[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

                               __________

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                        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.
                               __________
                               
                               
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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.


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    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.

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