[Joint House and Senate Hearing, 113 Congress]
[From the U.S. Government Publishing Office]


                                                         S. Hrg. 113-88
 
     LESSONS FROM REAGAN: HOW TAX REFORM CAN BOOST ECONOMIC GROWTH 

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

                                HEARING

                               before the

                        JOINT ECONOMIC COMMITTEE
                     CONGRESS OF THE UNITED STATES

                    ONE HUNDRED THIRTEENTH CONGRESS

                             FIRST SESSION

                               __________

                             JULY 31, 2013

                               __________

          Printed for the use of the Joint Economic Committee

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                        JOINT ECONOMIC COMMITTEE

    [Created pursuant to Sec. 5(a) of Public Law 304, 79th Congress]

HOUSE OF REPRESENTATIVES             SENATE
Kevin Brady, Texas, Chairman         Amy Klobuchar, Minnesota, Vice 
John Campbell, California                Chair
Sean P. Duffy, Wisconsin             Robert P. Casey, Jr., Pennsylvania
Justin Amash, Michigan               Mark R. Warner, Virginia
Erik Paulsen, Minnesota              Bernard Sanders, Vermont
Richard L. Hanna, New York           Christopher Murphy, Connecticut
Carolyn B. Maloney, New York         Martin Heinrich, New Mexico
Loretta Sanchez, California          Dan Coats, Indiana
Elijah E. Cummings, Maryland         Mike Lee, Utah
John Delaney, Maryland               Roger F. Wicker, Mississippi
                                     Pat Toomey, Pennsylvania

                 Robert P. O'Quinn, Executive Director
                 Niles Godes, Democratic Staff Director



                            C O N T E N T S

                              ----------                              

                     Opening Statements of Members

Hon. Kevin Brady, Chairman, a U.S. Representative from Texas.....     1

                               Witnesses

Hon. James S. Gilmore III, President and CEO of the Free Congress 
  Foundation and Free Congress Action and 68th Governor of 
  Virginia, Alexandria, VA.......................................     4
Hon. Laura D'Andrea Tyson, Professor, Business Administration and 
  Economics, Haas School of Business, University of California, 
  Berkeley, CA...................................................     6
Dr. Kevin Hassett, John G. Searle Senior Fellow and Director of 
  Economic Policy Studies, American Enterprise Institute, 
  Washington, DC.................................................     8
Dr. Jane Gravelle, Senior Specialist, Government and Finance 
  Division, Congressional Research Service, Washington, DC.......    10

                       Submissions for the Record

Prepared statement of Chairman Brady.............................    26
Prepared statement of Hon. James S. Gilmore III..................    27
Prepared statement of Hon. Laura D'Andrea Tyson..................    29
Prepared statement of Dr. Kevin Hassett..........................    34
Prepared statement of Dr. Jane Gravelle..........................    49
Prepared statement of Vice Chair Klobuchar.......................    60


     LESSONS FROM REAGAN: HOW TAX REFORM CAN BOOST ECONOMIC GROWTH

                              ----------                              


                        WEDNESDAY, JULY 31, 2013

             Congress of the United States,
                          Joint Economic Committee,
                                                    Washington, DC.
    The committee met, pursuant to call, at 2:05 p.m. in Room 
G-50 of the Dirksen Senate Office Building, the Honorable Kevin 
Brady, Chairman, presiding.
    Representatives present: Brady, Paulsen, Hanna, Maloney, 
and Delaney.
    Senators present: Lee.
    Staff present: Gabriel Adler, Gail Cohen, Connie Foster, 
Martha Gimbel, Niles Godes, Colleen Healy, Christina King, 
Robert O'Quinn, and Steve Robinson.

    OPENING STATEMENT OF HON. KEVIN BRADY, CHAIRMAN, A U.S. 
                   REPRESENTATIVE FROM TEXAS

    Chairman Brady. Good afternoon, everyone.
    America's current tax code is too costly, too complex, and 
unfair--but mostly, unfair.
    It is unfair to families. Whether you are single or raising 
children, starting your career or experiencing retirement, the 
tax code is impossible to understand. It is more time-consuming 
than ever, and you are always wondering: Is the next guy paying 
the same as me?
    You can't possibly keep up with the 4,000 changes 
Washington has made in the past decade. That is a new change in 
the tax code every day. Few taxpayers even know the tax 
provisions to which they are entitled. For example, there are 
15 different tax provisions for higher education, each with its 
own set of rules. The ``simple guide'' for these provisions in 
higher education is 90 pages long. And if you accidently make a 
mistake, the IRS is unforgiving.
    Today's tax code is unfair to businesses. It costs too much 
for businesses to keep up with their taxes--especially if you 
are a small business. Most have to rely on outside tax 
preparers. It is not fair that many small businesses pay higher 
tax rates than big businesses. And it is not fair that American 
companies face the highest tax rate among developed countries.
    Our outdated tax code often double-taxes American 
companies, forcing them to shift workers and research overseas 
just to try to compete on a level playing field against foreign 
competitors.
    Today's tax code is unfair to America.
    The complex and burdensome tax code drains over $160 
billion out of America's economy each and every year. It makes 
it too hard to start up new businesses and create new jobs. 
America has fallen behind its global competitors in Europe and 
China--saddled with a tax code that costs us sales, contracts, 
and jobs when we compete.
    Experts predict that a simpler, fairer, flatter tax code 
for families and businesses could create up to 1 million new 
jobs in the first year and make us competitive again in the 
21st Century.
    We need a simpler, fairer tax code that protects taxpayers, 
not special interests, and helps Americans compete and win.
    So what can we learn from the last comprehensive rewrite of 
the American tax code?
    When President Ronald Reagan took office on January 20th, 
1981, the top individual income tax rate was 70 percent. The 
Economic Recovery Tax Act of 1981 reduced the top individual 
rate to 50 percent by the end of his first term. The Tax Reform 
Act of 1986 reduced the top individual rate further to 28 
percent by the end of his second term.
    Contrary to the claims of Reagan's critics at the time, 
these rate reductions neither starved the Treasury for revenue 
nor undermined the progressivity of the income tax.
    Income taxes as a share of our economy remained virtually 
unchanged. The share of income tax paid by the richest 
Americans increased dramatically.
    For example, the share of federal income taxes paid by the 
top 1 percent rose from 19.1 percent in 1980 to 27.6 percent in 
1988.
    In contrast, the federal income tax burden on the middle 
class fell. Indeed, the share of federal income taxes paid by 
the bottom 50 percent fell from 7.1 percent in 1980 to 5.7 
percent 8 years later.
    The Tax Reform Act of 1986 reduced the top corporate income 
tax rate from 46 percent to 34 percent. But the positive 
effects of lower corporate rates were largely offset by the 
repeal of the Investment Tax Credit, longer depreciation 
schedules especially for buildings, and the repeal of the 60 
percent exclusion of capital gains from taxation, effectively 
raising the top tax rate on capital gains from 20 to 28 
percent.
    The tax reforms enacted under President Reagan were not 
perfect, yet collectively they boosted economic growth and 
employment. Tax changes in Reagan's first term increased real 
GDP by more than 10 percent, while tax changes in his second 
term partially offset these earlier gains by less than one 
percent.
    The overall success of Reagan's tax policies brought about 
a worldwide revolution in taxation. Over the next two-and-a-
half decades, nearly every developed country in the world 
reduced tax rates on both individuals and corporations.
    The average combined corporate tax rate among the countries 
in the OECD declined from approximately 48 percent in the early 
1980s to 25 percent last year. And after Japan recently cut its 
corporate income tax rate, the United States, regrettably, now 
has the highest combined corporate tax rate among our global 
competitors at 39.2 percent. It is the worst.
    Despite President Obama's individual income and capital 
gains tax rate increases in January which have slowed the U.S. 
economic recovery, the President still asserts the wealthy are 
not paying their fair share of federal taxes.
    However, the facts just don't support this assertion.
    An objective study by the OECD found that the highest 
earning 10 percent of the U.S. population actually paid the 
largest share among 24 countries examined, even after adjusting 
for their relatively higher incomes.
    The richest 10 percent in the United States pay 1.35 times 
their share of income in taxes compared to the OECD average of 
just 1.11. ``Taxation is most progressively distributed in the 
United States,'' the OECD study concluded.
    Unfortunately, as other countries have moved forward in 
reducing their individual and corporate income tax rates, the 
United States has reversed course, undoing much of the earlier 
rate reductions. Including President Obama's latest tax 
increases, our top individual income tax rate is now nearly 44 
percent.
    The purpose of today's hearing is to review the lessons we 
should have learned from previous tax reforms. What worked? 
What didn't? And why?
    And most importantly, given our anemic recovery from the 
current Recession--the weakest recovery since World War II--how 
can we improve our tax system to get the most economic bang for 
the buck.
    What I have seen as a member of the tax-writing House Ways 
and Means Committee is that our current complex tax system 
diverts productive resources into wasteful lobbying and tax 
avoidance schemes. It favors consumption over investment, debt 
over equity, large businesses over small, and some industries 
over others.
    Tax reform should eliminate these distortions and promote 
economic growth. Hopefully, today's hearing will help us 
identify the steps we need to take to achieve this goal.
    I look forward to the testimony of our witnesses.
    And I would note that the Vice Chair, Senator Klobuchar, is 
voting at this moment. When she returns, we will take a moment 
to have her read her opening statement, as well.
    So let me introduce those who are here today.
    Mr. James Gilmore currently serves as President and CEO of 
the Free Congress Foundation, an entity that offers bipartisan 
conservative solutions to various domestic and national 
security challenges. He also oversees operations in Gilmore 
Global Group, LLC, in which he consults with companies seeking 
to market goods and services throughout the world. Mr. Gilmore 
has served as the 68th Governor of Virginia, as Chairman of the 
Congressional Advisory Panel to Assess Domestic Response 
Capabilities for Terrorism Involving Weapons of Mass 
Destruction, known as ``The Gilmore Commission.'' This panel 
was influential in developing the Office of Homeland Security. 
Governor Gilmore is a graduate of the University of Virginia 
and the University of Virginia School of Law. Welcome.
    Dr. Laura D'Andrea Tyson is a Professor of Global 
Management at the Haas School of Business at the University of 
California, Berkeley. She is a member of the Brookings 
Institution's Hamilton Project Advisory Council, a member of 
the MIT Corporation. Dr. Tyson is a member of President Barack 
Obama's Economic Recovery Advisory Board. Previously she served 
as President Clinton's National Economic Advisor, and the 16th 
Chairman of the White House Council of Economic Advisers. Dr. 
Tyson has a summa cum laude undergraduate degree from Smith 
College, and a Doctorate in Economics from MIT. Welcome, 
Doctor.
    Dr. Kevin Hassett is the John G. Searle Senior Fellow and 
Director of Economic Policy Studies at the American Enterprise 
Institute. He was a senior economist at the Board of Governors 
of the Federal Reserve System, a policy consultant at the 
Treasury Department during the George H.W. Bush and Clinton 
Administrations. He has written a number of papers on 
fundamental tax reform, and has co-authored a book with 
renowned economist Glen Hubbard titled TAX POLICY AND 
INVESTMENT. He has a B.A. from Swarthmore and a Doctorate in 
Economics from the University of Pennsylvania. Welcome back, 
Dr. Hassett.
    Dr. Jane Gravelle is currently Senior Specialist in 
Economic Policy in the Government and Finance Division of the 
Congressional Research Service. She specializes in economics of 
taxation, particularly the effects of tax policies on economic 
growth in resource allocation. She is the author of THE 
ECONOMIC EFFECTS OF TAXING CAPITAL INCOME and co-editor of the 
ENCYCLOPEDIA OF TAXATION AND TAX POLICY. She is also past 
president of the National Tax Association. I have told you 
everything I know about our four witnesses today.
    Welcome. Thank you for being here. This will be an 
interesting hearing. Governor Gilmore, you are recognized for 
five minutes for your opening remarks.
    [The prepared statement of Chairman Brady appears in the 
Submissions for the Record on page 26.]

 STATEMENT OF HON. JAMES S. GILMORE III, PRESIDENT AND CEO OF 
  THE FREE CONGRESS FOUNDATION AND 68TH GOVERNOR OF VIRGINIA, 
                         ALEXANDRIA, VA

    Governor Gilmore. Mr. Chairman, thank you very much. And I 
want to thank the Committee and Ranking Members, and all the 
others who have invited us here to this distinguished panel 
today. I appreciate the opportunity to be a part of it.
    We at Free Congress Foundation are focused on a number of 
public policy issues, but we think that this Committee today is 
addressing a genuine national crisis. Something has got to be 
done about growing and restoring the economy of this country, 
and emerging from the Great Recession. We are not emerging from 
the Great Recession, and something has got to be done about it.
    Now this is as current as this morning's news, but first 
let me just say that as we look at our historic Free Congress 
Benchmarks, one of those is GDP. I made a note just recently 
that the Gross Domestic Product growth in this country in 
December of 2011 was 1.8 percent. The growth of the economy 
December of 2012 was 1.9 percent. This morning the report is 
that our economy is growing at 1.7 percent.
    Now we are just standing still. We are just moving sideways 
in the same direction. The historic growth rate of the United 
States is 3.2 percent. The gap between 3.2 and 1.8 or 1.7 is 
dramatic. Always, in the history of this country, when we have 
gone through a recession and dropped below the historic norm, 
we have always gone back and even above that norm so that we 
can return back to the proper trajectory of growth.
    We are not doing it this time. We are not doing it. And 
everything we are doing is counter-growth in this country. So 
we should not be surprised that we are in this kind of 
position.
    In the meanwhile, what is the direct impact of this? Well, 
in April of 2012 1.5 million, 53 percent of young people under 
25 years of age with Bachelor's Degrees were either jobless or 
under-employed. We know the unemployment rate is about, what, 
7.6 right now, Mr. Chairman? Unemployment in the African 
American community stands at 13.7. Young African Americans are 
facing unemployment at a rate of about 22.1 percent. 
Unemployment in the Hispanic community is likewise above the 
rate of the country at 13 percent. Women in the United States 
of America are at an unemployment rate of 11.6 percent.
    I am going to take what little time I have and tell you, 
Mr. Chairman, a quick personal story. I went over recently to 
the Giant Food in Old Town, Alexandria, near where I have my 
office. I wanted to buy a salad for lunch. I'm trying to lose 
weight, like everybody else. I couldn't get through the line. I 
couldn't understand why I couldn't get up to the cash register. 
And I looked up at the front and there was a young African 
American woman up there about 23 years old, and she's got 
several items, and a cabbage, and a couple of things, and she's 
trying to pay for it with a plastic card, which I determined 
was a food stamp card.
    And the cashier said--and I used to be a cashier when I got 
started in my career--said you don't have enough money on this 
card to pay this $5 bill. Whereupon, embarrassed, she put aside 
everything, picked up the cabbage, peeled off two singles out 
of her wallet and paid for the cabbage and went on.
    Now, Mr. Chairman, this is an historic crime on the people 
of this country that this government is taking no action to 
bring us out of this Recession. We should have an economy that 
is so dynamic that even that young woman has a better 
opportunity in life than what I just described to you. And that 
is the responsibility of this Congress and of this 
Administration, and it is not being done.
    We believe, and we think you should concentrate today on 
tax reform as a vehicle for growing the economy. We at Free 
Congress, at freecongress.org, have created a plan. We don't 
think it's the only plan. We think it could be subject to 
improvement. But the fact is that we have offered a plan that 
will grow the economy. And right now everything that is being 
done in the United States is counter-growth. So we should not 
be surprised that we are in this kind of position, and these 
kinds of impacts are being had on the people of the United 
States.
    We believe the emphasis of the Congress, Republican and 
Democrat, Senate and House, ought to be on growing the economy 
and creating American opportunity. American opportunity is 
dependent on growth, growth, growth.
    And you will not grow this economy through all the devices 
that we are seeing; of the Federal Reserve pumping up our 
currency, or stimulus spending that has not worked and will not 
work because it's just like spinning a top. When you stop 
spinning the top, the top falls over.
    We have to have organic growth, and that comes from 
investment. And that means that we have to do things in this 
country to create real investment, and the tax reform can in 
fact achieve that.
    Well, Mr. Chairman, I believe in the 21st Century that the 
United States can continue to play the kind of role that it 
ought to play; that we can have the revenue necessary to be 
able to do what we have to do without these devices like a 
sequester, or a cutting, or increases of taxation which just 
reduces investment and the kind of policies that we are 
following right now.
    We can have a strong economy, which was the foundation of 
America's strength in the 20th Century. We can do this again. 
We can have national security that is healthy and robust, and 
we can have a better quality of life for the American people, 
if the Congress does its job.
    Thank you, very much.
    [The prepared statement of Governor James S. Gilmore III 
appears in the Submissions for the Record on page 27.]
    Chairman Brady. Thank you, Governor.
    Dr. Tyson.

  STATEMENT OF HON. LAURA D'ANDREA TYSON, PROFESSOR, BUSINESS 
    ADMINISTRATION AND ECONOMICS, HAAS SCHOOL OF BUSINESS, 
             UNIVERSITY OF CALIFORNIA, BERKELEY, CA

    Dr. Tyson. Good afternoon, Chairman Brady, Members of the 
Joint Economic Committee. Thank you for the opportunity to 
testify about how carefully designed tax reform can improve 
growth.
    I agree with the Governor. I am, as you heard a Professor 
at the Haas School of Business, University of California at 
Berkeley. The views in my testimony are my own, but I do serve 
as an Economic Advisor to the Alliance for Competitive 
Taxation, a coalition of American businesses promoting 
comprehensive corporate tax reform, and my remarks will focus 
on corporate tax reform.
    As recently as 30 years ago, the American economy was the 
most competitive in the world. The U.S. could design its 
corporate tax code without considering the global economic 
environment.
    We no longer live in that world. Emerging market economies, 
falling trade barriers, and leaps in technology have expanded 
opportunities for American companies, but they have also 
heightened global competition for American companies, and among 
countries--between the U.S. as a location for investment, and 
Germany as a location for investment, just as an example.
    Today our corporate tax system is failing our country. It 
is reducing the competitiveness of the U.S. economy as a place 
to do business and create jobs.
    For example, when a U.S. company sells shampoo in Asia, it 
competes with shampoos produced by foreign competitors. The 
price of the shampoo to the foreign consumer has to be 
competitive. The Dutch company providing the shampoo pays zero 
tax to the Netherlands on its sales of shampoo in Asia. The 
U.S. company is subject to U.S. tax on those sales of its 
product in Asia whenever it chooses to repatriate its foreign 
earnings to the United States.
    This system encourages American companies to hold their 
foreign earnings abroad in order to counter the competitive 
disadvantage of our current tax system.
    Now the good news on corporate tax is there is widespread, 
bipartisan agreement that the system is flawed and needs 
fundamental reform.
    After the 1986 overhaul, the United States had one of the 
lowest corporate tax rates among OECD countries. Since then, 
country after country has reduced its rate. Why? To attract 
investment.
    They have left the U.S. with the highest corporate tax rate 
among developed countries. Cutting the U.S. corporate tax rate 
to a more competitive level would encourage more investment in 
the United States by both domestic U.S. companies and by 
foreign companies.
    With capital becoming increasingly mobile, national 
corporate tax rates have a growing influence on where 
multinational companies locate their operations, locate their 
jobs, and report their income.
    Higher investment in the U.S. by both domestic and foreign 
companies would foster growth, improve productivity, create 
jobs, and boost real wages over time. The pro-growth argument 
for reducing the U.S. corporate tax rate is compelling, but 
rate reduction by itself would reduce corporate tax revenues.
    What to do? Like most economists I believe we can and 
should pay for a significant rate reduction in the corporate 
tax by broadening the corporate tax base to eliminate tax 
breaks and preferences.
    This approach would reduce the complexity of the corporate 
tax code and would increase its efficiency by reducing 
distorting tax differences across economic activities.
    With 95 percent of the world's consumers and an increasing 
share of the world's purchasing power outside of the United 
States, the U.S. also needs to reform the way it taxes the 
foreign earnings of U.S. companies.
    Most other OECD countries have adopted a modern 
international tax system referred to as a ``Participation 
Exemption or Territorial System.'' This system generally allows 
internationally engaged companies to compete globally and 
reinvest their foreign business earnings at home without paying 
a second tax.
    The U.S., by contrast, taxes U.S. companies when they bring 
their foreign earnings to the U.S. And this approach lies far 
outside international norms of taxation.
    To counter this disadvantage, U.S. companies have a strong 
incentive, as I said, to keep their foreign earnings abroad. 
And we know now that these companies are holding an estimated 
$2 trillion in accumulated foreign earnings.
    These earnings are not financing investment and job 
creation in the United States. The U.S. companies are incurring 
efficiency costs from the suboptimal use of their balance 
sheets, and from higher debt levels than would be necessary if 
they could repatriate these earnings without incurring 
additional U.S. tax.
    Preliminary results from a study I'm conducting suggest 
that adopting a 95 percent participation exemption system in 
the U.S. would increase U.S. employment by about 150,000 jobs a 
year on a sustained basis. The up-front effect, the short-term 
employment gain would be nearly 10 times larger. And those 
gains come from the fact that there would be a significant 
increase in repatriated flows, and that money would be put to 
work on investment and consumption in the United States.
    Tax reform also has to address the incentives which U.S. 
companies have to shift their income to low tax jurisdictions. 
These incentives exist in the U.S. tax system and they exist in 
foreign tax systems. By itself, lowering the rate in the U.S. 
would actually reduce income-shifting incentives. But more 
needs to be done.
    Given the limits on my time, I will just mention two new 
proposals to address this. Chairman David Camp has proposed an 
innovative approach based on where products are sold.
    The OECD is also working on a 15-point plan to deal with 
income-shifting and base erosion.
    I believe we can move to a partial exemption system with 
serious base erosion protections. We need to reform our tax 
system to be more competitive internationally and to grow jobs 
at home.
    [The prepared statement of Hon. Laura D'Andrea Tyson 
appears in the Submissions for the Record on page 29.]
    Chairman Brady. Thank you, Doctor.
    Dr. Hassett.

 STATEMENT OF DR. KEVIN HASSETT, JOHN G. SEARLE SENIOR FELLOW 
 AND DIRECTOR OF ECONOMIC POLICY STUDIES, AMERICAN ENTERPRISE 
                   INSTITUTE, WASHINGTON, DC

    Dr. Hassett. Thank you, Chairman Brady, and Members of the 
Committee.
    In my testimony I attempt to put the current circumstance 
in more of an historic perspective and analyze the case for tax 
reform not just by comparing our rates to other countries' 
rates, and so on, but comparing our current economic experience 
to our own in the past, and that of other countries.
    I think, given that President Reagan's name is in the title 
of the hearing, that it was interesting at the beginning to 
look back on August 13th, 1981. President Reagan signed into 
law the Economic Recovery Tax Act of 1981, and it drastically 
reduced the tax burden on Americans. Those tax cuts were pared 
back some in 1982, but the majority of them survived. And the 
economic revival that followed was tremendous, as Senator 
Graham recently detailed in The Wall Street Journal.
    Within 55 months of the start of the recession, the economy 
had created 7.8 million more jobs than at its start, and real 
per capita GDP grew by about $3,000. During the same time 
frame, the number of people on disability stamps fell 14.3 
percent, or about 644,000 people; the number of food stamp 
recipients fell 13.4 percent, or by about 3 million people, and 
between 1981 and 1986 real median family income rose 7.7 
percent.
    In my testimony, I document how, while we don't know that 
all of those good statistics are related to the tax reductions, 
there is a mass of economic literature that supports that there 
is a positive link. But more troubling, I think that now that 
we are out of the area where we need to really be concerned 
about demand-side factors holding the economy down, in my 
testimony I start to look at where we are on the supply side 
factors that drive growth.
    And my testimony discusses something that, as you know, the 
CBO, and the Fed, and other forecasters called ``Potential GDP 
Growth,'' and the basic idea is that if you want to have long-
term growth in output, then you need to have long-term growth 
in inputs.
    And if we can project what is going to happen to the growth 
of inputs, then we have a good base for what output is going to 
be.
    Now if you look at what has happened in the evolution of 
the growth in inputs, it is really quite troubling. Let's look 
at the labor force. Growth in the labor force is an important 
contributor to economic growth, but it has been shrinking in 
importance over the past decade.
    At its peak in the 1970s, potential hours worked 
contributed 1.7 percentage points to potential GDP growth each 
year. Potential GDP growth is not exactly what is going to 
happen, but it is a key driving force of how the supply side is 
driving the economy forward.
    From 2002 through 2012, however, hours worked only 
contributed 0.3 percentage points on average to potential GDP 
growth. And so if you wonder, are we in this new normal where 
we are going to have low growth, well, yes, the growth of labor 
input alone is contributing about 1.4 percentage points less 
growth per year going forward.
    On the capital side, it is about a half a percent below 
where we were. And so what that means is that the underlying 
growth in inputs that drive the growth of the economy is 
contributing about two percentage points per year less than it 
used to to economic growth.
    In my testimony, I connect these factors to our really 
often indefensible policies. We have spoken in this Committee 
before, and the other witnesses also speak quite a bit about 
corporate reform. And in my testimony I go into that in detail, 
but I think that as we are thinking about tax reform we also 
have to recognize that the big kahuna in terms of the 
disappointing new normal is that labor force growth is so 
disappointing.
    And as my colleagues, Aspen Gorry and Sita Slavov have 
explained in a recent analysis, the structure of the tax code 
in the U.S., which is based on family units rather than 
individuals, has many disincentives for secondary workers.
    In addition, our retirement programs like Social Security 
and Medicare have structures that very often discourage 
participation in the workforce. And if we are going to have a 
fundamental reform that increases the growth of inputs in a way 
that we could expect to have higher long-term output, then we 
need to focus on labor supply as well.
    On the corporate side, I think that it is absolutely 
inexcusable that we are about the highest taxed place on 
earth--I think there are a couple of developing countries that 
are a little bit higher--and it has a massive negative effect I 
believe on capital stock growth; that firms right now, multi-
national firms, in response to these high rates, and our 
somewhat liberal transfer pricing rules, locate activity 
offshore rather than at home, contributing to the shortfall in 
capital stock growth.
    I think that as members of this Committee discuss why tax 
reform is urgent--to conclude--that it is important to keep in 
mind the fact that if you look at the tax rate data and so on, 
we're out of whack; but if you look at the input growth data, 
the potential GDP calculations, and see that we have basically 
created a new normal for ourselves where we are going to growth 
2 percent a year less, or 1.5 percent a year less, somewhere in 
there, because our policies are constraining input growth, then 
the urgency of tax reform becomes more apparent.
    Thank you, Mr. Chairman.
    [The prepared statement of Dr. Kevin Hassett appears in the 
Submissions for the Record on page 34.]
    Chairman Brady. Thank you, Doctor.
    Dr. Gravelle.

 STATEMENT OF DR. JANE GRAVELLE, SENIOR SPECIALIST, GOVERNMENT 
     AND FINANCE DIVISION, CONGRESSIONAL RESEARCH SERVICE, 
                        WASHINGTON, D.C.

    Dr. Gravelle. Thank you for inviting me. Comparing and 
contrasting the current effort with the 1986 Tax Reform Act 
[TRA], which is often considered a model, can help us to 
understand the expected effects.
    TRA, like many current proposals, must be revenue and 
distributionally neutral, although currently some proposals 
propose a revenue gain.
    The stated objectives of TRA were fairness, simplicity, and 
economic growth. But much of the initial analysis focused on 
neutrality or efficiency instead. While these terms are 
sometimes used interchangeably, each is a distinct concept.
    Economic growth refers to responses that increase income 
and output. Efficiency refers to reallocating resources to 
maximize welfare. Many, indeed most, efficiency effects are not 
detectable as a change in output. They are generally small and 
may largely reallocate output or risk.
    Economic growth generally arises from increases in labor 
supply, savings, and investment. Theory and evidence suggest, 
however, that TRA did not have much of an effect on growth. 
This limited effect was expected in part because supply 
responses are small, and in part because the revenue neutral 
tax reform that included base broadening offsets might have 
minimal aggregate effects on effective marginal tax rates.
    For example, TRA reduced the corporate tax rate and 
repealed the investment credit. This tradeoff contributed to 
the neutrality of tax burdens across assets, but increased the 
overall cost of capital because the investment credit applied 
only to new investment, while the corporate rate reduction 
provided a windfall for old capital.
    The same tradeoff would likely occur currently with the 
single largest corporate base-broadening provision commonly 
discussed: accelerated depreciation. Other corporate and 
individual base-broadening provisions would also offset cuts in 
statutory tax rates and limit the change in effective marginal 
tax rates.
    In comparing TRA and current tax reform, some economic 
aspects such as concerns about deficits are similar. Two 
factors differ substantially, however, from 1986: a lower rate 
of inflation, and a more integrated worldwide economy.
    Thus, some issues such as indexing capital income for 
inflation, may be less important today. However, the open 
economy and international investment flows, given relatively 
little attention in 1986, is now central to proposals to lower 
the corporate tax rate. Artificial shifting of profits to low-
tax countries has also become a major compliance issue.
    TRA is widely seen as a model for reform. And while TRA 
made major, dramatic changes on the corporate side, its 
individual base-broadening was actually somewhat limited.
    Currently, the TRA corporate reforms, however, have left 
little low-hanging fruit. The repeal of the investment credit 
at that time financed almost all of the 12 percentage point 
rate reduction, but eliminating accelerated depreciation today 
would allow a rate reduction of 2 to 3 percentage points.
    It would also increase the cost of capital. Rates could be 
reduced in the long run, steady state by only 5 percentage 
points, I estimate, if every corporate tax expenditure other 
than a deferral for in-source income were eliminated.
    And without having a lot of time to talk about the 
individual side, the same issues occur on the individual side. 
When you change deductions that are marginal and trade them off 
for statutory tax rates, you may not accomplish very much.
    Turning to the treatment of foreign source income, with 
current estimates eliminating the deferral, which has gotten 
larger, would offset a corporate rate reduction of almost 4 
percentage points, increasing the capital stock in the United 
States somewhat through both the lower rate and the removal of 
the incentive for U.S. firms to invest abroad. It would also 
eliminate the benefit of profit shifting and of course the 
problem of repatriation restrictions.
    Although these are traditional solutions, there is also a 
very strong interest in the Congress in moving in the other 
direction to a territorial tax. A pure territorial tax would 
make profit shifting more attractive, but these proposals have 
to contain anti-abuse provisions to address this issue. So a 
central issue is clear--how effective these anti-abuse 
provisions might be.
    Although TRA increased corporate taxes in order to cut 
individual taxes, a significant share of that revenue gain was 
actually transitory in part because of timing effects. There is 
a similar issue with current tax reform, if provisions like 
accelerated depreciation are adopted, or if movement to a 
territorial tax is financed with transitory revenues from a 
one-time repatriation holiday.
    Thank you.
    [The prepared statement of Dr. Jane Gravelle appears in the 
Submissions for the Record on page 49.]
    Chairman Brady. Thank you.
    Dr. Hassett, you know thinking about the lessons from 
President Reagan's tax reforms and the impact, today we have a 
code that is actually more progressive. Even though the rate is 
lower, more and more people are paying on the upper earners 
side.
    We have a low bracket, a 10 percent rather than 15 percent. 
But one of the biggest changes is how many businesses are 
filing as individuals, as corps, as pass-throughs, as 
partnerships, and all.
    Some have suggested that we only do, as a country, for 
economic growth, corporate-only tax reform. But given your view 
of how much of your job growth occurs on the individual side, 
how critical is it that we do both?
    Dr. Hassett. Thank you, Mr. Brady. The individual side is 
very important, as you know. There is an enormous share of 
aggregate business income now that goes through the individual 
code.
    If we have, however, a very solid, smart corporate tax 
reform, then we would expect, based on the analysis in the 
literature by economists such as Roger Gordon and others, that 
there would be a lot of change of organizational form. If we 
made the corporate tax code really attractive, then people 
might decide to organize their business less through the 
individual side.
    I think that is an important consideration if one starts to 
be constrained--and I am not an expert on this, and I know the 
members of the Committee are constrained by political realities 
that suggest that maybe you have to deal with the corporate 
reform all by itself. If you have a really good corporate 
reform the organizational form issues, I think most economists 
believe will kind of work themselves out.
    Chairman Brady. From a job creation standpoint, and the 
role business investment plays--buildings, equipment, 
software--how critical is it that in addition to low rates that 
the after-tax cost of capital be also low from the standpoint 
of much of our economy, from energy on, the goal is to raise--
it takes a large amount of capital invested, quickly recovered, 
and reinvested as well, very key to that job creation. What 
lessons should we keep in mind as we go forward?
    Dr. Hassett. It makes me--and here I concur with Dr. 
Gravelle who by the way I first met when she discussed a paper 
of mine on this topic on the Investment Tax Credit Repeal of 
the 1986 Tax Act.
    Dr. Gravelle. I remember that.
    [Laughter.]
    Dr. Hassett. But it is a concern that Dr. Gravelle and I 
both share that, if you are going to cut the corporate rate 
then the reduction in the corporate benefits both old capital, 
say a company that is making a lot of money today based on 
investments they made in the past, they'll pay less tax this 
year; and it will also benefit new capital, because if you make 
an investment that pays off then when you ultimately earn 
profits on it you will pay a lower rate.
    But the depreciation is only available to somebody who 
invests in a new machine. Like at the margins, starting right 
now, it's the depreciation that I get if I buy a new machine 
that has an influence on my decision.
    And so if we have a revenue-neutral reform that increases 
the tax on new capital, and then reduces the tax on new and old 
capital, then it necessarily on net has to increase the tax on 
new capital. And in the kind of models that I have used 
throughout my career, the kind of model that Dr. Gravelle used 
throughout her career perhaps as well, at least the career 
since we started interacting, that could be a negative for 
growth if you're not careful.
    Chairman Brady. All right. Thank you, Doctor.
    Dr. Tyson, given the competitive climate we are in 
worldwide, is it possible to remain competitive and have a pro-
growth tax code retaining a worldwide form of taxation for 
corporations?
    Dr. Tyson. I do not think we should. I think we have a 
worldwide system which has a lot of particular features which 
have encouraged and allowed our companies to overcome the 
competitive disadvantage associated with the worldwide system 
essentially by taking advantage of deferral and other options 
to keep money outside.
    Chairman Brady. We tied ourselves in knots.
    Dr. Tyson. So we get no revenue. We don't get the money for 
financing investment and employment in the United States. So we 
get none of the benefits.
    Moving to a partial exemption system with some serious base 
erosion protections--and Dr. Hassett and I agree on this--gets 
rid of the competitive disadvantage our firms face. We get rid 
of the competitive disadvantage of locating here. And we get 
the benefits of competitive advantage vis-a-vis the rest of the 
world.
    Chairman Brady. It just seems in this world, when our 
companies compete and win overseas and have profits, that we 
have a tax gate preventing them from bringing them back and 
reinvesting in U.S. jobs, U.S. research, U.S. growth.
    Dr. Tyson. Absolutely.
    Chairman Brady. It makes no sense at all.
    Dr. Tyson. It makes no sense.
    Chairman Brady. Thank you. Governor, I want to ask you. The 
lesson to us from your experience as we go forward in tax 
reform, is there one key message we ought to keep in mind as we 
pursue this?
    Governor Gilmore. Yes, sir. First of all, I happen to agree 
with Dr. Tyson about this issue of the repatriation of capital. 
I have been personally involved with corporations that have 
been very proud of the fact that they've moved their capital 
overseas so that they can increase their reports to their 
shareholders, and they are rather happy about it because they 
understand that they are tax-advantaged by going overseas.
    That is something that has to be changed. It has to be 
repaired. If we can bring the money back for our companies to 
get them invested in the United States, why do we insist on 
penalizing that? I agree with Dr. Tyson.
    Now secondly, you asked me a question--oh, let me also 
mention also that as part of our Growth Code, we think an 
innovation would be to break up this distinction between small 
businesses and individuals and corporations.
    You can tax all people on business activity the same, and 
eliminate this pass-through where a small business is just 
disadvantaged in passing through to higher individual tax 
brackets, as part of an overall program which we have developed 
called ``The Growth Code'' on our website.
    You asked me a question, Mr. Chairman, and I congratulate 
you, by the way. I think you are one of the Congressmen who 
actually understands what is going on around here, and we 
appreciate very much your having this hearing to push this 
forward and to do this.
    If there's one question, one point, it is this: Net growth 
must become the national goal of the United States of America, 
and we should not do anything that discourages it. We should do 
everything we can do to encourage it, at least until we get the 
revenue going again.
    And what have we done? Well, we've raised taxes on the 
higher brackets to make sure that the people don't invest--even 
though you won't see the revenue, because they can get away 
from that.
    We have increased the taxes on capital gains to make sure 
nobody will create any capital gains. You are not going to see 
any revenue from that, but we are discouraging the investment.
    We have done a sequester. We have done an Obamacare, which 
makes sure small businesses can't increase their employees over 
49 people.
    And amazingly, we have allowed a payroll tax on every wage 
earner in the United States to make sure that consumption goes 
down.
    We have done everything as a national policy to discourage 
growth, and we have done nothing to encourage growth. My 
message is that that must become the national challenge.
    Chairman Brady. Thank you, Governor.
    Representative Delaney.
    Representative Delaney. Thank you, Chairman Brady, for 
holding this important hearing. And I want to thank all of our 
guests for their testimony and for their work on behalf of 
these issues.
    I think at this point the testimony is very clear around 
the need for corporate tax reform, which I almost view as 
unassailable at this point. The case is so persuasive. The case 
is so obvious. The debate to whether it is 25 or 28, everyone 
has agreed on what the standards should be, which is revenue-
neutral, and we should get on with getting it done.
    And it is really an important issue for U.S. 
competitiveness. It also seems to be there are two components, 
particularly around the international system. The first is: How 
do we change the tax code, which we always do on a prospective 
basis so that the unintended outcomes that currently exist with 
all this cash accumulating overseas does not continue. And 
let's assume we agree on that, at some point.
    The second thing is: What do we do with the money that's 
over there? How do we create ways of bringing that money back 
in a way that is consistent with a pro-growth agenda, which is 
one of the reasons I have put forth bipartisan legislation to 
have that money used to invest in our infrastructure as a way 
of investing in a pro-growth economy that does not cost the 
taxpayers money, because that money is not coming back now.
    And I do care a lot about this competitiveness issue that 
this country faces. And I think we have to think of it not 
necessarily through the lens of what has happened across the 
last 20 or 25 years--although it should inform the way we think 
about the world. We really have to think about what is going to 
happen in the next 20 or 25 years.
    The macro trends in the world, globalization and 
technology, are going to continue to put pressure on the United 
States from a competitiveness standpoint.
    There are many things we need to do there. I touched on 
infrastructure, but this notion of investment is really, really 
important.
    Switching now to our capital gains tax, because I want to 
drill down on that for a minute or two, and maybe, Dr. Tyson, I 
will put the question to you first:
    It seems to me that right now there are two types of 
investments that professional investors make. They make 
investments in companies that by and large don't need them, 
which is the largest companies in this country who are all 
awash in cash; they have more liquidity than they have ever 
had; they are all increasing their dividends and buying back 
stock, which is terrific. But we do not necessarily need to 
create an incentive for people to invest in those types of 
transactions because they are not really capital formation 
transactions.
    Put more directly, someone buying Apple stock, holding it 
for 12 months, and selling it is not really necessarily 
stimulative to the economy. It is in a nuanced way because if 
they make money they have more money to spend, et cetera. But 
then there is the whole category of the investments that really 
create jobs in this country, investing in start-up businesses, 
mid-sized businesses which actually create all the jobs, 
infrastructure, things like that, they are long-tail 
investments.
    You typically need to have a long-term investment horizon 
on those investments because of the nature of what they do.
    Would you be in favor of a capital gains system that 
actually raised taxes for short-term capital gains but lowered 
it as the investment horizon was deferred 3, 5, 7 years, 
potentially down to zero, so that we really have a game-
changing view of how people allocate capital and are much more 
focused on allocated capital to start-ups, to fast-growing mid-
sized businesses, to other long-dated assets like 
infrastructure? Maybe, Dr. Tyson?
    Dr. Tyson. Well I did say that I was focusing primarily on 
corporate tax reform, so let me start by at least linking that 
question to your question. Because I have observed in past 
things that I have written that countries around the world, as 
they have shifted and reduced their corporate tax rates, have 
tended to offset some of the revenue losses in two different 
ways.
    One way is by adjusting their treatment of capital gains 
and dividends and the taxation of that, by moving taxation from 
the level of the business entity, the corporation, to its 
owners. Countries around the world have done that. We have been 
moving in the opposite direction.
    We raised the rate on corporations, and lowered the rates 
on individuals.
    Representative Delaney. Yes.
    Dr. Tyson. The second thing is, countries have--to go to 
the accelerated depreciation point--observed that for large 
multi-national companies looking for big investments around the 
world accelerated depreciation doesn't matter as much as 
statutory corporate rate differences.
    So companies are saying, get rid of all the deductions, 
including accelerated depreciation. We are going to be able to 
deal with being competitive. All of our competitive 
disadvantages will go away if we have a lower competitive 
corporate rate with territoriality.
    On the issue of capital gains, it has long been discussed 
among economists, and I remember discussing it in the Clinton 
Administration, that if you're looking at capital gains, it is 
perfectly reasonable to think about adjusting the rates with 
the duration of holding the assets.
    This is an argument which I will turn over to Kevin, but 
basically economists have looked at this and thought this might 
be something to do to encourage longer holding periods.
    Representative Delaney. Dr. Hassett, very quickly?
    Dr. Hassett. I am wary of the term ``differences in 
rates,'' because you don't want to have the government make 
people hold stuff for a given amount of time. Everybody should 
be making the decision based on the economic optimality of 
going here versus there.
    And so I think whatever rate you decide should apply pretty 
much across the board. I think that the lock-in effect is 
pretty well established, and that it's not necessarily 
something that supports economic efficiency.
    Representative Delaney. Thank you, Mr. Chairman.
    Chairman Brady. Thank you.
    Representative Hanna.
    Representative Hanna. Thank you, Mr. Chairman.
    Dr. Gravelle, the conversation is simple around here and 
long in the tooth. We want to level the tax field, eliminate 
deductions, and lower the rate. But clearly you don't think 
that the rate we may want to lower it to, whoever ``we'' are, 
is possible, inasmuch as you said that eliminating all 
deductions is someplace between 3 and 5 percent.
    So--and I will ask anybody this--does this mean our mission 
is impossible already?
    Dr. Gravelle. Well, you know, I think it is pretty tough. I 
mean, I think when you start with ``I want this rate'' instead 
of ``I want these tax changes,'' and what that rate will lead 
to, that is when you get yourself to something that you want 
that can't happen.
    Now there are some things outside of tax expenditures that 
you could consider. One of them I mentioned in my testimony was 
restricting deductions for interest, or disallowing the part 
that reflects inflation.
    There are other sort of nontax-expenditure base broadeners 
like capitalizing advertising. There are things like that that 
you could think of. But even with those, it seems to be very 
hard.
    If you--you could do what the Wyden-Gregg bill did, but 
they had--you know, they ended deferral. Without ending 
deferral, if that's off the table, then it's very hard to 
imagine, for me, to see a combination of provisions that will 
let you have a 25 percent corporate rate that's revenue 
neutral.
    Representative Hanna. Dr. Tyson. Thank you.
    Dr. Tyson. I think it is very difficult, but I do think 
that one of the reasons I agreed to be an economic advisor to 
this Alliance, and actually Doug Holtz-Eakin, my Republican 
counterpart, also agreed, is because we were convinced by work 
that is ongoing in the Congress that Congressman Camp and 
Senator Baucus are leading to determine whether it is possible 
to achieve a 25% rate that is revenue-neutral.
    And if we can get to it, are we willing to give up all the 
things that we need to give up to get to it?
    And I have been struck by the fact that there is a very 
strong view in the business community that indeed there is a 
path to get to a reform which leads to a significant rate 
reduction that is revenue neutral--and revenue neutral in two 
senses. It is revenue neutral on the domestic rate reduction, 
by eliminating credits and preferences. It's also revenue-
neutral internationally. By dealing with the transition tax on 
the repatriated earnings that are sitting outside right now and 
going forward, you can actually get rid of deferral and move to 
a territorial exemption system with base erosion protection, 
which does not lose revenue.
    Now I think we should work hard. This is the challenge. 
Those are ideal features of a corporate tax reform you would 
want. Let's see if we can get there. Many, many people in the 
United States who work on these issues regularly believe that 
we can. That is the challenge to the Congress, to work to see 
if we can.
    Representative Hanna. Thank you. Go ahead, Governor.
    Governor Gilmore. Congressman, just very quickly. We at 
Free Congress put together a program, working with an 
economist, we call ``The Growth Code.'' I would encourage your 
staff to look at it at freecongress.org. It's got five 
elements: Plan, comprehensive, revenue neutral. You buy down 
the rate on the corporate side to 15 percent, and you reform 
the personal exemptions. The elimination of double Taxation is 
a key element.
    And then the repatriation issues and others. And then 
finally, a refundable tax credit. It's revenue neutral, but the 
consequences of it on the dynamic side would be an explosive 
growth.
    Representative Hanna. Is anyone here able to assume 
anything about compliance, and the multiplier effect of being 
willing to say within capital gains, to Mr. Delaney's point, 
that the 15 percent rate allows people to--or at least makes it 
easier for people to accept that rate and reinvest that same 
money, that amount of money in a much shorter period of time 
where higher rates cause people to perhaps delay decisions?
    Dr. Gravelle. There's a vast literature on that that 
suggests that it varies quite a bit, but it suggests that the 
revenue maximizing tax rate is above the rates we have right 
now. So you could raise revenue. At least that's the assumption 
that the Joint Committee on Taxation would make, if they were 
scoring a capital gains tax increase.
    Dr. Hassett. May I interject, just that I think that, you 
know, sometimes the perfect is the enemy of the good. But in 
this tax reform debate, it seems like the mediocre is the enemy 
of the good; that we have to face up to the fact--Dr. Gravelle 
mentioned the literature that we are on opposite sides of.
    The Joint Tax Committee, frankly, does not have a clue how 
to score a bill that is changing the international tax code 
because the transfer pricing and everything is so complex. If 
we reduce the rate 3 percentage points, I tell you revenue is 
probably going to go up. Okay? But the point is that what's 
going on right now is the Joint Tax Committee is trying to give 
you a revenue-neutral bill based on scoring calls that are 
essentially impossible for a trained economist to make.
    And we are tying ourselves in knots to get it to add up to 
zero, rather than just trying to do the right thing and get the 
rate down. And so my suggestion is: Cut the rate a little bit 
for three years and see what happens.
    And if your revenue is too low, then do something about it. 
But to tie yourselves in a knot over these scores that have 
absolutely no scientific merit seems to me extremely illogical, 
especially given----
    Representative Hanna. And we do that pretty well, don't we. 
Thank you. Thank you, my time has expired, thank you, Chairman.
    Chairman Brady. Thank you. Former Chairwoman Maloney is 
recognized.
    Representative Maloney. Thank you. Thank you, Mr. Chairman, 
and welcome to all of our panelists. I enjoyed very much your 
testimony.
    The title of today's hearing is lessons learned from 
Reagan, and several of my colleagues have referenced his 
record. But it seems to me, if we are going to look at a 
successful record that turned our economy around and gave us 
record surpluses, we should be looking at the record of Former 
President Clinton.
    I know that Dr. Tyson you were the head of the Council of 
Economic Advisers under that Administration, and played a part 
in the success that happened for our country. During his 
Administration, we achieved record surpluses, the largest in 
recent history.
    We also achieved tax relief for the middle class families: 
Economic growth of almost 4 percent a year. The creation of 
over 22 million new jobs. And the lowest unemployment rate this 
country had seen since 1969.
    So as a member of that Administration, Dr. Tyson, I would 
like to know if you would like to comment on that success. And 
it seems to me that if raising individual tax rates inhibited 
economic growth, it did not seem to do so during the Clinton 
years.
    So I would like to ask you: Do you have any evidence that 
raising rates on individual rates inhibits economic growth? And 
could you comment on the success that you were part of 
achieving, the best economy in my lifetime, during the Clinton 
years?
    Dr. Tyson. Well I would certainly love to take credit for 
that, but--and I think we did some very sound and wise things. 
I think it was part of convincing the country that we had a 
credible, long-run plan to bring the deficit down. It was a 
balanced plan. It had spending cuts as well as revenue 
increases.
    Indeed, I remember the concerns about the increase in the 
top rates that occurred around the deficit reduction plan. 
Clearly, I don't think the evidence from what happened 
afterwards supports those concerns.
    I want to note, however, because again I am focusing now on 
the future rather than the past, even though this is a lesson 
from the past, but I think we really do have to look to the 
future and the changing environment that we live in.
    I remember President Clinton talked a lot about 
globalization, and he talked a lot about falling trade 
barriers, and he talked a lot about the importance of exports 
for the U.S. economy.
    And, if you ask him now, he has made it very clear that he 
thinks the corporate tax rate in the United States should be 
reduced to 25 percent.
    Representative Maloney. Well actually we were in a meeting 
earlier today with President Obama, and President Obama was 
appealing really to the Democratic Caucus that we needed to 
lower the corporate tax rate to 28 percent, and an even lower 
one for manufacturing, 25 percent. And he felt that this would 
grow our research and development, innovation, and be a driving 
force.
    So I would like to----
    Dr. Tyson. Indeed.
    Representative Maloney [continuing]. To hear your response 
to his proposals that were in his economic speech recently. And 
also, how does it compare to what is happening internationally 
with our global competitors?
    Are they moving to this territorial system you were 
describing earlier where there is no taxation? Could you give 
an overview of the competition that we are competing with?
    Dr. Tyson. So an overview, in my longer written testimony I 
do talk about the overview. And I can just summarize in the 
following way:
    Every other developed country has moved to what you can 
call technically a partial exemption system, what you can call 
generally as a territorial system. As I described in my 
remarks, if you are a U.S.-headquartered company selling a 
product abroad, you have set up a subsidiary to sell abroad, 
and most of the sales of foreign subsidiaries are actually to 
sales abroad. They're not to sales in the United States. You 
pay the tax in the country. If you repatriate the earnings, you 
would not pay the tax here in a territorial system.
    There is an exclusion--there is a small percent of your 
income that would be taxed. The rest of it would not be taxed. 
The rest of the countries in the OECD are there. They are just 
like us, though, with a different system.
    They confront the reality that we've got a world economy 
where a lot of the profits are based on intangible income. Very 
difficult to price. And can be located pretty easily any place 
in the world.
    So we do have what you would call base erosion going on, 
income shifting going on. You can see this in the numbers. You 
can see that for American multi-national companies like foreign 
multi-national companies, there's more income in certain places 
than there's production in certain places.
    So what's going on? So we have to deal with that. And as I 
said in my remarks as I was running out of time, Congressman 
Camp has a very interesting set of options to deal with that. 
President Obama has also suggested an approach similar to one 
of Congressman Camp's options.
    The new Commission the OECD is putting together is also 
working on base erosion protections. We've got to get it done 
right, but I think we have the opportunity now to do a 
corporate tax reform which gets it done right and is forward-
looking.
    A year ago, more than a year ago, in February of 2012, 
President Obama's Administration put out a business tax reform 
framework. And the idea there was, as the President said 
yesterday--and I haven't had a chance to review all the 
proposal, so I can't give you detail--but I know the basic 
rubric. It called for bringing the corporate rate down to 28, 
to try to bring it down to 25 for manufacturing, and to make 
that revenue-neutral.
    Now he has other ideas about territorial. He would not 
agree with my position on territorial, and that is something 
that has to be negotiated. But the point is that I think there 
is broad based, bipartisan recognition that we are on a path 
that can get us to a well-designed corporate tax reform. And it 
would be, to my mind, a real lost opportunity if we let this 
die because we can't work out other things.
    Why let impasse on other things be the enemy of the good, 
the perfect be the enemy of the good. Why not go after the 
good? I believe we can get meaningful corporate tax reform. 
Very important for the future. Very important for jobs and 
investment in the future. Let's do that. And there I see 
commonality, a lot of commonality with what President Obama 
said yesterday, and Former President Clinton is saying about 
the need to do this. We should get going and do it.
    Representative Maloney. My time has expired. Thank you. 
Good to see you again.
    Dr. Tyson. Nice to see you.
    Chairman Brady. Thank you.
    Representative Paulsen.
    Representative Paulsen. Thank you, Mr. Chairman, also for 
holding this hearing. As was mentioned earlier, both from I 
think your outsetting statement, as well as from the folks that 
testified today, the economic numbers that came out today if 
anything show that the economy is not on solid enough footing. 
Our anemic growth levels are such--they are such anemic growth 
levels that there's a lot more we can be doing to jumpstart our 
economy and put people back to work.
    And certainly tax reform, I think many of us really do 
believe that tax reform is the vehicle to getting the economy 
back on track and on solid footing. It's not about doing tax 
reform for tax reform's sake; it is definitely about making the 
tax code simpler and fairer and more competitive. That is the 
one word that has really stood out.
    As the topic of the hearing talks about, looking at past 
history in terms of, you know, the Reagan Tax Reform, and with 
the Democratic Congress' successes, and no tax reform is 
perfect. And certainly there were strengths and weaknesses in 
both the 1981 and the 1986 Tax Acts.
    So I am wondering if maybe you can just reflect a little 
bit, Dr. Hassett to start with you. What were some of the major 
strengths, and what were some of the major weaknesses? And 
then, Dr. Tyson, you can comment also because you referenced in 
1986 we were at the lowest, the U.S. had the lowest corporate 
tax rate, and everyone has adjusted since then.
    You know, how did our actions create sort of a worldwide 
revolution in tax policy?
    Dr. Hassett.
    Dr. Hassett. I'll begin. I think that the biggest strength 
of the 1986 Act was the reduction in the individual side 
marginal rate. I think there were two weaknesses that Dr. 
Gravelle alluded to one of them, that on the corporate side 
that basically increased the tax on new capital in order to 
reduce the tax on old capital.
    There were also a number of technical changes to things 
like passive loss rules that many people attribute, or think 
might have caused a real collapse in the nonresidential real 
estate market, that I think was like a bigger mess than people 
anticipated when they wrote the bill. But I would say that 
those are the pluses and minuses that are the headliners for 
me.
    Representative Paulsen. Dr. Tyson.
    Dr. Tyson. So I would like to point out that I think that 
at the time it would not have been clear exactly how the world 
was going to change. And what I want to emphasize is, we had a 
pretty good--it had pros and cons, and you've heard a couple of 
them--pretty good tax reform in 1986. But the world is so 
different now.
    And it is different because the share of the world's 
purchasing power out of the United States is so much larger, 
because in every sector of the economy, or practically every 
sector of the economy, there are serious new competitors, not 
just from developed countries but from developing countries.
    So the U.S. companies have had to in many cases, just to 
serve those foreign markets, have had to move production there, 
have had to move employment there. Sometimes it's to jump 
tariff walls. Sometimes it's because countries condition their 
sales to their customers by being there. Sometimes it's just 
because you have to design the product better by being close to 
the customers you are selling to.
    So what has happened here is that U.S. companies, multi-
national companies, still to this day locate most of their 
activity in the United States, but a large part of their 
markets have shifted abroad. And so now they are in a situation 
where they look at the tax rate in the United States and the 
tax rate in the other location, and the large difference 
becomes an additional reason to go to the other location.
    Then they look at the fact that their earnings from the 
other location are becoming a much larger share of their total 
earnings, and they can't bring their foreign earnings back to 
the United States without paying that additional tax.
    So we have got to change the system. I use in my testimony 
the word ``modern.'' Let's just say it's realistic. We have to 
say this is the world as it is. We can't re-engineer the world. 
We have to reform our tax system to deal with this world.
    Representative Paulsen. Governor.
    Governor Gilmore. Congressman, if I could add just two 
quick things. Once again, I continue to support Dr. Tyson and 
her idea of the repatriation of assets, because I have seen it 
in the real world.
    What is the rate in Europe? The blended rate in Europe, all 
these experts, it's 20 percent, isn't it? Yes, it's 20 percent.
    Dr. Tyson. The blended OECD rate is in the order of 25, 
actually. But let's say--it depends on how you weight it.
    Governor Gilmore. And we are at a maxium rate of 35 
percent. So the point is this. We have got to go below that. 
That has got to be our goal, and our aim, and our national 
objective.
    And second of all, I am getting increasingly uncomfortable 
with this discussion here about siloing the corporate tax rate. 
We in Free Congress think you have to look at the entire tax 
code in order to be able to put enough components together to 
get to your goals and objectives. If you just silo the 
corporate tax rate, then you get into some argument about how 
you're going ``to pay for it,'' and the next thing you know you 
don't do anything.
    Representative Paulsen. And knowing that many small 
businesses, obviously, are paying under that individual rate, 
and that is where a lot of jobs come from. There are a lot of 
us that do believe that we cannot leave one off the table 
without making sure we get our economy back on solid footing 
without helping small business.
    So I yield back.
    Chairman Brady. Thank you. First I want to--the Senate is 
voting, and I see Senator Lee is here now, but I would like to 
insert Vice Chairman Klobuchar's statement into the record.
    [The prepared statement of Chair Klobuchar appears in the 
Submissions for the Record on page 60.]
    Chairman Brady. And with perfect timing, I would like to 
recognize Senator Lee for five minutes.
    Senator Lee. Thank you, Mr. Chairman, and thanks to all of 
you for being with us today.
    Professor Tyson, I've got a question for you. In your 
testimony that you submitted to the Committee, you state that, 
quote, ``Scoring conventions ignore the stimulative effects of 
a cut in rate on future growth,'' close quote.
    Do you think it would be appropriate for Congress to 
consider dynamic scoring of corporate tax reform packages?
    Dr. Tyson. I'm afraid I have to leave this up to the 
Congress. We are all dealing, economists are dealing, and the 
Congress is dealing with models of corporate tax effects which 
are out of date relative to corporate reality, relative to the 
mobility of capital income, relative to competitive conditions 
around the world.
    So I do believe that the competitive effects of the kind of 
corporate tax reform that I have been discussing are 
significantly larger than traditional economic models, and 
dynamic scoring models would allow.
    What is important for me to emphasize here is that the 
Alliance for Competitive Taxation, and a lot of members of the 
business community and the corporate sector believe that we can 
get to a rate that we think significantly improves our 
competitive situation, paying for it by getting rid of 
preferences and credits, without dynamic scoring. We believe it 
is going to be better than that, but we aren't proposing that 
you do that.
    And I think that is an important point. I mean, if you want 
to try alternative models, I think that is great. But I think 
that the proposal is we can get a competitive tax rate that is 
paid for by base broadening without making assumptions about 
the dynamic effects, even though I personally believe in the 
dynamic effects.
    Senator Lee. Okay. And you personally believe in them such 
that if we were to use them we would probably get more accurate 
scoring, but you are saying we don't have to get there with 
what you are talking about, as much as it would be good, much 
as you would welcome seeing that. Okay.
    Dr. Hassett, any thoughts you have on dynamic scoring that 
you would like to share along those lines?
    Dr. Hassett. Well, sure. I think that ideally we would be 
basing our judgments on the best estimate of what might happen, 
and we are not doing that.
    And as I said a little bit earlier, before you arrived, 
that I think that it ends up creating almost a theater of the 
absurd where we are using scores that we do not think really 
have much to do with reality to tie ourselves into knots.
    And for me, I think that, absent having a new scoring 
debate and establishing new procedures, I think exercising 
humility on both sides, and being willing to learn is something 
else that you could do. And make a small, temporary tax change 
and then watch what happens to revenue, and then start to learn 
how tax changes affect revenues, and then collectively decide 
what the right thing to do is.
    Instead, what we are doing is tying ourselves in knots 
because we cannot come up with something that pleases the 
scoring models that have nothing to do with reality. And that 
gridlock has been with us really since President Clinton made a 
very, very small change in the corporate rate while the rest of 
the world has been cutting its rate.
    And so I think we have to fix the system of scoring because 
it has become an obstacle to competitiveness.
    Senator Lee. Back to Dr. Tyson for a minute. In a piece you 
recently wrote in Project Syndicate, I think it was in March, 
you discussed, among other things, the difficulty of doing 
corporate tax reform comprehensively, absent any changes to the 
treatment of pass-throughs, LLCs, or other businesses that 
pay--other businesses as to which taxes are typically paid 
through the individual side of the code.
    Do you think corporate-only tax reform is a viable option? 
And how do you think this would change the competitive position 
of small businesses relative to large corporations due to the 
tax code?
    Dr. Tyson. Let me say that I did preface that statement in 
Project Syndicate with the observation that I think it is not 
desirable to have a corporate tax code which distorts choice of 
organizational form, when everything is similar about the 
organization except whether it checks an ``S corp'' or a ``C 
corp'' box.
    So that is an inefficiency from an economist's point of 
view. I actually think that the best answer to this was again 
given by my colleague, Dr. Hassett, who said: If we had the 
right, well-designed corporate tax reform with an appropriate 
rate, a lot of businesses that are currently choosing other 
organizational forms would choose the corporate form.
    This is an organizational choice. And it depends upon the 
tax system. We could get rid of this organizational form 
distortion by a comprehensive corporate tax reform with an 
appropriate rate. As a result of such a reform, a lot of 
companies would choose to organize as corporations.
    I think that therefore what I prefer is to focus on getting 
the corporate tax reform right. And then that will allow 
businesses to choose the form of organization and taxation 
which is the most appropriate for them.
    Senator Lee. Okay. You are saying corporate form is itself 
a dynamic response.
    Dr. Tyson. I guess I think that. And, by the way, the 
Governor and I have agreed on a lot of things. Since I think we 
are on the road to possible, meaningful, sensible corporate tax 
reform, and I can see the political way to do that I would hate 
to see it get blocked because we are trying to get 
comprehensive tax reform and then therefore get no tax reform.
    Senator Lee. Thank you. I see my time has expired.
    Governor Gilmore. Mr. Chairman, may I answer the Senator's 
question?
    Chairman Brady. Very quickly, yes, sir.
    Governor Gilmore. Senator, the answer is: Yes, we should 
consider dynamic scoring. Now when we put together our program 
at Free Congress, I asked my economists to do a revenue-neutral 
static approach because I didn't think politically it would be 
acceptable otherwise. But we all know there's going to be 
dynamic pluses.
    And Kevin Hassett's right. Try it. You will see that it 
will work. And then we will learn something about economics.
    Senator Lee. Thank you, Governor.
    Chairman Brady. Thank you. On behalf of Vice Chair 
Klobuchar and myself, I want to thank our witnesses. I get the 
sense of enough is enough with this tax code. It is time to 
make the tough changes and become competitive again. It is not 
easy. That's why it is not done but once a generation, but this 
really is an opportunity in I think a bipartisan way to get 
this done.
    So I want to thank the witnesses for their insight, their 
thought, and past experience that is just hugely helpful for us 
at this Committee. So again, thank you for being here.
    The hearing is adjourned.
    (Whereupon, at 3:18 p.m., Wednesday, July 31, 2013, the 
hearing was adjourned.)
                       SUBMISSIONS FOR THE RECORD

   Prepared Statement of Hon. Kevin Brady, Chairman, Joint Economic 
                               Committee
    America's current tax code is too costly, too complex, and unfair, 
but mostly unfair.
    It's unfair to families. Whether you're single or raising children, 
starting your career or experiencing retirement, the tax code is 
impossible to understand. It's more time-consuming than ever. And 
you're always wondering--is the next guy paying the same as me?
    You can't possibly keep up with the 4,000 changes Washington has 
made the past decade. That's a new change in the tax code every day. 
Few taxpayers even know the tax provisions to which they are entitled. 
For example, there are 15 different tax provisions for higher 
education--each with its own set of rules. The ``simple guide'' for 
these provisions is 90 pages long! And if you accidentally make a 
mistake, the IRS is unforgiving.
    Today's tax code is unfair to businesses.
    It costs too much for businesses to keep up with their taxes--
especially if you're a small business. Most have to rely on outside tax 
preparers. It's not fair that many small businesses pay higher tax 
rates than big businesses. And it's not fair that American companies 
face the highest tax rate among developed countries.
    Our outdated tax code often double-taxes American companies--
forcing them to shift workers and research overseas just to try to 
compete on a level playing field against foreign competitors.
    Today's tax code is unfair to America.
    The complex and burdensome tax code drains over $160 billion out of 
America's economy each year. It makes it too hard to start up new 
businesses and create new jobs. America has fallen behind its global 
competitors in Europe and China--saddled with a tax code that costs us 
sales, contracts, and jobs when we compete.
    Experts predict a simpler, fairer, flatter tax code for families 
and businesses could create up to 1 million new jobs in the first year 
and make us competitive again in the 21st century.
    We need a simpler, fairer tax code that protects taxpayers--not 
special interests--and helps Americans compete and win.
    So what can we learn from the last comprehensive rewrite of the 
American tax code?
    When President Ronald Reagan took office on January 20, 1981, the 
top individual income tax rate was 70 percent. The Economic Recovery 
Tax Act of 1981 reduced the top individual rate to 50 percent by the 
end of his first term. The Tax Reform Act of 1986 reduced the top 
individual rate to 28 percent by the end of his second term.
    Contrary to the claims of Reagan's critics at the time, these rate 
reductions neither starved the Treasury for revenue nor undermined the 
progressivity of the income tax.
    Income taxes as a share of our economy remained virtually 
unchanged. The share of income taxes paid by the richest Americans 
increased dramatically.
    For example, the share of federal income taxes paid by the top 1 
percent rose from 19.1 percent in 1980 to 27.6 percent in 1988. In 
contrast, the federal income tax burden on the middle class fell. 
Indeed, the share of federal income taxes paid by the bottom 50 percent 
fell from 7.1 percent in 1980 to 5.7 percent in 1988.
    The Tax Reform Act of 1986 reduced the top corporate income tax 
rate from 46 percent to 34 percent. But the positive effects of lower 
corporate rates were largely offset by the repeal of the Investment Tax 
Credit, longer depreciation schedules especially for buildings, and the 
repeal of the 60 percent exclusion of capital gains from taxation, 
effectively raising the top tax rate on capital gains from 20 percent 
to 28 percent.
    The tax reforms enacted under President Reagan were not perfect, 
yet collectively they boosted economic growth and employment. Tax 
changes in Reagan's first term increased real GDP by more than 10 
percent, while tax changes in Reagan's second term partially offset 
these earlier gains by less than one percent.
    The overall success of Reagan's tax policies brought about a 
worldwide revolution in taxation. Over the next two and a half decades, 
nearly every developed country in the world reduced tax rates on both 
individuals and corporations.
    The average combined corporate tax rate among the countries in the 
Organization for Economic Cooperation and Development (OECD) declined 
from approximately 48 percent in the early 1980s to 25 percent in 2013. 
After Japan recently cut its corporate income tax rate, the United 
States now has the highest combined corporate tax rate in the OECD at 
39.2 percent--the worst.
    Despite President Obama's individual income and capital gains tax 
rate increases in January which have slowed the U.S. economic recovery, 
the President still asserts the wealthy are not paying their fair share 
of federal taxes.
    However, the facts don't support his assertion.
    An objective study by the OECD, found that the highest-earning 10 
percent of the U.S. population actually paid the largest share among 24 
countries examined, even after adjusting for their relatively higher 
incomes.
    The richest ten percent in the United States pay 1.35 times their 
share of income in taxes compared to the OECD average of 1.11. 
``Taxation is most progressively distributed in the United States,'' 
the OECD study concluded.
    Unfortunately, as other countries have moved forward in reducing 
their individual and corporate income tax rates, the United States has 
reversed course, undoing much of the earlier rate reductions. Including 
President Obama's latest tax increases, our top individual income tax 
rate is now nearly 44 percent.
    The purpose of today's hearing is to review the lessons we should 
have learned from previous tax reform efforts. What worked, what 
didn't, and why?
    And most importantly, given our anemic recovery from the current 
recession--the weakest recovery since World War II--how can we improve 
our tax system to get the most economic bang for the buck?
    What I've seen as a member of the tax-writing House Ways and Means 
Committee is that our current complex tax system diverts productive 
resources into wasteful lobbying and tax avoidance schemes. It favors 
consumption over investment, debt over equity, large businesses over 
small, and some industries over others.
    Tax reform should eliminate these distortions and promote economic 
growth. Hopefully, today's hearing will help us identify the steps we 
need to take to achieve this goal.
    I look forward to the testimony of our witnesses.
                               __________
   Prepared Statement of James S. Gilmore III, President & CEO, Free 
              Congress Foundation and Free Congress Action
    Good afternoon. Thank you for the opportunity to speak at this 
hearing today. As a former alternate delegate for presidential 
candidate, Ronald Reagan, at the 1976 Kansas City Republican 
Convention, I like the title of this hearing. But we cannot simply look 
to the past. John F. Kennedy and Ronald Reagan lived in different times 
and rose to the occasion to lift our spirits--but also our economic 
growth through their policies. Millions of unemployed and underemployed 
Americans need today's leaders to look forward and create a sense of 
purpose for our new national goal--which is economic growth. Currently, 
our leaders are not proposing bold, new ideas.
    We here at the Free Congress Foundation have focused on economic 
recovery for the United States for more than three years. We have 
participated in numerous panel discussions and written op-eds to 
promote an economic program that most Republicans and Democrats can 
agree on. At the end of 2011 we offered the ``Growth Code,'' a specific 
program of tax reform that if enacted would spur growth, get the 
economy moving, and create jobs that would get us out of this 
recession.
    The truth is that this country has not yet recovered from the 
``Great Recession.'' Historically, this country grows at 3.2%. We are 
not growing anything like that rate. All estimates show growth in the 
near future at less than 2%. No estimates show recovery at 3.2% or the 
higher rate it will take to make up the ground we have lost in recent 
years. Unemployment is historically 5.7% (or better) in the U.S. We 
have been over 7.5% unemployment FOR FOUR YEARS NOW.
    Current economic trends show the following:

      1.5 million or 53% of young people (under 25 years of 
age) with bachelor degrees are jobless or underemployed. (April 2012)
      Unemployment in the African-American community currently 
stands at 13.7%; Young African-Americans (ages 18-29) are facing an 
unemployment rate of 22.1%. (Jan. 2013)
      Unemployment in the Hispanic community (ages 18-29) 
stands at 13%. (Jan. 2013)
      All women in the United States of America (ages 18-29) 
are staring at an unemployment rate of 11.6%. (Jan 2013)

    The consequences of this situation are not simple economic numbers. 
It means lower wages as more workers chase fewer jobs. It means gross 
unemployment in the black community. It means no jobs for our bright 
young people coming out of school and getting started. It means that 
long time workers are being laid off, and not being able to get 
reemployed. It means family strife. It means an endangered national 
security.
    This is a historic crime against the citizens of our country, and 
no government benefit program will make up for lost opportunity. The 
only answer, as we have said for years, is to focus on growing our 
economy. A growing economy has more business opening and existing 
businesses expanding, creating more jobs. More jobs means a better life 
for our citizens. It also increases tax revenue organically, making 
high taxes unnecessary and eliminating deficit spending.
    We should control government spending, but it gets a lot easier 
when you have more tax money coming in.
    President Obama's current slate of proposals is not going to erase 
the economic, psychological and political damage done to date by a 
long-held, misplaced faith in excessive government spending and 
bureaucratic problem solving. Americans see this clearly. They can see 
that conventional government programs will not advance our nation 
beyond its current stagnation.
    What our country needs instead is an unambiguous and actionable way 
forward for the new political dynamic. The problem with the current 
national dialogue is the confusing mashup of conflicting policy signals 
from our political leadership. As if uncertainty about our economy were 
not enough, Washington creates even more uncertainty by, in some cases, 
proposing to give with one hand and take back with another. In other 
cases, it shows reluctance to offer any hand at all.
    Americans are tired of the talk. Tired of the gamesmanship of 
politics. They want results. I agree with President Obama that 
Washington is out of touch. I agree that we need to invest in our 
future. This week at Knox College the President asked for ideas. The 
President said in his speech ``I will welcome ideas from anyone from 
across the political spectrum.''
    OK Mr. President, we have a suggestion:
    The nation needs to set a new national goal. That goal should be to 
grow the economy of this nation and far beyond the historial 3.2% rate 
of economic growth. All other national objectives should be subordinate 
to this goal of growth. We as a nation should only implement national 
economic policy and laws that lead to growth. The reverse is also true: 
we should avoid at all cost actions that discourage growth.
    As we watch the debate between the House of Representatives, 
controlled by the Republicans, and the White House, controlled by the 
Democrats, we need to understand that judging by the new national 
standard, neither party is furthering the national goal. Cutting 
spending is a laudable objective, but it is not the best immediate way 
to obtain national growth. Raising taxes is the exact opposite of what 
is necessary to achieve national growth. Growth must become the new 
touchstone.
    The national discussion right now is all wrong. The loudest theme 
is ``tax the rich.'' This is not a growth strategy, and isn't even a 
debt/deficit reduction policy. The national debt today is about 16 
trillion dollars. Put another way, the debt is 16,000 billion dollars. 
The annual deficit is about one trillion, ninety billion dollars. This 
amount equals 1,090 billion dollars. Tax increases on the ``rich'' 
promise to bring in between 20 and 45 billion dollars: a drop in the 
bucket.
    While raising 20 to 45 billion extra dollars of new revenue is 
arguably better than nothing, it is clearly no strategy for taxing our 
way out of debt, and won't make a dent in the nation's deficit. Also, 
these proposals assume that the ``rich'' won't take steps to reduce 
their taxable incomes or otherwise shelter their incomes, including 
investing overseas instead of here at home. It's still a free county, 
and money is our most easily movable asset.
    In other words, we'll never see the 20 to 40 billion dollars from 
the tax increases. Meanwhile, investment will be discouraged, and we 
will have fewer jobs and less revenue on our economic activity. No one 
wants to become the advocate for the ``rich.'' The real point is 
different: The real question is: What actions will increase growth, 
employment, and real careers for all Americans, young or old, rich or 
poor, who want to get ahead?
    The point is that nothing about ``taxing the rich'' or 
``compromise'' or ``lets all work together'' has anything to do with 
the new national goal of growing the economy. While the ``fiscal 
cliff'' was avoided earlier this year, the only national policy that 
offers any real hope for the future is national growth. If the country 
grows, there will be more people employed. There will be more income 
for the government to tax. The country will get more revenue. The 
percent of spending as a percent of Gross Domestic Product, will go 
down automatically as our economic activity goes up. Pressure on 
entitlements and benefit programs will be reduced. Investment will be 
encouraged. National defense can be preserved. In fact, growth as the 
national policy should be the objective of both Democrats and 
Republicans, conservatives and liberals, and all Americans. Everybody 
wants more money to support the nation's aspirations, however each of 
us defines it.
    This is why we at the Free Congress Foundation have been consistent 
advocates for growth as a national policy, and why we created the 
``Growth Code,'' to propose a specific tax reform with predictable 
growth results. The ``Growth Code'' proposal can be found on the Free 
Congress Foundation website at FreeCongress.org and we hope you will 
read our specific five point plan and join us in our efforts to save 
the nation. The good news is that eventually we, as a nation, will do 
what is necessary to grow the economy because we have no other choice. 
The question is: How many people will have to suffer until we figure it 
out?
    What we should take away from President Obama's Knox College speech 
is what he does not mention: He has proposed no bold program that will 
incentivize investment, job creation, and growth. The country 
desperately needs a growth plan to save the livelihoods of the people 
of the United States, but the President does not want growth to be a 
focus of the economic debate. It may be that the philosophy of this 
President makes it impossible for him to see the path forward that will 
bring us out of recession. We can only ask how many lives must be 
ruined, how much loss must be endured by the people of this country 
before a positive program comes forward? The emergency is now. The need 
for action is now. We look forward to the day when we can complement 
the President on a new program to renew our economy and our country.
    We invite all of our friends to read ``The Growth Code'' proposal 
in full at www.freecongress.org
                            the growth code
    Made up of five steps, The Growth Code is simply, squarely and 
precisely focused on the taxcode and restoring America to a sustainable 
economic growth trajectory:

      A simple unified 15% rate on all business income, 
regardless of the type of entity;
      Tax rates of 10%, 15% and 25% on individual income is 
currently defined under the IRC;
      Immediate expensing of capital equipment;
      Elimination of the abhorrent practice of double taxation;
      Any household living in poverty will receive a family tax 
credit of $4,300.

    Full Report of the Growth Code http://www.freecongress.org/wp-
content/uploads/2011/11/The-Growth-Code-Final-Product.pdf
    James S. Gilmore III is the President and CEO of the Free Congress 
Foundation. He was Governor of Virginia from 1998-2002.
                               __________
             Prepared Statement of Dr. Laura D'Andrea Tyson
    Chairman Brady and Vice Chair Klobuchar, thank you for the 
opportunity today to address the issue of tax reform and specifically 
how carefully designed tax reform can improve the economy's 
performance. My name is Dr. Laura Tyson and I am a professor at the 
Haas School of Business at the University of California Berkeley. I 
served as the Chair of the Council of Economic Advisers and as Chair of 
the National Economic Council under President Clinton. I was a member 
of President Obama's Economic Recovery Advisory Board and his Council 
on Jobs and Competitiveness. I am currently an economic adviser to the 
Alliance for Competitive Taxation, a coalition of American businesses 
that are promoting comprehensive corporate tax reform. The views in 
this testimony are my own.
    My remarks will focus on corporate tax reform. Fifty years ago 
under President Kennedy and perhaps as recently as 30 years ago under 
President Reagan, the American economy was the most competitive in the 
world, and the U.S. could design its corporate tax code without 
considering the global economic environment. American companies derived 
most of their income from their domestic operations and to the extent 
they were engaged globally, they were typically larger than their 
foreign-based counterparts.
    But we no longer live in that world. Emerging market economies, 
falling trade barriers, and remarkable leaps in information and 
communications technology have expanded opportunities for U.S. 
companies abroad, but have also heightened global competition among 
companies to gain market share and lower production costs, and among 
countries to attract investment and jobs.
    Our current corporate tax system makes it harder for U.S. 
businesses--small and large--to compete with foreign companies, and 
reduces the competitiveness of the U.S. economy as a place to do 
business and create jobs. As a result of numerous credits, deductions 
and exclusions, the current system also results in high compliance 
costs for businesses--estimated at $148 billion in 2005--and undermines 
the efficiency of business decisions in numerous ways. There is 
widespread bipartisan agreement that our corporate tax system is deeply 
flawed and in need of fundamental reform.
    I believe there are ways to reform the corporate tax system that 
will strengthen the competitiveness of U.S. companies, make the U.S. a 
more attractive location for investment, and promote simplicity and 
efficiency in the tax code without increasing the deficit. In the 
remainder of my remarks, I will suggest changes to current tax rules 
affecting both the domestic and the foreign-earned income of U.S. 
corporations to achieve these objectives.
    Before turning to these changes, I want to use an example to 
illustrate how the current system undermines the competitiveness of 
U.S. companies. When a U.S. company sells shampoo in Asia, it is 
competing with shampoos made by its foreign competitors. The price of 
the shampoo to the consumer has to be competitive. However, a Dutch 
company pays zero tax to the Netherlands on the sale of its shampoo in 
Asia, whereas the U.S. company is subject to tax on its Asian income 
when repatriated. This puts foreign subsidiaries of U.S. companies at a 
competitive disadvantage among foreign competitors.
                          domestic tax reform
    After its 1986 tax overhaul, the United States had one of the 
lowest corporate tax rates among OECD countries. Since then, these 
other developed countries have been slashing their rates in order to 
attract foreign direct investment and discourage their own companies 
from shifting operations and profits to low-tax foreign locations. In 
the most recent and audacious move, the British government has embarked 
on a plan to reduce its corporate tax rate from 28% to 20%--one of the 
lowest in the OECD--by 2015. And this year the British government 
instituted a special 10% tax rate on income from patents.

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    The U.S. now has the highest corporate tax rate of these countries. 
Even after accounting for various deductions, credits, and other tax-
reducing provisions, the effective average and marginal corporate tax 
rates in the United States are higher than the OECD averages.

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    Cutting the corporate rate to a more competitive level would 
encourage more domestic investment by U.S. and foreign investors. 
Capital has become increasingly mobile, and differences in national 
corporate tax rates have a growing influence on where multinational 
companies locate their operations and report their income.
    Higher investment in the U.S. by both domestic and foreign 
companies would boost economic growth, while the resulting increase in 
capital--new businesses, factories, equipment, and research--would 
improve productivity. That should, in turn, boost real wages over time.
    The pro-growth rationale for reducing the U.S. corporate tax rate 
is compelling. But rate reduction--at least as estimated under the 
conventions used by the Joint Committee on Taxation and by Treasury--is 
costly, perhaps on the order of $100 billion or more per percentage 
point over the next 10 years. By scoring conventions, such calculations 
ignore the stimulative effects of a cut in the rate on future economic 
growth. Although I believe these effects are significant, I am not 
convinced that they would alone be sufficient to offset the lost 
revenues from a reduction in the rate to a level comparable to that in 
other OECD countries.
    So how should we finance a rate reduction large enough to have a 
significant effect on the competitiveness of U.S. companies and on the 
competitiveness of the U.S. as a location for investment without 
increasing the deficit? Like most economists, I believe that we can and 
should pay for such a rate reduction by broadening the corporate tax 
base through the elimination of tax breaks and preferences. This 
approach would also reduce the complexity of the tax code and increase 
its efficiency. The current system of deductions and credits not only 
reduces corporate tax revenues, it also results in large differences in 
effective tax rates across economic activities and these differences 
affect investment decisions, often with harmful effects on productivity 
and growth.
    Combining rate reduction with base broadening is the approach 
adopted in the 1986 corporate tax reform enacted under President Reagan 
and it is the approach advocated by numerous independent commissions on 
competitiveness and deficit reduction and by the Obama Administration.
    Given the importance of the statutory corporate tax rate in 
influencing the location of highly profitable and mobile capital, a 
significant reduction in this rate paid for by broadening the corporate 
tax base can achieve meaningful efficiency gains and boost economic 
growth. And over time as growth increases a revenue-neutral corporate 
tax reform will increase corporate tax revenues and reduce the deficit.
                        international tax reform
    In addition to reducing its corporate tax rate, the U.S. needs to 
reform the way it taxes the foreign earnings of U.S. companies.
    With 95% of the world's consumers located outside of the United 
States, American companies need to have a presence in foreign markets 
in order to be able to compete there. For companies trying to sell and 
service escalators, most of the growth potential exists in areas where 
construction is robust, such as Asia. If a U.S. company wants to be 
selected to install and service an escalator in a building abroad, it 
must have maintenance and engineering staff on the ground in the 
country where the building is located. And if the U.S. company isn't 
established in the foreign jurisdiction, a non-U.S. competitor will 
likely win the business.
    Every other G-8 country and 28 of the other 33 OECD member 
countries have adopted modern international tax systems that generally 
allow their internationally engaged companies to compete globally and 
reinvest active foreign earnings at home without paying a second tax. 
This approach, referred to as a participation exemption or territorial 
tax regime, is grounded in the principle of capital ownership 
neutrality--that is, the ownership of a foreign company by a domestic 
company should not result in greater taxation of its active income than 
ownership of that company by a foreign competitor.
    The United States, by contrast, taxes U.S. multinational companies 
when they repatriate active income earned abroad by their foreign 
subsidiaries, with a credit for foreign taxes imposed on this income. 
With the adoption of territorial tax systems by the United Kingdom and 
Japan in 2009, and by thirteen other OECD member countries since 2000, 
the U.S. international tax system now lies far outside of international 
norms. Indeed, of the companies that appeared on the Global Fortune 500 
list in 2012, 93 percent of the foreign companies that compete with 
U.S. companies were headquartered in territorial countries. Only two 
OECD countries have ever switched from exemption to foreign tax credit 
systems--Finland and New Zealand--and both subsequently reinstated 
exemption systems.
    The current worldwide approach to corporate taxation in the U.S. 
puts globally engaged U.S. companies at a competitive disadvantage. 
They cannot bring profits from their foreign affiliates home without 
paying the high U.S. corporate tax rate, while foreign-based 
competitors pay only the local tax rate on such profits. The 
combination of a high corporate tax rate and a worldwide approach to 
taxing the foreign active earnings of companies reduces the 
attractiveness of the U.S. as a place to locate the headquarters of 
global companies.
    As a consequence of both U.S. taxation of repatriated foreign 
earnings and the high U.S. corporate tax rate, U.S.-based multinational 
companies have a strong incentive to keep their foreign earnings 
abroad. Indeed, their non-U.S. affiliates currently hold an estimated 
$2 trillion in accumulated foreign earnings.
    These earnings are ``locked out'' and unavailable to finance 
investment and job creation in the United States without incurring 
significant additional U.S. taxes. Moreover, U.S. companies incur 
efficiency costs from the suboptimal use of these earnings and from 
higher levels of debt than would be necessary if their foreign earnings 
could be repatriated without incurring additional U.S. tax. Treasury 
economist Harry Grubert and Rutgers economics professor Rosanne 
Altshuler estimate that the hidden efficiency costs of the U.S. 
international tax system averages about five percent of the trapped 
foreign cash of mature U.S. multinational companies. These costs are a 
drag on their competitiveness.
    A participation exemption or territorial system similar to those in 
other developed countries would allow U.S. multinationals to put their 
foreign earnings to work in the United States and to compete more 
effectively in foreign markets, which today represent 75 percent of the 
world's purchasing power and which will become even more important in 
the future.
    Preliminary results from a study I am conducting at the Berkeley 
Research Group, an independent research and consulting group, with 
financial support from the Alliance for Competitive Taxation, suggest 
that exempting 95-percent of the active foreign income earned by the 
foreign subsidiaries of U.S. companies from U.S. corporate taxation 
would increase U.S. employment by about 150,000 jobs a year on a 
sustained basis, with a short-term employment gain nearly 10 times 
larger. These gains in employment are the result of a significant 
increase in the repatriation of income by foreign subsidiaries. 
Repatriated funds would boost U.S. employment and growth through an 
increase in the parent companies' economic activities in the U.S. and 
through distributions to their U.S. shareholders, who in turn would 
increase their investment and consumption.
    Adopting a hybrid participation exemption or territorial system 
similar to those in other developed countries would address the 
competitiveness disadvantages, the ``lock-out'' effect, and the 
inefficiencies of the current U.S. worldwide approach. However, such a 
system would not reduce the incentives for U.S. multinational companies 
to structure the transactions between their U.S. operations and the 
operations of their foreign affiliates in ways that shift their profits 
abroad to low tax jurisdictions. Recent Congressional hearings have 
focused on the incentives that U.S. companies face under present law to 
shift reported profits to lower tax foreign jurisdictions, in some 
cases through the transfer of intangible property and risks to foreign 
affiliates.
    Income-shifting incentives exist in both the current U.S. system 
and in territorial systems and have become stronger over time as a 
result of several factors including: the increasing globalization of 
business activity; the rising importance of intangible capital that is 
difficult to price and relatively easy to move; competitive cuts in 
corporate tax rates; and the availability of tax havens. As a result, 
income shifting and the resulting erosion of domestic corporate tax 
bases have become major policy concerns throughout the OECD. In 
response to such concerns, OECD countries with both worldwide and 
territorial systems have developed a variety of techniques to curb base 
erosion including transfer-pricing rules based on OECD guidelines, 
``exit'' taxes on outbound transfers of appreciated property, limits on 
interest deductibility, and domestic taxation of passive and certain 
types of mobile income earned by foreign subsidiaries. Territorial 
systems with such features are referred to as hybrid territorial 
systems. The current U.S. worldwide system already has all of these 
features.
    The OECD recently announced a 15-point action plan to develop 
coordinated national measures to further restrict opportunities for 
multinational companies to reduce or avoid taxation on cross-border 
income.
    As part of comprehensive corporate tax reform that includes a 
revenue-neutral rate cut, the House Ways and Means Committee is 
currently considering a hybrid international reform that would follow 
the participation exemption or territorial systems of other OECD 
countries and would include additional measures to counter tax-base 
erosion and income shifting. Lowering the high U.S. corporate tax rate 
by itself would reduce the incentives for both U.S. and foreign-based 
companies to shift income from their U.S. operations and erode the U.S. 
corporate tax base.
    Among the anti-base erosion options included in Ways and Means 
Committee Chairman David Camp's international tax reform discussion 
draft is an innovative proposal that rests on the ``destination 
principle,'' with the tax rate on intangible property income based on 
where products are sold. This option would significantly reduce 
incentives to move intangible property or manufacturing abroad for tax 
reasons by offering a low 15-percent rate on income from intangible 
property owned in the United States and used in connection with 
providing goods and services sold in foreign markets. This is a form of 
the ``patent box'' regimes recently put in effect by seven EU member 
countries and China.
                               conclusion
    The U.S. last reformed its business tax code in 1986, when it had 
one of the lowest corporate tax rates in the world and the competitive 
dynamics of the global economy were very different. It is time for 
another comprehensive corporate tax reform that, without increasing the 
budget deficit, reduces the tax rate, broadens the tax base, makes the 
corporate tax system simpler and more efficient, and adopts a hybrid 
international system with effective safeguards to protect the U.S. tax 
base.

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

 Prepared Statement of Hon. Amy Klobuchar, Vice Chair, Joint Economic 
                               Committee
    I would like to thank Chairman Brady for holding this hearing on 
tax reform and economic growth and thank our distinguished panel of 
witnesses for being here today.
    As we all know, getting tax reform legislation passed will require 
bipartisan cooperation. That was certainly one of the lessons of the 
1986 tax reform, when a Republican President worked with a Democratic-
controlled House, in a divided Congress, to enact sweeping tax reform. 
Together they were able to lower tax rates and reduce tax loopholes.
    While some tax rates were lower during the Reagan administration, 
tax revenues as a share of gross domestic product (or GDP) averaged 
about 18 percent. The few times that the budget has been balanced or 
generated a surplus, revenues made up about 19 percent of GDP. Yet, 
over the last several years, overall revenues have averaged about 15 
percent of GDP, which is the lowest in generations.
    Our tax code certainly needs serious reform. I think we're off to a 
good start with Senator Hatch working with Senator Baucus to move 
forward on tax reform together and start the discussion, soliciting 
everyone's input. Senator Baucus and House Ways and Means Chairman Dave 
Camp had their first stop on their tax reform listening tour in 
Minnesota--they visited some great Minnesota companies like 3M, who has 
said that they're willing to put all their tax breaks on the table for 
a lower corporate rate.
    We all agree that the tax code is broken. It is overly complex, 
out-of-date, and inefficient. As a part of balanced deficit reduction, 
tax reform provides us the opportunity to protect the middle class, 
promote economic growth and build upon the deficit reduction already 
achieved.
    Deficit reduction must be done in a balanced way that includes a 
mix of spending cuts and revenue. Congress has already achieved $2.4 
trillion in savings with approximately $1.8 trillion coming from 
spending reductions and interest savings and $600 billion from revenue.
    If sequestration continues, additional spending cuts will occur, 
which would mean the ratio of spending cuts to revenue would be four-
to-one. Such a ratio of cuts to revenue would be in sharp contrast to 
the recommendations of the bipartisan fiscal commissions that examined 
this question, including the 2010 Simpson-Bowles Fiscal Commission that 
recommended $4 trillion in deficit reduction in a more balanced manner.
    We have an opportunity to achieve a better balance of spending cuts 
to revenue with tax reform. I believe it is critical that the tax 
reform process start with and adhere to the framework included in the 
Senate's FY14 Budget Resolution that would achieve $1.85 trillion in 
additional deficit reduction divided evenly between responsible 
spending cuts and new revenue. Comprehensive tax reform is about more 
than fiscal discipline and balanced deficit reduction. If done right, 
it has the potential to lay the groundwork for expanded economic growth 
across the country.
    My home state of Minnesota is the hub of several major industries 
like medical device, finance, insurance, agriculture, food processing, 
and retail. With our entrepreneurs, innovators and a talented 
workforce, Minnesota has weathered the recession and moved towards 
growth earlier than other states. But there is more that can be done to 
encourage economic growth and investment.
    Reforming the tax code will provide certainty for businesses, 
reduce costs of compliance and eliminate a barrier to expansion. In 
order to achieve these outcomes, I believe that our work on tax reform 
should be guided by the following commonsense principles and goals:
    First, it is imperative that comprehensive tax reform encourage job 
creation, savings, investment, and economic growth in the United 
States. The tax code should not hinder the ability of U.S. corporations 
to compete at home or abroad. Yet, at the current level of 35 percent, 
our corporate tax rate is among the highest in the world. We should 
lower the corporate tax rate to a level that would ensure certainty and 
promote competitiveness, and closing certain loopholes would help us 
pay for the reduction in the overall corporate tax rate.
    Comprehensive tax reform must also recognize the importance of 
small businesses as drivers of economic growth and job creation. Many 
small businesses operate as partnerships or sole proprietorships, and 
some small businesses are established through unique structures like 
employee ownership or they utilize incentives specifically designed to 
boost small business. No matter the structure under which a small 
business operates, comprehensive tax reform should be done in a way 
that makes the tax code more simple, fair and competitive for these 
businesses.
    The tax code should also recognize and support growing industries 
like the medical device manufacturing industry. I, along with 
Representative Paulsen and Senator Coats, have done a lot of work to 
fully repeal the medical device tax. This sector of our economy is 
responsible for millions of high-quality jobs and is a significant 
economic driver for our nation--enjoying an annual trade surplus of 
roughly $5.4 billion.
    Second, predictability and certainty should be key goals of 
comprehensive tax reform. The current tax code's unpredictability 
hinders economic growth by not allowing individuals, small businesses, 
and corporations to adequately plan for the future.
    For example, the research and development (R&D) tax credit has 
expired and been extended numerous times since 1986. This uncertainty 
means that entrepreneurs, inventors, scientists and employers are 
forced to put on hold their important work while Congress works to 
renew the provision. By making the R&D credit permanent, these 
scientists and researchers would have the certainty they need to 
continue focusing on their work without an interruption caused by an 
expiring provision of the tax code.
    Third, we agree that fairness must remain a hallmark of the 
American tax system. Fairness in the tax code helps middle class 
families achieve their goals from homeownership to paying for college 
for their children to ensuring they have retirement security.
    By taking a more balanced approach to tax expenditures, we can 
continue to encourage specific policy goals while bringing down the 
deficit. For example, the home mortgage interest deduction could be 
capped at $500,000. That means a family with a $750,000 mortgage would 
be able to deduct the interest from the first $500,000 of that mortgage 
from their income. A cap at this level has the potential to save $40 
billion over 10 years.
    Fairness in the tax code also ensures that an executive assistant 
is not paying a higher effective tax rate than the CEO in the corner 
office. Enacting the ``Buffett Rule'' would bring in more than $46 
billion over 10 years in new revenue that could be used to pay down the 
deficit.
    Fourth, comprehensive tax reform should create a more efficient tax 
system that raises revenue for both deficit reduction and essential 
government programs.
    One way to raise revenue in the tax code is to close loopholes and 
remove inefficient or unnecessary expenditures such as tax breaks for 
large oil companies. We have already eliminated biofuel subsidies. The 
oil industry is one of the most profitable the world has ever seen, 
with the five largest oil companies in the U.S. earning nearly $1 
trillion in profits over the last decade. Yet, these companies still 
receive billions of dollars in tax breaks every year. If tax subsidies 
for oil companies are repealed, we would save $40 billion over the next 
10 years.
    Our work to reduce the deficit combined with comprehensive tax 
reform that adheres to the principles of expanded economic growth, 
predictability, efficiency and fairness will provide a stable economic 
framework so that businesses and entrepreneurs can invest and families 
can succeed well into the future.
                               conclusion
    We all agree that our tax code is broken. It is now nearly four 
million words long, which is about seven times longer than Tolstoy's 
War and Peace.
    The National Taxpayer Advocate reported this year that U.S. 
taxpayers spend 6.1 billion hours figuring out their federal taxes. 
Almost 60 percent of Americans pay someone else to prepare their 
returns, and 30 percent of Americans have to purchase software to do 
their returns.
    Just in the period since 2001, Congress has made more than 4,600 
changes to the tax code. That is, on average, more than one change 
every single day.
    This hearing is looking back at tax reform and economic growth in 
the past, and it's worth noting that the Clinton Administration 
achieved record budget surpluses, tax relief for middle-class families, 
economic growth of almost four percent per year, the creation of over 
22 million jobs, and the lowest unemployment rate the country had seen 
in 30 years.
    That's an economic record that would also be worth examining.
    Again, thanks to Chairman Brady and our witnesses.
  

                                  
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