whether it is temporary, 
back-to-school holidays, sales tax holidays or payroll tax 
holidays, that is bad tax policy. It creates uncertainty in the 
tax system and it violates most of our principles of tax 
policy. But the sooner that we move to a territorial system, 
the better off the U.S. Economy will be and the more 
competitive U.S. businesses will be.
    Mr. Lankford. Okay, thank you Mr. Chairman, I yield back, 
and Mr. Hodge, I apologize for running out of time on that.
    Chairman Ryan. Ms. Moore?
    Ms. Moore. I want to thank each and every one of you for 
your appearance here today. In particular, I want to thank Mr. 
Wall for being here. I have had many meals from the Case 
Company, my father worked there for 40 something years, my 
uncle has worked there for several years and I have a great 
affection for the Case Company. And I want to thank Mr. Hodge 
for being here and Dr. Rogers for being here as well.
    Let me get right in to my questioning with Mr. Wall. You 
are pushing for this territorial system and apparently Mr. 
Hodge thinks this is a good system as well. I guess my question 
would be, first of all, how much of this $3 trillion we hear 
about, 3 or $4 trillion, that companies have sitting on the 
side, how much would you say that Case has sitting on the side, 
waiting for tax certainty?
    Mr. Wall. Thank you Congresswoman. I think it is important 
we give a brief background.
    Ms. Moore. I do not want you to take up all my time.
    Mr. Wall. I will be very brief.
    Ms. Moore. I want the number, the amount of money.
    Mr. Wall. Insignificant. Our structures, we have very few, 
a handful, of corporations beneath the United States. We are a 
foreign investment in the United States, so when I advocate 
territorial, it is not a significant benefit for our company. 
To me, it is our prudent tax policy, which I put it in my 
written testimony.
    Ms. Moore. Okay, thank you so much. Mr. Hodge, I am really 
grateful to you for the $500 per child tax credit that you 
indicate that you pushed for in the contract for the people 
during the Newt Gingrich era. We have all seen reports as 
recently as today or yesterday that one in six people are poor 
in America. So I am wondering how your view of consumption 
based tax or flat based tax, how do you think that that will 
fair on the poor? And, indeed, children are the poorest among 
the population. How does that square with your view that we 
ought to move to consumption based taxes?
    Mr. Wall. Well, I think you probably know that half of all 
Americans pay no income taxes and many of those people actually 
get refundable tax credits through things like the $500 tax 
credit. We are giving out a little over $100 billion in 
refundable tax credits this year to people who pay no income 
tax. So that is actually a larger amount than all the corporate 
loopholes combined.
    Ms. Moore. So if one in six people are poor, and they have 
to consume, they have to buy bread and washers and dryers and 
they have to have stoves and refrigerators, how would a 
consumption based tax, do you think, how would they fare under 
that proposal? Would they not be more poor people? What if we 
were to move to a flatter tax?
    Mr. Wall. I do not think consumption taxes would drive 
people into poverty, but I think anyone who consumes anything 
would pay a sales tax for the consumption.
    Ms. Moore. Okay, thank you, thank you very much. Mr. Wall, 
I want you to respond to Dr. Rogers indication that if we were 
to move to a territorial system, that we could not be certain 
whether or not those dollars would actually be used to invest 
here in the United States. We would lose the revenue but there 
would be no certainty that those monies would be used for 
investment. Like now, money is sitting on the sideline, and 
corporations are profitable, but they are not re-investing. So 
what could you say to that point?
    Mr. Wall. Congresswoman, my response would be as Mr. Hodge 
indicated, the lock-out effect, trillions of dollars, if there 
was a patron holiday, or whatever Congress deemed appropriate, 
money would come back and companies are in the business of 
investing that money.
    Ms. Moore. Thank you, thank you. Dr. Rogers, I have not 
been for the just tax for the rich thing; I say we let all of 
the Bush-era tax cuts expire and get rid of all of them. Can 
you respond to that economist model?
    Ms. Rogers. Well, yes, I kind of agree with you, but I am 
speaking on my own behalf when I say that. The Bush tax cuts 
have a cost over 10 years of over two and a half trillion 
dollars without counting interest costs.
    Ms. Moore. And they do not help the poor as much as they do 
the rich.
    Ms. Rogers. That is right, and that does not count the AMT 
relief that we needed to pass every year to offset some of the 
facts of the Bush tax cuts. So, put those together and the CPO 
says that is $4 trillion, over 10 years.
    Ms. Moore. That would solve my problems right now. Get over 
George W. Bush.
    Ms. Rogers. Or either, I mean, what I have been trying to 
stress is that sticking to that current law baseline does not 
require that we stick to current laws. So if there are parts in 
the Bush tax cuts that both Democrats and Republicans like and 
want to keep, what it suggests is that we just try to find a 
way to pay for it. If we really want to keep them, they must be 
worth off setting its cost with some other types of base-
broadening tax reform.
    Chairman Ryan. Thank you Dr. Rogers, thank you Ms. Moore. 
Mr. Ribble.
    Mr. Ribble. Thank you, Mr. Chairman. Ranking Member Van 
Hollen, and thank you for calling for the hearing this morning. 
Mr. Wall, it is good to see you. I am from Green Bay. Feel free 
to expand up in the 8th District any time you like.
    Mr. Wall. No problem.
    Mr. Ribble. And so, it is good to be here. Ms. Rogers, was 
it last December that the Bush rates were extended?
    Ms. Rogers. Yes.
    Mr. Ribble. So it is really the Obama rates, correct?
    Ms. Rogers. Yes, you can call them the Bush-Obama tax cuts 
now.
    Mr. Ribble. Thank you very much.
    Ms. Rogers. I have talked about them that way, in fact.
    Mr. Ribble. I mean, we seem to reinvent history here. Those 
rates were extended under President Obama, most recently. I do 
want to ask Mr. Hodge a question though. You mentioned in your 
testimony that the tax cut code ought to be simple, transparent 
and equitable. Those were the three words I think you said. Am 
I describing them accurately?
    Mr. Hodge. Well, not equitable. I talked about a new way of 
looking at equity, but the tax code should be transparent, it 
should be simple, it should be neutral to economic decision 
making.
    Mr. Ribble. Okay, this is the tax code, roughly 10,000 
pages here. Would you say it is simple?
    Mr. Hodge. No, we have actually used that as a doorstop.
    Mr. Ribble. I have been using it as a paperweight in my 
office. But Ms. Rogers, would you call it simple?
    Ms. Rogers. No.
    Mr. Ribble. No. Mr. Wall?
    Mr. Wall. It is not simple.
    Mr. Ribble. It seems to me that every time Congress, and I 
have only been here nine months, so I do not have all the 
historical perspective on how it got here, but it does seem 
like every time Congress decides to simplify it, we add 500 or 
600 pages of complexity. Is that kind of how you see it too, 
Mr. Wall?
    Mr. Wall. Yes, Congressman.
    Mr. Ribble. Yes. Mr. Hodge?
    Mr. Hodge. Absolutely.
    Mr. Ribble. And, Ms. Rogers?
    Ms. Rogers. Yes.
    Mr. Ribble. Yes. Now, that is my fear, is that we are going 
to kind of nibble around the edges here, not really do any real 
true tax reform and we are going to end up in an effort to 
simplify something, make something more complex, more 
inequitable, more difficult for Americans to figure it all out. 
It just costs a God-awful amount of money for most Americans to 
even file their tax returns, now I cannot even imagine what it 
is like for a company like yours. But there is a tax on a tax. 
Who pays corporate taxes? I mean, where do you get the money 
the pay those corporate taxes from? Do you borrow it, or where 
do you get that money?
    Mr. Wall. Corporate taxes are levied out of the company's 
profits. It is a tax on labor, it is a tax on capital 
formation.
    Mr. Ribble. So you get those profits from selling product?
    Mr. Wall. Absolutely.
    Mr. Ribble. And those profits build in the taxes into the 
cost of the products? Would you sell your products for less 
money if your taxes were at a lower rate?
    Mr. Wall. If our taxes were at a lower rate, the market 
advantage, probably.
    Mr. Ribble. Yes, I mean, at the end of the day, for the 
most part, really, consumers pay all taxes. Every dollar of tax 
that is paid, is paid by consumers. You are going to pass it 
on. I ran my own roofing company for years and years, and 
roofing costs more when taxes are higher, costs less when taxes 
are lower.
    Mr. Hodge, looking at the flat rate that you mentioned, 
equitable taxes should apply a single flat rate on most 
everyone equally. That way every citizen pays at least 
something toward the basic cost of government. I think 
Representative Moore makes a valid question here, not so much 
on the consumption side, but on a flat tax rate. How would you 
structure a flat tax rate so as to not penalize lower income or 
poor families?
    Mr. Hodge. Well, let me just premise that by saying that I 
think we have too many people right now who are not paying any 
income taxes whatsoever and thus not contributing to the basic 
cost of government. They are consuming government, they are 
reaping great benefits from it, but they are not contributing 
to it. And I think that is a problem both fiscally and also for 
our nation's democracy. That more people benefit from our 
government than are actually contributing to it. And there are 
many ways to protect them and we do have a standard deduction 
and so forth, but we have simply knocked too many people off 
the tax rolls in recent years. The tax code has always 
protected the very poor, and that goes back to 1913, but I do 
think right now we have too many people who are paying nothing 
and contributing nothing to the cost of government and actually 
they are getting a check back from the IRS. They are looking at 
April 15th as payday rather than tax day.
    Mr. Ribble. Thank you very much, and thank you to all three 
of you for spending some time with us this morning. Mr. 
Chairman, I yield back.
    Chairman Ryan. Mr. Pascrell.
    Mr. Pascrell. Thank you, Mr. Chairman. Mr. Chairman, I want 
to commend you and Mr. Van Hollen and the witnesses today, in 
both sides of the aisle, but what I consider to be one of the 
most civil discussions about a very serious topic. Neither 
party is privy to virtue one what we are trying to do. And the 
book that was held up before by the gentleman from Wisconsin, 
what percentage of that tax code is there to protect the very 
two or three percent of the people we are talking about at the 
top of the scale? They have hundreds and hundreds of attorneys. 
The average guy, like you or like me, somewhat, they do not 
have any lawyers to deal with these things. And I think that is 
something we ought to address. We are talking about increasing 
the number of pages in the tax code over the years, every 
president said they were going to shrink it, every Congressman 
is going to shrink it; it only got worse because they are a lot 
smarter than we are. Those lawyers have gotten all kinds of 
concessions and unless we address that, and you know what, Mr. 
Chairman? I got to give the tea party credit. As your wing of 
the party, we have our wings, you have your wings, and they 
brought this subject, if they only understand all the facts 
rather than just having blinders on, I think they would 
understand what we are dealing with and that is, the rich got 
richer and the poor got poorer. That is an oversimplification, 
Mr. Chairman, but that is true.
    My friend from Oklahoma, who talked about repatriation, we 
tried this in 2004: 105, 110, companies. Chamber Watch in April 
of this year was very specific about the fact that no jobs were 
created. None. Zero. In fact, of those 105 major companies who 
took advantage of that repatriation with five and a quarter 
percent coming back on tax, on what was coming back into this 
country. Many of them, not most of them, many of them had tax 
cuts. Not only did they have tax cuts they cut jobs. So, we 
need to put things in context to see how these things really 
turn out.
    Now, the other side, your side Mr. Chairman, cut taxes, we 
joined you in some of them, tax cuts in 2000, 2001, 2003 made 
predictions, just like Mr. Obama made predictions in his team, 
both of them totally wrong about what was going to happen if we 
cut taxes in 2001, 2003 how many jobs would be created. You had 
to create 5 million jobs and we know it was less than half of 
that. Both sides do not know what they are talking about. And I 
would rather listen to the people in this room, than the folks 
from Yale or Harvard who have been giving me advice over the 
last 12 years. I can learn more in this room, God Bless you, in 
terms of boots on the ground, in terms of boots on the ground 
than I can learn in a minute in any of those folks that we have 
been listening to. We have got the protocol and the models 
wrong. And if you look back into the Financial Times at those 
series of articles back in 2003, you will see what was 
predicted and what really came out. And that it is why it was 
very disappointing. And the Democrats were obviously happy that 
they did not create the jobs; I am being cynical now, back in 
2001 and 2003, and just as many folks on your side hopefully do 
not see an increase in jobs, and we will get that guy in the 
White House, whatever it takes. I would rather listen to the 
folks in this room, Mr. Chairman.
    Now, Ms. Rogers. Today, I think, contrary to common 
perception, federal taxes at the lowest level in over 50 years, 
federal state and local income taxes, and by the way, Mr. 
Hodge, you may not like it that 50 percent of the people are 
not paying income tax, but you take a look at all of the other 
federal taxes that those people pay. Look at it in context, and 
they pay a higher percentage of what they are worth than those 
people who are paying income taxes. Please put it in context. 
Please put it in context. Those people pay other federal taxes, 
do they not, Mr. Hodge? Do they or do they not?
    Mr. Hodge. They do but it is much smaller.
    Mr. Pascrell. Do you know how much the percentage of what 
they are worth is?
    Mr. Hodge. Actually people in the lowest tax bracket, 
including all of their taxes are in negative effective tax 
rates.
    Mr. Pascrell. Even when you include the income taxes?
    Mr. Hodge. When you include the refundable tax.
    Mr. Pascrell. Well, that is not what I asked you.
    Chairman Ryan. Thank you, Mr. Pascrell. On that sunny 
bipartisan note, we will turn it over to Mr. Huelskamp.
    Mr. Huelskamp. Thank you, Mr. Chairman. I appreciate the 
opportunity to ask a few questions of the folks. And I want to 
come to Mr. Wall for the last question because I to hear from 
someone outside the room that is actually in the world of 
creating jobs. I particularly appreciate your testimony so far. 
One of the first comments and observation that I would like to 
make and ask a question of Ms. Rogers, is you were talking 
about sticking to current baseline by the estimates out of my 
office on January 1, 2013, if as Mr. Van Hollen indicated if 
Congress took a 10 year vacation and did nothing we would have 
about $5 trillion in tax increases over the next decade. That 
is the current baseline if nothing changes. Do you still 
support sticking to the current baseline and as far as its 
impact potentially on the economy: a $5 trillion tax increase 
that that is good for the economy?
    Ms. Rogers. I think it is needed for the economy, for both 
the medium term and longer term and I think that it does not 
require reverting to Clinton era tax rates, despite the fact 
that I do not think that is also very bad for the economy kinds 
of tax rates. I think that it is an opportunity to commit to a 
strict version of pay-as-you go rules, which is just to say 
whatever you want to keep in terms of extended tax cuts you can 
pay for them, because right now in current law we have 
committed to an expiration of all the Bush-Obama tax cuts at 
the end of 2012, so I am just asking that this committee, and 
Congress more generally commit to pay-as-you-go.
    Mr. Huelskamp. But you do not believe the president should 
commit to pay-as-you-go on his payroll tax proposals, is that 
correct?
    Ms. Rogers. No, I support the idea of offsetting the cost 
of those as well.
    Mr. Huelskamp. I read the bill last night, and there is no 
offset, essentially it is borrowing money, debt payments is 
what will be the offset. There is no offset in the president's 
bill; it is borrow and pay later, not pay-as-you-go. The 
question I would ask, we have $5 trillion tax increase 
potentially facing if we do not make some progress here.
    I appreciate the discussing today, but Mr. Wall, the 
question I would have for you, and as you talked about 
certainty, and temporary tax cuts, temporary tax relief, 
temporary measures as we have seen in Obama's Stimulus 1, Bush 
Stimulus 1, Obama Stimulus 2. How many years do you need to say 
that is the kind of certainty I need, and my problem is, as a 
member of Congress and everybody here is that we cannot bind 
future congresses. We can try to tie them down into a 
constitutional amendment, on the balanced budget amendment, but 
how many years do you need of certainty to say I can make those 
investment decisions?
    Mr. Wall. Thank you, congressman, with respect your 
question. I would say permanent; what I am advocating is not 
temporary a stimulus if you will: permanent stable fundamental 
corporate tax reform. We talked about the corporate taxes that 
was waged on capital formation, labor and customers. 
Corporations have the jobs. If the tax rate could be lower, 
when look at our competitors the OECD would stimulate 
investment with the United States. I think that would be huge 
for investment or job creation.
    Mr. Huelskamp. So, if, by some political miracle, and maybe 
I am not optimistic enough, the House Republican Budget that 
presumes fundamental tax reform would pass and become law; and 
this is the only chamber that has actually suggested that, 
becomes permanent in this year sometime before January 2013, 
you would think that is a good enough signal that a future 
congress could come in on sometime in the next year or two or 
three or four or five, make changes again, but if you were told 
we passed it, hopefully it is going to stick, that would be 
permanent enough for you because that is the problem; they 
could change it in two years.
    Mr. Wall. That is absolutely right. I mean we need the 
message that it is stable, it is permanent, the other side of 
the equation I mentioned in my written testimony: regulatory 
reform. The burden of regulation is loosened up; that is the 
type of message I think that would instill corporate 
confidence.
    Mr. Huelskamp. I appreciate that, and Mr. Hodge, I 
appreciate you being here as well. What is your expectation of 
what would happen if we fully implemented the Obama stimulus 
plan Number 2, how many jobs would that create in your best 
guess?
    Mr. Hodge. Few, if any. Jobs are not created out on 
temporary measures that can create long term expectations as we 
have been discussing. And right now, the long term expectations 
in the business community looking at the economy is very, very 
poor. And I doubt that even a small incentive would encourage 
someone to hire someone who could cost tens of thousands of 
dollars over the long term. If you get a $5,000 tax credit to 
hire a $25,000 a year worker, that person is going to cost 
$125,000 over the next five years, so that incentive is 
relatively small for that long term commitment. And so you 
ought to be absolutely sure that you have profits and business 
that is going to allow you to keep that person for the long 
term, and right now too few businesses have that certainty.
    Mr. Huelskamp. Thank you. Mr. Chairman and Ranking Member I 
appreciate the great panel today.
    Chairman Ryan. Ms. McCollum
    Ms. McCollum. Thank you Mr. Chairman for the temperature in 
this room so you and I do not feel so homesick. It is freezing 
in here. I just want to go back and I think demystify what some 
of the conversation has been about what people pay for income 
taxes, who pays and who does not pay. And I am going to give my 
say. The data is from the Tax Foundation and it shows that in 
2008, the average income for the bottom half of tax payers was 
$15,300. This year, the first $9,350 of income is exempt from 
taxes for singles and is $18,700 for married couples; that is 
slightly more than in 2008. And that means that millions of the 
poor do not make enough money to owe income taxes. It is not a 
question that they decided not to pay income taxes; many of 
them do not make enough money to owe income taxes.
    And as was pointed out, they do still pay plenty of other 
taxes: federal, payroll tax, which right now is a holiday for 
them, so that is the stimulative effect that Dr. Rogers was 
talking about. They pay gas tax. They are paying sales tax in 
their states. They are paying utility taxes and other taxes 
that they have no choice; they have no discretion. If you have 
water, if you have electric and there is a utility tax on it 
they are paying it.
    And then, when it comes to state and local taxes, the poor 
bear an even heavier burden than the rich in every state except 
Vermont; and that is the Institute of Taxation and Economic 
Policy that did a calculation on the data. Those are not my 
numbers or anything that has been cooked up.
    And this just troubles me. We throw out our good neighbor 
to the north: Canada. We talk about our strong ally in Asia: 
Japan. And when we talk about these economic comparisons, we 
are not talking about how they are fundamentally structured and 
function different within their business communities. In 
Canada, businesses do not have the burden of health care the 
way that your business does here. In Japan, the government 
decides it is going to work with its businesses to do R&D and 
by golly, they are going to have the best battery technology in 
the world and they help their corporations do it.
    So, when just kind of start throwing out countries, and 
Germany does the same thing, we sometimes shorthand things to 
make it work for the argument that we have. But here is my 
question. I am very concerned, and I did not vote for the Bush 
tax cuts, I did not vote for the Obama tax cuts, because I just 
thought we were too rosy with the scenario about what was going 
on out there and there was too much uncertainty and too much 
unpredictability.
    And here is my problem: I am willing to cut; I am willing 
to cut into programs that I think really make a different in 
investing in our future but we need to do something about our 
deficit. But what bothers me is when we talk about the income 
taxes, in particular, it is okay to go out and borrow the money 
on those. So, my question is, to the panel, do you have 
anything that shows, anything at all, any studies, that support 
the notion that tax cuts at this magnitude are ever going to 
pay for themselves, that will help reduce the deficit, or are 
we just going to continue to make no investments in our future? 
And we will start with Mr. Rogers and work down.
    Ms. Rogers. No, I mean, I actually do not think any 
economist would claim that the tax cuts would pay for 
themselves, so it has a cost, in other words. So we have to 
weigh the cost against the benefit, and I think you bring up an 
important point, which is that we have to start considering not 
do we like the tax cuts, but do we like them better than 
alternative uses of that money, because it is a lot of money 
and there are a lot of investments that government could make 
or other forms of spending they could make, and we should be 
weighing those trade-offs instead of just saying we like the 
tax cuts and we would rather keep them than lose them.
    Mr. Hodge. I would be happy to share with you some OECD 
research looking at the experience of other countries in 
cutting their corporate taxes while broadening their bases.
    Ms. McCollum. Mr. Hodge that goes to my point. What are 
those companies putting into R&D? What are those countries 
doing for health care? I think we need a balanced approach when 
we talk about that; if that includes everything then I would 
love to see it.
    Mr. Hodge. Well, this research is looking at what are the 
revenue losses from corporate tax reform and they find out 
that, generally speaking, that these kinds of corporate tax 
reductions do not lose as much money for the treasury as were 
expected and for some reasons it is because of the base 
broadening.
    Ms. McCollum. Mr. Hodge is referring to the individual 
income tax when he talked about the tax cuts.
    Mr. Hodge. I think that we should be broadening the bases 
we lowered individual rates as well. There is $900 billion 
worth of tax expenditures in the individual code; I do not 
think all of them should be eliminated, but many of them can 
while we cut those rates. I will be the first to start clicking 
off the tax expenditures we can eliminate.
    Chairman Ryan. Thank you. Mr. Woodall.
    Mr. Woodall. Thank you, Mr. Chairman, and thank you all for 
being here. Mr. Hodge, thank you for the time you have invested 
in us in tax policy over the years in the 7th District of 
Georgia, I appreciate that. Dr, Rodgers, do you think it is 
important for everybody to have skin in the game? You talked a 
lot about incentives and that somewhere up there on the margin 
high rates matter; they affect people's incentives. Low rates, 
I would argue, also matter. Do we, to keep this American 
experiment alive, do we all need skin in the game or is it okay 
to move folks off the tax rolls?
    Ms. Rogers. I, personally, would prefer that most people be 
on the tax rolls but we already all have skin in the game in 
one way or another. I mean, I think that focusing our 
attentions just on who pays federal income taxes is a little 
bit of a narrow view of who has skin in the game. There are 
opportunity costs of how we use are funds, and so, in a sense, 
we all have skin in the game.
    Mr. Woodall. I absolutely agree with you. I think we spend 
much too much time talking about the income tax, payroll tax is 
the largest tax; 80 percent of American families pay it and we 
spend very little time talking about that. Though, when we talk 
about looking at all of those stages I look at the CBO's 
report, for example, an effective tax rates. To the point my 
colleagues were making earlier, yes, according to the CBO, the 
two bottom quintiles in America have a negative income tax 
rate. They do have a four percent effective tax rate, but only 
because the CBO believes that the payroll tax that corporations 
pay on their employees behalf is actually a cost to the 
employee; only because the CBO believes that corporate income 
taxes are a cost to the consumer and making both of those 
conclusions folks still have skin in the game. Do you share 
those conclusions? That when we tax corporations with a payroll 
tax, that is really a cost to workers and when we have the 
corporate income tax that really goes lots of different places, 
but goes partially to consumer costs as well?
    Ms. Rogers. The way CBO constructs effective tax rates is 
it assigns the burden of any tax to ultimately a real person. 
So you can tax corporations in a legal sense. You can tax 
businesses in a legal sense. But ultimately, it has to be 
traced down to some real person, an individual in a household 
that bears the burden. It can be bearing the burden because you 
are the employee of a firm that pays the taxes. It could be 
because you are the purchaser of a product that that 
corporation makes. Or it could be because it is an income tax 
directly on the household.
    So all CBO does is make certain assumptions based on 
empirical research about the demand and supply in certain 
markets to assign the burden to certain households.
    Mr. Woodall. It all comes back to the only taxpayer we have 
in this country.
    Ms. Rogers. Is real people, yes.
    Mr. Woodall. I have always been interested in a symposium 
the joint tax committee did back in 1997 that you participated 
in. I think you were the non-supply sider there. They tried to 
bring in an entire spectrum of folks.
    Ms. Rogers. Actually, I had a model that was very much a 
supply-side model.
    Mr. Woodall. It was the Fullerton--what did they call it?
    Ms. Rogers. The Fullerton-Rogers model.
    Mr. Woodall. Fullerton-Rogers model. What I thought was 
interesting, and for folks who have not ever looked at that 
symposium, joint tax was trying to figure out how to model 
consumption tax economy because they just did not have a model 
that could handle fundamental tax reform, like the fair tax, 
for example. Economists do not always agree on a lot, but what 
I thought was interesting about the eight of those groups that 
participated with you in that study is that absolutely every 
group said if we moved to a consumption tax model from our 
current model, the economy would grow faster. That was the one 
thing you all agreed on. You differed on whether capital stock 
would grow a little or a lot. You differed on the labor 
effects, but every single group agreed that under a consumption 
tax, the economy would grow faster.
    Ms. Rogers. Can I explain a little bit of that though? One 
thing we learned from that experiment was that when you move 
from our current income tax system to a broad base consumption 
tax, what you get a lot of benefits from is mostly the broader 
base, more than the switch from an income tax base to a 
consumption tax base.
    Mr. Woodall. Though even the unified income tax that you 
also modeled that broadened the base did not report the same 
kind of growth that the consumption tax model with that broader 
base.
    Ms. Rogers. That is true. That is true.
    Mr. Woodall. Now with my last 15 seconds, Mr. Wall, one of 
your big competitors, AGCO, is in my district, so I am 
interested in your industry succeeding, and I am interested in 
what one of my colleagues asked you earlier. Here we are, we 
have the president proposing about a half trillion dollars 
worth of stimulative policy, in his words. Is it your position 
that however it is that we would distribute that kind of volume 
of money, something temporary, less valuable to you than 
something permanent? We live in a give it to me now economy, 
but you are saying, ``Give me something smaller that is 
permanent, rather than something big that is right now.''
    Mr. Wall. Congressman, we are in Georgia, as well. But with 
respect to your question, permanent, stable tax reform. These 
temporary incentives are not helpful; we look at investment and 
return.
    Mr. Woodall. Thank you.
    Chairman Ryan. Mr. Yarmuth.
    Mr. Yarmuth. Thank you, Mr. Chairman. Thanks to all the 
witnesses. About four or five months ago, I represent 
Louisville, Kentucky, and we hosted through the Chamber of 
Commerce in Louisville, a White House business roundtable. 
There were 30 to 40 businesspeople there, anywhere ranging from 
Humana to an individual restaurant owner. And for an hour and a 
half or so, they sat around and talked about what the federal 
government should do to stimulate the economy and job growth.
    In the course of that time, they talked about funding 
community colleges, investing in infrastructure, investing in R 
and D, other education spending, immigration reform. Only one 
person in that entire hour and a half from all those companies 
mentioned taxes, and he asked a question about property taxes, 
so obviously the federal government was not involved. 
Parenthetically, nobody else mentioned regulation changes.
    My question to any of you, particularly Mr. Wall, is why do 
you think that was the case?
    Mr. Wall. Why the gentleman mentioned the property taxes?
    Mr. Yarmuth. Why not one of them in an hour and a half, 35 
or 40 people, ever mentioned taxes?
    Mr. Wall. Obviously, I cannot answer for those gentlemen. 
Our view is we look to invest, it is a matter of circumstances 
or factors, and taxes is a significant component.
    Mr. Yarmuth. I do not know why they did not, either, but 
they did not. Now there has been a conversation, many people 
have mentioned it, this issue of planning and how hard it is to 
plan your business if you are subchapter, for instance, and if 
the rate may go from 35 percent to 39.6. I had this 
conversation with a constituent of mine, and so I asked him, is 
that the biggest variable in your business, that you cannot 
plan for the potential increase of 39.6? You can know that is 
the outside that he is going to pay, and that all the rest of 
the variables in your business are more predictable than that. 
Would you say that in your business, that all the rest of the 
variables in your business are more than essentially 10 percent 
in your tax rate?
    Mr. Wall. To your point, the other variables in our 
business are more variable than the taxes, but I think an 
important point when my CFA asks me to do a discounted cash 
flow on an investment, it is a five year window, and I give 
them an asterisk saying that assumes the tax rate is going to 
be this, so.
    Mr. Yarmuth. But it would not be hard to assume that your 
tax rate is going to be a maximum of 39.6, and that gives you 
some parameters, would it not? If you are planning a business?
    Mr. Wall. That is correct. When we do analysis, we look at 
the statutory rates.
    Mr. Yarmuth. Thanks. Dr. Rogers, you mentioned, in a 
response to Mr. Honda's question, you used the term 
``empirically'' as to why job growth was phenomenal when rates 
were higher. Do I take that answer to mean that there are a lot 
of factors other than taxes that determine whether taxes 
actually resulted in job, higher or lower taxes resulted in 
another effect? That the higher tax rate could have a very 
different effect under certain other circumstances or different 
effect under other circumstances? Is that really the gist of 
what you were saying?
    Ms. Rogers. Yes. Economists talk about taxes having two 
sorts of effects on economic behavior. There is the fact 
because you are changing relative prices that if you cut rates 
on certain forms of activity relative to others, that you 
encourage people to substitute into those lower tax activities, 
but then there are always income effects too, as well, which 
says what are you doing to people's real incomes. So if you are 
cutting taxes, you are making them feel better off; if you are 
raising taxes, you make them feel worse off, and we change our 
behavior. Everyone changes their behavior if you have more 
income or less income. So it is hard to predict.
    Mr. Yarmuth. Right. Well, I am going to tell a little 
story, which is a true story. I have a brother who is in the 
barbecue restaurant business. Sonny's Barbecue; I will give him 
a plug. I am an investor; I have to disclose, although I do not 
make the business decisions. And my brother is always 
Republican because he did not want to pay as much tax, and back 
in 2008, he called me, said, ``You know, John, I have decided 
to support President Obama this year, and all Democrats. I 
said, Well, that is great, Bob. What was your epiphany? And he 
said, ``I finally decided that if nobody can afford barbecue, 
it does not matter what my tax rate is.''
    And he will tell you to this day that a marginal tax rate 
change of something of the magnitude that is being discussed, 
and he is a subchapter S, is the last thing he considers in 
making a business decision. He wants to know whether he can 
make more money, and then he will worry about how much taxes he 
pays. And he pays at the highest rate, so I throw that out just 
to validate what you said. Thank you very much, Mr. Chairman.
    Chairman Ryan. Thank you. Mr. McClintock.
    Mr. McClintock. Thank you, Mr. Chairman. Mr. Hodge, we talk 
about taxes and deficits as if they are polar opposites, but 
are not they really identical twins? Is a deficit not simply a 
future tax?
    Mr. Hodge. Indeed, it is, and we are borrowing from our 
kids to the tune of $1.5 trillion a year, which by definition 
will mean they will pay higher taxes.
    Mr. McClintock. Dr. Rogers, would you agree with that?
    Ms. Rogers. Yes.
    Mr. McClintock. Are not taxes and deficits merely the only 
two possible ways to pay for spending? Is there any other way 
to pay for spending, other than to tax or a future tax?
    Mr. Hodge. I suppose the Fed could monetize it.
    Mr. McClintock. Well, but even that is a tax on the 
economy, is it not?
    Mr. Hodge. Right. Yes.
    Mr. McClintock. It is a tax on those holding dollars by 
reducing the value of the dollars that they hold. So those are 
the only two, so we are dealing then with identical twins here. 
It is not the question of taxes or deficits. It is a question 
of spending. I mean, apologies to the Clinton campaign, it is 
the spending stupid.
    We look at the Bush and Clinton administrations and the 
different approaches they took. Clinton raised tax rates, Bush 
cut them. The difference, though, I think, is Bush, while he 
was cutting tax rates, was also increasing federal spending 
dramatically by an astonishing two percent of GDP. Clinton, 
while he was raising taxes, was also cutting spending by a 
breathtaking three percent of GDP.
    When we look at all of these economic models, and I share 
Mr. Pascrell's concern that the modeling seems to have been 
wrong, we ought to be looking at our own experience. Herbert 
Hoover increased spending dramatically, increased tax rates 
dramatically, did not work out well. Roosevelt did the same 
thing. Did not work out well. Harry S. Truman slashed taxes 
dramatically, slashed government spending even more 
dramatically, and we had the whole post-war economic boom. And 
we can go through each of the administrations. It seems to me 
that it is the spending stoop. Your thoughts?
    Mr. Hodge. I believe that we are spending far more than we 
can ever pay for and I do not believe that current tax policy 
can ever keep up, with this level of spending, especially 
health care spending. And I have looked at some of the European 
experience with value added taxes and those value added taxes 
are not growing fast enough to pay for their health care 
spending nor their future entitlements. So they are having to 
raise those rates as well, and even that is not enough. Tax 
revenues will not really grow any faster than the economy. So 
if you have government programs that are growing at three or 
four or five times the rate of economic growth, your tax 
revenues will never catch up.
    Mr. McClintock. So revenue is very important but the 
healthy way of generating revenue is through economic growth, 
in fact the only source of revenue is prosperity. Is it not?
    Mr. Hodge. Indeed.
    Mr. McClintock. Mr. Ribble touched on this, I want to 
amplify on this a little bit. Who pays business taxes?
    Mr. Hodge. Well business taxes are paid by people, and the 
same way that people pay tobacco taxes, cigarettes do not pay 
tobacco taxes.
    Mr. McClintock. It seems to me that business taxes can only 
be paid in one of three ways: by consumers, higher prices, 
employees through lower wages and by investors, who lower 
earnings. Those are the 401Ks. So, really, it is not the middle 
class that bears all the business tax increases that we have 
been talking about?
    Mr. Hodge. Well, all workers, to some extent, bear the cost 
of corporate income taxes and what we have learned in the 
global economy where capital is very mobile but workers are 
not, that workers are increasingly paying or bearing the 
largest share of corporate taxes.
    Mr. McClintock. So when you increase the tax burden, in any 
way, on a business, ultimately it is paid for by consumers, by 
employees or by investors, mainly 401Ks.
    Mr. Hodge. That is correct.
    Mr. McClintock. We have looked at the enormous amount of 
money that we spend through the tax codes to bribe people to 
make decisions that they would not make if they were making 
them on their own. Just our office came up with about $1.3 
trillion, when you include everything. Is not that distorting 
the economy? Is that not sending dollars to their less 
productive use?
    Mr. Hodge. There is an incredible amount of what we call 
``dead weight loss'' because of all of this in the economy.
    Mr. McClintock. So should we not be doing away with those 
but at the same time, reducing the overall tax rates to assure 
that those taxes are not passed on to a middle class that is 
reeling under the economy?
    Mr. Hodge. We need to free up all of those wasted resources 
that are now going to either tax preparers or these 
unproductive activities.
    Mr. McClintock. One more quick question on the pay roll 
tax. The tax cuts in December did not affect the tax rates, 
they maintained the tax rates in place. The change is the 
payroll tax cut. Is that help to the economy?
    Mr. McClintock. I do not believe so.
    Chairman Ryan. Ms. Castor, you mind just sitting where Gwen 
was?
    Ms. Castor. Here we go. Thank you very much, thank you Mr. 
Chairman and Ranking Member Van Hollen for calling this hearing 
on tax fairness because I do not think folks at home think 
there is much fairness in the tax code right now. They see it 
as Swiss cheese, they look up at Washington and they think that 
the special interest folks who have the money to hire lobbyist 
have been able to carry the day and that those big special 
interests are not paying their fair share. While there are law-
abiding citizens just trying to get by and pay the bills and 
pay their taxes in a fair way.
    One of the things I am hearing often is how can it be that 
the big oil companies, especially that are making the highest 
profits in the history of the globe, are receiving tax-payer 
subsidies. So American taxpayers are actually subsidizing, in 
this day and age of growing debt and deficits, that American 
taxpayers are having to subsidize those industries. And I know 
my GOP colleagues have supported that, have guarded that, but 
at the same time we see American jobs going wanting. And this, 
frankly, could be put to bed or used by investing in a robust 
jobs plan. But just so we put some numbers behind it, over the 
next 10 years, American taxpayers are scheduled to pay oil and 
gas companies more than $40 billion. That is just to the big 
five alone, and the big five have reported over one trillion in 
collective profits over the past 10 years.
    Now the president's bi-partisan fiscal commission that the 
corporate income tax is riddled with special-interest tax 
breaks and subsidies that are badly in need of reform and I 
would hold this up as the poster child for reform. These most 
lucrative companies should not be receiving taxpayer subsidies, 
especially when the future deficits are projected to be so high 
and the GOP has put Medicare on the table to end Medicare as we 
know it. That is not fair and that is not passing the smell 
test at home.
    The fastest and most effective way to reduce the deficit is 
put people back to work and address tax fairness and failing to 
address this job situation will compound our economic weakness 
and our debt and deficit.
    So I would like to ask you if we know we have got to move 
forward and combine a robust jobs plan with greater fairness in 
the tax code by eliminating these special-interest loopholes, 
first of all, tell me, if you had to pick one initiative to 
create jobs what would it be? Right now, if you said this would 
be the most effective in creating jobs right away.
    Mr. Wall. From my perspective Congresswoman, fundamental 
tax reform. I mean we talked about special-interest loopholes, 
a lot of those are corporate tax expenditures legislated by 
Congress to initiate certain economic activity. I am for 
simplification. Bringing down the rate, and reducing the 
expenditures in a fiscally-responsible manner.
    Mr. Hodge. I would concur with that. I think fundamental 
tax reform, both bringing down both corporate and individual 
rates while broadening the base, will do the most for the long-
term health of the economy. Ultimately, that results in greater 
job creation.
    Ms. Rogers. I would ask the Congressional Budget Office to 
come up with a list, whether it be spending increases or tax 
cuts that are most stimulative to demand, and I would pursue 
the ones at the top of that list, whether they be spending 
increases or tax cuts, and I would commit to pay for it by 
letting some of the high-end Bush tax cuts, or all of the Bush 
tax cuts expire in the future.
    Ms. Castor. Okay so, as part of job creation you are 
pointing us back to the unfairness in the tax code. So I have 
highlighted one special-interest loophole that can go with this 
growing debt, the one for the big oil companies, $40 billion 
over the next 10 years, name another one. Give us some guides 
where--give us another loophole tax expenditure that could be 
closed.
    Mr. Wall. Congresswoman, as I have said before, it is very 
difficult for me to say that without seeing the totality of the 
package.
    Ms. Castor. Do you have a favorite out there? How about the 
gory video games? I mean, we believe in R&D tax credit, but do 
we cross a line where American taxpayers are subsidizing these 
violent, gory video games? You can not name one other?
    Mr. Wall. As I said Congresswoman, to me, I am for 
simplification, bringing down the rate, and eliminating the 
expenditures.
    Mr. Hodges. I would eliminate all the so-called subsidies 
for renewable energy: windmills, solar panels, all of that. 
Actually, there is about four times as much tax benefits for 
renewable energy right now than there is for the quote big oil. 
And actually, I would eliminate, along with that, the tax 
expenditure for tax-free municipal bonds. There is about 10 
times as much benefits going to municipal governments through 
the tax code than there is through big oil.
    Chairman Ryan. Thank you. Ms. Black.
    Mrs. Black. Thank you Mr. Chairman and again, panelists, 
thank you for being here today. I know we are little bit over 
our time, and thank you chairman and ranking member for 
allowing me to get my question in here. As we are talking about 
fundamental tax reform, I have been trying to understand, 
because it is a very complicated code, as seen by Congressman 
Ribble's book here that it is quite complicated but I want to 
go to the nomenclature because we keep hearing words that are 
not defined. In particular, let me go to just what was talked 
about by Ms. Castor and when we are looking at definitions of 
whether a subsidy is the same as a tax credit, as a loophole, 
as a tax expenditure, as a deduction. Can each of you tell me 
what is the difference between the subsidy and what I think, if 
you take all those other words, the tax credit loopholes, 
expenditures and deductions, they seem to be in one pot, the 
subsidies seems to be in another. Can you give me a clear 
definition? Are all these the same, are they just synonymous, 
or do they really have a difference?
    Ms. Rogers. Many of our tax, so-called, tax expenditures, 
which are the special preferences in the tax code are subsidies 
that encourage economic activity to be shifted into those 
sectors that face lower effective tax rates through the 
complications in the tax code. So I define a subsidy as 
something that gives a preferential rate, effective tax rate to 
certain industries or certain types of households or certain 
forms of income or certain ways of using income.
    Mrs. Black. So is the child tax credit the same as a child 
subsidy?
    Ms. Rogers. It does not come close to really subsidizing 
the cost of having children, but it does help. It is not what I 
would called subsidy in terms of shifting resources in 
particular sectors of the economy.
    Mrs. Black. Mr. Hodge.
    Mr. Hodge. Well, certainly the child tax return was not 
intended to incentivize anything, it was just merely, purely 
family tax relief. But whether we called something a subsidy, a 
credit or deduction depends on what your ideal tax base is. And 
for many of us, things like the tax deductions for savings and 
so forth, capital gains preferences, are not considered 
subsidies, because we believe those should not be taxed in the 
first place, nor ideal tax base. A lot of it does come down to 
what you believe the ideal is, but there are clearly too many 
things in the tax code that are intending to incentivize or 
benefit certain industries over others and that is clearly a 
violation of tax principles.
    Mrs. Black. Mr. Wall?
    Mr. Wall. Congresswoman, the nomenclature that is used is 
corporate tax expenditures. My view is Congress legislating 
incentives to encourage certain types of behavior. Section 199 
encouraged domestic manufacturing, so I used the terminology 
incentive.
    Mrs. Black. I do think, Mr. Chairman, that maybe that would 
be something good for us to have, is a list of some of these 
definitions of the words that we throw around so that we have a 
very clear idea about what we are really talking about. And I 
know I have very little time left, but I want to go to another 
group that we continue to hear, and yet I do not know that I 
know for sure what the definitions of that really is. When we 
talk about the rich or the wealthy, or millionaires or 
billionaires, or poor, do we have clear definitions that fit 
into the current codes that as we do reform, we have a clear 
idea about definitions of those words as well.
    Ms. Rogers. Well there is no standard definition for who is 
rich or middle class.
    Mrs. Black. Okay, so when we hear folks talk about taxing 
the rich, or the wealthy, I mean, millionaires and billionaires 
are a little easier to define. If you are a millionaire, you 
are a millionaire. If you are a billionaire, we can say here is 
your income, we know that. So when we talk about the rich, when 
we talk about the wealthy, when we talk about the poor, it 
seems that it sets up a lot of the emotional feelings and 
brings about feelings about whichever side, class warfare or 
someone feeling like they are being singled out, they have been 
successful. Again, definitions here do not seem to be clear as 
we move forward with how we reform our tax code in knowing 
which poor, wealthy, whatever.
    Mr. Hodge, do you want to speak to that really quickly? I 
know we do not have much time.
    Mr. Hodge. I think we need to make a distinction between 
middle class and middle income. Middle class is a values system 
of which about 99 percent of all Americans believe that they 
are in. The middle income is a narrow definition of what middle 
income is. But most of us believe, and I think most of us 
rightly think of ourselves as middle class and that is a whole 
different thing.
    Mrs. Black. Mr. Wall. Well, Mr. Chairman, I guess I am out 
of time.
    Chairman Ryan. Lunch is coming up. Ms. Kaptur.
    Ms. Kaptur. Thank you, Mr. Chairman. What America really 
needs is a pro-jobs in the U.S. Tax reform effort. From the 
figures I have, I am going to put some of these on the record, 
it has been a great year for corporate America. Caterpillar's 
second quarter earnings shot up 44 percent to one billion. 
General Electric's second quarter earnings were up 21 percent, 
3.75 billion. Mr. Wall, Case New Holland has been no exception, 
your company had another great quarter. Hosted in July, profits 
show your net sales grew by 24 percent and you brought in net 
sales of 4.9 billion. I mean, you have got to be proud of that. 
If we look at big oil, it is the same. I mean, BP made 5.6 
billion, Chevron's profit 7.7 billion, Exxon, another 10.7 
billion.
    Now, we are told that these companies are the job creators, 
so my question is where are the jobs being created? Last month, 
there was zero private sector job growth. According to Bureau 
of Labor Statistics, there are 3.2 million job openings, 
different kinds, around our country, but 14 to 24 million 
people who are unemployed, who are discouraged, are working 
three part-time jobs and frankly, burned out, I have these 
people that I represent, I meet them all the time. We are being 
told now we need to cut taxes on companies despite their robust 
earnings and their disinterest in hiring in our country. Maybe 
some of the witnesses missed the reporting recently that GE 
paid nothing in taxes. And I must question, how do you cut 
taxes of companies that pay nothing? This is a really 
interesting math problem.
    So, I think the system is somewhat unfair to the average 
citizen, in fact, very unfair. And it is unfair to small 
businesses and those who do pay their fair share. Tax avoidance 
is not just a factor of one company. In 2009 and 2010 the six 
largest banks that got America's economy down, including 
Goldman Sachs, Wells Fargo, Bank of America, and JPMorgan Chase 
paid an effective tax of 11 percent of their pre-tax earnings. 
And Goldman raked in $9.6 billion in profit. Its CEO received 
$64 million in compensation, he is willing to admit. Jamie 
Diamond at JPMorgan Chase earned $70.3 million as his bank 
raked in over $17 billion. Yet we live in a world where funds 
managers like Warren Buffet point out they pay at a lower tax 
rate than their secretaries. Mr. Hodge, in your testimony, you 
claim we should lower U.S. statutory tax rates for 
corporations. I assume you acknowledge the great disparity 
between what a few companies on Wall Street pay and the tax 
rates paid by small businesses in places like I represent. 
Would you support an effective tax rate where those companies 
would pay the same, the largest financial firms, the GE's of 
the world, as their hard work pays in my district? Or the 
bakeries, Strom's bakery? All these different companies. I 
assume you are not arguing that those who have learned to not 
pay their fair share should be rewarded by allowing them to do 
so.
    And then, you could wait a second to answer that question. 
Mr. Wall, I noticed that your company employs over 10,000 
people and I hope you agree that job creation needs to be our 
number one priority. Your company's CEO testified before the 
House Transportation and Infrastructure Committee last year 
that every billion dollar spent on infrastructure projects by 
the government creates about 18,000 jobs. Do you agree with 
your company's assessment? Do you believe we need to take on 
the deficit by growing the economy through investment and 
infrastructure in useful public works? So, first, Mr. Hodge, 
please.
    Mr. Hodge. Well, thank you, Congresswoman. I do not believe 
that there General Electric represents corporate America 
anymore than I think Leona Helmsley represents all of us. There 
are always going to be tax payers, private, personal, corporate 
that can configure themselves in such a way to minimize their 
tax burden. But I can look at the overall IRS data, in fact the 
tax foundation released a study last week looking at actual 
corporate IRS data. And we find that the effective tax rate for 
all corporations in America over the last 18 years is averaged 
around 26 percent. That is after taking all their credits and 
deductions and loopholes and everything else. And that does not 
count the taxes they pay abroad.
    Ms. Kaptur. Does that include hedge funds, sir?
    Mr. Hodge. It includes all corporations.
    Ms. Kaptur. Do they not pay an 11 percent rate?
    Mr. Hodge. In some cases, some hedge funds may pay, if you 
are talking about carried interest, which is a capital gain. 
They are paying at a 15 percent capital gains rate.
    Ms. Kaptur. But the hardware in my neighborhood, they pay a 
35 percent rate, what is fair about that?
    Mr. Hodge. That is the statutory rate which all 
corporations in America pay, whether they are C corps or's 
corps. The top statutory rate is 35 percent for all of us.
    Ms. Kaptur. You know the ones that have the big guns here 
in Washington always seem to push on it, and they make the 
biggest profits and the other businesses struggle out there.
    Chairman Ryan. Thank you, just in the interest of time, and 
Mr. Ryan. Not this Mr. Ryan, that Mr. Ryan. Thank you.
    Ms. Kaptur. Mr. Chairman, excuse me, could I ask the 
unanimous consent that Mr. Wall answer my question on 
infrastructure for the records?
    Chairman Ryan. Without objection.
    [The information follows:]

       Response by Mr. Wall to Questions Submitted by Ms. Kaptur

    Congresswoman Kaptur, thank you for your question regarding 
investment in infrastructure and jobs. The Congressional testimony you 
refer to in your question was provided by James McCullough, CEO and 
President of the Case New Holland Inc. (``CNH'') Construction division, 
in his capacity as First Vice Chair of the Association of Equipment 
Manufacturers (``AEM'') at a hearing of the House Committee on 
Transportation and Infrastructure held on September 29, 2010. Mr. 
McCullough was representing the construction equipment manufacturing 
sector in his testimony. Mr. McCullough in his testimony cites a 
Federal Highway Administration study that found that every $1 billion 
invested in highway construction would support approximately 27,800 
jobs. See ``Employment Impacts of Highway Infrastructure Investment,'' 
U.S. Department of Transportation, Federal Highway Administration, 
www.fhwa.dot.gov/policy/otps/pubs/impacts/index.htm (last visited 
September 23, 2011).
    You mention in your question the possibility of taking on the 
deficit by growing the economy through investment and infrastructure 
and useful public works. As I stated in my written testimony for this 
hearing, CNH believes that reducing the U.S. statutory corporate tax 
rate to 25% or lower, in conjunction with the adoption of a territorial 
tax system, would make the United States more competitive with other 
countries, which would significantly increase investment in the United 
States and lead to much needed job growth. Reforming corporate tax 
policy and removing regulatory uncertainty are necessary for long-term 
and sustainable job creation in the United States.
    With respect to proposals to increase investment in infrastructure, 
CNH would need to review a specific infrastructure investment 
legislative proposal, along with any potential accompanying revenue 
offsets recommended as part of such proposal, in order to assess 
whether we believe such a program would enhance the Nation's job and 
economic growth.
    Thank you for allowing me the opportunity to respond to your 
question.

    Mr. Ryan of Ohio. Thank you, Mr. Chairman. You guys agreed 
that deficits are future taxes? You guys all agreed that 
deficits are future taxes. So, is high unemployment inevitably 
then a future tax? If we have high unemployment, we have 
deficits and so therefore at some point we are going to have 
future taxes, right?
    Ms. Rogers. In that sense, yes. In terms of the economy and 
economic growth, yes.
    Mr. Ryan of Ohio. Mr. Hodge, thank you.
    Mr. Hodge. Inevitably, we are going to be paying higher 
taxes because right now, no amount of revenue is catching up to 
all of the spending that we are doing.
    Mr. Ryan of Ohio. No, I am just saying, in general, if 
deficits lead to higher taxes, high unemployment inevitably 
leads to deficits, so deficits lead to higher taxes so high 
unemployment leads to higher taxes, right?
    Mr. Hodge. Okay.
    Mr. Ryan of Ohio. Is that right? Am I wrong?
    Mr. Hodge. Sure. No, that is a complicated argument, but I 
will go with it.
    Mr. Ryan of Ohio. It does not seem very complicated. If we 
have high unemployment, we have less revenue going into the 
Treasury.
    Mr. Hodge. Right, we have fewer people working, fewer 
people paying taxes, ergo, eventually we are going to have to 
make up the difference.
    Mr. Ryan of Ohio. Okay.
    Mr. Wall. Congressman, I agree. Jobs, number one priority. 
I am advocating corporate taxes reform would be stimulative to 
the economy.
    Mr. Ryan of Ohio. So, Mr. Wall, you talked about tax rates 
are a contributor to your decisions that you are making, right? 
Are not consumer demand and consumer spending also a big part 
of that?
    Mr. Wall. Absolutely, Congressman. As I mentioned, it is a 
myriad of factors: logistics, quality of labor, where is the 
market demand, taxes.
    Mr. Ryan of Ohio. High unemployment, wages being stagnant, 
low consumer spending equals you are less inclined to then make 
investments. No one is going to buy your product. It just makes 
sense.
    Mr. Wall. I will let my colleagues answer the macro part of 
it. For our business agricultural equipment is doing well, so 
we have the demand and we are expanding capacity and jobs.
    Mr. Ryan of Ohio. Regardless of the tax rate.
    Mr. Wall. No, actually as I was trying to illustrate in my 
written testimony, the United States is not a competitive 
regime. We look to expand capacity around the globe, taxes as I 
mentioned, is one of the factors.
    Mr. Ryan of Ohio. Let me just ask Mr. Wall and Mr. Hodge. 
Are we in a liquidity trap now in our country?
    Mr. Hodge. In a liquidity trap? To some extent, certainly. 
But I think it comes back to the demand side, in which if no 
one is buying, if there is not market, there is no prospects of 
long-term consumer demand. People are just going to sit and 
wait, and wait for the economy. Even if you freed up borrowing, 
if they do not feel like they can expand to meet whatever 
demand, then they will not.
    Mr. Ryan of Ohio. But if people went back to work, for 
example, we have a 20 percent unemployment in construction 
trades right now. If we got that down to five, six, even the 
national average, nine or 10, would that help us get out of 
this liquidity trap?
    Mr. Hodge. I do not know if any one sector can spur that.
    Mr. Ryan of Ohio. Of course it would not be just one 
sector. If we got that number down significantly, and it is a 
large portion, and we hired those people, would that not help 
us get out of this mess we are in right now?
    Mr. Hodge. Well, I would like to see all sectors move up.
    Mr. Ryan of Ohio. Well, I would too, obviously.
    Mr. Hodge. Well, I do not know how one would spur one 
industry over another.
    Mr. Ryan of Ohio. Well, we can have a more direct effect 
from our end on putting people back to work, if we have a $2 
trillion infrastructure deficit in the country. Work has to get 
done.
    Mr. Hodge. Look, the Japanese tried to build infrastructure 
in order to try to stimulate their economy and it simply did 
not work. And I think that gold plating the nation's highways 
is just not necessary. Someone has to pay for that eventually 
right?
    Mr. Ryan of Ohio. Yes. So why not pay for it now? While we 
have high unemployment. Because high unemployment leads to 
deficits and deficits lead to higher taxes. It seems to me it 
would be better for us. We end up paying lower taxes if we made 
these investments now because we are going to have to pay 
higher taxes anyways, because there is unemployment and 
unemployment leads to deficits and deficits lead to higher 
taxes so the key to me to keep our taxes low would be to get 
unemployment down.
    Mr. Hodge. I hate to see our kids drive on nice highways 
but not have jobs.
    Mr. Ryan of Ohio. I have 80 bridges in my district that are 
deficient, dangerous, all across the country. This is not a 
waste of money, this needs to get done anyway. So we are not 
gold-plating any highways. Come to Ohio, nothing is gold-
plated, nothing will be. We are just tried to patch the 
potholes up.
    Chairman Ryan. Thank you, Mr. Ryan.
    Mr. Ryan of Ohio. Thanks.
    Chairman Ryan. This was a fantastic hearing, I think a lot 
of members enjoyed the participation and I want to thank our 
three witnesses for your indulgence from going from 10:00 until 
past noon. We appreciate it and this hearing is adjourned.
    [Questions submitted for the record and their responses 
follow:]

      Question for the Record Submitted by Hon. Mick Mulvaney, a 
      Representative in Congress From the State of South Carolina

 question for diane lim rogers, chief economist, the concord coalition
    Ms. Rogers, I believe you made a statement during the hearing that 
increasing taxes on the rich, while also decreasing taxes on the poor 
by an equal amount, would boost GDP.
    If I heard you correctly, how would this revenue-neutral tax rate 
change on the rich and poor alter GDP, as defined by C+I+G+(X-M)?

      Response by Ms. Rogers to Question Submitted for the Record

    Response to Question Submitted Mr. Mulvaney (SC-05)
    Question: ``Ms. Rogers, I believe you made a statement during the 
hearing that increasing taxes on the rich, while also decreasing taxes 
on the poor by an equal amount, would boost GDP.
    If I heard you correctly, how would this revenue-neutral tax rate 
change on the rich and poor alter GDP, as defined by C+I+G+(X-M)?''

    Answer: The statement in my testimony refers to a recessionary 
(less than full employment) economy, in which case the binding 
constraint in the economy is the lack of demand for goods and services. 
(Increasing the supply of productive factors to the economy won't 
increase economic output because there is not enough demand for the 
products produced by those factors.) The demand side of the economy is 
represented as the sum of personal consumption expenditures on goods 
and services (C), investment purchases of goods and services (I), 
direct government purchases of goods and services (G), and net exports 
of goods and services (X-M). Consumption can be increased by cash 
transfers to households, but unlike the dollar-for-dollar effect of 
direct government purchases (where a dollar spent goes fully into 
higher GDP), a dollar of government transfers to households only 
translates to higher GDP according to the households' marginal 
propensities to consume (how much of an additional dollar received they 
will spend). Because higher-income households have lower propensities 
to consume--i.e., they save larger fractions of their income than 
lower-income households--then taking a dollar away from a rich 
household and giving it to a poor household (thus, revenue neutral) 
would reduce the rich household's consumption less than it would 
increase the poor household's consumption. Thus, total consumption in 
the economy is increased when a tax policy redistributes income from 
higher-income households toward lower-income ones.
    This is only valid in a recessionary economy, however. In a full-
employment economy, the supply side of the economy becomes the binding 
constraint. A goal for longer-term economic growth might be to increase 
the rate of national saving, which increases the supply of capital in 
the economy. Then the opposite case for the effects of tax 
redistribution holds: a dollar taken away from a poor household and 
given to a rich household would likely decrease the poor household's 
saving by less than it increases the rich household's saving (because 
poor households hardly save anything). Of course, there are equity 
arguments that work against such a policy.

    [Whereupon, at 12:34 p.m., the Committee was adjourned.]

                                  
