[Joint House and Senate Hearing, 112 Congress]
[From the U.S. Government Publishing Office]
OVERVIEW: REVENUE OPTIONS
AND REFORMING THE TAX CODE
=======================================================================
HEARING
before the
JOINT SELECT COMMITTEE
ON DEFICIT REDUCTION
CONGRESS OF THE UNITED STATES
ONE HUNDRED TWELFTH CONGRESS
FIRST SESSION
__________
SEPTEMBER 22, 2011
__________
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JOINT SELECT COMMITTEE ON DEFICIT REDUCTION
JEB HENSARLING, Texas (R) Co-Chair
PATTY MURRAY, Washington (D) Co-Chair
XAVIER BECERRA, California (D) JON KYL, Arizona (R)
FRED UPTON, Michigan (R) MAX BAUCUS, Montana (D)
JAMES CLYBURN, South Carolina (D) ROB PORTMAN, Ohio (R)
DAVE CAMP, Michigan (R) JOHN KERRY, Massachusetts (D)
CHRIS VAN HOLLEN, Maryland (D) PAT TOOMEY, Pennsylvania
(R)
REP. JEB HENSARLING (R-Texas), Co-Chair
SEN. PATTY MURRAY (D-Wash.), Co-Chair
SEN. MAX BAUCUS (D-Mont.) SEN. JON KYL (R-Ariz.)
REP. XAVIER BECERRA (D-Calif.) SEN. ROB PORTMAN (R-Ohio)
REP. DAVE CAMP (R-Mich.) SEN. PAT TOOMEY (R-Pa.)
REP. JIM CLYBURN (D-S.C.) REP. FRED UPTON (R-Mich.)
SEN. JOHN KERRY (D-Mass.) REP. CHRIS VAN HOLLEN (D-Md.)
Mark Prater, Staff Director
Sarah Kuehl,Deputy Staff Director
(ii)
C O N T E N T S
__________
OPENING STATEMENTS
Page
Hensarling, Hon. Jeb, a U.S. Representative from Texas, co-
chairman, Joint Select Committee on Deficit Reduction.......... 1
Murray, Hon. Patty, a U.S. Senator from Washington, co-chairman,
Joint Select Committee on Deficit Reduction.................... 3
WITNESS
Barthold, Thomas A., Chief of Staff, Joint Committee on Taxation. 4
ALPHABETICAL LISTING AND APPENDIX MATERIAL
Barthold, Thomas A.:
Testimony.................................................... 4
Prepared statement........................................... 65
Responses to questions from committee members................ 151
Hensarling, Hon. Jeb:
Opening statement............................................ 1
Prepared statement........................................... 180
Murray, Hon. Patty:
Opening statement............................................ 3
Prepared statement........................................... 182
(iii)
OVERVIEW: REVENUE OPTIONS
AND REFORMING THE TAX CODE
----------
THURSDAY, SEPTEMBER 22, 2011
United States Congress,
Joint Select Committee
on Deficit Reduction,
Washington, DC.
The committee met, pursuant to call, at 10:08 a.m., in Room
2123, Rayburn House Office Building, Hon. Jeb Hensarling [co-
chairman of the joint committee] presiding.
Present: Representatives Hensarling, Becerra, Camp,
Clyburn, Upton, and Van Hollen.
Senators Murray, Baucus, Kerry, Kyl, Portman, and Toomey.
Chairman Hensarling. The committee will come to order.
One of the preliminary announcements, the chair wishes to
again remind our guests that any manifestation of approval or
disapproval, including the use of signs or placards, is a
violation of the rules which govern this committee; and the
chair wishes to thank our guests in advance for their
cooperation and compliance.
Today's hearing of the Joint Select Committee on Deficit
Reduction is entitled Revenue Options and Reforming the Tax
Code. We want to welcome our witness, Dr. Tom Barthold, the
Chief of Staff for the Joint Committee on Taxation.
Dr. Barthold, thank you for your time. Thank you for your
service. We look forward to your testimony. I suppose, more
precisely, testimonies.
We may have set a Congressional first today with two panels
and one witness. We will have our first testimony by our
witness on business tax reform. There will be a round of
questions by our members. Then we will have a second testimony
by our witness on individual tax reform.
Members of the joint committee have agreed to limit opening
statements to those of the two co-chairs. So at this time I
will recognize myself for an opening statement.
OPENING STATEMENT OF HON. JEB HENSARLING, A U.S. REPRESENTATIVE
FROM TEXAS, CO-CHAIRMAN, JOINT SELECT COMMITTEE ON DEFICIT
REDUCTION
Chairman Hensarling. In last week's testimony regarding the
drivers of our structural debt, we heard Congressional Budget
Office Director Doug Elmendorf say that, although government
revenues are certainly temporarily down, he expects them to
again reach their historic norm of a little over 18 percent of
GDP in short order. However, he reminded us that spending is
due to explode to over 34 percent of GDP in the years to come,
that principally driven by entitlement spending programs, some
of which are growing at two, three, and four times the expected
rate of growth of our economy.
As I have maintained since the first meeting of the Joint
Select Committee, there are many actions that this committee
can take that would be helpful in addressing our structural
debt crisis. However, we simply cannot and will not succeed
unless our primary focus is about saving and reforming social
safety net programs that are not only beginning to fail, many
of their beneficiaries but simultaneously going broke. If we
fail to do this and choose to solely or primarily address our
debt crisis by increasing the Nation's tax burden, I fear the
consequences.
Former CBO Director Rudy Penner, in testimony before the
Simpson-Bowles Commission, of which a number of us serve,
stated, ``the U.S. total tax burden, which is considerably
below the OECD average, would be higher than today's OECD
average by mid-century; and within a few years after that we
would be the highest taxed nation on Earth.''
Also appearing before Simpson-Bowles was former CBO
Director and current Social Security and Medicare trustee
Robert Reischauer, who stated, ``the longer we delay, the
greater risk of catastrophic economic consequences. The
magnitude of the required adjustments is so large that raising
taxes on the richer corporations, closing tax loopholes,
eliminating wasteful or low-priority programs and prohibiting
earmarks simply won't be enough.''
Finally, when he served as CBO Director, Dr. Peter Orszag,
in a letter to Budget Committee Chairman Paul Ryan, stated,
``the tax rate for the lowest tax bracket would have to be
increased from 10 percent to 25 percent. The tax rate on
incomes in the current 25 percent bracket would have to be
increased to 63 percent. And the tax rate of the highest
bracket would have to be raised from 35 percent to 88 percent.
The top corporate income tax rate would also increase from 35
percent to 88 percent.''
So the ability, wisdom, and consequences of addressing our
debt crisis through tax increases will continue to constitute a
rigorous debate by our committee. My hope, though, is that we
may be able to achieve rigorous agreement that fundamental tax
reform, even just limited to American businesses, can result in
both revenue from economic growth for the Federal Government
and more jobs for the American people. Seemingly, both the
President of the United States and the Speaker of the House
agree.
Most Americans agree that there is something fundamentally
wrong with our Tax Code when a small business in east Texas
pays 35 percent and a large Fortune 500 company pays little or
nothing. There is also something fundamentally wrong with our
Tax Code when an American company pays 35 percent and its chief
European competitor only pays 25 percent. We should seize the
opportunity and correct this for the sake of both bringing in
more revenues for economic growth and addressing our jobs
crisis at the same time.
At this time, I will recognize my co-chair, Senator Patty
Murray, for her opening statement.
[The prepared statement of Chairman Hensarling appears in
the appendix.]
OPENING STATEMENT OF HON. PATTY MURRAY, A U.S. SENATOR FROM
WASHINGTON, CO-CHAIRMAN, JOINT SELECT COMMITTEE ON DEFICIT
REDUCTION
Co-Chair Murray. Well, thank you very much, Co-Chairman
Hensarling; and I want to thank our witness, Thomas Barthold,
for taking the time to be here today, as well as all of our
colleagues and the members of the public and the audience that
are watching on television.
We all know the American people are looking at this
committee with great optimism but also with real skepticism.
They have heard the partisan rhetoric that has dominated our
Nation's capital recently; and, quite frankly, they are tired
of it. When it comes to this committee and its work, they don't
care how it impacts one party's fortune versus the other. They
don't care how it impacts one special interest versus another.
Their only question to us is how will it impact their life.
They want to know if we can help their spouse or family member
or neighbor get back to work. They want to know if we can make
a real dent in the deficit so their children are able to
compete and succeed and can it be done in time for families
that are losing faith with each passing day.
Answering those questions is going to take honesty from
every member of this committee, honesty with one another and
honesty with the American people about what it is going to
take. It is going to mean looking at every part of our budget
and realizing that there is spending that has grown too fast,
job investments that still need to be made, entitlements that
are expanding too quickly, and a Tax Code that has become
riddled with corporate giveaways and special interest carve-
outs for the richest Americans. But more than anything else it
is going to take the shared realization that solving our
deficit crisis and putting Americans back to work will mean
taking a truly balanced approach.
Now, to this point, in Congress we have begun the process
of addressing spending. In fact, the Budget Control Act that
established this committee cut more than $1 trillion from our
National deficit, and that was on top of caps to appropriations
bills that had already been put in place.
But as the overwhelming majority of American families and
economists and every serious bipartisan commission that has
examined this issue has agreed spending cuts alone are not
going to put Americans back to work or put our budget back in
balance. We have to address both spending and revenue.
So I am looking forward to hearing from Mr. Barthold about
the tax reforms and revenue this committee can explore. I am
interested in hearing about the loopholes and tax expenditures
my colleagues on both sides of the aisle have agreed are too
often wasteful and market distorting but are options for
broadening the base and lowering the rate, boosting the economy
and bringing in additional revenue and about keeping our Tax
Code truly progressive.
Revenue and the Tax Code is just one side of the ledger,
but it is an important one, and it needs to be part of a
balanced and bipartisan plan we owe it to Americans to come
together on this committee and pass. I am pleased this
committee has begun the hard work of negotiations over the last
few weeks, and I am hopeful that we can come together and
deliver the results that Americans deserve: a balanced plan
that helps get our economy back on track, gives businesses the
stability to hire again, and ensures that middle-class families
and the most vulnerable are not bearing the burden of balancing
our budget alone.
Thank you very much.
[The prepared statement of Co-Chair Murray appears in the
appendix.]
Chairman Hensarling. I thank my co-chair; and at this time,
Dr. Barthold, I wish to yield to you for your testimony on
business tax reform. You are recognized.
STATEMENT OF THOMAS A. BARTHOLD, CHIEF OF STAFF, JOINT
COMMITTEE ON TAXATION
Mr. Barthold. Thank you, Mr. Hensarling, Ms. Murray, and
members of the Joint Select Committee. I thought I would use
the time on this first panel to try and give you a very brief
overview of the Federal tax system with an emphasis on business
taxation under our system. My submitted testimony provides
substantially more detail than, of course, I will be able to go
into here.
I am going to concentrate on just a packet of slides that
has been placed at each of your chairs.
If you turn to the first page of that, Figure 1 really just
tells you that the Federal revenue system in the United States
is comprised of five tax sources, of which the individual
income tax is the largest, the payroll taxes are the second,
corporate income tax is the third largest component, followed
by a series of excise taxes and the estate and gift tax.
Figure 2 then documents for you that in fact this has been
the case. This has been the basic structure of the U.S. tax
system for many, many, many, many years. The one broad trend
that you will see in Figure 2 is that employment taxes have
grown in importance largely with the expansion of the Social
Security system through--over the decades and Medicare, and the
importance of the corporate income tax has declined since the
post-World War II era.
Figure 3 really just documents I think a point that Co-
Chairman Hensarling made that Doug Elmendorf presented to you a
week ago, and this is sort of the history of Federal receipts
as a percentage of the economy.
Looking over the next decade, there is some significant
changes in the tax system scheduled to occur with the
expiration of many current tax provisions after 2011 and then
again after the close of 2012; and Figure 4 shows you projected
revenues by source, the increasing revenues from the individual
income tax, the payroll tax, and the corporate income tax, et
cetera, for the debt next decade.
And just to scale that to the economy, Figure 7 provides
the same information scaled to GDP.
Now, these prior charts that I have turned through very
quickly divided the tax world into an individual income tax and
a corporate income tax. But I think it is important for us to
recognize that many business enterprises in the United States
are not C-corporations, and so that means they are not subject
to the corporate income tax. And in fact a significant amount
of business income is taxed directly to the individual return.
And so what Figure 6 shows you is just the number of
business entity types and how it has changed over the past 40
years or so, with Figure 7 providing particular detail on the
growth of S-corporations and partnerships in comparison to C-
corporations over the past 30 some years. As you can see in
Figure 7, these pass-through entities, these alternative
business forms, this includes State-chartered LLCs with which I
know many of you are aware from your constituents, have become
increasingly important in terms of the number of business
entities.
But it is not just number of entities, of course, when we
look at the tax system. It is the amount of revenue. And Figure
8 gives you a very quick look at the growth of net income
reported by these entities and reported by C-corporations,
again over the last 30 years. What this chart shows is the
relative growth of non-C-corporate business income as a
percentage of GDP.
The same information is really sort of emphasized in the
projections that we are making for the coming decade. When you
look at Figure 9, we project that the sum of income reported to
sole proprietorships, to S-corporations and partnerships and
other pass-through business forms will grow by 80 percent over
the coming decade, comprising a larger and larger share of
taxpayers' adjusted gross income.
Now, that said, it is also important to have a very good--I
guess it will be very brief in this case--overview of how we
tax business income in the United States. And the rules for
taxing business income, whether it be through an S-corporation
or a C-corporation, are really essentially the same. We look at
the gross income of the enterprise less allowable deductions.
Allowable deductions include all ordinary and necessary
business expenses such as salaries and wages, the fringe
benefits for such things as retirement and health and other
fringe benefits that employers provide employees, the cost of
raw materials, advertising expenses, and an important expense
for many business enterprises is the deduction for interest
expense for borrowed capital. It is probably important to note
in this case that interest expense is deductible to businesses,
but dividend payments, another form in which capital invested
is rewarded, is not deductible.
We provide rules for cost recovery for long-lived assets,
referred to as the modified accelerated capital recost system
makers. In other words, it accounts for the depreciation, the
economic loss in value from long-lived assets.
Now, in addition, currently, there is a special deduction
related to domestic production activities. This has the effect
of lowering the effective tax rate on qualifying activities.
Taxes on business income apply to the U.S. taxpayer's worldwide
income wherever it is earned, but certain active income earned
abroad may have its tax deferred until the income earned abroad
is repatriated to the United States.
Currently, the top rate of tax for C-corporations, which
applies to almost all large corporations, so just about any
corporate name you can think of, the statutory rate is 35
percent. There are smaller--there are lower tax rates for
smaller levels of income.
If you turn to Figure 12 in the packet before you it shows
you a brief history of corporate income tax rates, and so you
can see the 35 percent rate. The number inside the little
bubble tells you the income level at which that rate becomes
applicable, and so you can see both the bracket level as well
as the rate and how that has changed since the mid-1970s.
Now, the co-chairman asked me to take a couple of moments
and introduce the concept of tax expenditures and how they
might be important, both in the context of business income and
the individual income tax. The detailed presentation provides a
large list and shows you some of the evolution of tax
expenditures through time. Just to be clear, the notion of a
tax expenditure is relative to sort of a theoretically pure
income tax, what might be considered a special exclusion, a
special rate, a special credit, or a special deduction.
And Table 5, the next page in your packet, shows you the
largest tax expenditures as calculated by my staff colleagues
for corporations encompassing the period 2010. We are
projecting over 2010 to 2014, and you can see the 10 largest
tax expenditure items are an estimate of those items.
One point I would like to note is that, although this list,
this top 10 list, when you look in the detailed presentation,
has changed over time, two items have been in the list of top
10 expenditures every time we have done the analysis since
1975, and that is some form of accelerated depreciation and the
exclusion of interest on general purpose State and local debt
held by business entities.
It has also been the case that the reduced rates for
smaller levels of corporate income have been a feature of our
tax expenditure analysis and our corporate tax system every
year since the early 1980s. And generally also since the early
1980s one of the largest tax expenditures has always been
either a deduction or a tax credit or you can take the sum of
the two for research expenses.
I think at this point I have probably given you a very,
very quick and rough overview, but it is probably time for me
to turn it over to the committee so that you can ask specific
questions, and I would be happy to answer any question.
Thank you very much.
[The prepared statement of Mr. Barthold appears in the
appendix.]
Chairman Hensarling. Thank you, Dr. Barthold, and we look
forward to your second testimony as well.
The co-chair will yield to himself for the first round of
questions.
On your Figure 3, Federal receipts as a percentage of GDP--
as I understand it we, unfortunately, do not have these slides
for our monitors--but what I appear to see is a chart that
tells me that essentially since World War II that our Federal
receipts as a percentage of GDP have been somewhere between 15
and 20 percent; and, as I understand it, the average is about
18, 18\1/2\ of GDP in the post-war era?
Mr. Barthold. That is correct. Since 1950, the average is
actually 17.9 percent; and since 1971 the average has been 18
percent. So it has been----
Chairman Hensarling. Okay. So roughly 18 percent, and it
has operated within a fairly, I guess, relatively speaking,
narrow band.
It is also my understanding that during this same time
period that we have seen marginal rates go as low as 28 percent
and as high as perhaps 90 percent perhaps in the late 1950s,
early 1960s, is that correct?
Mr. Barthold. You are referring to the rates of the--the
top rate.
Chairman Hensarling. The top marginal bracket in the
income.
Mr. Barthold. And I actually have a--I think I have a nice
picture of that for the second panel. But, yes, sir, you are
correct.
Coming out of World War II and then during the Korean War,
the top marginal Federal tax rate on the individual income
tax--and this applied to ordinary income. There was a special
treatment of income from the sale of capital assets--but was as
high as 90 percent. It was then reduced to 70 percent in the
Kennedy round of tax cuts in the early 1960s. The marginal tax
rate individual income then was reduced further. In the mid-
1970s, we made a split between earned and unearned income, with
the top rate on unearned income remaining at 70 percent and on
earned income dropping to 50 percent.
Chairman Hensarling. Dr. Barthold, if I could--and I didn't
see a chart here--but would the same correlation prove roughly
true for corporate tax receipts?
Mr. Barthold. We did have--one of the figures, Figure 2,
sir, showed the Federal tax receipts as a share of total
receipts.
Chairman Hensarling. But not as a share of GDP.
Mr. Barthold. I have a supplemental table.
Chairman Hensarling. But to some extent does this not
suggest that there are limits to the amount of revenue that are
going to be gained by increases in marginal brackets if they
have ranged from anywhere on the personal level from 28 to 90
percent. We still see roughly that revenues appear to be
falling within this particular band. And so that was my
question. And at some time I would like to see, if we could,
that correlation of the corporate to GDP.
It is my understanding that--from data from the Joint
Committee on Taxation--that roughly 50 percent of small
business profits are taxed at the top two individual rates, is
that correct?
Mr. Barthold. I believe we have published that number, sir,
yes.
Chairman Hensarling. Okay. And one of your charts also
shows that there has been a large increase, I believe, in--I am
trying to find the chart--in the number of non-C-corp entities.
I guess it is your Figure 6, perhaps.
Mr. Barthold. Yes. In the packet before you, Figure 7----
Chairman Hensarling. Oh, I am sorry. It is Figure 7. So
certainly since the late 1970s there has been a huge increase
in essentially what are known as pass-through entities?
Mr. Barthold. That is correct, sir.
Chairman Hensarling. So is it fair to say then that
increases in the top two individual tax rates could impact--
again, by your testimony--50 percent of small business
profits--I don't know how many individual small businesses that
is. Your Figure 7 would suggest that, again, we have a large
number of pass-through entities that at least potentially could
be impacted by that.
The next question I have really has to do with the pro-
growth aspect that could be derived from some kind of
fundamental business entity tax reform. I guess also to some
extent your Figure 7 would suggest that tax reform in the realm
of C-corps alone may prove problematic unless you deal with
pass-through entities as well. Is that a fair----
Mr. Barthold. Well, what I was trying to emphasize was that
when we think of business income it is not just taxed in the
Federal system through the tax on C-corporations, that there is
a lot of business income that is reported on individual
returns. But the concepts in terms of how we measure that
income, the depreciation schedules, the treatment of research
expenses, advertising expenses, are the same regardless of the
entity cut.
Chairman Hensarling. My time is about to wind down. I want
to try to get in one more question.
I am curious about the type of model that JCT would use and
what type of academic studies that have been researched
regarding the potential pro-growth aspects of fundamental
business entity tax reform.
I have seen a lot of information come over the transom.
There was a 2010 Milken Institute Jobs for America report that
concluded that taking our U.S. corporate tax rate to the OECD
average of 25 percent could create 2.1 million private-sector
jobs by 2019. I have seen a study by the Journal of Public
Economics from a few years ago that found that a 10 percentage
point reduction in U.S. corporate tax rate could boost GDP
growth per capita by 1.1 to 1.8 percent per year. Can you give
us a little bit more information concerning what model you use
and how is it derived? What other studies have you looked at
that might suggest to the committee the positive pro-growth
aspects of fundamental business entity tax reform?
Mr. Barthold. How long do I have, sir?
Chairman Hensarling. Unfortunately, my time ran out. We
will give you about 30 seconds, and then I will yield to my co-
chair.
Mr. Barthold. Well, I will give it very quickly.
We do multiple types of modeling for the members of
Congress. The basic modeling that we do is based off of
microsimulation models, and it is against the Congressional
Budget Office macroeconomic baseline. And when we do that we
look at many different changes in behavior in terms of choices
that either individuals or businesses make. But for consistency
in reporting to Congress and subject to the budget resolutions,
we do not include a feedback effect in terms of this
legislative package will increase or decrease the growth rate
of the economy.
So for the past near decade now under House Rule 13 we have
been providing, as part of House Ways and Means Committee
reports on tax bills, supplemental information of macroeconomic
analysis; and we have three different primary macroeconomic
models that we use to emphasize different assumptions and to
emphasize different features that people think are important in
the macroeconomy. And in that analysis we look at the effect on
changes in labor force participation rates, in savings rates,
in cross-border capital flows, and changes in investment
incentives and how businesses respond----
Chairman Hensarling. Dr. Barthold, if I could, I am setting
a poor example here. So at this time allow me to my co-chair,
Senator Murray.
Senator Kerry. Mr. Chairman, I hope we are not being a
prisoner of the clock where if any member asks a question--I am
here to learn, and I hate to be truncating important data with
such rigidity and ask that we allow the witness to answer.
Representative Camp. Mr. Chairman, I would just say, having
chaired committees, if we don't stay on the clock, we will
never get through everyone's opportunity to have more than one
chance at questioning. So I appreciate what the Senator is
saying, but we are going to have to keep this moving. And we
can always follow up with Mr. Barthold after. He is a
government employee, and we can always talk to him after this
hearing.
Chairman Hensarling. We will have at least two rounds of
questioning per member and two panels, so I appreciate that.
And, again, I am not setting a particularly good example. And
if other members wish to have the witness explore this
particular question further they certainly can, but at this
time allow me to yield to my co-chair, Senator Murray.
Co-Chair Murray. Thank you very much.
And thank you again, Dr. Barthold. I appreciate your
testimony.
This hearing is divided into corporate and individual tax
sections, but I really wanted to start with the key issue
facing millions of Americans today, and that really is jobs.
We have heard a great deal about the negative impact the
current economic situation and high unemployment rate has on
the economy both in terms of demand for social services but
also in reduced tax revenue. We have also heard this committee
could have a positive effect on the fiscal situation of this
country if we would support pro-growth policies in the short
run, even if they result in greater spending, while promoting
gradual and real changes to spending and revenues in the medium
and the long term.
In terms of taxes, last week CBO Director Elmendorf
testified that CBO had considered various tax proposals and
weighed their effectiveness in stimulating the economy. He
mentioned reductions in payroll taxes as among the most
powerful, followed by expensing of investment costs for
businesses, and then followed below that by just a little bit
broader reductions in income taxes.
I wanted to ask you if JCT has performed a similar analysis
of any kind and whether or not, if you did, your conclusions
match or differ from CBO.
Mr. Barthold. Thank you, Senator.
We have not tried to replicate work that the Congressional
Budget Office did, but we have, in a number of different
projects for the Ways and Means Committee and other members of
the tax-writing committees, looked at some of the effects of
payroll tax reductions expensing provisions. And so let me just
address the way we approach that, and I think the Congressional
Budget Office's approach is similar.
Expensing. Okay, expensing works to essentially reduce the
cost of capital, reduce the cost of acquisition of new
equipment by businesses. So it increases the after-tax return,
makes it more attractive to make those investments. When we do
our macroeconomic analysis, then we show that that leads to an
increase in investment.
Now, what becomes important also in that analysis is what
is the context of the overall legislative package. Is it just
providing expensing relief for expensing of capital equipment
for a large number of years? Is it offset in some way?
It is also important to think about how the Fed might react
in terms of its policy for trying to moderate inflation. We
don't--of course, right now, in the current environment, we
don't think of inflation as a real--real problem. So as a
general statement, yes, expensing can be a very powerful pro-
investment incentive.
You mentioned payroll tax. We have looked at payroll tax.
It usually is the effect that it depends are we talking--and
this would be true of expensing, also--is it a permanent
reduction in the payroll tax or a temporary reduction in the
payroll tax? Is it offset in some way? So there is those same
general questions.
But then the principle, of course, is that if it reduces
the payroll tax and increases the after-tax wage that has two
effects. There is a cash flow effect. There is a short-run
stimulus in terms of aggregate demand, more money in my pocket.
I can potentially spend more, but it also makes it more
attractive for me to work longer hours.
Now, me personally, you already have me work fairly long
hours, so that wouldn't be a personal effect. But it could mean
that my wife might decide to, as she is currently not in the
labor force, but maybe she would say, well, there is a better
after-tax return to being in the labor force. And so labor
supply would increase. And that is pro growth.
But it is important to think in terms of the overall
legislative package as well. We can't just say because a
package has this in it that automatically you get one result
all the time.
Co-Chair Murray. Well, let me talk on corporate tax reform.
As you well know, the U.S. corporate tax rate is 35 percent at
the Federal level, 39 percent when the average State corporate
tax is included. The average rate for other industrial
countries of OECD is 25 percent, and only Japan has as high a
rate.
I think most people do agree that such high tax rates make
the United States a less attractive place in which to do
business. Our corporate Tax Code also distorts business
decisions making. Instead of making and improving their widgets
or hiring new people, they spend too much time and effort
devising business strategies aimed simply at tax avoidance. I
think we know that all of that reduces the number of jobs that
are created here at home, where we are all focused, and puts
greater strain elsewhere on us in terms of government spending.
Companies in my home State have consistently been telling
me that they care less about keeping a particular tax
expenditure, even when they benefit from it, than having a
predictable system of taxes with lower marginal rates. Right
now, they don't necessarily want to game the system to pay a
lower rate. They will use every loophole that is available to
them, obviously. But they tell me that they would rather focus
their efforts on making things and selling products around the
world.
So I think we all agree that our corporate Tax Code needs
substantial reform, and I think it is important to do both the
individual and the corporate side together because a
significant number of businesses operating as pass-through
entities pay taxes on the individual side. So to ensure the
competitiveness of U.S. business it is important, I believe, to
coordinate reforms for individual and corporate taxes; and I
want to ask you if you agree that there are advantages to doing
more comprehensive tax reform, as opposed to just looking at
the corporate side.
Mr. Barthold. In terms of business income, Senator, I think
that was the point I was trying to emphasize in my brief run-
through. It was to note that there are businesses that are
organized as C-corporations.
I should note when you look at the supplemental material
that I provided, while I have said there are a lot of non-C-
corporate businesses in terms of assets, large C-corporations
own the vast majority of assets and earn the vast majority of
business taxable income.
Now, that said, I have noted that non-C-corporate entities
are growing in number, and the income attributable to those
entities is growing relative to the overall tax base. Because
we define business income the same way, if we are looking--I
think we should not look just at corporate reform but business
income reform. And it would from a practical point of view,
sort of a practical legislative point of view, from sort of the
legislative weenie aspect, it would be very difficult to wall
off a number of provisions and say we will have one set of
rules if you are this type of entity and a potentially very,
very different set of rules if you are another type of entity.
Because then we would have to double back and have rules to
keep people from--to restrict their entity choice, and that
would be a bad outcome, to restrict entity choice.
Co-Chair Murray. Okay. Thank you very much. My time has
expired.
Chairman Hensarling. The co-chair now recognizes Senator
Kyl of Arizona.
Senator Kyl. Thank you.
Dr. Barthold, just to follow up on one of Senator Murray's
questions with regard to the effect of short-term payroll tax
deduction policy, in your studies did you find any evidence
that either the payroll reductions--well, just take the most
recent, but if you want to go back to the Bush administration,
if you can recall that as well--did that have a stimulative
effect on the economy and was it responsible for any job
creation? Obviously, we had job reductions during that period
of time. Did the temporary aspect of it reduce its
effectiveness and was the need for people to deleverage such
that, rather than spending a lot of that money, they ended up
paying off debts or saving the money? Were those possible
effects that reduced the effectiveness of that temporary
policy?
Mr. Barthold. Senator Kyl, just to be clear, you are
talking about the tax rebates under the Bush administration.
Senator Kyl. There was a tax rebate under Bush, and then
more recently we had a payroll tax one-year policy, which some
would like to see extended.
Mr. Barthold. Since we have done some work recently on the
payroll tax reduction, let me try and answer your question by
addressing that.
As I think I noted to Senator Murray, there is really sort
of two aspects to that in terms of macroeconomic analysis. An
increase in take-home pay can have a stimulative effect. It
increases the taxpayer's cash flow and the consumer can consume
more, if it is short--and that is true in the short term. There
is mixed empirical results on whether if someone just has a
very short-term increase in pay how much is saved as opposed to
how much is spent. So there is an effect in terms of the
efficacy as opposed to a long-run change, but there still is
that short-run demand effect.
Now, a second aspect that we talked about is, well, what is
the supply effect, the labor supply response? To a short-run
policy you would not expect a dramatic labor supply response,
because labor supply decisions tend to be a little bit longer-
run decisions. Now, we had used one of our macroeconomic models
to analyze a proposal to extend by 1 year a payroll tax
reduction comparable to the one that is in present law----
Senator Kyl. Could I just interrupt you? Rather than
speculating about what might happen in the future if the
current policy is extended, what is the evidence of what has
happened during the policy that is in effect now?
Mr. Barthold. Well, there is no academic study or solid
empirical evidence right now. I mean, there is only sort of
casual empiricism, because the data is not available. One
problem with economics and analyzing the effects of policies is
it sometimes takes 2, 3, 4 years to get the data and do a good
analysis. So I don't have a good answer for you in terms of the
effect of the policy that is currently in place right now.
Senator Kyl. So given that there are some of these other
factors, temporary versus permanent, short term versus longer
term, and obvious deleveraging that is going on in the country
right now, all of those are factors that you would have to put
into your analysis about what potentially might happen in the
future.
Mr. Barthold. As I had noted, it is important to think of
the overall context of the legislative package. You can't just
say because it has this one piece in it that you get a
guarantee.
Senator Kyl. Cause and effect is complicated in the
economy.
Mr. Barthold. Well, there is many--a number of the other
things that you mentioned will also affect business decisions
and potentially employment decisions.
Senator Kyl. Could I--we are all going to complain about
the fact our time is short.
I think I have got some yes-or-no questions, and I would
like to ask you if you could just answer these true or false or
yes or no. Let me just ask you about some general economic
principles or statements. And these are, as you said, generally
speaking, and then you qualified some of the other things that
you said, and I totally appreciate that. But, generally, there
is a positive relationship between economic growth and jobs,
true or false?
Mr. Barthold. Certainly.
Senator Kyl. Right. True.
There is a positive relationship between economic growth
and resulting revenues to government.
Mr. Barthold. That is also true, sir.
Senator Kyl. There is a positive relationship between
economic growth and reduced Federal spending on need-based
programs.
Mr. Barthold. Well, that will depend--I have got to give
you a qualified one there, because it depends on what is
happening in terms of where income is being earned.
Senator Kyl. Fair enough.
There is a positive relationship between economic growth
and deficit reduction.
Mr. Barthold. Well, that will depend on a lot of----
Senator Kyl. Again, if we don't go spend all the money, all
else being equal.
Mr. Barthold. That would be true, sir.
Senator Kyl. Right.
Senator Murray was saying tax policy affects economic
growth.
Mr. Barthold. That is what our macroeconomic analysis is
trying--it tries to provide members with information about how
it might or when it might not.
Senator Kyl. It may do it in a lot of different ways.
The official revenue estimates from the Joint Committee on
Taxation account for behavioral responses of individuals but
not larger economic growth effects. Is that a fair way to state
your revenue tables?
Mr. Barthold. That is fair shorthand. We work against the
Congressional Budget Office macroeconomic baseline and receipts
baseline, and so we do not assume that the large economic
aggregates of total income, total investment, employment, and
inflation are altered.
Senator Kyl. Right. But you also said earlier, I think in
response to Representative Hensarling's question, that the
Joint Committee on Taxation is capable of providing estimates
of growth effects since it provides this analysis to the House.
But these growth effects are not incorporated in the official
score of a proposal, is that correct?
Mr. Barthold. It certainly is the case they are not part of
budget rules and budget scorekeeping. The information that we
provide is a range of outcomes that reflect sensitivity to
different assumptions. But, yes, we do provide that information
to the House under Rule 13.
Senator Kyl. Right. Where is our light or timer? So I am
over. Sorry. Dadgum, I had a really good closing question.
Chairman Hensarling. The Senator from Arizona will have
another opportunity to ask that question.
At this time, the chair will yield to Congressman Becerra
of California.
Representative Becerra. Thank you, Mr. Chairman.
Mr. Barthold, good to see you again just 24 hours later. We
saw you in Ways and Means, and we thank you for that testimony
as well.
Let me ask if we can get your Table number--I am sorry--
yeah, Table number 5 from your charts. And I would like to talk
a little bit about the tax expenditures, at least those in this
chart that apply to corporations.
Expenditures seem to have quite a bit to do with the actual
taxes paid by a company. And so while we hear about the
corporate tax rate in America being around 35 percent, if you
are able to qualify for some of these tax breaks, these tax
expenditures, you can reduce what you effectively pay to the
Federal Government in taxes so that your actual tax payments
will be less than at a 35 percent rate.
And, actually, that is not the chart I am referring to. It
is Table, not Figure 5. So if we can go to the--it was your
last chart. That is correct. You have that one. Just so we get
it correct on the screen. It should be the very last chart I
believe you presented.
Mr. Barthold. In the handout that I gave you, it was the
last item before part two.
Representative Becerra. Right. I am not sure if folks can
see that clearly.
But I wanted to just move into that a little bit because,
quite honestly, through the Tax Code we select winners and
losers on the corporate side in terms of income taxes; and I
suspect we will see with regard to tax expenditures these same
kinds of tax breaks that are on the individual side of the Tax
Code that we select winners and losers as well. And if I could
ask a question. If we were to remove, for example, the first
tax break that you list, a deferral of active income of
controlled foreign corporations, $70 billion over a 4- or 5-
year period, who would lose?
Mr. Barthold. For the benefit of the committee, the
particular tax expenditure line item that Congressman Becerra
is referring to, deferral of active income of controlled
foreign corporations, relates to the point that I gave in my
overall testimony that the United States taxes business income
on a worldwide basis. But in the case of active income earned
abroad the taxpayer may elect not to repatriate that income,
and if the taxpayer so makes that election the tax is deferred
until the taxpayer chooses to do that.
So if the Congress were to decide to repeal deferral, just
to take shorthand, it would mean that the income would all be
taxed at the current statutory rates. Since this is about
income that is earned abroad by corporations, we are largely
talking about U.S.-headquartered multinational corporations,
and so it is the income that is earned on overseas investments
and overseas sales by those corporations.
Representative Becerra. And just going through the list,
you have a tax credit for low-income housing. I would assume if
we were to remove that tax break the $27 billion that goes to
those who take advantage of that tax break probably affects the
housing market. And if you were to go to the expensing of
research and experimental tax expenditure, where it is $25.5
billion, that it is those companies that do research and
experimentation that can claim on their taxes that they did
certain research or experimenting activities and therefore get
to reduce their tax burden.
So we could decide, based on what we eliminate or leave,
who becomes a winner and who becomes a loser. And so we have to
be very careful how we do this, because we could influence
actions of a lot of important companies that do business here
and maybe do business elsewhere but are American companies. And
so how we decide to reform the Tax Code could have a major
impact.
Obviously, those are all--the list of those different types
of tax breaks list a good chunk of money that we don't collect
because we give the tax break to those individual companies
that could qualify. So as we talk about making changes we could
pick--we could end up selecting the winners and losers.
Let me ask another question in the brief amount of time
that I have with regard to tax collection. We know that there
is owed tax money that is not collected. In some cases, it is
not intentional. People make a mistake on their filing. In some
cases we know, and we have had cases where it has been proven,
that people intentionally try to avoid paying their fair share
of the taxes.
There are estimates about how much we don't collect in
taxes that is owed. I don't know if there is any recent
estimate, but I know there was one from about 10 years ago that
was somewhere around $345 billion or $350 billion. Has there
been any update to that estimate of uncollected taxes?
Mr. Barthold. The research division of the Internal Revenue
Service runs what they call the National Research Project, and
they are working on updating those estimates. But the estimates
that you cite of about $350 billion in terms of what is
referred to as the tax gap per year I think are the most
recent, but they are a couple of--at least a couple of years
old, sir.
Representative Becerra. And with my time expiring I will
see if I can explore this a little bit more when we come back
and talk again about the individual income tax. So thank you
very much for your testimony.
Mr. Barthold. You are welcome, sir.
Chairman Hensarling. The co-chair now recognizes
Congressman Upton of Michigan.
Representative Upton. Well, thank you, Mr. Chairman.
And thank you, Mr. Barthold, for not only being here with
us today but, as I understand it, you will be with us a number
of times in the days ahead answering some questions, so I
appreciate that flexibility.
We know that the U.S. corporate tax rate is the second
highest that there is. And as we look back at the size of the
top 20 companies in the world 50 years ago, 17 of them were
U.S. based; in 1985, 13 of the top 20 companies were in the
U.S.; and, today, it is about six.
The companies that I talk to, particularly in Michigan and
before this committee here in Energy and Commerce, one of the
things that they talk quite a bit about is certainty in the Tax
Code. There is a lot of--and there has been--discussion,
working with Chairmen Camp and Baucus as well, to hear their
comments from the many hearings that they have had,. But the
R&D tax credit, which stops and starts and stops and starts, is
a real frustration. Accelerated depreciation has been a
bipartisan idea for a long time to encourage investment here in
this country and export products overseas.
How would changes in these two, accelerated depreciation
and R&D, and maybe moving the dials a little bit in terms of
increased deductions or whatever, how would those help us with
investment in jobs in this country? What would you encourage us
to do as you have examined the Tax Code? Have you done studies
along these lines?
Mr. Barthold. Well, Congressman, let me refer back to the
example that Senator Murray raised and you said that Doug
Elmendorf broached with you a week ago; and that is, what does
expensing do?
Well, expensing is one form of accelerated depreciation. It
is kind of like super-accelerated depreciation. Accelerated
depreciation methods, again, they go to the cost of capital for
business. Even from a sort of simple cash flow method it means
that you have more cash available after tax from being able to
recover more of your cost sooner. Or if you look at it in what
economists refer to as the user cost of capital model looking
over the lifetime of the asset, by having costs reduced early
over the life of the asset, as opposed to later over the life
of the asset, the present value of the returns to the asset are
increased, so it makes it a better investment.
So accelerated depreciation is a policy that encourages
investment in the United States.
Similarly, you mentioned the research credit and expensing
of research activities. From sort of a--from a----
Representative Upton. But do you have studies showing that
if we did X or Y it would allow companies to do more investing
here, allowing more people to work and pay taxes, a whole
number of positive things for the economy? Is there a laundry
list of things that can help us?
Mr. Barthold. The joint committee staff responds to
members' legislative initiatives, so we don't have really many
formal studies that say do this as opposed to do that.
Now, we have--in some of our macroeconomic work that we
have undertaken to provide supplemental information to the Ways
and Means Committee, we have looked at the role of expensing,
we have looked at the role of reduced corporate tax rates, some
of the same points that I made to the Senator earlier.
There are a number of academic studies which we review to
help inform our work, both in terms of our conventional
estimates and our macroeconomic work, on the impact of
incentives for research, on the impact of accelerated
depreciation; and most of the economic findings are that there
is an effect. There is differences of opinion as to how large
the effect is. But the incentives generally are, as the
theoretical discussion would suggest, that they are pro-
investment, or pro-research in the United States.
Representative Upton. Do you have any studies that show if
we increased the capital gains rate from the current 15
percent, what it would do to capital investment by companies if
we raised it to 20 or 25 percent?
Mr. Barthold. Well, again, Congressman, no study per se on
point. And you are asking about what would be the macroeconomic
effect of that change.
So to walk through, that is tax on capital gains affects
the--let's think of it on corporate stock--the shareholders
after-tax return to investment. So there is a couple of ways in
which the shareholder gets returns through investment. There is
a tax on dividends. There is----
Representative Upton. But the company itself, if it----
Mr. Barthold. Well, capital gain--remember, the capital
gain, of course, relates to the change in the value of the
company shares which can occur sort of two primary ways. The
company is very profitable, and so its income earning potential
increases, and so the value of the stock is, over the longer
haul, sort of the discounted value of the potential net income
of the company. So if the company is successful and its income
goes up, the value of the stock should go up. And a higher tax
on capital gains at then the individual level would say the
return to me saving and putting my money in equities as opposed
to maybe putting my money in the bank or buying debt
instruments or some alternative investments makes that after-
tax return a little bit less, so I may choose to do other
things.
So our macroeconomic analysis tries to look at the more
general portfolio effect of what are the different saving
options that individuals have; what does this do to the
taxation of the overall kind of net return to saving.
Net saving is important in the macroeconomy, because that
is really the wherewithal to invest. Those are the funds to
invest. And we think that taxpayers do respond to the net
return to saving, and if the net return to saving is reduced
there will be a little bit less saving. That works through the
macroeconomy. It is hard to sort of trace one particular aspect
of that saving return, but that would be an important aspect.
Chairman Hensarling. The time of the gentleman has expired.
The co-chair will now recognize Senator Baucus of Montana.
Senator Baucus. Thank you, Mr. Chairman. I would just like
to just address a bit this point that the top two rates, if
they were raised, hurt small business. It is true, as has been
mentioned already here today, that 50 percent of small business
income is subject to the top two rates, but it is not true that
50 percent of small businesses, employers, are subject to the
top two rates. In fact, only 3 percent are. And it is also,
isn't it true, Mr. Barthold, that again only 3 percent of
taxpayers with pass-through business income are subject to the
top two rates; is that correct?
Mr. Barthold. I believe that is a statistic that----
Senator Baucus. About 3 percent of taxpayers, not 50
percent, but 3 percent of taxpayers?
Mr. Barthold. There are a large number of businesses, pass-
through businesses, the owners of which, so the recipients of
the pass-through income, who are not in the top tax brackets.
Senator Baucus. And in addition, isn't it true that about
half of the 3 percent are taxpayers like bankers or celebrities
that earn large salaries and don't employ anybody but really
invest a small portion of their income in publicly traded pass-
throughs like, say, a REIT?
Mr. Barthold. Could you----
Senator Baucus. About half of that, half of the 3 percent
are people who don't really employ people, but they are
businesses that invest their income?
Mr. Barthold. Certainly a number of the recipients of what
you would consider active business income are the passive
investors in those businesses. That is certainly----
Senator Baucus. I was trying to make the main point that
only about 3 percent of pass-through income is affected by the
top two rates.
There is a lot of talk about corporate tax reform, which I
think it is good. In general the talk is we need to broaden the
base, lower the rates, et cetera, and there is a lot of talk
about lowering the top corporate rate to make it more
competitive with other countries in the world, and that is
good, but a lot of that would include eliminating, reducing
many of the tax expenditures. Some will point out that the
effective U.S. corporate rate is roughly comparable to the
effective tax rate of other companies in other countries.
I want to ask you if that is generally true, that our
effective tax rate is competitive with other countries?
Mr. Barthold. It is not always clear what some people mean
by the effective tax rate, what some----
Senator Baucus. After you deduct all the credits,
exclusions, and all that.
Mr. Barthold. Well, but there is also--it is after you
deduct and it is a little bit over what time period. So I have
seen the studies that you cite that say that, and so what you
say is true that there are studies that say that, but part of
what they are calculating is if you look at book reported
income and book reported taxes of U.S. public corporations,
they would not include in the taxes the taxes that are deferred
abroad on what they consider income----
Senator Baucus. Right. I don't want you to misunderstand. I
am for going down this road. I think we should lower our
corporate rates very significantly. However, I have also seen
other data that show that today the different industries in the
United States enjoy, there is a big difference among which
industries in the United States enjoy tax expenditures compared
with other industries. It is a big variation. For example, the
manufacturing industry and the real estate industry take much
better use of, because they are available, of the tax
expenditures than, say, the services industry, the retail
industry.
So I am really trying to point out that if there were very
significant changes, base broadening, and rate lowering of the
corporate tax income that there would be big dislocations. Some
industries would be hurt a lot compared to others, and some
would benefit compared to others, and I think it is only
important for us to know which those industries are and if we
go down this road then to know what the transition rules should
be to affect these different industries and then try to decide
which of these industries are really more important for jobs
and growth in America compared to others.
Now, we don't want--nobody likes to pick winners and losers
here, but it may be that some of these industries do provide
more jobs than some others, and I think it is important that we
note what they are. So it would help me, anyway, if Joint Tax
could come up with some kind of a study that shows which
industries benefit the most today compared to those that don't.
Mr. Barthold. Senator, I will follow up with you and your
staff. I think, as you know from work that we have done for you
in the past, I mean, we do identify certain features of the Tax
Code by the primary industry of the taxpayer, and we have done
some analysis for you in the past. We can do some more.
Senator Baucus. In part I am just trying to point out, this
is not an easy undertaking, corporate tax reform. It takes
time, and often when we go down this road it is more
complicated than we think, and there are unintended
consequences of major changes that we might otherwise make. It
is important that we think through what the intended
consequences are to try to avoid some of the unintended
consequences.
My time's expired.
Chairman Hensarling. The co-chair now recognizes Senator
Portman of Ohio.
Senator Portman. Thank you, Mr. Chairman, and I appreciate
Chairman Baucus' comments, both saying that he supports heading
down the road of lowering these rates, which are high relative
to our global competitors, but also the fact that this requires
hard work, and I am hoping this committee can roll up its
sleeves and with his guidance and Chairman Camp's guidance get
into some of these tough issues because he is right, this is
complicated.
I will tell you that as recently as yesterday a CEO of an
Ohio manufacturing company that does business overseas came to
me and said, I am at the point that I believe that a lower rate
is a better deal for me and my company than me taking advantage
of many of the current preferences that are in the code for
industrial companies, as the chairman said, and that would be
consistent with what Co-Chair Murray said earlier about
companies in her State that have come to her.
So this is a path, I agree with Chairman Baucus, worth us
pursuing, and with the extraordinary procedural opportunities
before this committee, I am hoping that this committee will use
this opportunity.
I have two sort of simple questions that I have about the
tax reforms that we have been discussing today. One is, you
know, what should the tax burden be on the economy? And I think
that is sort of the fundamental question that we need to answer
in this committee, and that goes right to your testimony, Mr.
Barthold, because in Figure 3 you talk about the 18 percent
historical average, percent of GDP of taxes, and then in Figure
5 you talk about what is going to happen over the coming
decades, and you see that percent of GDP in Figure 5 going up
significantly from 18 percent.
So, one, we need to figure out what is the right burden on
the economy, and that I think is properly reflected as the
percent of GDP, and then the second question is really the
fundamental one everyone has been asking today, what is the
best way to collect those taxes. I suppose some would say it is
a VAT tax or maybe some other consumption tax. I don't think
this committee has the time and ability to get into that level
of reform, but I do think that there has been a lot of work
done by Chairman Baucus, Chairman Camp, and others to look at
this to know that there is a way to lower rates and broaden the
base, and best is in the eye of the beholder I suppose.
Some have talked about distribution and fairness, some have
talked about efficiency, the cost of compliance, which is
really a separate issue from the impact on economic growth,
although it relates to it, and then finally, you know, what is
the most efficient way to allocate resources and what impact
will that have, as Mr. Barthold has talked about today, on
economic growth, and that is the sweet spot for this committee,
as I see it, you know, how do we do smart tax reform that, one,
does not provide additional new burdens on the economy that
make an already weak economy even weaker, and we can't do that.
President Obama has said that, President Clinton apparently
said that today somewhere, but the second one that is smart so
that it does generate more economic activity, and as a
consequence of that more efficient Tax Code that generates more
economic activity, generates more revenue.
So it is a consequence of the fact that it does have an
impact on economic growth. This feedback has to be measured,
and this is one of the frustrations that many of us have had
over the years, is that although there is plenty of economic
analysis out there showing this is true, and you have talked
about it this morning, Mr. Barthold, it needs to be reflected
somehow and measured so that good policy can result, and so in
the short time we have on this committee, I am really hoping
that we will be able to have those measurements and we will be
able to, with the Congressional Budget Office, be able to show
what the impact is of various tax reform proposals.
On the corporate rate, since we are talking about that now,
we don't collect as much revenue as we should, due in part to
the complex, inefficient, and loophole-ridden Tax Code we have
got, and therefore most economists agree that fundamental
corporate tax reform is going to produce more economic growth,
and therefore, again, as a consequence, more revenues.
Can you just quickly go through how you can give us that
information? Let me try to summarize what I heard you say
earlier, and you can correct me. One, you have a standard
model, and that model will provide us with some behavioral
changes. We talked earlier about allocating resources more
efficiently under a Tax Code that makes more sense, and
individual and firm responses I understand you can incorporate
within your standard model. Is that correct?
Mr. Barthold. Our conventional estimates always include
behavioral responses of many different types, sir, yes.
Senator Portman. So we will get some feedback through your
standard modeling, your conventional modeling. Second, you have
a macroeconomic effect you now do, you talked about House Rule
XI, and you provide that as a supplemental analysis to Chairman
Camp of Ways and Means Committee. That macroeconomic analysis
you do is something that is made public, correct?
Mr. Barthold. It is included in the House committee reports
on a reported bill, yes, sir.
Senator Portman. And can you extrapolate from the
macroeconomic effects that you are already studying--you have
the model to do it--as to what the revenue feedback is going to
be from, say, an increase in GDP?
Mr. Barthold. Senator, we have reported, as part of the
reports, changes in GDP, changes in employment, changes in
investment, and changes----
Senator Portman. Labor market?
Representative Barthold [continuing]. In revenues from the
resulting growth, again across a range of sensitivity
assumptions, to give sort of the breadth of possibilities.
Senator Portman. And labor market as well?
Mr. Barthold. Employment, yes, yes, sir.
Senator Portman. And so you have provided revenue estimates
from those changes----
Mr. Barthold. No, not revenue----
Senator Portman [continuing]. In GDP and labor market?
Mr. Barthold. No, I wouldn't want to call them revenue
estimates. You could, I guess, you know, think of taking the
next step and saying what is the feedback that was identified
and add that back in.
Senator Portman. So it could be done?
Mr. Barthold. Chairman Camp of Ways and Means held a
hearing yesterday, as Mr. Becerra had noted, and they discussed
some of those issues, and I can provide the members here later
with copies of that testimony. We gave some examples of some
macroeconomic----
Senator Portman. But Mr. Barthold, let me just say because
my time is short, I know this committee would be very
interested in knowing what that feedback is, and again you all
do great analysis. We need to be sure we have that analysis
that in the real world there is going to be changes that will
result in revenue changes, and we need to be able to consider
that, and we have to do it in a short period of time here,
which is several weeks.
I know my time has expired, but let me also just put on the
table, you also do a compliance analysis, and if you go from a
compliance, say, 88 percent compliance to 89 or 90 percent
compliance, that can have huge revenue changes, and then you do
a complexity analysis which can also impact that; is that
correct?
Mr. Barthold. We do a complexity analysis. We are trying to
study doing more comprehensive compliance analysis.
Chairman Hensarling. The time of the gentleman has expired.
The co-chair now recognizes Congressman Clyburn of South
Carolina.
Representative Clyburn. Thank you very much, Mr. Chairman.
Mr. Chairman, it is my humble opinion that the overarching
mission of this committee is to find common ground. Now,
recently, the House Republicans released a jobs plan in which
they referred to the Tax Code, and I quote, has grown too
complicated and cumbersome and is fundamentally unfair. I could
not agree more with this assessment. I think it is unfair that
wages are often taxed at a higher rate than investments, I
think it is unfair that the wealthiest among us get the most
tax breaks, and I think it is unfair that a number of top
corporations who are making record profits pay more to their
CEOs than they do in taxes.
Now, as we pursue common ground, I want to know whether or
not you would agree that the number I have seen is that those
people making over a million dollars a year, that is like
three-tenths of 1 percent of our entire population.
Mr. Barthold. That figure sounds correct, Congressman.
Representative Clyburn. Okay. If that figure is correct,
and you say that it is, I think the question before us today,
one of the questions is, is it fair to value wealth more than
we value work? Because if we are willing to say that our Tax
Code reflects our value system, our Tax Code seems to currently
put a greater value on wealth and dividends than it does on
work and wages. Now, is it class warfare to seek some equity in
the Tax Code? That is my question. Do you think it is tax
warfare? I am not asking--I don't know whether it is or not,
but do you think?
Mr. Barthold. Well, Congressman, I don't offer an opinion
on that sort of a question. I try and my staff tries to provide
information to Members such as yourself so that you can make
appropriate judgments for the American people.
Representative Clyburn. Thank you. That is fair. Let me ask
something about--I am a great believer that there is something
that we ought to pursue in this committee called, we may call
it consumption tax, we may call it a value-added tax, I don't
know what we might want to call it, but isn't it true that
every major economy with which the United States competes
really funds their government through consumption taxes?
Mr. Barthold. All the Western European economies have
individual income taxes, payroll taxes, corporate income taxes,
some excise taxes such as we do, some estate or inheritance
taxes such as we do, and in addition they all have a value-
added tax.
Representative Clyburn. Well, then, if CRS's estimates are
correct that a value-added tax could be levied on a taxable
base of $8.8 trillion, if we exempt food, health care, housing,
higher education, and social services, that would leave a
taxable base of around $5.1 trillion. Do you agree that a VAT
is a viable option?
Mr. Barthold. Through time, Congressman, a number of
Members of Congress and, in fact, the Ways and Means Committee
in the late 1990s held a series of hearings. They asked us to
explore a number of issues related to value-added taxation. Our
staff has identified for Congress a number of policy issues for
them to think about. Conceptually, legislatively, yes, it
would, you know--it is a viable option to create a VAT. It
would take a lot of work, a lot of decisions by the Members,
and a lot of technical work to get the law up and functioning
for taxpayers.
Representative Clyburn. Thank you. In the 50 seconds I have
got left, let me be clear, when we talk about a 35 percent
corporate tax rate in this country and comparing that with the
rates in other countries, we really are not comparing apples to
apples, we are actually comparing our rate to countries that
have a value-added tax?
Mr. Barthold. As I noted, sir, most of the----
Representative Clyburn. In addition.
Mr. Barthold. Those countries do have a value-added tax in
addition to their corporate tax.
Representative Clyburn. Thank you very much. I will yield
back my 16 seconds to someone else.
Chairman Hensarling. We thank the gentleman for yielding.
The co-chair now recognizes Congressman Camp of Michigan.
Representative Camp. Thank you, Mr. Chairman, and thank
you, Mr. Barthold, for your testimony yesterday on economic
models for analyzing tax reform.
Figure 1 of the handout that you gave us shows the Federal
receipts by source, and I just want to underscore, it shows
more than 47 percent of those receipts to the Federal
Government come from individuals, and only just over 8 percent
come from corporations or what we call C corporations.
Mr. Barthold. That is correct, sir.
Representative Camp. Corporate income. And in Figure 4 in
your projection of Federal revenues to come, which I think goes
through 2021, it basically shows receipts from corporations
being flat going forward, but yet revenue from individuals is
shown to be increasing over time. Is that a fair statement of
the two charts? I see another line on individual----
Mr. Barthold. It is a little bit a matter of scale. You can
see the green line, the corporate tax, does increase.
Representative Camp. Slightly.
Mr. Barthold. As expensing. It is currently slightly
lowered by the fact that we have had bonus depreciation
followed by expensing.
Representative Camp. But the point is the individual is
going to go up at a faster rate, receipts to the Federal
Government, projection of Federal revenues to the government is
going up greater from individuals than from corporations?
Mr. Barthold. Yeah, I believe that is consistent with our
projection.
Representative Camp. And some of that is related to your
testimony about the number of entities that are organized as
pass-throughs, which pay taxes as individuals, so some of that
is business activity that you are seeing increase in that
chart, and isn't the United States somewhat unique that so much
business activity takes place in the form of pass-through
entities, S corporations, LLCs, partnerships, and isn't it fair
to say that other countries do not have as much business
activity taking place in a pass-through form?
Mr. Barthold. These sorts of entities are more prevalent in
the United States, but I am not expert enough in all the other
countries to make a blanket statement.
Representative Camp. All right. But corporate reform alone
would then leave out many employers, leave them out of the
equation because of the way that business activity is organized
in the United States. So as we compare around the world, we
need to understand that.
Moving to corporate rates, which are a major factor in
where businesses decide to invest and to locate, it has been
said by yourself and others we have this high statutory rate,
and with capital being increasingly mobile, it has become a
much more important factor. The high corporate rate makes
investment and job creation in the U.S. less likely as we
compare around the world, and if you look particularly at
Canada, who is certainly a key ally of ours but also a key
trading partner, one of our largest trading partners, but when
it comes to trade, they are one of our key competitors, you
look in 1990 they had a 41\1/2\ percent corporate rate, in 2010
it was 29, 2011 it is 16.5, in 2012 their corporate rate is
going to go to 15 percent.
Now, we have a high statutory rate, second highest in the
world, in the OECD countries, but we have a number of
expenditures, tax expenditures that then lower that rate, and
that affects different sectors, as Chairman Baucus pointed out,
in different parts of our economy in different ways, but aren't
these other nations getting to their lower rates by eliminating
these tax expenditures around the world?
Mr. Barthold. Some of the other tax reforms that I am
familiar with have made trade-offs of that sort. For example,
Germany has lowered their statutory rate, and they made the,
one of the trade-offs they made was to lower their statutory
rate while lengthening cost recovery, cost recovery periods.
That was a policy choice that they have made. So the reduction
in special provisions I think as reported by the OECD, that
they have noted that that has been a factor in a number of
worldwide tax reforms.
Representative Camp. And as Chairman Upton pointed out, the
number of large companies headquartered in the U.S. has
declined as other economies have emerged or changed their tax
policy, and we are finding that many major employers are
located in other countries rather than the U.S.
Mr. Barthold. It is certainly a fact that worldwide large
corporations, that fewer of the top 50, the top 100 are U.S.-
headquartered companies. So I am sure there is many factors
that have accounted for that, you know, the growth of other
countries, but that is certainly a fact, sir.
Representative Camp. The other factor we face as a nation
is the number of expiring business tax provisions, and can you
comment on how that has grown? I mean, I remember as they used
to call it the Rostenkowski 13, the 13 business tax
expenditures that were expiring. How many do we have now that
expire on a regular basis? Do you have that?
Mr. Barthold. Okay, well, we actually, as I know you are
familiar, Mr. Camp, we publish annually a list of expiring
Federal tax provisions. Just for the other members, and I will
get a copy of this for all the joint select committee, it is
our document JCX2-11. We have done this annually for more than
a decade, and it used to be a lot thinner publication. I think
we are up to expiring within the next 2 years 150 or more
different provisions of law.
You know, it certainly creates uncertainty both at the
individual level and at the business level of what is the law
going to be next year, what is the law going to be 2 years from
now, and obviously there are a lot of important policy choices
that go into--that the members have to face as well.
Representative Camp. Thank you, Mr. Barthold.
Chairman Hensarling. The co-chair now recognizes Senator
Kerry of Massachusetts.
Senator Kerry. Thank you very much, Mr. Chairman. I want to
focus later on some of the tax expenditures probably more on
the individual, but I think it is important to note that 80
percent of all of the money the Federal Government raises in
taxes, 80 percent of it goes out right back into tax
expenditures. Only 20 percent of what we raise actually goes
into things we spend, pay for at the Federal level. 95 percent
of those tax expenditures, 95 percent of that 80 percent goes
to 10 top expenditure items.
So I have got a lot of questions about the efficiency of
that, among other things, and the choices that are made, which
I think we have to look at, but I want to just say at the
outset I second powerfully what Senator Portman said about our
opportunity here, given the mandate and given the structure of
this committee and its presentation to the Congress to take
advantage of this to try to get that sweet spot which he talked
about, which is really simplifying this, putting in place the
most efficient choices that will drive our economy, that
therefore will raise revenues and help us deal both with the
deficit as well as jobs at the same time, and I think that is
the key thing here.
One of the things I would like to focus on very quickly is
just this question, simple question. We hear a lot about the
top tax rate with respect to corporations, and, yes, it is the
second highest statutory rate, but the effective rate is what
matters to people. Business people know how to judge the bottom
line, and they make judgments accordingly, and we fall in the
middle on that.
Can you just say very quickly whether the committee should
in its thinking here be looking at the top statutory rate or is
it the effective rate that is more important?
Mr. Barthold. Senator Kerry, as an economist, I think it is
the effective marginal tax rate on investments that is really a
key factor in terms of both growth and economic efficiency
allocation across sectors. Now, that said, the effective
marginal tax rate depends on the statutory rate. It also
depends upon cost recovery, so it depends on how this is
structured.
Senator Kerry. The key would really be the interplay with
whatever the expenditures and incentives and other pieces are,
that is the important piece?
Mr. Barthold. Yes.
Senator Kerry. But we have to always keep that in mind, not
just be frozen on the rate, but look at the overall complexity
of what we create underneath it.
Mr. Barthold. You want to look at the overall structure of
how you are taxing the income.
Senator Kerry. Now let me jump to that for a minute. I have
been concerned for a long time about this issue of whether or
not we inadvertently and in some cases maybe purposefully
incent investment in other countries, that we are creating jobs
in other countries because of the structure of the Tax Code,
and the Fiscal Reform Commission recommended that we move to a
territorial system and replace the current practice of taxing
active foreign source income when it is repatriated, and this
is obviously a current struggle. It is potentially a source of
income as well as a better Tax Code and maybe a more
competitive one.
Could you share with the committee whether we can strike
the right balance and have a system that is globally
competitive, but encourages job creation and investment in the
United States even as we were to create a territorial
structure? Is that doable?
Mr. Barthold. Well, strike the right balance is a difficult
assessment for me, Senator. That would--that is----
Senator Kerry. Well, can you envision a tax structure that
does do that?
Mr. Barthold. Let me, to be responsive to your question,
highlight a few issues, some of which we have already talked
about. Investment in the United States, things that are
important to investment in the United States can be the
effective marginal tax rate on the income earned by those
investments, so the statutory rate, cost recovery matter.
Research in the United States, many countries provide research
incentives. We provide research incentives, so sort of weighing
the relative, again the return to what is the return to income
earned from research undertaken in the United States as opposed
to research undertaken abroad would be a factor.
When we look at territorial systems, we have to think
about, well, what does it say about location of any--some
investments in the United States as opposed to abroad. One
feature of a territorial system which I will take generically
as a dividend exemption system so that income earned abroad
would only be taxed at whatever rate the foreign country has
brought. If we lower our domestic rate and all other countries
leave their rates the same, then under a territorial system the
U.S. is relatively more attractive than it was before.
Senator Kerry. But some of those countries--if I could just
interrupt you for a minute, isn't it a fact that none of our
major U.S. trading partners have a complete exemption with all
taxes?
Mr. Barthold. It is typically--there are some that are 95
percent exemption, let's call it substantially complete.
Senator Kerry. Is there a particular country you would
point to where you think the model has sort of struck that
balance?
Mr. Barthold. I think there is a number of interesting
features with policy decisions for the members to consider from
a number of different countries, so I would----
Senator Kerry. Could you perhaps share with us? I think it
would be great if you and your terrific staff could present us
with a sense of how to perhaps strike this balance, whether
there are some provisions. What we don't want to do, what we
are currently doing, everybody is talking about this massive
amount of American corporate revenue sitting abroad that
doesn't come home because it doesn't want to be taxed. We have
had one round of sort of a grace amnesty, so to speak. It
didn't work so well. And the question is whether or not we can
find a way to see that money more effectively, the capital
formation component put to better use, and still not wind up
encouraging a company to go abroad to create the jobs. I mean,
there is a balance there, it is difficult.
Mr. Barthold. It is definitely a policy balancing act, sir.
I am happy to try and work through options with the members of
the committee if that is the direction you want to go. It is
complex because----
Senator Kerry. It is complex, but you have to acknowledge
that what we are living with today is not effective or
efficient.
Mr. Barthold. What we have today is also complex and
certainly has some incentives that people find creating
inefficiencies.
Senator Kerry. Thank you.
Chairman Hensarling. The co-chair now recognizes Senator
Toomey of Pennsylvania.
Senator Toomey. Thanks, Mr. Chairman. I am glad to be
following Senator Kerry, and I want to underscore my agreement
with him and Senator Portman on how important it is that we
really make every effort to do something substantial on the tax
reform side. This is the most pro-growth thing we can do is to
fundamentally reform our Tax Code. It is a way to generate very
substantial revenue while lowering marginal tax rates. That
creates jobs, that helps reduce our deficit problem. It can
enhance fairness, which we desperately need to do.
So I appreciate your testimony. I am glad we are focusing
on this.
I wanted to follow up a little bit on the vein that Senator
Kerry was just discussing. You know, tax expenditures
justifiably get a bad name because so many of them are, in my
view, egregious flaws in the code, especially those that are
narrowly targeted and have a distorting impact. But not all tax
expenditures, not everything that we described as tax
expenditures meets that description.
The first one on the list here on Table 5 is the deferral
of active income, right?
Mr. Barthold. Correct.
Senator Toomey. This reflects, of course, the fact that we
choose not to tax at the time that it is earned income that is
earned by overseas subsidiaries. If you looked at this as
number one on the list and the biggest number by far on the
list, you could superficially at a quick glance suggest, well,
maybe this is a good source of revenue. But, in fact, I would
argue that our current system puts us at a competitive
disadvantage because despite whatever number there is on this
form, we tax foreign income when it is brought home to a much
larger degree than most of our competitors; isn't that true?
Mr. Barthold. That is correct, sir.
Senator Toomey. So if we were to actually tax it at the
time that it is earned, we would be taking the competitive
disadvantage we have now and making it worse, right?
Mr. Barthold. You would be creating a higher tax rate on
the total income of the U.S. corporation.
Senator Toomey. Well, exactly, and we would be increasing
the disparity, the difference between that tax rate that we
charge on overseas income and that which our competitors
charge?
Mr. Barthold. To the extent that the competitor is in lower
tax locations.
Senator Toomey. Which most are?
Mr. Barthold. Yes, sir.
Senator Toomey. So one of the things that--well, I just
think we should be very conscious of the fact that reducing tax
expenditures, it matters very much which ones and how we were
to go about doing it. I am in favor of moving in the direction
of a territorial system, and I think of a lot of Pennsylvania
companies, whether it is U.S. Steel or Heinz or Air Products
and Chemicals, companies that have substantial operations
overseas, they exist to serve local markets overseas, and what
I would hate to see us do is a move in the direction that
creates an even greater incentive than there already is to have
corporate headquarters somewhere else because that costs us
jobs, it costs us a lot of good jobs. So my preference would be
that we move in the direction of a more territorial system.
I would like to get back to another line of questioning
that Senator Portman raised, and that is how your methodology
quantifies the feedback of variations in policy. So as I
understood you, you acknowledge that personal incentives affect
behavior, and so you used an example of a reduction in the
payroll tax might create an incentive for someone to enter the
workforce because their after-tax earnings would be that much
higher. Of course that is true of any reduction in marginal
income tax rates, payroll or ordinary income.
Mr. Barthold. That is correct, sir.
Senator Toomey. And so my question is, when you analyze
something like that, do you actually attempt to quantify the
number of people who would enter the workforce in response to
that greater incentive to work?
Mr. Barthold. When we undertake our macroeconomic analysis,
we report employment effects. Now, the employment effects are
usually in terms of hours of work, which you can then loosely
translate into, you know, numbers of individuals, but hours can
also be overtime by currently employed individuals.
Senator Toomey. Okay. So you acknowledge that. Do you also,
then, in your calculation attribute a new source of revenue
from these new workers, the fact that they are paying payroll
tax, at a somewhat lower rate perhaps, but they are paying tax
and they didn't before?
Mr. Barthold. This goes to a point we have broached a
couple of times. Our macroeconomic analysis that we have been
undertaking for about a decade is geared at providing
supplemental information to the Members of Congress relating to
tax policy changes that they are considering, and so what we
routinely report are changes in gross domestic product, changes
in employment, changes in investment, and we also report what
this would, could mean in terms of feedback effects on revenues
because general, a general premise is if national income grows,
the tax base will grow, and so there will be more income
subject to tax.
So in very loose terms, the answer to your question is yes.
This is not reported for budget scorekeeping purposes or for
House or Senate rule scorekeeping purposes, points of order,
and the like.
Senator Toomey. Okay. I see I am running out of time. I
just want to underscore, I think this is a problem with the
scorekeeping methodology. I mean, your analysis, you
acknowledge that a reduction in a marginal income tax rate does
not have a linear impact in reducing revenue because of the
positive feedback effect that offsets at least some of that,
but yet we don't capture that, we don't quantify that, as I
understand you to describe your process of scoring a given
change in tax policy.
Mr. Barthold. The macroeconomic analysis we do is not part
of scoring for Congressional scorekeeping and rule purposes.
Senator Toomey. Thank you, Mr. Chairman.
Chairman Hensarling. The co-chair now recognizes
Congressman Van Hollen of Maryland.
Representative Van Hollen. Thank you, Mr. Chairman. Thank
you, Mr. Barthold, for your testimony. I just want to briefly
turn to the question of pass-through entities because a lot of
people have described these pass-through entities as if they
were all small businesses, and I would just like to read from
your testimony before the Senate Finance Committee July 14,
2010, where you say ``the staff of the Joint Committee on
Taxation estimates that in 2011 just under 750,000 taxpayers
with net positive business income, 3 percent of all taxpayers
with net positive business income, would have marginal rates
that fell above $250,000;'' is that correct?
Mr. Barthold. If you are reading from something I said.
Representative Van Hollen. I just want to make sure that
fact remains true. And you have this very important caveat
right here in your testimony then. ``These figures for net
positive business income do not imply that all the income is
from entities that might be considered `small,' in quotations.
For example, in 2005, 12,862 S corporations and 6,658
partnerships had receipts of more than $50 million.''
Now, my point here is not--isn't that these aren't good
businesses. We should get over this conversation that all of
these are small mom and pop entities because they are just not.
If you had a Washington law firm with 500 partners, and those
partners each took a draw of a million dollars, under this
analysis they would be included as 500 distinct business
entities, correct?
Mr. Barthold. They would be----
Representative Van Hollen. They would be included in your
figure of 750,000?
Mr. Barthold. How did you structure your law firm?
Representative Van Hollen. As a partnership.
Mr. Barthold. The partnership, we did a number of counts,
and actually just to refer you to some more recent work that we
have done, appendix tables in the prepared testimony that you
have before you today, 10, 11, and 12, show you some ways that
you can distribute partnerships and S corporations by size,
either by the----
Representative Van Hollen. I was just going to ask you
that, Mr. Barthold.
Mr. Barthold. Well, that is why I----
Representative Van Hollen. Just so members realize as we
have this conversation, on page 54, if you look at your charts,
you will see that the top 2.2 percent of S corporations with
gross receipts of more than $10 million received 61.7 percent
of all the gross receipts of S corporations. Very small group.
And if you look at the top 0.8 percent of partnerships with
gross receipts of more than $10 million, they received 83.4
percent of all gross receipts, all gross receipts. 83.4 came
from the top 0.8 percent of the partnerships. So we should
remember when we are talking about this issue that we are
talking about in many cases individual partners at big law
firms and big lobbyist firms and considering each one of them
some kind of small business generator. I just don't think--I
think people need to take that into account.
Now, I want to ask you about the modeling.
Mr. Barthold. Mr. Van Hollen, the only thing I wanted----
Representative Van Hollen. Mr. Barthold, let me just--I am
sorry, I have got 2 minutes. I want to ask you about the
modeling here because Dr. Elmendorf testified before our
committee, and he said that if we are to keep in place the tax
cuts that were implemented in 2001, 2003 rather than allow them
to lapse in our current law, we would have much larger deficits
in the outyears, cumulatively 4.5 percent deficits.
Now, as I understand your testimony, higher deficits,
especially during a period of time of full employment, which we
all hope to get back to, that those higher deficits can have a
drag on the economy; is that correct?
Mr. Barthold. The higher deficit requires higher government
financing, and so potentially long run crowding out of private
investment.
Representative Van Hollen. And that crowding out is
especially true when you have full employment, correct?
Mr. Barthold. Well, it is not good anytime.
Representative Van Hollen. That is right. So now to get
back to your scoring, though, when tax cuts are scored, whether
they were 2001, 2003, because you do not take into account some
of those macroeconomic effects, you also don't take into
account the fact that those tax cuts could contribute to larger
deficits in the outyears and slow down the economy in terms of
GDP, right?
Mr. Barthold. Our macroeconomic analysis, when we provide
it to the Ways and Means Committee, as you know, sir, accounts
for what is happening with the deficit, how the package is
funded, and so it does reflect potential crowding out, if that
would occur.
Representative Van Hollen. Right. But I guess it does not
take the next step, which would be analogous to some of the
points that are being raised, which is that that crowding out
leads to lower GDP, which then leads to lower----
Mr. Barthold. Our macroeconomic analysis will show that.
Representative Van Hollen. Right, but will it show the
feedback, then, the feedback loop in terms of growth, in terms
of your scoring? I am talking about your scoring.
Mr. Barthold. On scoring, again, to emphasize the point
just made to Senator Toomey, we use our conventional, as does
the Congressional Budget Office, we use our conventional
models, which are scored against the Congressional Budget
Office macroeconomic baseline where we are not assuming that
GNP aggregate investment, aggregate employment, inflation rate,
none of those factors.
Representative Van Hollen. Thanks. I hear you. So you don't
take that into account, the low growth rate?
Mr. Barthold. Or conventional.
Representative Van Hollen. On CBO, when they score
investments, when CBO looks at the investment side, investment
infrastructure and education, they don't take into account
either the positive economic growth benefits of that in terms
of receipts, do they?
Mr. Barthold. In their conventional estimates, they do not
account for positive effects or the potential crowding out,
depending on----
Representative Van Hollen. Right. It is analogous on the
CBO side in terms of investment to what you do on the tax side,
correct?
Mr. Barthold. Correct, sir.
Representative Van Hollen. Thank you. Thank you, Mr.
Chairman.
Chairman Hensarling. That completes the first round of
questioning for the first panel. We will go to the second round
of questioning. The co-chair will yield to himself.
Dr. Barthold, in my opening statement I quoted from a
letter from former CBO Director Dr. Peter Orszag that I believe
under a current policy baseline, if solved on the tax side,
that the tax rate for the lowest tax bracket would go from 10
to 25, the 25 to 63, the 35 percent bracket to 88, the top
corporate income tax rate would also increase from 35 to 88
percent. Has the Joint Committee on Taxation performed any
analysis that is similar to Dr. Orszag's analysis or would you
have an opinion on his opinion?
Mr. Barthold. I can very clearly say no because I am
actually not even sure what he did and what you quoted, so I
know we haven't done anything quite analogous to that. I would
be happy to have my staff colleagues--I mean, we can take a
look if you would like.
Chairman Hensarling. Perhaps at a later time. I would
appreciate that.
Let me go to another subject matter, and that is who
actually ends up paying our corporate tax rate in America? I
suppose as a practical matter many view corporations as tax
collectors and not taxpayers, so clearly there is some impact
on consumers perhaps in the form of higher prices, depending
upon the elasticity of demand for the product or service,
workers in lower wages, and then certainly to shareholders in
the form of potentially lower stock prices.
Now, the last data that has come across my desk is a
Congressional Budget Office analysis of about 4 or 5 years ago
entitled International Burdens of the Corporate Income Tax that
seemed to indicate in their analysis that 70 percent of the
burden of the corporate income tax falls on labor in the form
of lower wages. I don't necessarily believe you would be
familiar with that particular study, but has JCT undertaken a
similar study? Do you have opinions? Have you reviewed the
academic literature on the subject? Do you have an opinion?
Mr. Barthold. I mean, you are discussing really one of the
big long-time important questions in economics, and that is
what is the incidence of any tax or in particular the incidence
of the corporate tax. In some of the economic literature there
has been some ebb and flow in terms of its view. It is often--
it had long been thought that perhaps substantially all the
burden of the corporate tax fell not just on corporate
shareholders because at its sort of simplest terms the
corporate income tax is a tax on the income earned by the
equity owners of the firm, but more generally that it would
have an effect on the overall, on all owners of capital, but
some of the more recent empirical work and theoretical work,
some of which you just cited, has looked at the increased
cross-border mobility of capital and even fixed capital,
relocation of factories from one country to another country to
suggest that there is a greater responsiveness to after-tax
returns of capital than perhaps after-tax returns of labor, and
by that they have attempted to measure and come up with results
such as you have noted that perhaps a substantial amount of the
burden of the corporate tax actually falls on labor, by, if we
make capital flee the U.S., there is less capital in the U.S.,
it is capital that is key to generating labor productivity, and
it is labor productivity that helps determine wages.
Chairman Hensarling. Dr. Barthold, my time has expired. So
at this time let me yield to my co-chair, Senator Murray of
Washington.
Co-Chair Murray. Thank you very much. We hear that
corporate tax reform or any tax reform must be revenue neutral,
and as our Nation faces $14 trillion in debt, I think we need
to be focused on job creation and long-term debt reduction.
Your predecessor on JCT, Dr. Kleinbard, testified to the Senate
Finance Committee last week, and he said, quote, we have to
abandon our nostalgia for the Tax Reform Act of 1986. That tax
reform effort was revenue neutral because it could afford to
be, and that was also of course preceded and followed by major
tax increases.
We hear today a lot of stories about profitable
corporations, even major corporations that are using tax
expenditures in order to reduce and in some cases eliminate
their tax bill completely. This is infuriating for average
taxpayers who are dutifully paying their taxes and don't
benefit as much from these big loopholes, and I am not talking
about failing companies here who might need a break. I am
talking about large, profitable companies.
During this economic downturn Congress has provided
generous incentives to encourage business activity; namely,
through the Tax Code, and even before the downturn there were
corporations that were very profitable but paid no share of
Federal corporate income taxes.
So I want to ask you if you have an assessment of what it
costs our Treasury in terms of lost revenue from profitable
corporations that don't pay corporate income taxes.
Mr. Barthold. Basically our tax expenditure analysis
provides most of the assessment that you are asking about, but
it does it on a provision-by-provision basis. You can't--
because of interactions between them, you can't really add them
up and say this is the aggregate amount lost, but the way we
estimate, measure the tax expenditure is we look at what the
business' tax liability would be with and without the provision
in question, and so if it is a corporation that is in a loss
position, there would be no tax liability regardless of the
provision, so it is only looking at where there are otherwise,
it would be positive taxable income. I hope that is responsive
to your question.
Co-Chair Murray. It is a response. In my last 30 seconds I
just wanted to ask you about this repatriation issue because we
are hearing a lot about that. Some people say it will raise
revenue, some people claim it loses revenue. What is your take?
Mr. Barthold. We have undertaken some estimates of a
particular proposal or a couple of different proposals, and our
assessment is that if we repeated the Section 965 repatriation
holiday that was enacted in 2004, that under the current
baseline that that would lose revenue. There would be short-run
revenue increases but long-term revenue losses, generally from
longer term erosion in the corporate tax base.
Co-Chair Murray. Okay, thank you very much. Appreciate it.
Chairman Hensarling. The co-chair recognizes Senator Kyl of
Arizona.
Senator Kyl. Thank you, Mr. Chairman. Let me just ask one
follow-up question to the other questions I was going to ask in
the interest of time here. You have heard a lot of frustration
up here about the fact that while you can provide estimates to
us of some of the behavioral impacts, that they are not
reflected in the official estimates that you provide to us.
My question is how we could change that or how we could
better take advantage of the behavioral estimates that you do
provide. Would it require a statutory change or simply some
kind of change within Joint Tax Committee to provide those
behavioral effects, those feedbacks that you talked about as
part of your official scoring estimates?
Mr. Barthold. Well, just as a reminder, I mean, we do
provide information to the Members now, and----
Senator Kyl. Understood, but you made it clear that they
are not part of the official scoring.
Mr. Barthold. So, I mean the Members--the budget rules are.
I am not a budget rule expert, and I am not sure if you wanted
to change budget rules or have information reported in a
different fashion for us. I mean, we try to provide information
to Members in a form that is useful to them. So I am really not
sure how to answer your question about what to do about budget
rules or decisions that the Select Committee might want to
tackle.
Senator Kyl. Appreciate that. What would it take for us,
for you to include those estimates that you talked about, the
feedback effects and so on, in your official revenue tables, in
your official scores of tax changes?
Mr. Barthold. Well, as I said, for the Ways and Means
Committee now on a reported bill, we do provide the
macroeconomic analysis with sensitivity. So it is available for
Members of Congress to read the conventional estimate and the
macroeconomic analysis and then make their decisions based upon
that. So as a mechanical, just as a mechanical feature, there
is really nothing. I will----
Senator Kyl. Well, but there----
Representative Barthold [continuing]. Note there are
certain time constraints.
Senator Kyl. If I could just interrupt, I understand--you
understand our problem----
Mr. Barthold. Right.
Senator Kyl [continuing]. Which is that people are going to
look at the score, how much of a 10-year savings have we
achieved, did we meet our goal of 1.5, and if we can't score--
you and CBO are the arbiters here in some sense of the success
of our policies in terms of everybody being willing to agree
that it had that effect. The estimates that you give us are
very useful to us, but it is not going to count in the score if
there isn't a way to include it. So I am just asking, is it a
matter of policy or practice? Is it something that CBO has as a
policy that we would need to change? Is there a statutory
change that we would have to make to include this? And if you
don't know and would need to think about it, then could we
visit with you some more so that we could help figure it out?
Mr. Barthold. Certainly help. I might suggest that Mr. Van
Hollen, who is on the House Budget Committee, might--would
probably know more about this than----
Senator Kyl. We will put the burden on him to answer the
question then.
Mr. Barthold. I am not trying to shrug the responsibility.
Senator Kyl. You don't have to know the answer, but we
need----
Mr. Barthold. I am not a budget law expert. I mean, I think
the question that you are posing, Senator, is one about House
and Senate rules and about the budget law. The macroeconomic
analysis that we provide currently is under a requirement under
House rules. The complexity analysis that we provide with any
bill was a result of legislative action, statutory action that
Senator Portman was one of the primary movers on back in the
late 1990s. So some of the things that we report to Members are
a result of statute, some are as a result of rule.
Senator Kyl. We can answer that question. I appreciate your
response. Thank you very much.
Thanks, Mr. Chairman.
Chairman Hensarling. The co-chair now recognizes
Congressman Becerra of California.
Representative Becerra. Mr. Barthold, I think we have
entered this interesting realm of asking you to predict the
weather. We know this is a large economy, and when it is
intertwined with the economies of the rest of the world it
becomes very difficult for you to come up with estimates of
what a tweak here will do or a tweak there will do, but you do
have conventions that you use to help you make decisions, and
we have to rely on those. We have to rely on the Congressional
Budget Office working with you to help us come up with these as
good as you can estimates of what might happen. You have
developed these over the years, have you not?
Mr. Barthold. Yes, sir, and we try to, you know, update the
modeling, the data, the thinking on a continuous basis.
Representative Becerra. Are you using what you believe are
the best models that we have to date?
Mr. Barthold. We think we are doing--I mean, we think we
have very good models. They are more sophisticated than they
were 10 years ago, 15 years ago. We have upgraded in a number
of areas.
Representative Becerra. You could use some of the less
conventional, some of the unconventional models that are out
there that haven't been as road tested as the models you use.
They may show in the future to be more accurate than yours, but
they also may show that they will have been less accurate than
the ones that you use?
Mr. Barthold. We look at work by outsiders all the time to
help inform ourselves.
Representative Becerra. Let me ask you this. In 30 days can
you come up with a better model than what you are using now to
tell us what the impact will be of anything we do on tax policy
or budgetary policy?
Mr. Barthold. Well, I am sorry to say, Mr. Becerra, but in
a 30-day time period you are probably stuck with us as we are.
Representative Becerra. Okay.
Mr. Barthold. I mean, and as you had noted, yesterday I
tried to outline some of the breadth and I believe
sophistication of our modeling.
Representative Becerra. And what you do will inform us as
we try to move forward. We may look at what you do and say we
agree completely, we may disagree, but at some point we have to
make a decision what we will use as the model. And what you are
saying to us is that you have given us the best model that you
can, at least within the next 30 days.
Let me ask you another question. Using that model, we have
heard discussion about corporate tax reform. There is talk
about eliminating those tax breaks that certain companies get
over other companies and then using the money to plow back into
the system to help reduce the rates for all the companies. That
way you broaden the base, and you make it a fair Tax Code for
all companies. If you were to eliminate all the tax breaks that
right now corporations take advantage of and put the money into
lower rates, using the model we have, does that help us, the 12
of us, reduce the deficits that we currently see?
Mr. Barthold. Lowering--if you did something to----
Representative Becerra. You plow back all the money that
you get from removing all the tax breaks into just lowering
rates, using the current model that you use, do we reduce the
deficits?
Mr. Barthold. Let me make an important point, and I hope I
don't--I guess I will probably exhaust your time, for which I
apologize.
As we have noted a couple of times, one of the large
corporate overall business tax expenditures is accelerated
depreciation. As I have noted, cost recovery is important in
terms of determining the effective marginal rate or the user
cost of capital. So it is not just looking at the statutory
rate. It is also what is the statutory rate and over--and how
do you get to recover costs for invested capital that determine
the profitability of investments and so the decision to invest.
So if you scale back accelerated cost recovery and use the
benefits of that to reduce the corporate rate, you are, on one
hand, saying you are making investment less attractive by
scaling back the capital cost recovery and, on the other hand,
saying you are making it more attractive by reducing the
marginal rate on the income when it is ultimately taxed. And
that in itself is not automatically pro growth, because you are
going in one direction with cost recovery and the other
direction with rate.
We have--can I have a--I am sorry, sir.
Chairman Hensarling. The witness can finish, please.
Mr. Barthold. We have done some preliminary work. A couple
of my colleagues presented some of this work just this last
spring at a symposium at a national tax association. And it
suggested within our corporate model that getting rid of
accelerated depreciation and plowing just that money back into
corporate tax rate is probably not going to be pro growth. It
is going to be much more neutral.
Chairman Hensarling. The time of the gentleman has expired.
The co-chair wishes to announce to members that a vote for
House Members is expected at 1:30. Doing a rough calculation
and in consultation with my co-chairman, I would like to ask
unanimous consent that for the second panel that the first
round of questioning be limited to 5 minutes and the second
round of questioning be limited to 1 minute. In a rough
calculation, it means that all members would be able to ask
their questions.
Without objection, so ordered.
Members are also encouraged, if they so choose, to
consolidate questions they may have on both panels at this time
in the interest of time.
The chair now recognizes Congressman Upton of Michigan.
Representative Upton. Thank you, Mr. Chairman.
I just want to say I am one of those folks not only on this
panel but I think in the entire Congress that wants to simplify
the tax code, that knows that we need real tax reform, we want
to simplify the code, we want to broaden the base, we want more
people working, we want to add to economic growth. It would be
great if we could do it in this panel. I don't know if we can.
And if we can't, we will do a long-term plan to work with
Chairman Camp to make sure that that happens.
In Michigan, we have had some really tough times. You may
know that our unemployment is over 11 percent, and we have had
32 consecutive months at double-digit unemployment.
My district is right on the State line. We have a new
Governor. We have a new legislature. And they began to pick up
the pieces and passed some tax reform and got rid of some
business taxes. The person that was most upset was the Governor
of Indiana, because he had billboards in my district that said
``Michigan businesses, come on down'', and they did.
So as I look at what we have to do on tax reform, we know
that we have to compete with other nations around the world.
And to comment on one of the things. I am going to yield back
to you on some of my time. In the last Congress we passed a
currency manipulation bill aimed at China, H.R. 2378. And I
know I saw a headline today in some of the news that some of
the business groups are very concerned that if this legislation
came about again it would perhaps lead to retaliation by
Chinese companies against American firms.
I am wondering, if you all did a study as to what the
impacts of the Chinese currency manipulation really mean as it
relates to U.S. businesses that export or involve trading
partners in China. Have you all done anything on that?
Mr. Barthold. We work with the Congressional Budget Office
on what we call indirect tax effects of nontax legislation, but
I do not think that we did any work on the currency bill, sir.
Representative Upton. Would it be possible to ask you maybe
or do I have to go through Chairman Camp to get a request in on
that?
Mr. Barthold. No, we work for all the Members of Congress.
I am not that familiar with the legislation, so I will ask a
couple of my colleagues to look into it.
Representative Upton. Okay. I yield back.
Chairman Hensarling. The co-chair recognizes Senator Baucus
of Montana.
Senator Baucus. Thank you, Mr. Chairman.
Mr. Barthold, it has been thrown around here by several
people that there is about $1 trillion worth of tax
expenditures annually. Could you tell me, I assume that is just
a total, that it has not been--those provisions are not all
scored. Because if you were to score all those, you reach a
number maybe the same as or slightly different than just adding
them all up.
Mr. Barthold. The tax expenditure estimates are
nonbehavioral estimates, and they are taken--and they are
really just a measure of, if you are claiming this particular
tax benefit, given your current tax position, what is the value
of that benefit to you. It is not to say that if you were to
eliminate that benefit that everything else that that taxpayer
is doing would remain the same and you would be able to recoup
all of that money.
For example, I mean, in the business tax expenditures, just
to pick on one, the low-income housing tax credit, now, some
businesses that invest in these low-income housing partnerships
through which they earn the tax credits they generally view
that as a profitable investment. So if we were to repeal that--
and part of the way it is profitable is because it is tax
sheltered. Well, we asked the question, where does that money
go? What else happens?
Senator Baucus. I know. But that does raise revenue. The
repeal would raise revenue.
Mr. Barthold. The repeal would raise revenue, but it would
not raise revenue equal to the value that----
Senator Baucus. That is my question. That is the point I am
making. So if you total up all the deductions, the credits--
let's just take the deductions, itemized deductions, the
standard deductions, what would that be, roughly?
Mr. Barthold. We will have to get it for you, Senator.
Senator Baucus. Okay. Therefore, you can't answer the next
question, which is, if we want revenue neutrality, how much
would that lower rates, individual rates?
Mr. Barthold. I will have to--we will have to undertake
that analysis. Some members have asked. We are actually in the
process of trying to do something close to that.
Senator Baucus. The first cut is just the itemizers or the
standard deduction.
Mr. Barthold. Uh-huh.
Senator Baucus. The next level let's add, okay, exclusions
and above-the-line measures. Let's say we repeal those.
Mr. Barthold. Okay.
Senator Baucus. And then, to some degree, you get the
business income. We have got interest, expense, and was it 199
deferral and so forth. It is difficult, because some of this
applies to C-corps only and some doesn't.
So if you could just--the major categories show what the
revenue effect is. If Category 1, if they were all repealed in
Category 1, those are the standard deduction and itemized
deductions, that is one. Next is exclusions and so forth,
employee health care exclusion, for example. And then the other
would be other business income. And what the corresponding rate
reduction would be for----
Mr. Barthold. I will follow up with your staff on that for
you, sir.
Senator Baucus. Thank you.
Chairman Hensarling. The co-chair now recognizes the
Senator from Ohio, Mr. Portman.
Senator Portman. Thank you, Mr. Chair.
I think all of us are going to be really interested in that
information because that goes to all the issues we talked about
earlier about a more efficient Tax Code and how low can the
rate get, how much can you broaden the base.
I want to go through some specific corporate tax reform
ideas that have come up today and maybe some concerns that have
been raised and get your quick response, if I could. Because I
think we have got a good hearing today on the big picture, but
we left some things unanswered.
First is the impact on so-called pass-throughs. And I know
there has been a discussion about pass-throughs. It is more
than 80 percent of U.S. businesses. I believe that is the
latest number. It is sole proprietors and partnerships, sub-Ss
and LLCs in my State.
If you lowered the corporate rate and did so by getting rid
of some of the existing preferences and those preferences also
applied to the pass-throughs, it would seem unfair. They would
still have a relatively high rate and yet they would not get
the advantage of any of the changes and preferences. How would
you address that apparent inequity to be sure that our smaller
businesses who are pass-throughs and organized not as C-corps
do not find themselves disadvantaged by corporate reform?
Mr. Barthold. Well, Senator Portman, I noted earlier that I
thought that it would be technically extremely, extremely
difficult to wall off the elimination of preference items to
one business entity and not--that it would create a lot of
behavioral questions that you might or might not want to
address about are you forcing people to change their choice of
their preferred business entity, would you try to prohibit
people from switching entity form.
As to other options, I imagine you could think of things
that you might do that could provide a new preference of some
sort for the pass-through--for pass-through entities. We could
explore options with you on that one.
But one of the reasons I emphasize that business income is
taxed as a C-corporation and business income is also taxed on
the individual return was to make exactly that point, that you
want to think of business income when you look at some of the
reforms that you might have in mind and not----
Senator Portman. Mr. Barthold, my time is short, and I
apologize.
One way to do it, it seems to me, is to look at the C-corp
separately so you wouldn't apply it to individual rates. You
just apply it to the----
Mr. Barthold. But it is very difficult to wall that off. I
mean, C-corporations participate in partnerships, for example,
on research ventures with individuals and other non-C-
corporations.
Senator Portman. Well, this is something, if you can get
back to us on that, it would be very helpful. Because I know
there are a number of us who have concerns about that and have
some ideas about it. But we need to follow up on that.
Second is the expiring provisions. You talked about 150
over the next couple of years. Certainly the issue of certainty
and predictability that everyone has raised here today should
enter into that. In other words, some of these expiring
provisions aren't nearly as effective as they should be because
companies can't rely on them. And what is that impact in terms
of economic growth and again in terms of extrapolating to
revenue.
On depreciated and expensing, you talked about that in
response to Mr. Becerra. I think we would love to see something
on the complexity of current depreciation rules and some of the
inefficiencies in the current system. So it is not just
accelerated depreciation we are talking about, it is the whole
system. Although you indicate it reduces cost of capital for
investment and capital formation. It has also got a lot of
complexity involved with it, which makes it less efficient than
it could be.
And then, finally, the territorial side, which we don't
have time to go into, evidently, since the chair is rightly
stopping me, but we would love more information on, as Senator
Kerry said, other ideas there.
Chairman Hensarling. The gentleman from South Carolina,
Congressman Clyburn, is recognized.
Representative Clyburn. Thank you, Mr. Chairman.
Mr. Chairman, in 1986, a Republican President and a
Democratic Congress found common ground and came to a
bipartisan agreement that is similar to the one we are trying
to get to today. In that agreement, capital gains rates as well
as income tax rates were the same--I think it was 28 percent--
and it stayed the same for about 4 years. Can you tell us
whether or not there was any significant decrease in
investments in the United States during that 4-year period?
Mr. Barthold. I don't know the answer to that question off
the top of my head. Between 1986 and 1990, the economy
generally grew at a reasonable pace.
Representative Clyburn. That same 4-year period there was
growth.
Now, since 1990, we have had subsequent reductions in the
capital gains tax rate. Have we seen any significant increase
that can be attributed to that--to that reduction?
Mr. Barthold. Well, attributing broad macroeconomic
outcomes to specific provisions is always very difficult. I
mean, of course, in 1991 we did have an economic downturn. We
then had strong, strong growth. We had a downturn again at the
turn of the century.
Representative Clyburn. Thank you, Mr. Chairman.
Chairman Hensarling. The co-chairman recognizes Congressman
Camp of Michigan.
Representative Camp. Thank you, Mr. Chairman.
The administration has expressed some interest in reducing
the corporate rate, although we have not seen any detailed
proposals or form of proposals. But most analysis is suggesting
a corporate rate somewhere in the mid 20s. And the
administration has suggested raising the top rate on
individuals and pass-through entities to 40 percent or more.
Figure 7 of your handout shows how many more pass-through
returns than C-corp returns, and the number of pass-through
returns are increasing while C-corps are declining. And figure
8 shows the aggregate net income as a percentage of GDP of
pass-through entities as being a significant player in the
economy. So, regardless of size, I guess my point is there is a
lot of economic activity and a lot of jobs in the U.S. that are
connected to pass-throughs.
My question for you is, what would be the economic
consequences of taxing individuals in pass-throughs at a rate
that is about 15 percentage points higher than would be a rate
on C-corps if in fact we did tax return and how might that
distort decisions on how businesses were organized, if you have
an opinion on that.
Mr. Barthold. Well, I think the economics are largely as
you laid out, Mr. Camp. I mean, one additional factor to add in
is, remember, C-corporation income tax is a second level of
tax. Shareholders receive distributions, dividends, or capital
gains. So there is corporate tax and then there is a tax at the
individual level.
So the sum--if we were to reduce the corporate tax, that
would make a C-corporation relatively more attractive than
other business entities. We might see some change, might see
some diminished growth in one form at the expense of the other.
Representative Camp. All right. Thank you.
The other question I have is, again, since 1940, there has
been a budget surplus about 11 years in the U.S., looking at
your Figure 3 chart on Federal receipts as a percentage of GDP.
In only one of those years, 2000, was it over 20 percent, and
that was largely the result of capital gains. Now, outlays or
spending in that same period since 1940 never exceeded 19.4
percent of GDP of our economy, is that correct?
Mr. Barthold. That sounds right, but I did not reproduce
the figure, so I assume Doug Elmendorf presented that to the
Joint Select Committee.
Representative Camp. Doesn't that suggest then if we have
been able to have a budget surplus in 11 years since 1940 yet
we never had spending above 19.4 percent in those years and
revenues were only above, as a percentage of our economy, only
once in the year 2000 above that amount, doesn't that suggest
that the answer has been--to controlling deficits has been to
control spending, rather than to increase revenue to
unsustainable levels?
Mr. Barthold. Well, I am here just to be the tax weenie,
Mr. Camp. I really don't have a good answer for that.
Representative Camp. Thank you.
Chairman Hensarling. The chair recognizes Senator Kerry of
Massachusetts.
Senator Kerry. Thank you very much.
Dr. Barthold, have you, given the nonpartisan status of the
Joint Tax Committee, ever compiled a list of those, quote,
incentives that are not having either the intended economic
impact or that don't--you know, aren't worth the level of
foregone or forgiven revenue? Do you have a list of suggestions
you might make to the committee about----
Mr. Barthold. Not in recent memory have we really published
a hit list of the type that you are suggesting. I mean, we
have--as background work for both the Ways and Means Committee
and the Finance Committee when they have reviewed different
provisions in the, Code we have presented--
Senator Kerry. Would it be possible for you in these next
weeks, given the work, the analysis and, the various modeling
that you have done, do you not have already a foundation of
conclusions and evidence with respect to those things that are
sort of most productive?
Mr. Barthold. Probably not on as many as there are.
Senator Kerry. On some, would you give us some?
Mr. Barthold. We did work on some. We can present----
Senator Kerry. It would be helpful to have your judgment on
that.
For instance--let me ask you a question. Are companies able
to significantly lower their effective tax rate by using
offshore subsidiaries to reassign the licensing of their
intellectual property?
Mr. Barthold. We have done some exploratory work on that,
and there are certainly cases where that appears to be the
case. We can't conclude that that is generally the case of all
multinational corporations, but there certainly is evidence
that income is being shifted abroad to foreign jurisdictions to
lower overall worldwide tax revenue.
Senator Kerry. Well, we know, for instance, there is one
single famous building in the Cayman Islands which has maybe
35,000, 40,000 registered companies that are not companies at
all.
Mr. Barthold. You are referring to Ugland House, I believe
is the name.
Senator Kerry. Yes, I am.
But, clearly, those are----
Mr. Barthold. But the point that you are making is what is
the availability under present law to take income that would
otherwise be part of the U.S. tax base and have it be reported
offshore. And that is just not--that is not as simple as the
existence of Ugland House, but there is a number of factors at
play.
Senator Kerry. Could you share with the committee those
factors. Congressman Camp just asked you I think an important
question about the pass-throughs and how they are treated and
how they might be treated relative to the C-corps. Could you
share with us your perception of is there one factor or what
are the most critical factors that have contributed to the
growth of the pass-throughs and the limited liability
corporations?
Mr. Barthold. Well, I think there is actually--there is not
one. I think there is a number of factors.
You used to do C-corporations--all public corporations
basically are C-corporations. And so if you were seeking at
some point the public capital markets you organized yourself as
a C-corporation.
Now, there has been a lot of financial innovation. The
ability of new start-ups, be they small or be they large, to
access broader pools of capital has not necessitated them to
necessarily go to the public market. So that has certainly been
one factor.
The 1986 Tax Reform Act repealed the general utilities
doctrine which was one legal doctrine that essentially made it
potentially more favorable to operate in C form.
And I will defer on a third and fourth.
Senator Kerry. Well, we will follow up with you.
Chairman Hensarling. The chair recognizes Senator Toomey of
Pennsylvania.
Senator Toomey. Thank you, Mr. Chairman.
Mr. Barthold, we both discussed the fact that there are
some very broad items that are often described as tax
expenditures, the reduction of which wouldn't necessarily,
obviously, be pro growth. You know, in the case of how we would
treat income that is earned overseas, you make the point of how
we treat depreciation.
But there is another entire category that is just
egregious, it seems to me, and that does cost us economic
growth by virtue of their being there. It seems to me we have
as many--maybe more than a dozen different subsidies for
various kinds of green energy amounting to over $2.5 billion a
year. We have ethanol tax credits that are nearly $6 billion a
year. We have domestic manufacturing deductions that you can
get by making a movie. We have credits for rehabilitating
privately owned houses. My question for you is, don't these
certainly amount to the government picking winners and losers
within the economy?
Mr. Barthold. Well, I think that precise point was made
earlier by one of the other members of the joint committee.
Winners, losers, they all reflect policy decisions made by
Congress at some point.
Senator Toomey. Right. Okay. So let me ask it this way. Do
these features distort economic activity compared to what it
would otherwise be?
Mr. Barthold. Certainly. And that is actually part of what
the tax expenditure notion is about if you favor one sector
over another sector.
Senator Toomey. Right. Isn't it generally likely that if we
use the Tax Code to distort economic activity on balance we are
going to have less economic growth than we would have if we
allowed the marketplace to allocate capital instead of
political people?
Mr. Barthold. As a general matter abstracting from the
potential for what economists call externalities, the general
economic thinking is that the market outcome allocates capital
most efficiently.
Senator Toomey. And, for instance, in a specific case when
it comes to these credits as they apply to energy, if you step
back and look at it, if we as a society decide we are going to
use the Tax Code to drive people toward the use of less
efficient sources of energy, aren't we poorer as a society on
balance as a result of that?
Mr. Barthold. Again, if you--up to whether there might be
market externalities involved, you are saying that by favoring
one sector over another you are distorting choice, which means
you are not getting as much total outcome as you otherwise
possibly could.
Senator Toomey. Well, yes.
Mr. Barthold. But you have made that choice for the
Congress----
Senator Toomey. Right. For whatever other reasons, from a
purely economic consideration, if you choose to use a less
efficient source of energy, you have less prosperity,
therefore, less growth and fewer jobs.
Mr. Barthold. That is correct, sir.
Senator Toomey. Thank you.
Chairman Hensarling. The chair now recognizes Congressman
Van Hollen of Maryland.
Representative Van Hollen. Thank you, Mr. Chairman.
I just want to agree with Mr. Camp and really with some of
the observations you made earlier, Mr. Barthold, with respect
to the need to consider corporate tax in conjunction with the
individual tax side, given the increasing use of pass-through
entities, so that we can make sure we understand the
interrelationship between those things.
Looking at the corporate side, because I think there is
consensus that, at the top rate, 35 percent, as has been said,
is obviously higher than a lot of our competitors, much higher.
Effective rates aren't necessarily all higher. But just so that
we know where we are heading here in terms of the revenue and
deficit impact that we have to make up if we want to do this in
a revenue neutral way, is there a rough rule of thumb as to
what it would cost in terms of lost revenue for every percent,
you know, reduction from, say, the 35 percent rate? I have
heard a rough rule of thumb about $100 billion a year.
Mr. Barthold. I will have to check that for you, Mr. Van
Hollen. We did a calculation like that in the past couple of
years. But the enactment of expensing, which sort of changes a
lot of the business cash flow over the 10-year period over
which we have measured this, changes that calculation a bit. So
I will get a new calculation.
Representative Van Hollen. It would be helpful for us just
to sort through this. Because if we wanted to do this within,
say, the corporate Tax Code we would have to look at which tax
expenditures we thought we should prune or eliminate in the
process.
Let me just go back--circle back to a question that has
been asked of you in different ways but with respect to
scoring. And you have mentioned the House rules, and I have
looked at some of the analyses that you have done with respect
to taking into account the GDP effects. And as I understand
your analyses, one of the reasons you might be reluctant to
include a set rule within the score is that they take into
account so many different factors in the economy, what
decisions the Fed makes, whether or not deficits--you know, the
cost of the tax cut is offset. I mean, is that one reason why
it is complicated--it complicates being able to have a hard and
fast rule on this?
Mr. Barthold. There is uncertainty. And the analysis that
we provided to the Ways and Means Committee is just reflective
of the uncertainty.
One of the points that you made, the uncertainty can arise
from when you are dealing with changes in tax policy, changes
in expenditure policy, you are dealing with what economists
call fiscal policy, and there has been always the uncertainty
of, well, if Congress takes one path of fiscal policy, what is
the Fed's monetary policy? Do they accommodate that fully or do
they partially offset that? That affects the macroeconomic
outcomes.
Representative Van Hollen. Thank you.
Thank you, Mr. Chairman.
Chairman Hensarling. Dr. Barthold, before you begin your
next testimony, I would inform you and other members we would
anticipate that the hearing would conclude 1:30-ish, 1:45
perhaps. As a courtesy to you, the chair is certainly willing
to declare a 5-minute recess.
I see you are ready to plow on. You are recognized for your
second round of testimony.
Mr. Barthold. Well, thank you again.
What I thought I would do, if you can turn back to just the
little packet of pictures and tables, is I will try and give a
very, again, a brief overview of the structure of the
individual income tax, some prominent features. And then I
wanted to maybe address in a little bit more detail the notion
of going to our tax expenditure analysis that our staff
prepares annually as the ultimate template for considering tax
reform.
But, first, the basic structure of the individual income
tax.
An individual computes his or her taxable income by
starting from gross income. You reduce that by the sum of
deductions allowable to get to adjusted gross income. Those are
referred to as the above-the-line deductions. The taxpayer may
then choose to either claim the standard deduction or itemized
deductions, and then there is a deduction for personal
exemptions depending upon the taxpayer's family size.
Then graduated rates are applied to the taxpayer's taxable
income to determine a preliminary tax liability. We have at
present and have had for several years special lower maximum
rates on income from capital gains--realized capital gains and
qualified dividend income. And then the taxpayer from the
preliminary tax liability may reduce that tax liability by
certain allowable tax credits.
Overlaying this, as I know all the members are aware, we
have an individual alternative minimum tax, which is a separate
calculation which in concept was designed to limit the overall
ability to claim--and I will speak very loosely--too many
deductions or too many credits.
If you turn to the first page in the second part of the
pamphlet, these are just really kind of the key parameters, the
beginning of the key parameters through time in terms of
defining the individual income tax. We have reported here from
1975 through the current year the value of personal exemptions
and the standard deduction. The reason to note these is to note
that the individual income tax is a personalized income tax and
that it depends upon filing status--married, single, head of
household--and essentially the family size, the number of
personal exemptions.
Senator Portman. Would you tell us what page you are on?
Are you on 71?
Mr. Barthold. Senator Portman, if you go back to the
special packet of figures, there was a break page that said
part two. And it is because I organized the testimony as
individual and business, but the co-chair said they would like
to talk business first, so I put together this separate packet.
So if you go to the--if you then go to the second page that
is labeled Table 2, Federal individual income tax rates for
2011, I reproduced this here just to show you the rate
structure which begins with a bottom rate of 10 percent. But,
remember, you don't get to that 10 percent rate until you are
above the level of the sum of the standard deduction and the
personal exemption. So there is effectively what is known as a
zero bracket. Our top rate, as you can see, is 35 percent.
But I do want to note that, as you are well aware,
effective in 2013 under present law the current rate structure
of 10, 15, 25, 28, 33, and 35 becomes 15, 28, 31, 36 and 39.6.
For a little bit of history, the next page of your packet,
Figure 10, reproduces for joint filers for some selected years
the introductory point, the bracket point, and the value of the
rate of the highest statutory marginal rate. And so what you
can see is the history of the top bracket and the top rate
through time since 1975.
The top rate has declined from 70 percent to 35 percent,
soon to be 39.6. But the entry point at which you get to that
top rate has also declined. So the top bracket in real 2010
dollars used to be at an income of--taxable income of over
$800,000. Today, it is approximately $375,000.
Comparable to that on the next page is Figure 11, sort of
the history of where the bottom bracket begins. And you can see
through time that there has not been as much change in the
bottom bracket's rate, but the entry point in real dollar terms
has increased. Whereas in 1975 it was approximately $13,750,
measuring in today's dollars, now you have no tax liability at
all until an income as a joint filer of over $18,700.
Now, an additional feature of the last 35 years is that the
Congress has enacted a number of tax credits. Some are specific
to specific types of activities. In the previous discussion,
some energy discussions were noted. The two most significant
credits are the refundable credits, the earned income tax
credit and the child tax credit.
Turning now to the next page, on Table 3 I identify under
our current projections the 10 largest individual tax
expenditures as part of the Internal Revenue Code today. And I
wanted to note, as I did for business, that several of these
items have consistently been among the top 10 tax expenditure
items that we report and measure since we began this exercise
in 1975. Four have made the top 10 lists in eight of the sample
periods that we have taken over this period: the exclusion of
employer contributions for health care and health insurance
premiums, the net exclusion of pension contributions and
earnings from employer pension plans, the deduction for
mortgage interest on owner-occupied homes, and the deduction
for nonbusiness State and local taxes. That would be sales
taxes and/or State income taxes.
Now, earlier--I guess it was last December now--the
National Commission on Fiscal Responsibility and Reform
suggested that one approach to deficit control was to undertake
a serious tax reform and to do that by looking at what is
actually a long list of tax expenditures that the joint
committee staff publishes annually. The appeal of that is
probably made most clear in Figure 13, which is the very last
page of the pamphlet--of the packet.
It just shows in a simple numerical count--this is not
measuring dollars, and we have had a little bit of a
methodological change. I can explain that later, if you would
like. But that, basically, the number of tax expenditures has
grown through time. That what have may reasonably be deemed
special provisions of law that deviate from a more
theoretically pure income tax, that we have added additional
special provisions through time. And that is what the line
graph on page 13 shows.
The National Commission suggested, let's take a clean
slate, eliminate all or almost all the tax expenditures. And
one thing I would like to emphasize for the committee--and this
is coming from I guess persons must characterize themselves as
sort of a tax technician--there is a lot of decisions that the
members have to make to get to that clean-slate proposal. It is
really not as easy I think as a simple read of the Commission
report suggests of taking a clean slate.
First of all, it is not clear as a matter of crafting
legislation what it means to eliminate a tax expenditure and
take a clean slate. For example, I will take a very minor tax
expenditure but a tax expenditure nonetheless.
A number of employers provide fitness and weight equipment
in the workplace for their employees to use as a working place
fringe benefit. Well, in tax principle that is compensation to
the employee, and it is compensation that goes untaxed under
the individual income tax.
And so if we were to say, well, let's wipe out that tax
expenditure, how do I do that? Do I have to take a valuation of
the value of the weight equipment and attribute that to the
employees? You know, if someone is, you know, the classic couch
potato and they wouldn't touch an exercise machine for anything
so they don't go to the one at the workplace, does that person
get the inclusion or not? Or do we do some second-best approach
and say, well, we know that the employer incurred expenses to
provide those facilities. Let's deny a deduction to the
employer.
Those are--if we wanted to have a clean slate, those are a
lot of important decisions both in terms of how we craft the
law and in terms of what the ultimate revenue effect would be.
And that is the second point that I want to make. In looking at
our list of tax expenditures, the dollar value of a tax
expenditure, as calculated by my staff and colleagues, is not
the same as the estimated revenue effect to the Federal
Treasury from elimination of that provision.
As another example, home mortgage interest deduction, it is
on the top 10 list that I posited there. If we were to
eliminate the home mortgage interest deduction, it doesn't mean
that we automatically capture the full value of all that
deduction. You will see a lot of different behavioral effects.
I might decide to take some additional funds out of my savings
accounts and prepay part of my mortgage, reducing future
interest payments that I would be making and thus affecting the
tax liability and the tax revenues increases that would result
in denying me a deduction for my home mortgage interest. A new
home buyer might decide to buy a smaller home and thus incur a
smaller mortgage than they would under the present law
baseline.
So two key points I would like to keep in mind is a lot of
important decisions--because it is not obvious what it means to
eliminate some tax expenditures and we can't just add up the
dollars that we have--that my staff and I have reported as tax
expenditure values and say we can get all that and reduce the
deficit dollar by dollar by an elimination--we take into
account a lot of important behavior, and how the legislation is
crafted also affects that estimate.
Chairman Hensarling. Thank you, Dr. Barthold.
Before the co-chair recognizes himself, again in
anticipation of pending votes in the House, with the indulgence
of our friends from the Senate, the chair would like the take
the liberty of calling upon House Members first and then
yielding the gavel to my co-chair, Senator Murray, to conclude
the hearing.
So at this time I will yield to my----
Co-Chair Murray. To the co-chair, many people think that
this is a partisan divide. I want to just concede that the
Senate is being conciliatory in the manner of this committee in
allowing that to occur.
Chairman Hensarling. Duly noted for the record.
Dr. Barthold, I want to go back to your Figure 3, Federal
receipts as a percentage of GDP. And you have graced us--and I
mean that sincerely--with a number of charts that are very
helpful. I did not--do you have a similar chart that just deals
with Federal income tax receipts as a percentage of GDP with a
historical retrospective to the post war? I did not see one.
Mr. Barthold. I have it in the--not a picture, but I have
the back-up data for it, I believe, in the Appendix around page
7. If it would be helpful to have it in figure form, I can get
that.
Chairman Hensarling. At some point.
Because, again, I want to return to a question I had
earlier. Regardless of the ongoing debate about the wisdom of
raising individual marginal rates, I am just questioning from a
historical perspective just how promising of a reservoir of
revenue that may prove to be. Because I have looked at other
data--and, again, you don't have data right in front of me that
totally correlates--but I believe somewhere in the early 1950s
marginal rates were as high as 90 percent, yet income tax
revenue as a percentage of GDP was roughly 10 percent.
Somewhere in the late 1980s I believe the top marginal rate
dropped as low as 28 percent, and income tax revenue as a
percentage of GDP was somewhere in the 10\1/2\ to 11 percent
range, I believe. And at least the data I have seen that shows
wide disparities in the top marginal bracket yet income tax
revenue as presented to GDP has been roughly 9 to 10 percent.
Is that a fair reading of the data? Do you have data that is
similar or contrary to that----
Mr. Barthold. Page 49 of the large version of my testimony
has the individual income tax and the other Federal taxes as a
percentage of GDP year by year from 1950 to 2010.
And just to confirm your recollection, as you did note
earlier this morning, in coming out of World War II and then at
the time of the Korean War top individual marginal tax rates
were 90 percent or above. The 1986 Tax Reform Act lowered the
top individual tax rate to 28 percent, although there had been
other legislation prior to that. It didn't drop from 90 to 28.
There had been other legislation prior to that.
There were at the time, both in the 1950s and then later in
the 1960s, 1970s, 1980s, a lot of other things going on, both
in terms of the economy and, of course, in terms of tax policy.
Part of the 1986 Reform Act broadened the base, so it lowered
the rate and broadened the base. In the 1950s and 1960s, there
was some tax sheltering activity. Part of the 1986 Act was to
try and moderate, mitigate, tax sheltering activity with a
broader base and attract people into more regular investments,
as opposed to tax shelter investments.
Chairman Hensarling. Forgive me, Dr. Barthold, but my time
is running out here. I want to get in one or two more
questions.
In data we have seen from the Congressional Budget Office
under their alternative fiscal scenario, essentially their
current policy baseline, they show revenues growing in nominal
terms by $2.1 trillion over the next decade. Under a current
law baseline, they show tax revenues growing by $2.6 trillion
over the next decade. Do you have a similar analysis? Do you
agree or disagree with their figures that, either under a
current policy baseline or a current law baseline, that tax
revenues are predicted to increase?
Mr. Barthold. Just to reemphasize, Mr. Hensarling, we do
all our work consistent with the Congressional Budget Office
macroeconomic and receipts baseline. So, yes, we concur. If
that is how they characterized the current policy baseline, I
concur in Doug Elmendorf's projections. Those are the
projections that we use.
Chairman Hensarling. In the limited time that I have, with
respect to individual income tax rates, one of my colleagues
brought up the question of tax fairness, which is a very
important subject. It tends to be a subjective subject. It is
important for a number of reasons, I assume not the least of
which is compliance.
But with respect to the facts, the latest data I have seen
from the IRS I believe dates back to either 2007 or 2008 and
would indicate that the top 1 percent of wage earners pay
approximately 40 percent of the income taxes; the top 5 percent
pay approximately 60 percent of the income taxes. Do you agree
with that analysis?
Mr. Barthold. I will produce separate tabs for you on
that----
Chairman Hensarling. I appreciate that.
My time has expired. And, again, the gentleman from
California has perfect timing, so the co-chair will yield to
the gentleman from California, Congressman Becerra.
Representative Becerra. Thank you, Mr. Chairman.
Mr. Barthold, thanks again, and let me focus on a couple of
things.
We have heard quite a bit in the last several days about
the Buffett rule, that someone like Mr. Buffett, one of the
wealthiest men in the world, pays at a lower rate of taxation
than does his secretary. Could you tell us a little bit about
the features of the Tax Code that makes something like this
possible, that someone who is making so much money, not a
millionaire but a billionaire, could actually have an effective
tax rate that is lower than his secretary?
Mr. Barthold. I assume that what Mr. Buffett is referring
to is his average tax rate, which is the total amount of tax
that he pays over his total amount of income, although it is
possible he might be referring to his marginal tax rate. I am
honestly not clear on what he is claiming.
But let's assume that his secretary is paid less than
approximately $106,000 a year. So that would mean that the
secretary is--each additional dollar--and I will talk marginal
tax rate--is subject to the individual income tax rate and is
subject to the payroll tax rate. Now, Mr. Buffett, as you
posited, I don't know what salary he is paid, but his total
income is not all subject to the payroll tax rate, the Social
Security part of payroll.
Representative Becerra. So any individual that has an
income that exceeds $106,000, $107,000----
Mr. Barthold. That exceeds the wage base is not subject to
the Social Security part of the payroll tax. Their wage income
is still subject to the Medicare part of the payroll tax. So
that would be one factor.
Representative Becerra. So that helps lower the rate a bit
for those who are wealthier or who make over $107,000 in
income.
Mr. Barthold. In terms of a marginal rate.
Now, if we are looking at average tax rate it becomes a
little bit more complex. Because, as I noted here, depending
upon your filing status and number of dependants, the first
$10,000 to $15,000 to $18,000 of income is not subject to any
tax and, in some situations, you are eligible for the earned
income tax credit. Those features would go into calculating an
average tax rate.
Representative Becerra. Let me see if I can concentrate you
a little bit, because I know my time will expire.
Someone who has a lot of investment income, passive income,
you have got dollars in stocks or bonds, does the fact that
part of your income or a great portion of your income is
generated through those investments, through passive income,
have a great deal to do with the distortion we see in someone
very wealthy, having a high income paying at a lower rate than
his or her secretary?
Mr. Barthold. Both the relative average and/or effective
marginal rate would be affected by the composition of income.
Under present law, there is a top statutory tax rate on income
from capital gains of 15 percent.
Representative Becerra. So let me make sure. So capital
gains, right now, 15 percent is taxed. There is a 15 percent
tax on the gain on a particular investment, capital gains
investment.
Mr. Barthold. If you realize an asset that has a gain so
your stock appreciated in value and you sold it, the gain would
be taxed at a maximum of 15 percent.
Representative Becerra. Right. Let me see if I--okay.
Because I am going to quickly run out of time.
So your stock appreciated, you sold it, you had a gain on
it, a profit, you are taxed at 15 percent.
Mr. Barthold. That is correct.
Representative Becerra. The secretary gets a paycheck every
2 weeks, every month, sees the payroll deduction, pays taxes on
the income, could be at the higher level of up to 28 percent.
She is paying at 28 percent if she has got income that takes
her to that tax rate, but the profits on that stock that was
sold will only pay at the 15 percent. That could account for
part of why some folks who are very wealthy have a lower rate.
Now, another question. We often hear people say, well, some
Americans don't pay any taxes. What they are I think really
saying is they don't pay any Federal income taxes. Because most
Americans will tell you, I just went to the grocery store, and
I pay taxes, the sales tax. Every time I take a look at my
property tax bill and I have to make that payment, I pay taxes
on the property. There are certain excise taxes. So even
modest-income Americans are paying taxes of some sort, is that
correct?
Mr. Barthold. We have a lot of different taxes in the
United States, yes, sir.
Representative Becerra. Thank you.
I yield back my time. Thank you, Mr. Chairman.
Chairman Hensarling. The co-chair recognizes Congressman
Upton of Michigan.
Representative Upton. Thank you, Mr. Chairman.
Again, I want to reiterate and put myself firmly in support
of tax reform. Though I wasn't here for Kemp-Roth I would love
to vote for Camp-Baucus at some point down the line, maybe in
the next 2 months.
Let me ask a couple of questions. One, you talked a little
bit about the mortgage interest deduction and the fact that it
may not be scored--if that was removed, it may not be scored at
the $484 billion, as you have reflected here on Table 3. Have
you actually--has Joint Tax actually done an analysis on if
that was removed what the impact would be, the jobs and
economic impact on home builders and roofers and the whole
impact on the construction sector across the country if that
was taken away?
Mr. Barthold. We have not been asked to do that, sir.
Some of our macroeconomic capability in the modeling we do
separately model a housing sector, but we have not looked at a
proposal that targets a large swath of mortgage interest
deductions either for new loans or existing loans.
Representative Upton. I think that would be very important
for the committee to understand in terms of the economic impact
if that was removed.
The second thing, I want to get back briefly to this cap or
if the 15 percent on capital gains was increased. Again, you
mentioned earlier my question--there is a question as to how
many folks, if you raised that percentage, would it be--would
folks not bank as much or save as much? Would they spend it?
What is the impact on jobs if that 15 percent capital gains tax
was raised in terms of the spending power that folks will have
taken away because they won't have that income for themselves?
Have you done any studies on that at all or not, particularly
maybe as reflected when we added a higher tax rate in earlier
years?
Mr. Barthold. Well, Congressman, under present law, that 15
percent rate moves to 20 percent in 2013.
And, again, we have not recently had any--really any
request to analyze a broader change to raise that rate, so we
have not undertaken a macroeconomic analysis. I don't even
think we have done one of our conventional estimates recently
for a change in that rate.
Representative Upton. The last question that I have is, I
know earlier this year former Assistant Treasury Secretary Pam
Olson told the Senate Finance Committee that if the AMT
survived tax reform that the committee should go back and start
over. I would like to think that we would have the same view
among the 12 of us here.
What are the compliance and complexity issues involved as
it relates to removing the AMT? I know, as I understand it,
when it first was put into place the view was that it was going
to impact about 16 American families, and today obviously it is
tens of thousands. So what advice do you have as it relates to
that?
Mr. Barthold. Well, the AMT was redesigned in 1986. And
really kind of the intent of Congress in 1986, it wasn't per se
a small number of higher-income families. It was really to say
we are broadening the base, and we wanted to put some overall
cap on the ability of people to take the deductions or special
credits or exclusions that remain. Now, that in and of itself
didn't automatically target it at any particular income level.
The targeting was by the exemption.
Complexity, the fact that you run a dual tax system and
that you plan or you have to prepare your taxes under one
schedule and then go recompute under a different schedule,
obviously additional time taken, additional complexity,
additional chance for error.
I think everyone on our staff, of course, recognizes that a
number of people are frustrated with sort of a dual system. It
is a difficult policy problem that I know the members face.
Chairman Hensarling. The co-chair now recognizes
Congressman Clyburn of South Carolina.
Representative Clyburn. Thank you, Mr. Chairman. Mr.
Barthold, thank you so much. I have two quick questions.
When Dr. Elmendorf testified last week, I asked him a
question about unemployment and what impact that number has on
the deficit. Could you give me some idea as to whether or not
you think there is any correlation between that unemployment
rate, job growth, and the deficit.
Mr. Barthold. Between job growth and----
Representative Clyburn. Job growth. Let me ask it another
way. The impact, reducing the unemployment. If you were to drop
unemployment from 9.1 to, say, 8.6, can you give us some idea
of what impact that would have on the deficit?
Mr. Barthold. Well, I am sure that Doug Elmendorf probably
gave a more precise estimate. I think the point that he----
Representative Clyburn. I assure you he didn't. He said he
would have to get back to us.
Mr. Barthold. Oh, he did, okay. Well, then, I will wait for
that, too, but I will tell you the general principle that is
going to, to get lower unemployment, you are getting stronger
economic growth. Stronger economic growth means that there is
more national income, which means that our tax base is
expanding, so if we could magically get more economic growth,
you know, doing nothing, then the deficit would decline from
increased economic growth, and so----
Representative Clyburn. So there is a correlation.
Mr. Barthold. I, too, will wait for Doug's analysis on
that.
Representative Clyburn. Let me ask you, what impact would
lifting the payroll taxes have, if you were to lift that cap, I
know it is $106,800 today, if that were moved to 212, 215?
Mr. Barthold. We have not had any cause to estimate a
proposal such as that. If the Joint Select Committee wanted to
explore that, we could provide an estimate of that proposal.
Representative Clyburn. Mr. Chairman, would it be okay to
ask for? I would like to see some analyses----
Mr. Barthold. Okay, we will provide that.
Representative Clyburn [continuing]. Incrementally up to
doubling it.
Mr. Barthold. Okay. So to a wage base of $212,000 was
your----
Representative Clyburn. Maybe 150, 175, 212, some
incremental steps.
Mr. Barthold. Okay, a couple of different halfway marks.
Representative Clyburn. Yes, sir.
Mr. Barthold. Okay, we will respond.
Representative Clyburn. Thank you. Finally, I also would
like to see, I understand you are going to get back to us with
the numbers as to who is paying how much, and I know I have
been hearing talk of late about whether or not the low income
pay their fair share of taxes. Could you provide us with some
kind of a profile of who the taxpayers are and what kind of
taxes they are paying?
Mr. Barthold. Okay. We have for both Ways and Means and
Finance for some hearing work have provided some analysis like
that. I will assemble that and I will get that to the Joint
Select Committee members.
Representative Clyburn. I would very much like to see that.
Thank you so much, and I yield back.
Chairman Hensarling. The chair recognizes Congressman Camp
of Michigan.
Representative Camp. Thank you, Mr. Chairman. The Joint
Committee on Taxation regularly publishes data on average tax
rates paid by Americans, do they not?
Mr. Barthold. Well, actually we don't make it a routine
practice, but we end up for work for your committee and for the
Finance Committee often preparing that information.
Representative Camp. And you have recently published the
data on that?
Mr. Barthold. Yes, we have.
Representative Camp. And it is made available to the
public?
Mr. Barthold. Yes, it is.
Representative Camp. And you are not alone, the IRS also
does this?
Mr. Barthold. The IRS reports with a lag because they
report on actual, compilations of actual tax returns filed.
Representative Camp. And the Congressional Budget Office
also does this, do they not?
Mr. Barthold. CBO does some distribution work using
slightly different modeling assumptions, but yes, they do.
Representative Camp. And according to the recent Joint
Committee on Taxation, and I just want to go at this point of
millionaires and billionaires pay lower rates than middle class
families, which has been out there in the public domain, and I
just want to go at this point.
Mr. Barthold. Certainly.
Representative Camp. According to your recent Joint
Committee on Taxation data on income, social insurance and
excise taxes, Americans with incomes between $50- and $75,000
pay an average tax rate of 12.8 percent, and Americans with
incomes over a million dollars pay an average tax rate of 23.6
percent?
Mr. Barthold. That is income and payroll taxes combined.
Representative Camp. Yes.
Mr. Barthold. Yes, sir, that sounds----
Representative Camp. That sounds correct? And the IRS backs
this up. Every agency does a little bit different analysis, but
they also have the most recent data saying on individual income
tax rates Americans making a million dollars or more pay an
average of 23.3 percent, so it pretty closely tracks what you
say, but they say Americans between $50,000 and $100,000 pay an
average rate of 8.9 percent.
Mr. Barthold. Okay.
Representative Camp. And CBO has a similar analysis.
According to their most recent data on Federal taxes, and that
is income, social insurance, corporate income taxes, and excise
taxes, and household income, the top 1 percent of American
households who earn an average, and they have a category of
1.7, above $1.7 million, pay an average tax of 31.2 percent,
and middle income families pay an average--and that is between
an average income of $60,700--pay 14.2 percent. So in America
it is just not the case that millionaires and billionaires pay
at a lower rate than middle class families.
Mr. Barthold. I was going to say that is why I was trying
to clarify for Mr. Becerra's question whether Mr. Buffett was
talking about marginal tax rates or whether he was talking
about average tax rates. What you are reporting are all what we
refer to as average tax rates, taking total amount of tax paid
and dividing it by your total income.
Representative Camp. Well, frankly, Mr. Buffett needs to
give his secretary a raise. But, I also want to talk about the
comparisons in income of salary versus capital gains, and they
are different, aren't they?
Mr. Barthold. One is return to investment, the other is
return to labor effort.
Representative Camp. And in common parlance, one is taxed
twice?
Mr. Barthold. Capital gains from equities, from stock, the
growth in the value that gives rise to the gain is in most
cases from increased earnings by the business, and the business
is taxed at the business level, as you noted. You can also have
capital gains on other capital assets that are not in corporate
form.
Representative Camp. But for the average American in terms
of the rhetorical discussion here, capital gains is taxed
twice, salaries are not. Now, salaries are deductible by
business entities, are they not?
Mr. Barthold. That is correct.
Representative Camp. And that is another difference; is
that correct?
Mr. Barthold. Well, that is your single level of tax.
Representative Camp. Right. So the comparison of the two is
not actually comparing two like commodities or two like things,
which is the point I wanted to make. So I appreciate your
comments, and I appreciate the work that the Joint Committee on
Taxation does analyzing tax data. It does track what the IRS
and the Congressional Budget Office are also saying about
average tax rates paid by both middle income and high income
Americans. So thank you for your testimony.
I yield back.
Mr. Barthold. Thank you, Mr. Camp.
Chairman Hensarling. Congressman Van Hollen of Maryland is
now recognized.
Representative Van Hollen. I thank you, Mr. Chairman. We
are talking about averages of averages. In other words, average
tax rates for average taxpayers over certain income levels. One
of the ideas of trying to make this fair is to make sure that
no individual taxpayer can take advantage of a lot of special
preferences, and I would point out that the top 400 richest
Americans, all making over $110 million per year and making an
average of $271 million a year, paid only 18 percent of their
income in income tax in 2008, the effective rate.
But what I really want to turn to is the larger
conversation about tax expenditures that has been discussed by
many tax experts for a long time but has gotten more popular
discussion as a result of Simpson-Bowles and some of the other
commissions that have looked at this. And there are a number of
ways to deal with the tax expenditure issue. One is to look
them over and decide to eliminate them or a subset of them.
That could be used to reduce the deficit, raise revenue, and
also to buy down rates.
Another way to do it is along the lines of one of the
proposals the President made, which is for higher income
earners, for example at the 35 percent rate you would say their
deductions, regardless of what specific deduction it was, would
get the 28 percent deduction level as opposed to 35 percent so
that higher income individuals weren't getting, you know, a
disproportionate benefit from the deduction.
A third way, and this is what I want to focus on, is to not
look at any particular deduction but to find a way to limit the
overall number of deductions. Then you don't have to
necessarily get in a fight over whether this has important
social policy or another policy. One way that has been done in
the past was something named after former Congressman Pease,
Don Pease, which is still an aspect of the Tax Code which sort
of phases out your deductions based on your income, and one of
the concerns that have been raised by some people about that,
including some of our Republican colleagues, is it changes
indirectly your marginal, your top marginal rates.
But there is another way to go about this, and I want to
explore that, and this is in the interest of searching for
common ground, and Martin Feldstein, who was of course the
Chairman of the Council of Economic Advisers under President
Reagan, has written about this. He has written about it in The
Wall Street Journal, the headline of the article, ``The Tax
Expenditure Solution to Our National Debt;'' written about it
in The Washington Post, headline ``How to Cut the Deficit
Without Raising Taxes;'' and I do want to just read a portion
of his article.
It says, ``There is a way to cut budget deficits without
raising taxes. Tax expenditures are the special feature of the
U.S. income tax law that subsidize a variety of things,'' and
he says ``with respect to the Simpson-Bowles proposals, their
most extreme suggestion is to eliminate all tax expenditures
raising a trillion dollars a year in tax revenue, and then use
all but $80 billion of that to cut taxes.'' He goes on to
comment, ``I think that devotes too little money to deficit
reduction at a time when fiscal deficits are dangerously
large,'' and then he goes on to present another alternative
because, as you pointed out, there may be tax expenditures that
whether for policy or political reasons people aren't going to
want to go after. So rather than picking one, he says ``let's
try and get at this overall issue,'' and here is his practical
alternative, and I am quoting, ``Congress should cap the total
benefit taxpayers can receive from the combined effect of
different tax expenditures. The cap could be set as a
percentage of an individual's adjusted gross income and perhaps
subject to an absolute dollar amount.''
Mr. Barthold, my question to you is, that approach, does it
address the concerns some have raised with respect to the so-
called Pease approach in that the approach being presented by
Martin Feldstein does not affect the top marginal rates or the
marginal rates?
Mr. Barthold. The short answer is yes. Do you want me to
explain why?
Representative Van Hollen. Yes, if you could, because again
I am offering this in the spirit of common--you know, trying to
find some common ground here.
Mr. Barthold. By contrast, the Pease provision basically
says if you earn more income, I take more of your itemized
deductions away. So that has the effect, as it is drafted, of
increasing your marginal rate by 3 percent. So if you were
otherwise in a 31 percent bracket, your effective marginal tax
rate on earning additional income, and if you are subject to
the Pease provision, would be 31 percent.
Now, what Professor Feldstein has proposed is a cap that is
based against--on adjusted gross income, and so as you earn
more income, as your adjusted gross income goes up, the cap
actually goes up, and so if the cap were binding on some
taxpayers, the effect of the Feldstein proposal would be to I
earn an additional $100, well, that will increase my allowable
deductions by whatever the percentage cap is, so that I maybe
even increase my deductions a little bit, which means my
taxable income goes up by $100 or if the cap is binding,
slightly less than $100. So that leaves the marginal tax rate
either unchanged or in some cases will reduce it.
Now, I, too, read The Wall Street Journal op-ed piece by
Professor Feldstein, and he had proposed a cap of 2 percent.
Representative Van Hollen. Right.
Mr. Barthold. Now, most of our States do have State income
taxes which are deductible against the Federal income tax, and
the State income taxes are generally at a rate above 2 percent,
so the State income tax would generally go up and increase your
itemized deductions, which means it is really sort of a wash.
You wouldn't get that reduced marginal rate effect, but you
would be held constant.
Representative Van Hollen. At the Federal level you could
actually have a reduction in your marginal tax rate?
Mr. Barthold. Well, not if you are in a State with State
income----
Representative Van Hollen. Okay, and I would just----
Mr. Barthold. It would never increase the marginal rate.
Representative Van Hollen. Right.
Mr. Barthold. It would only hold it constant or reduce it.
Representative Van Hollen. Thank you. And I just urge my
colleagues to take a look at this concept.
Chairman Hensarling. The co-chair recognizes his co-chair,
Senator Murray of Washington.
Co-Chair Murray. Thank you very much. I wanted to ask your
opinion about this notion that tax expenditures are just
another form of government spending. I have heard Chairman of
the Federal Reserve, former Chairman Alan Greenspan, Martin
Feldstein that was just being referred to. Both have argued
that tax expenditures are simply a difference in form than in-
kind as direct government spending, and I wanted to ask you,
what is your assessment on whether or not tax expenditures are
just simply government spending in an alternative package?
Mr. Barthold. Well, Senator, that is--the construct of the
tax expenditure is to say where am I doing something special,
and there is a lot of different ways that government
policymakers can choose to do something special. I mean, you
could have a direct subsidy or you could have implicitly a
subsidy through the Internal Revenue Code. So in that sense you
think of tax expenditures as spending by another name.
Now that sort of begs the question of why on policy merits,
you know, you decided, you know, the Congress decided to do it,
why they decided to do it this way. In some cases a direct
spending program could be easier to administer and more
efficacious, could require fewer rules. It is possible that the
opposite could also be the case, that it could be, you know,
easier to administer a tax benefit than, you know, a specific
new government program.
So, remember, it is a notion measured against a more, an
idea of a more theoretically pure income tax and saying where I
am deviating from that is I am not measuring income correctly
or I am not measuring income theoretically correctly, and I am
putting a value to that deviation, and so I could have said,
here, measure someone's income correctly and then provide a
subsidy related to whatever the activity is that you wanted to
do.
Co-Chair Murray. Okay. Well, we have heard over and over
and over again about the need to review and reduce redundant,
wasteful, inefficient government spending. The Budget Control
Act, which we just did, cuts a trillion dollars over the next
10 years, that is a very important step in that direction.
These budget discussions and cuts are impacting directly a lot
of people now as we try to put together our appropriations
bills, those of us who are on that committee are watching the
pain. We have reduced and eliminated programs that benefit
students, we have cut support for police officers on the
street, we have reduced support for programs that keep people
in emergency shelters rather than homeless. I mean, these cuts
are having an impact.
However, we have still largely left untouched whether it
makes sense to keep a whole host of these tax expenditures,
whether we should continue mortgage interest tax breaks for a
yacht that qualifies as a second home, whether the entire
amount of Leona Helmsley's $8 billion charitable bequest for
the care of her dogs should be left untouched, whether Kentucky
thoroughbred horses should be given special tax breaks. We
actually even have a tax credit for employees on former Indian
lands in Oklahoma, which is now covering two-thirds of that
State.
So, you know, maybe some of these tax credits make sense,
maybe they don't. We have had an intense discussion here about
earmarks. We have not had an intense discussion about these tax
expenditures.
I wanted to ask you if you see any policy reason why we
could not analyze or consider individual tax expenditures as
candidates for elimination or modification outside of
comprehensive reform or do we have to wait for reform of this
whole system?
Mr. Barthold. Senator, those sort of decisions are in your
hands. I mean, the tax writing committees in their oversight
role are looking at a number of these provisions all the time,
so I mean, I guess I don't have an answer that is better than
that for you. You certainly can explore the merits of different
provisions.
Co-Chair Murray. Okay, thank you. I yield back my time.
Chairman Hensarling. The co-chair now recognizes Senator
Kyl of Arizona.
Senator Kyl. Just a couple questions, but following up on
Senator Murray's question, are tax expenditures just another
form of government spending? In looking at the 10 items listed
under tax expenditure in your Table 3, isn't it the fact that
only one of those, the earned income tax credit, is actually
scored as outlays, government outlays?
Mr. Barthold. That is true.
Senator Kyl. Second, relative to Representative Becerra's
line of questioning, just to put a little bit of an exclamation
point on this, let's say you are a teacher, you hold some
stocks or you have got a pension, it has got stocks in
companies, you get a dividend from that. The value of what you
receive is affected by what the corporation first had to pay in
its corporate taxes; isn't that correct?
Mr. Barthold. That is the point.
Senator Kyl. So the old saw that corporations don't pay
taxes, people do is actually true, and so when--and I presume
that Warren Buffet's income is largely derived from passive
income of one kind or another, dividends, capital gains,
whatever other kind of corporate earnings there may be on his
significant investments. So to really calculate what he pays in
taxes, you would also have to know what the companies that he
is invested in have paid in the way of corporate income taxes,
would you not?
Mr. Barthold. To figure out the full burden.
Senator Kyl. And that is true of anybody else with
investment, with stock investments, for example?
Mr. Barthold. Yes.
Senator Kyl. Thank you very much.
Co-Chair Murray [presiding.] I will yield to Senator
Portman.
Senator Portman. Thank you, Madam Chair. I would like to,
if I could, dig a little deeper on the individual side now that
we are over there, and I would go back to the basic question,
you know, what should the burden be, we have talked about that,
of taxation on a weak economy, and then what is the best
system.
Looking at your testimony, starting on page 35 you talk
about the Simpson-Bowles approach, and you make the point that
some of the revenue estimations from the Joint Committee on
Taxation are going to be different than some of the general
reporting from the Simpson-Bowles committee because there are
some interactions between some of these tax preferences.
However, my general question for you is, have you all had
the opportunity to do an analysis, to do a revenue estimate of
the Simpson-Bowles proposals? I know it is a menu, in essence.
If you could answer that, it would be helpful.
Mr. Barthold. Well, the short answer, Senator, is no, and
that is for the one reason that I elaborated on in the
testimony, and that is because underlying the idea of
eliminating tax expenditures is, need some policy calls on, you
know, what the Members intend to do, what effective date the
repeal mortgage interest deduction, would it be just for new
mortgages or would it be for all?
Senator Portman. I didn't provide you enough specificity to
be able to come up with a score, but you could come up with a
score if certain decisions were made on timing?
Mr. Barthold. There is a long--if decisions were made, we
would get to work, but there are a lot of decisions to be made.
Senator Portman. But do you disagree with their menu? In
other words, do you think that their analysis is accurate as to
the various rates that you could get to based on the reduction
of certain preferences?
Mr. Barthold. Well, I think I have to disagree some. What
they are saying is if you gave, you know, if you started with
several hundred billion dollars over, let's say, you know, a
10-year period, that that would enable you to achieve, you
know, X percentage point reduction in individual rates. That
part of the analysis is probably, you know, reasonably
consistent with the analysis that we would do.
The point that I was making was that you can't take this,
my top 10 list here and add it up and say, ah, that money is
available to reach that same amount of----
Senator Portman. Because there will be transitions, there
will be some timing issues.
Mr. Barthold. Well, not just transition, but our tax
expenditure calculations do not account for taxpayer behavior
that would occur if you eliminated them.
Senator Portman. Right, some of the interactions. Well, I
think that would be very helpful, if we could give you some
more specificity as to timing and specifically, you know, which
preferences we are talking about because those sorts of scores
are very valuable. I know you have done some of this for
Senator Wyden and his good work, he did with Judd Gregg last
year and with Senator Coats this year, I know you have some
joint tax estimates on both the individual and corporate side
there; is that correct?
Mr. Barthold. Well, you know, officially we never comment
on any work that we do for any individual Member, but if
Senator Wyden told you that we did work for him, I am sure we
did.
Senator Portman. I just revealed a great secret here. My
point is simply that there has been a lot of work done on the
impact of some of these changes and preferences and how it
would affect rates.
Mr. Barthold. We have done work on a number of provisions
that are like a number of things that people want to look at
when they talk about modifying tax expenditures, but, again, it
matters a lot what you want to do.
Senator Portman. Quickly, can we talk about AMT for a
second? Can you tell us what the cost is of eliminating AMT
over the next 10 years under the current law baseline?
Mr. Barthold. Yeah. I think we are a little bit above $1.1
or $1.2 trillion.
Senator Portman. Okay, and is that with or without
extension of the tax cuts? Are you talking current policy or
current law? Are you talking about under the current law
baseline?
Mr. Barthold. That is under present law, which assumes that
the current----
Senator Portman. Elimination of all the Bush tax cuts?
Mr. Barthold. Well, that the current--yes, that is letting
EGTRRA/JGTRRA expire and also the current AMT patch would
expire.
Senator Portman. Which affects the AMT costs, correct?
Mr. Barthold. That is correct. There is interaction----
Senator Portman. What about a patch, what is a patch under
the scenario of current law assuming that we are--it is about
600, 650?
Mr. Barthold. I don't recall. I think it is closer to $800
billion.
Senator Portman. Okay, and that again assumes--that sounds
like it might assume that the top two rates do not expire or
does that assume current law?
Mr. Barthold. Under--I think that is under current law,
yeah.
Senator Portman. Okay, we would love to have those numbers.
I think there is a consensus on the committee here that we want
to look at least at the idea of patching the alternative
minimum tax for all the reasons we talked about today.
Mr. Barthold. We will provide all the members with an
estimate of--when you say the patch, would you propose just
indexing the current----
Senator Portman. As Congress has done over the last
several----
Mr. Barthold. Well, Congress has done it three different
ways. We will come up with something for you.
Senator Portman. Okay. And in terms of AMT, have you also
looked at the impact on your macroeconomic analysis we talked
about earlier? In other words, if you keep the Tax Code as it
is and allow the AMT to hit another 20 or 30 million Americans,
what would the impact be on the macroeconomic side, including
GDP?
Mr. Barthold. Some of the AMT effect has been built in to
past work that we have done. Since the AMT is part of present
law, the way our macroeconomic analysis is undertaken is we
take our conventional modeling analysis and use that to
determine what the effective marginal tax rates are on
different classes of taxpayers, on wage income, on their return
to saving. So that is built in.
If your specific question is if we--have we done an
analysis that says maintain present law except for some change
in the AMT, no, we have not done such a macroeconomic analysis
isolating on----
Senator Portman. Okay. Thank you, Madam Chair.
Co-Chair Murray. Thank you. Senator Kerry.
Senator Kerry. I was reminded a little while ago, somebody
mentioned the Tax Reform Act of, I guess, 1986, the rates at 70
percent, I had the pleasure of voting to get rid of the 70
percent and come down to--I think originally we chose two
rates, as I recall it was 28 and 14 under the Reagan proposal.
Mr. Barthold. 14 and 28.
Senator Kerry. Yes, and then we found we couldn't make it
work, there wasn't sufficient revenue, et cetera, and we popped
it up to the 33, and then there were sort of these incremental
changes, so we have had some experience with this process.
What I would like to ask you first of all is, the tax
expenditures are substantially higher today, are they not, than
they were immediately after the Tax Reform Act of 1986?
Mr. Barthold. Senator Kerry, tax expenditures, remember it
is a measure of the value of, for example----
Senator Kerry. Well, both in total size and as a percentage
of tax receipts, they are substantially higher than they were
immediately after 1986?
Mr. Barthold. Well, one--a nuance I want to put to that is
the calculation of the tax expenditure depends upon the tax
rates. Since tax rates today are higher than they were
immediately after the 1986 act, absent anything else, the
measure of tax expenditure----
Senator Kerry. But the tax expenditure per se hasn't been
responsible for the growth? It is not the tax expenditure that
has suddenly changed; it is other things, is it not? Choices we
made about what to provide as a preference, perhaps?
Mr. Barthold. And that is what the last figure in my short
packet, you know, indicated was that Congress has made policy
decisions.
Senator Kerry. Exactly, and I want to come to that for a
minute because I think it is important for all of us to connect
those. I think we have got to understand the relationship
between those choices, that the actual tax expenditure itself
post-1986 is substantially the same as the one we have today,
but other things have happened. For instance, are some of the
growth of tax expenditures attributable to the increase in the
tax rates?
Mr. Barthold. Yes, that was the point I was just making, in
terms of measuring the value.
Senator Kerry. So that is one increase. Another increase,
didn't we contribute to them relatively substantially when we
passed the preferential treatment on capital gains and
dividends?
Mr. Barthold. That is one of the larger tax expenditures.
Senator Kerry. That increased that expenditure?
Mr. Barthold. Yes.
Senator Kerry. Likewise, the incentive on retirement
savings?
Mr. Barthold. Retirement savings, as I noted here, it makes
our top 10 list.
Senator Kerry. Right. And in total those are the things
that have most substantially contributed to the growth of the
tax expenditures, the policy choices we made?
Mr. Barthold. The policy choices that Congress has made are
the factor that make, that have changed the tax expenditure
budget. I will note that we did include in the appendix to the
submitted testimony a list of all the tax expenditure items
added since the 1986 act.
Senator Kerry. Right, and that is very helpful, and I think
we need to bear through it. What I want to bear down on, Dr.
Barthold, is all of the major proposals--I mean, I consistently
hear colleagues on both sides of the aisle, and I share this,
it would be great if we could simplify, it would be great if we
could create pro-growth outcome, it would be terrific if we
could broaden the base and reduce the rates. I think that--are
those worthy goals that we ought to be pursuing?
Mr. Barthold. Improved efficiency, more growth, it all
sounds pretty----
Senator Kerry. Right. Now, most of the proposals to do
those kinds of things envision reducing the sort of six
marginal rates, bring them down to three rates, and that is
what you hear most often, and a lower rate, corporate rate, the
25 percent seems to be the one that is sort of ringing bells
these days. Is it possible, in your judgment, to structure a
system that lowers the rates, broadens that base, and improves
progressivity and creates growth in your judgment? Can you
envision that based on your experience all these years in doing
this?
Mr. Barthold. It is feasible. You know, as a tempering
factor, you remember that it is often the case in policy-making
that goals will be in conflict. Reducing tax rates sometimes is
in conflict with reducing what you perceive to be the overall
fairness or equity of outcomes. Improving efficiency can mean
that sometimes things are made more complicated rather than
less complicated. So there can be lots of trade-offs. There is
lots of different policy decisions. But it is a worthy thing to
try.
Senator Kerry. Is it--well, in 1986, for instance, we tried
to get really super simple, we created those two rates, but
then we had that tax bubble that got created as a result. Can
you sort of just as a matter of helping people understand the
difficulty here just talk about that for an instance, of how
that bubble came about?
Mr. Barthold. How the bubble came about?
Senator Kerry. Yes.
Mr. Barthold. The bubble----
Senator Kerry. What I am getting at is, can we create a
system where you have two or three rates and you don't create a
bubble?
Mr. Barthold. The bubble sort of--remember the bubble was
marginal, was about marginal rates. What the bubble did was it
phased out the benefit of the standard deduction and the lower
rates if you were above certain income levels. So while the
bubble had this range of income over which the marginal rate of
tax was 33 percent and then the marginal rate of tax dropped
down to 28 percent, the effect of the bubble, by eliminating
essentially to such a taxpayer the benefit of a zero rate of
tax, the standard deduction or the personal exemption or the 14
percent bracket, had the effect of by the time you were at the
end of the bubble, your average tax rate was 28 percent, but
everywhere in the bubble your average tax rate was less than 28
percent, less than 28 percent but increasing. So the bubble
promoted overall progressivity but had the appearance--well, it
didn't have the appearance, it had the actual effect of a
marginal tax rate of 33 percent for someone in the bubble range
and then the marginal tax rate dropped back down to 28 percent
beyond the bubble range. But the person beyond the bubble range
had a higher average tax rate than a person in the bubble or a
person beneath the bubble.
Senator Kerry. So it is all very simple. We will get there.
Mr. Barthold. I hope that was responsive. It was sort of a
technical point.
Senator Kerry. No, it is an important point and I
appreciate it. Thank you.
Co-Chair Murray. Senator Toomey.
Senator Toomey. Thanks very much, Madam Chairman. I want to
go back to the topic of capital gains because I just think this
is very, very important, and the one observation that I want to
make is that I think it is abundantly clear that it is the
investment of accumulated capital that makes economic growth
possible, and any policy that diminishes that accumulated
capital is very, very dangerous in terms of its implications
for economic growth. Congressman Camp and Senator Kyl both
observed that when capital gains are imposed on the appreciated
value of a stock, it is almost certainly a form of double
taxation because the underlying stock has been--had the income
associated with it taxed in the first place, and that is
certainly completely true.
I would like to make another point about this which has to
do with inflation. Mr. Barthold, I am sure you would agree that
in the post-war era our economy has had no sustained periods of
deflation. We have had inflation of varying levels, but
consistently. And we charge, we impose a capital gains tax on a
nominal gain in value of an asset, not on the real gain. So
that is to say that we impose the capital gains tax on the
inflationary gain. Is that true?
Mr. Barthold. Yes, it is correct. We tax nominal values
throughout the Internal Revenue Code.
Senator Toomey. So if you had a sustained period where
inflation averaged just 3 percent, as the math works out in 24
years, the value of assets doubles. I shouldn't say the value,
the nominal price doubles, but yet the real value hasn't gone
up at all in that scenario, and yet we would still impose a
capital gains tax, wouldn't we?
Mr. Barthold. That is correct.
Senator Toomey. So, in effect, what we are doing in the
case of assets that appreciate in value, if the appreciation
were due only to really the loss of value of the dollar and
inflation, you would have zero real gain, and yet you would pay
a tax, so you would literally be paying a tax, despite having
no gain in real terms; isn't that true?
Mr. Barthold. That is correct, sir.
Senator Toomey. So it seems to me that this phenomenon has
long been part of the reason that at least we try to mitigate
that by having a capital gains rate that is lower than ordinary
income tax rates, just one of the rationales?
Mr. Barthold. That has been one of the stated policy
rationales, sir.
Senator Toomey. Thanks, and I will yield the balance of my
time.
Co-Chair Murray. Thank you very much. Under our agreement
we had agreed that each member would have an additional minute.
But, Mr. Barthold, you have been generous with your seat time
here. In the interest of being a good example, I will yield
back my time.
Representative Becerra, do you have one additional
question?
Representative Becerra. I do, I will make use rapidly of my
one minute.
Mr. Barthold, very interesting here because I think
everyone would agree that the Tax Code is neither simple or
transparent, and the reality is that complexity, the opposite
of simplicity, is what helps people hide what they should pay
in taxes, and so if you have complexity and at the same time
you don't have transparency, which is, acts like complexity in
helping you hide your income, you can get away without paying
what would be your otherwise fair share.
Now, it is really fascinating the way we treat corporations
because there is this concern that we tax twice income that
comes from a corporation because ultimately the individual is
the one that pays the taxes. Are any Americans forced to form a
corporation?
Mr. Barthold. No, sir. Corporate is an elective form of
business.
Representative Becerra. Right. So if it is so bad, why are
so many people forming corporations? Because they get certain
benefits by doing so, whether it is on the tax side or
otherwise. So I think we have to recognize that complexity and
transparency, whether it is on the corporate side or individual
side, should be removed so we can truly understand how we get
to a fair Tax Code.
I yield back.
Co-Chair Murray. Representative Van Hollen.
Representative Van Hollen. Thank you, Madam Chairman. Just
to pick up on Mr. Becerra's question, because we have heard a
lot about the double taxation of capital gains, but isn't it
true that there are many assets that get the preferred 15
percent capital gains rate that are not subject to another
layer of taxation, real estate, commodities, S corporations;
isn't that true?
Mr. Barthold. Yes, I made that point briefly when Mr. Camp
was discussing the issue.
Representative Van Hollen. Do you have any idea, you know,
how that compares in magnitude to the overlapping?
Mr. Barthold. Off the top of my head, I don't. Our staff
has looked at that, and I can report from--back to the
committee on, from what--the IRS creates a sale of capital
asset files where we get some detailed information on what sort
of assets do people realize in reporting capital gains. We will
run some tabulations on the SOCA file, and I will make that
available to the members of the Joint Select Committee.
Representative Van Hollen. Thank you, Mr. Barthold. Thank
you.
Co-Chair Murray. Thank you very much. I want to thank the
witness today for participating and all of our members who were
here today as well. I remind all of our members that they have
3 business days to submit questions for the record, and I would
ask the witness to try and respond as quickly as possible. So
all of our members should submit their questions by the close
of business on Tuesday, September 27th, and with that without
objection, the joint committee stands adjourned.
[Whereupon, at 1:45 p.m., the committee was adjourned.]
A P P E N D I X
Additional Material Submitted for the Record
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