    [Joint House and Senate Hearing, 114 Congress]
    [From the U.S. Government Publishing Office]

                                                            S. Hrg. 114-335

                 IS OUR COMPLEX CODE TOO TAXING ON THE ECONOMY?

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

                                    HEARING

                                   before the

                            JOINT ECONOMIC COMMITTEE
                         CONGRESS OF THE UNITED STATES

                        ONE HUNDRED FOURTEENTH CONGRESS

                                 SECOND SESSION

                                   __________

                                 APRIL 20, 2016

                                   __________

              Printed for the use of the Joint Economic Committee

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

                                     ______

                             U.S. GOVERNMENT PUBLISHING OFFICE

    20-071                         WASHINGTON : 2016
    -----------------------------------------------------------------------
      For sale by the Superintendent of Documents, U.S. Government Publishing
      Office Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800;
             DC area (202) 512-1800 Fax: (202) 512-2104 Mail: Stop IDCC,
                              Washington, DC 20402-0001

                            JOINT ECONOMIC COMMITTEE

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

    SENATE                               HOUSE OF REPRESENTATIVES
    Daniel Coats, Indiana, Chairman      Patrick J. Tiberi, Ohio, Vice
    Mike Lee, Utah                           Chairman
    Tom Cotton, Arkansas                 Justin Amash, Michigan
    Ben Sasse, Nebraska                  Erik Paulsen, Minnesota
    Ted Cruz, Texas                      Richard L. Hanna, New York
    Bill Cassidy, M.D., Louisiana        David Schweikert, Arizona
    Amy Klobuchar, Minnesota             Glenn Grothman, Wisconsin
    Robert P. Casey, Jr., Pennsylvania   Carolyn B. Maloney, New York,
    Martin Heinrich, New Mexico              Ranking
    Gary C. Peters, Michigan             John Delaney, Maryland
                                         Alma S. Adams, Ph.D., North
                                             Carolina
                                         Donald S. Beyer, Jr., Virginia

                      Viraj M. Mirani, Executive Director
                     Harry Gural, Democratic Staff Director

                                C O N T E N T S

                                  ----------

                         Opening Statements of Members

    Hon. Daniel Coats, Chairman, a U.S. Senator from Indiana.........     1
    Hon. Carolyn B. Maloney, Ranking Member, a U.S. Representative
      from New York..................................................     2

                                   Witnesses

    Dr. Arthur B. Laffer, Chairman, Laffer Associates, Nashville, TN.     5
    Mr. Scott A. Hodge, President, Tax Foundation, Washington, DC....     7
    Mr. Joseph Grossbauer, President and CEO, GGNet Technologies,
      Chesterton, IN.................................................     9
    Dr. Jared Bernstein, Senior Fellow, Center on Budget and Policy
      Priorities, Washington, DC.....................................    12

                           Submissions for the Record

    Prepared statement of Hon. Daniel Coats, Chairman, a U.S. Senator
      from Indiana...................................................    32
    Prepared statement of Hon. Carolyn B. Maloney, Ranking Member, a
      U.S. Representative from New York..............................    32
    Prepared statement of Dr. Arthur B. Laffer, Chairman, Laffer
      Associates, Nashville, TN......................................    34
        Report titled ``The Economic Burden Caused By Tax Code
          Complexity''...............................................    35
    Prepared statement of Mr. Scott A. Hodge, President, Tax
      Foundation, Washington, DC.....................................    63
    Prepared statement of Mr. Joseph Grossbauer, President and CEO,
      GGNet Technologies, Chesterton, IN.............................    74
    Prepared statement of Dr. Jared Bernstein, Senior Fellow, Center
      on Budget and Policy Priorities, Washington, DC................    79
    Questions for the record and responses:..........................
        Questions for Dr. Arthur B. Laffer submitted by Chairman
          Coats......................................................    96
        Questions for Dr. Jared Bernstein submitted by Ranking Member
          Carolyn Maloney............................................    98

    IS OUR COMPLEX CODE TOO TAXING ON THE ECONOMY?

                                  ----------

                           WEDNESDAY, APRIL 20, 2016

                 Congress of the United States,
                              Joint Economic Committee,
                                                        Washington, DC.
        The Committee met, pursuant to call, at 2:33 p.m. in Room
    562 of the Dirksen Senate Office Building, the Honorable Daniel
    Coats, Chairman, presiding.
        Representatives present: Tiberi, Paulsen, Maloney, Hanna,
    Schweikert, Grothman, Delaney, and Adams.
        Senators present: Coats, Cotton, Klobuchar, Sasse, Casey,
    Heinrich, and Peters.
        Staff present: Breann Almos, Ted Boll, Doug Branch, Whitney
    Daffner, Barry Dexter, Connie Foster, Harry Gural, Colleen
    Healy, Matt Kaido, Jason Kanter, Christina King, Yana Mayayeva,
    Viraj Mirani, Brian Neale, Thomas Nicholas, Brian Phillips, Ken
    Scudder, and Phoebe Wong.

       OPENING STATEMENT OF HON. DANIEL COATS, CHAIRMAN, A U.S.
                          SENATOR FROM INDIANA

        Chairman Coats. The Committee will come to order.
        It is fitting that this hearing falls between Tax Filing
    Day, which was moved to April 18 this year--in case you haven't
    filed your taxes--and Tax Freedom Day, which occurs on April
    24th. As Mr. Hodge may explain, Tax Freedom Day represents the
    day taxpayers can stop working to pay off what they owe the
    government and start earning for themselves and their families.
        Unfortunately, Tax Freedom Day does not include freedom
    from complexity. Throughout the year, taxpayers will have to
    gather and store receipts and records to deal with next year's
    filing deadline. Some taxpayers will even make business or even
    personal life decisions based on some quirk in the tax code.
        I was looking for a tangible example at this hearing of
    just how complex our tax law is and, rather than stack up and
    tear down a whole forest of trees to print, that is why these
    boxes are stacked up in front of the dias. In 2014, a
    publication that includes the tax code, regulations, and court
    decisions that determine tax law totaled over 74,000 pages. If
    my staff had printed this out, we would need 15 boxes of paper
    that are represented here.
        Now I have got good news and bad news to report with
    respect to 2015. The good news is that the latest version of
    the tax code has fewer pages. We wondered how that could
    happen, since I think as we will hear from our witnesses we are
    adding to and not taking from, simplifying the tax code in any
    way, but was due to not an increase in the number of tax laws;
    it was because an explosion of pages no longer could fit in the
    binders. So the publisher shrank the font size. For those of us
    whose eyesight is not as good as it used to be, it will be ever
    harder to pay attention to the fine print that exists in our
    tax code.
        It is no wonder 90 percent of taxpayers pay a tax preparer
    or buy computer software to help them figure out their tax
    burden.
        Even before the new tax complications of the Affordable
    Care Act, the Internal Revenue Service estimated that taxpayers
    spent over 6 billion hours each year preparing and filing
    taxes. Estimates of the dollar cost to taxpayers range in the
    hundreds of billions of dollars.
        Complexity comes with many costs. Aside from the
    frustration and anxiety, it causes taxpayers to spend time and
    energy that could be put to much more productive uses.
        It costs the Treasury, since taxpayers make innocent
    mistakes and are never exactly sure what they owe. And it
    breeds a sense of distrust in the system when taxpayers suspect
    others are getting a better deal because they figured out how
    to game the tax code.
        But is there a real economic cost? Would America as a whole
    be dramatically better off with a much simpler, much fairer,
    much more pro-growth tax code?
        I think I know the answer, but I look forward to hearing
    from our witnesses with their views on this subject.
        Today we will hear from Dr. Art Laffer, known as the father
    of supply-side economics. We also have Scott Hodge of the Tax
    Foundation, which is famous for its tax research. We will also
    hear real-life stories from Joe Grossbauer, a small business
    owner who lives with tax complexity every day. And our final
    witness is Jared Bernstein of the Center on Budget and Policy
    Priorities.
        My thanks to all of you for coming here today. We look
    forward to your testimony.
        I now recognize Ranking Member Maloney for her opening
    statement.
        [The prepared statement of Chairman Coats appears in the
    Submissions for the Record on page 32.]

    OPENING STATEMENT OF HON. CAROLYN B. MALONEY, RANKING MEMBER, A
                   U.S. REPRESENTATIVE FROM NEW YORK

        Representative Maloney. Thank you so much, Chairman Coats,
    for calling this hearing, and to all of our panelists. We are
    here today to talk about simplifying the tax code.
        Most Americans think our tax system is too complex, and I
    believe we all agree. But simplifying the tax code will be a
    massive undertaking. It will be politically difficult. It will
    create winners and losers. That is because simplifying the code
    requires eliminating some of the tax credits, deductions, and
    exemptions that make it complicated.
        Those who benefit from these provisions will fight tooth
    and nail to protect them. That is why we should be very wary of
    anyone who offers a quick and seemingly painless fix. Some
    things are worth protecting, like the home mortgage interest
    deduction that enables Americans to achieve the American Dream
    of owning a home. Others widely benefit society, like the
    charitable deduction that helps support museums, parks, and
    other important charities. And some credits incentivize
    behavior that broadly benefits the economy like the research
    and development tax credit. Some credits are critical to giving
    working families a chance to succeed, like the Earned Income
    Tax Credit.
        However, many loopholes in our tax code are just giveaways
    to narrow, special interests. These are often buried deep in
    the fine print, making the tax code more complicated and less
    fair.
        So, yes, we should simplify our tax system. We should make
    it as easy as possible for individuals and small businesses to
    do their own taxes and pay them. We should enable companies to
    spend less money on tax accountants and more on building their
    businesses. And we should plug some of the thousands of
    loopholes that not only complicate the tax code but allow some
    to take unfair advantage of it.
        But at the same time, we should make sure that our tax
    system raises enough revenue to provide Americans the services
    they expect from their government, and that they need. And we
    should create one that makes the vast majority of Americans
    better off than they are today, or at least not worse off.
        But I fear that many proposals the conservatives claim
    would simplify the tax code are not really about
    simplification. Rather, they are about radically restructuring
    who pays how much.
        One proposal in the House Republican Budget is to reduce
    the number of brackets in order to lessen complexity. Some
    would go further. A plan backed by Witness Arthur Laffer is to
    create one flat tax. This would reduce the total number of
    brackets to one. This means that a family that earns $50,000
    would pay the same tax rate as the family earning $50 million.
        Many conservatives claim these simplification plans that
    translate into huge tax cuts for the wealthy will not increase
    deficits and won't affect the government services that many
    Americans believe are necessary.
        The theory is that tax cuts pay for themselves. In other
    words, cutting taxes can translate into such massive economic
    growth that it leads to higher government revenues.
        This means that tax cuts supposedly can take place without
    offsetting spending cuts. Americans supposedly won't lose any
    of the government services on which they depend.
        Social Security won't be touched, or Medicare, or education
    funding. Our national defense will remain strong. Our highways
    won't be allowed to fall into disrepair. We won't have to cut
    funding for dreaded diseases like the Zika Virus. But this math
    simply does not add up.
        Tax cuts don't pay for themselves. Tax cuts don't
    necessarily lead to strong economic growth. But they do lead to
    lost revenue and higher deficits. This is the lesson of the
    past 35 years.
        Despite tax increases under President Bill Clinton, we had
    a booming economy and created more than 22 million private-
    sector jobs, and four straight years of budget surpluses. And
    then we had two tax cuts under former President George Bush
    which contributed to massive budget deficits, with the tax cuts
    by themselves adding, according to some economists, $1.5
    trillion to deficits over 10 years.
        So in summary, when we talk about making the tax code less
    complex, let's not be fooled into claims that we simply need to
    flatten the code. My time is up, I guess. This will make it
    more regressive, shifting more of the tax burden onto the
    middle class and the poor.
        And let's not continue to pretend that tax cuts pay for
    themselves. History has shown that they do not in recent
    history, and so let's get down to the business of simplifying
    the tax code and making it more fair.
        I truly look forward to this very impressive panel and
    hearing your testimony today. Thank you.
        [The prepared statement of Representative Maloney appears
    in the Submissions for the Record on page 32.]
        Chairman Coats. Thank you, Ranking Member Maloney. Thank
    you very much.
        I would like to introduce our panel of witnesses.
        Dr. Arthur Laffer is an incredibly well known figure in tax
    policy circles. He is currently the Chairman of Laffer
    Associates in Nashville, Tennessee, and long before that he
    held various esteemed positions, including Chief Economist at
    the Office of Management and Budget, and a member of President
    Reagan's Economic Advisory Board.
        Most economists and policymakers are familiar with the
    Laffer Curve which shows the tradeoff between tax rates and
    revenues. As legend has it, Dr. Laffer pitched it by drawing it
    on a napkin at a dinner. Since then, he has been a prolific
    author on tax policy.
        Dr. Laffer, we welcome you.
        Mr. Scott Hodge is another well known expert in tax policy,
    and the President of the Tax Foundation, which calculates the
    Tax Freedom Day that I mentioned in my opening statement.
        He is one of the many creative drivers behind both the Tax
    Foundation's Dynamic Scoring Model and the State Business Tax
    Climate Index. Mr. Hodge has authored over 100 studies and
    conducted hundreds of interviews on tax policy and government
    spending.
        Mr. Hodge, we appreciate you joining us today.
        From Chesterton, Indiana, we have a fellow Hoosier, Mr.
    Joseph Grossbauer, the founder, President and CEO of GGNet
    Technologies.
        His company provides IT management, data security, and data
    center services for a variety of clients. Previously, Mr.
    Grossbauer was the Director of Mercy Hospital and Medical
    Center in Chicago, and an Adjunct Faculty Member at Colombia
    College.
        Mr. Grossbauer, it is a pleasure to have a Hoosier business
    owner with us today, and I thank you for taking time out of
    your schedule to come down to D.C. and testify.
        And finally, we have Dr. Jared Bernstein, Senior Fellow at
    the Center on Budget and Policy Priorities here in Washington,
    D.C.
        Before joining the Center for Budget Policy and Priorities,
    Dr. Bernstein served as the Chief Economist and Economic
    Adviser to Vice President Joe Biden, and Executive Director of
    the White House Task Force on the Middle Class.
        Before joining the Obama Administration, Dr. Bernstein was
    a Senior Economist and Director of the Living Standards Program
    at the Economic Policy Institute.
        Dr. Bernstein, we welcome you also.
        With that, I would like to turn to Dr. Laffer as our first
    witness, followed by Mr. Hodge, Mr. Grossbauer, and then Dr.
    Bernstein. In accord with our procedures here, we would like to
    get your conclusions and summaries in a roughly five-minute
    time frame so it gives us plenty of time. We have a number of
    our members here from both the House and the Senate that would
    like to ask you questions and hear from you.
        So, Dr. Laffer, you're on.

    STATEMENT OF DR. ARTHUR B. LAFFER, CHAIRMAN, LAFFER ASSOCIATES,
                             NASHVILLE, TN

        Dr. Laffer. I guess it is sort of like putting the TV
    inside the microwave so you can watch 60 Minutes in 30 seconds.
    Just teasing. It is really fun being with these other witnesses
    here today, as well, especially Jared Bernstein, who is a dear,
    dear friend for many, many, many years, and an excellent
    economist and good friend, and being with all of you.
        I guess I haven't been before this Committee for 35 years,
    and I think it's about time we started doing tax codes again. I
    would like to also have read into the record, if I might, a
    paper I did with John Childs, which is ``The Economic Burden
    Caused By Tax Code Complexity,'' which covers a lot of what you
    just talked about, Mr. Chairman.
        Chairman Coats. Without objection, we will put that into
    the record.
        Dr. Laffer. Thank you.
        [The report titled ``The Economic Burden Caused By Tax Code
    Complexity,'' appears in the Submissions for the Record on page
    35.]
        Dr. Laffer. But what I would like to do is, Mrs. Maloney, I
    would like to go right to the comments you made that were very
    interesting. What I would like to do is remove this from being
    partisan, if I may. It is not Republican, it's not Democrat,
    it's not liberal, it's not conservative, it's not left-wing,
    it's not right-wing. This is economics.
        And in fact, as some of you may know, I was a huge fan and
    voted for and did campaigning for Bill Clinton when he ran for
    office as President. I voted for him twice. I also did Jerry
    Brown's flat tax. In fact, I did it verbatim when he ran in the
    primary in 1992. And what I would like----
        Chairman Coats. Art, don't go too far, because we invited
    you----
        [Laughter.]
        Dr. Laffer [continuing]. You know I'm a Reagan guy all the
    way.
        Chairman Coats. All right, that eases the problem.
        Dr. Laffer. But it is not a partisan issue. It is all about
    economics, and about the incentives here. When you say tax
    complexity, it doesn't just mean lowering rates, or making one
    rate. It means changing the base, as well.
        I would like to give you an example of tax complexity and
    what it leads to. And this is someone you all are very familiar
    with, a man named Warren Buffett, a Frenchman from Omaha,
    Nebraska--you know ``Warren Buffett.'' And what he did was he
    wrote a letter to The New York Times in 2011 which described
    how he pays less in taxes than his secretary does. In fact, he
    pays half as much in taxes as his secretary does.
        And in the letter he said: Now I pay a lot in taxes. I pay,
    and he said six million nine hundred and whatever it is, I've
    got the exact numbers, but a little bit less than $7 million in
    taxes, which may seem like a lot of money to you, but in fact
    relative to my income it is not very much at all.
        In fact, he said, relative to my income it is only 17.4
    percent of my income. Now being the math whiz I am, I went and
    took that tax bill, which was a little less than $7 million,
    divided it by 17.4, and I got Warren Buffett's adjusted gross
    income, which was a little bit less, just a wee bit less than
    $40 million, which is a heck of a lot of money for one man to
    earn in one year in 2010.
        But then I went back to my Chicago training, University of
    Chicago training, and asked myself: What really is ``income''?
    Not the definition for the tax code, but the definition you and
    I would like to have, Mrs. Maloney, I mean very seriously. And
    your income should be how much you spend in a year, how much
    you give away in a year, and your increase in wealth.
        Now think about that income. It's what you spend in a year,
    what you give away in a year, and the increase in your wealth.
    That's your income from that year that you have to dispose of
    as you see fit.
        So I went to Warren Buffett, the records there, and I
    looked up in the Forbes Magazine to find out what happened to
    his wealth. He owns a company called Berkshire Hathaway, you
    know. The stock is fully traded, so we know how much he owns
    and what happened to his wealth. And in the Forbes Magazine
    that year his increase in wealth was a little over $10 billion.
        It went from $37 billion at the beginning of 2010 to $47
    billion at the end of the year. I then went to the Bill &
    Melinda Gates Foundation Web site. They announced that he had
    given $1.6 billion that year to the Bill & Melinda Gates
    Foundation. I didn't go to his two sons' Web sites, nor do I go
    to his daughter's, but he gave them a lot of money as well.
        I didn't look at his checking account to see how much he
    spent. But when I looked at his total income for the year 2010,
    it wasn't $40 million. His income for 2010 was $11.6 billion,
    and his total tax bill was less than $7 million.
        He paid in taxes 6/100ths of 1 percent of his income that
    year. All legal. What he did was his whole increase in his
    wealth was in unrealized capital gains. As you know, the tax
    rate on unrealized capital gains is zero, and on the increase
    it is also zero. The gifts to the Bill & Melinda Gates
    Foundation and the other foundations also pay no tax whatsoever
    there.
        If you look, he owns Berkshire Hathaway, so he never has to
    buy and sell a company stock. It is all below the shelter there
    of the company. So all the realized capital gains do not come
    to him in taxes; they just go to the company.
        You know, this is all because of complexity. And all of
    it--and he is not the only example. If you have a low rate,
    broad-based, flat tax that defines comprehensive income the way
    Jerry Brown proposed it in 1992, you would catch all of this.
    This is what we really mean by a simplified code.
        Now the code I wrote for Jerry Brown was not a tax rate
    reduction; it was much more like the 1986 Tax Act which had,
    for every rate reduction you had a broadening of the base to
    make it static revenue neutral. So all of this revenue feedback
    stuff is not true for complexity.
        Now the 1986 Tax Act, which was very--I was very involved
    in. I had done this paper of my own, as well as worked with
    Jack Kemp, as well as Bill Bradley. What we did there was we
    took the income tax down to two brackets, 15 percent and 28
    percent.
        We got rid of deductions, exemptions, exclusions. We
    dropped the corporate rate from 46 to 34 percent. And it was
    static revenue neutral. If you look at that bill at that time,
    we passed in the Senate--and I will just use the Senate vote--
    the Senate voted 97 to 3 to pass that bill.
        Now can you imagine that bill being done today where we
    drop the corporate rate from 46 to 34 percent, then the lowest
    in the OECD, and dropped the highest personal income tax rate
    from 50 percent to 28 percent, and yet we got 97 votes in
    there? It led to enormous prosperity, and my next-door neighbor
    and dear, dear friend, a guy named Al Gore, who I did the blurb
    on his latest book ``The Future,'' said it led to 20 years
    worth of prosperity and it was the best economic vote he has
    ever done, period.
        That is what we are talking about: bipartisan pro-growth,
    lowering the rates, broadening the base, and not making revenue
    shortfalls, not worrying about spending, but trying to create
    economic growth by really, really significantly reducing
    complexity.
        Thank you.
        [The prepared statement of Dr. Laffer appears in the
    Submissions for the Record on page 34.]
        Chairman Coats. Thank you.
        Mr. Hodge.

      STATEMENT OF MR. SCOTT A. HODGE, PRESIDENT, TAX FOUNDATION,
                             WASHINGTON, DC

        Mr. Hodge. Thank you very much, Mr. Chairman, and Ranking
    Member Maloney, and all the members of the Committee. I
    appreciate the opportunity to talk about tax complexity.
        Tax complexity is the number one issue facing Americans
    today. In addition to robbing us of 6 billion hours of our
    lives complying with the tax system, tax complexity punishes
    success and hard work, which robs the economy of its ability to
    create jobs and prosperity and better living standards.
        And over the past few months, Tax Foundation economists
    have actually been measuring the cost of complex provisions in
    the tax code using our Taxes and Growth macroeconomic tax
    model. In May we will publish these case studies in a new book
    titled ``Options For Reforming America's Tax Code.'' I hope
    that these case studies provide you with some dos and don'ts as
    you go about thinking about fundamental tax reform.
        What we find is that much of the complexity of our
    individual tax code in particular results from our attempts to
    make the tax system more progressive, either overtly through
    multiple brackets and rates, or covertly through backdoor
    clawbacks.
        And as we all know, and as Dr. Laffer has talked about,
    high marginal tax rates really matter. They work to diminish
    incentives and that ultimately undermines economic growth.
    Economists have referred to these high tax rates as ``success
    taxes.''
        For example, we can make our current income tax system a
    lot simpler by reducing the number of tax brackets from seven
    to say three. It would be simpler, more pro-growth, and still
    progressive if we had rates of say 10, 25, and 35 percent.
        Our model estimates that this would boost the long-term
    level of GDP by 1.4 percent, lift after-tax incomes by 3
    percent, and create more than a million jobs.
        But we also find that our policies aimed at helping the
    working poor also have unintended consequences.
        The complex structure of the Earned Income Tax Credit has
    the ironic effect of encouraging more growth as the subsidy
    phases in, but discouraging work effort as the subsidy phases
    out, because it penalizes workers for every new dollar that
    they earn above the poverty level.
        However, we can reduce those tax penalties with a slower
    phase out rate for the EITC. Our model finds that this would
    raise workers' after-tax incomes by 1 percent, and create as
    many as 164,000 new jobs.
        You know, I think we all want to simplify the number of
    loopholes and itemized deductions in the code, but we should
    use the savings from that simplification for lower tax rates.
    We found that if you were to eliminate most itemized
    deductions, except for the charitable deduction and home
    mortgage interest deduction, and reduced tax rates across the
    board by 10 percent, it would increase GDP by 0.6 percent, and
    create more than 577,000 jobs.
        On the business side, everyone on this Committee knows that
    the U.S. has the highest corporate tax rate in the
    industrialized world, along with an obsolete world-wide tax
    system. Cutting the corporate tax rate and moving to a
    territorial system would not only simplify the tax code but
    make the U.S. a more competitive place to do business in and do
    business from.
        But just as important, we should replace our immensely
    complicated depreciation and cost-recovery system with a much
    simpler system of full expensing for capital investment.
    Dollar-for-dollar, full expensing is one of the most pro-growth
    tax simplification measures this Congress could enact
    immediately.
        And by our estimates, full-expensing would increase the
    long-run level of GDP by over 5 percent, boost our capital
    stock by 16 percent, increase wages by more than 4 percent, and
    create more than a million new jobs.
        Over the past year, the Tax Foundation has been very
    fortunate. We have gained a lot of special insights into what
    kinds of tax policies lead to greater investment, wages, jobs,
    and economic growth, and what kind of policies actually retard
    that.
        We have scored the tax plans for every Presidential
    candidate, as well as numerous plans developed by Members of
    the House and Senate.
        In fact, we have scored the plans of two members of this
    Committee--Senator Lee's Rubio-Lee Tax Plan; and Senator Cruz's
    Tax Reform Plan, as well. And during this experience we have
    modeled every conceivable tax reform plan one can think of,
    including the flat tax, fair tax, Bradford X-tax, Value-added
    tax, and numerous plans that blend all of those different
    things together.
        And to one degree or another, the plans that produce the
    most economic growth tend to incorporate many of the things
    that I have just outlined. They simplify the tax code. They
    reduce marginal tax rates. They reduce taxes on capital. They
    reduce or eliminate the double taxation of savings and
    investment. And they move toward a neutral or consumption tax
    base.
        Well to wrap up, I hope that members of this Committee as
    well as all of your colleagues take some of these lessons to
    heart and start us down the road to fundamental tax reform
    sooner rather than later.
        Thank you, very much. I appreciate the time and will answer
    any questions you may have.
        [The prepared statement of Mr. Hodge appears in the
    Submissions for the Record on page 63.]
        Chairman Coats. You nailed the five-minute time limit. We
    give stars for that. So we thank you.
        [Laughter.]
        Mr. Grossbauer, you are joining some rarified company here.
    Warren Buffett, Bill Gates, Jerry Brown, Al Gore, Bill Bradley,
    Jack Kemp. What does a small business owner want to tell us
    about our tax code?

     STATEMENT OF MR. JOSEPH GROSSBAUER, PRESIDENT AND CEO, GGNet
                      TECHNOLOGIES, CHESTERTON, IN

        Mr. Grossbauer. Thank you, Senator Coats. And listening to
    the billions of dollars being spoken of here and, you know,
    they say a billion here, a billion there and, you know, the
    hundreds of thousands of jobs being created or could be
    created, I want to preface my presentation by saying that a
    thousand dollar investment, a thousand dollar outlay, is a
    significant outlay for me. It is something that I think about
    very seriously. I think about, you know, when I capitalize a
    piece of equipment and it costs me $5,000, that is a big deal
    to my small company.
        Expanding by one or two employees is a really big deal for
    my company. I just have to say, it is a really great honor to
    be here, and I really appreciate the opportunity to share my
    story. I want to thank you all for allowing me to be here.
        I also have to warn you, I am quite nervous. This is
    something that is clearly out of my comfort zone. So if I flub
    a word here or there, please excuse me. And now let me get on
    to my points.
        I want to say good morning, Chairman Coats, Ranking Member
    Maloney, and members of the Joint Economic Committee. Thank you
    for the opportunity to testify today. I am pleased to be here
    on behalf of the National Federation of Independent Business,
    NFIB, as the Committee discusses the issue of tax complexity
    and its negative impact on our Nation's economy, and especially
    small businesses.
        NFIB is the Nation's leading small business advocacy
    organization. The typical NFIB member employs 8 to 10 people
    with an annual gross receipts of about $500,000. So when you
    talk billions, we're not talking billions here, but we are
    talking about people who are really in the trenches every day,
    you know, growing their business.
        All NFIB members are independently owned, which is to say
    none are publicly traded corporations. While there is no one
    definition of ``small business,'' the problems NFIB members
    confront relative to the tax code are representative of the
    vast majority of small businesses.
        And I am glad the hearing was this week and not last week,
    because I really literally could not have attended last week.
    And I did not know that Tax Day was due Monday because I was so
    busy worrying about taxes I got panicky on Friday the 15th
    thinking I needed to file my taxes, and luckily I had an
    extension over the weekend.
        A few consistent concerns are raised regardless of the
    trade or industry in which small businesses are engaged, and 5
    of the top 10 small business concerns are tax related. And
    these tax problems fall into three categories: cost,
    complexity, and frequent changes.
        And I would submit that frequent changes are just additions
    to tax complexity.
        When I started my business 10 years ago, I could prepare my
    taxes myself. But now I have a--and you've got to remember, I
    have a staff of six people. I have a staff bookkeeper. I use an
    accounting firm. And for the really tricky questions, I have a
    tax attorney. This is really crazy. I'm serious. This is really
    crazy to have a small business having to, you know, call up
    their accountant or their tax attorney just to check on
    something.
        I will give you a very specific example. I serve as
    president and CEO of GGNet Technologies, which is a technology
    company that provides IT and data center services, along with
    cyber security, breach analysis, and mitigation. We are an S
    Corporation.
        Since our founding in 2006, our accounting costs have risen
    more than 400 percent. Some of that can be attributed to
    company growth, but much of it is in the rise of accounting
    costs due to the complexity of the tax code.
        It seems like the harder I work, the more I grow, not
    necessarily the more taxes I pay, it's really the more complex
    the tax code has made my life. You know, I deal with things
    like, you know, deductions, and how do we, you know, deal with
    those deductions?
        Do I deduct something? I deal with passthroughs, active and
    passive incomes, classification of items. You know, tax
    compliance is really now way beyond my capability, and I can
    deal with pretty complex situations in my business. I am no
    longer small enough to prepare my own taxes, but I am not large
    enough to have an entire accounting staff.
        My bookkeeper spends roughly 40 percent of her time working
    on tax-related functions, classifying various items, and filing
    federal, state, and local taxes. Like the doctor in surgery
    discovering a much more complex situation and having to call in
    other specialists, it takes much more time and a much higher
    cost.
        Between February and April, my bookkeeper and I are frozen.
    We don't focus on anything else primarily except taxes.
    Business reports and planning are put on hold or delayed
    because we are so focused on taxes. We are unable to produce
    timely reports on cash flow or profit/loss. This is not the way
    to run a business.
        I can't even during this time accurately project my
    staffing needs. I do it, but it is not as good as it normally
    would be. If the tax code were less burdensome, I would be able
    to focus more time and resources on my customers, product
    development, and services rather than taxes. And even a small
    company like mine, you know, looks for innovation. How can we
    be different?
        And I don't have the time to do that. Every day I have to
    think about taxes. How do I classify an item? Do I classify it
    under ``operations''? ``Capital''? Or ``minor equipment''? And
    if ``capital,'' I have to consider the depreciation formula. I
    mean, really. You know? I always seem to be calling my
    accountant.
        Another decision. We talk about job opportunities. I would
    really like to add more staff, but I just keep using contract
    workers and I follow the IRS Code, rather than hire a new
    employee knowing that the new employee would bring additional
    costs in tax overhead.
        Payroll complexity forces me to use software. Software
    doesn't always classify well, and we end up with support calls
    to companies and my accountant.
        And now we talk about economic development, and we talk
    about economic development in northwest Indiana. I discovered
    an under-utilized fiber optic network in my community. I teamed
    up with three partners to set up an LLC to acquire the SASA.
    This would bring--and we all talk about gigabit service to
    communities. This would bring gigabit service to homes and
    businesses.
        I would need to build a network operations center, small. I
    would have to hire an engineering staff, well-paid engineers,
    to make this opportunity work. As we developed our business
    plan and pro forma, we recognized the need for correct
    interpretation of the tax code in order to determine if this
    was a profitable or unprofitable venture.
        We did the market analysis. We projected income. Everything
    looked good. We calculated startup costs. Good. Everything
    looked really good. But as part of the due diligence we needed
    to project our tax liability.
        The fiber in the ground became the problem. One accountant
    said it was a capital asset and we'd have to depreciate it like
    that. This just didn't work. The numbers didn't work. The
    bottom line is, the numbers didn't work.
        So on the recommendation of one of our partners, we went to
    his accountant, reviewed it, looked at it, and said the same
    thing. Fiber in the ground is a capital expenditure. You have
    to depreciate it as capital.
        So I finally went to an accountant friend of mine, just
    handed this off to him and said, you know, what can I do? And
    he said, you're stuck. So at this point, acquiring the fiber
    became a risky venture and the partners were getting nervous.
    Out of the blue, or call it dumb luck, I read an article in one
    of my news feeds telling me that the IRS has reclassified fiber
    as real estate.
        So I went back to my accountant and showed him this, and he
    said, oh, no, no, no, it was capital. It's capital. I know the
    law. It's capital.
        Okay, so now I said, okay, let me go to my tax attorney,
    you know, who always deals with these kind of situations. And
    he read the article, and he said, well, it sure still seems
    like capital. So I pushed him, and he called an associate of
    his. I don't know where he ended up calling, but he checked
    further and he said, ah, yes, this can now be classified as
    real estate. That changed the entire picture.
        So I've yet to receive all the bills for this, but I think
    that the investment, you know, will be worth it. But I want to
    say, no small business should have to go through this trying to
    build a company and create jobs.
        The tax law--and I can't emphasize this enough--the tax law
    should not be a barrier to growth, and they are a barrier to my
    small business. I am a middle class person. I am not a Warren
    Buffett, you know? I really work very hard. And all of my staff
    are middle class people, and the current tax laws are truly a
    barrier--when I look at that wall over there--they are a
    barrier to my growth.
        In conclusion, small businesses are the engines of economic
    growth. This is not just a slogan. Small business--I'll give
    you some statistics--created two-thirds of the net new jobs
    over the past decade.
        Chairman Coats. Mr. Grossbauer, I've given you extra time
    here----
        Mr. Grossbauer. Okay, I'm sorry----
        Chairman Coats. But I did so because you are giving us a
    real live example of the average guy/gal out there trying to
    run a business in everyday life and make a little bit of
    profit. And you have given us a real, live example of this.
        We talk in mega terms up here in terms of theory and so
    forth, and you have brought it down to us.
        Mr. Grossbauer. I appreciate that. Yes.
        Chairman Coats. So I am going to just cut you off at that
    point.
        Mr. Grossbauer. That's fine.
        Chairman Coats. Thank you.
        Mr. Grossbauer. Thank you.
        [The prepared statement of Mr. Grossbauer appears in the
    Submissions for the Record on page 74.]

      STATEMENT OF DR. JARED BERNSTEIN, SENIOR FELLOW, CENTER ON
              BUDGET AND POLICY PRIORITIES, WASHINGTON, DC

        Dr. Bernstein. Well thanks very much for the invitation. I
    too appreciate your testimony, Mr. Grossbauer, in that spirit.
    And I want to try to emulate my old friend, Art, here and begin
    with a kind of broader view of the question at hand.
        Today's hearing is about tax complexity, but we cannot
    really address that issue unless we ask a broader question,
    which is: What is the goal of the federal tax system?
        This goal should be to raise the revenue necessary to fund
    the government's services and public goods that Americans want
    and need, but to do so in a way that is fair, equitable, pro-
    growth, and avoids unnecessary complexity.
        So my testimony has three main findings.
        Fairness, simplicity, and revenue raising are often
    complementary. By closing regressive loopholes in the tax code,
    we reduce incentives to game the system, close wasteful tax
    breaks that exacerbate inequality without promoting growth, and
    raise more revenues. Based on demographics, inflation, debt
    service, and rising health costs, a substantial fiscal policy--
    I should say, a sustainable fiscal policy will likely require
    more, not less, revenue going forward.
        And finally, I find no evidence in support of the claim
    that supply-side tax cuts come anywhere close to paying for
    themselves, or even are particularly pro-growth.
        Now the complexity in the tax code has nothing to do with
    the number of tax brackets and rates. If taxable income were
    easy to define, it would not matter how many rates existed in
    the code. All taxpayers would have to do is to look up their
    liabilities in the table or an online calculator.
        Instead--and the other witnesses have all said the same
    thing--what makes our system so complex are the exemptions,
    deductions, privileges for certain types of incomes and
    activities, and other loopholes that often allow wealthy and
    businesses flush with tax lawyers to pay less than their fair
    share. This problem is readily seen on the business side of the
    tax code which is so fraught with complex loopholes that the
    effective corporate tax rate is 10 to 15 percentage points
    below our uniquely high top statutory rate of 35 percent.
        One knowable distortion here is the fact that debt
    financing for business investments is heavily subsidized by the
    tax code. Another is the infinite deferral of foreign earnings.
        That is one reason why the foreign income of U.S. multi-
    nationals is taxed at a rate 10 percentage points lower than
    their domestic income. Now think about this for a second. Our
    tax system actually incentivizes production in Guangdong
    Province vs. Providence, Rhode Island.
        What should we do? Cutting taxes is no free lunch. In my
    testimony I have a bunch of scatter plots. I have a few here up
    on the slide projector here, showing that the top marginal
    rates faced by wealthy Americans have historically been
    uncorrelated with GDP growth, employment growth, investment
    growth, productivity, middle class income, as far back as we
    have the data.
        As Ranking Member Maloney said, this should come as no
    surprise to those who have lived through the Clinton years
    where higher top rates coincided with economic outcomes much
    better than those during the George W. Bush years when rates
    were lowest--lower.
        The State of Kansas' recent experience has proved the
    prediction of the supply side tax cuts spectacularly wrong as
    cuts recommended by advocates of the trickle-down theory have
    both caused serious underfunding of the state's education
    system, and have coincided with weak job and GDP growth.
        Fortunately, there are changes to the tax code that could
    simultaneously simplify it, raise revenues, improve fairness,
    and enhance economic efficiency. My testimony provides examples
    of such changes.
        An easy and obvious starting point is closing the so-called
    ``carried interest loophole'' which allows hedge fund managers
    to face favorable asset-based rates on their earnings. Those
    who claim to want to undertake major tax reform, yet are
    unwilling to close this loophole, one with virtually no
    defenders, should be considered akin to those who say they are
    ready to run a marathon but get winded walking up the stairs.
        Broadening the estate tax base and ending step-up basis
    would reduce the preferential treatment on inheritances of
    millionaires. A minimum tax on foreign earnings would help fix
    the deferral problem, as would efforts to crack down on the
    increasingly evident problem of illegal tax evasion.
        One last point. U.S. foreign profits booked in tax havens
    have grown sharply in recent years. In 2010, foreign
    subsidiaries of U.S. firms reported profits in the Cayman
    Islands that were more than 20 times that country's entire
    economic output--20 times their GDP. This simple fact alone
    provides overwhelming evidence of base-eroding profit shifting
    from where income is earned to where it will be taxed.
        I look forward to further discussion of these and other
    ways to dial back the complexity in the code while dialing up
    its fairness.
        [The prepared statement of Dr. Bernstein appears in the
    Submissions for the Record on page 79.]
        Chairman Coats. Dr. Bernstein, thank you. Let me start with
    some questions here. I am going to try to only do five minutes
    so I set the example for my colleagues here.
        But, you know, I cannot resist asking Dr. Laffer to respond
    to what you said, Dr. Bernstein, particularly in terms of pro-
    growth and supply-side economics. My recollection is that after
    the 1986 Act we were growing at a rate I have never seen in my
    lifetime.
        But I would like--and then I want to give you a chance to
    rebut that. So within five minutes, Art, you have about two-
    and-a-half minutes to give us your thoughts on this subject.
    And then, Dr. Bernstein, if you want to go back and forth I
    think it would be entertaining for us.
        Dr. Bernstein. Just like the old days, Art.
        Chairman Coats. Like the old days, and informative----
        Mr. Hodge. Should I sit back aways?
        [Laughter.]
        Chairman Coats. When it comes to the next questioner,
    hopefully somebody will ask you, Mr. Hodge, what your opinion
    is. I am just trying to stay within my five minutes. Go ahead,
    Art.
        Dr. Laffer. If you take the states with no earned income
    tax and compare them with the nine states that have the highest
    tax rates--oh, sorry [microphone was turned off]. I pressed it
    again wrong. Sorry.
        If you take the states that have no earned income tax in
    the U.S., and you take the states with the highest tax rates,
    if you look at the growth rates over the last 50 years, every
    single year, the nine states without income taxes, earned
    income taxes, have grown much faster in every single metric
    than have the states with the highest income tax rates.
        A clear-cut example of growth rates, taxes, same country,
    same time, same place, same station. If you look at the 11
    states that have introduced an income tax in the last 55-plus
    years, starting with West Virginia and ending with Connecticut
    in 1991, each and every one of those states, in every single
    metric, each and every one in every metric--population,
    employment, labor force, and, yes, even tax revenues--declined
    relative to the rest of the Nation, without exception.
        If you look at the growth rates of Germany and Japan in the
    post-war period, all of these, but most of all in the academic
    literature, if you go to the academic literature of the top
    journals, you can find all over the place measures of taxes
    affecting growth.
        In fact, Christina Romer, in her famous article shows the
    effect of tax rate reductions on economic growth, and she I
    think was Obama's chief economist there for awhile. So the
    literature is just full of those examples when done carefully
    and academically that really show that tax rates do matter.
        You know, if you tax people who work, and you pay people
    who don't work, do I need to say the next sentence to you?
    Don't be surprised if you find a lot of people not working.
    That's all we're talking about.
        We tax speeders to get them to stop speeding. We tax
    smokers to get them to stop smoking. Why on earth do we tax
    people who earn income? Why do we tax people who employ other
    people? Why do we tax businesses that make wonderful products
    at very low cost? To get them to stop earning income? To get
    them to stop employing other people? To get them to stop making
    wonderful products at low cost? No. We don't. We do it to get
    the revenues.
        But don't for a moment believe that these taxes don't have
    negative consequences. That is the ultimate false hope. You've
    got to have a clear eye to be able to also have a warm heart.
    You've got to be able to look at the consequences and make a
    tax plan that does have tradeoffs.
        Taxes do affect growth. They do affect incomes. They do
    affect jobs. But we need the money. And how do you get those
    revenues in the least-costly fashion and provide those
    resources to government for the most beneficial uses possible?
        Chairman Coats. Dr. Bernstein.
        Dr. Bernstein. Thank you very much. I appreciate your
    giving me the opportunity to go back and forth.
        In my testimony I list five scatter plots that I would like
    to share a couple of with you right now. This idea cannot be
    asserted, it cannot be found in the literature the way my
    friend Art does because I can find just as many studies that go
    the other way. It must be empirically tested.
        What we did here is we took every single year we have on
    record of tax changes, and a whole set of variables. There are
    five of these slides in my testimony: GDP, productivity, labor
    supply, capital supply, investment, median family income. And
    we simply asked: To what extent does the growth in these
    economic variables correlate with the top rate in the income
    tax code?
        If the supply side claims were correct, we would see an
    inverse correlation. We would see that growth was consistently
    more positive, whether it is investment, income, GDP,
    productivity, when rates were low, and vice versa when they
    were high.
        Instead, in every single plot we made--I mean, I really
    bent over backwards to try to get to the bottom of this--the
    correlation was about zero. In fact, if anything it was
    slightly positive and significantly positive when we looked at
    median family income, meaning that over the course of history
    family income grew more quickly when rates were higher than
    when they were lower.
        Now I am not saying, and I am not at all claiming--I want
    to be clear about this--that higher rates in fact drive growth
    and investment up. I am saying that the correlations are not
    there. And if the correlations are not there, it would be an
    extremely I think reckless mistake to try these supply side
    solutions at home. And by ``home''--and I'll finish with this
    because I know we're crunched for time--by ``home'' I mean
    Kansas, for example.
        In Kansas, the Governor and the legislature aggressively
    cut taxes urged by policy officials touting the benefits of
    supply side tax cuts. They have blown a hole in their budget,
    about a $400 million hole in the state budget. Serious under-
    funding to the state's education system, of great concern to
    constituents throughout the state. And jobs now in Kansas have
    been growing half as fast, at a rate that is half as fast, as
    jobs growing in the four surrounding states.
        So this is an empirical question. It is not a theoretical
    question. And the empirics I think tell you the answer that I
    stress in my testimony.
        Chairman Coats. Well I would love to get into a debate
    here, but two things have happened. One, I have been just
    handed a note that the House is expecting to begin votes at
    3:30, a series of those votes. Our House Members will have to
    leave. I want to quickly turn it over here to our Ranking House
    Member, Mrs. Maloney, for her questions, and knowing you have
    to hustle out of here. So you are on.
        Representative Maloney. Dr. Laffer, you were quoted in The
    Washington Post yesterday saying that the tax plans proposed by
    Republican presidential candidates Trump and Cruz could lead
    to, quote, ``massive revenue increases,'' end quote, to the
    Federal Treasury. Is that correct? Yes, or no?
        Dr. Laffer. Yes, that's correct.
        Representative Maloney. Okay. But, Mr. Hodge, you have
    written something very different. In an op-ed last month, you
    wrote that the Republican candidates' tax plans would, quote,
    ``cut federal tax revenues substantially,'' end quote. This was
    your article on which GOP candidate's tax plan is----
        Mr. Hodge. That's correct.
        Representative Maloney. And, Mr. Hodge, would the Trump and
    Cruz tax plans increase revenues, or reduce revenues?
        Mr. Hodge. Both of the plans are tax cut plans, and they
    are intended to be tax cut plans. We modeled all the
    Presidential candidates' plans. We found that there is an
    interesting tradeoff, sort of three tradeoffs----
        Representative Maloney. But, first of all, just can you
    answer for me, because I want to go back to the tax brackets
    and I don't have much time.
        Mr. Hodge. Sure.
        Representative Maloney. You said that they would, quote,
    ``cut federal tax revenues substantially.''
        Mr. Hodge. Right. The Trump plan is, in conventional terms,
    is a $12 trillion tax cut. After we factored in the economic
    growth, it is a $10 trillion tax cut.
        The Cruz plan we find that if measured on a conventional
    basis, it costs a little over $3 trillion. But once you factor
    in the substantial economic growth that it generates, about a
    14 percent increase in GDP, that cost comes down to about $800
    billion over 10 years.
        Representative Maloney. But you wrote that they cut federal
    tax revenues substantially.
        Mr. Hodge. That's what I'm saying, yes.
        Representative Maloney. I want to go back. We have two
    proposals before Congress right now. There is one, and I would
    like to ask Jared Bernstein, one would reduce the number of tax
    brackets to three. This is one put forward by the Republicans.
    And some have supported cutting, following Dr. Laffer's
    suggestion of a flat tax, the number of brackets to one rate
    for everyone.
        So I would like to ask Dr. Bernstein, is this an effective
    way to reduce tax complexity? What would be the impact of fewer
    tax brackets on the share of the tax burden shouldered by the
    middle class? And how would the wealthiest one percent do under
    these two proposals?
        Dr. Bernstein. Well as I tried to stress in my testimony,
    the complications of the tax code, all those boxes over there,
    are simply not driven by the number of rates. This, by the way,
    is a finding I have seen in all the testimonies you've heard
    today.
        The complications are driven by all the different
    definitions of income, the exemptions, the incentives to defer
    income overseas, to finance investments with debt vs. equity,
    to defer foreign earnings, and so on. All the things we have
    been talking about today and the things that Mr. Grossbauer is
    busy with February through April.
        That would not change one whit if he or other filers had 1
    rate as opposed to 3, or as opposed to 12. I actually asked a
    tax accountant about this, and I quote her in my testimony,
    about this question of rates vs. the other aspects of
    complexity, and she called it, quote, ``gut-busting laughable''
    that somehow reducing the rates--reducing the number of rates
    would make a difference, if you left all these other
    complexities in place.
        The other problem you face, as you intimated in your
    question, is that typically if we are trying to be revenue
    neutral, and we reduce taxes at the top, which is
    characteristic of the kinds of plans you have been talking
    about, and certainly characteristic of those put forth by
    Republican candidates mentioned earlier, if those are going to
    be revenue neutral, you have to make the revenue up somewhere
    else.
        And so typically they increase the tax burden on the middle
    class.
        Representative Maloney. And what does history show us about
    the impact of tax cuts on revenue?
        Dr. Bernstein. If you--this is actually a fairly simple
    relationship that can be I think distracting and made more
    complicated by some of the mythology around supply side taxes.
    Historically if you cut tax rates significantly, you will lose
    revenue on net.
        Now I want to be very clear. I am not contradicting my
    fellow witnesses in terms of the following point: There will be
    potentially, under certain conditions, more capital investment,
    more labor supply, under some tax cuts. That is not saying--but
    on net, the question is how much will you get back through
    these growth effects vs. how much will you lose?
        And I think history is pretty clear on this point, that the
    growth effects of the kinds of tax cuts that are being bandied
    about here today do not come anywhere close to offsetting the
    revenue costs.
        Representative Maloney. My time has expired. Thank you.
        Chairman Coats. Thank you. Our Vice Chairman, Mr. Tiberi.
        Vice Chairman Tiberi. Thank you all for being here.
        Mr. Hodge, something in your testimony really jumped out at
    me. You mentioned that the multiple depreciation schedules that
    we have in place create often a complex and arbitrary process.
        As you know, we have talked about before, I introduced a
    bill to make 50 percent depreciation permanent. I was pleased
    with what was included in the PATH Act that was passed last
    year and signed by the President to extend it for five years,
    but I think we should go further and I know you do, as well.
        You mentioned in your written testimony that one way to
    both simplify the tax code and increase economic growth would
    be through full expensing. You have modeled my 50 percent
    current depreciation bill, and I think you have also modeled
    Representative Nunes's ABC permanent expensing, full expensing
    bill. And I know in my bill's case you stated that it would
    increase GDP by over one percent a year, and create over
    200,000 jobs.
        And you mentioned in your verbal testimony what full
    expensing would do. But you also say, and I quote from your
    written testimony, ``Dollar for dollar, full expensing is one
    of the most pro-growth tax changes that Congress could enact.''
        And last week I asked that same question to Tom Barthold,
    who as you know is the Chief of Staff at JCT, and I gave him a
    story about a manufacturer in my state that said they modeled
    whether to build a plant overseas or in the United States, and
    because of the temporary law of bonus depreciation they decided
    to build the plant in Ohio, thereby providing more employment
    and paying more taxes in our state.
        So to me, expensing and full expensing in particular seem
    like a no-brainer. When I asked Mr. Barthold about his thoughts
    and gave that example about expensing and bonus, he explained
    that, and I'm going to quote, ``While expensing reduces the
    cost of capital and increases investment,'' he also said,
    ``there are tradeoffs that occur at the same time.''
        That government receipts would decrease, creating a larger
    government deficit, driving up interest costs, which could in
    turn ultimately increase the cost of capital.
        I know your modeling has maybe a different approach than
    that, that those tradeoffs might not occur, but more
    importantly even if they do, that we would see GDP growth at 5
    percent, which we would obviously love to see and have not seen
    for a long, long time.
        Could you tell us why you believe that even with those
    tradeoffs that growth would be around 5 percent in your
    modeling?
        Mr. Hodge. Well I think that in this case the Joint Tax's
    model is incorrect, that deficits cause some increase in
    interest rates. I think the last seven years have sort of
    proved that wrong.
        And especially with the small numbers that we are talking
    about, with the size of global capital markets, a little bit of
    a deficit to pay for full expensing would not drive interest
    rates at all. In our model we hold Federal Reserve policy
    constant. So we don't measure that at all. And we just figure
    that the Fed would be accommodative of this.
        And so what we are looking at is the pure effects of moving
    to full expensing, which, as Mr. Barthold mentioned,
    dramatically lowers the cost of capital. That drives investment
    in new plant and equipment. Ultimately that makes the workers
    far more productive.
        More productive people earn more. And in turn that leads to
    a growing healthy economy. And it leads to better living
    standards. And that is ultimately what tax policy should be
    doing. And I think that full expensing really ought to be first
    and foremost on the top of our agenda here, along with lowering
    tax rates, obviously. But expensing would be a powerful tool to
    gaining U.S. competitiveness, to bringing jobs back to the
    United States, especially high-paying manufacturing jobs.
        Vice Chairman Tiberi. Thank you. I am going to yield back
    because we have a vote coming up, Mr. Chairman.
        Chairman Coats. Thank you. I am going to get my list here.
    It is unfortunate that votes have made a play here, but it does
    open up the possibility and the probability and the ability for
    Senator Klobuchar to go next.
        Senator Klobuchar. Okay. Well as I said, I could defer to
    one more House Member if you would like, and then go after
    that.
        Chairman Coats. You offered to do that, and I thank you for
    doing that.
        Senator Klobuchar. Okay.
        Chairman Coats. Your colleague, Congressman Paulsen.
        Representative Paulsen. All right. Thank you. I thank my
    colleague from Minnesota. Minnesotans are Minnesota nice, so I
    appreciate that.
        [Laughter.]
        Mr. Chairman, thanks for holding this hearing. I think the
    focus has been very apt, in terms of the impact of a very
    complex tax code on our economy. It doesn't matter if you are
    an individual, a small business, a large employer, this is
    probably one of the top concerns I hear about from many folks
    in Minnesota. The tax code is too complex, too costly, it takes
    too much time to comply with.
        Nine out of 10 Americans have to pay someone to do their
    taxes for them or purchase the financial software to do their
    taxes.
        I remember one company, a large employer--you shared some
    great testimony, Mr. Grossbauer--but there was a large employer
    who spoke at the Ways and Means Committee not too long ago, and
    they talked about having a 17,000 page tax return. So, think of
    the army of accountants that have to go through that process,
    and the ingenuity and the know-how that is not employed in
    helping the company produce more growth.
        So, I guess my question is this. Dr. Laffer, you have
    already dated yourself a little bit with the Reagan tax reform
    initiatives back in 1986, but if you could give some additional
    advice, you did some comparisons before with states and
    international, but if you could give simple, straightforward
    advice about what we should focus on when we talk about growth,
    what would you advise? We are going through this once-in-a-
    generation opportunity to get it right, to do it right. We will
    do this right hopefully right after the next Presidential
    election. We'll be ready to go.
        Dr. Laffer. Yes, and that is the reason I am here today. I
    took a hiatus for 35 years. I'm here because I think the
    opportunity is right now. And I think if we did the first thing
    here, what has been talked about here, expensing, corporate tax
    rate reduction, to really kickstart the system, I think that
    would be a wonderful one. Not unlike Reagan's 1981 tax bill.
        But that should be considered a first step. You can do some
    simplification of personal income taxes, as well. But the long
    run position should be to make the tax code do the least damage
    possible to collect the requisite revenues to run government.
        And if you look at that, what you want to do is have the
    lowest possible tax rate to provide people with the least
    incentives to evade, avoid, or otherwise not report taxable
    income. That is why I used the Warren Buffett example there.
    You want the lowest possible rate to do that, and the broadest
    possible tax base, so you provide people with the least places
    in which they can place their income to avoid paying taxes.
        So you really want to do the least damage. All taxes are
    bad. Some are worse than others. The reason we have taxes is to
    collect the revenues to run government. Then you want to spend
    your money in the best way possible.
        Both of those are really, really important. I mean, Mrs.
    Maloney, the issue there is that tax simplification includes
    tax rates and the tax base. And you can make it static revenue
    neutral like we did in the 1986 Tax Act, and there is no reason
    why you can't do--that is what I did with Jerry Brown's flat
    tax, as well, in 1992. There was no net revenue loss on a
    static basis.
        And what you will do is just generate pure economic growth.
    But the first ones I would kickstart tax reform with some of
    the biggest types of taxes we dropped, with a Democrat, by the
    way, through an amendment that we cut the unearned income tax
    rate from 70 percent to 50 percent with Reagan. That was, I
    believe it was, I forget whose amendment it was (it was the
    Brodhead Amendment) to the bill, but Reagan agreed to do. It
    also cut the capital gains tax.
        That is what we have to do to kickstart. Once this economy
    starts growing, then you can afford to really go into a much
    broader tax reform just like we did in the 1980s.
        Representative Paulsen. Mr. Grossbauer, you talked about
    fiber optics getting categorized as real estate. Is there
    another example you have of what you think the focus should be
    on, or what small businesses or the entrepreneurs as the engine
    of the economy would want to have us focus on first and
    foremost?
        Mr. Grossbauer. Well, you know, listening to full
    expensing, one of the most difficult--am I on [referring to the
    microphone]--one of the most difficult things is depreciation,
    and how do we depreciate capital items.
        I have data center space in Chicago. I have a lot of
    servers in Chicago. It is all capitalized. It is all capital
    equipment. And the depreciation laws are really, really--you
    know, hit my company very hard.
        And I can only imagine how it affects, you know, Arcelor-
    Mittal and U.S. Steel, but it does impact my company. So that's
    something that would make a clear impact on my company.
        As we think about, you know, growth, this becomes a
    barrier.
        Representative Paulsen. Thank you, Mr. Chairman.
        Chairman Coats. Thank you. Now, Senator Klobuchar.
        Senator Klobuchar. Thank you very much, Mr. Chairman.
        I am a big fan on moving forward on tax reform, and doing
    something about the trillions of dollars overseas. We certainly
    know this in Minnesota with the Medtronics situation, although
    that has worked out for us in terms of adding jobs in our
    state. But overall that's just not how we should run our
    business situation. And so we not only need some rules. Mostly
    I'm interested in corporate tax reform and trying to bring that
    money from overseas, and creating incentives.
        But ours was kind of--however, I do have one. You will
    probably call it an aberration, but CNBC did the rankings of
    the best states to do business in, and maybe Dr. Bernstein
    knows this, but the number one state to do business in was?
        Dr. Laffer. Minnesota.
        Senator Klobuchar. Minnesota. And we actually have a 3.7
    percent unemployment rate. Yet our taxes--we were just checking
    this--are somewhere in the middle. But of the top earners,
    Governor Dayton made some changes because we had a $6 billion
    budget gap, and put them at 9.85 percent. So they are one of
    the higher tax rates for top earners.
        And CNBC said they have never had a state quite like ours.
    It is a bit more pro-union. It is a bit more higher wages. And
    it is also clearly not in a low tax. I think Texas was second.
    But what they noted was, more and more with the economy stable
    companies are looking at places with good infrastructure, high
    quality of life, well educated employees. And I just thought
    maybe you wanted to, might want to comment on that, Dr.
    Bernstein.
        And I have another question of you, Dr. Laffer, but I
    thought you might want to look at this strange aberration.
        Dr. Bernstein. So if you look at the Kansas story, the
    slide over there shows that for all their tax cuts not only did
    they blow a revenue hole in their budget, but their job growth
    is half as fast as those of surrounding states.
        Well if you break down those surrounding states, the states
    that are doing the best tend to be the ones whose taxes are
    actually higher. The ones who have experimented with supply
    side, Missouri to some extent, Oklahoma, they are finding
    economic results that are relatively worse than the others.
        And I do think--again, I am not trying to say that raise
    your taxes and watch growth bust out everywhere, because what
    really matters is what you do with it. And here I strongly
    disagree with Art's ``I hate taxes,'' or ``no taxes are good.''
    It is all a matter of what you do with them.
        When you say taxes are all bad, you are also saying Social
    Security and Medicare are bad
        Senator Klobuchar. Okay----
        Dr. Bernstein. No, my point is that if you are going to use
    your tax revenue to create a business friendly environment,
    through infrastructure, through an educated workforce, you are
    going to draw business in. That has certainly been the
    Minnesota case. You know that better than I do.
        Senator Klobuchar. Well we have 17 Fortune 500 companies.
    We are second per capita for Fortune 500. We may be something
    of a unique situation, making everything from the pacemaker to
    the Post-it note.
        But I do think that is an issue. Now where we are having
    some major challenges, and Dr. Laffer you are an expert on
    this, is the steel industry. Iron ore, we've lost 2,000
    workers, in the part of the state where my grandpa was an iron
    ore miner. The plants are idled because of steel dumping,
    because of overproduction, because of Chinese currency
    manipulation, and the White House is actually working on this
    quite a bit, but we invited Dennis McDonough to Minnesota and
    he went up north. We are really concerned about security if we
    do not have a steel industry, and we are also worried about how
    we get ourselves out of this.
        So if you could, in my remaining minute and a half here, if
    you could comment on that and what you think we could do there.
        Dr. Laffer. Well I was born in Youngstown, raised in a
    steel family, all the way back. The problem with steel, as I
    see it, is location. And location is because of tax, in part.
    Obviously a lot of other factors come in. And Minnesota is a
    lovely, wonderful state, by the way, it really is.
        And if you look at my Rich States/Poor States ranking,
    which I do every year, I have for the last 10 years with ALEC,
    you can see the ranking----
        Senator Klobuchar. Okay, alright, but let's get to----
        Dr. Laffer. What you have now is U.S. companies are taxed
    at U.S. rates, no matter where they make their profits, etc. If
    you have two locations, A and B, if you raise taxes in B and
    you lower them in A, producers and manufacturers and people are
    going to move from B to A.
        What we have done is increased tax structures on
    manufacturers, especially steel and these types of things,
    depreciation schedules all play in this both for the customers,
    etc., that have made the U.S. a not favored location.
        We have the highest corporate tax rate in the OECD, and
    that clearly causes discrimination. And our corporate taxes are
    global. And so therefore no matter where the U.S. company is
    located, it has to pay the U.S. tax rate, even if these
    companies are competing against other companies with much lower
    tax rates in those foreign locations.
        And that to me explains a large reason of why we did so
    well during the 1980s and are doing less well now.
        Senator Klobuchar. How about the currency manipulation? Do
    you believe that's a part of it?
        Dr. Laffer. I do. I testified for TPP, and I think currency
    manipulation is a serious issue with TPP. I think all of these
    things combined make a lot of difference. But the tax rates
    really have a hammering effect on U.S. companies in aggregate,
    and especially on manufacturing companies and, if I may double
    down, especially on steel companies from my home town of
    Youngstown, Ohio, steel, which is pretty important.
        Senator Klobuchar. Right. Thank you, very much.
        Dr. Laffer. Thank you.
        Chairman Coats. Senator Cotton.
        Senator Cotton. Thank you.
        Dr. Laffer, Mr. Hodge, one of the two of you said that
    obviously taxes are necessary and always have been to fund the
    legitimate and needful functions of government. Some are
    better, and some are worse.
        Would you care to characterize which ones are the worst in
    terms of their impact on economic growth? What the alternatives
    might be, and whether they are politically feasible?
        Mr. Hodge. Sure. In fact, economists at the OECD have
    looked at this in a very interesting study a few years ago.
    They found that corporate income taxes and taxes on capital are
    the most harmful taxes for economic growth, followed by taxes
    on income, followed by taxes on consumption, and finally taxes
    on property. And why is that?
        It all has to do with the mobility of the factor in the
    economy. Capital is the most mobile factor in the economy, and
    thus the most sensitive to high tax rates. And you see that
    with our corporate tax system.
        Income taxes are slightly less sensitive because people are
    less mobile. I cannot follow my employer to Ireland to take
    advantage of that 12\1/2\ percent corporate tax rate. And
    obviously property tax, you can't move property. So it is less
    sensitive to tax policy.
        So keeping that in mind should guide our tax reform
    measures as we go about trying to reform the tax system. And
    that is why things like full expensing are such a powerful
    engine for growth, is because it is reducing the cost of
    capital.
        Senator Cotton. Dr. Laffer.
        Dr. Laffer. I totally agree. Corporate and personal income
    taxes are key. I would rank the order the other way around. The
    literature has a great deal to say on this, and progressive
    income taxes are killers. The more successful you are, the
    higher the rate you pay, which really teaches you how to change
    where you live, where you report income, how you report income.
        If you are facing a 50 percent marginal income tax rate,
    you are going to spend 50 percent of your time trying to reduce
    your tax bill rather than trying to earn more income. It is
    just simple math.
        And the literature is unambiguous that the income taxes,
    both corporate and personal, are the key drivers. And
    progressive taxes are much worse than flat taxes.
        Senator Cotton. It sounds like you are saying to Senator
    Klobuchar, as revealed in some of your research, about people
    moving from higher tax states to lower tax states?
        Dr. Laffer. Well I just finished my book, which is ``The
    Wealth of States,'' which is about 430 pages of combining all
    the literature and all the data on states. As you all know, I
    do Rich States/Poor States every single year, have done it
    forever. We look at all these metrics, and we rank the states.
    And it is unambiguous how important taxes are for a movement of
    people, movement of jobs, and prosperity. If you don't believe
    me, look at West Virginia, unfortunately.
        Senator Cotton. Dr. Bernstein, so the hierarchy we just
    heard from Mr. Hodge and Dr. Laffer, capital, income,
    consumption, property. Would you care to reflect on that?
        Dr. Bernstein. Yeah. I am much less moved by all of the
    discussion on how responsive capital income is to these
    changes. I think the evidentiary record is quite different than
    has been represented.
        So if you look at the relationship between real investment
    and changes in capital tax rates, there is just nothing there.
    So I think that they are very much exaggerating that.
        If I may say, where I think I would answer your question,
    where I would make a change, is on the estate, inheritance side
    of the code. And actually Art might agree with me on this. The
    extent to which we favor inherited income, step-up basis, I'm
    sure you're familiar with, step-up basis is a huge waste of
    money. And it is also an economic distortion because it creates
    a lock-in effect. So that is where I would start.
        Senator Cotton. Mr. Hodge, you look like you wanted to
    respond.
        Mr. Hodge. Well, I kind of find it interesting when people
    say that they are unmoved by the effect that taxes on capital
    can have. Then people complain about the profit-shifting
    behavior of U.S. companies out of the United States to lower
    tax jurisdictions.
        The reason we have profit shifting, and we have seen
    economists such as Kim Clausing demonstrate that about a third
    of our corporate tax base is being moved out of the U.S.
    because of our high corporate tax rate.
        So the key to moving that tax base back into the U.S. is to
    cut our corporate tax rate.
        Senator Cotton. Dr. Bernstein.
        Dr. Bernstein. The extent of tax evasion and tax avoidance
    is remarkably insensitive to changes in the tax rate. Now it
    may be the case, where Scott and I might agree, it may be the
    case that if you took our corporate tax rate down to 10 or 12
    percent you would see the kind of differences he's talking
    about. But the damage that that would do to our fiscal accounts
    and the knock-on damage it would do to the rest of the economy
    would make that prohibitive.
        So again, I really think you have to be driven by the
    empirical record here, and you simply don't see the kind of
    elasticity responses that not only are these guys talking
    about, but that they are erroneously building into their
    models.
        Senator Cotton. Do you have anything to say about the
    distribution of Dr. Laffer's, Mr. Hodge's hierarchy of capital
    income----
        Dr. Bernstein. I think that they're--I agree with them, and
    I think that there is wide bipartisan agreement, and again this
    agrees a little bit with what Scott just said, that the
    corporate side of the code is a mess. And, that our statutory
    rate is uncompetitively high.
        I think the difference between us is that I recognize that
    very few corporations in the multinational space pay anything
    like that.
        Senator Cotton. Dr. Laffer.
        Dr. Laffer. Yeah, but it's not just what they pay. It's
    what the expenses are that they go through to avoid paying
    taxes. And what I've done here on this is shown that there are
    huge expenses that companies pay, but that don't get collected
    by the government in tax revenues.
        What we want to do, and what my paper that I read into the
    record does, is try to eliminate or reduce the difference
    between the cost to the company and what the actual government
    collects.
        And what happens is, people will spend fortunes getting
    around the taxes so that the government doesn't get the revenue
    and there are damages done to the companies as well. And that
    just makes no sense whatsoever.
        If you are going to pay taxes, at least let the government
    collect them. But that is not what these tax codes--and if I
    can say, Jared, I mean very seriously the complexity of these
    tax codes, and all of this stuff you're talking about, is just
    disastrous. And you used Kansas as an example, which is really
    unfair because I've done the response to Kansas in the
    Investors Business Daily. You know those numbers.
        Look at North Carolina. Look at Indiana. Look at these
    states that have done major tax reform. Look at Texas vs.
    California. Look at Florida vs. New York. Look at Tennessee vs.
    Kentucky. Look at any of these states. For goodness sakes, the
    evidence couldn't be more obvious.
        It takes--it takes--I mean sophistry of the worst kind to
    be able to convolute these results into something that goes in
    the opposite direction.
        Dr. Bernstein. Well let me disagree----
        Dr. Laffer. Let me finish, first.
        Dr. Bernstein. Sorry.
        Dr. Laffer. You cannot tax an economy into prosperity. You
    just plain can't. Everyone knows that from first grade on. And
    the Tax Foundation has done wonderful work on this. I would
    just disagree with them that they're not quite as strong a
    result as I think they really are, but, hey, I love ya. But
    it's just silly to argue that taxes don't matter. They matter,
    and matter a lot, and everyone knows that. Everyone who has
    been in business knows that.
        Dr. Bernstein. Thank you. If I may----
        Senator Cotton. If we have the time----
        The Chairman . We have the luxury of more time here.
        Senator Cotton. Well I'm having fun, and I have the floor
    until someone else comes in.
        Chairman Coats. Senator Cotton and I are having a great
    time, and----
        Senator Cotton. And Dr. Bernstein----
        Chairman Coats. He is still on the floor, and he is going
    to give you some time.
        Dr. Bernstein. Well I appreciate the opportunity because I
    think there are actually some common views here that I would
    like to amplify, and I suspect you share them, Senator.
        Which is that the problems with the corporate side of the
    code that were just described by Art strike me as spot on. And
    the expenses that businesses have to go through to bend
    themselves into a pretzel, I mean last I looked GE, which I
    don't think makes tax law, has something like a thousand tax
    lawyers on staff. And just like Mr. Grossbauer was saying,
    that's inefficient.
        That said, it is not that the politicians and the people on
    this panel disagree with broadening the base and lowering the
    corporate rate. It is all of the industries and their lobbyists
    who would get dinged, because let's face it, if you are going
    to do tax revenue neutral, corporate tax reform, and I think
    that's the lowest bar, I think we need more revenue. You are
    going to have winners and losers.
        And the losers do not like it. We can sit around all day
    and agree.
        Secondly, look, Art and I have a fundamental factual
    disagreement on the state-based evidence. We are not going to
    hash it out here. But I would be happy to submit evidence to
    the Committee in very much support of states that have in fact
    raised their taxes who are doing a whole lot better than states
    that have lowered them, and vice versa. It goes both ways.
        Chairman Coats. Well, the Committee, I can tell you, would
    welcome both of you submitting that. That is what we're here--
    we are not the Joint Tax Committee, but we are the Joint
    Economic Committee, and we do have a tax component. So we would
    appreciate all the information that either one of you can give
    us.
        Senator Cotton, take whatever time----
        Senator Cotton. Yes, I will keep rolling if no one else is.
        Dr. Bernstein, what about the fairness of that hierarchy?
    So here at capital income, rich people can have more of that
    than poor people. Consumption is a higher percentage of poor
    people's income than it is for rich people. And property has a
    smaller variance, either a small, single family home to a
    billionaire's home who can only have a certain number of square
    feet, and bathrooms, and car garages, and all the rest.
        But income can be infinite. Do you have concerns that the
    hierarchy that Dr. Laffer and Mr. Hodge have laid out is not
    fair?
        Dr. Bernstein. Well, it's a good question because I think
    they were largely answering questions vis-a-vis growth in their
    hierarchy. And I think that when we talk about fairness or
    distribution, I do think you probably have to flip that
    hierarchy considerably.
        The fact that capital income is largely concentrated among
    the wealthy, the ownership therein, and that it is taxed at a
    privileged rate, builds in a level of unfairness, or
    regressivity into a tax code. Now broadly our tax code is
    progressive, but that is on the income side.
        If you actually look at the benefits of favorable treatment
    of capital-based income, they flow exclusively to the top 20
    percent. And within the top 20 percent, the top 10, 5, 1
    percent. So that is a regressive problem.
        Senator Cotton. And Dr. Laffer or Mr. Hodge, would you care
    to respond?
        Mr. Hodge. Do you want me to go first?
        Dr. Laffer. Go ahead.
        Mr. Hodge. One of the challenges of tax reform is that what
    is politically popular--and that is tax cuts for individuals--
    is not really the biggest driver of economic growth. And what
    is not politically popular--and that is, cutting capital
    taxes--is the biggest driver.
        So you have this sort of I think conflict there between
    politics and good economics. And somehow trying to balance that
    is one of the challenges of fundamental tax reform.
        Dr. Laffer. Let me, if I can, just say on the income
    distribution and what's going on, high tax rates are not paid
    by the top one percent of income earners. End of discussion. If
    you look at the effective tax rate of the top one percent of
    income earners, it is flat all the way across history with
    statutory rates going up and down and all over the place. The
    top one percent of income earners find exemptions, loopholes,
    that's why I used the Warren Buffett example.
        It is a perfect example of how you get around your taxes,
    and how he personally has gotten around his taxes. All legal.
    When you look at the migration of income from high income tax
    states to low income tax states, the wealthy move from
    California to Texas. They do. All of that you can see ``How
    Money Walks,'' or in my book ``The Wealth of States.'' We have
    documented IRS data from the beginning of time.
        If you look at estate taxes; those estate taxes filed in
    states that don't have an estate tax and in those that do have
    an estate tax, there's two times as many filed in a state that
    does not have an estate tax as there are in states that have
    estate taxes. And the size of the estates is nearly twice as
    large.
        People really like their own money and will go to great
    lengths to go around taxation. It is pure and simple common
    sense. And that is what they do.
        And, Jared, all your talk notwithstanding, if you look at
    North Carolina, we cut the highest tax rate by two percentage
    points. We cut the welfare generosity variables. We cut welfare
    eligibility. And now look at North Carolina. Huge surpluses are
    going on there, and prosperous, and all the boycotts have been
    gone there a long time. And that is Governor McCrory, as you
    know.
        If you look at the other states. Indiana. Your state. Look
    at what's happened with Mike Pence, and before Mike,
    whatchamacallit----
        Chairman Coats. Mitch Daniels.
        Dr. Laffer. Mitch Daniels. I mean, it's great. Look what
    happened with right-to-work there. If you look at the states,
    right-to-work is the way it's going. Look at right-to-work
    states' growth vs. nonright-to-work states' growth. You can see
    it clearly. You can see it with income taxes. Jared, I just
    don't know where you're getting your evidence because the
    academic literature is replete with the examples I am
    describing. I could send you hundreds and hundreds of articles
    that show this. Now they show it in different ways, different
    magnitudes, but no one thinks that raising tax rates increases
    growth.
        Chairman Coats. I feel like the moderator at a debate, a
    Presidential debate here----
        Dr. Laffer. He's wrong on that.
        Chairman Coats. You have raised Dr. Bernstein's name again,
    and he has 30 seconds to respond.
        Dr. Bernstein. Well, thank you. Thank you.
        Mr. Hodge. Could somebody pick on me, please?
        Dr. Bernstein. I'm sorry?
        Mr. Hodge. Could somebody pick on me, please?
        [Laughter.]
        Dr. Bernstein. I think I can arrange that, Scott. Art
    doesn't want to talk about Kansas. Art was instrumental in
    nudging Kansas to embrace the kind of supply-side tax cuts he
    has been arguing are absolutely, unequivocally associated with
    higher growth. He predicted, quote, ``an immediate and lasting
    boost to the Kansas economy.''
        Not only has the budget there been seriously underfunded,
    the state's education system is in trouble there. It is widely
    recognized that the tax cuts were the reason for that. And as
    I've mentioned, job and GDP growth have really done poorly
    relative to neighboring places, including places that actually
    either increased or certainly did not lower their tax.
        The Kansas Legislative Research Department's projection
    suggested the economy is going to remain weaker relative to the
    overall U.S. economy for the foreseeable future. This is an
    experiment.
        In fact, Governor Brownback called it an experiment. And it
    is a failed experiment. And you can bang the table with your
    shoe all day, but the data tell you what they tell you.
        Senator Cotton. Dr. Bernstein, rather than talking about
    Kansas, let's talk about Arkansas for a minute, since we
    pronounced the last six words of that name correctly, you
    brought up the stepped up basis for the estate tax. Dr. Laffer
    just brought it up as a critic. I want to talk about the impact
    it has, particularly in rural areas. I think a lot of people,
    when they think about the estate tax, have the image of, you
    know, wealthy investors who have highly liquid assets like
    marketable securities that when they pass away could be easily
    sold to pay off the tax. It's not always the case.
        In rural areas, the classic example in Arkansas would be
    timber forestry products. You own a lot of land. You have a lot
    of trees. It takes 40 years to make a tree. Very asset high.
    Very cash poor. Regardless of the threshold or the exemptions,
    you still often see families having to break up family
    businesses to pay the tax.
        What is the right solution to that if it is not simply
    repealing the estate tax, which as you might guess would be my
    proposal.
        Dr. Bernstein. Well, the exemption for the estate tax for
    couples is $11 million. And the estate tax hits 0.2 percent of
    estates--not 2 percent, 0.2--so 2 out of 1,000. And for those
    who get hit by it, the average tax rate is 17 percent.
        So I would consider that to be, if anything, an extremely
    fair and even a regressive treatment. So I would probably push
    the other way, as suggested in the President's budget, to lower
    that threshold. He suggests a threshold of $7 million for
    couples. Instead of hitting 0.2 percent of estates, that would
    hit 0.3. And I think that would be, that would be a smart thing
    to do in the sense of revenue, meeting some of our revenue
    needs.
        Senator Cotton. Dr. Laffer.
        Dr. Laffer. Yeah, I think he missed your question. I think
    you were talking about state taxes and what happens with them.
        Senator Cotton. No, I was talking primarily about federal--
    --
        Dr. Laffer. Oh, you were----
        Senator Cotton [continuing]. The same economic----
        Dr. Laffer [continuing]. The movement among states with and
    without estate taxes is just unambiguous. Rich people move to
    lower estate tax states, and they take their money and their
    jobs with them. And they move a long time ahead of time because
    they are not quite sure when they are going to die, and they do
    it in massive--the best one of all was the very famous Senator,
    a guy named Howard Metzenbaum from my home state of Ohio, and
    Howard Metzenbaum, weeks before he died, moved to Florida where
    there is no estate tax. And he wasn't wrong to move to Florida.
    He just was wrong in espousing an estate tax for everyone else
    except himself.
        And we see it all the time. Rich people move from
    California. And if they don't move, they shelter their income.
    That's what they do. And all these data are just clear as
    bells. And, you know, when you look at the U.S., if you take
    tax revenues from the top one percent of incomers, we have the
    data back to 1913. We've got it all, by account. If you look at
    it, when we've cut statutory rates, revenues from the top one
    percent of income earners rises as a share of GDP, which also
    rises very rapidly. When we've raised rates, tax revenues from
    the top one percent have declined as a share of GDP.
        In 1978, tax revenues from the top one percent of income
    were 1\1/2\ percent of GDP. In 2007, tax revenues from the top
    1 percent of income earners were 3.1 percent of GDP, with all
    those tax rate reductions. If you look at that period, it is
    unambiguous. Rich people respond to tax rates, and they pay you
    more money at lower rates within reason. And that is why we
    want a low-rate, broad-based tax so when we collect those
    monies from the rich people, and not just have them go into
    shelters and not pay any taxes like Warren Buffett.
        Chairman Coats. Senator Cotton----
        Senator Cotton. I am exhausted.
        Chairman Coats [continuing]. Good----
        Senator Cotton. I am out of questions. Thank you all very
    much.
        Chairman Coats. You set the record for time allotted to
    members of this Committee. Just two points in closing.
        This has been fascinating. I mean, we could go on for hours
    here.
        Dr. Laffer. Jared would run out--no, just kidding.
        [Laughter.]
        Chairman Coats. No, we don't want to be too hard on him.
    But our Finance Committee on which I sit, we brought back Bob
    Packwood and Bill Bradley to tell us how did you guys get it
    done in 1986? Well, it was an exhausting series of
    opportunities, and doors opened, and doors closed, and work-
    arounds, and so forth.
        There is strong bipartisan support for, and need for
    comprehensive tax reform, but we just cannot seem to get the
    thing moving, for whatever number of reasons. But I think all
    of you have laid out some real reasons why we need to keep
    pushing on this, and why it is important for the country.
        By the way, Dr. Bernstein, I was handed a note here from my
    tax staff which said that during the last two years Kansas has
    exploded in growth. Labor force participation is nearly 5.3
    points higher than national average. So maybe it just took
    longer to kick in.
        Dr. Bernstein. The slide in my testimony on the job growth,
    we made that yesterday with the most up-to-date data there is.
        Chairman Coats. Alright. Well----
        Dr. Bernstein. I challenge that.
        Chairman Coats. I'm not trying to promote Art's book on the
    states. Some of my information comes from some people we know
    in Kansas that basically have said, look, as long as the Royals
    are competing for the World Series, and the Jay Hawks are
    competing for the Final Four, life is still good in Kansas. So
    I don't want to denigrate Kansas too much.
        But nevertheless, this has been a fascinating time here
    with the Committee. I love the back and forth. It is so much
    more dynamic--so is dynamic scoring--so much more dynamic than
    it is just simply the question and the time to move on, etc.,
    etc., etc.
        Mr. Grossbauer, you were part of a very, very interesting
    hearing here.
        Mr. Grossbauer. It was. It was quite fascinating.
        Chairman Coats. I hope you enjoyed it.
        Mr. Grossbauer. I did.
        Senator Cotton. If I can say, if you had simply rolled your
    eyes and sighed more at your panelists' responses, you would
    have gotten called on more in that last long round.
        [Laughter.]
        Chairman Coats. That is true. Listen, this is terrific. I
    want to thank all four of you for being here. You added a real
    dynamic to a very, very important debate for the future of this
    country. And, frankly, it has been 30 years and we are falling
    further and further behind. If there is a consensus here on
    anything, it is that we need comprehensive tax reform, and we
    need it now. And our country will benefit from it.
        Thank you all very, very much. This hearing is adjourned.
        (Whereupon, at 4:01 p.m., Wednesday, April 20, 2016, the
    hearing was adjourned.)

                           SUBMISSIONS FOR THE RECORD

       Prepared Statement of Hon. Daniel Coats, Chairman, Joint Economic
                                   Committee
        It's fitting that this hearing falls between Tax Filing Day, which
    was moved to April 18 this year, and Tax Freedom Day on April 24. As
    Mr. Hodge may explain, Tax Freedom Day represents the day taxpayers can
    stop working to pay off what they owe the government and start earning
    for themselves and their families.
        Unfortunately, Tax Freedom Day does not include freedom from
    complexity. Throughout the year, taxpayers will have to gather and
    store receipts and records to deal with next year's filing deadline.
    Some taxpayers will even make business or even personal life decisions
    based on some quirk in the tax code.
        I wanted a tangible example at this hearing of just how complex tax
    law is. That's why these boxes are stacked in front of the dais. In
    2014, a publication that includes the tax code, regulations, and court
    decisions that determine tax law totaled over 74,000 pages. If my staff
    had printed this out, they would need the 15 boxes of paper represented
    here.
        I have good news and bad news to report with respect to 2015. The
    good news is that the latest version has fewer pages.
        The bad news is this was not due to a decrease in the number of tax
    laws. It was because the explosion of pages no longer fit in the
    binders, so the publisher shrank the font size. Now taxpayers really
    have to pay attention to the fine print because it's all fine print.
        No wonder 90 percent of taxpayers pay a tax preparer or buy
    computer software to help them figure out their tax burden.
        Even before the new tax complications of the Affordable Care Act,
    the Internal Revenue Service estimated that taxpayers spent over 6
    billion hours each year preparing and filing taxes. Estimates of the
    dollar cost to taxpayers range in the hundreds of billions.
        Complexity comes with many costs. Aside from frustration and
    anxiety, it causes taxpayers to spend time and energy that could be put
    to much more productive uses, including time with family.
        It costs the Treasury, since taxpayers make innocent mistakes and
    are never sure exactly what they owe. And it breeds a sense of distrust
    in the system when taxpayers suspect others are getting a better deal
    because they figured out how to game the tax code.
        But is there a real economic cost? Would America as a whole be
    dramatically better off with a much simpler, pro-growth tax code?
        I think I know the answer, but I look forward to hearing the views
    of our distinguished witnesses.
        Today we will hear from Dr. Art Laffer, known as the father of
    supply-side economics. We also have Scott Hodge of the Tax Foundation,
    which is famous for its tax research. We will also hear real-life
    stories from Joe Grossbauer, a small business owner who lives with tax
    complexity every day. Our final witness is Jared Bernstein of the
    Center on Budget and Policy Priorities.
        My thanks to all of you for tackling this complex issue, which I
    hope will become much simpler.
                                   __________
       Prepared Statement of Carolyn B. Maloney, Ranking Democrat, Joint
                               Economic Committee
        Thank you so much Chairman Coats for calling this hearing, and to
    all of our panelists.
        We are here today to talk about simplifying the tax code. Most
    Americans think our tax system is too complex, and I believe we all
    agree.
        But simplifying the tax code will be a massive undertaking. It will
    be politically difficult. It will create winners and losers.
        That's because simplifying the code requires eliminating some of
    the tax credits, deductions and exemptions that make it complicated.
    Those who benefit from these provisions will fight tooth and nail to
    protect them.
        That's why we should be very wary of anyone who offers a quick and
    seemingly painless fix.
        Some things are worth protecting, like the home mortgage interest
    deduction that enables Americans to achieve the American Dream of
    owning a home.
        Others widely benefit society, like the charitable deduction that
    helps support museums, parks, and other important charities.
        And some credits incentivize behavior that broadly benefits the
    economy, like the Research and Development Tax Credit.
        Some credits are critical to giving working families a chance to
    succeed, like the Earned Income Tax Credit.
        However, many loopholes in our tax code are just giveaways to
    narrow special interests. These are often buried deep in the fine
    print, making the tax code more complicated and less fair.
        So yes, we should simplify our tax system. We should make it as
    easy as possible for individuals and small businesses to do their own
    taxes and pay them. We should enable companies to spend less money on
    tax accountants and more on building their businesses.
        And we should plug some of the thousands of loopholes that not only
    complicate the tax code, but allow some to take unfair advantage of it.
        But at the same time, we should make sure that our tax system
    raises enough revenue to provide Americans the services they expect
    from their government and that they need.
        And we should create one that makes the vast majority of Americans
    better off than they are today--or at least not worse.
        But I fear that many proposals that conservatives claim would
    simplify the tax code are not really about simplification. Rather, they
    are about radically restructuring who pays how much.
        One proposal in the House Republican Budget is to reduce the number
    of brackets in order to lessen complexity.
        Some would go further. A plan backed by hearing witness Arthur
    Laffer is to create one ``Flat Tax.''
        This would reduce the total number of brackets to ONE. This means
    that a family that earns $50,000 would pay the same tax rate as a
    family earning $50 million.
        Many conservatives claim these simplification plans that translate
    into huge tax cuts for the wealthy won't increase deficits and won't
    affect the government services that many Americans believe are
    necessary.
        The theory is that ``tax cuts pay for themselves''--in other words,
    cutting taxes can translate into such massive economic growth that it
    leads to higher government revenues.
        This means that tax cuts SUPPOSEDLY can take place without
    offsetting spending cuts. Americans SUPPOSEDLY won't lose any of the
    government services on which they depend.
        Social Security won't be touched. Or Medicare. Or Education
    funding. Our national defense will remain strong. Our highways won't be
    allowed to fall into disrepair. We won't have to cut funding for
    dreaded diseases like the Zika Virus.
        But this math simply does not add up. Tax cuts don't pay for
    themselves. Tax cuts don't necessarily lead to strong economic growth.
        But they do lead to lost revenue and higher deficits.
        This is the lesson of the past 35 years.
        Despite tax increases under President Bill Clinton we had a booming
    economy, and created more than 22 million private-sector jobs, and four
    straight years of budget surpluses.
        And then we had two tax cuts under former President George Bush
    which contributed to massive budget deficits, with the tax cuts by
    themselves adding, according to some economists, $1.5 TRILLION to
    deficits over ten years.
        So in summary, when we talk about making the tax code less complex,
    let's not be fooled by claims that we simply need to ``flatten'' the
    code.
        This will make it more regressive, shifting more of the tax burden
    onto the middle class and the poor.
        And let's not continue to pretend that ``tax cuts pay for
    themselves.'' History has shown that they do not, in recent history.
        And so let's get down to the business of simplifying the tax code
    and making it more fair.
        I truly look forward to this very impressive panel and hearing your
    testimony today.
        Thank you.
                                   __________

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    Questions for the Record for Dr. Arthur Laffer from Senator Dan Coats,
                                    Chairman
        1. In response to a question, you compared the difference in growth
    between states with an income tax and those without one. How many
    states are you referencing and could you elaborate in more detail what
    performance measures you used and how those states compare to their
    higher-taxed counterparts?

        Mr. Chairman, thank you for this question.
        As of 2016--and ever since the early 1990s when Connecticut was the
    last state without an income tax to implement one--there have been nine
    states without earned income taxes. These states are Alaska, Florida,
    Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and
    Wyoming.
        The distinction of ``earned'' income tax is necessary because both
    Tennessee and New Hampshire have taxes on so-called ``unearned'' income
    such as interest and dividend income, although Tennessee is just
    starting the process of phasing out its ``unearned'' income tax.
        A simple way to examine the effects of earned income taxes on
    economic growth in states is to compare those nine zero-earned-income-
    tax states with the nine states with the highest earned income tax
    rates. Figure 1 below shows this exact comparison over the most recent
    10-year window for which data are available.

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        The metrics examined in Figure 1 are all of the typical measures of
    a state's economic growth--decadal growth in population, employment,
    personal income, gross state product and state and local tax revenue.
    And the results in Figure 1 are clear as bells--the nine states without
    earned income taxes are vastly outperforming the nine states with the
    highest earned income tax rates.
        And this trend is not a new development that only applies to the
    most recent ten years. In fact, I've extended this analysis back in
    time using historical state income tax rates, examining real personal
    income growth rates in the states without earned income taxes vs. an
    equivalent number of the highest earned income tax rates (e.g., if, at
    a point in history, there were 12 states without earned income taxes, I
    compared growth in those 12 states to growth in the 12 states with the
    highest earned income tax rates). Again, the results are astounding.
    Figure 2 below shows that, on a rolling 10-year basis,\1\ there hasn't
    been a single 10-year period over the past 55 years in which the
    highest earned income tax rate states outperformed the states without
    earned income taxes.
    ---------------------------------------------------------------------------
        \1\ A ``rolling 10-year basis,'' means that data are measured in
    10-year increments at a frequency of every year. For example, the first
    data point plotted in Figure 2 would be 10-year growth between 1960 and
    1970; the second data point would be ten-year growth between 1961 and
    1971, etc.

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

                                      [all]