[Senate Hearing 114-157]
[From the U.S. Government Publishing Office]









                                                        S. Hrg. 114-157

                   GETTING TO ``YES'' ON TAX REFORM:
                    WHAT LESSONS CAN CONGRESS LEARN
                    FROM THE TAX REFORM ACT OF 1986?

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

                                HEARING

                               before the

                          COMMITTEE ON FINANCE
                          UNITED STATES SENATE

                    ONE HUNDRED FOURTEENTH CONGRESS

                             FIRST SESSION

                               __________

                           FEBRUARY 10, 2015

                               __________

                                     
 
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            Printed for the use of the Committee on Finance

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                          COMMITTEE ON FINANCE

                     ORRIN G. HATCH, Utah, Chairman

CHUCK GRASSLEY, Iowa                 RON WYDEN, Oregon
MIKE CRAPO, Idaho                    CHARLES E. SCHUMER, New York
PAT ROBERTS, Kansas                  DEBBIE STABENOW, Michigan
MICHAEL B. ENZI, Wyoming             MARIA CANTWELL, Washington
JOHN CORNYN, Texas                   BILL NELSON, Florida
JOHN THUNE, South Dakota             ROBERT MENENDEZ, New Jersey
RICHARD BURR, North Carolina         THOMAS R. CARPER, Delaware
JOHNNY ISAKSON, Georgia              BENJAMIN L. CARDIN, Maryland
ROB PORTMAN, Ohio                    SHERROD BROWN, Ohio
PATRICK J. TOOMEY, Pennsylvania      MICHAEL F. BENNET, Colorado
DANIEL COATS, Indiana                ROBERT P. CASEY, Jr., Pennsylvania
DEAN HELLER, Nevada                  MARK R. WARNER, Virginia
TIM SCOTT, South Carolina

                     Chris Campbell, Staff Director

              Joshua Sheinkman, Democratic Staff Director

                                  (ii)












                            C O N T E N T S

                              ----------                              

                           OPENING STATEMENTS

                                                                   Page
Hatch, Hon. Orrin G., a U.S. Senator from Utah, chairman, 
  Committee on Finance...........................................     1
Wyden, Hon. Ron, a U.S. Senator from Oregon......................     3

                               WITNESSES

Packwood, Hon. Bob, former chairman, Committee on Finance, 
  Portland, OR...................................................     6
Bradley, Hon. Bill, former member, Committee on Finance, New 
  York, NY.......................................................    10

               ALPHABETICAL LISTING AND APPENDIX MATERIAL

Bradley, Hon. Bill:
    Testimony....................................................    10
    Prepared statement...........................................    39
Hatch, Hon. Orrin G.:
    Opening statement............................................     1
    Prepared statement...........................................    41
Packwood, Hon. Bob:
    Testimony....................................................     6
    Prepared statement...........................................    42
    Responses to questions from committee members................    48
Wyden, Hon. Ron:
    Opening statement............................................     3
    Prepared statement...........................................    50

                             Communications

The ESOP Association.............................................    51
NFIB.............................................................    56

                                 (iii)

 
                   GETTING TO ``YES'' ON TAX REFORM:
                    WHAT LESSONS CAN CONGRESS LEARN
                   FROM THE TAX REFORM ACT OF 1986?

                              ----------                              


                       TUESDAY, FEBRUARY 10, 2015

                                       U.S. Senate,
                                      Committee on Finance,
                                                    Washington, DC.
    The hearing was convened, pursuant to notice, at 10:17 
a.m., in room SD-215, Dirksen Senate Office Building, Hon. 
Orrin G. Hatch (chairman of the committee) presiding.
    Present: Senators Grassley, Crapo, Thune, Isakson, Coats, 
Heller, Scott, Wyden, Stabenow, Cantwell, Nelson, Menendez, 
Carper, Cardin, Bennet, and Warner.
    Also present: Republican Staff: Chris Campbell, Staff 
Director; Jim Lyons, Tax Counsel; Mark Prater, Deputy Staff 
Director and Chief Tax Counsel; and Caleb Wiley, Professional 
Staff Member. Democratic Staff: Adam Carasso, Senior Tax and 
Economic Advisor; Michael Evans, General Counsel; Kara Getz, 
Senior Tax Counsel; and Todd Metcalf, Chief Tax Counsel.

 OPENING STATEMENT OF HON. ORRIN G. HATCH, A U.S. SENATOR FROM 
              UTAH, CHAIRMAN, COMMITTEE ON FINANCE

    The Chairman. The committee will come to order.
    Today's hearing is about the need for tax reform and what 
lessons we can learn from the Tax Reform Act of 1986, the last 
successful overhaul of the United States tax code.
    We have before us today two former Senators who were key to 
that effort. I do not know why they call you former Senators. I 
think you are always going to be Senators to me. I look forward 
to hearing your thoughts and advice, and I think we all do, 
during today's hearing.
    Before we engage meaningfully in tax reform, we need a 
clear vision of what we want success to look like. A vision is 
not a specific system of rates, deductions, or credits. 
Instead, a vision is how we want to change the opportunities 
for American families and the rewards that Americans receive 
from their labor, entrepreneurship, and investment.
    A successfully reformed tax system will help make America 
the best place in the world to work, conduct business, invest, 
and prosper. A successfully reformed tax system will be one 
that provides economic growth and is simple and fair. This more 
than anything else should be our vision for tax reform.
    The landmark Tax Reform Act of 1986 was developed by then-
chairman Bob Packwood through a careful and methodical 
bipartisan process that relied heavily on member input. Senator 
Bradley was a key part of that process. I do not want to leave 
out Congressman Rostenkowski and a whole raft of others in the 
White House at that time, but these two were the two great 
leaders in the Senate at the time.
    Over the last few weeks, we have begun a similar process 
that we hope will yield a similar result: tax reform 
legislation that both parties can support.
    The 1986 Act, signed into law by President Reagan, reformed 
a costly and complicated tax system into a simpler one with 
lower tax rates for American households and businesses, 
affording them greater personal prosperity. Over time, our tax 
system has once again become costly and complex. It is impeding 
growth, standing in the way of shared prosperity, and placing 
American workers and businesses at a distinct disadvantage.
    Put simply, it is past time for Congress to stand up once 
again to fix our broken tax system. If you have been around 
Washington over the last few years, chances are you have 
already heard me talk about tax reform. I have been making the 
case for tax reform on the Senate floor, here in the Finance 
Committee, in public appearances, in written materials, and in 
private conversations.
    In December, the Republican staff of this committee 
produced a comprehensive report outlining the need for tax 
reform and providing some direction to our overall efforts. I 
am sure everyone here has read that report cover to cover. 
[Laughter.] I have already publicly laid out seven principles 
that I believe should guide our tax reform efforts. I will not 
go into much detail on each principle today. Instead, I will 
just talk about them briefly.
    The first principle is economic growth. Tax reform, if it 
is done correctly, should promote growth and significantly 
reduce economic distortions that are present under the current 
income tax system.
    The second principle is fairness. The income tax base, 
which has become riddled with exclusions, exemptions, 
deductions, and credits, should be as broad as possible. Tax 
reform should broaden the tax base by eliminating or reducing a 
number of tax expenditures, along with lowering tax rates and 
removing distortions.
    The third principle is simplicity. Taxpayers and businesses 
spend over 6 billion hours a year complying with tax filing 
requirements, with annual compliance costs in excess of $171 
billion, which is more than the gross domestic product of New 
Zealand, for instance. Simplifying the tax code will result in 
greater clarity and compliance and will free up resources for 
families, job creation, and other productive uses.
    The fourth principle is revenue neutrality. Tax reform 
should be revenue-neutral and not an occasion to raise taxes on 
American households or businesses. Federal revenues already 
exceed their historic average as a share of our economy, and 
greater revenue should not be an objective of reform.
    The fifth principle is permanence. The Joint Committee on 
Taxation lists almost 100 provisions in the tax code that will 
expire over the next decade. This is unacceptable. Families and 
businesses should be able to plan for the future without 
wondering if the tax code is going to change from year to year.
    The sixth principle is competitiveness. The combination of 
a high corporate tax rate, worldwide taxation, and the 
temporary nature of some tax incentives makes American 
companies less competitive when compared to their foreign 
counterparts. Tax reform should reduce burdens on businesses 
large and small to allow them to more effectively compete on 
the world stage.
    The seventh principle is the promotion of savings and 
investment. Many aspects of our current tax system discourage 
savings and investment, thereby hindering long-term growth. 
Savings and investment help build the capital stock, providing 
fuel for economic growth that generates prosperity for American 
workers and businesses.
    These seven principles are the guideposts I will use when 
looking at tax reform proposals.
    I think we are going to have an interesting hearing today. 
We have two really great former leaders, Chairman Packwood and 
Senator Bradley, to see what advice they can give us as we 
undertake our tax reform efforts in this Congress.
    I did read ``Showdown at Gucci Gulch,'' and it gives some 
indication as to how difficult this really was. If anything, it 
may be even more difficult today because of the messes that 
have occurred since, none of which you deserve to be blamed 
for.*
---------------------------------------------------------------------------
    * For more information, see also, ``Background Information on Tax 
Expenditure Analysis and Historical Survey of Tax Expenditure 
Estimates,'' Joint Committee on Taxation staff report, February 6, 2015 
(JCX-18-15), https://www.jct.gov/publications.html?func=startdown&id= 
4705.
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    [The prepared statement of Chairman Hatch appears in the 
appendix.]
    The Chairman. Senator Wyden?

             OPENING STATEMENT OF HON. RON WYDEN, 
                   A U.S. SENATOR FROM OREGON

    Senator Wyden. Thank you very much, Chairman Hatch.
    As Chairman Hatch noted, the Finance Committee is joined 
this morning by two legislators who were at the heart of the 
last major overhaul of the U.S. tax code in 1986. Chairman 
Packwood spent more time than anyone figuring out how to make 
the numbers in tax reform work. That is the tough work of 
legislating.
    Senator Bill Bradley was the intellectual godfather of the 
reform plan that broadened the base, closed loopholes, and kept 
progressivity in the code. Senator Bradley lit the fire that 
got the Reagan administration invested in reform, and I do not 
think anyone would question my judgment that Senator Bradley 
had, by a wide margin, the best jump shot in the Senate Tall 
Guy Caucus.
    Now, if there is one obvious similarity between 1986 and 
today, it is that people are quick to say that tax reform is 
absolutely impossible. Americans say Congress cannot organize a 
2-car parade--there is no way they can come together on major 
economic legislation.
    So what happened 3 decades ago needs to happen again: 
turning the impossible into the possible.
    The Congress and President Reagan came together to pass the 
1986 Tax Reform Act based on what I call principled 
bipartisanship. One side wanted to flatten the tax code. The 
other side wanted to close loopholes and guarantee that the tax 
code treated everyone fairly. Both sides said, ``We are going 
to set aside the partisan attacks and look for common ground,'' 
and each side came away with the feeling that it had upheld its 
principles.
    When President Reagan signed the bill into law, he called 
it a historic overhaul of our tax code and a sweeping victory 
for fairness. He continued, and I quote here, ``It is also the 
best antipoverty program, the best pro-family measure, and the 
best job creation program ever to come out of the Congress of 
the United States.''
    Those same objectives ought to guide the Finance Committee 
and the Congress as they work again to modernize our tax 
system. Reforming the tax code is always a herculean task, but 
the same strategy of principled bipartisanship can work once 
again. The Congress can turn the impossible into the possible.
    However, policymakers need to recognize that the process is 
going to look different. Not every part of a 30-year-old game 
plan for tax reform can work today. China and India are now 
superpowers in the global economy, which is a much bigger 
factor in the tax reform debate. The gulf between wage earners 
and the top of the income ladder has widened, and America is at 
its best when a rising tide lifts all boats, and it should be 
obvious that making that a reality once again is going to take 
some hard work.
    The status of the middle class in Oregon and across America 
is at the top of the list of compelling issues for tax reform 
to address. It is fundamentally unfair that a middle-class wage 
earner could pay a higher tax rate than an affluent person 
whose earnings come entirely from investments.
    The tax code should not be used to punish the wage earner 
in America. And many tax incentives for college education and 
retirement savings are simply out of whack. The support those 
incentives provide does not always get to those who need it the 
most, and that ought to change.
    Another challenge is making America more competitive in the 
global economy. Today you often come away saying that our 
country is trying to win a road race in a 30-year-old car. Our 
competition meanwhile trades up to more efficient models. 
America has not done enough to drive innovation at home, and, 
worse, the tax provisions for research and development expire 
year after year.
    In 1986, there was not a lot of talk about the tax code, 
for example, in a clean energy future for our country. That is 
something else that has to change this time. And finally, 
modernizing our tax code has to be done in a fiscally 
responsible fashion. Tax reform cannot become an exercise at 
slashing rates at any cost.
    The biggest lesson from 1986 is that tax reform is possible 
when Democrats and Republicans set partisanship aside, come 
together, and focus on shared principles. Over the years I have 
talked frequently with Senator Bradley about how tax reform is 
always totally, completely, and thoroughly impossible until 
that moment when it happens.
    The Finance Committee today has two experienced, 
knowledgeable witnesses who are going to help us get closer to 
that point today.
    Chairman Hatch, thank you. And I look forward to our 
witnesses.
    [The prepared statement of Senator Wyden appears in the 
appendix.]
    Senator Menendez. Mr. Chairman?
    The Chairman. Yes?
    Senator Menendez. If I may have a point of privilege just 
for a moment. And I thank the chair very much.
    I have an intelligence briefing on Iran, but I wanted to 
come to join the committee and its leadership in welcoming the 
most outstanding U.S. Senator New Jersey has ever had to 
represent it. Not only does he have a great ability to shoot a 
3-point shot effortlessly, but the intellect that Bill Bradley 
possesses and his willingness to pass the ball to fellow 
teammates made him a consummate successful U.S. Senator here 
and in New Jersey.
    So I have read his testimony. I look forward to the Q&A so 
we can engage in some of it, and I appreciate him and Senator 
Packwood joining us.
    Thank you, Mr. Chairman.
    The Chairman. Thank you, Senator. I think that was a pretty 
good outline of our Senator.
    Our first witness is Bob Packwood. Senator Packwood was 
first elected to the U.S. Senate in 1968 and served the people 
of Oregon in this body for 26 years. He was chairman of the 
Finance Committee from 1985 to 1987 and presided over this 
committee's efforts to draft and pass the Tax Reform Act of 
1986. He made a pivotal difference in this, as did our other 
witness.
    He also served as chairman of the Commerce Committee for 4 
years. Prior to his time in the Senate, Senator Packwood 
practiced law in Portland, OR for 10 years. He was elected to 
serve for 3 terms in the Oregon State Legislature.
    He received a bachelor's degree in political science from 
Willamette University in Portland, OR and a law degree from New 
York University Law School.
    We feel honored to have you here today. We know you can 
help us in many ways to understand some of the difficulties we 
are going to have to get through, and hopefully give us some 
advice on how to get through them.
    Our second witness is another great human being whom I 
greatly admire and admired before he came to the Senate. That 
is Senator Bill Bradley. Senator Bradley represented the people 
of New Jersey here in the Senate for 3 terms, beginning in 
1979.
    As a member of the Senate Finance Committee, he played a 
pivotal role in the drafting and passage of the Tax Reform Act 
of 1986. Of course, prior to his time in the Senate, Senator 
Bradley was a great professional basketball player. He is a 
two-time NBA champion and a member of the Basketball Hall of 
Fame.
    Senator Bradley holds a bachelor's degree in American 
history from Princeton University and a master's degree from 
Oxford University, where he was a Rhodes Scholar. He is the 
author of seven books on American politics, culture, and 
economy, and currently hosts ``American Voices,'' a radio show 
highlighting the remarkable accomplishments of both famous and 
unknown Americans.
    We welcome you, Senator Bradley, as well. We thank both of 
you for being here today, and we look forward to your 
testimony.
    Senator Packwood, you go first.

 STATEMENT OF HON. BOB PACKWOOD, FORMER CHAIRMAN, COMMITTEE ON 
                     FINANCE, PORTLAND, OR

    Mr. Packwood. And Senator Bradley also holds the record for 
the most points ever scored in the basketball playoff in 
Portland, OR when he scored, what, 64 points?
    Mr. Bradley. Fifty-eight. [Laughter.]
    Mr. Packwood. Mr. Chairman, when I was contacted, everyone 
asked, how did you do it in 1986, and are there any parallels 
to today? There are some, but the circumstances were different.
    In our era, fairness was the issue, not income inequality. 
In the next to last page of my statement, you will see a list 
of newspaper stories about people who paid no taxes at all. 
There were industries, defense industries, at the time of the 
Reagan buildup that not only paid no taxes, they got money 
back, and the public and the members of Congress could not 
understand how wealthy corporations and wealthy individuals 
could pay nothing. It was not fair. So that was the premise we 
were operating under at the time.
    You will find in my statement, on occasion, the word 
``diary.'' That means that it was taken specifically from my 
diary at the time.
    Now, what happened? Of course, tax reform is not a new 
idea. Stanley Surrey, who was President Kennedy's Assistant 
Treasury Secretary for Tax, came up with the idea of tax 
expenditures. You can lower taxes if you get rid of them.
    Bill Bradley and Dick Gephardt, in their fair tax plan, 
said the same thing. The studies known as Treasury I and 
Treasury II all said the same thing. We all knew how it worked. 
We all knew that you could lower the rates if you could get rid 
of deductions. It was just pure mathematics.
    The House had public hearings for a year in 1985, and they 
had a lot of individual votes on things as they went along, and 
they picked up enemies. They picked up barnacles because, with 
some of those interest groups, they lost their votes. And there 
are lots of single-issue groups, and I do not mean the NRA or 
Right to Life, but if you touch mortgage interest, you have the 
realtors; if you touch inside buildup, you have insurance 
companies; if you touch 501(c)(3) charitable contributions, you 
have every organization in the country opposed.
    And the problem with the House bill was that they had 
enough of these barnacles attached to the bill when it finally 
came out of committee that the votes were not there on the 
floor to pass it.
    It would have failed but for the fact that Ronald Reagan 
literally came up on the Hill, met with the Republicans and 
said, ``Please vote for this bill. I will veto it if it passes 
in this form, but send it to the Senate and see what they can 
do.'' With that, enough Republicans changed their vote, and the 
bill passed, although you would never know if they changed 
their vote because it passed on a voice vote in the House.
    It came to the Senate. And in those days the Senate did not 
get going as quickly as you have gotten going now. We did not 
get going until mid-February or March. I finally started having 
some hearings on this bill, but we did not need many hearings 
because, in the summer of 1985, we had had about 30 hearings on 
the subject of tax reform just in case the House would pass 
something, because if they passed it, I knew we would have to 
act relatively quickly, and I did not want to have a lot of 
hearings at the same time.
    So we pretty much cleared the deck of hearings. But there 
was one thing that caught my mind at the time of the hearings. 
I would ask witnesses how low the tax rate would have to be 
before they did not care whether there were any deductions. Oh, 
30 percent, 20 percent, 25 percent--it was always in that 
range. I did not think much about it at the time, but I was 
intrigued that almost every witness I would ask, that is what I 
would get.
    Well, all right. We come to the spring of 1986. I am, 
frankly, making no progress in committee. We are not making the 
bill any better, we are not making it any worse. We just are 
not getting anyplace.
    So on Friday, April 18th, I simply adjourned the committee 
and said, ``We are done with the bill.'' Somebody said, ``You 
mean we are done for the day?'' I said, ``No, we are done with 
the bill. It is the end of this bill.'' And at that stage, I 
called--and this is where things moved so rapidly.
    I called David Brockway, who was then the Chief of the 
Joint Tax Committee, and said, ``Give me three bills: 25 
percent, 26 percent, 27 percent high.'' He said, ``At 25 
percent, you will have to get rid of mortgage interest.''
    And, Bill, I remember you saying how much trouble mortgage 
interest gave you on your bill. So I asked him, ``What about 26 
percent?'' That was Friday.
    The following Tuesday he comes and he gives me three--not 
bills, they were not in bill form, but three plans as to how 
you could get to 25 percent, 26 percent, 27 percent. And I 
looked at them, and then I was delayed for 2\1/2\ days because 
at this stage, up came fast-track for the Canada Free Trade 
Agreement. It was one of those things where the President 
cannot move unless you give him fast-track authority. And there 
was a deadline. If Congress had not acted by--this was 
Tuesday--the next Wednesday at midnight, he got it.
    The House had not acted. It fell on our side to take care 
of it. I thought it was a slam dunk. I was sure we were there. 
It turned out I did not have the votes. I was missing one, and 
it was Spark Matsunaga from Hawaii, who was mad that the 
President had not answered his letter on macadamia nuts. And I 
had to get over that hurdle and bring him around.
    We finally succeeded in doing it, but it was Thursday 
before I was done.
    Then on Thursday, I presented to the committees at the same 
time, our committee, just the outlines--we have no bill--just 
the outlines of what might be possible, and they seemed to like 
that.
    So I thought to myself--the meeting was over and I was 
getting toward the weekend, and I was thinking at this stage, 
``How are we going to do this?'' And I thought the only way it 
could be done was bipartisan, quickly, and behind closed doors. 
Bipartisan because I could see any bill that was utterly 
partisan on the Republican side would have no success with the 
House Conference. Any bill that was not done quickly, but hung 
out like the House bill had been, would pick up enemies all 
along the way. And it would have to be done behind closed 
doors.
    It was helpful to have the President on board at the start. 
It was not critical, but it was helpful to have him basically 
tilting the same way we were going to go in the Senate.
    On that weekend, on Saturday and Sunday, I called six 
Senators--Bill Bradley, George Mitchell, Pat Moynihan, Jack 
Danforth, John Chafee, Malcolm Wallop--and I said, ``Would you 
be willing to meet in my office starting next Tuesday at 8:30 
to see if we can work out a bill that will be satisfactory to 
us and the President?'' Every one of them said, ``yes.''
    And then passed, starting that Tuesday, the most 
extraordinary experience in my life in politics. We met from 
Tuesday to Tuesday, and Bill was at every meeting. In fact, 
they were all at every meeting, every morning at 8:30. I would 
meet with staff at 7:30 and this core group, a cabal as I 
called it, at 8:30, and we would work out what we thought 
should be in the bill.
    We had one or two open committee meetings, but basically 
the committee was just marking time waiting for us to finish. 
And you could tell, although the meetings were behind closed 
doors, there are no secrets in this town and word was getting 
out we were having the meetings, but no one exactly knew what 
it was we were doing.
    But on the Thursday between these two Tuesdays came a phone 
call that became very important in this whole process, and I 
will read it to you because it is from the diary.
    ``Back again to tax reform in closed session. Was 
interrupted by a phone call from Danny Rostenkowski. Bless his 
soul, he said, `Pal, I've been thinking of coming over there 
and without fanfare, without press, just to say I've been 
through it. I know every day you go through troughs and on 
hills and I've been bleeding for you. But I think what you've 
got in terms of tax reform is the best thing Congress has seen 
in 10 years. You get this through the Senate and between the 
two of us, we're going to put out a bill that for a generation 
of Americans will look like a pinnacle.' God, I appreciated 
it.''
    What he was saying, what the Ways and Means Committee 
chairman was saying was, write this bill in the Senate, which 
Ways and Means does not say very often.
    We continued our meetings through Friday and then we had a 
public meeting Friday afternoon, and I said to everybody, ``We 
are done, and we are not going to meet this weekend.''
    By this time, the hallway was packed with lobbyists. We had 
speakers out there. ``Committee, we are done, we are not 
meeting at all this weekend''--cheers and huzzahs. And then I 
said to the core group, ``But we will meet tomorrow.''
    Bill had already planned--you went to Kentucky that night 
for a speech, canceled your trip to the Kentucky Derby, and 
came back to be with us the next day. On that Saturday, the 
seven of us met all day, from about 8:30 to around 4:30 or 5 in 
the afternoon, and that tied up all the last of the things we 
needed.
    Joint Tax needed a couple of days to get it together, but 
they would have it for us Monday or Tuesday, and we were ready 
to go on Tuesday night, until I finally had to make an odious 
deal with the oilies to get their support--not in committee, we 
could have beaten them in committee, but to get their support 
for something we needed desperately on the floor, and if we 
lost this particular issue on the floor, the bill was dead.
    And that was it. We voted that night. Most of the committee 
had not ever seen the whole outline of the bill or the whole 
bill until that night. And so from Tuesday to Tuesday, the 
seven of us worked. That night the bill was adopted 20-0.
    Now, can you do the same thing now in this committee? Here 
are the things that would be critical. It is helpful to have 
the President on board, to have him with you from the start. 
But at a minimum, you have to make sure that he is not against 
you or gives the impression that he is not sure if he is going 
to support it or he has some questions, because you are not 
going to get your members to take tough votes on things that 
the President might veto if you put them in the bill. So at a 
minimum, he must say, ``I am open; send me a good bill.''
    Two, I think you are going to have to do it in much the 
same way we did, which is behind closed doors, but that is not 
uncommon in the House and the Senate even today. Do it behind 
closed doors and try to do it quickly and present it in one 
grand bill. We did it combining both corporate and individual 
into one bill and then used the money we raised from them to 
lower tax bills for everybody else.
    If you look on the last page of the statement, you will see 
who the major groups were we hit. It was almost all 
corporations and rich individuals. And do it in one bill so 
that people do not have to pick out a particular thing that 
they do not like and are forced to vote against.
    You give them this. You give them the whole bill, and I 
think they will go for it. So that is what we succeeded in 
doing, and, believe it or not, by hitting business as hard as 
we did, raising their taxes about $140 billion, we managed to 
lower the corporate rates from 48 percent to 34 percent, lower 
the individual rates from 50 percent to 27 percent, and keep 
the bill revenue-neutral.
    You can do it, but, Orrin and Ron, the two of you are going 
to have to make an agreement as to what you are trying to get. 
And the thing I like about the fact that it is the two of you 
doing it--Ron, you may recall about 10 years ago we ran into 
each other in the dry cleaners, and you were working on tax 
reform then.
    I know, Orrin, you have crossed party lines many times. I 
remember you working with Ted Kennedy on things. You both 
showed a willingness to work across party line on some 
occasions when it did not please your parties too much.
    So it can be done, but it can only be done if the majority 
and the minority at the start are on the same page.
    Thank you, Mr. Chairman.
    The Chairman. Thank you. That was fascinating. We are very 
fortunate to have that overview.
    [The prepared statement of Mr. Packwood appears in the 
appendix.]
    The Chairman. Senator Bradley, we would love to hear from 
you.

  STATEMENT OF HON. BILL BRADLEY, FORMER MEMBER, COMMITTEE ON 
                     FINANCE, NEW YORK, NY

    Mr. Bradley. Thank you very much, Mr. Chairman. It is 
always a pleasure to be on a panel with Senator Packwood. He is 
an extraordinary leader, and he ran the committee with great 
effectiveness not only on tax reform, but on a whole series of 
other issues.
    This is also a first for me: the first time I have been in 
this room since December 1996. I notice it has not changed.
    But what I would like to do is, I would like to give you a 
few thoughts about structure and provide amplification on two 
things that Senator Packwood said.
    First, what is the ideal income tax system? I believe the 
ideal income tax system is a system that provides the greatest 
number of people the lowest rate. And in terms of principles--
and these were the principles that I think we used in 1986 to 
determine what was in, what was out--one was efficiency. It is 
a basic threshold question for members of the Finance 
Committee. And the efficiency point is, I believe, that the 
market is a more efficient allocator of resources than is a 
member of the Ways and Means Committee or the Finance 
Committee. So that is one principle.
    The second principle is an equity question: horizontal 
equity. Equal incomes should pay equal taxes, not somebody has 
the same income, and next door somebody is using loopholes to 
reduce their tax rate.
    Third is fairness, which is essentially vertical equity, 
and that is, those who have more should pay more; in other 
words, the progressive nature of the system.
    And fourth, do whatever you can to make the system less 
complex. We live in a time where few people fill out their 
returns and where tax fraud is estimated to be yearly $80 
billion to $100 billion.
    So those are the principles--efficiency, equity, fairness, 
simplicity--and you measure everything against those 
principles.
    Now, what do you need to pass tax reform? Drawing on our 
experience, I think you need at least six things. The first 
thing you need is the exact thing Senator Packwood said. You 
need a President who is going to put his prestige and clout on 
the line to drive things through when the inevitable obstacles 
appear.
    Second, you need a Treasury Secretary who is the 
President's designee to deal with it every day, and you need a 
Treasury Secretary who has an incredible person who constantly 
monitors that.
    Of course, in 1986 the President was Ronald Reagan, his 
Secretary of Treasury was Jim Baker, and his assistant was Dick 
Darman, all of whom played critical roles in this. And I cannot 
tell you how important it was to have a Treasury Secretary who 
could speak for the President so I did not have to run back to 
the White House all the time to check this or check that.
    In fact, as Bob remembers, we had gotten down to the 
critical strokes at the end of this process. There was some 
difference of opinion, and Jim Baker was in the room doing the 
negotiating because he knew enough of the substance and had 
paid attention to it. I remember him convening a meeting during 
the period when there was Treasury I and Treasury II, which 
were things that Ronald Reagan tasked the Treasury Department 
to do, and he convened a meeting with Jack Kemp at his house 
with me and I think Bob--a few other people.
    I think it is important to know the longer-term journey of 
tax reform. One of the reasons I ran for the Senate was I 
wanted to reform the income tax system. I remember reading an 
article by Milton Friedman many years before when I was a 
basketball player about how you could have a tax system with a 
16-percent rate, and I thought that was pretty interesting. And 
I have read all of Stanley Surrey from Harvard, Joe Pechman at 
Brookings.
    And I remember in 1984 I went to Walter Mondale, who was 
the candidate for President for the Democrats, and tried to 
convince him to do tax reform. I said it could take the issue 
away from the Republicans: they were out there talking about 
tax cuts, here you could talk tax cuts and equity.
    He had been a member of the Finance Committee, and Charlie 
Rangel was his advisor on this issue, and I think the 
combination of those things made him unwilling to take what he 
thought was the big risk for a hopeless cause. And so it 
passed.
    However, as everyone in politics knows, nothing is secret, 
and it leaked that maybe Mondale would be doing tax reform. And 
so that is when Ronald Reagan, in the middle of the campaign, 
called for a study by the Treasury Department, which was 
Treasury I. And it so happened that the people at the Treasury 
Department in the tax area were really great people. And so 
they took the charge seriously, and they produced a document 
that was an outstanding document, laying out the boundaries and 
the parameters and the specifics of what tax reform is.
    Naturally, when you throw it out there, as I had 
experienced when I threw out the Bradley-Gephardt bill in 1982, 
you throw out something specific and everybody chews on it. So 
everybody chewed on Treasury I and how terrible this is and how 
terrible that is and you ended up having Treasury II, and 
Treasury II accommodated some of those interests, stiff-armed 
others, but it was an improvement over Treasury I.
    And so that is how the Treasury Department got involved, 
and you absolutely need a commitment from the Treasury 
Secretary. So you need the President, and you need a Treasury 
Secretary who likes it, knows it, and can cut the deal for the 
President.
    The third thing you need is the chairmen of Ways and Means 
and Finance to want to get this done, to see that some of their 
own political interests are served by getting this done. And 
Bob mentioned Dan Rostenkowski. In 1981, we passed a bill which 
President Reagan put forward the first year cutting rates 30 
percent, and Dan Rostenkowski ended up being labeled as the 
king of special interests.
    And so I think that what he saw in this was an opportunity 
to seize the good government mantle and push forward with a 
challenge that would make him a historic chairman of Ways and 
Means. I think the Senate was very fortunate to have Bob 
Packwood as the chairman, because I do not know specifically 
what your political interests were, but I sense that it was 
that you wanted to do something that no other chairman of the 
Finance Committee had ever done before, and you wanted to do 
something that would affect 100 million Americans in a positive 
way and potentially change the way we think about taxes.
    Without Bob Packwood and Dan Rostenkowski and Jim Baker and 
President Reagan, this would never have happened. You have to 
have those parts in place, and then you have a chance.
    Then the fifth thing you need is maybe a zealot. That is 
the role I played in 1986. I did nothing but talk about tax 
reform for 4 years. Every speech would be about tax reform. It 
got so bad--I remember I was on a Sunday morning interview show 
that was recorded on a Thursday night and rebroadcast on 
Sunday.
    At that time, my daughter was about 8 or 9 years old and 
she had a girlfriend of hers staying with us, and I said, 
``Hey, Teresa, dad is going to be on TV,'' because the guy 
said, ``Eyewitness News conference with Senator Bill Bradley.'' 
``Stick around, dad is going to be on TV.'' So she elbowed her 
friend and said, ``Come on, let's go; all he is going to talk 
about are loopholes.'' [Laughter.]
    And, indeed, that was all I talked about for 4 years. And I 
also tried--I recognized I did not have the power. The power 
was with Bob Packwood and Dan Rostenkowski. So I had to be 
supportive in any way I could, and I tried to play that role.
    The sixth thing that you need if you are going to get it 
passed is, you need a committed, knowledgeable staff. I 
remember Bob's staff--absolutely first rate. And the key thing 
in this is that they can cut the deal on a lot of issues, and 
everybody knows they speak for the chairman, and they say the 
same thing to everybody. They do not say one thing to one 
person and another thing to another. But they keep their word, 
just like the Senator keeps his or her word.
    So I think that those are the six things that you need. You 
need a President who is committed, you need a Treasury 
Secretary who is committed and knowledgeable, you need the 
chairman of the Ways and Means Committee and the chairman of 
the Finance Committee, you maybe or maybe not need a zealot, 
and then you need to have a staff that is competent and 
honorable and has absolute integrity.
    The last thing I think you need, and this is probably the 
most important--it was epitomized by a visit that we made to 
the White House to meet President Reagan. I was a Democrat, 
kind of a junior member, and I was not invited a lot to the 
White House to meet with President Reagan, but there I was 
seated around the table in the West Wing.
    If you recall, each of us around the table could tell the 
President what we thought about tax reform. He was listening 
mainly, not talking. So when it came to me, even though he had 
made his commitment and even though he had made his position 
clear, I said, ``Mr. President, I know you are interested in 
tax reform which means lower rates, because, when you were an 
actor, the rates were 90 percent.''
    He kind of nodded. And I said, ``Mr. President, I am 
interested in tax reform because, when I was a basketball 
player, I was a depreciable asset.'' [Laughter.]
    Which, in fact, I was. In other words, what that story says 
is, there has to be something for each party in a deal. It 
cannot be all one-sided. There has to be something for each 
party. Each party has to know what they want, and then, if they 
do, there is a chance to get something done.
    I will only make two other quick comments. Bob talked about 
writing the bill in a short period of time with seven people. 
Again, the only reason that happened is because Bob Packwood 
wanted it to happen. He was the chairman. If I had called seven 
people, they would have said, ``Yes, okay, meet you in the 
cafeteria tomorrow or the next day or 2 years from now.'' But 
when the chairman called, you showed up.
    So it was because of him that that committee, that small 
committee of committees, worked. But he also mentioned that 
when we were headed down the path the House took for a long 
period of time, we had 30 hearings about tax reform. Bob 
presided over every one. I was at every one. And we asked 
questions of every witness, and the question that he mentioned 
was one of them, which was, ``How low would the rate have to go 
before you would give up this, that, or the other thing?'' And 
I asked, ``How low would the rate have to go before you give up 
capital gains exclusion?''
    In the latter, the answers came back--if you were from 
Silicon Valley, the witness would say, ``I do not care if the 
rate is 10 percent, we still need a differential for capital 
gains, because that will affect capital appreciation and 
capital formation.''
    But a lot of other people came in--I do not want to say 
just Silicon Valley--but there was a certain kind of person who 
said, ``No matter what, you have to have a differential.''
    Other people said, ``Well, you know, if you got the rate 
down to about 28 percent, 29 percent, we would give up that 
differential for capital gains.'' And that is indeed what we 
did. We got the rate to 28, and that 28 percent was the rate 
that applied to both capital and earned income.
    So, Mr. Chairman, with those thoughts, I would thank the 
committee for the opportunity to come back to the room once 
every 25 years.
    [The prepared statement of Mr. Bradley appears in the 
appendix.]
    The Chairman. Well, we are honored to have both of you 
here, and I think anybody listening to this has to realize that 
you went through a very trying time--very difficult. Congress 
was split. You had a Republican President.
    I just want you both to know how much I respect and 
appreciate both of you.
    Let me just ask this question. According to CBO, revenues 
as a percentage of GDP have averaged 17.4 percent over the past 
50 years. Revenues in 2014 were 17.5 percent of GDP, trending 
up to 18.3 percent of GDP by 2025.
    In other words, taxes are higher now than their historical 
average and headed even higher. Since taxes are already higher 
than average and raising revenue in tax reform makes enacting 
it less likely, should we not do tax reform on a revenue-
neutral basis?
    We will start with you, Senator Packwood.
    Mr. Packwood. I would much prefer you do it on a revenue-
neutral basis, although I would combine both corporate and 
individual into one bill, and then you have a little more 
wiggle room using either side of that equation to be able to 
reach your revenue neutrality.
    The Chairman. Bill? Senator?
    Mr. Bradley. We, of course, did it revenue-neutral. I think 
the times today probably might require some additional tax, but 
I believe that that is something that the committee has to work 
out itself.
    If you really do thorough tax reform, what you find is--at 
least we found that upper-income Americans will pay a higher 
percent. For example, we cut the rate from 50 to 28, and yet 
the top 5 percent paid a higher percent of the total tax 
revenue after that reduction than before.
    The Chairman. Well, the U.S. is one of five major economies 
operating on a worldwide tax system, meaning it currently taxes 
the income of its companies wherever that income is earned, 
even if it is not in our country.
    Currently, companies have the option of bringing the 
profits they earn back to the U.S., but they face a tax of 35 
percent, minus foreign tax credits. Those businesses would 
rather not pay these additional taxes, so they keep their 
earnings abroad, deferring the additional tax. Current U.S. law 
allows companies to defer the tax indefinitely.
    President Obama's proposal released in this year's budget 
would substantially limit deferral, since it imposes a minimum 
tax of 19 percent.
    Now, do you think we should go to a territorial tax system 
with base-erosion protections like almost all other major 
countries or not?
    Mr. Packwood. Mr. Chairman, I have thought so for the last 
30 years. We are often saying we have to compete overseas, and 
there are advantages they have. And one of the advantages they 
have is territorial taxation. I think we ought to go to the 
system that the rest of the principal industrial countries use, 
which is, if you invest overseas and you make profits overseas 
and you pay your taxes overseas, you can bring back whatever 
profits you have to this country and they are not taxed. I 
think that is a good system.
    The Chairman. Senator Bradley?
    Senator Bradley. Of course, when you have profits overseas 
and you are taxed in a particular country at the rate that that 
country charges, all of those taxes are deducted against your 
liability in the United States--the tax credit. So I think you 
have a clear view of how this works.
    The President has proposed two things, I think. One is a 
19-percent tax on the deferred income going forward and a 14-
percent tax as a toll on the tax if it is paid abroad. I think 
that the committee will have to work its will on that.
    I think that the territorial tax makes sense in terms of 
the overall picture, but in reality you are going to have to 
figure out, is there some other way--because I do not think 
that is going to happen--is there some other way that you could 
bring the money back? And I think embodied in the President's 
proposal of the 14 percent is the possibility that maybe it is 
not 14, maybe it is 10. Maybe it is not 19, maybe it is less.
    But somewhere in there--like where do you give up capital 
gains, at what rate--there is a willingness to bring the 
capital back.
    The Chairman. My time is up. Senator Wyden?
    Senator Wyden. Thank you, Mr. Chairman.
    The two of you have told an inspiring story this morning 
about bipartisanship on a major economic issue, and, 
colleagues, we just looked up the vote that attests to what 
happened. It was 97-3, the original vote coming in the Senate, 
and then on the conference report it was 74-23, and in the 
House it was more than two-thirds. So this kind of work paid 
off.
    What I would like to start with is asking you about the 
process, because as far as I can tell, in this effort to 
promote bipartisanship every step of the way, you said, we are 
going to use the normal process, because the normal process in 
the Senate really promotes bipartisanship. And you have to have 
60 votes, and certainly neither side today has 60 votes. So you 
use the normal process, and it really forces bipartisanship.
    The alternative is to use what is called reconciliation, 
which, in effect, is 51 votes. If one side now has 51 votes, 
they could have their way on tax reform.
    My question to both of you is, either one who wants to 
start, is it your view that using the normal process, which you 
all used in 1986, was helpful, and is it your assessment that 
using the normal process helps promote bipartisanship? Either 
one of you.
    Mr. Packwood. Absolutely, but for a variety of reasons. 
One, every member of this committee ought to have misgivings 
about reconciliation and using it to jam as many things into a 
bill as the majority wants because they are not sure they can 
get it passed any other way. What that lends itself to is, more 
and more, the decisions moving up to the leadership.
    In my era, let alone now, even in Lyndon Johnson's era, no 
Majority Leader would have ever thought of taking a bill away 
from committee. Reconciliation just holds out that plum and 
says, ``Use it this way.''
    No. I would much prefer the regular order, for a couple of 
reasons. One, it stilled the arguments against it. We had no 
chance. We did not get to offer the amendments. There was a 
time limit. And if you win it in the normal process, you have a 
lot better credibility than if you have jammed it through in 
reconciliation.
    Senator Wyden. Senator Bradley, can you top that?
    Mr. Bradley. No. But I will have a comment or two. Your 
question was what, Senator Wyden?
    Senator Wyden. Normal process. The normal process inviting 
bipartisanship, reconciliation going more of a partisan track.
    Mr. Bradley. I think the way that we did it, I would agree 
with Senator Packwood 100 percent that the normal process is 
better. It also has to do with what is the clout of the 
committee in the larger Senate.
    We had agreement among members of the committee that 
whenever a vote would come up on the floor, none of the 
committee members would break from the bill that was reported 
out of the Finance Committee and would stay with the committee 
bill.
    And that was a point of personal anguish for me, because in 
the committee, as it related to what Senator Packwood referred 
to as the oilies, Senator Packwood was the chair at that time 
and Senator Russell Long of Louisiana was the ranking member, 
and he had a few interests in the oil patch.
    I, of course, was going to go after it. We had to go after 
that. We could not leave that out. We were meeting in secret 
back there and we had a vote in the back room, and it was 11-9 
against me. And I viewed that--this was in the back room. If 
there was one Senator who was taking it public, he would not 
vote that way.
    So I did not raise the issue in the committee, the full 
committee, and I saw Senator Long's head go like that, and I 
called for the vote, and the person whom I thought would switch 
did not switch. And right up there against that wall 
afterwards, Russell Long got a hold of me and said, ``If you 
ever do that again.'' [Laughter.]
    But life went on, and the screw turned. We got to the 
Senate floor, and then Republican Senator Lowell Weicker 
offered the exact amendment that I had offered in the Finance 
Committee. But because we had a deal that we were all going to 
stay together, I voted against my own amendment.
    So the clout of the Finance Committee in the Senate as a 
whole is instrumental in getting a bill passed, because most of 
the other Senators do not know a whole lot about taxes. They 
have a few opinions about this, that, and the other thing, but 
to the extent that you can speak clearly, authoritatively and 
hang together, you will not need to have any kind of 
reconciliation.
    Senator Wyden. Senator Hatch said I could ask one other 
question, because this was a remarkable feature of the 1986 
bill, and I think it would be helpful for the committee to know 
how you two got to common ground in 1986.
    In 1986, you were able to say that income from wages and 
income from capital were treated equally. Senator Bradley 
talked a little bit about his views on that. But I think it 
would be very helpful to know how you two reached that judgment 
that by today's standards would be remarkable. In fact, today 
people say that if you could just reduce the difference between 
the way income from capital and the income from wages are 
treated, that would be a huge reform.
    How did you two in 1986 get to common ground on treating 
wage income and capital income the same?
    Mr. Packwood. Well, realize we wanted to keep the same 
progressivity that we had in the existing law, but we were 
going to lower the rates tremendously. So in order to make sure 
that the very wealthy still were roughly in the same 
progressivity incline, we had to get rid of capital gains at a 
differential. It was as simple as that.
    In fact, it did not even really bother the committee that 
much. It was a small issue. Malcolm Wallop had some misgivings 
about it, and I would say to his credit, we agreed. Remember, 
Bill, we made the rate the same, but we did not put it as a 
separate section of the bill because Malcolm Wallop said if we 
put that in the bill and got rid of the words capital gains, 
then pretty soon Congress was going to start to raise the 
rates, and capital gains would go right up with them.
    Now, it turns out he was right. But it was to make sure our 
progressivity was the same.
    Mr. Bradley. Just a little addition to that. I exactly 
agree with what Senator Packwood said. There was a provision in 
the bill--since we got to the magic number of 28 for both 
capital and earned income--that said if the general rate ever 
went higher than 28 percent, the capital gains rate would be 28 
percent. In other words, you would never tax capital higher 
than 28 percent.
    I remember, it might have been 4 months after the passage 
of that bill, people were in saying, we need a differential in 
capital gains. And my point was, if you take a differential in 
capital gains, you are going to end up with a much higher 
general rate, and, indeed, that is precisely what happened when 
President Clinton came in. The capital gains differential went 
back in, and the rates went to 39 percent.
    It seems to me that there is a lot more coherence in a bill 
with a lower rate that treats capital and labor the same.
    The Chairman. Thank you. Senator Grassley?
    Senator Grassley. Thank you both for coming. I want to 
start with something you both touched on in your opening 
statements, but I want to get more specific. So I will start 
with Senator Packwood, but I will ask Senator Bradley a similar 
question.
    It deals with the process and presidential involvement.
    Senator Packwood, do you think tax reform would have 
happened if President Reagan had not made tax reform a priority 
in his administration? And a follow-on then: is it not going to 
take at least that much commitment or involvement from 
President Obama with his own party in Congress to get a tax 
reform bill enacted?
    Then for Senator Bradley, could you share your thoughts on 
the importance of presidential leadership in accomplishing tax 
reform?
    Senator Packwood?
    Mr. Packwood. Well, President Reagan was immensely helpful. 
If you are asking me, is it absolutely essential that the 
President be there from day 1 and pushing, I do not know. It is 
like saying this committee could not reach its own conclusion 
without the President. But it was very helpful.
    One morning there was a small breakfast at the White House. 
It was just Danny and me and the President, the Vice President, 
and Jim Baker. It was before the bill--the bill had passed 
here, but before conference. And the President took Danny and 
me aside right at the end, and he said, ``If you can keep this 
bill revenue-neutral and you can get the rates that you have 
got,'' he says, ``you may count on my support no matter how you 
get to those rates.''
    So that is how critical it was. We knew we had his backing, 
absolutely. But Bill touched on something, and that was about 
the Treasury. Jim Baker was up to his neck in the negotiations 
with us, as was especially his Assistant Treasury Secretary 
Dick Darman, because in the last 7 days that I talked about 
where this was all done, Baker was not here. He was in Tokyo 
with the President on one of those economic multinational 
meetings, and all of the final negotiations for the 
administration were done by Darman.
    In the last paragraph of my testimony, you will see an 
interesting exchange on the phone with Darman calling Baker in 
Tokyo and telling him what to tell the President.
    So is it critical? I do not know if it is critical. Is it 
immensely helpful, and was it immensely helpful? Yes.
    Senator Grassley. Senator Bradley?
    Mr. Bradley. I think presidential leadership is essential. 
I believe that there are so many times when things happen where 
you need to be able to get the White House's clout, and that 
can be manifested through the Treasury Secretary. It is not you 
talking to the President all the time.
    I also would say, going back to my anecdote, I think the 
President was viscerally in favor of lowering tax rates 
because, when he was an actor, he had a 90-percent rate--90 
percent. And I was viscerally in favor of this because I was a 
depreciable asset as a basketball player.
    In other words, closing loopholes had traditionally been 
what Democrats were for. Lowering rates was traditionally what 
Republicans were for. The question is, can you bridge that 
divide and bring something together? The answer is ``yes.'' But 
if Ronald Reagan had not said, ``I put my imprimatur on this,'' 
it would not have happened.
    Mr. Packwood. And Bill has touched on something right 
there, Senator Grassley. Democrats wanted to get rid of 
unjustifiable deductions. Republicans were not adverse to going 
along with that if they could use the money to lower the rates. 
And as President Reagan had said, ``I am not signing unless it 
is revenue-neutral.'' If you got rid of a lot of deductions and 
produced a pot full of money, you could not raise revenues with 
this bill; you had to use it to lower rates.
    But you had a willingness on both sides for different 
reasons to want to reach the same conclusion.
    Senator Grassley. My last question deals with something we 
have to tackle here in a basic way. So both of you, in your 
view, how important was it in getting support for its passage 
that the 1986 bill was a comprehensive tax reform package 
rather than focusing only on business or, on the other hand, 
individual reform?
    Mr. Packwood. For us, it was critical, because we needed a 
lot of the money we raised from business--do not confuse rates 
with revenue. We raised an immense amount of revenue, more than 
we were raising from businesses before. But we lowered the 
rates and we used a lot of their money to lower rates for 
individuals, and we mixed the two of them up.
    I would have misgivings about trying to do just business 
and then later on try to do just individual. I think you are 
better off to try to do both of them at once in one big bill. 
And I want to use the word ``grandeur'' again. You come out 
with a big bill that you have agreed upon, and if you do--and 
it touches the point Bill and I have talked about--before the 
bill ever gets to the floor of the Senate, you are going to 
have immense newspaper support, academic support across the 
board, liberal or conservative, and you will be glad, in 
retrospect, that you combined it all in one.
    Mr. Bradley. I agree you should combine both corporate and 
individual, because if you just do corporate, it is not like 
you are going to have an easy path if you do anything that is 
serious.
    For example, when we did the individual and corporate, 
essentially the business community split. A large percentage of 
the business community was for the reform. Another segment of 
the business community was against reform.
    Guess what was the dividing line? What tax rate they paid. 
If they paid less taxes because the rate went from 50 to 28 
percent, they were for it. If they paid up more, they were 
against it. But the key was constructing a coalition that 
included a significant part of business, and this is where Bob 
was brilliant. So I would argue that that is very important.
    You also might get to a point where you have more 
flexibility if you do individual and corporate, because they 
both are essentially two sides of the same coin. For example, 
you might decide that you want to cut the corporate rate to 10 
percent or 15 percent and you might want to offset that by 
increasing the taxes on the individual side, on dividends and 
capital gains. That is what they do in Denmark, for example.
    You would not have that flexibility if you did not have 
both individual and corporate put together in the same bill.
    The Chairman. Thank you, Senator.
    Senator Isakson?
    Senator Isakson. Thank you, Mr. Chairman.
    Thanks, both of you, for being here. I was a real estate 
guy in 1986 and had a development company and a brokerage 
company. So I have a question for both of you.
    First of all, thanks for being on the nine who voted 
against selected treatment in terms of passive loss. I think 
that is right. Both of you voted against that, if I am not 
mistaken. Oil and gas won; real estate kind of lost.
    But looking in a rearview mirror, could some transition 
have been applied to those investments made prior to 1986 so 
that the tax treatment could have continued and the tax 
treatment on passive loss been prospective rather than a claw-
back? Did you ever think about doing that, or, if we go into 
something like that again, could we do it that way?
    Mr. Packwood. We did not think about it at the time. And he 
is absolutely right. If there was an industry that we hit, it 
was real estate. And we drove the S&Ls out of business, which 
were one of the principal financers of real estate. And we did 
it retroactively.
    We found passive losses such a grievous way for rich people 
to shield their money and pay very little taxes, we got rid of 
them.
    But, Senator, you are absolutely right. The real estate 
industry was hit hard, and the oil industry got a particular 
favor because of a deal that I made because I was going to need 
their votes later on on the floor on a particular issue.
    Senator Isakson. Senator Bradley?
    Mr. Bradley. I agree that the real estate industry paid 
more. If you phase it in, of course, you have not as much 
revenue and you also skew the distributional tables. But in 
regard to real estate, keep in mind, that was at a time when 
there was, I would say, real estate investment that was not 
based on the need for apartments or office space, but was based 
upon the individual taxpayer getting a tax deduction offset 
against all his other income or her other income.
    I had a call sometime in this period from Paul Volcker, who 
was then the Federal Reserve Chairman, and he said, ``You know, 
I really like what you guys are doing up there.'' And I said, 
``Why is that?'' And he said, ``Because I cannot get at these 
banks who are simply throwing money at uneconomic real estate 
investments, and it has to be through the tax code.''
    So I think that is one of the reasons, at least for me, 
that I felt we were on strong ground.
    Senator Isakson. I think you did the right thing, because 
there was abuse. My point was, if you could have transitioned 
prospectively in terms of the treatment of passive loss rather 
than claw-back, you might have prevented the collapse of the 
savings and loans and the creation of the REITs, which is 
basically what the ramifications were.
    Mr. Packwood. I think you are right.
    Senator Isakson. One other question I have----
    Mr. Bradley. Well, I would not say that the savings and 
loans collapsed because of the Tax Reform Act.
    Senator Isakson. No. It was the last straw, I guess.
    Mr. Bradley. Yes, maybe that is a better way to say it.
    Senator Isakson. My other question is, did you consider in 
1986 or have you thought since about going to a retail sales 
tax or a consumption tax instead of a progressive income tax?
    Mr. Packwood. I have, and I have often thought to myself, 
what kind of a deal could be made between the Republicans and 
the Democrats that would result in some increased revenue? And 
I thought, what happens if the Democrats were to offer this to 
the Republicans? We will go to an electronic funds transaction 
tax, which I prefer to a VAT or a retail sales tax, and we will 
cut in half the corporate and individual income tax, and you 
will allow the tax, however, to produce an additional $500 
billion in revenue.
    And now the Republicans are thinking, wow, cut the income 
tax in half and the corporate tax in half, and we have always 
kind of supported a consumption tax anyway. Is that kind of a 
deal possible?
    We will go to it one day, there is no question in my mind. 
The danger of any kind of a consumption tax is--and this is 
where Republicans are more afraid of it--it is so easy to 
raise. Need a little more money? You raise it half a percent.
    Take a look at your sales taxes in different States that 
started at 1 percent or 2 percent 30 years ago, and they are 
now at 8 percent or 9 percent. Look at the European value-added 
taxes. I do not know if any major country in Europe is less 
than 20 percent on the value-added tax.
    But to answer your question, yes. If you could combine it, 
I think there is a possibility that--I can maybe see the 
Republicans shaking their heads--you could possibly make an 
argument for some increased revenue in exchange for dramatic 
reductions in corporate and individual taxes.
    Senator Isakson. I am out of time. But really quickly, 
Senator Bradley, I would love to hear your comment.
    Mr. Bradley. I think that what Senator Packwood said about 
an electronic transfer tax is extremely interesting. If I were 
the chairman, I would task the Joint Tax Committee to do an 
analysis of that in terms of revenue that could be generated, 
because you have to know what revenue you are going to generate 
before you decide how you want to spend it.
    On the consumption tax issue, in my testimony, I make a 
suggestion. Basically, the point is that we should tax less 
those things we like, such as wages, and tax more those things 
which are bad for us or dangerous, such as pollution, for 
example. And I think here, there could be a very interesting 
tradeoff between employment taxes, Social Security, Medicare, 
and unemployment, and a gasoline tax, or a tax on things like 
volatile organics, or sulfur dioxide, or lead, or nitrous 
oxide, or whatever.
    It is just a numbers game. And if you did that, it would 
have profound impact. For example, if you were able to 
dramatically cut both individual and corporate Social Security 
employment taxes, you would, in essence, be giving individuals 
a tax cut and corporations a tax cut at a time when jobs are 
needed.
    The fact that there is this 15-percent hurdle is--it 
affects different industries in different ways. For example, if 
you are a McKinsey, or Microsoft, or Google, and you want to 
hire real talent, you pay more because you really need that 
talent. So you pay more to offset the employment tax.
    If you work in a lumber yard in Oregon or somewhere where 
there is a surplus of labor, you do not pay them more to 
offset. So the irony is that it ends up hitting the lower-paid 
guy in the struggling industry more than it hits the person who 
is in the consulting or technology industry.
    So reducing those employment taxes has many benefits. For 
example, the 24 million people or 25 million people who are 
working part-time now could very well be brought into the 
workforce. You could find people who were not working, who 
could be brought into the workforce. So that is the good news.
    The question is, what are you going to use to provide the 
money to do that? And I know the committee has looked at it. It 
is probably not possible, but who knows. They said tax reform 
was not possible in 1986.
    You could take a $1 gasoline tax or you could take a carbon 
tax and use all that money to reduce those employment taxes, 
and I think the net benefit would be greater job creation and 
economic growth.
    It would hit certain sectors more than others, obviously, 
but let us just take the $1 gasoline tax. Never, could it be 
offered, would be a better time to do it than now when prices 
are where they are. But let us say you phase it in, as you 
suggested you do on the other things. If you phased in a 
gasoline tax over 5 years and the automobile industry was going 
to improve the auto mileage efficiency, at the end of that 5 
years, since the individual would be getting more miles with 
less gasoline, they would be paying no more for gasoline with a 
$1 tax that could be used to reduce Social Security taxes and 
employment taxes than they are paying now without that.
    The Chairman. Senator Nelson?
    Senator Nelson. And we could also, Senator Bradley, improve 
the roads and bridges that are crumbling.
    This has been a fascinating discussion for me, and thank 
you very much. I take your ideas and try to put them into 
today's politics.
    Offsetting, lowering employment taxes, and going after 
something like nitrous oxide, that is much more difficult today 
because of the climate debate that is going on, getting the 
votes.
    I think about what you said, Senator Packwood, that 
President Reagan was so critical in tamping down the opposition 
among Republicans in the House. Well, how are you going to get 
President Obama to tamp down that opposition today just over 
the kneejerk reaction of some Republicans to the word ``tax''?
    So it is hard for me to make the transition from your 
success in 1986 to today, and it really puts a real burden on 
the shoulders of our chairman and ranking member.
    Mr. Packwood. Well, that is why this committee--at least in 
Bill's and my era, there was much more nonpartisanship in the 
Senate than there apparently is today.
    I cannot tell you whether or not you can put it together, 
but in 1986 it appeared to us just as difficult to put it 
together as it appears to you now. There are different issues 
than we had then. And nobody can make the right circumstances. 
You cannot buy them, you cannot wish them, you cannot coerce 
them.
    All you can do is be around when the circumstance comes and 
hope you can take advantage of it. As I say, maybe there is a 
possibility. But if, at the start, we are going to have the 
Republicans say no bill if there are any revenue increases 
total, and if the Democratic position is no bill unless there 
are some revenue increases, then you might as well spend your 
time working on the Asia Pacific Trade Agreement or something 
like that.
    Senator Nelson. Our problem thus far, since a lot of your 
success, has been we are in this kind of herky-jerky, patch at 
the 11th hour mode. Tax extenders are an example.
    Do you want to give us your thought about how we overcome 
this illogical approach to taxes? Do you have to do it in the 
overall global kind of big deal in order to get it done?
    Mr. Bradley. Tax extenders are a lobbyist's Full Employment 
Act.
    Senator Nelson. Yes.
    Mr. Bradley. You have to bite the bullet and make some 
decisions. What should be permanent and what should not be 
permanent? And there are always questions of revenue, so you 
want it to go out 1 year or 2 years, but not 3 years or 4 
years, because that would affect the revenue.
    I just think that the practical reality is that people 
would probably say extenders are necessary, but they are 
necessary only because fundamental choices are not made about 
the tax code. What kind of tax code do you want? What do you 
want in, what do you want out----
    Senator Nelson. Right.
    Mr. Bradley [continuing]. Not what do you want in this 
year, because then we all know that means you are lobbied every 
year about the same thing and, quite frankly, it becomes 
boring, I would think. You know the arguments before they come 
in.
    On your earlier point about nitrous oxide, you would be 
cutting some taxes, like Social Security. Recall a couple of 
years ago you cut the Social Security tax, and then there was a 
quiet deal where you let it go back up, and nobody said 
anything about it. Not one party attacked the other party. 
Well, that is the kind of thing you could get here with the 
employment tax reduction and the increased taxes on essentially 
pollutants or gas or carbon.
    Mr. Packwood. I have mixed feelings about extenders. If you 
make some of these permanent, you are going to play hell ever 
getting rid of them when the time comes you think you ought to 
get rid of them.
    At least with extenders you are forced to look at them and 
think, should this be kept, and then, of course, everything 
falls apart and you extend them all. But let us say you made 
them all permanent. Now, you do not have to look at them until 
somebody says, ``I wonder if we should look at this one.'' So 
you kind of pay your money and take your chance on it.
    Senator Nelson. Thank you.
    The Chairman. Next is Senator Coats.
    Senator Coats. Well, Mr. Chairman, this has been 
fascinating for me. I am a rookie Senator sitting--I cannot use 
the basketball analogy, but I can use a baseball analogy--in 
the left-field bleachers here with my friend from Nevada. They 
had to extend the rostrum here to accommodate the three of us.
    The Chairman. That is the right-field bleachers.
    Senator Coats. Well, if you are at home plate, I figure I 
am in left field. [Laughter.] Although I would prefer to be in 
the right field.
    Nevertheless, having had the opportunity to serve with 
these two distinguished former Senators, just sitting here 
listening to them talk through the process has been 
fascinating.
    So often we take an issue and we start with the substance 
of the issue, and nobody pays attention to the process until 
everything comes to a grinding halt because the process was not 
set at the beginning in terms of, what is it going to take to 
get from here to there? So it was fascinating to me that both 
of you outlined the principles of the process that you had to 
work through in order to accomplish the goal.
    It occurs to me, Mr. Chairman, that a buy-in of the 
committee with the principles up front would prevent us from 
being seduced away either through ideology or through special 
interest group pressure on particulars. Well, all right, I can 
get behind you unless you exclude this or include that--that 
traps us from getting from the batter's box all the way around 
to home plate.
    So I just thought it was a fascinating lesson in history 
here. And I had the great pleasure of serving with both of you, 
being in the House in 1986, but watching what was happening 
there as a somewhat neophyte member of the House. And now all 
of a sudden we have this opportunity, sitting here thinking, 
could this really be done, and what you have left with us is 
``yes.''
    If we as a committee can avoid the pitfalls of making 
prejudgments as to what ought to be in and what ought to be out 
and look at how we could accomplish something of enormous 
impact for the future of America, for a whole generation--I 
think that is what we are looking at here--what a legacy that 
would be to you, Mr. Chairman, to the ranking member, to all of 
us on this committee.
    It appears to me that there are some stars lining up here 
between the House and the Senate, given the personalities, the 
experience, and the background of the leadership of the Ways 
and Means Committee, as well as the Finance Committee here.
    There is a question mark in terms of where the occupant of 
1600 Pennsylvania Avenue is starting from, relative to their 
situation, and relative to their income level and the things 
that cause them the eureka moment to say, yes, I want to get on 
board that.
    To me, it seems like--I am just going on here--but it seems 
like the real challenge here is to address the question of how 
a lower rate and cleaner product can result in the kind of 
growth and the dynamic economic impact from something that we 
would do, and where that money should go.
    Should it go back into government for expenditures, 
perhaps, appealing as that might be? How many roads could we 
pave and how many bridges could we fix, or do we let the market 
determine how that capital is better invested?
    It is really not asking the question. If the panelists want 
to comment on that, I was actually making a statement. I am 
over my time here.
    Mr. Packwood. A comment only in one sense. Senator Wyden, 
you may remember my predecessor, for whom you worked at one 
time, used to use the expression, ``Give me control of the 
procedures of democracy, and I will control the substance of 
democracy.''
    Dan, this process in 1986 was not really a planned 
procedure. The House pretty much ceded us the right to go ahead 
and write the bill, and if we wrote it the way Danny liked it, 
they would adopt it. But I was not making any progress 
following normal procedures. It was only when the thing was not 
moving at all that I came up with this idea about half a dozen 
of us getting together in secret as quickly as possible.
    And in that group we had four Republicans and three 
Democrats. We had an agreement. If any four of us could agree 
on something, it would be put in the chairman's mark. I recall 
no vote that was four Republicans, three Democrats. I recall a 
number of votes where I was on the three side of a vote. But we 
had that agreement. It was that bipartisan, in that sense, but 
it was not planned.
    Nothing else had worked, and yet the circumstance was there 
to make something work, and that is how it happened.
    I do not know if the circumstance is here. You feel it. You 
do not plan for it. It arrives, and I am not sure I know how to 
make it arrive.
    The Chairman. I am trying to get that feeling. [Laughter.]
    Senator Carper, you are next.
    Senator Carper. Thank you, Mr. Chairman, Senator Wyden.
    To Chairman Packwood, to my friend Bill Bradley, it is 
great to see you. It is just great to see you. I was talking 
with Brian Selander the other day, whom you graciously sent to 
me when you withdrew from the presidential race, sent him to 
Delaware, signed him up to my Senate race. And one of the 
reasons why I am here today is because of that kind of gift, 
along with Sean Barney and a couple of others who came as well. 
So thank you for all of them. Now I serve on this committee 
where you both once provided great leadership.
    A couple of years ago, we had a hearing on the issue of 
deficit reduction, and we had a bunch of really smart people 
here to talk to us that day too. One of them was Alan Blinder. 
He had previously been Vice Chairman of the Federal Reserve, as 
you may recall. He is back now teaching economics at some 
school in New Jersey; it starts with a ``P.'' [Laughter.]
    In his testimony, he said to us, he said, in terms of 
deficit reduction, ``The 800-pound gorilla in the room on 
deficit reduction is health care costs.'' He said, ``If we do 
not get our arms around that, we are doomed.'' And he said more 
than that, but that was the sum and substance of what he said.
    We had a chance to ask questions. It came to be my time to 
ask a question. I said, ``Dr. Blinder, you say health care 
costs are the 800-pound gorilla in the room. If we do not get 
our arms around that, then we are doomed.'' And I said, ``What 
is your advice to us?''
    He sat there for a while and thought, and then he finally 
said, ``I am not a health economist, I am not an expert on that 
stuff, but,'' he said, ``this would be my advice to you.'' He 
said, ``Find out what works. Do more of that.'' That is all he 
said. ``Find out what works, and do more of that.'' I said, 
``You mean, find out what does not work and do less of that?'' 
And he said, ``Yes.''
    We are happy you are here, and we are looking to find out--
and you have given us some ideas of what worked all those many 
years ago. And one of the keys is, it is clear to me in what 
you are saying here, leadership is the most important 
ingredient in any organization. Whether it is a basketball 
team; whether it is a military unit in the Navy, Army, Air 
Force, Marine Corps; whether it is a college or university or 
business, the most important ingredient is leadership.
    And we cannot pass laws to create leadership, but every now 
and then people come along and provide great leadership.
    Just talk about leadership, the importance of leadership 
here, and what our leaders in this committee and in the Senate 
especially, what we need to be doing, please.
    Mr. Bradley. Well, as I said earlier, leadership starts 
from the President, the Treasury Secretary, the chairman of 
Ways and Means, and the chairman of the Finance Committee. That 
is the leadership structure. If any one of those is not on 
board, it is not going to happen.
    I would also make the point, when Senator Packwood talked 
about the seven people in the room, voting 4-3, whoever voted--
he lost sometime, I lost sometime--but four Republicans, three 
Democrats, that was fun. Legislating is fun with the right 
people. You can do something very important, and you can enjoy 
what you are doing because you never know what is coming around 
tomorrow, if you are in that kind of negotiation.
    It requires you to know what you are talking about, and I 
just hope you guys are having that much fun.
    Senator Carper. Fun would be good around here.
    Mr. Packwood. I have to tell a humorous story about Bill, 
because----
    Senator Carper. Remember I only have a little bit of time. 
So I hope it is a short story.
    Mr. Packwood. I am sorry. Go ahead.
    Senator Carper. No, no. Go ahead. If you could, just 
answer--I would love to hear the story about Bill--the question 
about leadership. I think what Senator Bradley told us is very 
important, right on.
    Mr. Packwood. Well, all of us in politics have seen natural 
leaders. Some of them are inside leaders, like Lyndon Johnson. 
Some are outside leaders, like Ronald Reagan. But everybody in 
the Senate--this is a small fraternity. We all know who are the 
standout leaders.
    We knew in my era that Scoop Jackson and Sam Nunn on 
defense were good for 7 or 8 votes in a tight vote anytime. We 
knew that Dick Lugar on foreign policy was good for 6 or 7 
votes. They were leaders in their area.
    All of you on this committee know who the half a dozen 
leaders of this committee are. I do not know who they are, but 
you know, and certainly the ranking member and chairman know 
who they are, and a coalition of those can be put together.
    But the key is not, do you have the leadership, but does 
the little leadership group agree on the goal that they want to 
reach? If they do not agree on the goal, no quantity of 
leadership is going to make any difference.
    Senator Carper. Thank you. The second question deals with--
you did all this work in 1986. No sooner was the ink dry on the 
legislation that you labored on for all those years, then we 
started changing it. We started changing it a whole lot over 
time.
    Did you ever think at the time that we would see this kind 
of change that quickly and to such an extent? And did you ever 
think at the time about, what can we do to sort of preserve 
what we have, at least for a while?
    I do not know how many changes we have seen, but I am told 
like 15,000 or something, maybe more, since 1986. But should we 
be thinking about--should we be looking for some way to 
preserve for a while at least what work we are going to do, or 
is that just a fool's errand?
    Mr. Bradley. Tom, that was a real lesson for me. Obviously, 
one Congress cannot buy another Congress. You can pass 
something--which I thought and I think Bob did and people 
generally--as significant as tax reform, and it can be like a 
sandcastle on the edge of the sea. It could be washed away the 
next year, which means you have to be humble when you do these 
things. I do not think there is an institutional fix to make 
things permanent.
    Maybe the reason this was not permanent was that this was 
not something that bubbled up from the country saying, you must 
do this. This was something that happened because people who 
had responsibility on this committee assessed what was the 
right thing for the country.
    Senator Carper. My time has expired, I am afraid. Thank 
you.
    The Chairman. Senator Heller?
    Senator Heller. Mr. Chairman, thank you. Thanks for holding 
this hearing.
    I want to begin by thanking our distinguished guests for 
being here today. As a relatively new member of the Senate and 
a new member of this committee, it is great to get this 
historical perspective. So thank you very much for taking time.
    Mr. Chairman, I want to also thank you and the ranking 
member for being committed to this effort. I know it is not 
going to be easy, but it is good to see that there is real 
work, real work moving forward, and I appreciate your seven 
priorities, and I share those with you and look forward to 
getting that done.
    To our witnesses, the further you get out here in left 
field, the more general the questions. But the good news is, it 
is good to know that both of you started where I am today. So 
there is hope for the future.
    I want to move to 5 years ago and the Bowles-Simpson 
proposal. Did either of you testify or have an opportunity to 
have any input on that particular proposal?
    Mr. Packwood. I did not. I was not called as a witness. I 
followed it very carefully in the press, but I was not a 
witness before that commission.
    Senator Heller. Can you give me any perspective on what you 
thought of that report?
    Mr. Packwood. Well, I thought the report was excellent in 
the sense of, here is where this country is going if we do not 
do something. I have often put it--when I speak, I put it in a 
different version.
    I am less concerned about the deficit than I am about the 
increased spending. If you are rich enough, you can afford a 
deficit. As long as you stay rich, you can afford to pay the 
interest on the debt. But I look at spending, and the figures 
are not necessarily good from a century ago, but as best we can 
tell, a century ago, all of the governments in this country--
Federal, State, local, water districts, fire districts--spent 
about 10 percent of the gross domestic product.
    Today the same governments spend around 40 percent of the 
gross domestic product, and that same pattern has been true, by 
the way, in all the major industrial countries. They just 
started at a higher point a century ago than where we were.
    But, if you look at the Simpson-Bowles report and you see 
what is coming in Medicare, Medicaid, Social Security, that 40 
percent figure is going to go up, and the debate we ought to be 
having in this country is, not is there a deficit, of course 
there is. You can debate, if you want, can we afford to carry 
it? I think we can. But do you want this country to eventually 
spend 45 percent, 50 percent, 55 percent of all the available 
assets in this country on government?
    That debate does not get discussed very often, because it 
gets mixed up with the deficit.
    Senator Heller. Thank you.
    Senator Bradley, I would pose the same question to you.
    Mr. Bradley. No, I was not--I did not testify. I always 
talked to my buddy, Al Simpson, but we did not spend a lot of 
time talking about taxes.
    Senator Heller. He is one of my favorites, Alan Simpson. 
When I was in the House, I was on the Ways and Means Committee, 
and Dave Camp was my chairman. As you know, Bowles-Simpson was 
dead on arrival. Camp came up with a proposal last year and, as 
you are well-aware, it got no hearings and, frankly, was dead 
on arrival.
    What did we learn? What lesson did we learn from these 
efforts?
    Mr. Packwood. You are discouraged. I have read the Camp 
proposal. I thought it was a good proposal. I thought it 
covered a lot of the bases that needed to be covered. And you 
are right: it was dead on arrival.
    I am not going to badmouth the President, but it irritated 
me that he appoints this commission, and, as soon as its report 
comes out, he just gives it the back of his hand. Well, that 
practically kills it right there. But I thought the commission 
did a first-rate job.
    Mr. Bradley. I think Camp had some interesting ideas. What 
happened? He kind of started too late. People knew he was going 
out the door, and he did his own thing and put something 
specific forward, which is a necessary prerequisite. Remember 
Treasury I, Treasury II, the two bills I put in, you have to 
put out something specific, because then the interests chew it 
up and you figure out what can be swallowed and what cannot.
    So I just think that you need to see the total picture. I 
think he did a very good job of thinking through tax policy and 
coming out with a coherent package.
    The Chairman. Senator Bennet, you are next.
    Senator Bennet. Thank you, Mr. Chairman.
    What a great privilege to have both of you here. I was 
thinking back, actually, as Senator Packwood was talking, to, 
believe it or not, John McPhee's book ``A Sense of Where You 
Are,'' a book about Senator Bradley when he was playing 
basketball at Princeton.
    He sort of asked the question, how could this, maybe not 
the best athlete that we have, maybe not the best of this or 
that, succeed so well at what he was doing? And I think, in 
terms of tax reform, Senator Packwood interestingly said, the 
opportunity appears to do it.
    So with that in mind, I took a look at ``Showdown at Gucci 
Gulch'' in advance of your arrival, the first chapter, and I 
think it is worth the historical perspective.
    The authors wrote--and I would just sort of ask you to 
respond to it for us: ``The groups with an interest in the 
existing tax system were well-organized and ready to defend 
their tax breaks at a moment's notice. The populous who stood 
to benefit from lower rates were unorganized and diffuse. 
Furthermore, Congress was a slow and cumbersome institution''--
that is not true anymore, of course [laughter]--``that usually 
made only piecemeal incremental changes. Tax reform proposed 
something very different--a radical revamping of the entire tax 
structure. There was a tremendous inertia in Congress that 
resisted any such sweeping change. As a result, the 
conventional wisdom in Washington held that tax reform was 
destined to lose, and the conventional wisdom had plenty of 
history to back it up. Tax breaks, after all, had always been 
part of the currency of Congress.''
    This passage, I would say, is even truer today than it was 
30 years ago as a description of where we are. Just in 2014, 
Federal lobbying totaled over $3.2 billion.
    I wonder if you could take us inside that room that you 
talked about and tell us a little bit, as Senators, how you 
were able to overcome these interests and the pressures that 
you faced, and how we as Senators should think about that in 
the arc of our careers on this committee.
    Mr. Packwood. Well, if you are talking about the little 
cabal of seven of us, the pressures were not really that great 
on us. We knew what had to be done. We wondered, can we swing 
it, will it work? But I do not recall any one of us saying, I 
am not going along with this if X is in this bill or if X is 
not in this bill.
    So those pressures were not on us. I know what you mean 
about the interest groups, and that is what happened to the 
House bill. They had a lot of individual votes on each of those 
little parts, and if it is your part and you hate that, you are 
against the bill. You do not care what is in the rest of it, 
you hate the bill, and there was enough of that.
    That was not the case in the Senate. The Senate bill just 
did not happen that way. That Senate bill was written in those 
7 days, and we did not have any hearings. Suddenly it was like 
Minerva, born fully formed. Here on the last night does the 
committee see the whole bill for the first time and vote for it 
20-0.
    But had they had to vote on individual little sections--in 
fact, I will give you this. The reason I made this deal--I 
never told Bill why I did this. The reason I made the deal with 
the oilies and gave them what they wanted when nobody else got 
it and we had taken it away from everybody else and I gave it 
back to them--Bill was furious, George Mitchell was furious, 
because I had not bounced this off my little group because it 
was the night we were voting anyway.
    The reason I did it is because the biggest issue I was 
going to face on the floor--when this came out of committee 20-
0, it was going to pass, but there was one issue, and it was 
the IRAs.
    On the IRAs, there were not two sides. There was not a 
great clamor about tightening up the IRAs. The clamor was on 
the other side about more, more. And, as you will see listed in 
my testimony, the IRAs, as I recall, were about a $24-billion 
pickup.
    Well, on the Senate floor, this IRA amendment came up, and 
I won it 51-48, and 19 out of the 20 oily Senators voted with 
me. And had I not made that deal, I would have lost a couple of 
them. And had I lost a couple, I would have lost on the IRAs 
and lost the bill.
    Senator Bennet. Senator Bradley?
    Mr. Bradley. The reality is that tax reform was failing 
until the Packwood counteroffensive. And it was not like this 
just sprung forth from the head of Zeus, right? We had had 30 
hearings. The substance had been thoroughly chewed over by the 
committee.
    So it was familiar territory. It was just put together in a 
different way.
    Senator Bennet. Thank you, Mr. Chairman.
    The Chairman. Thank you.
    Senator Thune? Wait a minute. Let me just see here. I am 
sorry. It is Senator Menendez first.
    Senator Menendez. Mr. Chairman, thank you.
    Thank you both for your testimony, which I read at length.
    I think we all agree we need to simplify the tax code and 
make it more economically efficient. But I always think that 
before we go about the task of comprehensive tax reform, we 
need to agree what are the end goals that we are trying to 
achieve so that we can direct our focus.
    I mean, I know that some of my friends here argue that we 
should focus solely on corporate tax reform and profits and 
stock market gains, and I think I have heard you both say that 
you really need to do it all at the end of the day in order to 
make it effective.
    Senator Bradley, do you believe it is enough for tax reform 
to be focused on increasing GDP, on the stock market, on 
corporate profits, or should we also have the goal of ensuring 
economic growth as part of it, particularly if it is felt by as 
many Americans as possible? Is that the type of goal we should 
be looking forward to?
    Mr. Bradley. Yes. You want the economy to grow, and you 
want everybody to benefit from that. And when we did this bill, 
as I said earlier, we had four principles, and these are the 
things you should consider.
    First, that the market is a more efficient allocator of 
resources than we are or the Ways and Means Committee or 
Finance is, in figuring out whether we ought to do this 
activity or that activity. Second, equal incomes should pay 
equal tax. It is not fair to have your neighbor pay less 
because they have a particular tax benefit. Third, those who 
have more should pay more--the progressive principle. And 
fourth, if you can simplify it, please simplify it.
    To me, those are the four principles: the economic issues; 
economic growth, obviously; progressivity would say you would 
want people to move up; and you would want to say to the people 
at the top, ``You have to pay a little bit more.''
    So I think those are the principles that I would use going 
forward.
    Senator Menendez. I think that my question suggests--at 
least I view it that it is not an either/or proposition. In 
fact, fairness and equity in the code actually help reduce the 
burden on low- and 
middle-class working families.
    It is not only morally desirable, but economically good 
policy, because about two-thirds of our economy is fueled by 
consumer spending, and certainly low- and middle-income 
families have a higher percentage of their income that they 
need to spend on goods and services.
    So in that respect, I think that it makes eminent sense to 
be looking at how the consequences of reform deal with them, 
not just with the corporate taxes, because I think it will fuel 
spending that will help private-sector profits.
    Senator Packwood, at the end of your testimony, you 
included a statistic that in 1983, at least 1,900 people who 
earned $1 million or more paid no Federal tax, and that fact 
was due to a myriad of special interest loopholes that were 
clogging the arteries of the tax code before 1986.
    As you noted in your testimony, the product that passed the 
Finance Committee 20-0 and would later become law raised the 
taxes significantly on corporations and rich individuals. They 
would pay more, middle-income people and the poor would pay 
less.
    So we have now a situation in which the average New Jersey 
family that makes $65,000 per year pays a higher rate than the 
wealthiest 400 Americans who make an average of about $270 
million per year.
    So, from your experience, what impact does inequity have on 
the public's perception of tax code fairness, and would you 
agree that a focus of reform should be to eliminate the 
loopholes and preferential rates that have allowed the 
wealthiest to steadily reduce their effective tax rate over the 
past 30 years?
    Mr. Packwood. There is no question that the public is aware 
of the inequality. In 1986, they were not, and the issue was 
fairness. How did these people avoid paying any tax at all or 
how do major corporations that are making profits in the 
defense industry get money back? And that just irritated 
everybody, and that was a driving goal for us.
    Inequality today is obviously a much higher goal, 
preference, issue, than it was 30 years ago. What I am hesitant 
about is not, do you want to fix that? The longer I had been in 
life and the longer I had been in the Senate, the less 
confident I was that what we were going to do would necessarily 
get us to what we wanted.
    And that is why I agree with Bill, the market is a better 
allocator. If you want to somehow undo the inequality, I think 
that is legislatively doable. If you can get both sides to 
agree on that, that is perfect. But it was not what drove us in 
1986.
    Mr. Bradley. I might say that, in terms of the middle 
class, we need good-paying jobs, more good-paying jobs. So that 
is tough to get at through the tax code, but not impossible.
    So I will share with you one of my hobbyhorses. 
Infrastructure investment is desperately needed. In a tough 
budget, you cannot do it in the size that we would like to do 
it. But there are people who have money--Chinese, Singaporeans, 
Koreans, in the Persian Gulf--large sovereign funds, I mean, 
hundreds and hundreds and hundreds of billions of dollars, and 
they have to decide what do they do with that money.
    I asked any number of them, ``Why don't you invest in 
infrastructure in the United States?'' In other words, they 
would play the role the British played in the 19th century. And 
they would say, ``Well, there is this one provision in the tax 
code, and the provision in the tax code is section 892, and 
that says that if you are a foreign government and you invest 
in stocks or bonds, you do not pay tax on that.'' Very simple--
extend that to infrastructure and you could very well find a 
significant amount of money for infrastructure coming from 
sovereign funds.
    Senator Menendez. Thank you.
    The Chairman. Great. Senator Thune?
    Senator Thune. Thank you, Mr. Chairman.
    Thank you all very much for being here. I was a staffer 
back in 1986 when this was done last time and a great admirer 
of the hard work that went into it and the ultimate result.
    There are some things that are very different. This is a 
different time. I think this is a different place probably than 
it was back then. And the one thing you already noted too that 
I think really made a difference was the involvement, active 
engagement of the President in the process.
    Remember Treasury I and Treasury II, the big books that 
they sent up here and how hard they worked to try to get that 
across the finish line. To me, it seems like to do anything 
really big and consequential in this town, you really need 
presidential leadership. So I hope that we will get that.
    I just want to ask a couple of quick questions with regard 
to a couple of the issues that you batted around back at that 
time. One had to do with whether lower rates or more favorable 
cost recovery provisions ought to be the focus of tax reform 
and which of the approaches is better for economic growth. I 
think that was a part of the debate.
    The question, I guess, is, do you believe lower rates 
paired with longer depreciation schedules was the right policy 
choice, and how do you suggest we ought to approach that 
question today?
    Mr. Packwood. I do not know how you ought to approach it 
today. We clearly felt that lower rates were the most desirable 
thing we were doing. Depreciation was a major difference in 
interest between the House and the Senate on that when we had 
to go to conference.
    But I am not going to advise you as to what you ought to do 
on this. I would just say, lower rates, in my mind, keep it 
revenue-neutral, but as I say, there might be something you can 
work out on that to increase revenues. But lower rates were 
what was driving me.
    Senator Thune. How about the issue of cap gains at the time 
going at the same rate as ordinary income? And we have since 
then gone back to the differential. What do you think about 
that? In your view, as you look back on it, was that a good 
thing?
    Mr. Packwood. Yes, I think it was. I remember Bill talking 
just a moment ago about the hearings we had, and that fellow 
would say you had to have a differential. If the regular rate 
was 30 percent, it had to be 15 percent, and if it was 20 
percent, it had to be 10 percent.
    So I asked him, I said, ``If there was no income tax, would 
you have to have a subsidy to invest, because there is no 
differential,'' and he had never been asked that question and 
did not know how to answer it.
    But I think you could do very well if you have a low rate 
with capital gains being the same rate.
    Senator Thune. This has been alluded to a little bit 
already today too, but there has been some discussion about 
what are the goals of tax reform. One of the things I think 
that separates us here, which makes it kind of hard, is that 
there are folks who look at this as an exercise to raise 
revenue. That is something the President obviously wants to do.
    A lot of us believe that the best way to get revenue is 
through greater growth and that the goal of tax reform ought to 
be, how do we generate economic growth in the economy, which 
lifts everybody's boats and addresses a lot of those income 
disparity issues that were mentioned earlier as well?
    So speak a little bit about growth as an objective, a goal 
of tax reform and how you think that plays into the 
deliberations that should occur here.
    Mr. Packwood. Growth--obviously everybody wants growth. But 
I remember Russell Long, who was chairman of this committee for 
16, 17 years, in one meeting going, ``I have been here for 30 
years.'' He says, ``Three times we have put the investment tax 
credit in in tax reform. Three times we have taken it out in 
tax reform. Now you tell me, when is it reform, and when does 
it work to help the economy?''
    I think a lot of us do not know exactly what works. I do 
know there are all kinds of industries that want things that 
say this will work, but I do not think we are necessarily smart 
enough to know.
    Senator Thune. Senator Bradley, you have talked a lot about 
growth. Tell me your views on that.
    Mr. Bradley. Well, I think you can have growth and equity. 
I think growth you get, in part, through the lower rates, but 
also, in part, from clearing out the code of all of this 
underbrush that prevents the economy from growing because it 
subsidizes one segment as opposed to another.
    I think that if you are going to deal with the equity 
question, I think the way to do that is with the Earned Income 
Tax Credit. I think the President's proposal on the second 
earner credit is pretty interesting.
    You can do things in the code that are structural, that are 
not special interest, that will allow you to deal with equity 
at the same time you are lowering the overall rate, and to me, 
that is the key.
    Senator Thune. Thank you, Mr. Chairman.
    Senator Bradley, you are a credit to basketball players 
everywhere.
    Mr. Bradley. That is a big compliment coming from you, 
Senator.
    Senator Thune. Thanks, Mr. Chairman.
    The Chairman. Senator Scott, you are up.
    Senator Scott. Thank you, Mr. Chairman.
    Thank you both for being here today with us and providing 
us insight from 1986 in how you brought together what at times 
seemed to be impossible. And I will tell you that sitting here, 
as a relatively new Senator, it seems relatively impossible for 
the two sides to come together as well. So your insight has 
been valuable to all of us.
    Just for a point of reference, I think this is Treasury II 
and this is Treasury I [holding up two thick, bound books] 
during the years that you guys found the will to make things 
happen, and these are about 6 years of the President's 
proposals [holding up a stack of thin pamphlets].
    My first question really for both of you all is, how do we 
find common ground, when finding a serious partner towards real 
tax reform appears to be missing in the seriousness of the 
presentations and the proposals, number one? And the second 
part of that is, we have heard from both our chairman, Senator 
Hatch, and Senator Thune about a revenue-neutral position. When 
you start the conversation, as well, talking about achieving 
several hundred billion dollars more of revenue versus the 
position of neutrality, how do we bridge that chasm?
    Mr. Packwood. I do not think Bill and I can tell you how to 
bridge that gap. If the positions are irrevocable--revenue/no 
revenue--that gap cannot be bridged.
    Senator Scott. I kind of agree. Senator?
    Mr. Bradley. If you cannot bridge that gap, then spend some 
time doing something else. I think, however, that the question 
is, can you put together a small group of people on this 
committee who have sufficient clout within the committee, as 
Bob said earlier, so that you could actually, if you chose, 
spend the time to come up with something that was pretty good?
    I mean, more taxes--you have to figure out which taxes. The 
tradeoffs that I offered with the consumption tax versus 
cutting the Social Security and employment taxes, that is not 
something we are going to decide. That is something that you 
have to decide.
    As I said earlier, all I know is that we did not have room 
with seven people--when you are making votes and doing things 
and affecting this part of the economy and that, that is a lot 
of fun. If you are just coming in and having your two sides 
make your statements, that cannot be too much fun.
    Senator Scott. It cannot be too much fun is correct. I am 
looking for other things to do with our time, so I thought 
about playing basketball, but I am too short and built for 
football.
    The good news is that Senator Hatch, on the other hand, has 
taken a fairly inventive and creative approach to making sure 
that we find some common ground, working across the aisle and 
looking for sweet spots, and he has put together some working 
groups that I think may be very beneficial going forward.
    One of the areas that I have a great passion and interest 
in, as an entrepreneur for the last 15 years, is why 
simplification of the tax code actually benefits all. I think, 
Senator Bradley, you said that tax loopholes are ways for 
politicians to spend money without having to go through the 
appropriations process, and the more opportunities that 
politicians have to spend money without going through the 
appropriations process, the more complicated and difficult the 
tax code becomes.
    When I started my business, I will tell you that I did not 
think about loopholes as they relate to starting a business. I 
thought about creating jobs and making a profit and changing 
the lives of family members and employees.
    I would love to hear you chat just a little bit about the 
notion of simplification--either of you esteemed gentlemen. 
Talk about the notion of simplification and the natural outcome 
of allowing money to find its best place through the private 
sector.
    Mr. Bradley. When I was speaking about this every day for 4 
years, I went on the David Letterman Show. That is when he was 
late, late. And I took out a card and said, ``You ought to be 
able to do your income tax on this card.'' Now, that is not 
quite true, but we do know that the vast number of Americans 
have income from wages, interest, or dividends.
    Guess who has all that information other than the 
individuals? The IRS. The IRS, for the bulk of Americans, could 
do the return based on that, send it to the people, and the 
people could either sign it or they could say, ``No, I want to 
have another accountant do it.'' That would be a dramatic 
simplification.
    Mr. Packwood. In 1986, I had a younger person on the Joint 
Tax Committee who is gone--I cannot remember who it was now--
give me just a ballpark estimate, not spend time on it, what 
you could do with a flat tax, which is certainly simple. And he 
said, at that time--it took him a few days--you could have a 
flat tax--this is the individual side--of 11 percent and raise 
the same amount of money that we are now raising.
    But, of course, that meant that a widow with two kids who 
paid no taxes would now pay $1,100 in taxes. So I said, ``What 
about if you exempt families of four under $30,000, just exempt 
them?'' He came back in a couple of days and he said 19 
percent, but it slightly tilts toward the rich. And I was 
curious about ``slightly.'' He said, ``You realize that when 
you are going to get rid of every deduction that mankind 
conceivably has, you are mainly talking about people who are 
rich, not the poor?'' Just Sally who works at the mill who 
fills out a 1040-EZ and does not have any deductions is not 
adversely affected.
    He said, ``But I think if 19 percent would be the norm, you 
could keep the same progressivity and do it at around 17 
percent on the low end, 20 percent in the middle, and around 23 
percent on the top.''
    Now, this is a top-of-the-head thought of his, but it is 
worth running if you want to see what you could do, and then, 
Senator, you have a simple tax.
    How much did you earn? You are in the 20-percent tax 
bracket. You do not get any deductions. That is simple.
    The Chairman. That is interesting.
    Senator Scott. Thank you.
    The Chairman. Thank you, Senator.
    By the way, we have had over 30 hearings on this over the 
last 4 years.
    Mr. Packwood. I do want to tell just one quick story about 
Bill, because it was cute.
    The Chairman. Sure.
    Mr. Packwood. The President signed the bill. The signing 
ceremony was going to be, say, on a Wednesday. Bill was in 
Portland at a noontime luncheon, a fundraiser for a Democratic 
candidate for Governor. Then he was going to catch the plane 
back for the signing ceremony.
    My campaign manager was a tough woman. She says, ``You are 
up for election this year. You are not going back. You will not 
get any publicity back there anyway.'' But Bill was going.
    Well, Portland was socked in. He could not get a plane out 
in the afternoon. He called Seattle. ``Can I drive to Seattle 
to get a plane out?'' No. ``Can I get a charter plane to San 
Francisco?'' Nothing is flying out.
    And I was having a press conference the next day at 7:30, 
and the President was going to call me after he finished 
signing. I said, ``Well, Bill, we have a press conference 
tomorrow morning if you would like to come.'' He said, ``No, I 
am going to get out.''
    Early the next morning, he calls my hotel and he says, 
``Where is that press conference?'' And he comes and the 
President talks to me and the local network affiliates are 
there. And the President talks to me, and I chat a bit.
    And I said, ``By the way, Mr. President, Bill Bradley is 
here, and you know how valuable he was for us on this. I kind 
of wonder if you could say a few words to him.'' So he comes 
on, and he speaks to Bill.
    Now, the thing that irritates me, he makes national 
television from appearing on the local affiliate in Portland, 
and I do not get covered nationwide. [Laughter.]
    Mr. Bradley. The more relevant point is, it was because of 
my respect for Bob Packwood that I decided in the middle of his 
campaign to join him in a press conference about tax reform. 
[Laughter.] I think that has probably not happened a lot 
recently.
    Mr. Packwood. That was well done.
    The Chairman. Well, I have a lot of respect for both of 
you. You have both been great Senators, and you both have done 
an awful lot for this country, and we are very proud of you.
    Senator Wyden has one more question.
    Senator Wyden. I am going to be very brief. And thank you 
both for that simplicity discussion, because I have thought for 
a long time that this insanely complicated tax code plays right 
into the hands of the special interests and the lobbyists, and 
it is going to be even more challenging today than it was in 
1986. We have been talking about ``Gucci Gulch,'' and there are 
these wonderful descriptions in ``Gucci Gulch'' about the 
lobbyists who would wait in line outside the Ways and Means 
room for a phone booth.
    Well, today a lobbyist is going to sit in the back of the 
room and set in motion a tweet that is, in effect, probably 
going to go to millions. Maybe they are going to be able to 
tweet directly to millions from the back of the room.
    So simplicity is going to be hugely important, and I think 
there are some contenders for how to do it, and Senator Bradley 
mentioned one in his testimony with respect to the information 
that the IRS has and giving the citizen an option of, in 
effect, having the IRS mail something. It would not be 
required, it would just be an option.
    The postcard concept, in effect, you can almost put a tax 
return on the back of a W-2, and that is something worth 
exploring.
    We will be following up with the two of you on the idea 
that if you triple the standard deduction--and a number of 
Senators of both political parties are interested in a 
significant increase in the standard deduction--people itemize. 
So that is another possibility.
    But just know we are going to follow up with you on the 
simplicity issue.
    I want to wrap up with one last question, and that is, is 
there one thing you regret about what happened in 1986 that you 
would counsel us on in terms of what to do for the future? In 
other words, it is always easy to kind of think about what is 
possible today in the abstract, but you two went through it.
    Is there anything you regret and you would like us to 
change? I know that one thing that I regret about 1986, and I 
was just a junior, junior Congressperson, is--Senator Bradley 
is right when he says no current Congress can permanently bind 
a future Congress from unraveling it. But you can make it 
really hard. I mean, you can put people through multiple votes 
and the like. I can think of some things.
    But you two went through it. Is there anything you regret, 
one thing that you would tell us to be careful about?
    Mr. Packwood. Well, I regret the odious deal I had to make 
with the oilies, which was totally unjustified and given to 
them when no other business got it, but I needed their votes on 
the floor. And what they wanted did not cost very much money, 
and the IRAs were $24 billion.
    But do I wish I did not have to put that in? You are right. 
But that is one of those decisions you make on the spur of the 
moment. I made it the night we were doing the final markup, and 
I did not bounce it off my group of six because I knew they 
would vote against it.
    So I would rather just put it in and have them mad than 
have them vote on it and put it in and think I had double-
crossed them.
    Senator Wyden. Senator Bradley?
    Mr. Bradley. Even in this world of great equality among 
Senators and among the group of seven that Senator Packwood 
talked about, there was still the chairman's prerogative, and I 
think that nobody questioned that because we had been through 
the whole process.
    Do I regret anything? I regret that the bill lasted only a 
short period of time. As I said, it was a humbling experience, 
sandcastles at the edge of the ocean, and only a commitment 
from members of this committee and from Presidents, succeeding 
Presidents--I mean, President Clinton had a totally different 
idea of taxes. He liked to spend through the tax code, and, 
therefore, that helped unravel it.
    The differential on capital gains came back. We no longer 
treated capital and labor the same, which was what we did. The 
rate went up to 39 percent. There were infinite numbers of 
hiding places for little provisions, my favorite being the one 
that says if you rent your house for 2 weeks, you pay no tax on 
that income.
    There was once a Senator from Georgia on this committee who 
had a lot of friends who had big houses around the Masters Golf 
Tournament. These things happen, right? But I do not regret 
that, that was before my time.
    But I do think that you have to find some way--I regret 
that it did not last. That is what I would say.
    Senator Wyden. Thank you, Mr. Chairman.
    The Chairman. Thank you to both of you. Senator Packwood, 
you have one of your top staffers here--at least one I know--
who was with you at the time, if you care to introduce----
    Mr. Packwood. Bill?
    The Chairman. Yes.
    Mr. Packwood. Bill Diefenderfer, stand up.
    Mr. Diefenderfer. I barely can, sir.
    The Chairman. That is what tax reform does to you. 
[Laughter.]
    Mr. Packwood. Bill was the chief of staff of the Finance 
Committee at the time, and I have often said that bill was not 
my bill, this was our bill. He was absolutely critical in this, 
and especially critical in dealing with the administration and 
with Dick Darman. But it would not have passed but for him.
    Mr. Bradley. And I agree with that.
    The Chairman. He is still legendary. I want to thank both 
of you. This means a lot to me personally, and I have admired 
both of you for a long time as premier legislators, as people 
who really care for people, and who both are extremely 
intelligent.
    So this has meant a lot to me, and I appreciate it.
    With that, we will recess until further notice.
    [Whereupon, at 11:30 a.m., the hearing was concluded.]

                            A P P E N D I X

              Additional Material Submitted for the Record

                              ----------                              


        Prepared Statement of Hon. Bill Bradley, Former Member, 
                          Committee on Finance
    The income-tax system is unfair (equal incomes don't pay equal 
tax), inefficient (the market knows better where to put capital than do 
members of the Finance or Ways and Means Committees), and overly 
complex (few people fill out their own returns, and tax fraud has 
reached between $40 billion and $70 billion per year). By cutting tax 
rates and eliminating most of the nearly $1 trillion in individual and 
corporate tax loopholes, we do two things simultaneously. We allow 
people to keep more of each additional dollar they earn, and we deal a 
blow to the special interests. As Justice Oliver Wendell Holmes, Jr. 
said, ``Taxes are the price we pay for civilization.''

    The government subsidizes many activities by allowing you to pay 
less tax if you do them. Buying a home is an example. There, the 
government allows you to reduce your taxable income by the amount of 
your mortgage interest and property taxes, which means you pay tax on 
less income. These tax savings are the government subsidy to home 
ownership. In any tax reform it would be possible to protect such 
middle-class ``tax expenditures''--that is, deductions, exclusions, and 
credits; besides mortgage interest, these include charitable 
contributions, state and local taxes, health insurance, and pension 
buildup--even as we lowered tax rates. In a system with just three 
rates, these items could be deductible only against the bottom two; 
everyone would thus get the subsidy, but for the wealthy it would be 
worth less. For example, if the rates were 10, 20, and 30 percent, a 
dollar's worth of deductions would save, at the most, twenty cents in 
taxes for someone in the 20-percent bracket and ten cents in taxes for 
someone in the 10-percent bracket. Those in the 30-percent bracket 
would still get the deduction, but it would be worth only twenty cents. 
They could not deduct it against the top rate of 30 percent.

    In the 1986 tax reform, we cut rates to 15 and 28 percent and 
eliminated about $30 billion per year in loopholes, and the wealthy, 
even though the top rate was reduced from 50 percent to 28 percent, 
ended up paying a bigger percentage of the total income taxes 
collected.

    There are rates that everyone, including most of the wealthy, can 
agree are fair. I believe that the best tax rate is the lowest tax rate 
for the greatest number of Americans. Increasing the earned income tax 
credit assures lower-income working Americans that they, too, can keep 
more of each dollar they earn. By eliminating most of the tax 
deductions, exclusions, and credits (now worth $911 billion), we could 
reduce rates, make the system fairer, and raise revenue. By simply 
reducing these ``expenditures,'' or tax subsidies, in the tax code, we 
could spend more through appropriations for education, health, and 
pension security.

    In addition, by increasing the minimum wage and the Earned Income 
Tax Credit, we could further reduce inequality and give people 
incentives to work. And more IRS agents and better computer systems 
would increase tax collection from the wealthy. Commissioner Charles 
Rossoti says that for an investment of $296 million the service could 
collect $9 billion more annually.

    Another tax innovation would be aimed at people who have only wage, 
interest, or dividend income and take no itemized deductions. There is 
no reason for them to fill out tax returns; the IRS has all the 
information about them that it needs, and it can prepare individual tax 
returns from those W-2 and 1099 forms and send the returns to the 
taxpayers. If taxpayers wanted to fill out their own forms at that 
point, they could; more likely, they would simply sign and return the 
prepared forms. Not having to pay a tax preparer would amount to a kind 
of tax cut. California put such an initiative on the ballot in 2004, 
but groups such as H&R Block with a vested interest in the current 
system managed to kill it.

    If one were bolder, they could take on an even more ambitious and 
complex tax reform--moving taxation away from work to pollution and 
natural resources. In general, we ought to tax less whatever we need, 
such as wages, and tax more whatever is dangerous to us, such as 
pollution, resource depletion, trans fats, and tobacco. In this vein, 
we could implement a $1-per-gallon gasoline tax (or an equivalent 
carbon tax, which is a tax on any energy source that emits carbon 
dioxide) or equivalent taxes on other major air pollutants: volatile 
organics, nitrogen oxide, lead, sulfurous dioxide, and particulates. 
These taxes could be phased in over five years, with the revenue going 
to reduce employment taxes (Social Security, Medicare, and unemployment 
insurance) for employees and employers alike. The gasoline or carbon 
tax would encourage the nation to reduce its dependence on insecure 
sources of foreign oil, and with payroll taxes now amounting to 15 
percent of labor costs, the lower employment taxes would be an 
incentive for businesses to hire workers. Given where the price of oil 
is today, there never was a better opportunity to enact such a tax.

    Such a shift in taxation--away from jobs and toward pollution, 
energy, and natural resources--will draw many of the 24 million part-
time employed into the full-time workforce and millions more who are 
not in the labor force will now be more likely to find a job. After a 
few years of adjustment in the case of a gasoline or carbon tax, cars 
would be more fuel-efficient, so consumers would pay what they used to 
pay for the same amount of driving, and the broad middle class would 
continue to pay lower employment taxes. The result would be increasing 
demand for goods and services; shrinking dependency payments such as 
unemployment compensation or welfare; lowered social costs such as 
crime or avoidable illness; and a more equitable tax system--one that 
encourage rising employment.

    Reducing employment taxes also makes sense on grounds of 
competitiveness and equity. Employment taxes now hit our most 
successful companies hardest. A company such as Microsoft or McKinsey 
need talented people desperately. As a part of the company's 
compensation package they have to pay enough salary to offset the 
employment taxes on the employee. If they don't assume the tax costs, 
the employee can go somewhere else. Meanwhile at a lumber yard where 
there is an excess of labor the lumber company doesn't have to pay 
higher wages and the bulk of the employer's taxes hit the worker. 
Perversely, it is the lowest paid workers and the companies most 
essential to economic growth that are hit hardest by employment taxes.

    Better yet, if politicians wanted a comprehensive and fair way to 
reduce the deficit and invest in health care, education, and pension 
security, they could combine income tax reform and gasoline- or 
pollution-tax increases with a reduction in employment taxes, a 10-
percent cut in defense spending, a 30-percent cut in what the federal 
government spends on corporate subsidies such as mining and digital 
spectrum, a limit on the corporate deduction for the most expensive 
medical plans, and a cut in farm subsidies--which today go to only 25 
percent of American farmers, with $7 billion of the total $14 billion 
going to the richest 3 percent, including large agribusiness.

    In addition, the budget process should be governed by the pay-as-
you-go budget rules that existed in the 1990s. Under those rules, any 
tax cut or spending increase had to be offset by a spending cut 
elsewhere in the budget. Finally, the entire federal budget should be 
on the Internet with keyword accessibility. For example, if you 
searched for ``breast cancer'' or ``housing'' you would be directed to 
all the places in the federal budget where money is spent for those 
purposes. That way, citizens could have the information with which to 
understand the trade-offs in taxes and spending and hold their 
legislators accountable.

    The key to passage of these measures would be to have them all in 
one package, so that choices--between more money for health care, 
education, and pension security, on the one hand, and spending cuts and 
higher taxes on the other--could be made clearer. If we included 
spending cuts or increases in one bill and tax reform in another, the 
connection between what we were giving up in tax increases would be 
lost and what we were getting in spending increases. The debate should 
be about the whole, not the parts. Issues such as sharing the burden 
fairly between the young and the old, and trade-offs between weapons 
systems and health care, or corporate welfare and human welfare, would 
be clearly set out.

                                 ______
                                 
              Prepared Statement of Hon. Orrin G. Hatch, 
                        a U.S. Senator From Utah
WASHINGTON--Senate Finance Committee Chairman Orrin Hatch (R-Utah) 
today delivered the following opening statement at a committee hearing 
examining the lessons from the Tax Reform Act of 1986:

    The committee will come to order.

    Today's hearing is about the need for tax reform and what lessons 
we can learn from the Tax Reform Act of 1986, the last successful 
overhaul of our nation's tax code.

    We have before us today two former Senators who were key to that 
effort. I look forward to hearing their thoughts and advice during 
today's hearing.

    Before we engage meaningfully in tax reform, we need a clear vision 
of what we want success to look like. A vision is not a specific system 
of rates, deductions, or credits. Instead, a vision is how we want to 
change the opportunities for American families and the rewards that 
Americans receive from their labor, entrepreneurship, and investment.

    A successfully reformed tax system will help make America the best 
place in the world to work, conduct business, invest, and prosper. A 
successfully reformed tax system will be one that promotes economic 
growth and is simple and fair. This, more than anything else, should be 
our vision for tax reform.

    The landmark Tax Reform Act of 1986 was developed by then-Chairman 
Bob Packwood through a careful and methodical bipartisan process that 
relied heavily on member input. Senator Bradley was a key part of that 
process.

    Over the last few weeks, we've begun a similar process that we hope 
will yield a similar result: tax reform legislation that both parties 
can support.

    The 1986 act, signed into law by President Reagan, reformed a 
costly and complicated tax system into a simpler one with lower tax 
rates for American households and businesses, affording them greater 
personal prosperity. Over time, our tax system has once again 
becomecostly and complex, impeding growth, standing in the way of 
shared prosperity, and placing American workers and businesses at a 
disadvantage.

    Put simply, it is past time for Congress to stand up once again to 
fix our broken tax system.

    If you've been around Washington over the last few years, chances 
are, you've already heard me talk about tax reform. I've been making 
the case for reform on the Senate floor, here in the Finance Committee, 
in public appearances, in written materials, and in private 
conversations.

    In December, the Republican staff of this committee produced a 
comprehensive report outlining the need for tax reform and providing 
some direction to our overall efforts. I'm sure everyone here has read 
that report--cover to cover.

    I've already publicly laid out seven principles that I believe 
should guide our tax reform efforts.

    I won't go into much detail on each principle today. Instead, I'll 
just talk about them briefly.

    The first principle is economic growth. Tax reform, if it's done 
correctly, should promote growth and significantly reduce economic 
distortions that are present under the current income tax system.

    The second principle is fairness. The income tax base, which has 
become riddled with exclusions, exemptions, deductions, and credits, 
should be as broad as possible. Tax reform should broaden the tax base 
by eliminating or reducing a number of tax expenditures, along with 
lowering tax rates, and removing distortions.

    The third principle is simplicity. Taxpayers and businesses spend 
over six billion hours a year complying with tax-filing requirements, 
with annual compliance costs in excess of $170 billion, which is more 
than the gross domestic product of New Zealand. Simplifying the tax 
code will result in greater clarity and compliance and will free up 
resources for families, job creation, and other productive uses.
    The fourth principle is revenue neutrality. Tax reform should be 
revenue neutral and not an occasion to raise taxes on American 
households or businesses. Federal revenues already exceed their 
historic average as a share of our economy, and greater revenue should 
not be an objective of reform.

    The fifth principle is permanence. The Joint Committee on Taxation 
lists almost 100 provisions in the tax code that will expire over the 
next decade. This is unacceptable. Familiesand businesses should be 
able to plan for the future without wondering if the tax code is going 
to change from year to year.

    The sixth principle is competitiveness. The combination of a high 
corporate tax rate, worldwide taxation, and the temporary nature of 
some tax incentives makes American companies less competitive when 
compared to their foreign counterparts. Tax reform should reduce 
burdens on businesses, large and small, to allow them to more 
effectively compete on the world stage.

    The seventh principle is the promotion of savings and investment. 
Many aspects of our current tax system discourage savings and 
investment, thereby hindering long-term growth. Savings and investment 
help build the capital stock, providing fuel for economic growth that 
generates prosperity for American workers and businesses.

    These seven principles are the guideposts I will use when looking 
at tax reform proposals.

    I think we're going to have an interesting hearing today.

    I look forward to hearing from Chairman Packwood and Senator 
Bradley to see what advice they can give us as we undertake our tax 
reform efforts in this Congress.

    I will now turn it over to Senator Wyden.

                                 ______
                                 
       Prepared Statement of Hon. Bob Packwood, Former Chairman, 
                          Committee on Finance
    The concept of tax reform is quite simple. If you assume that a 
country has an income of $1,000 and that the government needs $100 to 
run on then a 10 percent tax will produce the $100 needed. But now 
suppose that the government also allows taxpayers to take all kinds of 
deductions for things like charitable contributions and home mortgage 
interest. After all of the deductions are taken what remains is called 
the ``taxable income.'' In our hypothetical country let's say that's 
now only $500. If the government still needs $100 to run on, the tax 
rate now has to be 20 percent to raise the needed funds.

    Early in 1985, the Ways and Means Committee of the House of 
Representatives started having extensive public hearings on tax reform. 
They were numerous and extended over a long period of time, giving 
opponents of tax reform plenty of opportunity to gather, plot, 
organize, and attempt to kill the bill.

    Almost all the Republicans were opposed to the bill, not so much on 
substance, but procedural. They felt they had been left out of the 
drafting of the bill. A fair number of individual Democrats were also 
opposed because of diverse provisions they thought adversely affected a 
particular interest in their state. As a result not long after the bill 
came to the floor of the House of Representatives it had to be pulled 
before it would fail. But President Reagan contacted the Republicans 
and urged them vote for the bill saying that while he'd veto it in its 
current form, the Senate should have a chance to work on it. 
Acquiescing to their party leader, Republicans rallied and the bill 
passed the House; albeit by a voice vote. No one wanted their 
fingerprints on it.

    In the spring of 1986, the Senate Finance Committee started working 
on the bill sent to us by the House of Representatives. There was no 
enthusiasm for what we were doing. It was not big enough. Not strong 
enough. There was no grandeur. Support dwindled to the point that at 
noon on Friday, April 18, 1986, I exercised the chairman's prerogative 
and adjourned the committee saying that we were permanently done with 
this bill!
Friday, April 18--1:30 p.m.
I called David Brockway [Chief of Staff of the Joint Tax Committee--the 
fulltime professional group that advises Congress on taxes]. I asked 
him to come back with a bill with a 25 percent top rate. He said we 
would have to get rid of the mortgage interest deduction. I said what 
about 26 or 27 percent.
Friday, April 18--2:30 p.m.
I met with Secretary of the Treasury Jim Baker and his principal aide 
Undersecretary of the Treasury, Dick Darman. . . . I had nothing but 
theory to give them at the moment. They, of course, liked the theory, 
but more or less said where do we go from here.
Tuesday, April 22--6:00 p.m.
David Brockway stopped at the office with his figures for 25, 26 and 27 
percent top rate for individuals. His briefing gave me the outlines of 
what I needed to present to the committee.
Thursday, April 24--7:30 a.m.
Again and again I played with numbers balancing the attraction of the 
low rates versus the opposition we would get from eliminating certain 
deductions. I wanted a balance that would achieve the following:

    1.  Bring Democrats on board by getting rid of loopholes. This 
would bring in lots of money.

    2.  Bring the Republicans onboard by using the money raised to 
lower rates.

    3.  Bring economists, editorialists, and others onboard who wanted 
to get rid of deductions and achieve lower rates. They would also 
applaud the simplicity of the plan, an added bonus.

Thursday, April 24--9:30 a.m.
I called the committee together and presented the outline of what was 
possible. I still had no bill to show them, just concepts.
Diary, Thursday, April 24--9:30 a.m.
''Chafee thought it was wonderful. Bentsen spoke approvingly. Bradley 
spoke eloquently and forcefully. Danforth said it was the only chance 
for reform. Wallop said he liked the idea.''

    As I worked I recalled how the House of Representatives had almost 
floundered because of the yearlong public meetings allowing time for 
opponents to gather and oppose. They were already organized and I did 
not want to give them time to try and kill the Senate bill as well. If 
we wanted to pass this bill, it would have to be bipartisan, and work 
would need to be done in closed meetings and quickly.

    A small closed meeting with a bipartisan group of Senators was our 
only chance. I wanted the intellectual leaders of the committee on both 
sides. If I got them with me, I'd have the rest of the committee.

    I made some calls. On the Democratic side Pat Moynihan, of New York 
and my closest friend in the Democratic Party, Bill Bradley, of New 
Jersey, the guru of tax reform in the Senate, and George Mitchell, of 
Maine, a relatively newer member of the committee, but one I found so 
sharp that you could see ``leadership'' written all over him. On the 
Republican side Jack Danforth, of Missouri, John Chafee, of Rhode 
Island, both liberal Republicans, and Malcolm Wallop, of Wyoming, a 
very conservative Republican, and well regarded by other conservatives. 
Would they be willing to meet with me in closed meetings starting next 
Tuesday to see if we could fashion a bill acceptable to the President. 
To the man--they agreed.

    To stay ahead of the curve, starting Tuesday April 29, I met with 
staff every morning at 7:30. We discussed the details of whatever 
portion of the bill were to be discussed with the core group of the 
committee I'd put together. An hour later, at 8:30, the core group of 
Senators met and we strategized how to get the full Finance Committee 
on board with what we were planning. We would meet every morning 
thereafter, save Sunday, from Tuesday, April 29 to Tuesday, May 6.
Tuesday, April 29--8:30 a.m.
We agreed that from time to time we might invite some other Senator in 
if we wanted him for a specific purpose, but that the seven of us would 
form the loyal band. We decided that if any four of us could agree on 
something to be put in the bill all of us would agree. A smart 
decision, and one that was never used unfairly, I don't recall that 
there was ever a vote that broke four Republicans and three Democrats. 
I do, however, remember a couple of votes where I fell in the minority.
Diary, Tuesday, April 29--6:45 p.m.
``Met with Baker and Dick Darman, Bill Diefenderfer [my Finance 
Committee Chief of Staff] . . . Darman loves the plan. Baker is worried 
about the elimination of passive losses and what about those oil rigs 
and what about those limited partnerships in drilling for oil. Bill and 
I in essence said, oh, Jim, shut up. Here we are talking to the 
Treasury Secretary--shut up. Here you've got a plan. All we need you to 
say is we think it is wonderful. We'll get it to the President. Jim, 
we're going to wrap this up by Sunday.

    . . . You put in one pro forma appearance before the Senate Finance 
Committee Republicans and get your little tail out to Tokyo or wherever 
it is the President is going to be meeting. And leave Darman here to 
take care of the strategy and the details and we'll have this done 
before you get back, but don't start niggling and quibbling over 
minuscule details. Well they left pretty happy because it is a victory 
if we get it. It is like Disraeli and the Corn Laws. ``It doesn't 
matter what you win. It is that you won.''
Diary, Wednesday, April 30--8:30 a.m.
``I've still got to solve Bentsen's [Senator Lloyd Bentsen of Texas] 
problem about passive losses. . . . With that I can get Lloyd.''
Diary, Wednesday, April 30
``. . . Talked with Norm Winningstad [founder of Floating Point 
Systems] who is terribly upset about the elimination of capital gains 
and had a note from Tom Bruggere [founder of Mentor Graphics]. . . . He 
is terribly upset about the elimination of capital gains . . . two of 
our more successful high-tech firms. God, leadership exacts a toll, but 
I don't mind the flak. I'll mind it if I can't get the result. I'm 
willing to stop the buck here, but I want to get a result.''
Diary, Thursday, May 1--8:30 a.m.
``A downer--The core group. Boy, was it exciting. Moynihan, Bradley, 
Chafee, Danforth, Wallop, Mitchell--we're on our way. We are agreed and 
with Bentsen onboard we were sensational. Lloyd came in and said he 
couldn't agree to the passive income provisions. Nobody said a word. 
There were 20 seconds of silence. Lloyd said, boy I wished I had never 
come in. It did take all of the wind out of our sails. I went from Mt. 
Everest to Death Valley in 20 seconds.''

The problem with what Lloyd Bentsen wants is two-fold:

    1.  In this bill we have eliminated for everybody the very 
provision that Lloyd wants us to put back in solely for oil and gas.

    2.  If we put it back in for oil and gas alone, it's not a big 
revenue loser. If all the others who are losing this kind of provision 
get wind of it, they'll want to be included again and that loses so 
much money that the bill would be dead.
Thursday, May 1--2:00 p.m.
If the Senate agreed on our bill, we would need to come together with 
the House of Representatives to create one document that could pass 
both chambers. There were vast differences between the two bills. Danny 
Rostenkowski was Chairman of the House Ways and Means Committee. We had 
tangled earlier over another bill in conference. I was unjustifiably 
belligerent. I wondered if that would make the conference on this tax 
bill difficult. He quelled some of my fears by making a generous 
gesture.
Diary, Thursday, May 1--2:00 p.m.
``Back again to tax reform in closed session. Was interrupted by a 
phone call from Danny Rostenkowski. Bless his soul. He said, `Pal, I've 
been thinking of coming over there, without fanfare, without press, 
just to say I've been through it. I know every day you go through 
troughs and you're on hills and I've been bleeding for you but I think 
what you've got in terms of tax reform is the best thing this Congress 
has seen in ten years. You get that through the Senate and between the 
two of us, we're going to put out a bill that for a generation or 
longer America will look to as a pinnacle.' God, I appreciated it.''
Diary, Friday, May 2--7:30 a.m.
``Brockway, et al. God are these sessions valuable for me so I can be 
one jump ahead of the core group.''
Diary, Friday, May 2--8:30 a.m.
``The core group. And are these sessions valuable, so that the core 
group can be one jump ahead of everybody else.''

    The staff at 7:30 and the core group at 8:30 continued to meet in 
my office in closed meetings every morning. The open Finance Committee 
meetings followed later, but basically all the full committee did was 
mark time while the core committee worked. Even though we tried to keep 
our work secret, there are no secrets in Washington. Word was getting 
out. You could tell it by turnout of spectators at the committee 
meetings. On Monday, attendance was spare. By Friday, so many people 
jammed into the committee room that speakers had to be set up in the 
hallway so the overflow could hear.
Diary, Friday, May 2--10:30 a.m.
``Back to the backroom with all of the members. . . . I ducked into 
Bill D's office to call Jack Rosenthal at The New York Times. He is my 
old friend from Grant High School. I said, Jack, do you have any idea 
what we're doing on tax reform. He said, well, kind of a vague idea and 
I sensed that the vague idea he had was where we were several weeks ago 
and he didn't like what we were doing, but was polite enough he didn't 
want to say it. I said, Jack I don't know if you are up to speed, but 
as I recall from your editorials you like Bradley-Gephardt. What we are 
now working on is Bradley-Gephardt and I need some help from The New 
York Times with a good editorial. He said, well, I first need to find 
out from my people what it is you're doing. I said fine. If you need to 
find out anything here, call Bill Diefenderfer and here's the number. I 
then called Steve Rosenfeld at The Washington Post and told him roughly 
the same thing. He was a little more up to speed in what we're doing, 
but not much more. He didn't seem too receptive, but at least I made my 
pitch.''

    Shortly thereafter, ``Bill D. had gotten back to me and said he had 
talked with Rosenthal. They are going to do a New York Times editorial 
Sunday, called 
Packwood-Bradley-Gephardt. I think even Bill was surprised that I was 
able to pull that off.''

    Late Friday afternoon, May 2, I announced to the committee and the 
lobbyists, ``We're done for the day. In fact we're done for the 
weekend. The Finance Committee is not going to meet this weekend. It's 
too nice of a day. You all ought to be out sailing or playing golf.'' 
Raucous cheers. I said, ``We'll see you all next week.''

    I told everyone, that is, except the core group. I told them we 
would meet Saturday. I didn't want the other committee members, or 
anybody else, to know we planned to meet however.

    Not a lobbyist or committee member, other than the core group, 
showed up Saturday. A success.

    It was on that long, hot day that we made all the final decisions. 
Brockway needed two days to get the final draft back to us. We knew we 
could finish by Tuesday or Wednesday. I thought we were done--but not 
quite--the oilies wanted another bite of the apple.
Diary, Tuesday, May 6--2:30 p.m.
``The oil state Senators led by Boren, Bentsen, Russell Long, and 
accompanied by Bob Dole and Heinz . . . joined together with Baucus, 
Pryor, and Malcolm Wallop. Just enough to demand that we give an 
exception for working interest for oil.''

    We'd worked hard to eliminate this type of exception for all other 
businesses. They wanted it back for oil and gas.

    I had no doubt I could beat the oilies in committee at worse 12 to 
8, probably 13 to 7, and if I leaned on people 14 to 6.
Diary, Tuesday, May 6--10:00 p.m.
``. . . they were willing to give away immense quantities of money to 
get their little working interest provision which costs $700 million if 
you give it to those who are active in the oil industry or $1.4 billion 
if you allow non-active partners . . . I could see this whole thing 
becoming unraveled. We were going to give up great things for small 
things. We were going to give up closing loopholes worth $50 billion, 
lower rates, better corporate depreciation and a lower corporate rate. 
Everything for the sake of $1.4 billion and I resolved that at this 
stage the time for compromise had come. I called Lloyd Bentsen and 
said, `Lloyd, let me lay out a deal for you. You get working interests 
and you support the rest of the package,' He said it sounded like a 
good deal to him.''

    He then added as an aside, ``If there's a vote on this, Bob, I'm 
sure I can count on your vote.'' I said, ``Lloyd, you absolutely cannot 
count on my vote. I'm going to vote against it, but I will get you 
votes to pass it.''

    I knew--or at least sensed--something that the other members had 
not yet grasped. Our problem was not going to be in committee. The bill 
would pass. The problem would come on the floor. Our Achilles' heel in 
this bill was going to be the individual retirement accounts--IRAs. 
Through several years of research, we had discovered that the IRAs did 
not increase the total savings in the country, they simply resulted in 
upper-middle and upper income people shifting their savings to the tax 
preferred individual retirement account. IRAs were immensely popular 
and I knew that on the floor there would be a very close vote to 
restore what we had taken out. If this happened and IRAs remained the 
same, our bill would lose so much money it would die. To keep IRAs out, 
I needed the oilies in. I made the trade.
Diary, Tuesday, May 6--8:00 p.m.
``I called the members together at 8:00 p.m. in the backroom and we 
stayed in that backroom until 11:30 p.m.''

    It was in this three-and-half-hour period that all of the final 
important decisions were made.
Diary, Tuesday, May 6--10:45 p.m.
``We gradually hammered it down to the end. It's clear. We voted on 
working interest in the group. I voted with Bradley. The oil people won 
11-9, fortunately, because we would have had no deal without them. I 
had the best of all possible worlds. I was opposed to them and yet they 
won so we could have the deal. I rapped the gavel and we went out to 
the committee room.''

    Just before the final vote started, however, George Mitchell--one 
of the strongest members of my cabal--wanted to make a statement.

Senator Mitchell.

    ``Mr. Chairman, I think it ought to be clear that what we are doing 
here is establishing one rule for every American business, every 
American interest except oil and gas, and then a special rule for those 
in the oil and gas business.

    An American who invests in a project involving real estate, under 
legal circumstances identical to those with another person who invests 
in oil and gas, will be treated differently and to his disadvantage.

    An American who invests in an extractive industry, an American who 
invests in any other business but oil and gas, even though under 
identical circumstances, will be treated in a wholly different fashion, 
and those who invest in oil and gas will be treated in a preferential 
fashion even though the circumstances are identical.

    I can see no justification for that. No rational basis has been 
offered. No standards by which such a distinction can be made has been 
suggested. All we are saying is that we are going to give special 
treatment to one industry and one category of persons and everybody 
else will be treated differently.''

    Of course George Mitchell was right. Without speaking to any of the 
core group of six who so fully supported me I made a deal with Bentsen 
and I had yet to explain to the others why. They would later learn my 
reasons, but I couldn't tell them yet.

    After eleven closed meetings over seven days, seven of the core 
group and four of the full committee--final passage came--20-0! We had 
raised the taxes significantly on corporations and rich individuals. 
They would pay more and middle income and the poor would pay less, and 
we accomplished all this while at the same time lowering the top 
corporate tax rate from 48 to 34 percent and the individual tax rate 
from 50 to 27 percent. The bill was revenue neutral and was as 
progressive as the existing tax law.

    Not a bad week's work.

    We concluded with a champagne party in Bill Diefenderfer's office.

     Dick Darman placed a phone call to Jim Baker who was in Tokyo with 
Ronald Reagan at one of those multi-nation economic meetings. I, of 
course, heard only Darman's end of the conversation.

    ``Jim, just tell him to shut up. He's going to like this bill, but 
he's got friends who aren't going to like a lot of this bill. Don't let 
them get to him before I have a chance to get to you and explain 
everything that has happened. Let me emphasize again. He is going to 
like this bill.''


                   MAJOR AMERICAN COMPANIES PAYING ZERO OR LESS IN FEDERL INCOME TAX, 1981-83
----------------------------------------------------------------------------------------------------------------
                                                       Federal Income Tax  (in
      Company            Profits  (in millions)               millions)                       Tax Rate
----------------------------------------------------------------------------------------------------------------
General Electric                         $6,527.0                        -$283.0                          -4.3%
----------------------------------------------------------------------------------------------------------------
Boeing                                   $1,530.0                        -$267.0                         -17.5%
----------------------------------------------------------------------------------------------------------------
Lockheed                                 $1,085.0                             $0                             0%
----------------------------------------------------------------------------------------------------------------
General Dynamics                           $930.8                         -$70.6                          -7.6%
----------------------------------------------------------------------------------------------------------------


                                   Time Magazine, November 26, 1984

                              INDIVIDUALS

    ``A total of 230 of the nation's wealthiest individuals paid no 
federal income taxes in 1975.''

                                The Associated Press, March 3, 1977

    ``The Internal Revenue Service says 198 couples or individuals with 
incomes above $200,000 used deductions and credits to wipe out all 
their federal income-tax liability in 1980.''

                            The Associated Press, November 16, 1982

    ``Almost 30,000 couples and individuals with income tax above 
$250,000 paid little or no federal income tax in 1983, the Treasury 
Department said Thursday.''

    ``As many as 306 people who earned over $1 million paid no tax,''

                               The Associated Press, August 1, 1985

    ``Consider the 28,000 persons whose 1983 incomes were $1 million or 
more. More than 300 of them paid not a dime in taxes.''

                       The Los Angeles Times Mirror, August 6, 1985

    ``. . . 55,000 taxpayers with incomes exceeding $250,000 paid a 
lower percentage of their income in federal taxes than the average 
middle-income family or four.''

    ``Perhaps even more striking, 3,170 taxpayers who earned more than 
$1 million in 1983 paid virtually no tax at all. At least 1,900 of 
these high earners paid no tax at all.''

                                     Time Magazine, August 12, 1985

        10 BIGGEST REVENUE RAISERS IN THE TAX REFORM ACT OF 1986
                    (revenue increase in $ billions)
 
                                           Revenue Gain_FY 1987-1991
 
                                         Total    Individual   Corporate
 
 1. Repeal investment tax credit....       $143         $24        $119
 2. Impose uniform capitalization           $32           0         $32
 rules (e.g., require manufacturers
 to delay deductions for more of
 their expenses until they get paid
 for the goods they make)...........
 3. Strengthen minimum tax..........        $30          $8         $22
 4. Limit interest deductions (e.g.,        $29         $29           0
 consumer interest).................
 5. Repeal second earner deduction..        $27         $27           0
 6. Limit IRA deductions............        $24         $24           0
 7. Eliminate passive loss                  $23         $36        -$13
 deductions (the $23 total is a net
 of $36 increase for individuals and
 $13 cut for corporations)..........
 8. Repeal sales tax deduction......        $21         $20          $1
 9. Impose 2% floor for deduction of        $19          $5           0
 employee business expenses (e.g.,
 union and professional dues).......
10. Restrict depreciation...........        $13          $5          $8
 
 
Source: The Bluebook for the Tax Reform Act of l986 (published by Joint
  Committee on Taxation).


                                 ______
                                 
        Questions Submitted for the Record to Hon. Bob Packwood
               Question Submitted by Hon. Orrin G. Hatch
    Question. I wanted to ask you about the Tax Reform Act of 1986 and 
in particular its suitability for today. Numerous commentators say that 
the Tax Reform Act of 1986 was a wonderful piece of legislation, and 
it's too bad that the tax code doesn't look like that anymore. My 
question is: Should we indeed go back to that? That is, if the Tax 
Reform Act of 1986 was so great, should Congress just have an up or 
down vote on that? No amendments allowed? I am not necessarily 
advocating that, but it does make me wonder. I realize there is a lot 
both sides of the aisle would lose with the Tax Reform Act of 1986 
simply being re-enacted, without any amendments. For example, most 
Republicans would not like losing the preferential tax rate for capital 
gains and some of the exceptions to the subpart F rules such as the 
Active Financing Exception. Most Democrats would not want to lose the 
10 percent tax bracket or the many refundable tax credits that have 
worked their way into the tax code over the years. But there would be 
much that both sides could be happy about. For example: There would 
only be two individual tax rates, 15 and 28 percent. That would be a 
lot better than the six rates we have today, which effectively range 
into the mid-40s. The corporate rate would go down to 34 percent (not 
nearly enough, in my opinion, but slightly better at least than the 
current 35 percent).

    We would get rid of the deliberately hidden marginal tax rate 
increases known as PEP and Pease. Numerous tax expenditures that 
clutter and complicate the code would be eliminated. Again, I want to 
emphasize that I am not necessarily advocating this. But I would want 
to know why, if the Tax Reform Act of 1986 was so great, then why not 
simply re-enact here in 2015, word-for-word, the Tax Reform Act of 
1986?

    Answer. Reenacting the 1986 Tax Reform Act is an interesting idea. 
First thing I would do is ask the Joint Tax Committee to do a revenue 
estimate. Remember that in 1986 we lowered the corporate tax rate from 
48 to 34 percent and still managed, over a 5-year period, to increase 
taxes on business by $140 billion. We then used that money to lower 
individual rates. You can imagine how much fat there must have been in 
the corporate tax code at that time if you could lower their rates from 
48 to 34 percent and still raise $140 billion.

    In any event, I don't have now an exact idea of all of the major 
changes that have been made in the act since that time, but probably 
scores of minute ones that collectively might add up to some money.

    A perfect example: The 1986 act eliminated deduction of the state 
sales tax. Years later it was put back in.

    If you reenact the 1986 Tax Reform Act you will pick up a lot of 
money by eliminating deduction of the state sales tax.

    You see the questions I would have. For a matter of pride, I would 
love to have it reenacted. Please put my name on it as it the Packwood 
Re-Reform Tax Act of 2015.
                                 ______
                                 
                Questions Submitted by Hon. Dean Heller
    Question. In your witness testimony, Senator Packwood, you discuss 
the tough trades you and the committee had to make in order to keep tax 
reform moving forward. Looking back, is there anything significant you 
would have done differently?

    Answer. We had no choice but to follow the procedures we adopted. 
Without them there would have been no tax reform bill. The bill had 
almost died in the House. Only President Reagan's personal intervention 
caused the bill to pass the House. And he promised he would veto it if 
it came to him in form that it passed the House. He said, however, give 
the Senate a chance to work on it and let's see what happens. With that 
the House grudgingly passed it. Ironically, it was on a voice vote. No 
one wanted their fingerprints on it.

    In the Senate for the better part of a month I was making no 
progress. The bill wasn't getting worse. It wasn't getting better. We 
were more or less treading water. It was time for a Hail Mary. These 
were in the days when you could work across party lines. I asked six 
Senators--three Democrats and three Republicans--to join me in my 
office at 8:30 a.m. every morning in secret meetings to see if we could 
reach some kind of an agreed compromise. I picked the intellectual 
heavyweights of the committee on both sides. If I had them with me, 
they could bring the rest of the committee members. The Democrats were 
George Mitchell, of Maine--later Majority Leader--Pat Moynihan, of New 
York, and Bill Bradley, of New Jersey. The latter had been the 
Democratic guru on tax reform for a number of years. On the Republican 
side I picked Jack Danforth, of Missouri, John Chafee, of Rhode Island, 
and Malcolm Wallop, of Wyoming. We met for only seven days and in those 
seven days we worked out the bill that we wanted.

    The problem was the oil industry wanted a specific provision put 
back into the bill that had been taken out for every business in 
America. They controlled seven, maybe eight, votes on the committee. I 
could have beaten them in committee, but then would have lost their 
support and the bill would have passed committee 12-8 or 13-7 rather 
than 20-0. But more importantly I needed their vote on the floor of the 
Senate on what I knew would be the only amendment I might loose and if 
I lost it, the bill was dead.

    That amendment involved IRAs (Individual Retirement Accounts). We 
had severely limited eligibility for IRAs. As you can imagine, there 
wasn't any overwhelming public constituency for limiting IRAs only 
fierce objection from every side. When the tax bill was on the floor, 
an amendment was offered to restore the IRAs to the present law. I 
defeated the amendment 52-48. Without the oil Senators that amendment 
would have passed. The revenue loss would have been so great that the 
bill was dead.

    So, yes, there is nothing different I could have done then. The key 
now is can you put together the same kind of bipartisan coalition--and 
especially a coalition of the leaders on the committee in both parties. 
If not, I see no hope of a bill becoming law that it passed through 
with purely Republican votes. It would either be filibustered or if 
passed, vetoed.

    Question. As you are aware, one of the great stories of the Tax 
Reform Act of 1986 is when President Reagan came to the hill to make a 
personal plea to his own party to keep tax reform alive. The following 
day the House passes the bill by voice vote. In your opinion, can tax 
reform happen without presidential leadership?

    Answer. The President's support was absolutely critical on the 
bill, but it was not necessarily his personal support. Jim Baker was 
his Secretary of the Treasury. Everyone knew he spoke for the 
President. He and his principal aide, Under Secretary of the Treasury 
Dick Darman, were heavily involved in the negotiations in the Senate as 
we were working on the Senate bill. The irony is, however, in that 
seven-day period when the bipartisan group was meeting in my office, 
the President and Jim Baker were overseas at one of those multi-nation 
economic meetings. Dick Darman carried all of the weight for the 
Administration during those seven days. But we all knew he spoke for 
the President. The support was critical.

    I see no likelihood of a bill passing without Presidential support. 
The support could be in the form of a powerful Treasury Secretary that 
could speak for him, and you knew the Treasury Secretary did speak for 
him. But if a President attempts to tell the Congress, ``You folks work 
on it and I'll take a look at what you pass.'' Nothing will pass. 
You're going to ask Members to make very tough votes. They're not going 
to do it if they think in the end the President will not support the 
bill.
                                 ______
                                 
                 Prepared Statement of Hon. Ron Wyden, 
                       a U.S. Senator From Oregon
    If there's one obvious similarity between 1986 and today, it's that 
people are quick to say tax reform is impossible. They say Congress 
can't organize a two-car parade--there's no way they can come together 
on major economic legislation. So what happened three decades ago will 
need to happen again: turning the impossible into the possible.

    Congress and President Reagan came together to pass the 1986 Tax 
Reform Act based on what I call principled bipartisanship. One side 
wanted to flatten the tax structure. The other side wanted to close 
loopholes and guarantee the tax code treated everyone fairly. So they 
set aside the partisan attacks, looked for common ground, and each side 
came away with the feeling that it had upheld its principles.

    When President Reagan signed the bill into law, he called it an 
``historic overhaul of our tax code and a sweeping victory for 
fairness.'' He continued, ``. . . it's also the best antipoverty bill, 
the best pro-family measure, and the best job-creation program ever to 
come out of the Congress of the United States.'' Those same objectives 
should guide the committee and Congress as it again works to modernize 
our tax system. Reforming the tax code is always a Herculean task, but 
the same strategy of principled bipartisanship can work again today. 
Congress can turn the impossible into the possible.

    However, policymakers need to recognize that the process will look 
different. Not every part of a 30 year-old game plan for tax reform can 
work today.

    China and India are now superpowers in the global economy, which is 
a much bigger factor in reform. The gulf between wage earners and the 
top of the income ladder has widened. And America is at its best when a 
rising tide lifts all boats, and it should be obvious that making that 
a reality once again will take work.

    The status of the middle class in Oregon and across the country is 
at the top of the list of compelling issues for tax reform to address. 
It is fundamentally unfair that a middle-class wage earner could pay a 
higher tax rate than an affluent person whose earnings come entirely 
from investments. The tax code should never punish wage earners. And 
many tax incentives for college education and retirement savings are 
out of whack. The support those incentives provide doesn't always get 
to people most in need, and that ought to change.

    Another challenge is making the U.S. more competitive in the global 
economy. Today, the U.S. is trying to win a road race in a thirty-year 
old car. Our competition, meanwhile, is trading up to more efficient 
models. America has not done enough to drive innovation at home, and 
worse, the tax provisions for R&D expire year after year.

    In 1986, there wasn't a lot of talk about the tax code and a clean 
energy future in the United States. That has to change.

    And finally, modernizing our tax code must be done in a fiscally 
responsible way. Tax reform cannot become an exercise in slashing rates 
at any cost.

    The biggest lesson from 1986 is that tax reform is possible when 
Democrats and Republicans set partisanship aside, come together and 
focus on shared principles. Over the years, I've talked with Senator 
Bradley about how tax reform is totally, entirely, completely 
impossible--right up until it happens. The Finance Committee has two 
experienced, knowledgeable witnesses who will help us get closer to 
that point today.

                                 ______
                                 

                             Communications

                              ----------                              


Statement for the Record for:

Getting to ``Yes'' on Tax Reform:

What Lessons Can Congress Learn From the Tax Reform Act of 1986?

Tuesday, February 10, 2015

ATTN: Working Group on Savings and Investment

The following statement is submitted by The ESOP Association located at 
1726 M Street, NW, #501, Washington, D.C. 20036, phone 202-293-2971. 
The person who drafted the following statement is J. Michael Keeling, 
President, The ESOP Association, email [email protected].

The ESOP Association is a 501(c)(6) business trade association with 
approximately 2,800 members. Its mission is to educate and advocate for 
broad-based employee ownership among U.S. Employees via the ESOP model.

The statement begins below:

For Chair Crapo and Ranking Member Brown, and members of the Tax Reform 
Working Group on Savings & Investment:

    This statement provides a brief history of employee stock ownership 
plans (ESOPs) and evidence that the ESOP model of employee ownership is 
spot on with six of Chair Hatch's seven principles for comprehensive 
tax reform, and arguably exceeding the seventh principle.

    The seven principles for comprehensive tax reform are:

    1. Economic Growth;
    2. Fairness;
    3. Simplicity;
    4. Permanence;
    5. Competitiveness;
    6. Promoting Savings and Investments; and
    7. Revenue Neutrality.

                            What Is an ESOP?

    Unique among ERISA plans, an ESOP, by law, must be primarily 
invested in the highest class of stock of the plan sponsor and the 
stock may be acquired with borrowed funds. In practical terms, the plan 
sponsor may take on ``debt'' to acquire shares of the sponsor, and not 
be engaged in a prohibited transaction if the shares are acquired by 
the ESOP trust at a price no greater than the fair market value.

                         Brief History of ESOPs

    The ESOP model of employee ownership actually has its roots in a 
compensation practice from the 19th Century. (A recent book, The 
Citizen's Share, Blasi, Freeman, and Kruse, Yale Press, wrote a very 
convincing case, pages 1-56, that our founding fathers, such as 
Washington, Jefferson, Adams, Hamilton, et al., believed in broad 
ownership of productive assets as being essential to the survival of a 
democracy. President Lincoln's views, as evidenced by the Homestead 
Act, were also in sync with our founding fathers' views.)

    As the U.S. economy moved into the industrial age, corporations 
with nationwide reach, and large numbers of employees emerged--Procter 
& Gamble, Montgomery Ward, and others. Leaders of these companies 
realized that some employees would work for many years, reach an age 
requiring retirement, and retire with no income. There was no 19th 
Century safety net for retirees, and leaders of a number of national 
firms decided to set aside company stock for the employees to have when 
they retired, and to ``cash in.''

    After World War I, and the ratification of the 16th Amendment to 
the Constitution authorizing a national income tax, Congress recognized 
that taxing income was not so simple, and that many issues had arisen 
because the basic definition that income is anything of value received 
by an individual, and the general rule that an income tax should tax 
anything of value.

    In response to questions of what income should be taxed, Congress 
developed the very first true income tax code, the Code of 1921.

    In developing the Code, those firms that were setting aside stock 
for their retiring employees came to the House Committee on Ways and 
Means and asked--``Is the stock set aside for an employee's retirement 
taxable when set aside, and is the value of the stock an employer's 
compensation cost?''

    The Ways and Means Committee decided no, it was not current income 
to the employee, but would be taxed when the employee realized the 
previously deferred income; and yes, the set aside was compensation, 
and thus a cost of business for the employer and thus deductible for 
income tax purposes.

    Thus, the first deferred compensation plan recognized by Congress 
was the ``stock bonus plan,'' the forerunner of today's ESOP.

    Fast forward to post War World II and owners of privately-held 
businesses began to consider how to ``exit'' their businesses and 
``cash'' in their non-tradable stock in the company they started and 
which had become successful because of the hard work of the company 
employees. While somewhat lost in history due to the fact that until 
the mid-1970s private letter rulings were not public documents, an 
owner in Alaska, followed by others, obtained permission from the IRS, 
in a non-public letter ruling, that the company could ``buy'' his stock 
with borrowed money, have the stock placed in the company's stock bonus 
plan, and have the stock allocated to the employees as the debt was 
paid off.

    A true visionary in San Francisco, California, Dr. Louis O. Kelso, 
developed a comprehensive economic philosophy in using such a method 
for funding stock bonus plans to expand ownership in a capitalistic 
society and to facilitate capitalization of for-profit businesses. He 
and his law firm colleagues led the way in expanding the use of this 
method blessed by the letter rulings, and many correctly note that the 
first ``ESOP'' was the sale by exiting shareholders of the Monterrey 
Press north of San Francisco in 1957 to an ESOP.

    By the mid-1950s, many, both conservative and liberals, were seeing 
abuses in the area of pensions, or tax qualified deferred compensation 
plans, which the tax laws sanctioned and encouraged. Evidence was 
overwhelming that some pension funds were investing in organized crime 
activities. Then there was the collapse of major U.S. employers, 
leaving employees with no retirement income as promised. As a result, a 
drive in Congress to ``reform'' the tax and labor laws governing tax 
qualified deferred compensation plans, or ``retirement savings plans,'' 
led to the enactment of ERISA in 1974.

    During Congressional work on these ``tax qualified deferred 
compensation plans,'' a major influence on tax policy of that era, 
Senator Russell B. Long, long time chair of the Senate Committee on 
Finance became a champion of the economic philosophy of Dr. Kelso, and 
made sure the new ERTSA law sanctioned ESOPs.

    His support for the ESOP model grew stronger with each passing 
year, and his leadership led to major enactment of tax laws promoting 
the creation and operation of ESOPs. The bulk of these laws passed in 
1984, in legislation referred to as DEFRA, and the perfection of those 
laws was in the Tax Reform Act of 1986.

    Many of these laws of the 1980s remain in the Code, and were 
evidenced and endorsed repeatedly by the Finance Committee members in 
hearings, and tax law legislation of the late 80s through the late 90s, 
even after Senator Long retired in 1987.

    To be noted, a major partner with Senator Long promoting ESOPs in 
the 80s through 1988, was former President Ronald Reagan, who often 
spoke of his view that widespread ownership of productive assets was 
the core of maintaining equitable wealth ratios in a capitalistic 
society.

    And, after Senator Long retired, his successor in the Senate, 
former Senator John Breaux, led the expansion of ESOP law in the 1996-
1997 tax bills permitting S corporations to sponsor ESOPs. Since 
Senator Breaux's work to expand ESOPs, the number of 100% ESOPs that 
are S corporations has exploded. (There are out of the estimated 10,000 
ESOP companies, an estimated 3,000 are 100% ESOP.)

    In sum, the work you are doing is part and parcel of a long, 
supportive policy of the Finance Committee's developing laws to have 
average pay employees, or workers if you will, be owners as being good 
for the employees, good for their employer, and good for the well-being 
of our economy and democracy.

                     ESOPs and the Seven Principles

    1. Economic Growth: The laws, most originating in the Committee on 
Finance, that encourage the creation and operation of employee owned 
companies utilizing the ESOP model, are not industry specific; thus 
unlike many special tax rules that benefit certain taxpayers, there is 
no one area of the economy to claim, or discredit the claim that law x, 
or y, or z, caused the industry, or set of industries, to grow and 
provide more jobs.

    But there is considerable evidence that ESOP companies outperform 
similar conventionally owned businesses in terms of profitability, 
productivity, sales, job sustainability, with the jobs in the United 
States.

    One macro statistic that underlies the view that ESOP companies are 
more likely to be providing growth arises from data from the General 
Social Survey of 2010 that employee stock owned companies laid off 
employees at a rate of less than 4% during the Great Recession of 2008-
2010, whereas conventionally owned companies laid off employees at a 
rate of greater than 12%. While one can do some speculation why as a 
rule employee stock owned companies were able to keep average pay 
employees on the payroll during the Great Recession, a common sense 
view would be that these companies were performing better than 
conventionally owned companies.

    Any economist would agree that the more people work and have 
income, the more the economy can grow, as people with money from their 
jobs, buy things--from big ticket items such as a car, to a small 
ticket item such as chewing gum.

    And, as Attachment 2 displays, there is a law, that originated in 
the Senate, 90 Stat. 1520, Pub. L. 94-455, Section 803, that clearly 
states Congress has passed laws to encourage ESOPs in order to 
strengthen the free enterprise system because the method of creating 
ESOPs solves the problems of securing capital funds for necessary 
capital growth. Capital growth and economic growth are interchangeable.

    Attachment 1 summarizes the data that the reason Congress passed 
laws to encourage capital, or economic growth, has been met over the 
past 40 plus years. In fact, given the experience of this nation with 
the limited number of ESOP companies, a strong case can be made that 
there should be more employee owned companies via the ESOP model if the 
Congress wants to see more economic growth, particularly in the global 
economy in which we live.

    2. Fairness: The core attraction of ESOPs is having policy to 
increase the wealth of average pay employees, not just the already 
wealthy, without ``taking'' from those who have wealth and who may have 
done the most to create successful businesses that provide jobs and 
opportunity. The fairness attraction of ``shared'' ownership is a fact, 
as noted by leaders from George Washington to Abraham Lincoln to Ronald 
Reagan, and many others.

    3. Simplicity: The primary beneficiary of employee ownership via 
the ESOP model, the average pay employee, does not face complexity of 
any significance due to the fact she/he has a share of ownership of the 
company where she/he works because of participation in an ESOP.

    Certainly, when the employee owner cashes out of an ESOP, she/he 
faces the matter of paying taxes on his/her money. And to claim the 
ESOP model is too complex for the company sponsor of an ESOP compared 
to its benefits would be a stretch.

    4. Permanence: Congress, both House and Senate, have consistently 
maintained for over 40 years the core laws, and benefits of ESOP. Yes, 
during the second half of the 1980's, Congress tweaked some of the 
1984/1986 special tax benefits for ESOPs, but all the key benefits were 
maintained. In the late 1990's, Congress added law to permit S 
corporations to maintain ESOPs. This 1996/1997 pro-ESOP law was tweaked 
in 2001 to stop anyone from creating a flim flam S ESOP, but the S ESOP 
law's intent is still maintained.

    And is the permanence of ESOP law an oversight by the Congressional 
tax committees? No, as evidenced by fact that the Tax Reform proposal 
released February 26, 2014, by former Chair of the House Ways and Means 
Committee, Dave Camp after over a year of closed door review of current 
Federal tax law, did not alter any specific ESOP law. And evidence is 
strong that the majority members of Ways and Means were presented 
options by staff to diminish ESOP tax laws, as staff did so for all 
special tax laws, as is the standard procedure in a tax reform effort.

    5. Competitiveness: Years of research, by reputable academics and 
think tanks, make an overwhelming case that ESOPs are more competitive 
than conventionally owned companies. As already noted Attachment 1 
provides more details about the macro data evidencing that employee 
owned companies are more competitive, but highlights are: In Shared 
Capitalism at Work, edited by two Rutgers University professors--Blasi 
and Kruse--and a Harvard professor--Freeman--it was evidenced that 
employee owned companies had harder working employees that work harder, 
had a low turnover, had greater job security, better labor management 
relations; work by Dr. Brent Kramer in his dissertation for City 
University of New York evidenced that majority employee-owned 
companies, using size and sales comparables, had an over 8% average of 
more sales per employee; and in the late 20th Century, in a review of 
closely held ESOP companies, which are the majority of American 
businesses, for over a decade, with 1,100 ESOP companies compared to 
similar 1,100 conventionally owned companies, evidenced that the ESOP 
companies had better sales, and were more likely to remain in business 
over an eleven year period.

    6. Promoting Savings and Investments: Data collected by various 
researchers in the field of retirement savings indicated that on 
average, ESOP account balances are greater than other retirement 
savings, in defined contribution plans. Data collected from ESOP 
companies collected each year by The ESOP Association indicates the 
average account balances--keeping in mind averages are for those 
relatively ``new'' employee with only a few years of allocations to 
their accounts, and, for example the balances of long-term employees of 
ESOP participants, is over $200,000, whereas data released by a variety 
of retirement savings researchers indicate average balances in the 
popular 401(k) plans to be approximately $85,000. (While anecdotal, and 
thus not impressive to ``researchers'' the author of this document, 
Michael Keeling, President of The ESOP Association has visited 
personally in over 500 ESOP companies the past two decades, and has 
heard many, many times of distributions from ESOPs to average pay 
employees in the $500,000 to $1 million plus range.)

    7. Revenue Neutrality: There is no way, based on the historical 
methods used by government revenue estimators, by employees of the 
Executive and Congressional branch of our government, not to says 
special ESOP tax benefits are revenue losers to the tune of around $2 
billion each year.

    But, once it became evident that during the Great Recession that 
employee stock owned companies laid off people at a rate of less than 
4% compared to conventionally owned companies that laid of employees at 
a rate of more than 12% in the same time line, one had to step back and 
say, ``Wait a second--what if there had been no employee stock owned 
companies during the Great Recession, and the companies all laid off 
employees at a rate of more than 12%, how much money would Uncle Sam 
not collect--in other words, how much money did ESOP companies save 
Uncle Sam during the Great Recession as ESOP companies had more people 
paying income taxes, Social Security taxes, and Medicare taxes in the 
2010 period?'' Using an average income tax rate of 8% for the average 
pay worker, the National Center for Employee Ownership calculated that 
these ESOP companies, by keeping people at work, because they are more 
competitive, put into Uncle Sam's Treasury over $14.5 billion more than 
if they had worked for those companies with 12% plus lay off rates, or 
approximately seven times more revenue than the $2 billion revenue loss 
because of the ESOP laws encouraging the creation and operation of ESOP 
companies.

    Yes, ESOP tax benefits may not be revenue neutral, but the fact is 
that ESOP companies pay a lot more to Uncle Sam than conventionally 
owned companies because ESOP company employees are more likely to have 
sustainable jobs triggering tax payments to Uncle Sam.

    Thus to say ESOP laws are hurting Federal revenue collection is not 
supported by solid evidence gleaned from the General Social Survey of 
2010.

    Conclusion: Laws to promote the creation and operation of employee 
owned companies through the ESOP model are more than justified because 
ESOP laws meet the seven criteria set forth by Chair Hatch to use when 
judging, are the laws good for America? Bottom line, ESOPs are more 
productive, more sustainable, with jobs controlled by U.S. interests, 
providing better retirement savings for average pay workers than other 
savings plans, and making our nation more competitive.

                                 ______
                                 
                              attachment 1

            Employee Owner Impact on Corporate Performance--

            Positively Overwhelming Evidence ESOP Companies

        More Productive, More Profitable, and More Sustainable,

                   Providing Locally Controlled Jobs

 During the Great Recession, employee stock owned companies laid off 
    employees at a rate of less than 3%, whereas conventionally owned 
    companies laid off at a rate greater than 12%. (Data source: 2010 
    General Social Survey.)

 Because employees of ESOP companies were four times more likely to 
    retain jobs during the Great Recession, Federal government 
    recognized savings of over $14 billion in 2010 compared to tax 
    payments foregone by laid off employees of conventionally owned 
    companies; in other words for every $1 in tax expenditures to 
    promote employee stock ownership, the Federal Government collected 
    $13 in taxes. (Data Source: 2010 General Social Survey analyzed by 
    National Center for Employee Ownership.)

 A survey of 1,400 ESOP companies in 2010 evidenced the average age of 
    the companies' ESOPs were 15 years, and the average account 
    balances for employees were nearly $200,000, much higher than data 
    reported for average 401(k) account balances. (The ESOP Company 
    Survey, 2010, of The ESOP Association's Corporate members.)

 According to 2012 General Social Survey, 13% of employees of employee 
    stock-owned companies were thinking of seeking employment 
    elsewhere, whereas 24% of the employees of conventionally-owned 
    companies were considering leaving their current job.

 In the summer of 2014, the Employee Ownership Foundation released 
    results from the 23rd Annual Economic Performance Survey (EPS) of 
    ESOP companies. Since the Employee Ownership Foundation's annual 
    economic survey began 23 years ago, a very high percentage, 93% of 
    survey respondents, have consistently agreed that creating employee 
    ownership through an ESOP was ``a good business decision that has 
    helped the company.'' It should be noted that this figure has been 
    over 85% for the last 14 years the survey has been conducted. In 
    addition, 76% of respondents indicated the ESOP positively affected 
    the overall productivity of the employee owners. In terms of 
    revenue and profitability--70% of respondents noted that revenue 
    increased and 64% of respondents reported that profitability 
    increased. In terms of stock value, the majority of respondents, 
    80%, stated the company's stock value increased as determined by 
    outside independent valuations; 18% of the respondents reported a 
    decline in share value; 2% reported no change. The survey also 
    asked respondents what year the ESOP was established. Among those 
    responding to this survey, the average age of the ESOP was 16 years 
    with the average year for establishment being 1998.

 More than half of the ESOP companies have two retirement savings plan 
    (primarily a 401(k)), whereas more than half of all companies have 
    no retirement income savings plan. (Analysis of forms 5500, and 
    Bureau of Labor Statistics by the National Center for Employee 
    Ownership, funded by the Employee Ownership Foundation.)

 The average ESOP company (less than 200 employees) has sales $9 
    million more per year than its non-employee owned comparable 
    competition (June 2008 Dissertation, Dr. Brent Kramer, CUNY.)

 A study of 1,100 ESOP companies over eleven years compared to 1,100 
    comparable conventional owned companies evidenced the 1,100 ESOP 
    companies had better sales, more employment, and were more likely 
    over the period to remain independent businesses by 16%. (Most 
    detailed study of ESOP companies by Dr. Joseph Blasi, and Dr. 
    Douglas Kruse, tenured professors, Rutgers University School of 
    Labor and Management, 1999.)
                              attachment 2

                            This Is the Law!

90 Stat. 1520, Pub. L. 94-455

    (h) Intent of Congress Concerning Employee Stock Ownership Plans.--
The Congress, in a series of laws (the Regional Rail Reorganization Act 
of 1973, the Employee Retirement Income Security Act of 1974, and the 
Tax Reduction Act of 1975) and this act has made clear its interest in 
encouraging employee stock ownership plans as a bold and innovative 
method of strengthening the free private enterprise system which will 
solve the dual problems of securing capital funds for necessary capital 
growth and of bringing about stock ownership by all corporate 
employees. The Congress is deeply concerned that the objectives sought 
by this series of laws will be made unattainable by regulations and 
rulings which treat employee stock ownership plans as conventional 
retirement plans, which reduce the freedom of the employee trust and 
employers to take the necessary steps to implement the plans, and which 
otherwise block the establishment and success of these plans. (Pub. L. 
94-455, 90 Stat. 1520)

                                 ______
                                 

                                  NFIB

                The Voice of Small Business'

                              www.nfib.org

                        STATEMENT FOR THE RECORD

                        Senate Finance Committee

                           February 10, 2015

``Getting to `Yes' on Tax Reform: What Lessons Can Congress Learn from 
                     the Tax Reform Act of 1986?''

Chairman Hatch and Ranking Member Wyden, thank you for the opportunity 
to submit this statement for the record regarding the importance of 
comprehensive tax reform that includes both corporations and pass-
through entities.

During the Senate Finance Committee hearing on February 10, 2015, the 
Honorable Bob Packwood and the Honorable Bill Bradley discussed their 
views on tax reform and whether Congress should focus on business-only 
reform, individual-only reform, or comprehensive reform that addresses 
corporations of all sizes as well as individuals. Both witnesses 
expressed the opinion that comprehensive tax reform is imperative due 
to the way the corporate and individual tax codes are intertwined. As 
Mr. Bradley rightfully acknowledged, they are two sides of the same 
coin.

NFIB is the nation's leading small business advocacy organization, 
representing 350,000 small business owners, and we commend the 
Committee for starting the tax reform discussion and actively working 
to make reform a reality. According to an NFIB study of small business 
owners on taxes and spending, eighty-five percent of our members agree 
that Congress should reform the tax code.\1\ However, NFIB shares the 
views of Mr. Packwood and Mr. Bradley that tax reform should be 
accomplished in a comprehensive manner.
---------------------------------------------------------------------------
    \1\ Taxes and Spending: Small Business Owner Opinions--NFIB Member 
Poll, NFIB Research Foundation.

Seventy-seven percent of NFIB members,\2\ and seventy-five percent of 
small businesses across America,\3\ are organized as pass-through 
entities and pay their taxes at the individual rates. These pass-
through businesses employ a majority of the private sector workforce 
and comprise over half of all net businessincome.\4\ These businesses 
are critical engines in our nation's economy and simply cannot be 
ignored in the tax reform process.
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    \2\ Taxes and Spending: Small Business Owner Opinions--NFIB Member 
Poll, NFIB Research Foundation, Washington, DC, March 2013.
    \3\ Tax Complexity and the IRS--NFIB Member Poll, NFIB Research 
Foundation, Washington, DC, Volume 6; Issue 6; 2006.
    \4\ An Overview of Pass-Through Businesses in the United States--
Tax Foundation Special Report No. 227, Tax Foundation, Washington, DC, 
January 2015.

Mr. Packwood and Mr. Bradley also mentioned the importance of 
Presidential leadership if tax reform is to be successful. While we 
agree, we also have concerns with President Obama's recent comments 
surrounding ``business'' tax reform. This broad term does not provide 
much insight into what the President is willing to consider in a tax 
reform package. Moreover, we are concerned that this approach leaves 
America's main street businesses behind. Given President Obama's past 
reluctance to lower individual rates, one can only assume that his 
version of ``business'' tax reform is a package that solely addresses 
the corporate tax code. Given President Obama's recent statements, as 
well as the tax writing committees' presumed desire to produce 
legislation the President could support, we have concerns that the path 
to common ground will lead to tax reform that falls on the backs of 
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small businesses.

As you know, there are numerous credits and deductions in place that 
both corporations and pass-through entities can claim. Tax reform 
seeking to lower the corporate tax rate would likely eliminate most, if 
not all, of these credits and deductions in an effort to offset the 
lowered rate. In doing so, that endeavor would actually raise the 
effective tax rate on pass-through businesses by eight percent since 
they would lose these credits and deductions without receiving a lower 
rate.\5\ This would lead to an unlevel playing field in which pass-
through entities would struggle to fight and compete with much larger 
corporations. While we do believe the corporate tax rate should be 
lowered, we do not believe Congress should be picking winners and 
losers in the business community. It is vital that tax reform benefit 
businesses of all sizes, not just the largest corporations.
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    \5\ Long-run macroeconomic impact of increasing tax rates on high-
income taxpayers in 2013, Ernst & Young, July 2012.

Supporters of corporate-only tax reform may argue that pass-through 
entities can simply switch their filing status to become a C 
corporation; however, that is not a viable solution for small 
businesses looking for both rate relief and simplicity. There are many 
administrative and operational costs that pass-through businesses could 
incur if they choose to change their filing status. Additionally, S 
corporations who opt to change their status and become C corporations 
generally must wait five years before being permitted to return to S 
election.\6\ According to an NFIB Member Ballot, eighty-nine percent of 
NFIB members oppose being required to convert to a C corporation in 
order to have the same tax rate as large corporations.\7\
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    \6\ This would rise to ten years without Congressional action on 
tax extenders.
    \7\ NFIB Member Ballot, volume 565, August 2014.

We believe the best type of tax reform for small business owners and 
the economy is pro-growth reform that lowers both corporate and 
individual rates, simplifies the code, and enables business owners to 
keep more of their money to reinvest and grow their businesses. Small 
businesses are the backbone of our economy and the federal government 
should not hinder their abilities to hire new workers and create 
lasting jobs. As the tax reform discussion moves forward, we urge the 
Committee to take steps to ensure that small businesses have a seat at 
the table. We look forward to continuing to work with you on this 
issue.



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