[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

                               __________









 Printed for the use of the Joint Select Committee on Deficit Reduction


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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.]


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              Additional Material Submitted for the Record

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