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





                    TAX REFORM AND CONSUMPTION-BASED
                              TAX SYSTEMS

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

                                HEARING

                               before the

                      COMMITTEE ON WAYS AND MEANS
                     U.S. HOUSE OF REPRESENTATIVES

                      ONE HUNDRED TWELFTH CONGRESS

                             FIRST SESSION

                               __________

                             JULY 26, 2011

                               __________

                           Serial No. 112-15

                               __________

         Printed for the use of the Committee on Ways and Means











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                      COMMITTEE ON WAYS AND MEANS

                     DAVE CAMP, Michigan, Chairman

WALLY HERGER, California             SANDER M. LEVIN, Michigan
SAM JOHNSON, Texas                   CHARLES B. RANGEL, New York
KEVIN BRADY, Texas                   FORTNEY PETE STARK, California
PAUL RYAN, Wisconsin                 JIM MCDERMOTT, Washington
DEVIN NUNES, California              JOHN LEWIS, Georgia
PATRICK J. TIBERI, Ohio              RICHARD E. NEAL, Massachusetts
GEOFF DAVIS, Kentucky                XAVIER BECERRA, California
DAVID G. REICHERT, Washington        LLOYD DOGGETT, Texas
CHARLES W. BOUSTANY, JR., Louisiana  MIKE THOMPSON, California
PETER J. ROSKAM, Illinois            JOHN B. LARSON, Connecticut
JIM GERLACH, Pennsylvania            EARL BLUMENAUER, Oregon
TOM PRICE, Georgia                   RON KIND, Wisconsin
VERN BUCHANAN, Florida               BILL PASCRELL, JR., New Jersey
ADRIAN SMITH, Nebraska               SHELLEY BERKLEY, Nevada
AARON SCHOCK, Illinois               JOSEPH CROWLEY, New York
LYNN JENKINS, Kansas
ERIK PAULSEN, Minnesota
KENNY MARCHANT, Texas
RICK BERG, North Dakota
DIANE BLACK, Tennessee
TOM REED, New York

                       Jon Traub, Staff Director

                  Janice Mays, Minority Staff Director









                            C O N T E N T S

                               __________

                                                                   Page
Advisory of July 26, 2011, announcing the hearing................     2

                               WITNESSES

PANEL (FairTax):

  Mr. Mike Huckabee, Former Governor of Arkansas.................     6
  Dr. Laurence J. Kotlikoff, Professor of Economics, Boston 
    University, Boston, MA; accompanied by Dr. David Tuerck, 
    Executive Director, The Beacon Hill Institute, Professor and 
    Chairman, Department of Economics, Suffolk University........    11
  Mr. Bruce Bartlett, Columnist, Tax Notes, The Fiscal Times, 
    Contributor, The New York Times..............................    22

PANEL (Value Added Tax):

  Mr. Michael J. Graetz, Columbia Alumni Professor of Tax Law, 
    Columbia University..........................................    66
  Dr. Rosanne Altshuler, Professor and Chair, Economics 
    Department, Rutgers University...............................    89
  Dr. Robert J. Carroll, Ernst & Young, LLP......................   103
  Mr. Jim White, Director, Tax Issues, Government Accountability 
    Office.......................................................   121
  Dr. Daniel J. Mitchell, Senior Fellow, Cato Institute..........   137
  Dr. Simon Johnson, Ronald A. Kurtz Professor of 
    Entrepreneurship, Sloan School of Management, Massachusetts 
    Institute of Technology, former Economic Counselor and 
    Director of the Research Department at the International 
    Monetary Fund................................................   151

                       SUBMISSIONS FOR THE RECORD

The Honorable Steve King.........................................   167
The Honorable Rob Woodall........................................   170
The Honorable Jeff Miller........................................   172
American Manufacturing Trade Action Coalition....................   173
Americans for Fair Taxation......................................   184
Bay County Florida Executive Committee...........................   194
Bobby L. Austin..................................................   196
Bruce Burton.....................................................   203
Center for Fiscal Equity.........................................   204
Charlene Westgate................................................   212
Dan Horton.......................................................   214
David E. Miller..................................................   215
David H. Leake...................................................   215
Dr. Nanette Parratto-Wagner......................................   216
Dr. Roger Sdao...................................................   219
E. Ray McKee, Jr.................................................   220
Elizabeth Yingling...............................................   222
Garret Swayne....................................................   224
Hugh J. Campbell.................................................   227
James M. Bennett.................................................   230
John J. Riehecky.................................................   234
Linda M. Jolicoeur...............................................   236
Linda Scott Cummings.............................................   237
Lisa Chambers....................................................   238
Mark Curran......................................................   239
Mike Kelly.......................................................   242
Mike Warlick.....................................................   243
National Association of Small Business Investment Companies......   244
National Debt Awareness Center...................................   248
National Retail Federation.......................................   249
Orient American Ore Co., LLC.....................................   259
Paul D. Wheaton..................................................   262
Retail Industry Leaders Association..............................   273
Richard Giambruno................................................   276
Richard T. Ainsworth.............................................   278
Sal Tranchina, Jr................................................   287
Scott Lombardo...................................................   287
Shawn Murphy.....................................................   288
Steven M. Puma...................................................   289
Todd Sarmiento...................................................   292
VATinfo.org......................................................   294

                   MATERIAL SUIBMITTED FOR THE RECORD

Questions and Responses for the Record:
      The Honorable Tom Price....................................   299

 
              TAX REFORM AND CONSUMPTION-BASED TAX SYSTEMS

                              ----------                              


                         TUESDAY, JULY 26, 2011

             U.S. House of Representatives,
                       Committee on Ways and Means,
                                                    Washington, DC.
    The committee met, pursuant to notiice, at 10:05 a.m., in 
Room 1100, Longworth House Office Building, the Honorable Dave 
Camp [chairman of the committee] presiding.
    [The advisory of the hearing follows:]

HEARING ADVISORY

 Camp Announces Hearing on Tax Reform and Consumption-Based Tax Systems

Tuesday, July 26, 2011

    Congressman Dave Camp (R-MI), Chairman of the Committee on Ways and 
Means, today announced that the Committee will hold a hearing on 
alternative tax systems, with a focus on tax systems that are based on 
taxing consumption rather than income. Specifically, the Committee will 
consider the FairTax--a proposal to replace existing federal taxes with 
a national retail sales tax--and the Value-Added Tax (VAT), a type of 
consumption tax used by many other countries as a supplement to other 
taxes, such as taxes on individual and corporate income. The hearing 
will take place on Tuesday, July 26, 2011, in Room 1100 of the 
Longworth House Office Building, beginning at 10:00 A.M.
      
    In view of the limited time available to hear witnesses, oral 
testimony at this hearing will be from invited witnesses only. However, 
any individual or organization not scheduled for an oral appearance may 
submit a written statement for consideration by the Committee and for 
inclusion in the printed record of the hearing. A list of invited 
witnesses will follow.
      

BACKGROUND

      
    For several consecutive Congresses, legislation to repeal existing 
federal taxes on income, payroll, estates and gifts and replace them 
with a single national retail sales tax has been introduced as the Fair 
Tax Act. The bill would grant states the primary authority for the 
collection of sales tax revenues and the remittance of such revenues to 
the Treasury. It also would abolish the Internal Revenue Service after 
fiscal year 2015, replacing it with a Sales Tax Bureau to administer 
the FairTax and an Excise Tax Bureau to administer remaining excise 
taxes formerly under the jurisdiction of the IRS. In the 112th 
Congress, the Fair Tax Act has been introduced as H.R. 25.
      
    Many countries have adopted a different kind of consumption tax--
the Value-Added Tax--in addition to their income and other taxes. Under 
a VAT, a business pays tax on the value it adds during its stage in the 
production, distribution, and sales processes. Generally, ``value 
added'' is measured as the difference between the price for which a 
business sells a good or service and the cost of the inputs the 
business incurred to produce it. Economically, however, a VAT is 
considered equivalent to a retail sales tax, in that the VAT paid at 
each stage of the process is passed on to the ultimate consumer in the 
form of a higher retail price.
      
    In announcing this hearing, Chairman Camp said, ``While the 
Committee thus far has focused on reforming the income tax, tax 
proposals that would move us away from an income base and instead adopt 
consumption as the tax base have continued to generate interest as 
well. Supporters of such approaches believe that taxing consumption 
rather than income could have important economic benefits, and so as 
part of our efforts to reform the Tax Code, the Committee needs to 
examine those proposals. This hearing will allow the Committee to learn 
more about two of the most-discussed consumption tax proposals, the 
FairTax and the VAT.''
      

FOCUS OF THE HEARING:

      
    The hearing will consider separately two different consumption tax 
models. One panel will examine the advantages and disadvantages of a 
VAT, whether as a supplement to or full replacement for existing taxes. 
Another panel will discuss the policy arguments for and against 
adopting the FairTax as a replacement for existing federal taxes. The 
hearing will explore the economic impact of consumption tax systems, as 
well as issues surrounding administration and compliance.
      

DETAILS FOR SUBMISSION OF WRITTEN COMMENTS:

      
    Please Note: Any person(s) and/or organization(s) wishing to submit 
written comments for the hearing record must follow the appropriate 
link on the hearing page of the Committee website and complete the 
informational forms. From the Committee homepage, http://
waysandmeans.house.gov, select ``Hearings.'' Select the hearing for 
which you would like to submit, and click on the link entitled, ``Click 
here to provide a submission for the record.'' Once you have followed 
the online instructions, submit all requested information. ATTACH your 
submission as a Word document, in compliance with the formatting 
requirements listed below, by the close of business on Tuesday, August 
9, 2011. Finally, please note that due to the change in House mail 
policy, the U.S. Capitol Police will refuse sealed-package deliveries 
to all House Office Buildings. For questions, or if you encounter 
technical problems, please call (202) 225-3625 or (202) 225-2610.
      

FORMATTING REQUIREMENTS:

      
    The Committee relies on electronic submissions for printing the 
official hearing record. As always, submissions will be included in the 
record according to the discretion of the Committee. The Committee will 
not alter the content of your submission, but we reserve the right to 
format it according to our guidelines. Any submission provided to the 
Committee by a witness, any supplementary materials submitted for the 
printed record, and any written comments in response to a request for 
written comments must conform to the guidelines listed below. Any 
submission or supplementary item not in compliance with these 
guidelines will not be printed, but will be maintained in the Committee 
files for review and use by the Committee.
      
    1. All submissions and supplementary materials must be provided in 
Word format and MUST NOT exceed a total of 10 pages, including 
attachments. Witnesses and submitters are advised that the Committee 
relies on electronic submissions for printing the official hearing 
record.
      
    2. Copies of whole documents submitted as exhibit material will not 
be accepted for printing. Instead, exhibit material should be 
referenced and quoted or paraphrased. All exhibit material not meeting 
these specifications will be maintained in the Committee files for 
review and use by the Committee.
      
    3. All submissions must include a list of all clients, persons and/
or organizations on whose behalf the witness appears. A supplemental 
sheet must accompany each submission listing the name, company, 
address, telephone, and fax numbers of each witness.
      
    The Committee seeks to make its facilities accessible to persons 
with disabilities. If you are in need of special accommodations, please 
call 202-225-1721 or 202-226-3411 TTD/TTY in advance of the event (four 
business days notice is requested). Questions with regard to special 
accommodation needs in general (including availability of Committee 
materials in alternative formats) may be directed to the Committee as 
noted above.
      
    Note: All Committee advisories and news releases are available on 
the World Wide Web at http://www.waysandmeans.house.gov/.

                                 

    Chairman CAMP. Good morning. And thank you all for joining 
us today.
    Today is the ninth hearing that we have held on 
comprehensive tax reform, not counting the roundtable 
discussion held by the Joint Committee on Taxation, where we 
were joined by key architects of the Tax Reform Act of 1986. 
During our very first hearing of the year, which was also our 
first hearing on tax reform, we discussed the need to transform 
our Tax Code so that it would encourage, rather than inhibit 
job creation.
    Six months later, as we continue to struggle in an economy 
where unemployment remains high, and growth is virtually 
stagnant, the need to overhaul Americans' broken Tax Code has 
never been greater. Clearly, the Tax Code is too complex, too 
costly, and takes too much time to comply with. All this adds 
more burdens on families and employers, making it more 
difficult to create the jobs that 14 million men and women in 
this country need.
    Since the beginning of our discussions on comprehensive tax 
reform, I have cited three things I am certain of, as we take 
on this endeavor. First, I have no illusions that this will be 
an easy task. But then, most things that are worth doing never 
are. Second, I don't think this should be a partisan exercise. 
And third, and most importantly, we will talk to the American 
people: individuals, families, employers, both large and small, 
who are actually affected by the laws we pass here in 
Washington. They are the real experts, and that is why their 
voices are critical, as we explore and develop tax reform 
policy.
    That brings us to why we are here today. Although our 
current tax system does include some elements that are 
consumption-based, such as excise taxes, for the most part our 
Tax Code is thought of as being based on the taxation of 
income. To this point, our hearings this year, including the 
joint hearing we held with the Senate Finance Committee two 
weeks ago, explore tax reform with an eye toward maintaining an 
income-focused tax base. We have explored how the current tax 
system works and, in many cases, doesn't work for employers and 
families.
    Today we are shifting gears just a bit to explore a 
different basis for taxation: consumption. We will examine two 
different consumption tax models that have emerged as potential 
alternatives to our current income tax system: the fair tax, 
and the value-added tax. Our first panel will discuss the 
policy arguments for and against adopting the fair tax as a 
replacement for existing federal taxes. Our second panel will 
examine the advantages and disadvantages of a value-added tax, 
or VAT, whether as a supplement to or a full replacement for 
existing taxes.
    We have some terrific witnesses on our panels, and I would 
like to thank them for being here today. We are anxious to hear 
from them, and look forward to engaging in discussion. And with 
that, I will yield to Ranking Member Levin for the purposes of 
his opening statement.
    Mr. LEVIN. Thank you very much. First, I would like to join 
in welcoming this panel. You are very active and distinguished 
people. If I might, I would like to say a special hello to Mr. 
Huckabee, the Honorable Huckabee. It says H-o-n in front of 
your name, and we are glad to see you.
    This hearing may take on a number of sparks, in view of the 
crisis that we face today, but I don't want anyone to feel that 
we anything but welcome all of you here today.
    Yesterday the Speaker put forward what he calls a two-step 
approach, and I quote, ``to hold President Obama accountable.'' 
Under that proposal, the Speaker states that there will be, and 
I quote, ``no tax hikes.'' But what would the proposals before 
us today mean for millions of working American families? A tax 
hike.
    At the same time, the Speaker's proposal establishes a 
commission that cannot recommend reducing the deficit by ending 
tax breaks for people making over $1 million a year, or ending 
tax loopholes that encourage companies to shift jobs overseas, 
or shutting down tax havens. This prohibition on a commission 
even considering revenues, along with the spending caps in the 
Speaker's proposal would mean major cuts in vital programs like 
Social Security, Medicare, and Medicaid.
    So, today, while our nation is facing a severe crisis, the 
majority is holding this hearing on proposals that do not 
address this immediate crisis, and would raise taxes for 
millions of middle and low-income families. And at the same 
time, they are insisting on a deficit package that protects tax 
breaks for very wealthy households.
    What we must focus on right now, and I emphasize this, is 
avoiding a default that would risk another financial crisis and 
millions of jobs. It could delay the Social Security checks 
that millions of seniors depend on. It could permanently call 
into question the full faith and credit of the U.S., and make 
it even more difficult to reduce the deficit.
    Our President has called again and again for a balanced 
approach to getting a handle on our nation's debt. This 
committee has jurisdiction over many of the elements of such an 
approach. It is the committee in the House with jurisdiction 
over legislation on the debt ceiling. We on this committee have 
a solemn obligation, a solemn obligation, to step up to the 
plate and address the matter at hand; avoiding a default, and 
finding a balanced approach to deficit reduction.
    Thank you, Mr. Chairman.
    Chairman CAMP. Well, thank you, Mr. Levin. Today we will 
hear from two distinguished panels of witnesses. Our witnesses 
bring a wealth of knowledge with combined experience in 
government, academia, and the private sector.
    Our first panel includes four experts on the fair tax 
embodied in this Congress in H.R. 25, as introduced by 
Representative Rob Woodall. Our second panel will include six 
experts on value-added taxes. We begin with our fair tax 
experts.
    First, I would like to welcome the Honorable Mike Huckabee. 
From 1996 until 2007, Governor Huckabee served as the 44th 
governor of Arkansas. He ran for the Republican nomination for 
President in 2008, and currently is the host of the television 
show, ``Huckabee,'' and the radio program, ``The Huckabee 
Report.'' Governor, we extend a warm welcome to you, and look 
forward to your testimony.
    Next we will hear from Laurence Kotlikoff. Mr. Kotlikoff is 
a professor of economics at Boston University. He has authored 
or co-authored 14 different books, and from 1981 to 1982, 
served as a senior economist on the President's Council of 
Economic Advisors.
    Mr. Kotlikoff is accompanied this morning by Mr. David 
Tuerck. Mr. Tuerck is a professor, and chairman of the 
department of economics at Suffolk University in Boston, 
Massachusetts. He is also the chairman of the Beacon Hill 
Institute, a research center that develops and performs 
economic and statistical analysis of current and emerging 
public policy issues.
    And finally, we welcome Mr. Bruce Bartlett. Mr. Bartlett 
has served as the staff director of the Joint Economic 
Committee, as a senior policy advisor for President Reagan, and 
as the deputy assistant secretary for economic policy at the 
U.S. Treasury Department. Mr. Bartlett is currently a columnist 
for Tax Notes, and The Fiscal Times, and also contributes to 
the New York Times economics blog.
    Thank you all, again, for being with us today. The 
committee has received each of your written statements, and 
they will be made part of the formal hearing record. Each of 
you will be recognized for 5 minutes for your oral remarks.
    And, Governor Huckabee, we will begin with you. Welcome, 
again, and you are recognized for 5 minutes.

STATEMENT OF MIKE HUCKABEE, FORMER GOVERNOR OF ARKANSAS, HOPE, 
                            ARKANSAS

    Mr. HUCKABEE. Chairman Camp and Ranking Member Levin, 
Members of the Committee, it is an honor and privilege to be 
able to be with you today to talk about the fair tax.
    Let me just begin with a personal observation. Having 
raised three children, all of whom are now adults--and when 
they moved out my wife and I ended up with three dogs--my kids 
think we replaced them with the dogs, they also think we treat 
the dogs better than we ever treated them. I tell them it's 
because the dogs behave better than the kids ever did.
    But I learned something about behavior, both from raising 
children and training dogs. And the basic premise is this. If 
you want a certain behavior, you reward it, and you will get 
more of it. And if you want to stop a certain behavior, you 
consequence it and you get less of it. It's a principle of life 
that we all understand. The fair tax is based on the simple 
idea that we ought to reward good economic behavior, and we 
should not reward irresponsible and reckless economic behavior.
    The sort of behaviors that will create a stronger economy, 
grow jobs, make it possible for people to be independent, is 
that we reward them for their work, we reward them for their 
investments, their risk-taking. We reward them for saving 
something, because that puts something aside for those 
unexpected moments in life, so that they won't be dependent 
upon somebody else's charity, they will be dependent upon their 
own thoughtfulness in preparing for the unforseen circumstances 
that, frankly, all of us have experienced.
    The fair tax doesn't punish people for their productivity, 
and it does not reward them for their irresponsibility, and 
that is the essence of it.
    I must be honest with you. I didn't know what the fair tax 
was when I was campaigning four years ago. People would come up 
to me and say, ``Do you believe in the fair tax?'' I said, 
``Well, of course I believe that taxes ought to be fair.'' They 
said, ``No, the fair tax.'' And I had no idea what they were 
talking about.
    Somebody finally handed me a book and the bill, the fair 
tax bill. I read it. Made too much sense. So I read it again. 
And then I met with a group of economists to ask them, and to 
spend several hours peppering them with questions about how it 
would functionally work. And I came away as a strong proponent. 
And I wish I could take credit for some of the creation, but I 
am not the chemist that designed it, I'm just the pharmacist 
that is trying to dispense it.
    And so, today I come with a sense of recognizing that the 
fair tax is, in fact, a transformational approach to the 
government getting revenue. It is revenue-neutral, as it is 
designed. It is not intended to raise taxes or lower taxes. It 
is, I believe, an approach that could be equally embraced by 
Democrats and Republicans, because it accomplishes something 
both want to do. It helps people at the bottom end of the 
economic spectrum, because of a unique feature that is often 
overlooked or misunderstood, called the prebate. And it is 
fundamental to its effectiveness. But it also makes it possible 
to bring manufacturing jobs and other types of economic models 
back to the United States from its offshore infusion, because 
of the fact that people are not going to be punished for 
actually producing.
    There are so many things that I would like to present, and 
I hope you will have an opportunity to look at some of the 
written testimony. But the fair tax, in many ways, I want to 
contend, works because of its fundamental idea that it is flat, 
it's based on the consumption of things purchased at the retail 
level. It is fair, because it does not adjust itself to any 
particular demographic group. It is finite, because it's a 
fixed rate with total transparency, which is one of the things 
that I find most appealing about it. There is an absolute 
transparency about what people would pay. And it's family 
friendly, and it doesn't penalize marriage or raising children, 
as sometimes the Tax Code does.
    I think it's clear to say that there are very few people, 
if anyone, in the entire country who understands the 67,000 
pages of the Tax Code. It is extraordinarily convoluted. It is 
so convoluted that, for the most part, the reason that there 
are 35,000 lobbyists in this city are to influence the Tax 
Code, so that there can be winners and losers. What I would 
like to suggest is that the fair tax means that every American, 
in essence, becomes his or her own lobbyist, because there is 
no need to always be manipulating the Tax Code to create 
special favors for one against another.
    All of us who watch sporting events know this one thing, 
that the guys in the striped shirts are not there to determine 
the outcome of the game, they are just there to make sure that 
the game is played fairly. When the guys in the striped shirts 
start determining the outcome of the game, we no longer respect 
them. The purpose, I believe, of the tax system is not to 
determine the outcome of the game, but to make sure that there 
is a fair and absolutely objective playing field. And that is 
what the fair tax does.
    And I come today with over 75,000 online signatures of 
people who, just in the past 3 or 4 days, have urged me to 
appeal to you to give consideration to it, notwithstanding any 
political or partisan consideration.
    And I thank you very much for the opportunity to be here.
    [The prepared statement of Mr. Huckabee follows:]





    Chairman CAMP. Well, thank you very much, Governor.
    Mr. Kotlikoff and Mr. Tuerck, you each have, together, 5 
minutes. And you are recognized now. Thank you. Your written 
statements are part of the record.

  STATEMENT OF LAURENCE J. KOTLIKOFF, PROFESSOR OF ECONOMICS, 
BOSTON UNIVERSITY, BOSTON, MASSACHUSETTS; ACCOMPANIED BY DAVID 
    TUERCK, EXECUTIVE DIRECTOR, THE BEACON HILL INSTITUTE, 
   PROFESSOR AND CHAIRMAN, DEPARTMENT OF ECONOMICS, SUFFOLK 
               UNIVERSITY, BOSTON, MASSACHUSETTS

    Mr. KOTLIKOFF. Thank you, Chairman Camp and Ranking Member 
Levin, and Members of the Committee. We are honored by this 
invitation to testify today about the fair tax. This is one of 
several different ways we could implement consumption taxation.
    We think the fair tax has a number of reasons to recommend 
it over the other alternatives. I want to talk to you about 
that. I, myself, have an alternative to the fair tax, which is 
called the purple tax, which I put forth recently. But today I 
am here to talk about the fair tax, together with my co-author, 
David Tuerck.
    So, the fair tax would replace the personal income tax, the 
federal personal income tax, and the federal corporate income 
tax, and the estate and gift tax with a federal retail sales 
tax that would tax all consumption goods and services, with the 
exception of imputed rent on existing houses at a 23 percent 
effective rate, a 30 percent nominal rate. And it would have--
as Governor Huckabee indicated, there would be a demigrant to 
make that tax progressive.
    But I want to point out that, as an economist, my 
profession doesn't believe that a consumption tax is 
regressive. I know that a number of you folks do believe that a 
consumption tax is regressive, even without a--for--leaving 
aside the issue of the rebate or the prebate, a number of you 
believe that a consumption tax is regressive. We economists 
don't believe you're right. We think you are looking at it the 
wrong way, we think you are measuring progressivity the wrong 
way. We think, when you look at it correctly, and measure 
progressivity against lifetime resources, lifetime--think about 
lifetime tax burdens as a share of lifetime resources--you will 
see that a consumption tax is actually more progressive than 
you think.
    Now, what is a consumption, tax, actually? I think there is 
a lot of misunderstanding, not just about the progressivity, 
but what actually it is taxing. A consumption tax is really 
taxing what is used to pay for consumption. And what is used to 
pay for consumption are two things: wealth and wages, not just 
your current wages, but also your future wages.
    So, your consumption over your lifetime is being financed, 
being paid for, by your taxes on your wealth--well, by your 
wealth and your wages. So if you taxed your consumption, 
you're, in effect, taxing what is used to pay for your 
consumption.
    So, economists believe--and this is just mathematically the 
case; it's not really a belief, it's just a mathematical 
proposition--that a tax on wealth plus a tax on wages is 
equivalent to a tax on consumption. So if you're an advocating 
of taxing wealth, and using the proceeds from taxing wealth to 
lower the tax rate on workers--and I think a lot of Democrats 
would say, ``That sounds very progressive to me, taxing wealth, 
using the revenues to lower the tax rate on wages''--then you 
have to be, logically speaking, a proponent of consumption tax, 
because that is what a consumption tax does, it taxes wealth, 
and it uses the revenues to lower the tax on workers--on wages.
    Now, a fair tax, consumption tax, also, compared to an 
existing income tax, is much more favorable toward saving, 
insofar as it doesn't prejudice you towards consuming in the 
present, relative to the future. That is what an income tax 
does.
    If you look at this chart in our testimony--my testimony, 
joint with David--you will see that the national saving rate 
last year was exactly zero, except for a decimal place. It was 
0.1 percent last year, that's our national saving rate last 
year. Our domestic investment rate was 4.4 percent. So we're 
not saving, as a nation. We are saving nothing as a nation. We 
are investing next to nothing. We need to have a tax system 
that gives people incentives to save, and also puts the burden 
on people fairly, so that we get equity, as well as the right 
incentives.
    So, that is a couple points, of what exactly the fair tax 
taxes and its incentives. The other thing is it's--that we have 
in this testimony is a table on the--we're going to have two 
tables, one on effective tax rates, which show that the 
effective tax rates, marginal effective tax rates, are much 
lower under the fair tax than under the existing tax structure, 
and that the--there is also a table showing you lifetime 
progressivity. And we show in this table that the fair tax on 
lifetime tax basis is actually more progressive than the 
existing tax system, basically because it does do this thing 
that I mentioned, which is tax wealth and use the proceeds to 
lower the tax on wages.
    Let me now turn the time over to David that I took away 
from him. Sorry.
    Chairman CAMP. Well, I will make an exception, Mr. Tuerck. 
I will give you a minute to sum up.
    Mr. TUERCK. Well, thank you. All economics professors are 
long-winded, and I am no exception.
    I think that Larry covered the main points about the issue 
of regressivity versus progressivity. He is right. No modern 
economist believes any longer that consumption taxes are 
regressive--something for the analysts in Washington to start 
thinking about.
    I am simply going to draw attention to one of the tables in 
our combined testimony that relates to the effect of the fair 
tax on investment. Economic theory tells us that consumption 
taxes untax net investment. That should be intuitively obvious, 
because of the fact that the corporate income tax goes away. 
So, lots of us have done estimates on this. I will tell you 
something about our estimates.
    We show that in the first year of implementation, real GDP 
would go up by about eight percent. Domestic investment would 
go up by a whopping 75 percent, employment by 12 percent, real 
wages by 10 percent, and eventually consumption would go up, 
too, by about 6 percent. These are numbers on which there is 
widespread agreement by people who have modeled this issue. And 
it should be no surprise. You untax investment, you get more 
investment; you get more investment, you get more growth.
    Thank you. And I thank the committee, too, for inviting me.
    [The prepared statement of Mr. Kotlikoff and Mr. Tuerck 
follows:]





    Chairman CAMP. All right, thank you. Thank you both. Mr. 
Bartlett, you are recognized for 5 minutes.

  STATEMENT OF BRUCE BARTLETT, COLUMNIST, ``TAX NOTES,'' AND 
                      ``THE FISCAL TIMES''

    Mr. BARTLETT. Thank you, Mr. Chairman. First of all, I 
would like to say that I do support, in principle, the concept 
of a consumption-based tax system. But I think that many 
economists--perhaps including those to my right--gloss over the 
critical administrative aspects of consumption taxes, and they 
want to take all of the benefits that you would get from any 
consumption-based tax system, and attribute them exclusively to 
the fair tax, which I think is wrong.
    My main objection to the FairTax has always been one simple 
thing: it simply won't work. It is a ridiculously pie-in-the-
sky proposal. Let me point to a couple of things.
    It would abolish the Internal Revenue Service and all of 
the collection machinery that has been built up over the last 
100 years for collecting taxes, and force the states to collect 
the Federal Government's revenues for it. Now, this strikes me 
as unconstitutional, but I don't want to argue that point. The 
main thing is that it won't work. We tried this during the 
Articles of Confederation, and we ended up with the 
Constitution.
    Secondly, the tax would apply to all governments. State and 
local governments would have to pay the tax to the Federal 
Government, as well as collecting the tax for the Federal 
Government. This makes no sense. The Federal Government would 
have to pay the tax to itself. The cost of every single thing 
the Federal Government buys will be 30 percent higher. But the 
proponents somehow or other assume that federal spending is 
fixed in nominal terms. So you get a huge cut in spending that 
helps finance this whole operation.
    Third, housing. If you buy a new house, you are going to 
have to pay 30 percent more. But if you buy a used house, you 
don't have to pay anything. This strikes me as administratively 
impossible, whatever its virtues may be.
    The problem of evasion is always glossed over. The reason 
why--I mean we all know we have a very serious evasion problem 
right now, when we have a huge amount of taxes withheld from 
people's paychecks and so on. But under the fair tax, you would 
eliminate all that machinery, you would collect taxes at 
exactly one point in the entire economic system: at the retail 
outlet. There is too much incentive for people to go to the 
wholesale level and buy out of the factory door. The retail 
store owner has just as much incentive to evade the tax as the 
buyer, they just do their sales off the books.
    The idea of having a national retail sales tax has been 
studied by other countries. They always rejected it, because 
there would be too high a degree of evasion. Instead, they have 
all favored the value-added tax, which is a form of consumption 
tax that will work. We know it works because every other 
country except us has one. It was designed to deal with all of 
the administrative and evasion problems that are inherent in 
the nature of a retail sales tax.
    Finally, I want to mention something about the rebate, 
which the FairTax supporters say is necessary to offset the 
regressivity of the tax. But, as the George W. Bush 
administration's tax reform report pointed out, this would 
involve the creation of the largest entitlement program in the 
history of the United States. They estimated that its cost 
would be $800 billion per year in 2005 dollars. And these 
checks would go out to people with Social Security numbers on a 
monthly basis.
    Now, as this committee knows perfectly well, we have a huge 
problem of people with fake Social Security numbers now. Can 
you imagine what it will be like if, by getting a fake Social 
Security number, you can get monthly checks from the 
government? Large checks, too. This is just a license for abuse 
waiting to happen.
    A couple of technical points. Getting rid of the corporate 
income tax may sound very good to the corporate community, but 
what's going to happen to all their unused depreciation the day 
the corporate income tax disappears? They have nothing to 
deduct it against. And if you think this isn't a problem, it 
is.
    When Professor Kotlikoff talks about taxing wealth, you 
have to understand that the people whose wealth would 
essentially be taxed by this proposal are the elderly. They 
saved all during their lifetimes when there was no broad-based 
consumption tax, and in retirement they had this anticipation 
that they would be able to withdraw that saving, tax free. But, 
in fact, they will have to pay a 30 percent tax on everything 
at that point.
    Thank you very much.
    [The prepared statement of Mr. Bartlett follows:]





    Chairman CAMP. Thank you. Thank you all very much. Governor 
Huckabee, as you know, our nation's unemployment is 
unacceptably high. And how would the fair tax, if we adopted 
that, how would that bring about more jobs in this country?
    Mr. HUCKABEE. Well, Congressman, one of the ways that it 
will happen, manufacturing has moved offshore in large measure 
because corporations are having a difficult time, and job 
creators have a difficult time when they are competing with 
countries with a lower tax rate. If our tax rate is zero, and 
there is no tax assessed at the production level, then it is 
obvious that we then become more competitive.
    If we have a zero capital gains tax, capital not only that 
has been parked offshore--and it has been estimated that there 
is as much as $14 trillion of U.S. money--that's as much as the 
debt--$14 trillion parked offshore to protect it from the Tax 
Code, legally and legitimately. But what would happen if that 
money came back to the United States because there was no 
penalty for parking it here? That would certainly be a far 
better situation.
    Let me--if I could, very quickly--give this anecdotal 
mention, because it was one of the things that sold me on the 
fair tax. I was in New Hampshire four years ago, and visiting 
with a gentleman who was working at a machine shop, working two 
shifts because he wanted to help his daughter through grad 
school at Cornell. And he said that was costing $53,000 a year, 
which caused me to gasp.
    But he said--this is a guy with a high school education, 
working two shifts--he said when he took on the second shift he 
thought he would make twice as much money. But, as it turned 
out, it put him in a different tax bracket, and a lot of what 
he was making in the second shift was going to taxes, not to 
his daughter. He said, ``I don't understand this.'' And the 
honest answer is neither do I. Why should you punish a person 
who is working twice as hard?
    Truth is, if he quit both jobs, then his daughter would 
qualify for some assistance that he and her would not qualify 
for under the current Tax Code. I think, for most of us, 
regardless of our political persuasion, that seems insane.
    Chairman CAMP. I have a question for both you and Mr. 
Kotlikoff. Different states have different laws and rules. For 
example, in Michigan, my home state, there is a sales tax, but 
the sales tax doesn't apply to groceries, for example. Under 
the fair tax, groceries are not exempt. How would that impact 
stores in Michigan?
    And if they don't currently collect sales taxes, would they 
now be required to do that? And would there be any transition 
rules or similar relief available to help sort of ease the 
administrative burden on those businesses and employers?
    And either one of you can answer. If, Mr. Kotlikoff, you 
want to go first----
    Mr. KOTLIKOFF. Yes, they would be required to collect the 
tax at the store. Whether there was some transition relief 
would be up to you folks to provide, if you felt it was 
necessary.
    But let's think about the people coming into the store to 
actually buy these consumption goods: the food, the bread, 
eggs. Well, they are going to get--if they are working, they 
are going to get a paycheck that has no income tax withheld 
from it. And there is also going to be no FICA tax withheld. So 
they are going to have more wherewithal. And they are also 
going to get a monthly rebate check.
    We are sending out lots of checks to lots of people, older 
retirees, through Social Security, Bruce, and we do have some 
fraud, I'm sure. But I don't think it's a reason to eliminate 
Social Security, for example.
    So, just to answer--back to your question, I think it's not 
going to be--you know, all the prices of all the goods and 
services are going to uniformly go up because of this. People 
are still going to need to buy groceries, and I think that 
store will still be able to function.
    Chairman CAMP. But you envision the collection point being 
at the grocery story?
    Mr. KOTLIKOFF. At the store, yes. We're going to go from 
about--with the fair tax, one would go from about 120 million 
tax-paying entities to about 700,000. So that's really relevant 
to the issue of enforcement and evasion. If you have an entire 
IRS--I'm not particularly so keen on abolishing the IRS. I 
think we have a lot of people there that could be used to 
enforce the fair tax, if that's what you folks implement.
    So, if you go to 700,000, rather than 120 million tax 
returns, you have a lot more ability to enforce that--the tax 
collection, because you have fewer tax payers.
    Chairman CAMP. Okay, Governor.
    Mr. HUCKABEE. Congressman, if I could address the 
administrative issue, as a governor for 10\1/2\ years, I mean 
we certainly understand how to collect taxes. But the reality 
is that every business owner who is collecting taxes has that 
set up electronically, and it is programmed in. And the idea 
that this is going to be a monstrous task is simply not the 
case. This is not Mom and Pop jotting down on a pad, this is a 
computer program that easily can be programmed, and the states 
and localities would be getting basis points for their 
collections.
    So they're going to get, in essence, a cash windfall as a 
result of their part of the collection process. And that will 
make it more attractive to them, because they are not doing it 
without some compensation for their administrative efforts.
    Chairman CAMP. All right, thank you. Mr. Levin is 
recognized.
    Mr. LEVIN. Well, this is called a fair tax. By the way, 
people worked for their Social Security. It's not a hand-out 
from the government.
    But I want to get to one of the basic issues here relating 
to the so-called fair tax. And, Mr. Bartlett, I read from your 
special report dated December 24, 2007 on why the fair tax 
won't work. And I just want to get to this issue of 
regressivity. So I'm just reading from this tax report of 
yours.
    But what if a worker is currently paying less than 23 
percent of his income in federal taxes? In this case, he is 
clearly worse off under the so-called FairTax. The prices of 
the things he buys will rise by more than his income rises, 
from the elimination of elimination and payroll taxes. 
Conversely, if one is wealthy and in a tax bracket above 23 
percent, that person would be much better off. His income and 
payroll taxes would fall by much more than the prices of goods 
and services he consumes would rise.
    I want to ask you about this, because here we are in this 
battle over raising the debt ceiling. And the majority position 
in the House is no taxes, that you can't touch the tax rates 
for people who are making over $1 million. This is annual 
income of $150,000. Most of that is income over $1 million.
    So, just reading this analysis of yours, it seems to me 
that it is clear that for people who already are doing very, 
very well, in most cases this helps them, while for middle-
income taxpayers who would not receive a check in most cases, 
from the government, this would mean an increase in their 
taxes. I don't see how you escape this.
    And, therefore, I think it is absolutely (what should I 
say?)--inappropriate, to be charitable, to call this a fair 
taxation proposal. Could you comment on that?
    Mr. BARTLETT. Let me make a point that is very seldom 
discussed by FairTax supporters, although Professor Kotlikoff 
alluded to it.
    If you impose a sales tax, the Federal Reserve accommodates 
this tax--then the price level is going to rise by the amount 
of the tax. If it's a 23 percent or 30 percent sales tax, the 
price of every single consumption good is going to rise by 30 
percent. So, while it's true you will have more cash income 
because you will no longer have to pay income and payroll 
taxes, the cost of everything you buy is going to cost more. 
That's where the burden of the tax comes from.
    Now, alternatively, if you assume that the Federal Reserve 
will not accommodate this one-time inflation rate that would be 
the highest in our history, then real wages have to fall, 
because they always make the argument that the prices of goods 
will fall by enough to compensate for the tax. They basically 
make two simultaneous and contrary arguments: the prices will 
fall, but then they will rise. But if you assume a fixed price 
level, then wages have to fall. Otherwise, the producers will 
not be able to reduce their prices. Their costs have to be 
lower.
    Mr. LEVIN. So who bears the burden of this? From your 
analysis, the very wealthy more or less, in most cases, are 
helped, while many, many mostly middle-income tax brackets are 
hurt. Isn't that correct?
    Mr. BARTLETT. The burden is borne by consumption. And so, 
it depends on what your consumption is relative to your income. 
People with low incomes consume virtually all of their income. 
People in the middle bracket save some. That would not be 
taxed. People in the upper brackets save almost all of their 
income. So it would be proportional to your consumption.
    Mr. LEVIN. Yes, so I think this is an unfair tax proposal. 
Thank you.
    Chairman CAMP. Mr. Johnson is recognized.
    Mr. JOHNSON of Texas. Thank you, Mr. Chairman. Governor, 
welcome.
    Governor, as you well know, there has been a lot of debate 
when it comes to the real fair tax rate. And Mr. Bartlett 
argues the true rate is not really 23 percent but 30 percent. 
How would you answer that charge on a true rate?
    Mr. HUCKABEE. Well, I think the economists are probably 
better equipped to get into the specifics. They are trained for 
that.
    But I would say that one of the things that is being missed 
is that there is an embedded tax in everything that we purchase 
that is hidden. It is estimated to be approximately 22 percent 
of everything that we buy, because if we buy a loaf of bread, 
the taxes that were built in to the people who planted the 
wheat, harvested the wheat, manufactured the process, delivered 
it, all the taxes that go into the process are hidden. And the 
consumer doesn't know that that tax is embedded.
    When that tax is taken out of the process, and it is paid 
at the consumption level, you already have a dramatically 
different situation, in terms of the price of the goods that 
will likely go down. Plus, when the consumer goes to purchase 
that item, the consumer is going with his or her entire 
paycheck. Most Americans have never gone to the marketplace 
with their entire paycheck. Their paycheck has all the 
extractions from the Federal Government, and they never see 
what their paycheck is.
    But the other thing, it provides a more stable funding for 
Social Security, because it is based on the consumption that 
all of us make, not just the wages that wage-earners are 
making, which is, I think, another good reason for the fair tax 
to be a strong consideration.
    Mr. JOHNSON of Texas. Mr. Bartlett, you care to respond?
    Mr. BARTLETT. Well, it is very confusing. So if you just 
eliminated all existing federal taxation and it just 
disappeared forever, then clearly, all prices and wages would 
eventually fall by the amount of the tax, and you would be 
better off. But if you then put the tax back on in a different 
form, then the prices go back up again.
    So, at times, the FairTax people make it sound like it's 
all a wash. Okay? You take out the income taxes, prices fall by 
23 percent. You put a 23 percent tax on. Then everything is 
exactly is the way it is right now. No change in the price 
level.
    But if that is true, there is no need for the rebate, 
because there is no regressivity to offset. Everything has been 
a wash. You get more take-home pay, you pay a little bit more 
at the checkout of exactly the amount that is now being 
withheld for the goods and services you buy. You are no worse 
off. So there is no need for the rebate because there is no 
regressivity. And the truth is that, obviously, there is 
regressivity. You can't have a consumption-based tax system 
without it.
    And whether having some kind of monthly check that goes to 
every person in the United States is the way to deal with that 
is a debatable point.
    Mr. JOHNSON of Texas. Well, you stated in your testimony 
that, given that tax revenues have averaged around 18 percent 
of GDP since World War II, what, in your view, would the fair 
tax have to be to generate that level of revenue?
    Mr. BARTLETT. I honestly don't know, for this reason. For 
as long as I have heard of the FairTax, which is more than 20 
years, they have always said that arate of 23 percent would 
equal current revenues, and not increase them and not reduce 
them. But during that time period, revenues have been as high 
as 20.6 percent of GDP in the year 2000. And right now they are 
about 14.8 percent of GDP.
    So, if it would equal revenues in 2000 at 23 percent, then 
it would have to be a massive tax increase today. Either that, 
or it never would come anywhere close to have equaled the 
revenues that we had in the year 2000. If they were honest, the 
rate would vary, depending on taxes as a share of GDP. But they 
always say, year after year, it is always 23 percent.
    Mr. JOHNSON of Texas. Governor and Professor, would you 
care to comment?
    Mr. KOTLIKOFF. Yes, I would. First of all, let me say I am 
not, you know, the fair tax guys that Bruce is alluding to. 
Well, I'm not one of them. I am a professional economist, okay? 
And I am here to talk to you folks as a professional economist, 
not as ``the fair tax guy,'' all right? Let's just start there.
    Now, a lot of----
    Mr. JOHNSON of Texas. So you don't want to pay a fair tax.
    Mr. KOTLIKOFF. What? Well, I want to tell you what I know, 
as an economist, okay?
    Mr. JOHNSON of Texas. Okay.
    Mr. KOTLIKOFF. And a lot of the statements that have just 
been made would not get through my course--that Bruce just 
made, and even a couple that Governor Huckabee made were not 
really appropriate about the fair tax, because we don't really 
think that the current tax system is embedded in prices. We 
don't think the current prices embed the current taxes.
    We do think that if you put on a fair tax, prices will go 
up. If the Fed accommodates--we think the Federal Reserve 
determines the price level. It does.
    Chairman CAMP. I'm going to have to stop you here, because 
the 5 minutes has expired. Mr. Rangel is recognized.
    Mr. RANGEL. Thank you, Mr. Chairman, and thank you, 
experts, for sharing your views with us. But I just want to 
take this opportunity to thank Governor Huckabee. He was kind 
enough to invite me to his very popular TV show, and was more 
than fair to me in the differences that we had politically.
    And I really thought I had you when I gave you the scenario 
of a debate between how you protect the vulnerable. And I put 
on one side the naked and the thirsty and the hungry and those 
who were jobless, and wanted to protect these people. They were 
unemployed and they were poor. And then I put on the other side 
that we can kind of protect them a little better if we made an 
appeal to the very rich, and kind of said, ``Could you help us 
out a little bit to protect the vulnerable?'' And I really 
thought I had you.
    But you went to Divinity School, and you came up with some 
verses that I never heard of, where the rich were entitled to 
empower the whatever, humanity, and that the poor was here to 
stay. Could you restate that? Because most of that was done 
when I was asked to leave the show.
    [Laughter.]
    Mr. HUCKABEE. Congressman, it is a pleasure to see you 
again. I hope you will come back to the show.
    But in the meantime, let me just say that what I believe 
you are referencing is--my understanding of the scripture is 
that--do we have an obligation to the poor? Absolutely. Should 
we reach out and help people and lift them up? Absolutely. One 
of my reasons for the advocacy for the fair tax is because I 
believe that, ultimately, it does more to give people the 
opportunity to rise above where they have come from.
    I did not grow up with a silver spoon. I grew up dirt poor, 
paid my own way through college, paid my way through graduate 
school. First male in my entire family lineage to graduate high 
school, much less go to college. I have lived the American 
Dream, and I didn't live it by having all of the aspects of 
attempting to get to the next rung on the ladder pushed back by 
a tax system that punished me for trying to get to the next 
rung on the ladder.
    I feel a great sense of personal responsibility to help 
those who struggle, and continue to feel strongly.
    Mr. RANGEL. But?
    Mr. HUCKABEE. If I did not feel the tax system could be 
improved, I wouldn't be here today. I believe this approach 
does, in fact, empower the people at the lowest part of----
    Mr. RANGEL. Well, thank you----
    Mr. HUCKABEE [continuing]. the spectrum.
    Mr. RANGEL [continuing]. Governor Huckabee. I am going to 
have to go back to the scriptures. Because if the tax burden is 
what I am talking about with the sick, the poor, and the lesser 
among us----
    Mr. HUCKABEE. No, I don't----
    Mr. RANGEL [continuing]. I got a learning to do. Mr.--let 
me ask the fair tax people, quickly.
    This rebate this, does the rich get a rebate, as well as 
the poor?
    Mr. TUERCK. Everybody gets the rebate, depending on the----
    Mr. RANGEL. Very--okay.
    Mr. TUERCK [continuing]. composition of their family.
    Mr. RANGEL. That's good enough for me. How much--would the 
rebate be called an entitlement program, or what name would you 
have? Just ``rebate''?
    Mr. TUERCK. I think ``rebate'' does just fine. It's no more 
an entitlement than the existing----
    Mr. RANGEL. No, okay, that's good. And that would mean 
that--would the governors operate the rebate, or the Federal 
Government?
    Mr. KOTLIKOFF. Federal Government.
    Mr. RANGEL. And who would pay the people to operate this 
massive trillion-dollar rebate to everybody, including the 
rich? Who would pay that?
    Mr. KOTLIKOFF. I would leave the IRS in place until we got 
everything working.
    Mr. RANGEL. Okay. Now, how about those who would eliminate 
the IRS completely?
    Mr. KOTLIKOFF. Well, I think----
    Mr. RANGEL. Because that goes over big in every community.
    Mr. KOTLIKOFF. I think we've got to--you know, if you start 
picking on every little detail of----
    Mr. RANGEL. No, no, that's not a--IRS is more than a detail 
in my community.
    Mr. KOTLIKOFF. Yes, I agree. And I agree, and I think 
it's--all right, it's more than a detail. I think abolishing 
the IRS is not a clever idea, and not something I support----
    Mr. RANGEL. Mr. Tuerck, do you agree that we have to keep 
the IRS?
    Mr. TUERCK. No, I don't agree that we have to keep it. But 
somebody has to send out the checks.
    Mr. RANGEL. Good. I just want to make certain I'm not the 
only guy out here. So, with you, we will have the IRS plus this 
massive program to give back money and not collect it. Right? 
Right. That's okay.
    Mr. KOTLIKOFF. I would have the IRS hand out--yes, the 
rebate, exactly.
    Mr. RANGEL. Oh, I see. They would be the giver and the 
taker.
    Mr. KOTLIKOFF. Yes.
    Mr. RANGEL. Okay.
    Mr. KOTLIKOFF. The way they are now.
    Mr. RANGEL. Mr. Bartlett, one question I want to ask you. 
Because when I saw your background, you worked for every 
Republican that I have ever served under, including my friend 
Jack Kemp, and Reagan, and Bush. And they gave tax cuts, and 
they said that these tax cuts paid for themselves, and went 
beyond that, and created jobs.
    And yet, when you look at the ledger, it seems as though 
the tax cuts that were given by President Bush and Reagan 
actually were part of the deficit, and not the job creation. 
What were your observations?
    Chairman CAMP. And if you could, just answer briefly 
because time has expired.
    Mr. BARTLETT. Well, I think the Reagan tax cut in 1981, 
which I had some personal involvement with, was exactly the 
right thing to do under those economic circumstances. But I 
think it's wrong to assume that just doing the same thing over 
and over again, you're going to get the same results.
    I think current economic circumstances, you would not get 
any economic benefits from any tax cut that I am aware of, 
because our fundamental problem is a lack of aggregate demand, 
and tax cuts are essentially passive.
    Chairman CAMP. All right, thank you. Mr. Tiberi is 
recognized.
    Mr. TIBERI. Thank you, Mr. Chairman, and thank you for 
holding this hearing today on the fair tax.
    Professor, kind of expanding upon Mr. Rangel's questioning, 
can you envision--or how do you envision the Federal Government 
being involved--giving you a little bit of time to respond to 
this--in the manner of either sending out these rebates, or 
some enforcement mechanism? Is it the IRS, or is it something 
different? Either one of you, or both.
    Mr. KOTLIKOFF. I mean I envision the states doing--the 
Federal Government working with the states to collect the tax, 
and the Federal Government, whether it's through the IRS or 
some other agency, mailing the rebate checks or distributing 
those to all Americans. So Bill Gates is going to get the same-
sized check as somebody with his size family.
    But the check is going to be big enough so that poor people 
won't have to pay any sales tax on net. That is very important. 
This is going to produce a zero net tax liability for poor 
people. That is one of the reasons why this is a progressive 
tax structure.
    There is a table two in this testimony that we have that 
shows very clearly that Congressman Levin's statements about 
progressivity are not correct. It shows a very clear table of 
progressivity. It shows that Mr. Bartlett's statements are not 
correct, either, about the progressivity of the system.
    Let me just say one thing about this which may get your 
attention. Suppose you have Warren Buffet here, and he has $30 
billion. Suppose that Mr. Rangel were sitting here in front of 
Mr. Buffett. Mr. Buffett has $30 billion. And you ask Mr. 
Buffett and Mr. Rangel, ``Gee, Mr. Buffett, if you were to 
spend your $30 billion today on 30 billion steaks, maybe you 
could buy them at $1 a steak. How many steaks would you get?'' 
Mr. Buffett would say, ``Thirty billion steaks.''
    Now, Mr. Buffett, what if you had to face a 30 percent 
retail sales tax? How many steaks would you get? Well, you do 
the calculation, find out he had--got 23 percent fewer steaks. 
In effect, the sales tax taxes Mr. Buffett's wealth. That's why 
I keep saying that the sale tax is a tax partly on wealth and 
partly on wages.
    So, are we taxing wealth right now under the current 
system? No. Mr. Buffett's wealth is not taxed. We don't tax 
principal. We tax the income from it. If Mr. Buffett actually 
realizes his capital gains, which he probably doesn't--he 
probably borrows against it to do consumption. So do a lot of 
other rich people.
    So, you have to realize that the rich aren't paying a lot 
of taxes in the system--you know that as well as I, Mr. Rangel. 
But if you have a way to tax their wealth--and even if they 
don't spend their wealth today, whenever he does spend it he is 
going to be facing this tax. And present value, he is going to 
be out 23 percent of his wages. That's why the effective tax 
rate is 23 percent. That's the rate we need to use to compare 
the current income tax with the fair tax, because it's an 
apples-to-apples comparison.
    That's why you want to look at the effective tax rate, not 
the nominal tax rate.
    Mr. TIBERI. Let me try to take this back. The governor 
mentioned about the IRS, and mentioned about the--or mentioned 
the Tax Code, and how lengthy it was. This obviously is very 
much simpler than our current system. Would you need the 
current bureaucracy that we have in place? Wouldn't you just 
need something much smaller? Professor?
    Mr. TUERCK. We have done some estimates of the impact on 
administration of the system. And it is vastly more expensive 
to have the existing income tax system, when you count all the 
compliance costs that taxpayers have to bear, compared to the 
fair tax.
    The only reason the fair tax architects want the states to 
collect the money is because almost all states have a sales 
tax, and it would be a simple extension of that mechanism to 
collecting the fair tax and passing it on to the government.
    But on the other hand, it would be perfectly okay too if 
the Federal Government could do it more efficiently. So I'm 
with Larry on that. Why not let them--whoever can do it more 
efficiently, they should collect the tax.
    And I have to say one thing about Mr. Bartlett's comments. 
His analysis is a welter of confusion in mathematical error. 
There is no new burden on state and local governments. There is 
no burden on the Federal Government. There is no basis for the 
rebate in whatever happens to prices. The rebate is there to 
make--take this from a proportional tax to a progressive tax.
    In fact, there is so much that we could begin with here as 
a baseline to--that would eliminate this confused thinking, 
that would take us much further along toward getting to a good 
answer to this problem. And I would hope that there would be a 
future hearing some time where your economists would look at 
the discussion that has gone back and forth between Mr. 
Bartlett and me and Larry on this, and start from a baseline 
where we have at least the basic algebra correct. Thank you.
    Mr. TIBERI. I yield back.
    Chairman CAMP. Thank you. Mr. Stark is recognized.
    Mr. STARK. Thank you, Mr. Chairman. Thank you for holding 
this hearing. I guess I have my credentials. Somebody down 
there said they were poor; I was, too. As a youngster--I never 
slept alone until I was married. And that defines how the Stark 
family got along in the deep depression.
    The value-added tax, or fair tax, as you call it, I would 
just like to talk a little bit about why I would oppose it.
    One, I would no longer be able to go to Europe and meet 
with American CPAs as they studied the value-added tax and 
complained about the complexities that it imposed on American 
companies. Those are nice trips, and they are interesting. But 
I would like to just talk about some of the issues that would 
affect the Uniform Commercial Code.
    A transfer of title. Where do you pay the tax then, when 
the title transfers, or when you collect? How every lawyer who 
provides a service to a client would owe the tax, at the time 
he provided the service or she provided the service, not at the 
time when they collected the money. So, you would suddenly find 
an awful lot of our professionals--lawyers, dentists, others--
who may not collect in cash on the spot suddenly owing tax 
immediately, yet not having collected the revenue to pay for 
it.
    So, in dealing with the Uniform Commercial Code that we are 
used to in this country, bankers would have a problem getting 
title to goods to lend against. All of these things would have 
to be restructured for the value-added tax to work. And that is 
one of the problems that I see in providing this.
    I wanted to ask the chairman if--is this a provision that 
might be in your suggestions for tax reform?
    Chairman CAMP. We are----
    Mr. STARK. You don't know yet, but----
    Chairman CAMP. We are holding a number of hearings on tax 
reform, and this is one of them.
    Mr. STARK. So this is just one of the things you are----
    Chairman CAMP. Yes.
    Mr. STARK. Okay. So, I don't know. I would ask Mr. 
Bartlett. What would you have to do to accommodate all of the 
changes in the way we conduct business in this country, if you 
had a fair tax or value-added tax?
    Mr. BARTLETT. Well, it would be extremely difficult, but I 
presume we could get some guidance from other countries as to 
how they operate. And I believe that Mr. White from the GAO may 
be able to talk about that.
    But let me make a point, a more general point, which is 
that one of the reasons why the FairTax is administratively 
difficult is because it will tax all services. Now, no state 
makes any effort to tax more than a tiny fraction of services 
because there is no tangible exchange. There is no good 
involved. So it is ridiculously simple to go to somebody who is 
doing some work for you, whether it is a lawyer or a doctor or 
somebody who is doing landscaping for you, and say, ``Let's 
just do this off the books. I will pay you cash,'' and there 
will be nothing for Uncle Sam, because there will be no 
records.
    Mr. STARK. Well, it's also--in Europe, where they have it, 
they talk about tax collection. In other words, if the tax 
collector doesn't find you, you don't pay. So the European tax 
collectors have to run around from door to door, see if you 
bought a new car, remodeled your house, and then levy a tax and 
extract it from you. Here we still, for the most part, have a 
voluntary tax system. And I think, under a fair tax or a VAT, 
that would disappear and no longer--did--were--how many of you 
on the panel here have been paid for your research in the area 
of fair tax or value-added tax? Just two of you? Okay.
    Governor Huckabee, you didn't collect anything for all the 
good work you are doing?
    Mr. HUCKABEE. I have received not a penny from anyone 
associated with the fair tax. It is simply a position I have 
taken out of my wonderful charity for the United States of 
America, and my consideration for the fine Members of Congress.
    Mr. STARK. Well, I want to thank you particularly for your 
kind words about me some weeks ago. I hope they don't come back 
to haunt you. And thank the witnesses for participating today. 
Thank you, Mr. Chairman.
    Chairman CAMP. Thank you. Mr. Davis is recognized.
    Mr. DAVIS. Thank you, Mr. Chairman. It was interesting, 
hearing the scripture tossed around here earlier. Different 
people try to fit these perceptions into their sense of world 
view. The thing I would remind everybody is we are told not to 
add to or take away from the Word.
    And it reminds me of something the chairman likes to say: 
``The Tax Code is 10 times bigger than the bible with no good 
news.''
    [Laughter.]
    Mr. DAVIS. Which brings me to a question when we relate to 
this issue of process, the huge cost of tax compliance. And 
compliance in any tax system is going to be an issue, because 
there are those who are going to attempt to comply with the 
plan in the most advantageous way to themselves, and then there 
are those who will simply try to skirt the system.
    And I guess the question I would like to start with, 
Professor Kotlikoff, is because all systems have a certain 
amount of non-compliance, first, who is going to enforce the 
fair tax? And is this a job for--that current IRS employees 
might handle?
    Mr. KOTLIKOFF. Well, I have nothing against the current IRS 
employees. I think they are pretty efficient. They come on the 
phone these days.
    I mean, look. Lots of the--the vast majority of the sales 
are going to be in places like Wal-Marts, where there is not 
going to be much issue of compliance. So then the question is--
and you are reducing dramatically the number of taxpayers, from 
120 million down to 700,000.
    So then the question is how do you go after--deal with 
compliance where somebody comes up to mow your lawn. And that 
kind of issue arises under the income tax. These people that 
are selling services aren't reporting their--for cash--aren't 
reporting their income under the income tax. So the question is 
whether the evasion will be worse, and whether the compliance--
the cost of getting people to comply will be higher.
    We think the cost will be smaller. We think the evasion 
should be smaller, because we are going to have more people to 
dedicate to a smaller number of taxpayers to work on that 
problem.
    But there is also some new ways you can think about dealing 
with evasion. I mean suppose you tell the home owner who is 
getting his lawn mowed: ``When you get your lawn mowed, you are 
supposed to get a receipt with a bar code and the amount that 
you paid for the lawn.''
    You are supposed to put that into the mail box, and also 
the person who mowed your lawn is supposed to put it in the 
mail box, so the IRS or whatever agency can then compare.
    Mr. DAVIS. Just as an aside, would that not give us 
something similar to what we had to un-do with the 1099 
situation earlier?
    Mr. KOTLIKOFF. I do not know about the 1099 situation you 
are referring to.
    Mr. DAVIS. I am referring to buried in the health care bill 
was that all business transactions over $600 would require the 
filing of 1099s, which would have inundated the very retail 
outlets that we are talking about.
    I am not sharp shooting you with the question, but coming 
down to a deeper process issue, any time we reduce complexity, 
we reduce cost of compliance, because the overhead component is 
reduced, and in that case, money in the economy.
    I am just trying to understand how we would have a 
legitimate enforcement mechanism from a process standpoint--I 
am an engineer, not a politician.
    I am interested in how the flow would work in order to cut 
that cost and----
    Mr. KOTLIKOFF. The stores, the retail outlets, would be 
responsible for collecting the taxes and mailing it in.
    Again, most of the sales collection or tax collection would 
be done by big outlets like Wal-Mart.
    It is likely to be an easier collection process than we now 
have with millions and millions of taxpayers having to decide 
really what income they want to report under income taxes. It 
is pretty much a voluntary tax the way it is set up.
    Nobody is checking my expenses or income very carefully 
from one year to the next. The Government is relying on me to 
be honest, basically, which I am.
    Mr. DAVIS. Governor Huckabee.
    Mr. HUCKABEE. What I would like to point out is there is an 
extraordinary amount of underground economy that is currently 
not taxed.
    I doubt that many gamblers, prostitutes, pimps, and drug 
dealers are filling out 1040 forms and sending in their due 
tax.
    When you base taxation on retail consumption, people who 
purchase things in the marketplace, even if they are drug 
dealers, prostitutes, pimps and others, are going to be paying 
the tax like the rest of us who honestly pay our taxes.
    Dishonest people are still going to be dishonest. We have a 
greater level or mechanism of collecting tax, and the 
compliance issue is a huge one.
    It has been estimated that as much as $500 billion a year 
is spent just complying with the Tax Code in this country. That 
is money that does not produce a thing except paperwork.
    That is why I think FairTax brings simplicity to a system 
that is overwhelmingly complicated.
    Mr. DAVIS. Thank you all very much. I yield back.
    Chairman CAMP. Thank you. Mr. Lewis is recognized.
    Mr. LEWIS. Thank you, Mr. Chairman, for holding this 
hearing. I appreciate any opportunity we have to discuss 
comprehensive tax reform.
    However, I must express my disappointment that we are not 
gathered here to discuss the most pressing issue of the day, 
the ongoing debt ceiling negotiation.
    What worries me even more is that House Republicans seem to 
be making a habit of this.
    Last week, the House Republicans allowed FAA authorization 
to expire, freezing airport projects nationwide, sending 
hundreds and thousands of hard working Americans home 
indefinitely.
    We are just days away from August 2, yet we are here 
talking about everything but the debt limit. There seems to be 
no sense of urgency to help get Americans back to work.
    Mr. Bartlett, you have been around for a while, in two 
Administrations. You are a very smart, gifted man.
    Could you tell us about the dangers of not raising the debt 
ceiling, what it will really mean for workers and their 
families if we do not raise the debt ceiling?
    Mr. BARTLETT. The worst case scenario, quite frankly, is 
that the financial markets will completely seize up the way 
they did when Lehman Brothers collapsed, except it would be far 
worse.
    The market for U.S. Treasury securities is essentially the 
foundation upon which the entire world financial system rests. 
It is the one asset that everybody has always believed has zero 
risk of default.
    You introduce into that system the tiniest little risk of 
default, and all of a sudden you have enormous problems.
    The rating agencies have repeatedly said our debt may be 
downgraded, and this sets in motion a number of forces, because 
there are certain banks that are only allowed to hold AAA rated 
debt. If it goes down to BB, they have to get rid of some 
things.
    There are many securities that use U.S. Treasuries as their 
backing. If the Treasury security falls in price, they have 
problems. It becomes a ripple effect that we may not know the 
full consequences of unless it happens.
    Everybody thought the fall of Lehman--certainly the 
Treasury and the Federal Reserve--was not that big a deal, 
otherwise they would have bailed them out. They said let it go. 
We know what happened. Financial markets seized up.
    I think we could see something potentially worse if we 
allow a default to occur.
    Mr. LEWIS. Thank you very much.
    Professor, do you care to respond?
    Mr. TUERCK. Yes. I envision a meeting with the President 
and the Majority Leader of the Senate and the Speaker of the 
House in which they say we have come up with a way to raise 
more revenue, to increase the fairness of the tax system, and 
have spending cuts, too.
    If you want to come up with that plan, adopt the FairTax. 
If you impose the FairTax rate at the statutory rate we have 
today, the Government would bring in about $200 billion more 
than it is currently bringing in. That would be the new 
revenue.
    We would create jobs, ten percent growth in jobs. Spur 
investment. Then we would have the revenue increases that the 
President wants, and we could get the spending cuts that the 
Speaker of the House wants.
    That is the way to solve this problem. We could end this 
whole discussion right now, and I suggest that is the way we do 
it.
    Mr. LEWIS. Let me ask your friend here who is assisting 
you.
    Mr. TUERCK. I think I am assisting him, actually.
    Mr. LEWIS. If a family of four at the poverty level lost 
the benefit of the EITC and child credit, had to pay 23 percent 
more for everything they purchased, would they really be better 
off?
    Mr. KOTLIKOFF. That is addressed in table two, Congressman 
Lewis. Let me say my sensibilities about the poor are identical 
to yours. I think if you spent time with me, you would 
understand that I have the same views.
    Mr. LEWIS. There are some numbers that came out today or 
maybe late last night that the gap has widened. The rich are 
getting richer and the poor are getting poorer.
    Mr. KOTLIKOFF. I am concerned about that. I have cited this 
carefully. It is included in a framework where the EITC, the 
child tax credit, all the provisions of the Federal income tax 
are incorporated. I have done my homework on this.
    In Table 2, if we look at the table, if we look at a 
married couple earning $30,000--not Table 2--sorry, it is Table 
2.
    A family that is now middle aged, $30,000. Their lifetime 
average tax rate under the current system is 15.3 percent. That 
incorporates the EITC and the child tax credit.
    Under the FairTax, it is 3.4 percent. I did not know the 
answer before I did the calculation, just so you know. I did 
get paid for the research, but I did not know the answer, and 
the research is what the research shows.
    I said let's take this framework, which is a lifetime life 
cycle framework. Let's look at the taxes that this couple is 
going to pay every year for the rest of their lives.
    Let's figure out as a share of the present value of the 
remaining lifetime resources the labor income and their initial 
wealth, what is their tax rate, the average tax rate under the 
current tax system, and then let's do it again under the 
FairTax.
    It turns out to be lower under the FairTax. If you look at 
the results in Table 2 of the testimony, you will see that this 
is actually a highly progressive tax, and it does lower the 
taxes on working people because it is coming up with another 
source of revenue, which is Warren Buffett's steak dinners.
    That is what I am trying to get across here. This is 
embedding a wealth tax. If I came to you and said you Democrats 
here on this panel, how would you feel about having a 23 
percent effective tax on wealth and use the proceeds, a tax on 
all the wealthy people in this country, use the proceeds to 
lower the taxes on workers?
    You would say that is fantastic, it will never get through. 
No Republican would ever propose it.
    That is what Republicans are proposing in the FairTax. That 
is mathematical. You take any first rate economist from any top 
department, ask them that question, and he will say that is the 
answer.
    Chairman CAMP. Thank you. Mr. Reichert is recognized for 5 
minutes.
    Mr. REICHERT. Thank you, Mr. Chairman.
    Professor, I do agree with you. Mr. Chairman, thank you for 
holding this.
    This debt ceiling discussion is certainly centered around 
as we watch taxes and spending, and I think everyone recognizes 
there needs to be tax reform. We would like a simpler Tax Code 
and tax process.
    I think more than anything, Americans across this country 
recognize that we have a spending problem. We are spending 
money we do not have.
    As we look at tax reform as a part of our economic 
solution, financial solution, I was listening to Mr. Bartlett 
who mentioned used houses were not taxed and new homes are 
taxed.
    I want to ask the Professor and Mr. Bartlett what would be 
the impact to new construction of homes under this plan if used 
homes are not taxed and new construction is taxed?
    Home buyers would be obviously directed toward buying used 
homes. Is that not correct? What would be the impact to new 
construction in the home buying industry?
    Mr. KOTLIKOFF. The price of new homes would go up in the 
marketplace relative to--I mean old homes would go up in the 
marketplace, so it would lead to a capital gain on old homes.
    That is why under the purple tax plan I have put forward, I 
tax housing uniformly, no matter whether it is new or old, by 
taxing the imputed rent, the consumption services from the 
housing.
    Whether it is new housing or old housing, under the purple 
tax, which is a modification of the FairTax proposal, this 
problem that I see with the FairTax gets corrected, and we have 
a bigger tax base, and also tax imputed rent on yachts, private 
airplanes.
    I think all consumption should be taxed. That is what is 
part of the purple tax.
    I also deal with one of Bruce's concerns in the purple tax, 
if I might just take a second to mention it. He is concerned 
and I think there is a concern about evasion, because the tax 
rate under the FairTax is 30 percent, relatively high.
    What I propose in the purple tax is to have a FairTax at 
17.5 percent nominal rate, 15 percent effective rate, and then 
take the FICA tax and make that progressive. Get rid of the 
ceiling on the FICA tax and exempt the first $40,000 of the 
employee part of the FICA tax from taxation. Get rid of the 
first $40,000 employee based taxes or the first $40,000 of 
earnings.
    Now you have a progressive FICA tax, a lower rated FairTax, 
two progressive elements, and also a 15 percent inheritance 
tax. That is what the purple tax plan is.
    I think we need to think broadly about consumption 
taxation. We can implement it in a lot of different ways. We 
should not say just because somebody is trying to talk about 
the merits and demerits of the FairTax, you are the FairTax 
guy, therefore, you are the enemy.
    Let's try to understand what we really care about. We care 
about incentives. We care about fair treatment between 
generations. We want to make sure we can get our fiscal policy 
in order.
    Mr. REICHERT. Professor, under a clean FairTax, this old 
versus new language would apply to homes, it would apply to 
boats, it would apply to yachts. Would it apply to commercial 
construction? Would your purple tax cover commercial 
construction?
    Mr. KOTLIKOFF. No. Construction for buildings that are used 
in production of goods and services, that is not taxed. It is 
just consumption of goods and services by households and 
purchases of consumption items by governments and non-profits. 
All of consumption, what the national income accounts record as 
consumption. That would be the tax base.
    I am saying take the FairTax, if you like the FairTax, 
think about maybe modifying it so that all of housing 
consumption services are subject to taxation, so that all the 
services from private jets and yachts are subject to taxation.
    Mr. REICHERT. Used cars, new cars?
    Mr. KOTLIKOFF. I have an excise tax I have to pay every 
year to my local town in Massachusetts; yes.
    Mr. REICHERT. Thank you, Mr. Chairman.
    Chairman CAMP. Thank you. Mr. Neal is recognized.
    Mr. NEAL. Thank you, Mr. Chairman.
    Mr. Bartlett, one of the arguments our Republican friends 
have made here over decades is that tax cuts pay for 
themselves.
    I noted in the blog you recently wrote that indeed, you 
suggest that tax cuts do not pay for themselves.
    As a Treasury official who served with President Reagan, 
can you explain to the committee why you do not believe that 
tax cuts pay for themselves?
    Mr. BARTLETT. First of all, nobody in the Reagan 
Administration said that the Reagan tax cut would pay for 
itself. The documents that the administration sent to Capitol 
Hill in February of 1981 all showed standard revenue losses 
based on Joint Committee/Treasury methodology that has been 
around forever.
    In fact, if you check Congressional Budget Office documents 
from that time period and keep in mind the CBO was then headed 
by Mrs. Rivlin, I believe, it showed revenue losses almost 
identical to those projected by the administration.
    The argument that we were making when I was working for 
Jack Kemp was that you would not lose as much as the static 
revenue loss because if you got some growth in the economy, 
that would enlarge the tax base and you would get back some of 
that money.
    Eventually, Larry Lindsey, an economist who is probably 
known to this committee, wrote a book and he concluded you got 
back maybe a third. You lose two-thirds. I think that is pretty 
standard public finance theory.
    The only tax cut that I have ever heard anybody credibly 
assert pays for itself is occasionally you can cut the capital 
gains tax. But that is because capital gains involves gains 
that may have taken place over a long period of time, and if 
you realize them all at once, then you can get an unlocking 
effect and possibly pay for itself.
    In general, tax cuts lose revenue. I do not know anyone who 
really argues that point.
    Mr. NEAL. Thank you. Governor Huckabee, the Treasury 
Department and the Joint Committee on Taxation have concluded 
that a rate significantly higher than 23 percent would be 
necessary for FairTax to be fiscally neutral.
    I cite the examples of Joint Tax and Treasury because they 
tend to be made up of Democrats and Republicans who in the next 
life want to be known for their honesty, as they secure a 
position in the private sector.
    They have suggested that--by the way, they are not paid for 
their advocacy, as you know, other than by the taxpayer--rate 
would actually have to be closer to 50 percent to make up for 
lost revenue.
    I have listened to Dick Armey and others over many years 
talk about transition costs, and they are substantial.
    Mr. HUCKABEE. I have never heard the 50 percent figure, and 
I think that would be frankly one of the issues that one of the 
economists could better address.
    I do know that politically speaking, the simplification of 
the Tax Code would be much preferable to a Tax Code that is 
beyond anyone's comprehension.
    What I believe is without the ability to refute is that the 
complications of our current Tax Code make it so that business 
owners no longer are making business decisions. They are making 
tax decisions.
    Mr. NEAL. Even Dick Armey, as the Majority Leader, stated 
as he offered his sales tax proposal at the time, which is a 
bit different than what we are discussing here--Dick Armey used 
to say not only would there be a substantial transition cost 
that was slightly enormous, but he also stated we had to be in 
the vicinity of 28 to 30 percent.
    Mr. TUERCK. Congressman.
    Mr. NEAL. Yes, just a moment for me to question Professor 
Kotlikoff, but go ahead.
    Mr. TUERCK. I would make this simple. Our research is on 
line. It is simply a matter of going to the National Income and 
Product accounts and going through the statute and figuring out 
what the base is, and then figuring out what the rate is.
    We could all sit down over a spreadsheet and resolve this 
question in a few minutes. To be more realistic, in a few days.
    We came up with a rate of 23.82 percent for a hypothetical 
2007 tax year. We re-did the calculation and in 2010, we think 
a lower rate would work.
    It is not rocket science. It is simply getting the base 
correct, which we think we have done. I would like to see the 
other calculations that lead to a different rate.
    Mr. NEAL. Professor Kotlikoff, I appreciate your testimony. 
You mentioned the phrase ``transitional cost.'' That is a fair 
statement. There is a transitional cost, and that has been part 
of the discussion we have had for a long period of time.
    You mentioned lawn care as an example. Are you satisfied in 
Wellesley, Sudbury, Gloucester, Haverhill, Springfield and 
Worcester, these people there cutting lawns during the Summer, 
they are all currently complying with IRS regulations?
    Mr. KOTLIKOFF. No, I am sure they are not. I am saying we 
have to think out of the box. Technology is available now, I 
think, to help us to enforce even their paying taxes.
    Chairman CAMP. Time has expired. Thank you. Dr. Boustany is 
recognized.
    Mr. BOUSTANY. Thank you, Mr. Chairman. I am glad we are 
having this hearing. I am finding it helpful given that I am 
certainly getting a lot of calls from constituents back home in 
Louisiana about the FairTax. I am finding this very helpful to 
flesh out some of the issues.
    I want to explore the issue of small business compliance 
and potential burdens on small businesses if we go to this type 
of tax system.
    Right now, we are very concerned about jobs and job 
creation, especially with small businesses, as we look at our 
economy.
    Mr. Bartlett, as I understand it, small businesses across 
the U.S. would be responsible for collecting this FairTax. In 
addition, small businesses would have to maintain certain 
segregated accounts for the payment of taxes, and larger 
sellers would actually have to provide a security deposit equal 
to or greater than $100,000 or 1.5 times the seller's average 
monthly tax liability during the previous six calendar months.
    Given all that, if we went to this type of system, talk to 
me a little bit about the compliance burden on small businesses 
and the impact this might have on jobs.
    Mr. BARTLETT. It is hard to say what the impact on jobs 
would be. There is no question there will be a vast increase in 
the compliance burden on small businesses. Basically, to reduce 
the compliance burden on individuals, you have to increase it 
on businesses.
    They are the ones who are going to be responsible for being 
the IRS' tax collectors. They are going to have to collect the 
revenue and transmit it to the Treasury.
    As we know, we already have enormous problems in that area, 
in the small business area, where they are having great 
difficulty complying with the taxes. It is very well known.
    They have to collect already Social Security and payroll 
taxes and transmit them. And often times, small businesses need 
that cash flow and they use it to cover other expenses, and 
they end up being in trouble with the IRS.
    There is no question there will be an increased burden on 
small businesses. No question.
    Mr. BOUSTANY. Thank you. Professor Kotlikoff?
    Mr. KOTLIKOFF. Under the FairTax proposal, you are getting 
rid of the FICA tax, so they will not have to comply with that.
    I presume they would be able to get software that would 
help them deal with segregation of the accounts.
    I do not see this as a huge thing. I go to a lot of small 
stores. They are in operation, even though they are paying the 
Massachusetts' sales tax when I buy something.
    This is just going to be an extra sales tax that is 
collected. It is going to be the software's job to get this 
right. It is not going to be the actual owner, that he is 
actually going to have to do calculations. It will all be 
automated, I believe.
    The Federal Government can certainly assist small 
businesses with that technology if need be.
    Mr. BOUSTANY. Governor Huckabee, you have traveled around 
the country a great bit and spoken to many, many people across 
this great country of ours. Have you heard those concerns in 
the context of FairTax among small business owners?
    Mr. HUCKABEE. Congressman, small business owners love the 
FairTax because of the simplicity of it. Right now, they are 
eaten up with complying with an incredibly impossible to 
understand Tax Code that requires them to hire lawyers and 
accountants at a good deal of their profit.
    The FairTax means anyone can figure out 23 percent. It does 
not take a lawyer and accountant to come up with figuring that.
    This idea that it is complicated, I would contest that. I 
think it is quite the opposite. It is the simplicity of it that 
causes small business owners, with whom I have spoken all over 
the country, to embrace this, because they would rather put 
their money into putting products on the shelves and employees 
on their floors as opposed to sending checks to accountants and 
lawyers in order to help be a part of this half a trillion 
dollar compliance cost that we currently have with the 67,000 
page complex Tax Code.
    Mr. BOUSTANY. Thank you. Professor Kotlikoff, the goal of 
the FairTax is to remove the taxes embedded within prices and 
replace them with a clear simple tax of 23 percent.
    Give me a little breakdown again on the price/wage issue. 
It came up earlier.
    Mr. KOTLIKOFF. The notion that prices in the current 
system, tax system, embed the current tax system, is not 
correct. Supporters of FairTax have come up with that 
proposition. It is not based on economics. It is just not 
right.
    The basic story is this, there is a price level, a price 
for let's say a chicken, and the retail price level is set by 
the Federal Reserve by how much money it has in the economy, 
and what is going to happen is if we went to FairTax, workers 
would receive more pay in their checks because they would not 
have to pay the FICA tax or the income tax. They would also get 
the prebate check.
    Then they are going to go the store, and the prices will be 
30 percent higher, as Bruce indicated, that is correct, and 
then the question is are they worse off or better off.
    The answer is if you look at Table 2 and other 
calculations, you find out that working people, poor people, 
are better off. They pay less taxes over their lifetime, 
measure of present value lifetime tax rate, under this FairTax 
system, than they do under the current system. They also have 
lower marginal effective tax rates.
    The marginal effective tax rate on saving becomes zero 
under the FairTax. Our national savings rate is zero this 
year--last year. It was 15 percent in 1965. We have driven it 
down to zero.
    That is why we are importing so much capital from abroad, 
from China and other places. That is why we are running the 
current account deficits we are, because our national saving 
rate is so low.
    You have better incentives and more prospects for growth 
from this system.
    As David was indicating, having no corporate income tax, 
and as the Governor was indicating, is going to be a great 
boom.
    Chairman CAMP. Thank you. Time has expired. Mr. Becerra is 
recognized.
    Mr. BECERRA. Thank you, Mr. Chairman. Thank you all for 
your testimony. It is a great conversation to have, and we will 
need to have a conversation like this if we ever hope to be 
able to reform the Tax Code, although I am not sure how fair 
this so-called ``FairTax proposal'' is. It is converging more 
on the fairy tale side of fair than real fairness.
    My understanding is there is no country, no state, that has 
ever implemented anything along the lines of this so-called 
``FairTax proposal,'' probably because it is unworkable for the 
reasons that have been discussed, and that I think Mr. Neal 
pointed out.
    How do you get compliance up to a point where you really 
have everyone paying truly their fair share.
    Mr. Bartlett, I know you have done a number of studies on 
this. I know you worked in the administration and Government 
and outside of it in the past.
    Are you familiar with any country or any place in the world 
ever where a proposal like the so-called ``FairTax proposal'' 
has been put in place?
    Mr. BARTLETT. No country to my knowledge has anything 
remotely like this. They have studied the idea of something 
like a FairTax, and in every case they concluded that a value 
added tax makes more sense if that is the route you want to go.
    Mr. BECERRA. That is because it is a lot easier to try to 
get compliance.
    Mr. BARTLETT. I do not want to jump on what they will be 
talking about on the next panel, but the VAT is easier to 
administer and much harder to evade because it is embedded in 
the prices.
    Let me make another point, which is----
    Mr. BECERRA. Very quickly.
    Mr. BARTLETT. There are no two states that have exactly the 
same sales tax base, and no state has a sales tax base that is 
anywhere near as comprehensive as the FairTax.
    Mr. BECERRA. Take a state like mine, California, which has 
a fairly high sales tax rate, but it is still under ten 
percent. To buy a house in California, you are looking at 
$200,000 to $500,000, depending on what part of the state you 
live in, to have to pay a 30 percent tax on top of the price of 
that home, or whether it is just to buy a computer or car, all 
of a sudden, you are calculating 30 percent more on a tax.
    If you go to a state like Virginia that has a far lower 
sales tax than my state of California, I think it is around 
five or six percent, you go to 30 percent, all of a sudden, 
somebody making $50,000 is looking at how you purchase that 
house or that new dishwasher or clothes washer, it makes it a 
little bit more difficult.
    As interesting a conversation this is, it is still 
academic. We are a week away from something that is not 
academic, and that is this whole discussion of whether or not 
the country will pay its debts.
    I am hoping I can get you all to concentrate a bit more on 
the revenue aspect of this crisis that has been manufactured, 
because the reality is we have always found a way to get past 
this issue of paying our bills, yet this time, it seems like we 
have hit an intractable resolution to this.
    Mr. Bartlett, you wrote an interesting article recently, 
where you talked about what happens when you deal with the Tax 
Code, tinker with the Tax Code, and make it sound like it is 
going to do one thing and have it do something totally 
different.
    Back in the early 2000s, we were running budget surpluses. 
President Bush at that point told us we could actually reduce 
the size of those surpluses by returning money to the American 
people for the taxes they had paid because we had these massive 
surpluses, $5.6 trillion in surpluses over the coming ten 
years. These tax cuts were passed.
    You wrote this article that points out that not only as a 
result have we drained the Treasury of trillions of dollars of 
revenue, which now makes these deficits far larger, but at the 
same time, we did not see the commensurate growth in the 
economy that would help produce jobs that would help produce 
more revenue by people paying more taxes.
    Can you comment a bit on what you found?
    Mr. BARTLETT. Yes. There is an article in the New York 
Times this morning on exactly that point. I note that according 
to the CBO, the Bush tax cuts reduced Federal revenues by about 
$3 trillion below what they would have otherwise been, and you 
got about another $3 trillion loss of revenues due to slower 
than expected economic growth. And then you have about $6 
trillion of additional spending for unpaid wars and various 
things of that sort.
    You went from a $6 trillion surplus to a $6 trillion 
deficit, which is a turnaround of $12 trillion.
    I think the argument is very commonly made that we cannot 
raise taxes because it will destroy the economy. That same 
identical argument was made in 1982 when Ronald Reagan put 
forward the largest peacetime tax increase in American history. 
We had massive growth thereafter.
    The same argument was made in 1993 when President Clinton 
raised taxes. We had a very strong economy.
    The argument for the Bush tax cuts, at least one of them, 
was we would have faster growth. We had the worse ten years, 
economic years, since the Great Depression.
    It seems at least superficially the relationship is the 
opposite. Higher taxes actually raised economic growth and tax 
cuts caused the economy to collapse.
    I am just saying you can make that argument based on 
history.
    Chairman CAMP. Thank you. Dr. Price is recognized.
    Mr. PRICE. Thank you. I want to thank the panelists as 
well. This has been an exciting conversation to have. I want to 
commend the chairman for holding this hearing because I think 
it is important to talk about solutions, and I believe this is 
one of those types of programs that could truly be a solution 
for our country.
    The current tax system, as so many have said, is incredibly 
broke and it is remarkably complex. The costs of compliance are 
massive. It has the Government picking winners and losers, 
which all of us say we do not want, which makes the FairTax, I 
think, the national retail sales tax, remarkably attractive.
    It is simpler. The cost of compliance is less. It certainly 
is much more fair.
    As the Governor pointed out in his comments, we say we want 
success. We say we want hard work. We say we want vision. We 
say we want entrepreneurship. We say we want savings. We say we 
want job creation.
    Yet, in our tax system, we punish every single one of them. 
Every single one of them. Again, I think that makes the FairTax 
something that we all ought to take a very serious look at.
    It rewards savings. It rewards hard work. It rewards 
entrepreneurship. It rewards job creation.
    In addition, it does a couple of things that I think are 
important to point out. One is that it captures all the 
underground economy that we currently are not capturing right 
now. That is estimated to be a third of our economy by some 
folks.
    It would decrease the cost of doing business by 23 percent, 
virtually overnight. I beg to differ with Mr. Bartlett. I will 
touch on that in a moment.
    It is a less regressive system. It is more fair to 
individuals at the bottom end of the economic spectrum.
    I am excited by having this conversation. I am concerned 
that some to be imprisoned by their past deeds and comments. I 
an enthused and excited by folks actually gaining a greater 
understanding of what I believe to be, as Mr. Tuerck said, a 
solution to the challenges that we have right now.
    Mr. Bartlett mentioned that the proponents of this say that 
it decreases the cost of services or goods by 23 percent, adds 
in 23 percent, so the consumer sees basically a wash, which I 
think is accurate.
    Why on earth would you need the rebate if that is so? The 
fact of the matter is we believe the rebate is appropriate 
because the current system is unfair. The current system is 
remarkably regressive and punishing those individuals at the 
lower end of the economic spectrum.
    That is the reason the rebate is needed, and then those 
individuals actually have a much more fair system.
    Mr. Tuerck, I want to touch on Table 2, because I think it 
is incredibly important.
    Mr. TUERCK. Which table? I am sorry.
    Mr. PRICE. Table 2. This is the one that talks about 
lifetime tax rates. This is for young adults, middle aged, 
seniors, married, individuals, single households.
    For every single line that you have here, whether it is 
$10,000, $50,000, $100,000, $250,000, et cetera, for every 
single line compared to the current system and their lifetime 
tax rates compared to the FairTax, every single one of them has 
individuals paying less under the FairTax system. Every single 
one. How can that be?
    Mr. TUERCK. First of all, that is Larry's table, so I am 
going to ask him to comment on that.
    We did our own calculation and we broke individuals down by 
spending deciles, which is in a way mirroring Larry's own 
approach, and what we find is that the people in the lowest 
spending deciles would all gain, and more so over time as the 
economy expanded, and the people who would lose were the ones 
in the top spending deciles.
    That reflects current economic thinking about the way to 
address the progressivity/regressivity issue.
    I would only add to that I wonder what this committee would 
say if somebody walked into this room and said I have a plan 
for broadening the base, cutting the rate, and by every 
economic standard imaginable drilling the economy, what do you 
think about that?
    That is what the FairTax does. It has a broader base, and 
therefore, it has a lower rate, and if you read any economics 
textbook, I do not know whether you believe them or not, but if 
you read them, moving toward a consumption tax un-taxes net 
investment and expands the economy.
    Mr. PRICE. I could not agree more. Mr. Kotlikoff, everybody 
here wins. How is that possible?
    Mr. KOTLIKOFF. There is a tax on wealth associated. This is 
really a tax, on what happens to workers, what happens to their 
lifetime tax payments as a share of their lifetime labor 
income.
    It assumes some wealth holdings, but the super wealthy in 
this country, a lot of them do not pay any taxes, and they 
would pay taxes under the FairTax.
    Whenever they buy their yachts or their jets, homes, cars, 
villa's, they would pay taxes on what I am proposing on the 
imputed rent from those services, from those durables. When 
they bought expensive restaurant meals, they would pay tax.
    This is a Democrat's fantasy, this proposal.
    Chairman CAMP. Thank you. Time has expired. Mr. Thompson is 
recognized for 5 minutes.
    Mr. THOMPSON. Thank you, Mr. Chairman. I have a couple of 
questions on the particulars of the FairTax, that maybe one of 
the professors could answer.
    Internet purchases would be taxed?
    Mr. KOTLIKOFF. Yes, if it is consumption.
    Mr. THOMPSON. Would churches be taxed?
    Mr. KOTLIKOFF. Consumption, non-profits; yes.
    Mr. TUERCK. Church payments to their employees would not, 
as I recall. I can get that answer to you. I may be wrong on 
that.
    Mr. THOMPSON. Churches would or would not be taxed?
    Mr. TUERCK. To that extent. As I recall, I will have to 
check, payments to their employees would not be taxed.
    Mr. THOMPSON. The taxes to their employees would not be, 
but any of their purchases would be?
    Mr. TUERCK. That is correct. That is what I recall.
    Mr. THOMPSON. Corporations, how are they handled? They are 
taxed?
    Mr. KOTLIKOFF. There is no corporate income tax. 
Corporations are not buying consumption.
    Mr. THOMPSON. No corporate tax. What if I worked for a 
corporation and the corporation buys me my car. Is that 
purchase taxed?
    Mr. KOTLIKOFF. I think the way the FairTax would handle 
that is it would assess taxes and the corporation would have to 
affirmatively show that this was used for business purposes.
    I think they would take the money at the dealership, the 
tax would be charged.
    Mr. THOMPSON. From who? Who would they take the money from?
    Mr. KOTLIKOFF. From the corporation that buys the car. They 
would send the corporation excise tax for the car, and then the 
corporation would have to show this was actually used for 
business purposes.
    Mr. THOMPSON. If I am not working for a corporation and 
went down and bought a car, I would be taxed?
    Mr. KOTLIKOFF. Again, I am proposing the taxes on durables, 
on homes, cars, be done like an excise tax, computed rent, tax 
on what we call the imputed services from these durables, like 
the car, you would be paying each year. You pay a tax on it.
    Mr. THOMPSON. I just am having a hard time understanding 
how this is at all progressive if I as a regular person buy a 
car and I am taxed but the corporations avoid that.
    Mr. KOTLIKOFF. Corporations----
    Mr THOMPSON. Let me finish my question so you know how to 
answer.
    Mr. KOTLIKOFF. Yes, sir.
    Mr. THOMPSON. If I worked for a corporation, somebody else, 
I guess nobody pays the tax, and people who get meals, 
computers or cars from their employer, which would probably be 
wealthier people, getting back to what Mr. Lewis was talking 
about, that division between the rich and the poor, they would 
be----
    Mr. KOTLIKOFF. I see your concern. I think the way to 
handle that would be to basically tax the purchases. If the 
corporation pays to give lunch to its employees, that should be 
subject to tax.
    Mr. THOMPSON. It sounds pretty confusing.
    Mr. KOTLIKOFF. If it buys lunch for its employees, it 
should be subject to taxation.
    Mr. THOMPSON. It does not look very progressive nor very 
fair to me. Everyone gets the same rebate and everybody pays 
the same tax rate, unless of course, somebody else is buying 
your stuff for you, then you get a break.
    Mr. Bartlett, you had talked about the problems associated 
with default or the threat of default and what this would do to 
our economic system.
    Would higher interest rates be part of this?
    Mr. BARTLETT. People on Wall Street, and there is a report 
out from J.P. Morgan that has been widely cited, have said that 
interest rates would probably rise by about 60 basis points. 
That is .6 percentage points in the event of a default.
    I really think that focusing on interest rates may 
understate what really may happen. My great fear is a complete 
nuclear-type meltdown.
    Mr. THOMPSON. I do not want to understate. I just want to 
point out that if it is a little bit or a lot, that means car 
loans, the price of a car loan goes up, the price of a home 
loan goes up, the price of a small business loan goes up.
    This all impacts regular people working, trying to make a 
living. It would be an incredible increase on them personally, 
on their finances.
    The article that you referenced, I was trying to read 
through it. You talked about what is commonly called the ``Bush 
tax cuts,'' and you mentioned that they did not pay for 
themselves.
    Did they bring us a higher rate of economic growth?
    Mr. BARTLETT. No, they did not.
    Mr. THOMPSON. They did not pay for themselves, and we did 
not see any economic growth as a result of those Bush tax cuts?
    Mr. BARTLETT. That is correct.
    Chairman CAMP. Thank you. Ms. Jenkins is recognized.
    Ms. JENKINS. Thank you, Mr. Chairman, for holding this 
hearing, and thank you all for being here. I find this very 
helpful, and I am sure the American people do, too.
    As our committee continues to hold hearings on fundamental 
tax reform, one motivation we have behind our efforts is to 
stimulate economic growth through lower taxes and to lessen the 
burden on the taxpayers, and to reduce complexity.
    FairTax advocates have claimed that after implementation of 
the FairTax, the economy would grow at 10.5 percent. Exports 
would grow by 26 percent, and investment by 41 percent, and 
employment would be nine percent higher, and that real pre-tax 
wages would increase by 11.5 percent.
    I would just like each of the panel members to maybe 
comment for us about the claims and why they believe that we 
might see increased exports, increased employment, and growth 
in GDP and investment in the economy.
    If the Governor would like to go first.
    Mr. HUCKABEE. There has been a lot of talk about this 
system would be complex. The reality is it is not complex, not 
compared to what we have now.
    Are there some complications? Of course, there are. Always 
when I say if we compare the complications to the complications 
of the current Tax Code, I cannot imagine how anyone would 
defend the current Tax Code against the proposals of FairTax, 
which is in its worse description much simpler.
    The reason that some of these numbers that the economists 
have come up with--again, as I said at the beginning, I do not 
pretend to be the chemist, just the pharmacist, I cannot tell 
you how they arrived at some of the numbers, but I trust their 
numbers are carefully researched.
    It makes perfect sense to me that if you simplify anything, 
it is going to be less expensive.
    The reason so much of what you see in the FairTax is 
effective is because it does simplify things for the 
individual, who now stays up until midnight rushing down to the 
post office on April 15 trying to get the tax form in the mail, 
or generally goes to a tax preparer, and hopes they get it 
right, and often CPAs are trying to figure out every year all 
the changes in the Tax Code that may come from this city.
    Would it not be much simpler if in fact there was a pretty 
straightforward approach, here is the percentage of tax on the 
things you purchase.
    It is the transparency of it that makes it more effective. 
When I hear people say things will cost more, we cannot even 
say that unless you equally say people show up at the 
marketplace with their entire paychecks, something they have 
never done before.
    It is not going to change dramatically except for the 
people at the lowest end of the economic spectrum, as has been 
pointed out. They are going to come out better off.
    Ms. JENKINS. Thank you.
    Mr. KOTLIKOFF. Congresswoman, the calculations for the 
growth of the economy are based on simulating a large scale 
life cycle model that takes into account people's incentives, 
but also what we economists call ``income effects.''
    We have to realize that this decline in the national saving 
rate that has occurred over five or six decades now, has 
corresponded to a major increase in the absolute and relative 
consumption of the elderly.
    There has been a huge transfer from young savers to old 
spenders, systematically, through time, through the retirement 
programs we have been running.
    If you really want to understand why consumption has gone 
up, why national saving has gone down, why investment has gone 
down, it has to do with this redistribution from the young 
savers to old spenders.
    Why are people who are older spenders? They are closer to 
the end of their lives.
    When you have the FairTax and you go to a consumption tax, 
the older people hold disproportionate amounts of the wealth, 
they are going to be hit with a relatively higher tax burden, 
so their consumption is going to be reduced relative to that of 
younger people.
    Part of the advantage of FairTax is it un-does some of the 
redistribution away from the young towards the old that we have 
been engaged in in this economy, and it gets the older people 
to consume less, and consequently, the total economy consumes 
less, saves more, and there is more investment. More funds to 
be invested.
    In addition, there are better incentives to save because 
you move away from an income tax which discourages saving to 
one that is neutral with respect to consuming today versus 
tomorrow.
    The third thing is that you eliminate the corporate income 
tax, so that companies, international companies, are thinking 
about whether to invest here or there, gee, if we invest in the 
U.S., there is no corporate income tax any more.
    These three elements are the main reason why you see in 
these simulations some very significant effects through time. 
It is not supply side magic. It is not that at all. There is no 
supply slide gobbledy-gook here. I am not a supply side nut.
    I think a lot of those folks have done a lot of disservice 
to economics. This is just old fashioned economics that 
delivers the goods if you actually look at what has gone on in 
terms of who gets what under this system.
    Ms. JENKINS. Thank you. I yield back.
    Chairman CAMP. Thank you. I also want to thank Governor 
Huckabee for being here before I recognize Mr. Pascrell. I 
understand you have a plane to catch.
    I would just say some members may wish to submit questions 
in writing to you that have not had an opportunity to question 
you, if you could be kind enough to respond in writing, and 
they will be part of the formal hearing record.
    Mr. HUCKABEE. Mr. Chairman, I would be delighted to. I want 
to thank all of the members for the opportunity to be here. I 
wish I could stay. Unfortunately, the airlines will not hold 
the plane for me. Maybe for you, but not for me.
    Chairman CAMP. No, that is not the case at all.
    Mr. HUCKABEE. I appreciate very much the opportunity to be 
here, and thank you for your kind attention.
    Chairman CAMP. Thank you very, very much, Governor. Mr. 
Pascrell is recognized.
    Mr. PASCRELL. Mr. Chairman, I have heard a lot mentioned 
today of the current tax system. I certainly hope that the two 
of you remain. Of course, you are not speaking for the poor.
    We have had a lot of people come in front of us that want 
to make life a lot better for the poor. We have seen it over 
decades.
    I do not have to bring to your attention the figures that 
came out this morning, and the gap has grown greater, and this 
foolish proposal that is before us makes the matter hideous in 
my eyes.
    The poor and the middle class do not make the Tax Code Moby 
Dick.
    Two thousand of the 2,300 pages are there because folks who 
have want to keep what they have. They have every right under 
the law to do that.
    The Tax Code. A lot of folks have to hire lawyers to keep 
what they have. It is a shame they have to hire all those 
lawyers.
    You are saying that if we put this into effect in this 
nation, we will not go through that.
    The tax cuts of 2001 and 2003 did not increase employment 
in the United States of America. Did not increase productivity 
in the United States of America, the trickle down that was 
promised then is promised now and has never worked.
    Why in God's name do we continue on that path which does 
not make any sense? Further more, it was not until 2005 that we 
even increase the revenue. Right, Mr. Bartlett? Is that 
correct?
    Mr. BARTLETT. I believe that was the first year that 
revenues, nominal revenues, were higher than they had been in 
2000.
    Mr. PASCRELL. Then we saw what happened after that.
    Mr. BARTLETT. We had a crash.
    Mr. PASCRELL. Let's be clear. A national sales tax would be 
nothing more, in my perception, than an enormous windfall for 
the very wealthy of this country. Plain and simple, the wealthy 
do not spend as much as lower income families and the middle 
class. They just do not, as a percentage of their income.
    Mr. Bartlett, how much more would the national sales tax 
have to be in order to be revenue neutral? How much more would 
it have to increase?
    Mr. BARTLETT. Actually, you have a panelist on the next 
panel who can answer that better than me, Rosanne Altshuler, 
who was a chief economist for the Bush administration's Tax 
Reform Panel. They did calculations on exactly this subject 
that showed you----
    Mr. PASCRELL. What did they conclude?
    Mr. BARTLETT. It depends on how much evasion you think you 
would get if it was about the same as the median state, 39 
percent or 47 percent.
    Mr. PASCRELL. My next question is this, what would be the 
effect on the debt? Someone asked you about this very briefly 
before. If we were to create the largest entitlement program, 
and it would become the largest entitlement program, it would 
supersede Social Security and Medicare, if we had this prebate 
program they are talking about in FairTax, what would happen to 
the debt of this nation?
    Mr. BARTLETT. The prebate is in the base. They have 
calculated that cost. It is not over and above.
    Mr. PASCRELL. What does it do to the debt?
    Mr. BARTLETT. It would increase Government spending is what 
it would do.
    Mr. PASCRELL. What would it increase the debt exactly?
    Mr. BARTLETT. The estimates of the cost of the rebate that 
the Bush Tax Reform Panel made were there would be upwards of 
$800 billion a year.
    Mr. PASCRELL. What did President Bush say about this plan, 
by the way? Back in the mid-2000s.
    Mr. BARTLETT. About the FairTax?
    Mr. PASCRELL. Yes.
    Mr. BARTLETT. I do not know that he ever said anything 
about it. I could be mistaken. He certainly did not endorse it. 
He did not endorse his own tax reform.
    Mr. PASCRELL. As a former Reagan Treasury official, how 
many times did Mr. Reagan raise the debt ceiling?
    Mr. BARTLETT. It was either 17 or 18 times, I believe.
    Mr. PASCRELL. Can you briefly explain how the value of a 
Treasury note affects the life of every day Americans?
    Mr. BARTLETT. As I said before, it is the foundation upon 
which much of the financial system rests.
    If you go to the market to sell corporate bonds, for 
example, they are historically priced off the equivalent 
Treasury. It is absolutely essential to have some asset for 
which there is no default risk in order to establish prices for 
a great many other financial products.
    Chairman CAMP. Thank you.
    Mr. PASCRELL. Thank you, Mr. Bartlett.
    Chairman CAMP. Mr. Paulsen is recognized.
    Mr. PAULSEN. Thank you, Mr. Chairman. I appreciate the 
panelists taking the time to talk about consumption tax. We 
have had a multitude of hearings in the Tax Committee laying 
the foundation for tax reform.
    This is the first chance we have really had to engage in 
some of the consumption tax ideas, and FairTax being one.
    I like some of the concepts that were brought forward about 
the transparency, about driving investment. We are all, I 
think, in favor of promoting job creation, which is so 
desperately needed when we have 18,000 jobs coming out a month.
    I do have some concerns. Tell me how this would work. The 
impact of tax reform for those who are already retired is 
something we are paying attention to, and how do you encourage 
retirement savings in the long run.
    If the FairTax gets implemented, how do you transition or 
move forward for the folks that have already essentially worked 
all their lives and paid income tax. They move into a new 
system where now they are going to pay under consumption, and 
they only have their retirement savings.
    How do you kind of make that work for them? Mr. Kotlikoff, 
first.
    Mr. KOTLIKOFF. It is a good challenge. You have people with 
401(k) accounts who have not paid taxes yet on those balances. 
I think you would have to tax those during the transition so we 
would get the right amount of revenue from them, a fair amount 
of revenue from them, and not just give them carte blanche or 
scott free.
    You have to have that occur. Capital gains that have not 
been realized, I think they would have to be realized and 
subject to taxation.
    You are immediately taxing consumption. Again, I think it 
should be all consumption, including imputed rent on housing 
and other durables.
    Is this going to absolutely help everybody? It is not going 
to be a free lunch; no. I am saying the people who are really 
going to get hurt differentially are the rich.
    If I came here and told Mr. Pascrell that I was advocating 
a tax on wealth, using the tax revenues to lower the tax on 
wages, you would think I am a pretty far left person, 
economist. You might. Some other people might.
    I am saying please let's talk after the hearing and 
converse, and let me try to persuade you what economics has to 
say. There are lots of things said about the FairTax that is 
not about economics. Lots of statements that are not being made 
by economists.
    It is a really progressive tax structure. I think it is 
more progressive than the current system.
    Mr. PAULSEN. Mr. Tuerck, do you have any follow up on that, 
just in terms of retirement savings or promoting retirement 
savings as a part of the Tax Code?
    Mr. TUERCK. I am currently drawing down some of my pension, 
which I did not pay taxes when it was being accumulated. Now 
the IRS is taking a chunk of that as I draw it down. In my 
case, it would be a wash.
    Either I am going to let the IRS grab a chunk of it and I 
might end up paying more for consumption goods because the 
price has gone up. It seems to me it is neutral in that 
respect.
    Larry makes a persuasive argument and he does it better 
than anybody else that this is a tax on the wealthy. I think 
there would be people who have saved over their lifetime who 
would find this is a burden, and that is part of his argument, 
as I understand it.
    Mr. PAULSEN. I know you have characterized it as being a 
tax on the wealthy. Governor Huckabee had to leave. I think 
there is an exemption for educational services as part of the 
proposal.
    How do you avoid having a situation where folks come 
forward and say, we would like to exempt this? How do you avoid 
that in the long term?
    Mr. KOTLIKOFF. What I propose, no exemptions of any kind. I 
am an educator and I am urging that we tax educational 
expenditures. I think a good chunk of what people pay for in 
college is consumption, not education, from what I can tell.
    The rebate is there to deal with concerns about proclivity. 
If somebody says look, let's exempt bread and eggs. Well, the 
rebate is here to make sure that poor people, anybody living at 
the poverty line or lower, is going to have enough money from 
the rebate to cover all their FairTax payments at the store.
    So that would be the way that you can try and avoid having 
the tax undone. And the whole idea of the FairTax is to have 
one tax break that everybody can look at and say everybody is 
paying this tax rate, so that if we spend more money on 
anything or anybody, that tax rate has to go up.
    Under the current system, nobody knows when we spend more 
money down here in congress who's paying the bill. The whole 
connection, the whole value of having a single tax rate has to 
do with trying to connect our spending to our revenue source in 
a very concrete manner.
    Chairman CAMP. All right. Thank you. Mr. Larson is 
recognized.
    Mr. LARSON. Thank you, Chairman Camp, and thank the 
panelists for being here this morning. Let me start, first of 
all, with Mr. Bartlett; and I know others have gone down this 
line of questioning. But defaulting on the federal debt I 
believe you said would be analogous to what transpired when 
Lehmans went down, except on--perhaps Lehmans on steroids. In 
the Reagan Administration you took a balanced approach, both in 
terms of dealing with debt ceilings but also making cuts, but 
also balancing them off of revenues. Is that pretty much how 
this current situation should be approached?
    Mr. BARTLETT. Well I personally would favor a balanced 
approach. I think one of the biggest problems we have right now 
is that revenues are too low. They are less than 15 percent of 
GDP and have been for the last three years. So if there is any 
truth to the idea that low taxes spur growth, we should be 
growing like crazy, and obviously we are not. We have other 
problems.
    One point I would like to make that hasn't really quite 
come out here is when Professor Kotlikoff talks about the 
importance of national savings, he is of course correct, but 
the deficit is negative saving. Therefore, if we raise revenues 
in such a way as to reduce the deficit, that will add to 
national savings; and, that was what happened, frankly, during 
the Clinton Administration. That is why we had budget surpluses 
and the added saving is what created a lot of the economic 
growth that I wish we still had.
    Mr. LARSON. Another question that comes up often, and I'm 
glad that we have two economists here, et cetera. And let me 
say I think the current system that we operate under is flawed.
    Mr. Neal has been trying to simplify this system for some 
time now in a number of his proposals, but there's a debate 
that rages on here with respect to the very fragile recovery 
that we're in in terms of both cuts and taxes. Now, people will 
say, and I don't disagree with them, that raising taxes at this 
time in a frail economy is not a wise thing, because of the 
fragility.
    Is cuts a wise thing, or do cuts result in hurting a 
fragile economy. Do cuts that result in layoffs and people on 
unemployment and furthering what has to come out of the federal 
proceeds, how would you categorize those as the difference 
between the two?
    Mr. TUERCK. You mean cuts in spending or cuts in taxes?
    Mr. LARSON. Cuts in general; taxes, you know, being raised 
or cuts to programs that lay off people.
    Mr. TUERCK. I'm sure that all spending cuts hurt people, 
and in many cases people that we don't want to hurt. But the 
problem is that we're having the wrong conversation. I 
personally don't have a clue as to whether canceling some of 
the Bush tax cuts would affect the economy one way or another, 
but I do know that we have a hopelessly convoluted tax system 
where we can't get the base straight, when what we ought to do 
is we ought to change the base into a consumption base, so that 
then we know that we're on taxing and growing the economy.
    Mr. LARSON. Let's say that could be if we would be willing 
to look at a hybrid. Or how long of a transition period do you 
think that that would take?
    Mr. TUERCK. I think that the transition would require a lot 
of adjustments.
    Mr. LARSON. How long would you say that might take?
    Mr. TUERCK. I think we could transition to a FairTax within 
a year or two.
    Mr. LARSON. Within a year?
    Mr. TUERCK. Yes.
    Mr. LARSON. And during that time, what would you do with 
the existing tax system?
    Mr. TUERCK. Well the existing tax system would go away and 
we would then impose the tax on consumption to replace those 
revenues; and the date we impose it, if the statutory 23----
    Mr. LARSON. So I'm trying to figure this out. Just so 
within a year's time we would move out of the Internal Revenue 
system and go to a collection of consumption taxes; and how 
would that end up in a neutral situation. Don't you think you 
ought to give yourself a little more time than that?
    Mr. KOTLIKOFF. I give it as much time as needed.
    Mr. LARSON. Well then let me ask you this, because that's 
where I was leading. I would think that you would need more 
time. Would you be willing to put in your consumption tax and 
have that consumption tax be dedicated only to reducing the 
deficit as you try to figure out just in fact what its 
implications will be and have an economic model that's out 
there?
    Mr. KOTLIKOFF. Well, as I've indicated, I have this 
proposal called the Purple Tax, which retains the FICA tax, 
makes it progressive, very progressive, as a FairTax that 
basically half the level, at a 15 percent effective rate, and 
has an inheritance tax of 15 percent.
    So 15 percent solution is a very simple tax structure. I 
think it is more progressive than the current system. I think 
it will generate at least two percent more of GDP than the 
current system. We need more revenue. So why don't you folks 
pass that today?
    Mr. LARSON. But as you are working the modeling out with 
that specific tax, would you let that money all go while you 
are running almost tandem systems to reduce the national debt?
    Chairman CAMP. All right. Time has expired. Mr. Marchant is 
recognized.
    Mr. MARCHANT. Thank you, Mr. Chairman, and I appreciate the 
fact that the chairman is having these hearings with the goal 
of a simpler Tax Code, a lower tax rate, and as a result of 
that having increased revenues to the government. I think that 
that is something this panel should discuss at length and I 
appreciate the fact we are doing that.
    I would like to talk about an average family in my district 
and how this FairTax proposal would affect that family. Let's 
say it is a man and wife. They are both working. One is a 
school teacher. One is a fireman. They have two kids. They have 
a gross income of about $8,000 a month. Will they have any FICA 
tax withheld?
    Mr. KOTLIKOFF. No FICA tax.
    Mr. MARCHANT. Will their employer have FICA tax?
    Mr. KOTLIKOFF. No FICA tax.
    Mr. MARCHANT. So their income would go up about 7\1/2\ 
percent. Their take home would be about 7\1/2\ percent higher.
    Mr. KOTLIKOFF. Well, it would be 15.3, because the employer 
portion is also going to be available to be handed out to the 
employee.
    Mr. MARCHANT. Is that in the proposal?
    Mr. KOTLIKOFF. Well economists think the employers aren't 
paying our taxes for us out of the goodness of their hearts. We 
think workers pay both the employee's share and the employer's 
share. And then when you eliminate the FICA tax, all 15.3 
percent is going to end up in the hands of the employee.
    Mr. MARCHANT. Okay. And so then whatever tax rate they had, 
let's say 20 percent.
    Mr. KOTLIKOFF. Right.
    Mr. MARCHANT. Will they lose their mortgage deductions?
    Mr. KOTLIKOFF. Well there won't be any mortgage deductions, 
because there won't be any income tax against which you can 
adjust it.
    Mr. MARCHANT. There shall be no income taxes so perhaps 
they'll get 25 percent. Maybe they will get $20,000 of income 
tax they won't pay.
    Mr. KOTLIKOFF. Yeah. And this Table 2 in this testimony 
dealt with all the issues of mortgage deductibility and the 
earning of tax credit and the child tax credit.
    Mr. MARCHANT. Well a lot of the people that are going to be 
watching this hearing in my district are not going to have the 
ability to have those tables. So would their take-home pay be 
as high as $20,000 more a year?
    Mr. KOTLIKOFF. Well, you know, it is a hypothetical. I 
don't want to be imprecise and give you the wrong answer to 
that specific question. But if we looked at the table that I 
have here, which was--what was the income of the family?
    Mr. MARCHANT. Around 4,000 each a month.
    Mr. KOTLIKOFF. So we are talking about 8,000. So we are 
talking about----
    Mr. MARCHANT. About $96,000.
    Mr. KOTLIKOFF. A hundred thousand a year, so let's look at 
a married couple who's 45 with a couple kids and a house, a 
moderate size house, mortgage deduction. They are currently 
paying 24 percent of their lifetime resources to the Federal 
Government in FICA and income taxes under the current system. 
Under the FairTax, it would be 14.7 percent.
    Mr. MARCHANT. I am trying to talk about their month to 
month.
    Mr. KOTLIKOFF. Yeah. Their month to month take home pay 
would go up.
    Mr. MARCHANT. So will this family qualify for a prebate?
    Mr. KOTLIKOFF. Everybody gets a prebate. Yes, they would.
    Mr. MARCHANT. So what number of checks would the Federal 
Government be cutting a month?
    Mr. KOTLIKOFF. One month to that family based on their 
household size.
    Mr. MARCHANT. Okay. So how many is that? Would that be a 
hundred million rebate checks a month?
    Mr. KOTLIKOFF. Well, yeah. It might be 130 million checks. 
Every American household will get a check.
    Mr. MARCHANT. So adding to the in the last----
    Mr. KOTLIKOFF. You could send electronically, by the way.
    Mr. MARCHANT. Right. I understand. And then when they go to 
the grocery store they are going to pay 23 percent more.
    Mr. KOTLIKOFF. Well, they pay 30. The nominal rate is 30 
percent. In effect every dollar that you spend, 23 cents out of 
that dollar is going to go to taxes. So that's what it cost.
    Mr. MARCHANT. How about utilities?
    Mr. KOTLIKOFF. Yeah. That's also consumption.
    Mr. MARCHANT. Rent.
    Mr. KOTLIKOFF. Rent, yes.
    Mr. MARCHANT. Gasoline.
    Mr. KOTLIKOFF. Yes.
    Mr. MARCHANT. So everything that they consume then they 
will pay the extra 23 to 30 percent on.
    Mr. KOTLIKOFF. Yes.
    Mr. MARCHANT. And the theory being that this family, 
together with the amount of money that they keep, that they 
were paying plus the prebate are going to come out.
    Mr. KOTLIKOFF. Better off.
    Mr. MARCHANT. Better off or hold?
    Mr. KOTLIKOFF. Better off. And I didn't know the answer to 
the question until I did the calculations. And this is my best 
judgment based on pretty careful, serious. You know. It wasn't 
a two-day study, either.
    Mr. MARCHANT. Well, I have a tremendous number of people in 
my district that support the FairTax. I've read every book that 
I can available on the FairTax, and the prebate is my single 
largest mechanical problem that I haven't been able to work 
through, but this will help me in answering the questions that 
I get on that.
    Chairman CAMP. All right. Thank you. Time is expired. Ms. 
Black is recognized.
    Mrs. BLACK. Thank you, Mr. Chairman. I want to go back to 
the prebate, rebate, whatever the acronym is for that, but I am 
not sure that I understand exactly know the information gets to 
the government to identify what their income is. If you don't 
have an income tax, how does the information get from the 
employer to the government to know what that salary is and how 
to figure that?
    Mr. TUERCK. It doesn't have anything to do with the salary. 
It has to do with the composition of the family, whether it is 
a married couple, how many kids they have. And then that is a 
mechanical formula. And once that is determined, then that 
determines the size of the prebate, the philosophy being that 
if that family were at the poverty level they would pay no 
taxes under the FairTax.
    Mr. KOTLIKOFF. So the prebate doesn't depend on your 
income. If you have a family of four, you get one size 
demograph. That is the word that Pat Moynihan used to use, I 
believe, when he advocated the negative income tax, he quoted a 
demograph, a monthly payment. So if you have got a family of 
four, you get one size. If you have got a family of three, it 
would be a smaller check, but it wouldn't depend on your 
income.
    Mrs. BLACK. So then how does that help those who are at the 
lower income?
    Mr. KOTLIKOFF. Because for people that are low income, it 
is going to be a much bigger deal than for Bill Gates as a 
proportion. So progressivity is always tax is a proportion of 
resources, and so that's why this would be progressive as 
conventionally defined in terms of what progressivity means.
    Mrs. BLACK. All right. That makes sense. That clears that 
piece up. This may or may not be a question that you as an 
economist can answer, but I am curious. In all of the 
information that I have here I can't find anything that 
indicates what percentage of those are not paying any tax 
whatsoever at this point in time. We keep hearing there is 
about 47 to 50 percent of the people who pay nothing. Is that 
something that you can help with?
    Mr. TUERCK. Close to 50 percent of individual taxpayers pay 
no personal income tax. That is correct, close to that.
    Mr. BARTLETT. Yes, that is correct. But I want to make a 
point here that is relevant to your point, which is that if you 
are right now at a poverty level income, you have a negative 
tax because of the earned income tax credit. You get a check 
from the government and pay zero. Okay? And for most people in 
the bottom quintile, that rebate or the EITC is more than 
enough to compensate for your payroll taxes as well. So that 
you are literally paying zero, but you may still be getting 
more on top of that.
    But just keep in mind that if you are under the FairTax, if 
you are now at the poverty level income, the rebate compensates 
you for your consumption, but you are going from negative to 
zero, which is a tax increase, you see. You are not getting the 
EITC anymore. And keep in mind also, there is a lot of 
confusion about the difference between consumption and income.
    If you look at the Consumer Expenditure Survey, you will 
see that people in the bottom quintile spend about twice as 
much as their income. So the tax base that applies to 
consumption for people with low income is going to be higher, 
precisely because a lot of those people are the elderly who are 
drawing down saving.
    That's the point Professor Kotlikoff keeps getting at when 
he talks about taxing wealth. That's basically where the 
incidence of that wealth tax comes from.
    Mr. KOTLIKOFF. Let me respond, if I could.
    Mrs. BLACK. Yes, thank you.
    Mr. KOTLIKOFF. We have I think some segment of very poor 
people who might, because the EITC might end up with a somewhat 
higher tax rate, but at the table incorporated the EITC. And 
there is not a whole lot of selves here where the average tax 
rate actually goes up under the FairTax. It basically goes 
down. There is a lot of very poor people that don't get the ITC 
because they don't have kids or they're not working.
    We have to also think about in terms of the tax burden on 
older people, poor older people, the older people are going to 
get this rebate, just like everybody else; and their social 
security benefits are also going to be CPI indexed. So they're 
going to get an extra bonus here, because when the price level 
goes up, their Social Security benefits are going to rise by 30 
percent, and then they are also going to get the rebate.
    So this is actually going to redistribute toward the poorer 
elderly away from the rich and middle class elderly, and get a 
bigger burden, tax burden on the rich and middle class elderly; 
and, therefore lower the burden on younger people. We have had 
a mass of redistribution away from younger people towards older 
people. That is a large part of this deeper conversation we 
need to have about how to fix the fiscal system of the country.
    Chairman CAMP. All right. Thank you. Mr. Reed is 
recognized.
    Mr. REED. No questions.
    Chairman CAMP. All right. Mr. Berg is recognized.
    Mr. BERG. Thank you, Mr. Chairman. Two questions: one 
question is on stability.
    I mean what we want is a revenue source that is stable. 
That is how we need to plan, and I guess my question is how 
would you compare the stability of, again, just one of the new 
consumption tax versus our current revenue.
    Mr. TUERCK. Well consumption taxes are going to be more 
stable than the current tax system, because consumption is more 
stable of the economic cycle than income is. I don't have--
maybe Larry's done some estimates of the difference it makes; 
but, we found for example, that if you have the 23 percent 
FairTax in effect in 2010, which is obviously a period of 
depressed economic circumstances, then we would have brought in 
more revenue than needed in order to pay the government's 
bills; and that's just largely because consumption was better 
than the rest of the economy.
    Mr. KOTLIKOFF. Well, I concur with that. The consumption is 
more stable than income. It is more stable than investment, so 
it is a more stable tax base and more reliable.
    Mr. BERG. Then my follow-up question really relates to the 
transactions that would be conducted by local and state 
government. I understand the individual, but as we go into 
local and state government, and they're paying an additional 23 
percent tax, how does that filter through the formula.
    It seems to me that they're not paying income now; they 
would pay this. And so many of them are exempted now, but that 
would have an increased cost in local services or state 
services.
    Mr. KOTLIKOFF. Well in our calculations for revenue 
neutrality, we incorporate paying back, compensating the 
governments state and federal for the extra taxes that they're 
going to incur. So that the idea is to keep this revenue 
neutral and not to force governments to have a bigger burden 
through the back door.
    Mr. TUERCK. It is a little tricky. The tax base at the 
state and local level would go down, slightly, and that would 
represent a temporary boon to state and local taxpayers. But 
the states and local governments could compensate for that by 
adjusting their Tax Codes. They would have to do that, but an 
easy fix, for example, would be for the state to impose its own 
sales tax on top of the FairTax rate.
    That would adjust for that part of the problem, and then 
they might have to also make some adjustments in their income 
tax rates. At the end of the day after everything was worked 
out everybody would be whole. Everybody would be where they 
started out.
    Mr. KOTLIKOFF. Let me just say we spent with several other 
economists at Suffolk University, we spent a good part of the 
year very carefully trying to figure out what tax rate would be 
relatively neutral. And we didn't know the answer before we sat 
down, and whatever the answer was going to come out, we were 
going to report it. And so when other people testify about the 
sales tax, let's make sure that the methodology was the same.
    I mean we use the same methodology as Bill Gale, who is a 
major critic of the sales tax. He reviewed our study. He said 
it is the same methodology. There are some different 
assumptions here and there, but I think this is a very careful 
study. It is on line, available to anybody to look at.
    Mr. BERG. Thank you. Thank you, Mr. Chairman.
    Chairman CAMP. Well, thank you, and I want to thank our 
first panel for their testimony today. It has been very 
helpful, and I hope we will be able to engage with you as we 
continue this discussion on fundamental tax reform.
    Members may wish to submit additional questions to you in 
writing for inclusion in the formal record, and I would just 
ask that you be prompt in responding to those questions if you 
do receive them. Again, let me thank you again for being here 
today, and I would now invite our second panel to come to the 
witness table.
    We are pleased to welcome our second panel, which features 
six individuals who are highly regarded as experts in value 
added taxes. First I would like to welcome and introduce Mr. 
Michael Graetz. Mr. Graetz is the Columbia alumni professor of 
tax law at Columbia Law School, and is a professor emeritus of 
law at the Yale Law School. In addition to his teaching career, 
Mr. Graetz served at the Treasury Department from 1990 to 1992.
    And, second, we will hear from Rosanne Altshuler. Ms. 
Altshuler is a professor in the economics department at Rutgers 
University. She has previously served as the director of the 
Urban Brookings Tax Policy Center as a Senior economist to the 
President's Advisory Panel on Federal Tax Reform in 2005, and 
as a special advisor to the Joint Committee on Taxation.
    And, third, we welcome back Robert Carroll, a principal 
with Ernst & Young's quantitative economics and statistics 
group in the National Tax Department. Before joining Ernst & 
Young, Mr. Carroll served as the deputy assistant secretary for 
tax analysis at the Treasury Department.
    And, fourth, we will hear from Jim White, the director of 
tax issues for the U.S. Government Accountability Office. As a 
Director of Tax issues, Mr. White is responsible for work on 
IRS, tax administration and tax policy. He has been with GAO 
since 1990.
    And, fifth, we welcome Dan Mitchell, a senior fellow at the 
Cato Institute. Prior to joining Cato, Mr. Mitchell was a 
senior fellow with the Heritage Foundation and previously 
served as an economist for the Senate Finance Committee. And, 
finally, we welcome back Simon Johnson, the Ronald A. Kurtz 
professor of entrepreneurship at the Massachusetts Institute of 
Technology. He is also a senior fellow at the Peterson 
Institute for International Economics in Washington, D.C., and 
from March 2007 to August 2008 Mr. Johnson was the economic 
counselor and director of the research department at the 
International Monetary Fund.
    Thank you all for your time today. The committee has 
received each of your written statements, and they will be made 
part of the formal hearing record. Each of you will be 
recognized for 5 minutes for your oral remarks. There will be a 
yellow light one minute out in which you can sum-up before the 
red light comes on.
    Again, I look forward to hearing from all of you. Mr. 
Graetz, we'll begin with you. You are recognized for 5 minutes.

 STATEMENT OF MICHAEL J. GRAETZ, COLUMBIA ALUMNI PROFESSOR OF 
                  TAX LAW, COLUMBIA UNIVERSITY

    Mr. GRAETZ. Thank you, Mr. Chairman. Thank you, Mr. Levin 
and Members of the Committee for inviting me to testify on this 
important subject.
    We know our tax system is broken. Nobody argues with that. 
The question is what should we do about it. Until World War II 
we had a consumption tax on most Americans, and an income tax 
only on high income individuals. And it was only the revenue 
needs of the Second World War that extended the income tax to 
the masses. Today, the U.S. is a low tax country, but we are 
not a low income tax country. So we have sacrificed our 
advantage from our low taxes by having income taxes that are 
comparable to those of other nations in the OECD.
    The biggest difference between the U.S. and everybody else 
in the world is that we have no national level consumption tax, 
which 156 nations, at last count, do have. We know the problems 
with the income tax. The congress uses the income tax the way 
my mother used to use chicken soup--as a solution to every ill 
facing the country. We know that we haven't solved the nation's 
health problems. We haven't solved the nation's education 
problems. We haven't solved the nation's energy problems, 
despite the many billions of dollars a year in tax deductions 
and credits that go in those directions. The Tax Reform Act of 
1986 was a great success; it gave the income tax a good 
cleansing, but it has not proved stable. We can cleanse it 
again, as many people have proposed, and as most of the 
conversation around this committee has suggested over the last 
couple of years. But we know that the Tax Code is going to get 
dirty rather quickly again.
    The other thing that has happened since the 1986 Act is 
that we are now a world economy. Given the internationalization 
of the world economy, in my view, we need to have a low income 
tax, particularly a low corporate tax rate in order to attract 
jobs to the United States, to attract investment to the United 
States, and to allow American workers and businesses to compete 
worldwide.
    I have advanced a tax reform plan in my book, One Hundred 
Million Unnecessary Returns: A Simple, Fair and Competitive Tax 
System for the United States. I am certainly happy to get a 
copy for any member or staff person that would like to read it. 
I know some of you have. Let me just review the pieces of my 
proposal.
    First, add a value added tax, which is basically a retail 
sales tax with withholding. The idea that you would not have 
withholding on an income tax strikes me as foolish. We are the 
only OECD country that does not have a value added tax. 
Sometimes it is called a goods and services tax.
    Second, use the revenues from that tax to finance an income 
tax exemption of $100,000 and to lower substantially the rates 
above that amount. Third, lower the corporate income tax rate 
to 15 percent; and, fourth, replace the earned income tax 
credit and provide low and middle income families with tax 
relief from the VAT burden through payroll tax offsets and 
through debit cards that allow them to avoid VAT on their 
purchases.
    This plan has many advantages over existing law. It would 
be more favorable to savings and investment, and economic 
growth in America. It would take advantage of our status as a 
low tax country: a 15 percent tax on corporate income would be 
among the lowest in the world. It would solve the problems of 
transfer pricing, and other tax planning that goes on in the 
international community.
    Third, it would eliminate more than a hundred million of 
the 140 million tax returns the IRS gets every year. 150 
million Americans would never have to face the income tax. 
Fourth, there would be less temptation under such a small 
income tax for Congress to view tax exclusions, deductions and 
credits as if they were solutions to America's problems. We 
know they're not.
    Fifth, a value added tax would be border adjustable under 
WTO international trade rules, which means that it could tax 
imports and exempt exports, which an income tax cannot. Given 
the size of our trade imbalances, we would likely produce 
hundreds of billions of dollars in additional revenue from 
taxes on imports alone over the next 10 years.
    Sixth, it would avoid most of the difficult issues of 
transition that virtually all of the other tax reform proposals 
have. And, finally, by using taxes that are common throughout 
the world, it would fit well with international standards.
    The Tax Policy Center, pursuant to a contract with the Pew 
Charitable Trust, has estimated the plan. They've determined 
some preliminary numbers. They have given me permission to 
share them with the committee today. Basically, they estimate 
that for the year 2015, my plan is revenue neutral with a value 
added tax of under 12\1/2\ percent, a 15 percent corporate 
income tax rate, a 16 percent tax on married couples between 
$100,000 and $200,000 of income, and a 25 or 26 percent rate on 
families above $200,000. This shows that you could dramatically 
reduce income tax rates.
    My proposal is also distributionally neutral; that is, 
unlike the so-called FairTax, it does not shift the burden of 
taxes down the income scale. Given its widespread application 
around the world, it is clear that the U.S. can readily 
administer a value-added tax. I have been working over the last 
two years with a number of VAT managers, accounting firms, and 
law firms around the world in an effort to design a model value 
added tax for the United States. And I would be happy to share 
some of that learning with the committee.
    [The prepared statement of Mr. Graetz follows:]





    Chairman CAMP. Thank you. I am afraid we are going to have 
to keep the hearing moving, and your time has expired. So we 
will move on to Ms. Altshuler.
    You have 5 minutes.

 STATEMENT OF ROSANNE ALTSHULER, PROFESSOR AND CHAIR, ECONOMIC 
                 DEPARTMENT, RUTGERS UNIVERSITY

    Ms. ALTSHULER. Thank you, Chairman Camp, Ranking Member 
Levin and Members of the Committee, it's an honor to appear 
before you today.
    CBO analysis shows that the government began this year with 
the projected budget deficit of almost 10 percent of GDP, and 
its future growth is driven by rising healthcare costs, an 
aging population, and the interest payments on an ever 
increasing public debt. Reducing the deficit to an economically 
sustainable level will require both the scaling back of 
expenditure programs and an increase in tax revenues.
    In work I've done with economists at the Tax Policy Center, 
we find that raising significantly more revenue from our 
current tax system, however, would be politically difficult, 
and likely damaging to economic growth. The substantial near 
and long term fiscal pressures facing the Federal Government 
require that we both reform our income tax system and consider 
new revenue sources, including federal taxes on consumption.
    That is a type of consumption tax that is similar to a 
retail sales tax, but it is collected in smaller increments 
throughout the production process. That is part of the tax 
systems of nearly 150 countries around the world, including all 
OECD member countries except the United States. Adding a VAT to 
the U.S. federal tax system could help address the medium and 
long term revenue shortfalls forecast for the United States. 
That is particularly effective in raising substantial amounts 
of revenue in a relatively efficient manner, and has proven to 
be an administrable tax.
    If we were to adopt a VAT, we could rely on the experience 
and best practices of other countries in setting up and 
administering the tax. In addition to these attributes, the VAT 
has a number of other advantages. First, a portion of the 
revenues from a VAT could be used to finance reductions in 
statutory income tax rates, as Michael Graetz has just told us.
    Two, tax systems: a VAT, and an income tax, with low tax 
rates, may be superior from an efficiency and administration 
perspective to an income tax system with higher statutory 
rates. Second, given the size of projected future budget 
deficits, adding a VAT to our current system to generate 
revenues for deficit reduction alone would likely have positive 
effects on economic growth.
    Third, a preannounced and phased-in VAT might stimulate the 
economy by encouraging consumption in anticipation of the 
imposition of the tax. Finally, while the states are likely to 
protest, a properly designed VAT may actually help force them 
to redesign or improve their retail sales taxes.
    There are a number of issues that need to be addressed in 
designing and implementing a VAT, and I will hit on a few of 
these issues in my remaining time--distributional issues. The 
VAT is equivalent to a retail sales tax, but it is collected at 
different stages of the production process. Since higher income 
households save more than those with lower or moderate incomes, 
the burden of the tax increases with current income, reducing 
the overall progressivity of the tax system.
    The additional VAT burden, however, can be relieved for low 
and middle income households through refundable credits. This 
approach to relieving the VAT burden is more effective than 
exempting food and other necessities from taxation or applying 
preferential rates, since it can be targeted to lower and 
middle income households rather than all households.
    TPC has recently released a report that illustrates the 
impact of a five percent VAT in the distribution of income. 
While regressive in the absence of a rebate, the authors show 
that the impact on low and middle income households could be 
offset by allowing a rebate in the form of a refundable credit 
claimed on income tax returns. With the rebate, the VAT is 
progressive throughout almost the entire income distribution.
    The TPC study shows that one should not look at the 
distributional impact of the VAT in isolation. The 
progressiveness of the complete federal tax system with that 
rebate, for example, must be taken into account. What about 
revenue? Well, policy analysts point out that given the fixed 
administrative costs of the VAT, if the U.S. adopts a VAT, it 
should be at a fairly substantial rate. Work again out of the 
Tax Policy Center suggests that with a ten percent rate, a VAT 
with a broad base and a rebate to offset the regressivity of 
the tax could raise about two percent of GDP.
    It is important to think about how any tax instrument we 
use to raise additional revenue will affect economic growth. 
Recent work from economists at the OECD suggested the VAT is 
more pro-growth than personal and corporate income taxes. 
Revenues from the VAT could be used to buy down the deficit 
and/or reduce individual and corporate statutory tax rates.
    Large and persistent deficits can have negative affects on 
economic growth by reducing national savings, driving up 
interest rates, and increasing our reliance on foreign 
investors. A single rate VAT on a broad base at a rate of ten 
percent could go a long way towards reducing the economic 
burden of our large and growing debt.
    Using some VAT revenues to buy down statutory income tax 
rates would also have positive effects on growth. Lower 
marginal income tax rates on individuals and businesses would 
strengthen the incentive to save, invest, work and innovate, 
while making our tax system more efficient. The fiscal 
challenges ahead are daunting. The VAT on its own cannot solve 
the country's fiscal problems, and introducing a VAT has its 
own problems.
    If we adopted the VAT, we would have to institute some form 
of rebate to offset its regressivity and make every effort to 
adopt the broadest possible base. We would need to increase IRS 
resources for administration, and be attentive to a range of 
compliance issues. But, we must recognize that near and long-
term fiscal pressures require that we raise more revenue from 
our tax system. The VAT is an efficient revenue raiser that is 
likely to be significantly less damaging to economic growth 
than increasing personal and corporate statutory rates.
    Thank you. I am happy to answer any questions.
    [The prepared statement of Ms. Altshuler follows:]





    Chairman CAMP. Thank you, Ms. Altshuler.
    Mr. Carroll, you are recognized for 5 minutes.

           STATEMENT OF ROBERT CARROLL, ERNST & YOUNG

    Mr. CARROLL. Thank you. Chairman Camp, Ranking Member 
Levin, distinguished Members of the Committee, I thank you for 
the opportunity to testify today regarding considerations for 
value added tax in the United States.
    The U.S. faces serious fiscal challenges over the next 
several decades as the federal deficit and debt are projected 
to rise to unsustainable levels. At the same time, many view 
the existing tax system as overly complex, and an obstacle to 
economic growth. These issues have led to some discussion of a 
value added tax.
    Some view a VAT as a possible source of additional revenue 
to help reduce the deficit and stabilize the debt. Others view 
a VAT as a means to help improve the competitiveness of the 
U.S. by providing revenue to permit a reduction in the 
corporate income tax rate, or a reduction in the scope of the 
income tax system.
    VATs are the norm in most of the countries. More than 150 
countries rely on VATs, and in these countries VATs account for 
nearly one-fifth of total government revenue. Consideration of 
a VAT in the United States is not a new issue. VATs have been 
discussed and considered in the U.S. for more than four 
decades. A VAT was considered by a task force appointed by 
President Nixon in 1970 and an advisory panel appointed by 
President Bush in 2005.
    A VAT in the U.S. would raise a number of issues, and they 
can have very different economic effects depending on a number 
of key considerations. For example, would the VAT be a 
replacement tax or an add-on tax? Which features of the income 
tax would be replaced by a replacement VAT? How would the 
revenue from an add-on VAT be used? Would it be used to reduce 
the deficit, reform the existing tax system, or fund additional 
spending?
    Would the VAT apply broadly to consumption, or would a 
large portion of household consumption be excluded from the VAT 
base? Answers to these questions would have a significant 
impact on the economic effects of a VAT. A broad-based VAT that 
replaces the worst features of the income tax has the potential 
to provide significant economic benefits. A VAT is 
fundamentally a tax on consumption, and does not tax the return 
to saving and investment, thereby reducing the cost of capital 
and increasing investment.
    Greater investment means more capital formation, and 
ultimately higher labor productivity and living standards than 
otherwise would be the case. Estimates suggest that the 
economic gains from replacing all or a portion of the income 
tax with a consumption type tax, such as a VAT, could be 
significant. One study found that complete replacement of the 
individual and corporate income taxes could increase the size 
of the economy in the long run by six to ten percent.
    The December 2007 Treasury Department study on approaches 
to make the U.S. more competitive found that replacement of the 
corporate income tax with a VAT could increase long run output 
by two percent to two point five percent. But it is important 
to emphasize that these potential, economic benefits arise from 
a VAT that is replacing all or the worst features of the income 
tax.
    A deficient reducing, add-on VAT could have significantly 
different economic effects, using the revenue from an add-on 
VAT to reduce the deficit would put downward pressure on long-
term interest rates, as deficit financed government spending is 
replaced with VAT financed government spending. And deficits 
that would otherwise crowd out private savings are reduced.
    Lower long-term interest rates would reduce borrowing costs 
for both households and businesses, and eventually boost 
output; however, the rise in prices that would accompany an 
add-on VAT would also likely lower consumer spending. And there 
is evidence that consumer spending and employment would be 
permanently reduced.
    Another key consideration is how broad a VAT base would 
actually be in practice. The VATs in most other countries and 
the state sales taxes in the U.S. are generally not broad-based 
and exclude significant amounts of consumption from the tax 
base through exemptions and preferential rates. They might be 
better termed partial VATs. A more narrow base requires a 
higher tax rate to raise a given amount of revenue, and can 
lead to differential taxation of consumption. Both can reduce 
the economic benefits of a VAT, and adversely affect the 
sectors of the economy that are taxed.
    Additionally, an add-on VAT, while possibly addressing the 
nation's long-term fiscal imbalance, would represent a new tax 
with additional compliance costs. Businesses would have to 
collect the VAT on behalf of the government, keep and maintain 
records of their VAT payments and collection, and prepare VAT 
returns. The extent of these costs would depend on factors such 
as the number of transactions involved, the complexity of the 
VAT base, rate structure, definitions and administrative 
enforcement regimes.
    VATs can also impose extra, non-recoverable costs on 
businesses. Under a VAT, businesses act as tax collectors. A 
business is liable for VAT on its gross sales, but receives 
credits for a VAT previously paid on its purchases. There may 
be circumstances, in which VAT crediting may be incomplete, 
thereby imposing a direct tax cost on businesses. Because the 
gross flows are so large, imperfections in the VAT system can 
be greatly amplified.
    Finally, the transition as a VAT is introduced would be 
crucial. Introduction of a VAT involves a lump sum tax on 
existing assets, plus there could be large, near-term economic 
effects as the economy adjusts to a large, new revenue source. 
In summary, the specific design of a VAT is critical to its 
economic effects. All VATs are not equal, and they could have 
very different economic effects depending on key design 
elements.
    I thank you again for the opportunity to testify, and look 
forward to responding to any questions you may have.
    [The prepared statement of Mr. Carroll follows:]





    Chairman CAMP. Thank you, Mr. Carroll.
    Mr. White, you are recognized for 5 minutes.

 STATEMENT OF JAMES R. WHITE, DIRECTOR, TAX ISSUES, GOVERNMENT 
                     ACCOUNTABILITY OFFICE

    Mr. WHITE. Thank you. Chairman Camp, Ranking Member Levin 
and Members of the Committee, I am pleased to be here to 
discuss value added taxes. Others will discuss the economics of 
a VAT.
    I would note in passing, though, that a VAT and a retail 
sales tax are both consumption taxes. The economics are 
essentially the same. The administration is different. I will 
focus on how a VAT is administered. Specifically, five 
countries' experiences with a VAT: New Zealand, Australia, 
Canada, France and the United Kingdom. They represent a range 
of VAT designs from relatively simple to complex, including 
some with both national and provincial taxes and some that 
recently enacted a VAT.
    I will discuss, one, how VAT designed choices such as the 
number of tax rates and exemptions affect compliance, 
administrative costs and taxpayers compliance burdens; how 
Canada combined a national VAT with provincial consumption 
taxes; how countries transition to a VAT, and some possible 
lessons for the U.S. My main point is that VATs, like income 
taxes and sales taxes, require a robust administrative 
presence. I illustrate a simple VAT on page 3 of my statement.
    Each business in the chain that produces and sells 
furniture to a consumer owes a VAT of ten percent on its sales, 
but gets a credit for VAT paid on its purchases of inputs. The 
figure shows how the tax is paid by each company in the chain 
add up to a VAT of ten percent on the price the consumer pays, 
exactly equivalent to a sales tax of the same rate.
    In my example, each business is taxed at the same rate. 
There are no exemptions. However, even such a simple VAT has 
compliance risks, which I show on page 5. Unscrupulous 
businesses may not collect VAT owed or may not remit it to the 
government, by for example, not reporting cash sales or falsely 
reporting imports. Or, they may over claim credit for tax paid 
on inputs.
    Some of these compliance risks, such as under reporting 
cash, are also problems with an income tax. Others, such as 
fraudulent refunds are probably more of an issue with a VAT, 
because unlike our current income tax, most of these VAT 
credits are refundable.
    Under a VAT, large numbers of businesses such as start-ups 
are legitimately entitled to refunds making it a challenge to 
detect refund fraud. In fact, some VAT fraud schemes are common 
enough to have earned names. One is called ``carousel fraud,'' 
because goods move in a circle between countries with tax 
cheats collecting VAT but not remitting it to the government. 
Not surprisingly, adding complexity to a VAT through tax 
preferences increases the challenges of tax administration and 
loses revenue.
    France and the United Kingdom built so many exemptions, 
special rates and other preferences into their VATs that it is 
estimated they collect less than half the revenue they could 
have with a very simple VAT. While all taxes require an 
administration system, there is some evidence from our study 
countries that VATs are easier to administer than an income 
tax.
    The U.K. found its VAT cheaper to administer, measured as a 
percent of revenue collected, than the U.K. income tax. New 
Zealand with a relatively simple VAT found many fewer errors on 
VAT returns than on income tax returns. As with other taxes, 
the VAT compliance burden on taxpayers is mostly driven by 
recordkeeping requirements, the number of times a year returns 
must be filed, and the time needed to deal with audits.
    Studies in the U.K., Canada, and New Zealand show VAT 
compliance cost as a percent of sales are greatest for small 
businesses and much lower for large businesses. For this 
reason, some countries exempt small businesses from VAT. 
Interestingly, however, many small businesses in Australia and 
Canada volunteer to be subject to VAT. Some want credit for 
taxes paid on their inputs. Some fear being outside the system 
will cost them customers. Large businesses don't like the extra 
recordkeeping required when dealing with exempt businesses.
    Canada shows how a VAT can work in a federal system. Some 
provinces adopted a provincial VAT and harmonized it with the 
federal VAT. Others adopted VATs but with different exemptions 
and other preferences. Still others kept their provincial sales 
taxes. Canada shows those different options are workable, but 
the amount of burden on businesses to comply vary depending on 
the amount of harmonization.
    Australia, Canada and New Zealand all introduced their VATs 
since 1986. All three had the advantage that their VATs replace 
preexisting national consumption taxes. Nevertheless, 
implementation took up to two years, required significant 
resources for outreach, and the country still had difficulty 
getting businesses to register for the VAT system before the 
implementation date.
    In summary, one lesson about VAT design is that like our 
income tax, tax preferences reduce revenue and add complexity, 
compliance risks and compliance burden. Having said that, tax 
design is influenced by criteria in addition to 
administerability, such as revenue needs, the effect on the 
economy and distributional concerns.
    That concludes my statement. I'd be happy to answer 
questions.
    [The prepared statement of Mr. White follows:]





    Chairman CAMP. Thank you, Mr. White.
    Mr. Mitchell, you are recognized for 5 minutes.

 STATEMENT OF DANIEL J. MITCHELL, SENIOR FELLOW, CATO INSTITUTE

    Mr. MITCHELL. Thank you, Mr. Chairman, Ranking Members, and 
Members of the Committee.
    In my summation of my testimony I want to focus on what I 
would call the real world versus the theory. I agree with the 
theory that a value added tax, compared to our current income 
tax, is a less destructive way of raising revenue. It doesn't 
do as much damage per dollar raised. And so, in theory, if you 
replaced or got rid of other taxes, or if you somehow paid down 
deficits or debt with the value added tax, you might get some 
benefits.
    But if you look at the experience in Europe and other 
countries, you find that this is not what happens. The question 
that I always pose is, why on earth would we want to copy the 
fiscal policy of Greece, Portugal and other countries that are 
now teetering on the edge of financial collapse? Because what 
you find in those countries--and I'll walk through some of the 
data--is that they did not reduce other taxes. They did not 
reduce deficits and debt. Instead, the VAT became, as it is 
sometimes referred to, a money machine or for larger 
government.
    Now, to touch on the theory for just a little bit, the 
shortcut way of understanding a VAT is that it is a system that 
doesn't allow for the deductibility of wages at the business 
level. You can get into the details on credit, invoice, 
subtraction method; but, if you think about a tax system that 
doesn't allow deductibility of wages, that is really what a VAT 
is all about, and it is important to realize what that means.
    It means that, in effect, you have an entirely additional 
system for taxing income. If you don't allow businesses to 
deduct the wages and salaries they pay their workers, their 
employees, you have a withholding tax that is in addition to 
the income tax that they already pay. Now, in the language of 
public finance economists, the VAT is a consumption tax, but 
this term requires some elaboration.
    A consumption, or consumption based tax does not mean, 
necessarily, that the tax is actually paid by consumers. It 
simply means that it's a tax system where there is no double 
taxation of income that is saved and invested. The Social 
Security payroll tax is a consumption based tax, since it is 
not imposed on dividends, interest and capital gains.
    Likewise, the flat tax, popularized by a former house 
majority leader, Dick Armey, is a consumption tax, since 
dividends, interest, capital gains are not subject to a second 
layer of tax. In short, a consumption tax is a system where 
income is taxed only once. It might be taxed only one time when 
the income is earned. It might be taxed only one time when the 
income is spent. And this is in contrast to our current system, 
the Haig-Simons or comprehensive income tax system, which does 
have pervasive double and triple taxation of income that is 
saved and invested.
    Now, because a VAT does not have all this double taxation, 
it often gets favorable reviews from economists, but that is 
only if you assume that you are getting rid of other taxes. 
That's not what anybody is talking about. A VAT is always being 
discussed as an add-on tax. And what would it mean?
    Well, if you look at the experience from Europe, you will 
see that an add-on value-added tax basically leads to two 
things. It leads to higher, overall tax burdens, and it leads 
to a higher burden of government spending. If you look at the 
OECD data, you will see that government spending in Europe back 
in the mid-60s before a VAT became pervasive was not that 
different than government spending in the U.S., when measured 
as a share of GDP.
    But, ever since the VAT was adopted government spending in 
Europe has increased dramatically. Of course they've had higher 
payroll taxes, energy taxes and things like that. So it is not 
always a one to one relationship, but the correlation still 
exists. The other thing that you find in Europe since the 
adoption of a value-added tax is that we do not see any 
improvements in fiscal balance.
    If anything, deficits and debt have gotten much higher in 
Europe since the adoption of the value-added tax. In some 
sense, they are confirming what Milton Friedman said back in 
the 1990s, that governments will spend everything that the 
revenue system will generate, plus as much as they can get away 
with.
    Another one of the big assertions about a value added tax 
is that you can use it to reduce or lower other taxes. Well, 
let's look at what happened in Europe. Let's look at what 
happened to taxes on income and profits as a share of GDP in 
Europe. Ever since the VAT was adopted, the tax on income and 
profits in Europe as a share of GDP has gone up, not down.
    If we look just at the tax on corporate income as a share 
of GDP in Europe, you will see that it has gone up, not down. 
By contrast, in the United States, which doesn't have a value 
added tax, the overall tax burden on income and profits has 
stayed relatively flat over the last 40 or 50 years, and our 
tax burden on corporations as a share of GDP has actually 
fallen. So, the assertion that a value added tax can somehow 
lead us to a better tax system certainly hasn't applied in any 
countries in the world right now, although I will say that in 
some of the more recent countries, like Australia, Japan, that 
have adopted a VAT or goods and services tax, you don't find 
the same problems.
    But, I am out of time, and so I will stop there. Thank you 
very much.
    [The prepared statement of Mr. Mitchell follows:]





    Chairman CAMP. Thank you, Mr. Mitchell.
    Mr. Johnson, you are recognized for 5 minutes.

   STATEMENT OF SIMON JOHNSON, RONALD A. KURTZ PROFESSOR OF 
  ENTREPRENEURSHIP, SLOAN SCHOOL OF MANAGEMENT, MASSACHUSETTS 
                    INSTITUTE OF TECHNOLOGY

    Mr. JOHNSON. Thank you, Mr. Chairman.
    I would like to make three points that have not come out in 
the discussion so far. First of all, while I support the VAT on 
efficiency grounds in terms of the ability to raise revenue as 
the previous panelists have indicated--and I broadly would 
agree with the numbers they put forward--I think we should 
stress that the VAT is an inherently regressive tax.
    Income distribution in this country has become much more 
skewed since the tax reform of 1986. These are striking and 
dramatic numbers, and this is a very hard trend to reverse in 
many ways. It is certainly possible, as some of the previous 
panelists said, to address the regressivity of VAT through 
various forms, some sort of refundable tax credit, and also 
addressing, perhaps, Social Security payments.
    But I would point everyone to the report made by President 
Bush's advisory panel when they looked carefully at this issue. 
Even when trying to address this issue, they present numbers 
that show you the amount of tax being paid at the top of income 
distribution goes down dramatically. And the amount of tax 
being paid in the middle of the income distribution goes up. So 
I think this is a very serious issue that has to be taken fully 
on board.
    The second point is, and I don't think this has been 
mentioned so far, is the way that financial services are 
treated in a VAT system has to be viewed carefully. The one 
problem with the European VAT system is that it has typically--
because it is a relatively old system and this problem wasn't 
especially thought through--it is under taxed financial 
services.
    The IMF proposed in light of the financial crisis at the 
behest of the G20 a new form of taxation, which is called, 
rather memorably, the FAT financial activities tax. So we have 
the VAT and the FAT. I didn't pick the name. It was after I 
left the IMF. But the point of the fact is to redress this 
balance, and the latest thinking, although this has not been 
done fully and properly in any country so far, but it is 
doable, is to have a version of FAT that would fully integrate 
with VAT and would result in a fair, equitable taxation on the 
same basis of financial services.
    Now, in this context and completely consistent with that 
FAT, I would stress that we should also be addressing the 
excess leverage in the financial system in this country, and I 
would commend to you a speech made recently by the President of 
the Minneapolis Fed, Mr. Cocha Lakota, who goes through in 
detail why the Tax Code is encouraging excessive leverage for 
the corporate sector, particularly for the financial sector. 
This can be addressed at the same time as moving to a VAT, plus 
FAT, system.
    The third point I would like to make or the question I 
think I would like to raise is when exactly is the fiscal 
crisis that we need to address with tax reform? And, of course, 
there are several possibilities. One is the crisis next week, 
which I certainly hope we will avert. I don't think that is 
going to happen. We'll see.
    Another is a crisis over the next 10 years, and that, of 
course, is part of the discussion around the CBO's forecast 
window, but the numbers there are quite string. If the CBO is 
correct, and they certainly are the projections that we all 
use, the United States under reasonable assumptions will have a 
small, primary surplus at the end of the 10 years. This is not 
a dramatic budget crisis by any means.
    There is a budget problem, which has already been 
mentioned, which is in the longer term spending. And the IMF 
also has very good, comparative numbers; but, this is mostly 
about increase in medical cost, medical spending over a 30-year 
period. On this scale we stand out relative to other countries. 
So I think the good news part of this is that we have time for 
proper tax reform.
    At the same time as we are thinking about tax reform and 
thinking about the appropriate level and extent of a 
consumption tax, or a VAT plus financial activities tax, I 
would stress we need to think about the changing nature of our 
society over these 30 years. The society is aging in a way that 
needs the robust provision of public goods, for example, for 
education and health, for children and for lower income people. 
And we also live in a very dangerous world in which having a 
robust income base for military spending is absolutely 
important.
    One very important feature of these consumption taxes--this 
is actually mentioned also in the last panel, at least in 
passing, is that consumption goes down less than does income 
when you have a major crisis. Now to the extent that we don't 
reduce the risks in our financial system, I am very worried 
about future crises that will damage the receipts from income 
tax and cause a big increase in debt.
    The reason why debt has surged over the past four years is 
primarily due to the effect of banks, big banks in particular, 
blowing themselves up at great cost to the American taxpayer. 
Thank you.
    [The prepared statement of Mr. Johnson follows:]





    Chairman CAMP. All right. Thank you.
    We expect a series of votes in about 15 minutes that will 
last about an hour. So, as a result, Mr. Levin and I have 
yielded back our time and we are going to go to a three-minute 
questioning period.
    So at this point, Mr. Rangel, you are recognized for 3 
minutes.
    Mr. RANGEL. I just want to ask Mr. Johnson. All the time 
during his testimony I was thinking of a possible crises, if 
the congress and the President can't get together.
    Now, Mr. Johnson, I think some people believe that if we do 
have a default that we'll have a smaller government; and I 
think I read somewhere that you had indicated that a default 
would increase the size of government. Is that correct?
    Mr. JOHNSON. Yes, Mr. Rangel, that is my opinion, because 
government debt as a triple A rated securities, the basis of 
our credit system, so much of the private sector depends on 
credit one way or another. If you have any kind of government 
default, and that could be next week--it could be at any 
point--you'll destroy the credit system. You make the private 
sector smaller. And the government, whatever you think about 
it, has an ability to operate. You saw this in the great 
depression, even as the private sector crumbles around it.
    So, ironically, one effect, and tragically, I could say, 
because I certainly don't want to default, and I would argue 
very strongly against anything that would take you down the 
road. But one ironic effect would be to make the private sector 
much, much smaller. Therefore, government as a share of GDP 
will become bigger while GDP was getting smaller.
    Mr. RANGEL. Thank you, Mr. Johnson. I yield back the 
balance of my time.
    Chairman CAMP. Thank you, Mr. Rangel.
    Mr. Davis, you are recognized for 3 minutes.
    Mr. DAVIS. Thank you, Mr. Chairman. I would like to ask a 
hypothetical question, open it up to the panel. If the VAT were 
imposed, how wide ranging should this be if you were to do 
something like this in the United States? I have heard a range 
of different opinions here.
    I mean should some products and services be excluded as 
they are in the current retail economy from sales tax or 
professional services? You know. How are you concerned that 
implementation of VAT will be no different than our current Tax 
Code in terms of complexity and compliance issues that exempt 
certain income and taxes others. I'd just like to throw it open 
to the group there.
    Mr. WHITE. That's a very good question; and, as I 
mentioned, the European VATs are quite complex. They've got a 
lot of exemptions, special rates, other tax preferences or tax 
expenditures built in, so many that they lose roughly half the 
revenue that they could have collected from a simpler version. 
So that the overall point is that just like an income tax, you 
can add a lot of complexity with exemptions, deductions, 
special rates, those kinds of----
    Mr. DAVIS. So hypothetically you could have a simpler VAT 
with a lower rate and actually make more money.
    Mr. WHITE. New Zealand is an example of a country that's 
got a much simpler VAT; many fewer exemptions, fewer special 
rates.
    Mr. DAVIS. Anybody else?
    Mr. GRAETZ. Mr. Davis.
    Mr. DAVIS. I will come back to you, Mr. Johnson. We will 
get Mr. Graetz and come back to you briefly.
    Mr. GRAETZ. We have been looking at this very carefully, 
and the VATs to use as your models are Singapore, South Africa, 
New Zealand, Australia and Canada.
    Talking about Europe is non-sensical, because Europe's VATs 
are ancient and because of the European treaties. They can't 
change them without agreement throughout Europe, so Europe is 
really not the right comparison. These are all modern value 
added taxes. They are very broad-based. They are very simple. 
Their compliance costs are relatively low.
    Singapore has a very large exemption for small businesses. 
If I were recommending an exemption for small businesses, I 
would say that any business under $500,000 of receipts doesn't 
need to come into the VAT, unless it elects to come into the 
VAT. Some of them will elect to come in because they will get 
refunds, because of where they are in the chain. I agree with 
Mr. Johnson, Professor Johnson, that the financial services 
problem is a big one, under many VATs.
    Financial services transactions with businesses are over 
taxed, and their transactions with customers, with retail 
customers, are under-taxed, and we have come up with some 
solutions that we think will work on that front. These problems 
of implementation are solvable and the advantages of having a 
value added tax are large and eliminating, if we can eliminate 
a large part of the income tax in the process and get our 
corporate rate down.
    You can't solve the corporate income tax problem in this 
country by tinkering with the international tax rules. It's not 
going to work.
    Mr. DAVIS. I am sorry, Mr. Johnson, but the clock has run 
out on me there. Hopefully, someone else will pick up on this.
    Chairman CAMP. Mr. Neal is recognized.
    Mr. NEAL. Thank you, Mr. Chairman.
    Dr. Altshuler, the relationship of the VAT or proposed VAT 
and exports is a lot of conflicting advice on whether or not 
the VAT actually would help our exporting industries.
    Ms. ALTSHULER. Well, I think as you know we economists 
don't think that the border adjusting attacks will have an 
affect in the long-term on trade. What we think will happen is 
that there'll be exchange rate adjustments that will take away 
any advantage or disadvantage that we would gain from adopting 
a board or adjustable tax.
    That said, it's possible that during the transition period 
there could be advantages or disadvantages in terms of trade; 
and, if you were to do what I think we would all advise that 
you should not do and adopt a VAT that has lots of holes and 
lots of exemptions, you'd create a system in which there would 
be some disadvantages and advantages in terms of export and 
import. But, again, a reason to adopt the VAT is not because it 
will be a positive for trade or negative for trade.
    Mr. GRAETZ. An export driver. Can I make just one quick 
comment on that, Mr. Neal? Not all exchange rates are moving 
freely. As we know, China does not, and exempting exports and 
taxing imports from a country like that might make a real 
difference, in addition to its other advantages and compliance.
    Mr. CARROLL. I would just add to that. The economic 
theories would suggest that it's the relative price levels 
between nations that would adjust for countries where there are 
flexible exchange rates that would happen through the flexible 
exchange rates, for countries with fixed exchange rates or 
where they're pegged. It would probably happen in other ways, 
but it would happen much more slowly. There was a lot of 
inflexibility in labor contracts and so on, but I would agree 
with Rosanne that it would still happen, but it would happen 
more slowly.
    And I would just reiterate one of the points that Rosanne 
made, that border adjustments could have significant 
differential effects if you were to enact a narrow base such as 
they have in Europe, or even as they have at the state level in 
this country through kind of the partial sales taxes that are 
in effect.
    Mr. NEAL. Mr. Chairman, given DOHA and the fact we have 
three pending bilateral agreements, I think this would be worth 
pursuing as we go forward. So I think these panels have been 
helpful, and I think something along those lines could be more 
helpful.
    Chairman CAMP. All right. Thank you.
    Ms. Jenkins is recognized for 3 minutes.
    Ms. JENKINS. Thank you, Mr. Chairman. Thank you all for 
being here.
    I think most of us in this room acknowledge that the 
current Tax Code is broken. Pro growth tax system should be 
simpler, more efficient, fair. A simple Tax Code is essential 
in my belief to promoting economic efficiency and reducing the 
interference of taxes with families' everyday business making 
decisions. It seems that the layering of a VAT tax in addition 
to this already complex personal and business tax would only 
produce an ever more burdensome Tax Code.
    Instead of promoting widespread economic growth promised by 
fundamental tax reform, it would promote two sectors above all 
others: accountants and tax lawyers. That continues to be 
highly contentions and controversies over virtually every 
aspect of that includes a laundry list: the determination of 
what activities fall within the scope of that; the delineation 
of exempt and zero-related supplies; the characterization of 
supplies and determination of where they're provided; treatment 
of the composite supplies; apportionment of input taxes to tax 
exempt supplies as VAT tax is immune from controversy. I'd just 
like you all to comment briefly or elaborate on which aspects 
of that tend to invite controversy and litigation, and are 
there any particular cases that should caution the United 
States from following other countries in an acting VAT.
    Mr. GRAETZ. Well, I would say two things. One is I do think 
if you have a broad base, these issues are much, much simpler. 
New Zealand and those countries, Singapore, are not having a 
great controversy over their value added taxes; and, if you 
used the revenues from a value added tax to remove 150 million 
Americans from the income tax and you use it to get a 15 
percent rate on income above $100,000 and 25 percent above 
$200,000, which is distributionally neutral and can have a 15 
percent corporate income tax rate, we will have put the United 
States in a much better position, and I think you'll find that 
the amounts of money that are being spent by businesses on tax 
planning and tax advice, this is the only sector in which the 
current system creates jobs is the tax planning, tax return 
preparation, tax advice sector. And I think a value added tax 
from all experience, if it is used to buy down the income tax 
significantly, would make a big difference, a positive 
difference.
    Ms. JENKINS. Thank you, Mr. Chairman.
    Chairman CAMP. Thank you. Ms. Black is recognized.
    Mrs. BLACK. Thank you, Mr. Chairman, and I know that my 
time is very limited with just 3 minutes, but having just had 
the presentation prior to you on the FairTax, and what I would 
like each of the panelists to do as briefly as you can with a 
little comment on why you would support or not support the 
difference between the VAT and the FairTax.
    So maybe we could start on this end, since Mr. Johnson 
seems to be left out. Mr. Johnson, let's do that and go down.
    Mr. JOHNSON. Yeah. I actually would echo again what 
President Bush's advisory panel said, which is they came out 
strongly against FairTax or national sales tax. So they were 
split, but they were rather more favoring the VAT in terms of 
how you administer the system, in terms of the compliance risks 
that you have, in terms of the burden that you have on small 
business; and, of course, in terms of the inherent regressivity 
and how easy it is to do with it. You are creating a massive 
new entitlement plan with the prebates. Why would you want to 
do that when we have enough difficulty managing our existing 
structure?
    Mrs. BLACK. Thank you. Mr. Mitchell.
    Mr. MITCHELL. And if we could repeal the 16th Amendment and 
put it so deep under the ground that no Supreme Court could 
possibly let an income tax ever spring up to haunt us again, 
then either a VAT or some sort of national retail sales tax 
would be a less destructive way of raising revenue. That's not 
going to happen, and therefore I hope that we keep a VAT or a 
national retail sales tax deep under the ground.
    Mrs. BLACK. Thank you. Mr. White.
    Mr. WHITE. As I noted, both a sales tax and a VAT are 
consumption taxes, so the economics is the same for the two. 
The administration of them is quite different; and so you've 
got different issues concerning compliance, non-compliance, 
risks of non-compliance.
    That would have to be addressed. I would note that with a 
sales tax, our experience has been with relatively low rate 
sales taxes. I don't think around the world there's been any 
experience with very high rate sales taxes and the compliance 
risks there.
    Mrs. BLACK. Thank you. Mr. Carroll.
    Mr. CARROLL. I would make the same point. I think one of 
the two major differences that I would highlight, some of which 
have already been made, one is the collection of a retail sales 
tax that is focused at the retail level. That makes evasion a 
much more significant problem, and so that is one area.
    The second point I would make is it is probably the case 
that would be much more likely to have base erosion with the 
retail sales tax than with the value added tax, and it is much 
more likely that the experience that we would follow over time 
would be more typical of what we have seen at the state level 
where there has been a very significant erosion of the base by 
excluding various consumption items.
    Maybe the third point I would make, it is much more likely 
we would tax, we would include some intermediate inputs in a 
sales tax base but not in a VAT, and that would lead to 
cascading and undermine the efficiency benefits of the sales 
tax.
    Mrs. BLACK. Time is running out. Ms. Altshuler.
    Ms. ALTSHULER. I'll echo what everybody else said. Well, 
not what everybody else said, but I was the chief economist for 
the tax reform panel. We looked closely at the FairTax. We 
looked fairly at the FairTax. The FairTax is not a FairTax and 
it just doesn't work.
    Chairman CAMP. All right. Thank you.
    Mr. Herger is recognized for 3 minutes to conclude this 
session.
    Mr. HERGER. Thank you very much, Mr. Chairman. I want to 
thank our witnesses. I feel the consumption part tax of the VAT 
is very admirable. I have some very strong concerns about the 
lack of transparency, and also the fact that it hides the true 
cost of government from voters.
    Mr. Mitchell, you mentioned in your testimony that value 
added taxes are typically built into the price of goods and 
services. Can you elaborate on why this is a problem?
    Mr. MITCHELL. If the tax system is supposed to be the price 
of government, and you want prices to be transparent so voters 
can understand what they're getting and whether it is worth it, 
then you want a tax system that is very visible. You don't want 
it hidden. And we certainly have seen in Europe--I included a 
chart that I took out of a European Commission report that just 
was released, showing that just in the last couple of years 
alone value added tax rates have jumped by something like two 
percentage points.
    And, of course, because they're such broad-based taxes, 
that is a huge increase and a burden on the people of Europe. 
And one of the reasons why that tax is always so easy to raise 
is precisely because it is hidden. And one of my concerns is if 
we put in a VAT at five or ten percent in the U.S., as we get 
further and further into this entitlement tsunami, we will try 
to keep up with that wave by just raising the VAT rate one or 
two percentage points every other year. And, of course, we will 
make the same mistake that the Europeans made, higher taxes, 
following higher spending, leading to more stagnation, leading 
to higher deficits and debt.
    As I said in my oral testimony, I don't want a copy of the 
fiscal policy of countries that are on the verge of collapse, 
especially when we have--if want a single rate consumption 
based tax, we already have a harabuska system that would be 
much easier and safer to implement.
    Mr. GRAETZ. Mr. Herger, Canada separately states their 
value added tax just like a retail sales tax. There's no reason 
why in legislation if you want people to know what they're 
paying. You just don't have it separately stated, just like a 
retail sales tax. And Canada's spending has gone down and its 
rate actually went down. So, you know, there are ways to 
control these issues.
    Mr. HERGER. I admire what Canada has done. I also remember 
back in the days when I am old enough to remember when you 
bought gasoline, and you had when you filled your tank exactly 
how many cents of tax you were paying. We don't see that 
anymore. My concern is future congresses that will hide it. So, 
therefore, again I share your concern, Mr. Mitchell. I thank 
you. It could be right if we had the perfect people in. 
Regrettably, we more times than not do not have that be the 
case. But, Mr. Chairman, again I thank you for this hearing, 
and I thank each of the witnesses.
    Chairman CAMP. All right. Thank you. I heard the bells. We 
are having a series of votes, and we are having a series of 
votes on the floor. So I want to thank you all.
    Members who did not get a chance to question may want to 
submit some questions to you in writing. If you would be kind 
enough to respond to those promptly, we could make those part 
of the formal hearing record. And I would very much appreciate 
you all being here. This was a very strong panel, and I really 
appreciate the good information that you brought to the 
committee.
    Thank you. This hearing is now adjourned.
    [Whereupon, at 1:20 p.m., the committee was adjourned.]

    [Submissions for the Record follow:]






                                 
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