    [Senate Hearing 114-202]
    [From the U.S. Government Publishing Office]

                                                            S. Hrg. 114-202

                              FAIRNESS IN TAXATION

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

                                    HEARING

                                   before the

                              COMMITTEE ON FINANCE
                              UNITED STATES SENATE

                        ONE HUNDRED FOURTEENTH CONGRESS

                                 FIRST SESSION

                                   __________

                                 MARCH 3, 2015

                                   __________

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

                Printed for the use of the Committee on Finance
                                      ______

                             U.S. GOVERNMENT PUBLISHING OFFICE

    99-455-PDF                     WASHINGTON : 2016
    -----------------------------------------------------------------------
      For sale by the Superintendent of Documents, U.S. Government Publishing
      Office Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800;
             DC area (202) 512-1800 Fax: (202) 512-2104 Mail: Stop IDCC,
                              Washington, DC 20402-0001

                              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

    Lindsey, Lawrence B., Ph.D., president and chief executive
      officer, The Lindsey Group, Fairfax, VA........................     6
    Murdock, Deroy, journalist, Fox News contributor, and senior
      fellow, Atlas Network, New York, NY............................     8
    Boushey, Heather, Ph.D., executive director and chief economist,
      Washington Center for Equitable Growth, Washington, DC.........     9
    Rattner, Steven, chairman, Willett Advisors LLC, New York, NY....    11

                   ALPHABETICAL LISTING AND APPENDIX MATERIAL

    Boushey, Heather, Ph.D.:
        Testimony....................................................     9
        Prepared statement...........................................    29
        Responses to questions from committee members................    35
    Hatch, Hon. Orrin G.:
        Opening statement............................................     1
        Prepared statement...........................................    40
    Lindsey, Lawrence B., Ph.D.:
        Testimony....................................................     6
        Prepared statement...........................................    41
        Responses to questions from committee members................    44
    Murdock, Deroy:
        Testimony....................................................     8
        Prepared statement with attachments..........................    47
        Responses to questions from committee members................    57
    Rattner, Steven:
        Testimony....................................................    11
        Prepared statement...........................................    60
        Responses to questions from committee members................    64
    Wyden, Hon. Ron:
        Opening statement............................................     3
        Prepared statement...........................................    66

                                 Communications

    Cole, Dixie Hickman..............................................    69
    Council of Engineers and Scientists Organizations (CESO).........    70
    Henderson, Martha A..............................................    76
    Scheidler, K. Margaret...........................................    80
    Scorse, Gerald E.................................................    80
    Zwiers, Don......................................................    82

                                     (iii)

                              FAIRNESS IN TAXATION

                                  ----------

                             TUESDAY, MARCH 3, 2015

                                           U.S. Senate,
                                          Committee on Finance,
                                                        Washington, DC.
        The hearing was convened, pursuant to notice, at 9:05 a.m.,
    in room SD-215, Dirksen Senate Office Building, Hon. Orrin G.
    Hatch (chairman of the committee) presiding.
        Present: Senators Grassley, Crapo, Isakson, Toomey, Heller,
    Scott, Wyden, Cantwell, Cardin, Bennet, Casey, and Warner.
        Also present: Republican Staff: Tony Coughlan, Tax Counsel;
    Jeff Wrase, Chief Economist; and Chris Campbell, Staff
    Director. Democratic Staff: Joshua Sheinkman, Staff Director;
    Adam Carasso, Senior Tax and Economic Advisor; Todd Metcalf,
    Chief Tax Counsel; and Tiffany Smith, Senior 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. I want to
    welcome everyone to today's hearing to discuss fairness in
    taxation. Senator Wyden has asked me to go ahead.
        I also want to thank our witnesses for appearing before the
    committee today. I am especially delighted that one of our
    witnesses, Deroy Murdock, is a former intern of mine from the
    Reagan era. He has gone on to great success, and we are very
    proud of him. So welcome back, Mr. Murdock. Welcome to our
    entire panel.
        Speaking of the Reagan era, we all know that the last
    successful comprehensive tax reform effort took place during
    that time nearly 3 decades ago. During that effort, President
    Reagan emphasized three principles for tax reform: efficiency,
    fairness, and simplicity. I have made no secret that I believe
    these same principles, along with a handful of others, should
    guide our current reform efforts. The Finance Committee had a
    hearing on efficiency and growth just last week, and a hearing
    on simplicity will be coming in the future.
        Today we focus on the tax reform goal of fairness. If our
    tax reform efforts are going to be successful, it is essential
    that the final, hopefully bipartisan, product is viewed as
    fair. If the American people do not believe a tax reform
    proposal is fair, it is hard to see, politically, how it could
    be enacted.
        Quite simply, fairness in the context of the tax code means
    that similarly situated taxpayers should be treated similarly.
    The tax code should not pick winners and losers. It should
    instead be crafted to allow people to prosper with as little
    interference from the government as possible.
        Since the 1986 reforms, our tax code has become riddled
    with credits, deductions, exclusions, and exemptions, many of
    which serve to benefit certain taxpayers at the expense of
    others. A fairer tax code would be one that eliminates many of
    these tax expenditures, allowing us to broaden the base and
    lower the overall tax rates. Fairness also means that, to the
    extent reasonably possible, Americans should make some
    contributions for the benefits they receive from the
    government.
        Clearly, we need to make exceptions for the truly needy,
    and indeed our tax code should be progressive enough to
    acknowledge individual taxpayers' ability to pay. But the
    current situation, where nearly half the country is effectively
    shielded from the cost of funding the Federal Government,
    deserves some attention in any tax reform effort.
        There is no denying that some of our fellow citizens,
    particularly those with lower incomes, have been left behind.
    Though we have seen some upticks in economic growth, many are
    not experiencing a positive impact on their own situations.
    This is a concern to all of us on the committee and to
    everybody else, I think.
        President Kennedy once said that a rising tide lifts all
    boats. But how is it that we have an economy where not all
    boats are currently being lifted? Part of the reason for that
    is that the U.S. law has high hidden marginal tax rates even
    for low- and modest-income people that discourage career
    advancement, labor, and savings.
        I look forward to hearing more about what we can do to see
    that more boats are lifted by the rising tide. Fairness will
    undoubtedly be one of the keys to tax reform.
        While I know that, in the context of the tax code, fairness
    may mean different things to different people, I think we have
    assembled a panel today that will allow us to sift through
    these arguments and arrive at some helpful conclusions.*
    ---------------------------------------------------------------------------
        * For more information, see also, ``Fairness and Tax Policy,''
    Joint Committee on Taxation staff report, February 27, 2015 (JCX-48-
    15), https://www.jct.gov/publications.html?func=startdown
    &id=4737.
    ---------------------------------------------------------------------------
        Before I turn it over to our ranking member, I just want to
    note that I may have to step out from the hearing, as president
    pro tempore, to open up the Senate and also for some other
    duties that I have.
        So I thank my friend, Senator Heller, for volunteering to
    preside in my absence.
        In addition, we anticipate the hearing closing out at
    around 10:20 in order to allow members to attend Prime Minister
    Netanyahu's address later on this morning.
        [The prepared statement of Chairman Hatch appears in the
    appendix.]
        The Chairman. With that, let me now turn to our ranking
    member, Senator Wyden, for his opening remarks.

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

        Senator Wyden. Thank you very much, Mr. Chairman.
        Chairman Hatch, I think you are absolutely right in
    spotlighting this question of tax fairness. It is absolutely
    key to the kind of work we anticipate doing in a bipartisan way
    to work on tax reform. So I very much appreciate your choosing
    this topic.
        Now, if there is a common economic theme to take away from
    the town hall meetings and other community discussions I have
    had at home in Oregon, it is that too many Americans feel
    stuck. Too many Americans worry about being able to afford
    necessities, like child care and college tuition. Too many
    Americans say they are struggling to make ends meet and they
    are simply unable to save.
        The fact is, Americans fear more than a daunting climb up
    America's economic ladder of opportunity. Our people often fear
    losing hold of the rungs and sliding back into hardship, and
    the numbers show why.
        Mr. Rattner, I know, has discussed this at considerable
    length. For 15 years, America's middle class has been
    shrinking, and shrinking for the wrong reason. The fact is, too
    many of our people have fallen out of the middle class and have
    not moved up.
        Now, no single piece of legislation is capable of turning
    this all around, but I share the view--Chairman Hatch touched
    on it in his opening statement--that tax reform can help. As
    deeply flawed as the tax code may be, it reflects many of our
    country's most significant economic goals.
        There are policies designed to spark innovation and
    investment and help create high-skill, high-wage jobs. There
    are policies that fund our safety net, health care, and Social
    Security programs. Most importantly, there are policies that
    help hardworking people grab the rungs and climb America's
    economic ladder.
        So the challenge of tax reform can go one of two ways. The
    first option is to forget those important goals that I laid out
    and to say that lowering rates is simply your overriding
    objective. But that would leave too many of our middle class
    hanging without the means to achieve the American dream of
    owning a home, saving for a secure retirement, and helping
    their kids achieve a better future.
        The better option is to fix the tax code in a bipartisan
    way and accomplish our goals more effectively, to build a
    stronger economy and help more Americans climb the economic
    ladder. That is the option I prefer. It is the smartest route
    to a smarter and more efficient tax system, and an unfair tax
    reform plan would risk heaping a new burden on those who are
    already struggling to get ahead.
        Now, recently there has been considerable discussion that
    not enough people are pitching in and paying taxes. It focuses
    on Americans of modest means who are not hit by the income tax.
    And as we begin this discussion, I just want to unpack this for
    a moment.
        I strongly favor personal responsibility. And I also want
    us to think, for example, about a young veteran just coming
    home from serving our country overseas. For the sake of our tax
    reform discussion, let us just operate under the theory that
    this veteran has health problems.
        As soon as that vet gets home, the bills start piling up.
    He or she is fighting against a current that has forced a lot
    of vets into extreme hardship. Some of them have even wound up
    sleeping in the woods in my home State of Oregon.
        But that vet is doing his or her best to grab the rungs and
    climb the economic ladder, and he or she certainly chips in by
    paying excise taxes and, when the veteran finds a job, at a
    minimum, his or her payroll taxes. That veteran is doing his or
    her part.
        One of the tenets of the income tax has always been that it
    is paid by those who can afford it. So to build fairness into
    tax reform, let us look back at how the tax overhaul worked.
    The day President Reagan signed the 1986 Tax Reform Act into
    law was a landmark day for tax fairness.
        President Reagan celebrated the fact that reforms spared 6
    million Americans from having to pay income taxes. The
    President, President Reagan, called it, and I quote here, ``the
    best jobs creation bill, the best anti-poverty legislation, and
    the best pro-family legislation the U.S. Congress has ever
    produced.'' Those are the words of the late President Reagan.
        Now, to meet the standard of fairness President Reagan set,
    I think we also ought to hone in on several other important
    provisions of the 1986 act. First, it gave fair treatment to
    wage earners. Instead of punishing them by taxing their income
    at higher rates than others, it said that income from wages and
    income from investment would be treated equally.
        We have four very distinguished panel members. I can tell
    you that the architects of the 1986 reform bill were here
    sitting in your seats, at least two of them, very recently, and
    they said it could and should be done again.
        Second, the 1986 bill cracked down on tax cheats who pry
    open loopholes and skirt their responsibilities. So today, in
    connection with this important hearing, I am releasing a report
    that sheds light on some of the most egregious tax loopholes.
    They are called ``wash sales'' or ``options collars,'' and
    basically they just disguise income. They shield gains.
        Sophisticated taxpayers can go out and hire lawyers and
    accountants to take advantage of these dodges. But when you
    hear about these loopholes, I am sure that the working-class
    person just gets more frustrated about what is going on here in
    Washington and wants reform.
        For people having a hard time or just making their way as
    best they can, too many of our citizens feel that the game is
    just stacked against them and the other person gets to climb
    the economic ladder far easier than they do.
        The 1986 Tax Reform Act went a long way to changing that,
    and the Senate version of that bill passed with 97 votes. That
    is a bipartisan route that Congress ought to take again: a tax
    reform plan built on fundamental fairness that makes it easier
    for everybody. And I want to emphasize that word, because you
    are going to hear me say it a lot. I want everybody in America
    to be able to climb our economic ladder of opportunity.
        I look forward to our four distinguished witnesses. Thank
    you, Chairman Hatch, for this hearing, and I look forward to
    tackling this in a bipartisan way.
        The Chairman. Thank you, Senator.
        [The prepared statement of Senator Wyden appears in the
    appendix.]
        The Chairman. Our first witness is Dr. Lawrence Lindsey.
    Dr. Lindsey was Director of the National Economic Council from
    2001 to 2002 and Assistant to the President on Economic Policy
    for President George W. Bush. He played a major role in
    formulating President Bush's $1.35-trillion tax cut plan.
        Dr. Lindsey graduated magma cum laude with his bachelor's
    degree from Bowdoin College and with his master's and Ph.D. in
    economics from Harvard University.
        He has authored several books on taxes and is a frequent
    contributor to the Wall Street Journal, The Weekly Standard,
    and other publications.
        Dr. Lindsey is chief executive officer of the Lindsey
    Group, which he runs with a former colleague from the National
    Economic Council.
        Our next witness is Deroy Murdock. Mr. Murdock is a Fox
    News contributor, a contributing editor with National Review
    Online, and a senior fellow with the Atlas Network, which
    supports and connects some 462 free market think tanks in the
    U.S.A. and 93 countries overseas.
        Deroy's columns run in the New York Post, the Boston
    Herald, the Washington Times, National Review, the Orange
    County Register, and many other news publications. He has
    appeared on ABC's ``Nightline,'' NBC Nightly News, CNN, MSNBC,
    PBS, and other television news channels and numerous radio
    outlets.
        Deroy received his bachelor's degree in government from
    Georgetown University and his MBA in marketing and
    international business from New York University.
        He was also an intern for me 30 years ago. So I take credit
    for your success. [Laughter.] We are very proud of you, Deroy.
        Our third witness is Dr. Heather Boushey. Dr. Boushey is a
    senior fellow at the Center for American Progress and the
    executive director and chief economist at the Washington Center
    for Equitable Growth.
        Her research focuses on economic inequality and public
    policy, specifically employment, social policy, and family
    economic well-being. She also worked as an economist for the
    Joint Economic Committee, the Center for Economic and Policy
    Research, and the Economic Policy Institute.
        Dr. Boushey received her bachelor's degree from Hampshire
    College and her Ph.D. in economics from the New School for
    Social Research.
        Our final witness is Steven Rattner. Mr. Rattner served as
    counselor to the Secretary of the Treasury and led the Obama
    administration's successful effort to restructure the
    automobile industry.
        He was an economic correspondent for the New York Times
    before beginning his career in investment banking in 1982 with
    Lehman Brothers. He later joined Morgan Stanley and then Lazard
    Freres before forming Quadrangle in 2000, where he was managing
    principal.
        Today, Steven is chairman of Willett Advisors, LLC. That is
    the investment arm for former New York Mayor Michael
    Bloomberg's personal and philanthropic assets, and there are a
    lot of those. And he is a great friend of mine, so I am happy
    to see you helping him.
        He has also served as a board member or trustee for a
    number of public and philanthropic organizations.
        Mr. Rattner graduated with honors in economics from Brown
    University in 1974 and is married to Maureen White, a former
    official of the State Department.
        I want to thank each of you for being here and apologize
    that I have some other duties that conflict with chairing this
    hearing. But I am going to pay attention to what you say, and I
    will read your statements. I have read some of them already.
        I just appreciate all four of you being here today.
        We will start with you, Dr. Lindsey.

     STATEMENT OF LAWRENCE B. LINDSEY, Ph.D., PRESIDENT AND CHIEF
           EXECUTIVE OFFICER, THE LINDSEY GROUP, FAIRFAX, VA

        Dr. Lindsey. Thank you, Mr. Chairman. Senator Wyden, it is
    good to see you again.
        I listened very carefully to your opening remarks, Senator,
    and I thought you, by quoting John Kennedy, really hit the nail
    on the head. You mentioned the rising tide lifting all boats.
    You can concentrate on rising one boat over another boat, but
    the thrust of my comments today would be, the most important
    thing to do is have the tide come in, and that is what we are
    missing.
        I am going to not read my testimony, in the interest of
    time. I would ask that it be submitted in full for the record.
        The Chairman. Without objection.
        Dr. Lindsey. Thank you. One of the problems we are having
    now is that fundamental economic growth, which is best
    measured, I think, by labor productivity for long-term growth,
    just is not happening. The last 5 years, we have had economic
    growth averaging just seven-tenths of a percent in terms of
    labor productivity. That is a third of the pace that it has
    been over the last 3 decades.
        I think that is one of the reasons that the people you were
    talking about, Senator Wyden, are in trouble. I think that they
    are correct to be angry at what is happening.
        The first observation I would make is that getting the tide
    to come in is the most important thing this committee could do
    in the form of tax reform, that restoring economic growth is
    sort of the key.
        I give a story in my testimony about comparing the quality
    of life George Washington had, who was not just a top 1
    percenter, but probably a top 1 percent of the 1 percents in
    his day, with the average quality of life of a Fairfax County
    resident today, and I think that that comparison points out the
    advantages of long-term economic growth over simply where you
    stand in the income distribution. So I think, as far as
    effectiveness, that is the most important thing to do.
        The second observation I would make is that, although I got
    my start in taxes--I have done a lot of nefarious things in my
    life, but my original thesis was on tax policy, and here,
    obviously, there is certainly a bias of having tax policy be
    able to accomplish things.
        The fact is, we are not very good at it. We are not very
    good at achieving the ends we want to achieve. I would refer
    you to the first chart that is attached to my testimony, where
    I am using Commerce Department data on income distribution. And
    the first observation I would make is that under every
    President since Nixon we have had, by the three measures given,
    rising income inequality.
        There is almost no relationship--it happened under every
    President. One of the ironic things, and I think they are
    ironies--I do not think they are causal--is that, for example,
    President Clinton had the biggest rise in inequality.
    Inequality rose more under his 8 years than under Reagan's 8
    years and Bush's 8 years combined. And under President Obama's
    first term, inequality has risen more than it did under George
    Bush's 8 years.
        So again, I am not saying this is causal. I am just
    suggesting that when we focus on something, it does not mean we
    are particularly good at achieving the end of reducing
    inequality, in spite of our ability to talk about it.
        Second, if you look at chart 2, you will see that, over
    this entire period, we have had a big increase in the
    progressivity of the income tax burden. Here I am comparing
    taxes paid by various shares with the Commerce Department's
    definition of income. Effectively, what you are seeing is
    average tax rates.
        I think it is important that we use the Commerce
    Department's definition as opposed to simple IRS data because,
    first of all, transfer payments are an important component.
    They are in the Commerce Department's data. They are not in the
    IRS data, by and large.
        As you will see, the ratio of income paid by the top 5
    percent to everyone else has risen substantially, and it has
    risen consistently since 1980. So, even though we have had an
    increase in the progressivity of our income tax collections,
    you still see a rise in inequality.
        Finally, to bring home the point that we are not very good
    at achieving what we want to achieve--and let me say, Senator
    Wyden, we all agree on the need for reducing income inequality.
    The chairman was kind enough to mention my efforts in the 2001
    bill. In that bill, we took the zero tax threshold from a
    family of four, a married couple with two kids, from $27,000 to
    $41,000, which I think was an important positive objective and
    in line with what you were saying.
        But if you look at chart 3, we are comparing the share of
    income from capital versus the share of income from transfers.
    So what I am struck by is that, since 1960, the share of income
    from transfers has tripled from 6 percent to 18 percent, and
    yet in spite of moving 12 percent of personal income around, we
    have not been able to reduce inequality.
        Well, that suggests that maybe we are not as good as we
    think we are at achieving our end. So I would go back to the
    first conclusion. Let us focus on growth. I think growth trumps
    fairness in its long-term impact, and, second of all, we are
    not very good at creating fairness, and I would turn it over to
    growth.
        Thank you.
        Senator Heller [presiding]. Dr. Lindsey, thank you. I told
    Senator Hatch that if this seat is comfortable, he is going to
    have a tough time prying me out of it. [Laughter.]
        [The prepared statement of Dr. Lindsey appears in the
    appendix.]
        Senator Heller. I certainly appreciate all the witnesses
    being here.
        Mr. Murdock, please continue.

     STATEMENT OF DEROY MURDOCK, JOURNALIST, FOX NEWS CONTRIBUTOR,
             AND SENIOR FELLOW, ATLAS NETWORK, NEW YORK, NY

        Mr. Murdock. Good morning. Thank you very much for inviting
    me here.
        As we look at today's topic, it would help to start with a
    thought experiment. I invite everyone in the room to imagine
    that you are weighing two job offers. Company A offers $50,000,
    but the boss makes $55,000. That represents an income gap of
    just 10 percent. I think even Occupy Wall Street could live
    with that. Now, Company B offers $500,000, but the boss makes
    $1 million. Imagine that. Income inequality of 100 percent. Who
    does the boss think he is?
        Now, how many of you would prefer job offer A? And how many
    would prefer job offer B? Exactly. Most people would grab the
    half a million dollars and laugh all the way to the bank, never
    mind the 100-percent income gap. And that is the point.
        Too much of our political rhetoric these days revolves
    around envy, resentment, and sometimes even violence toward the
    affluent, all in an effort to take what they have and
    redistribute it to those who have less.
        Obama's words from September 2011 illustrate this point. He
    said, and I quote, ``If asking a millionaire to pay the same
    tax rate as a plumber makes me a class warrior, a warrior for
    the working class, I will accept that. I will wear that charge
    as a badge of honor.''
        The American left has made plenty of hay about the notion
    that the wealthy do not pay their fair share of taxes. This is
    an exciting slogan. Too bad it is not supported by the facts.
        According to the latest Internal Revenue Service data, in
    2012, the top 1 percent of tax filers earned approximately 22
    percent of all adjusted gross income. They also paid 38 percent
    of all Federal income taxes. That looks to me like more than
    their fair share. The top 10 percent of earners made 48 percent
    of AGI and paid 70 percent of income taxes.
        Now, what about the bottom 50 percent? They made 11 percent
    of AGI and paid just 3 percent of Federal income taxes. So
    rather than berate top income earners, we should thank them for
    paying more than their fair share to keep Washington so
    generously funded.
        Rather than obsess over how to squeeze, humiliate, and
    punish the wealthy, let us focus on how to lift the incomes of
    those at the opposite end of the income distribution. Rather
    than drag the wealthy from their penthouses, let us figure out
    how to bring those on the sidewalk up to the third or fourth
    floor and then help them move up from there.
        I would make three suggestions. First, America needs a tax
    code that is geared toward dynamic, robust economic growth--the
    kind of expansion in national output that enriches the poor and
    middle class, as well as the affluent.
        I recommend scrapping the U.S. tax code, in its 72,000-page
    splendor, and replacing it with a flat tax. While this idea
    needs deeper study and proper scoring, the National Taxpayers
    Union has estimated, very roughly, that a 10-percent tax with
    no deductions paid by all American adults, would generate about
    as much income as today's convoluted system.
        I call this the 0-10-100 plan, and we can discuss it
    further, if you like. The fairest tax would be one universal
    rate. Everyone would pay his fair share.
        Two, America's 35-percent corporate tax is the OECD's
    highest. This is absurd, self-destructive, and a national
    disgrace. The corporate tax should be slashed dramatically, if
    not scrapped all together.
        Shrinking or eliminating the corporate tax would be a small
    price to pay for the far, far greater benefit of seeing
    American companies remain here rather than move offshore and
    haul jobs with them. And if a far more competitive corporate
    tax system actually attracts foreign firms to relocate here,
    all the better for Americans, especially those with low
    incomes.
        Number three, disadvantaged Americans need to make
    themselves globally competitive. Good luck doing so with the
    often calamitous government schools that hermetically seal the
    minds of too many low-income and minority children.
        Higher standards, charter schools, and initiatives like the
    Washington, DC voucher program and New York's private sector
    Harlem Educational Activities Fund would help these children
    develop the intellects and skills that they need to prosper in
    a world where the Internet ships talent across borders at the
    speed of light.
        Thank you very much, Mr. Chairman, Ranking Member Wyden,
    and the other members of the committee. I look forward to your
    questions and comments.
        Senator Heller. Mr. Murdock, thank you.
        [The prepared statement of Mr. Murdock appears in the
    appendix.]
        Senator Heller. Dr. Boushey?

      STATEMENT OF HEATHER BOUSHEY, Ph.D., EXECUTIVE DIRECTOR AND
       CHIEF ECONOMIST, WASHINGTON CENTER FOR EQUITABLE GROWTH,
                             WASHINGTON, DC

        Dr. Boushey. Thank you. Thank you for inviting me here to
    speak today. My name is Heather Boushey. I am the executive
    director and chief economist at the Washington Center for
    Equitable Growth. The Center is a new project devoted to
    understanding what grows our economy, with a particular
    emphasis on understanding whether and how rising levels of
    economic inequality affect economic growth and stability. I am
    honored to be here today to discuss a very important topic, the
    relationship between fairness and taxation.
        There are three conclusions from my testimony. First, as
    inequalities increase, the tax code has not kept pace with this
    change.
        Second, economic evidence shows that inequality is not in
    tension with economic growth. A variety of research shows that
    steps taken to reduce inequality do not significantly hinder
    growth. In fact, low tax rates at the top promote what
    economists call rent-seeking behavior over productivity-
    enhancing activities.
        Third, there are policy options that can make the tax code
    more progressive that would have broad benefits for everyone.
        The story of the past 4 decades when it comes to inequality
    is a rapid rise in incomes and wealth for those at the very
    top. From 1979 to 2012, the average pre-tax income of the top 1
    percent grew by 178 percent. At the same time, inequality of
    wealth has been rising. The share of wealth going to the top .1
    percent of households has increased to 22 percent in 2012 from
    roughly 7 percent in 1979.
        What we are seeing is income inequality calcifying into
    wealth inequality. At the same time, the top marginal tax rate
    has been dropped considerably, but the improved economic
    performance that we might have expected given the conventional
    wisdom simply has not shown up.
        A look at the data shows no discernible relationship
    between the level of the top marginal tax rate and employment
    or productivity growth since the end of the second World War.
    When it comes specifically to top tax rates, new research has
    shown that the optimal tax rate for high incomes in the United
    States is much higher than previously thought.
        When economists break down the link between top incomes and
    top tax rates, we see that the rent-seeking effects outweigh
    the supply-side effects. These economists conclude that the
    optimal tax rate for top incomes could be as high as 80
    percent. We know this thanks to new data made available by the
    IRS, and we hope that that kind of work will continue.
        New research also challenges the idea that capital taxation
    will invariably result in lower savings and, consequently,
    lower economic growth. Recent work shows that the long-held
    belief that capital income should not be taxed at all appears
    to be flawed. The assumptions underlying this research are
    unrealistic, and recent work has shown that they do not
    necessarily lead to the often-cited conclusion that capital
    should not be taxed.
        One form of capital taxation is increased taxation of
    bequests and inheritances. Recent research has found that the
    optimal taxation level for inheritances is much higher than our
    current levels, upwards of 60 percent. If we are concerned
    about the possibility of families passing along large estates
    to children and the damages that this could have to the
    vitality of our economy, our current level of taxation is
    inefficient and there is room there to maneuver.
        This knowledge provides a variety of options for you as you
    are making your decisions on tax policy moving forward. I would
    just like to offer a couple here this morning.
        First, I think there is room to focus on the top by
    implementing policies like eliminating the so-called stepped-up
    basis for taxation of bequests. Capital gains on an asset can
    go untaxed if the asset is bequeathed before the gains are
    realized. This loophole leaves quite a bit of money untaxed and
    disproportionately benefits those at the very top of the income
    distribution and the wealthy. It can be closed without worries
    about economic growth.
        At the other end of the income spectrum, we can focus on
    tax policies that boost incomes for those at the bottom; for
    example, expanding the Child Tax Credit and making it
    permanent. This credit is partially refundable for a set
    percentage of income over a set threshold, currently $3,000.
    The current value and threshold are temporary, and I recommend
    making these reforms permanent.
        The past 4 decades have been a period of high and rising
    inequality in the United States. Tax policy has an important
    role to play in the policy response to this major shift in our
    economy. Our economy currently is not creating prosperity that
    is broadly shared, and it has not for quite a while.
        Today's hearing is an important contribution to this
    conversation about how to get our economy on track to creating
    shared prosperity for all Americans, and I thank you for
    holding it.
        Senator Heller. Dr. Boushey, thank you. Thank you for being
    here.
        [The prepared statement of Dr. Boushey appears in the
    appendix.]
        Senator Heller. Mr. Rattner?

                STATEMENT OF STEVEN RATTNER, CHAIRMAN,
                   WILLETT ADVISORS LLC, NEW YORK, NY

        Mr. Rattner. Thank you very much, Senator. Thank you to
    Chairman Hatch and Ranking Member Wyden for inviting me here
    today.
        As both Chairman Hatch and Ranking Member Wyden and many
    others mentioned in their opening remarks, this is the 30th
    anniversary of the passage of the last major piece of tax
    reform legislation, and, in my view, it has been far too long
    since we undertook such an effort. Ensuring a fair and
    effective tax code is a bit like maintaining a garden. Without
    constant watering and weeding, it will quickly deteriorate as
    lawyers and accountants find new ways to ease their clients'
    tax burdens.
        Consider, for example, the wealthiest Americans. In 1995,
    the 400 highest-income Americans paid just under 30 percent of
    their adjusted gross income in taxes. By 2012, the tax rate for
    this group had dropped to 17 percent, in part because of
    lowered rates on capital gains and dividends, as well as on
    ordinary income. Meanwhile, overall tax collections remain at
    the low end of the historic band of 17 to 19 percent of GDP and
    are projected to remain there.
        To be fair, the 1986 law has hardly been gutted. Many of
    the most egregious tax avoidance schemes that operated prior to
    the law's passage remain off limits. But other abusive
    practices have proliferated.
        We learned, for example, during the last presidential
    campaign that one of the candidates was able to amass an
    individual retirement account with a balance of between $20.7
    million and $101.6 million. That occurred in the context of
    maximum allowed total contributions during the relevant years
    on the order of $5,000 in total.
        Another well-publicized loophole is the ability of private
    equity and certain hedge fund operators to have their carried
    interest proceeds taxed as capital gains. At times, including
    at present, I have been a substantial beneficiary of these
    provisions, and, for the life of me, I cannot understand why my
    tax rate on income from my work was less than half of the tax
    rate paid by friends in other parts of Wall Street on their
    work.
        Other indefensible provisions allow private-equity
    provisions to convert ordinary income for management fees into
    lower-tax capital gains on their investments. While lost
    revenue may not be huge, the significant attention around them
    contributes to resentment and a feeling of unfairness on the
    part of average Americans. By now, many Americans know that
    Warren Buffett's executive assistant suffers under a higher tax
    rate than he does.
        Now, it is true, as Dr. Lindsey noted, that by some
    measures the progressivity of the tax code has increased in
    recent years, particularly because of tax reductions for those
    at the very bottom. However, Congress should also take into
    account that pre-tax income inequality, as has been also noted,
    is currently at record levels. No formula exists to determine
    appropriate levels of progressivity. No doubt, at some level,
    confiscatory taxes can discourage work. But in my 32 years on
    Wall Street, I have experienced top marginal Federal tax rates
    as high as 50 percent and as low as 28 percent, and I never
    detected any change in my motivation to work or that of any of
    my colleagues.
        Similarly, the tax rate on long-term capital gains has
    ranged from 35 percent in the 1970s to as low as 15 percent. A
    tax rate of at least 28 percent on this type of income would be
    appropriate. In that regard, as has also been noted, remember
    that the 1986 law provided that capital gains would be taxed at
    the same rate as ordinary income, a principle to which we
    should endeavor to return.
        In addition to achieving greater fairness, we need more
    revenue. While our budget deficit has fallen rapidly, it will
    soon turn back up, and, in that regard, the cost of special
    rates for capital gains and dividends is substantial, about
    $120 billion per year.
        Let me turn briefly to corporate tax reform. Few disagree
    that the business provisions of the tax code, as has also been
    noted, are riddled with loopholes, drive business out of the
    United States, and create such diversion outcomes as to make
    the individual provisions look like a paragon of equity.
        Practices such as the rampant use of inversions and
    earnings stripping, and the even more rampant abuse of transfer
    pricing, have contributed to a massive decline in the
    contribution of business tax revenues to overall Federal tax
    revenues from 23 percent in 1966 to 10.6 percent in 2014.
        No shortage of meritorious plans exists for how to think
    about reforms, such as the exhaustive work of the Simpson-
    Bowles Commission, as well as proposals like the one made by
    Senators Wyden and Coats in 2011.
        Finally, please note that the President's proposed tax
    reductions, particularly the expansion of the Earned Income Tax
    Credit, should also be taken into account on behalf of
    Americans whose incomes have not been raised by the economic
    recovery.
        Thank you very much.
        Senator Heller. Mr. Rattner, thank you. And I want to thank
    again all the witnesses who are here today, and I certainly do
    appreciate your time and effort to be here.
        [The prepared statement of Mr. Rattner appears in the
    appendix.]
        Senator Heller. I think we have just defined with the four
    witnesses in front of us the differences between what we
    perceive as fairness, and I think that is probably the first
    question we ought to talk about a little bit. What is fairness?
        I think all of us, for the most part, can agree that our
    current tax code is too costly, too complex, and something
    needs to change. It is creating unnecessary challenges for
    families across America, whether they are Nevadans or others,
    and especially for small businesses.
        So I commend the chairman of this committee for his efforts
    to examine fundamental tax reform. The question is: fundamental
    tax reform--how are you going to make it fair? And as co-chair
    of one of the tax reform working groups, I look forward to
    working with my colleague, Senator Bennet, and others on the
    committee so that we can create a tax code that, frankly, is
    simpler, that is fair, and that will work to grow the American
    businesses.
        So I want to go across the panel, starting with you, Dr.
    Lindsey. Would you repeat, in your mind, what a fair tax code
    is?
        Dr. Lindsey. I think a fair tax code is one that--I
    disagree with my colleague to my left here. I have no problem
    with modest progressivity, but I think fairness also has to
    balance the relationship between the state and the individual.
        It was interesting that Dr. Boushey used the word
    ``optimal,'' which is often associated with revenue maximizing.
    I remember when I wrote my thesis, the first page of my thesis
    was about that concept, because Jude Wanniski, who is on the
    opposite side of the spectrum, similarly said ``optimal'' was
    revenue maximizing.
        There is no such thing because, as you approach the
    revenue-maximizing level, the excess burden you are imposing on
    the private sector rises very dramatically, and the revenue,
    marginal revenue collected by the state, goes down
    substantially.
        So at the revenue-maximizing rate, what you actually get is
    an infinite preference for money going to the state over money
    going to the individual. I do not think anyone thinks that is
    optimal. I mean, maybe Stalin did. But it is not optimal. It is
    just not optimal.
        What we need to keep in mind is that we are a society where
    the government works for the individuals and not vice versa. So
    when you start to take--people have to not only work Monday and
    Tuesday like I do to pay my income taxes, but they also have to
    work Wednesday and now Thursday to pay their income taxes. I do
    not think that is fair.
        At the same time, though, I favor progressivity. My
    recommendation--which, of course, like all economists, is in my
    book--is that I think we have to move away from income-based
    taxation because I think defining income is part of the
    problem.
        As they say on Wall Street: cash is a fact; income is an
    opinion. I think we have to move away from opinions, and we
    have to move toward cash-based taxation. And I think by
    accomplishing it with a two-tier cash flow-based tax paid only
    by the business, we could get rid of the corporate income tax,
    the personal income tax, and the payroll tax, and have a fair
    and more pro-growth tax system.
        Thank you.
        Senator Heller. Dr. Lindsey, thank you.
        Mr. Murdock?
        Mr. Murdock. My view on this is that the income tax rate
    should be very low, and it should be consistent across the
    board. I favor a 10-percent flat tax. My rough calculations are
    that if everyone paid in, the amount of revenue generated by a
    10-percent flat tax would be approximately what we get now with
    our very elaborate and confusing system that no one really
    understands.
        I fear that once you start adding additional rates and then
    working, of course, with deductions and loopholes and so on,
    you are right back to the situation we have now where the
    government essentially uses the tax code as a blunt instrument
    for social engineering.
        If you have so many children, you get this kind of a
    benefit. If you are married, you get this. If you are single,
    you get the other. If you live in an apartment like I do, there
    is no mortgage deduction. If I go buy a house, then I get a
    mortgage deduction.
        So, unfortunately, the tax code, I think, is used
    essentially as a way of getting people to behave in the way
    government wishes them to rather than as an instrument for
    raising a modest amount of money, or money at a modest rate, to
    pay for what is required under the U.S. Constitution.
        So, again, I think a 10-percent flat tax across the board
    paid by all American adults would be the way we should go.
        Dr. Boushey. I think that is the right question to ask:
    what is a fair tax code? I think there are three answers.
    First, we need to be thinking about what kind of revenue we
    need to be making the investments that we need to grow our
    economy and to make sure that we have shared prosperity. So we
    need a tax system that provides sufficient revenue for our
    national priorities.
        Second, we live in a country that has seen rampant and
    extremely high economic inequality in terms of incomes and in
    terms of wealth. This has not happened in other developed
    countries, and there is evidence that this is related to the
    way that we have constructed our tax system.
        Third, we need to consider very seriously the question of
    whether or not that inequality is good for our entire economy
    and our society as a whole and if we think that the tax system
    and the way that it is structured is actually promoting
    unproductive activities and rent-seeking, rather than
    productive activities that are benefitting the competitiveness
    of our economy. That is a question that we need to focus on in
    understanding what tax fairness is.
        It is not just about who gets what. It is about how we are
    creating the right incentives to have the most competitive U.S.
    economy. And I think that, unfortunately, the weight of the
    empirical, serious economic evidence is that our system right
    now is not promoting the kind of productive investments that we
    want to be having.
        Mr. Rattner. Let me say two things. First, I think you have
    to--as I think Dr. Boushey said, you need to separate the
    question into two parts. The first question is, what is an
    adequate level of revenue for the U.S. Government to be able to
    function? And, as I said in my opening remarks, we are down to
    around 17.5 percent at the moment, which is the low end of a
    historic band of roughly 17 to 19 percent that we have, in the
    fullness of time.
        Given the entitlements burdens that we are facing--which I
    do not believe there is any political will to significantly
    reduce as the baby booomers such as myself begin to retire--I
    think that revenue target is going to inevitably have to move
    up in order to maintain some fiscal prudence. So we not only
    need every bit of revenue we are getting now, we need somewhat
    more revenue than what we are getting now.
        So the second question is then, who should pay it? And my
    personal view is that the basic structure of having a
    progressive income tax--ideally with fewer brackets and
    certainly with major changes in loopholes, exemptions, and
    things like that--that basic structure, I think, has served us
    well for over 100 years and is one that we should maintain.
        As I said in my opening remarks, a scenario in which
    capital income, as valuable as it is to this economy, is taxed
    in such a way that you have people like Warren Buffett having a
    lower tax rate than their secretary, seems to me to be patently
    unfair.
        I can think of no way, nor can he, for that matter, to
    justify that. So I think that as we move toward a simplified
    structure, we get rid of a lot of the exemptions and loopholes
    that I went through in my opening statement--I will not repeat
    them now--and create, I think, a fairer tax code that way,
    without major surgery in terms of the basic concept of
    progressivity and having a limited number of tax brackets along
    the way.
        Senator Heller. Mr. Rattner, thank you. My time is up.
        The ranking member, Senator Wyden.
        Senator Wyden. Thank you very much, Senator Heller.
        I noted that in his opening statement, Chairman Hatch
    quoted Jack Kennedy, and you probably heard in my opening
    statement I quoted Ronald Reagan. So there have to be improved
    prospects for tax reform given that.
        You all have been an excellent panel.
        Let me start this way. I think we all understand that about
    two-thirds of the American economy is now driven by the
    consumer, and Census Bureau data tell us that workers'
    paychecks too often do not keep up with inflation. So the
    consumer is not in a position to make those purchases of
    durable goods and create demand and put people to work--the
    kinds of things that grow a private economy.
        So I have made, as a central tenet of tax reform--and Mr.
    Rattner talked about my work with Senator Coats and Senator
    Gregg. These are bipartisan proposals, and, as a central
    premise, we have focused on growing American workers'
    paychecks, putting more dollars into their pocket.
        One approach that we took that has been followed by former
    Chairman Dave Camp is to significantly increase the standard
    deduction so as to increase the spending power of the middle-
    class person.
        I want to go right down the row, start with Mr. Rattner,
    who, by the way, I think made very important points with
    respect to closing tax loopholes. That is something that the
    staff today reiterated in a staff report that looked at wash
    sales and collars and all kinds of other dodges that people
    have come out with. We put that report out today. So I share
    your view on that.
        Let us go down the row and have each one of you offer your
    thoughts about how to best grow the paychecks of middle-income
    people, give them the chance to get ahead. What is going to put
    more money in their pocket? Let us start with Mr. Rattner and
    just go down the row.
        Mr. Rattner. First, I would certainly have no problem with
    a proposal along the lines of what you suggested. I think Dr.
    Lindsey and others might, because it would increase the
    progressivity of the tax code.
        My own view is that, in an era that we are living in of
    such extreme levels of income inequality, it is appropriate for
    the tax code, which has been progressive since its inception,
    to become even more progressive in order to take account of
    that.
        Some will call that redistribution. We can call it what we
    want. But I would also acknowledge, before others on the panel
    say this, I think that giving people a higher standard
    deduction or, frankly, much of what you are going to do with
    the tax code, is not going to resolve the fundamental problems
    that we have which are incredibly real, of declining middle-
    class wages as adjusted for inflation.
        I think to really address that is a much broader project
    for the entire Congress and for every committee of the Congress
    in different ways, whether it is education, training,
    investment, R&D, whatever. But it is a very big problem.
        I have no disagreement with your suggestion for how to make
    a dent in it, but recognize that it is a bigger problem.
        Senator Wyden. There is no question it is a big problem.
    The question is, what can we do to get started, and this is
    bipartisan. So when you have Dave Camp, Dan Coats, Judd Gregg,
    at least we have a shot at getting going.
        Dr. Boushey?
        Dr. Boushey. I think it is a great question. I think I will
    start where Mr. Rattner ended. Certainly, if you want to grow
    middle-class income, there are a lot of things you need to do
    outside of the tax system. Certainly, we need to focus on full
    employment. That is front and center, the most important thing.
        But I think, as we are thinking about the tax system, there
    is one set of activities that we can think about to put money
    directly in the hands of middle-class families, such as
    increasing the standard deduction or the kinds of policies that
    have been put on the table in terms of reducing taxes for
    middle-class families more generally.
        But I think we also need to think about the intersection
    between how we are taxing at the top and how we are promoting
    economic growth and how that is leading to the creation of jobs
    and the kinds of investment that we want to see.
        So, if it is true that the very low marginal tax rates that
    they were seeing at the top actually promote rent-seeking
    behavior, that is money that is being taken out of the economy
    and out of the investment that firms are making or out of the
    wages that middle-class workers are experiencing.
        So we have to think about all of these things together. So
    it is not enough to just isolate what is happening to middle-
    class families.
        I would end by, again, sort of ending where you ended, Mr.
    Rattner, that as an economist, I think many of the things that
    we need to do to support middle-class families are actually
    outside of taxes. We need to do things like making sure that
    people can keep their jobs, making sure that they have
    schedules that work, and things like that.
        Senator Wyden. Mr. Murdock?
        Mr. Murdock. I would say that the proposal on increasing
    the standard deduction is very helpful for people who have
    jobs. The problem is, we have people who need jobs. If you do
    not have a job, the deduction is really not all that attractive
    to you.
        So the real focus should be--rather than adding additional
    bells and whistles to our bell- and whistle-laden tax code--I
    think we should focus on the overall question of, how do you
    get this economy growing, not at about 2 percent to 2.5
    percent, where it seems to have been stuck for the last 5 or 6
    years, but expanding at the rate that it did when I graduated
    from college in 1986--4 percent, 5 percent, 6 percent, 7
    percent?
        When I graduated college, all my friends who wanted to work
    found jobs. Now, one-third of kids graduating from college are
    living in their parents' basements wondering when their careers
    are going to get started. It is an awful situation. I think we
    need to cut our 35-percent corporate tax rate at least to the
    OECD average of 25. Again, I would cut it to 10 percent or
    eliminate it altogether in order to entice people to start
    companies, bring overseas companies here rather than U.S.
    companies going to Canada and China. How about Chinese and
    Canadian and British and French and Italian companies moving
    into the United States?
        I also think that the $2.1 trillion in overseas profits
    that are trapped overseas--I would call it the Welcome Home
    Tax--bring that money over maybe at a 5-percent tax rate and
    put that money to work. That will do far more to increase wages
    and incomes and job opportunities for people than just changing
    the income tax deduction.
        Senator Wyden. Before we go to Dr. Lindsey, just so we are
    clear, on the bells and whistles with respect to the tax code,
    what you do when you triple the standard deduction is you get
    people out of itemizing. And we have a 1-page 1040 form, and I
    think all of you would agree with that, and we also have the
    lowest corporate rate on offer. So I think your point there is
    also one for following up.
        Let us wrap up with Dr. Lindsey. Fitting--a longtime
    veteran of the tax reform wars.
        Dr. Lindsey. Yes. Again, I think increasing the standard
    deductions is a reasonable way to do it. As I mentioned, in
    2001, we raised the zero threshold from $27,000 to $41,000. We
    did it mainly by having a 10-percent bracket and by doubling
    the child credit. So that is all along the same kind of lines.
    Been there, done that.
        I was interested in how to pay for it, and the comment on
    rent-seeking behavior. I am going to suggest three places where
    there is rent-seeking behavior.
        First, rent-seeking behavior is attracted by price
    differentials. So the higher the tax rate, by definition, the
    more rent-seeking there will be exploiting the tax code.
        Second, I think the key way of reducing rent-seeking
    behavior in the tax code is by simplification, and I went to
    the extreme of, we have to just forget income-based taxation.
    That would be my recommendation. But I agree, I am out there on
    that.
        The third observation I would make is, where I think most
    rent-seeking behavior is now that is holding back our economic
    growth and is also unfair, has to do with maintaining an
    artificially low cost of capital for an extended period of
    time.
        This is an issue that goes back to Fisher. When money is
    free, there will be lots of rent-seeking behavior on how to
    exploit free money. And the more money you have, the easier it
    is to exploit free money. And I say this as a former Governor
    of the Federal Reserve.
        I think we have to move quickly away from the rent-seeking
    behavior that is being encouraged by maintaining a zero or
    near-zero interest rate for an extended period of time.
        Long-term, it can do us no good, and I think that right now
    it is the main source of rent-seeking behavior in America.
        Senator Wyden. We will put you, Dr. Lindsey, with Dr.
    Boushey to work on trying to deal with rent-seeking, because we
    have to get going on this in a bipartisan way.
        Dr. Lindsey. Economists all hate rent-seeking.
        Senator Wyden. I understand. I hear you.
        Senator Heller. Senator Cardin?
        Senator Cardin. Thank you, Mr. Chairman. And let me thank
    all the witnesses here.
        This is an important subject for today's hearing, which is
    fairness in taxation. And I was listening to your testimonies,
    and I want to talk about the progressive consumption tax, a
    bill that I filed in December of last year.
        One could define fairness as the impact it has on middle-
    income families, and I agree with that. So we have designed a
    progressive consumption tax in which low-income and middle-
    income families will pay no more, and in many cases less, than
    they are currently paying, answering many of the concerns that
    you have raised.
        We talk about predictability as a matter of fairness, and
    the one thing I think we learned in 1986 is, our best
    intentions are hard to maintain. There have been 10,000 changes
    to the tax code since 1986.
        We talk about competitiveness--and we know that we have
    high marginal rates--as a matter of fairness for economic
    growth. The progressive consumption tax gets the corporate rate
    down to 17 percent, starts the income tax at $100,000 of family
    taxable income at 15 percent, and graduates for over $.5
    million to 28 percent.
        We talk about rewarding savings for economic growth in this
    country, and moving toward a consumption tax rewards savings,
    which helps us accumulate more for economic growth.
        Then, as Chairman Hatch said in the beginning of this
    hearing, you judge fairness by how you are treated compared to
    your next-door neighbor in the same economic circumstance. The
    progressive consumption tax taxes all consumptions--goods and
    services--including all income on the income tax other than
    four areas of modifications concerning charitable deductions,
    interest on mortgage expenses, State and local deductions, and
    the benefits that employers provide for health and retirement.
        So it really does simplify. It really does allow neighbors
    to know that they are being treated fairly, and it throws in,
    as a matter of fairness, compliance costs that would be much
    less than the current compliance costs.
        So tell me your view. I do not want to hear that this is so
    radical a change, how can it get done. One hundred sixty
    countries around the world have consumption taxes. In fact, we
    are out there with countries that we do not like to be compared
    with that have not used a national consumption tax.
        So, if we are talking fairness, should we be considering
    the progressive consumption tax?
        Dr. Lindsey, I will let you start, because I doubt I am
    going to get a friendly reply after I heard your last comment.
    But I would like to get Mr. Rattner's reply on this.
        Dr. Lindsey. Yes, yes. I think that is one way. Senator, I
    am attracted by the idea. I think I am going to anticipate my
    colleagues at the other end of the table, and I am not
    unsympathetic to what I anticipate is going to be their
    complaint.
        I have looked at the issue of minimizing taxation of
    capital income, and you do it in a very special way in your
    bill, which is not quite as egregious as what I think they are
    going to complain about.
        Our problem is that, when we separate out capital-based
    income from labor-based income or special treatment of savings,
    we open up the possibility of how you define the income and
    what----
        Senator Cardin. Of course, there are other countries that
    have done this. I mean, one of the good things about trying to
    move to a national consumption tax is that other countries have
    confronted similar problems. And what we have tried to do is
    take the very best ways of doing it.
        Dr. Lindsey. I like your bill, Senator.
        Senator Cardin. I think I will stop there. That is a good
    answer. [Laughter.]
        Dr. Lindsey. I would just urge you to go one step further
    and stop with the definition of income and move to cash-based
    taxation instead of income-based taxation.
        Senator Cardin. Are there others who want to comment? I am
    not going to let any of you off the hook. Mr. Rattner, think
    about your reply, because I am going to get to you.
        Mr. Murdock. Senator, unlike Dr. Lindsey, I have not read
    your proposal, but I think it is an interesting one. I am not
    averse to the concept of a consumption tax of whatever sort--
    yours or another.
        I do have a concern, though--a couple. One is the problem
    of, ``We can get that wholesale.'' If you have a consumption
    tax or a sales tax, people find some way of skirting around the
    sales tax at the cash register and try to get goods wholesale
    or whatever.
        Senator Cardin. Of course, we then use the subtraction
    method, which has been a very effective way of collecting taxes
    in other countries. So the efficiency issues have been tested
    in other countries.
        Mr. Murdock. I do think there is also a matter of
    shopkeepers having to deal with additional paperwork. That is a
    bit of a concern of mine. Not a deal killer, but those are
    words of caution I would have about any kind of a sales tax.
        Senator Cardin. With the chair's permission, I would like
    to, if I could, have an extra 30 seconds to get a response.
        Senator Heller. Without objection.
        Senator Cardin. Mr. Rattner?
        Mr. Rattner. I am not that familiar with your bill. I
    apologize for that. But I have no conceptual problem with a
    progressive consumption tax. To me, at the end of the day, what
    you have to measure is, what is the full impact of all the
    taxes on individuals and, for that matter, on business from a
    fairness or progressivity point of view?
        So if a progressive consumption tax--which, as you say,
    would encourage investment--as used by many other countries
    around the world, could be incorporated to achieve some of the
    revenue goals that I mentioned consistent with maintaining at
    least the current progressivity of the overall tax code, if not
    increasing it, then I would have no problem with it.
        Senator Cardin. I will take that as an endorsement.
        Dr. Boushey, very quickly.
        Dr. Boushey. Yes. I would agree with Mr. Rattner on this
    one. I am certainly not opposed to a consumption tax. I am not
    familiar with your legislation, but it sounds very interesting.
        It has been remarkable that other countries have managed to
    implement this kind of policy to great effect and have been
    able to use that to boost revenue in ways that the United
    States has not.
        So I applaud you for looking into this, because that could
    be a solution to some of our problems.
        Senator Cardin. Thank you very much.
        Thank you, Mr. Chairman.
        Senator Heller. Senator Casey, before you start, I just
    want to remind everybody on the committee, let us try to stay
    within our 5 minutes. The chairman did say we had a hard stop
    at 10:20. I just want to make sure everybody gets a chance to
    ask questions.
        Senator Casey?
        Senator Casey. Mr. Chairman, thank you very much. I want to
    thank Chairman Hatch and Ranking Member Wyden for having this
    hearing, and I want to thank our witnesses for being here and
    bringing your experience and your scholarship to these
    difficult issues.
        We need to do more of this for all of us to get to a
    resolution or even a consensus on tax reform.
        I will start with a chart that is not in the materials,
    just as a predicate for my first question. I will start with
    Mr. Rattner.
        One of the more alarming and maybe, for me, the most
    alarming charts I have seen in a very long time was set forth
    in a January 6, 2015 report by the Economic Policy Institute.
    And, among other things, I will just read--Mr. Chairman, I
    would ask that this chart be made part of the record.
        Senator Heller. Without objection.

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        Senator Casey. Thank you very much.
        I would just read the two time periods. Let me read the
    headline first. ``Workers produced much more, but typical
    workers' pay lagged far behind.'' And then the sub-headline is
    ``Disconnect between productivity and typical worker's
    compensation 1948-2013.''
        Here is what it says. ``1948 to 1973, productivity up 96.7
    percent, hourly compensation up 91.3 percent.'' So almost a
    perfect alignment between productivity and wages.
        Then the second part of the chart is 1973 to 2013,
    productivity up still again, but only by 74.4; hourly
    compensation up 9.2 percent--9.2. In the previous period, 91,
    now up just 9 percent.
        So, in addition to the tax issues we are citing today, in
    addition to the income inequality problem that we cite and also
    what drives it, I believe the tax code is one of the
    substantial factors, maybe not the only factor.
        So with that as a predicate, I would start with you, Mr.
    Rattner. On page 4 of your testimony, you say, and I quote,
    ``The 1986 [tax] law provided that capital gains would be taxed
    at the same rate as ordinary income, a principle to which we
    should endeavor to return.'' And then in the next line you give
    a cost for that of $120 billion per year.
        I would ask you, in the context of this committee and
    ultimately, we hope, the Congress arriving at a consensus on
    tax reform, how should we evaluate that information that you
    point to on page 4, meaning the recent trend toward lower
    taxation of capital gains relative to ordinary income? How do
    you think we should evaluate that?
        Mr. Rattner. Well, first, Senator, the chart that you
    referred to I have seen many times. I feel like it is engraved
    in my cerebral cortex, because it is really an important chart
    and a scary chart.
        I think the reasons for that mostly lie outside of the tax
    area, and most relate to globalization and a lot of other
    factors we could certainly talk about on another occasion.
        With respect to the tax on capital income, while I am
    certainly, as a Wall Street guy, very pro-investment and very
    sensitive to the need for investment, as I said in my
    testimony, I have seen the capital gains rate fluctuate to all
    kinds of different levels during my career.
        I have not detected any discernible alignment between the
    tax rates and investment, work ethic, or anything of the sort,
    and I think it is a basic element of fairness and the need for
    revenue in the long run to try to bring the capital gains rate
    more in line with the income tax rate, which would then also
    allow the marginal tax rate on work to come down.
        So to me, I just think it is a principle that we should all
    be working toward as part of any kind of comprehensive tax
    reform.
        Senator Casey. And you base that upon not only your work or
    your scholarship, but as well on your own experience?
        Mr. Rattner. Well, I am not a scholar, so I base it on my
    experience. I see a lot of distinguished scholars here. I am
    sort of out there in the real world, and I see what goes on
    every day in the financial community, and my clear view is
    that, especially when it was down to 15 percent and even as it
    has gradually risen, the tax on capital gains and dividends is
    far too low.
        Senator Heller. Senator Casey, I have to cut you off. We
    have to move on.
        Senator Casey. Let me just make one point on the chart, and
    I will submit a written question to Dr. Boushey.
        The reason I cite the EPI chart is not to say the tax
    problems we are citing today cause it, only to say that, even
    if we have substantial tax reform, we are not going to get
    anywhere close to solving this wage problem.
        So we have a lot more work to do than just tax reform.
        Thank you, Mr. Chairman.
        Senator Heller. Thank you, Senator Casey.
        Senator Isakson, if we can reduce to 4 minutes.
        Senator Isakson. I will not cut anyone off, I promise.
        Senator Heller. Thank you.
        Senator Isakson. I come from the State of Georgia, which is
    the home to Neal Boortz and Congressman John Linder, who wrote
    ``The Fair Tax Book'' 22 years ago, which was a New York Times
    bestseller, which I think details the ultimate cash-based
    taxation, Dr. Lindsey, if I am not mistaken. And it proposed a
    23-percent sales tax on those with an income above $32,000 and
    a repeal of the income tax, the payroll tax, and the
    inheritance tax.
        Are you (A), familiar with the book, and (B), do you have
    any comment on the tax?
        Dr. Lindsey. Yes. It was a very good approach. My only
    variation on that is, I think it would be easier
    administratively to move to a subtraction method, cash-based.
    Basically, it is a value-added tax; do the sales tax that way.
        Secondly, I think if you do that, you can have a two-tier
    tax that would answer some of the progressivity questions that
    plague the fair-tax proposal.
        Senator Isakson. Thank you, and thank you for your work for
    the country.
        Mr. Murdock?
        Mr. Murdock. I am familiar with the concept. I have not
    read the book. I believe that, again, one word of caution to
    all of us is, if people go to the supermarket and confront a
    23-percent sales tax, right on top of everything else, I think
    we have to be careful there is not the temptation to say,
    ``Okay, how can I pay cash? If I give you cash, can I avoid the
    tax?'' and so on. Will that lead to less revenue than intended,
    therefore, the tax rate has to go to 25 to 27 to 30 percent,
    and so on and so forth?
        So I would offer that word of caution.
        Senator Isakson. Dr. Boushey?
        Dr. Boushey. I am not familiar with the book. While I think
    it sounds interesting--and I will definitely follow up and look
    at it--I would caution getting rid of--if I understood you
    correctly--getting rid of the income tax.
        I think that certainly, at least in this country, thinking
    about the effects of the very high incomes that we are seeing
    today and the income tax on both economic growth and
    productivity is something that we cannot discount. But I would
    be happy to follow up with that.
        Senator Isakson. Thank you.
        Mr. Rattner?
        Mr. Rattner. In the interest of time, I think Dr. Boushey
    said essentially what I would have said.
        Senator Isakson. Did you read the book, by chance?
        Mr. Rattner. I have not.
        Senator Isakson. In fairness to my friends, I will make
    sure the three of you who did not read it get a copy of the
    book. I have a box of them at home that I have to get rid of
    somehow. [Laughter.]
        Dr. Lindsey, I agree with your comment on quantitative
    easing. I think it has masked some of our problems, and one of
    these days we are going to pay the piper for it.
        But there is another thing that contributes to income
    inequality that I just wanted to mention before my minute runs
    out. The overregulation of government is causing a lot of
    stagnation in job growth and I think is a suppressant on raises
    and income improvement for workers.
        Would you agree with that, Dr. Lindsey?
        Dr. Lindsey. Yes. I think complexity is certainly doing
    that more than increased regulation. It is doing that at least
    as much as the income tax. We have had an explosion in
    regulation recently.
        Mr. Murdock. I agree with you completely. I will just give
    this observation as someone who lives in Manhattan. The Empire
    State Building was built in approximately, I believe it was 15
    months--start to finish. Try getting a permit to build a
    parking garage in that amount of time. I think that illustrates
    the problem of overregulation that you raise.
        Senator Isakson. Dr. Boushey?
        Dr. Boushey. A lot of those regulations are actually local
    and not Federal, if I understand things. So it seems like a
    different jurisdiction.
        But I would not make the argument that overregulation
    generally is the big problem. I mean, I would point to studies
    that show that the United States has lower entrepreneurship
    than other countries because we do not have the same sorts of
    social insurance and strong middle class that give people the
    platform.
        That is something that, if we want to sort of look at the
    regulatory framework that is stymieing entrepreneurship or the
    platform that is allowing people to become entrepreneurs, it
    looks like we have really erred on the side of not focusing on
    giving people that platform.
        So, if I were to focus on anything, I would focus there.
        Senator Isakson. Not to be rude, but to comply, Mr.
    Rattner, I am going to have to cut you off, because my minute
    just ended right now.
        Senator Heller. Thank you. Try opening up a gold mine in
    Nevada. It takes you 7 years to get through the Federal
    permits.
        Senator Warner, and then Senator Scott.
        Senator Warner. Thank you, Mr. Chairman.
        Let me echo one of the things my friend, the Senator from
    Georgia, said. I do think there may be a way--is regulatory
    relief something we need to look at? I 100-percent agree.
        Some of this, though, may be more involved in the timing of
    giving a decision than just the volume of regulation. So there
    are ways to think through this, I think, that might give us a
    new look.
        I want to make two comments and then, one quick question,
    starting with Dr. Lindsey and then coming on down the line.
        First, I want to also identify myself with Mr. Rattner's
    remarks. I love a lot of my colleagues who always go back and
    say, well, we need to look at the 50-year historic run rate on
    revenues, which is around 17.4 percent of GDP. What sometimes
    they forget to say is that we never balance the budget at 17.4.
        Based upon the new CBO data, the way they measure this, it
    is usually between 18.5 percent and 19.5 percent, and clearly
    we need to bring down spending. And I have taken some arrows
    for suggestions I have made about entitlement reform.
        But without the revenue piece, we are never going to be
    able to grapple with this. And I would point out--and I
    appreciate the panel's comments on the consumption tax. I do
    think it is important to remind ourselves, whenever anyone
    cites other nations' corporate tax rates, that every one of
    these other nations that has this enormously lower corporate
    tax rate has a consumption tax, VAT, however you want to frame
    it. So we ought to be comparing apples to apples.
        I guess the question I have--and I want to start with you,
    Dr. Lindsey, and I appreciate all the work that we have had to
    do in the past together, and this is kind of an out-there
    question.
        But traditional economics, in terms of the mismatch between
    capital and labor, everything we have is about aggregating
    capital, and everything in our tax code, from capital gains to
    depreciation to interest expenses, values capital over labor,
    because in the past, labor has always been abundant, capital
    has been scarce.
        Is there anything that has happened in the last 30 to 40
    years, with overall increase in valuations, with the in-flows
    of capital, with the diminishment of skilled labor, that has
    kind of fundamentally changed that equilibrium? Should there be
    in our tax code some approach that says we should put a little
    more value on skilled labor versus the tremendous biases we
    have in the tax code towards capital? Right down the line.
        Dr. Lindsey. It would certainly benefit me if we did that.
    So I am all for it.
        Senator Warner. Say again, I am sorry.
        Dr. Lindsey. I said it would certainly benefit me if we did
    that, because I feel overtaxed, especially compared to Mr.
    Rattner. [Laughter.]
        But I would urge pursuing that line of reasoning because of
    two reasons. One is the excess complexity of defining the
    difference between labor and capital that now applies because
    things have gotten so complicated as to what is labor and what
    is capital.
        Secondly, I think one of the reasons for the big changes in
    the last few years, in particular, has been that artificially
    low prices of capital imposed by the government greatly
    increase valuations in that sector, greatly increase rent-
    seeking behavior in that sector. We will ultimately, as Senator
    Isakson said, pay a huge price for that.
        But I think a lot of the distortions we are now seeing in
    terms of income distribution and the definition of capital and
    labor income come from that source and not from the tax code.
        Senator Warner. Quickly, down the line.
        Mr. Murdock. Rather than that, I would recognize the fact
    that income tax revenue now is, I believe, a record $1.2
    trillion, approximately, according to the Tax Foundation. If we
    want to bring the budget into balance, what I would do is
    implement the Penny Plan, in which you spend 100 cents on the
    dollar this year, next year $0.99 on the dollar, then $0.98.
    Within about 5 years, the budget comes into balance in, I
    think, a rather painless way. And you say to people running
    Federal agencies, ``Okay, cut a penny from your budget this
    year, cut another penny the next.'' And if you are any kind of
    a competent manager, you ought to be able to squeeze one penny
    out of your budget every year for 5 years and, therefore,
    balance the budget.
        Dr. Boushey. Very briefly. I would direct you to page 7 of
    my written testimony that references a couple of studies that
    look at this question, and I can follow up afterwards, in the
    interest of time.
        Senator Warner. Thank you, Mr. Chairman.
        Senator Heller. Thank you.
        Senator Scott?
        Senator Scott. Thank you, Mr. Chairman.
        I just wanted to thank my colleagues for leaving me the
    balance of the time between now and 10:20 to use at my
    discretion. Thank you very much for those 20 minutes.
    [Laughter.] I will try to fill these minutes appropriately. I
    appreciate that time, sir. I will ignore your 4-minute time
    that just started.
        Dr. Lindsey, I speak at a school in South Carolina every
    month. I think the future is in those schools. I want to spend
    time understanding and appreciating what is in their minds and
    how they view the issue of fairness, and it very often comes
    up.
        One of the questions I typically ask is, if an American or
    a bunch of Americans earn 22 percent of AGI, but they pay 38
    percent of the taxes, is that fair? And I have not found a
    child so far who thinks that is fair.
        Now, I ask a question, if 50 percent of the folks make 11
    percent of the income and only pay 3 percent of the taxes, is
    that fair? I have not found a kid yet who believes that is
    fair.
        Now, certainly, we appreciate the progressive nature of the
    tax code, but most kids--I speak in many inner-city schools--
    cannot understand and appreciate that the definition that we
    use for ``fair'' does not match anything that they would use
    for ``fair.''
        So from my perspective, help me understand why those kids
    are wrong when they believe that, disproportionately, if you
    make X and you pay twice as much, that is unfair. That makes
    sense to me.
        Dr. Lindsey. That is because they have not been to Harvard
    yet. [Laughter.]
        Senator Scott. Let me make that note really quickly here,
    sir, because I think you have a point.
        Dr. Lindsey. I think the comments on this definition of
    fairness are exactly what you are saying. Maybe because I have
    been around too long I am actually somewhat persuaded by the
    notion of progressivity, but I think there has to be some limit
    on that.
        As I have noted in chart 2 of my paper, the ratio of the
    average taxes paid at the top to those paid at the bottom has
    increased dramatically over the last few years. So I think we
    are now pushing the limits on that.
        Secondly, in spite of that fact, we have a rise in income
    inequality. So at best, it is ineffective, and at worst, I
    think it is pernicious.
        Senator Scott. We were talking earlier about the impact
    that our tax code and the regulatory burden may have or may not
    have on creating or stopping entrepreneurs from being creative.
        Having been an entrepreneur for the last 20 years, I will
    tell you that one regulatory burden is not knowing your
    regulatory burdens. Frankly, as an entrepreneur, when you add
    them all together, whether it is the State, whether it is the
    local, whether it is unfunded mandates that come down from the
    Federal Government, the fact of the matter is that the
    challenge that we face as entrepreneurs is that we do not have
    an HR department, we do not have a gang of lawyers waiting to
    do work for free. We take that role upon ourselves.
        You put on top of that the inability to find access to
    capital because of the increase in the capital gains tax, and
    you start stifling the innovative nature of entrepreneurs who
    typically hire people from their own communities, which then
    has a disproportionate effect on smaller businesses, on
    minority communities, and those companies that are not yet
    legacy companies.
        Would you like to comment on that, Mr. Murdock?
        Mr. Murdock. I think you are absolutely right, Senator. I
    think that you have companies facing local regulations, State
    regulations, Federal regulations, in many instances, not
    knowing what the regulations are with Obamacare.
        For example, you are starting a company and trying to
    figure out what your labor costs are, and there are a lot of
    questions as to what the subsidies will be or not be, how much
    are you going to make, what will your premium be, et cetera,
    and there are just a lot of question marks. I never have seen a
    spreadsheet where there is a question mark on the bottom line
    that will help you make any sort of a decision.
        So I think regulatory relief needs to be part of the
    equation to advance freedom and prosperity across the board
    and, as you say, especially in minority communities across the
    country.
        Senator Scott. I know my time is up now. Do I have time for
    another question?
        Senator Heller. It is 10:22. We did have a hard stop
    because of the Prime Minister's address to the Congress. If you
    could make it quick, I do not have a problem with it.
        Senator Scott. Certainly. Mr. Murdock, one thing I noted in
    your comments had to do with school choice. In my opinion, when
    we think about the issue of tax fairness and moving forward, if
    we do not educate those kids who are going to help us solve the
    problem of entitlement spending, we find ourselves in a very
    unfair position moving forward, and certainly they do as well.
        When I look at the impact in the tax code of not providing
    preferences to those parents who are already paying for public
    education but are unable to find a high-performing school in
    their neighborhood, it seems to me consistently unfair that
    that person, a single mom like mine, will pay the tax but will
    not be able to afford to send their student, their child, to a
    school of their own choosing.
        That, to me, seems to be fundamentally unfair, number one,
    and, number two, seems to lead to great disparity in who can
    pay taxes and who will pay taxes long-term.
        Thoughts?
        Mr. Murdock. I think you are correct about that. I think
    one of the things that fuels the inequality on which we focus
    today is the fact that a lot of people who are stuck, either
    with poor jobs or no jobs, they are not getting the kind of
    educations they need in order to get the knowledge and skills
    and even the contacts that they need in order to prosper in
    society.
        And one of the ways out, and one of the ways to improve
    this, is school choice to improve inner-city schools so that
    children actually can get a chance to learn something, to get
    the skills to be able to graduate out of high school, when the
    high school graduation rate in a lot of urban centers--the
    dropout rate, I should say, is around 50 percent. Half the kids
    are not graduating high school. They never catch up, and they
    stay behind for life; not just for 4 or 5 years, but for life.
        That is a national crisis, and I think, unfortunately, the
    government school system in the United States, I describe as a
    system largely of institutionalized child abuse.
        Senator Heller. Senator Scott, I need to move on.
        Senator Scott. Yes, sir.
        Senator Heller. I want to thank the witnesses who were here
    today. I want to thank all the Senators who participated. And I
    have to tell you, I have enjoyed sitting in this seat, as
    temporary as it may be.
        That being said, any questions for the record should be
    submitted no later than Tuesday, March 10th.
        This hearing is adjourned.
        [Whereupon, at 10:25 a.m., the hearing was concluded.]

                                A P P E N D I X

                  Additional Material Submitted for the Record

                                  ----------

     Prepared Statement of Heather Boushey, Ph.D., Executive Director and
            Chief Economist, Washington Center for Equitable Growth

               Taxation and Fairness in an Era of High Inequality

                                  introduction
        I would like to thank Chairman Hatch, Ranking Member Wyden, and the
    rest of the Committee for inviting me here today to testify.

        My name is Heather Boushey and I am Executive Director and Chief
    Economist of the Washington Center for Equitable Growth. The center is
    a new project devoted to understanding what grows our economy, with a
    particular emphasis on understanding whether and how rising levels of
    economic inequality affect economic growth and stability.

        I'm honored to be here today to discuss a very important topic: the
    relationship between fairness and taxation. Over the past several
    decades, economic inequality, on a variety of measures, has increased
    in the United States. The benefits of economic growth have flowed
    primarily to households and individuals at the top of the income and
    wealth ladders. We need to keep this fact in mind when we consider
    taxation and fairness in the years ahead.

        There are three major conclusions from my testimony:

       As inequality has increased, the tax code has not kept pace with
            this change. The tax code does less to reduce inequality than
            it did in the late 1970s
       Efforts to reduce inequality are not in tension with economic
            growth. A variety of research shows that steps taken to reduce
            inequality do not significantly hinder economic growth
       There are policy options that can make the tax code more
            progressive that will have broad benefits for everyone

        The rest of my testimony will focus on documenting the rise in
    inequality, reviewing the academic research on the effects of taxation,
    and some thoughts about where policy should go forward.
                             the rise of inequality
        Inequality, at least in the popular conversation about it, is
    talked about like it is a single phenomenon. Even the most widely used
    measure of inequality, the Gini coefficient, treats it as such. If the
    coefficient rises, we know that inequality has gone up. But what we
    don't know is how exactly inequality has increased.

        In short, the story of the past four decades when it comes to
    inequality is a rapid rise in incomes and wealth for those at the top,
    slower growth for the middle compared to earlier time periods, and
    stagnation, if not outright declines, for incomes at the bottom of the
    ladder.

        According to data from Paris School of Economics professor Thomas
    Piketty and University of California-Berkeley economist Emmanuel Saez,
    the average pre-tax income of the top 1 percent grew by 178 percent
    from 1979 to 2012. Correspondingly, the top 1 percent's share of pre-
    tax income has increased from 8 percent to 19 percent over the same
    time period.\1\
    ---------------------------------------------------------------------------
        \1\ Thomas Piketty and Emmanuel Saez, ``Income Inequality in the
    United States, 1913-1998,'' The Quarterly Journal of Economics 118, no.
    1 (February 2003): 1-39.

        At the same time, inequality of wealth has been rising as well.
    According to research by Saez and London School of Economics professor
    Gabriel Zucman, the share of wealth going to top 0.1 percent of
    households has increased to 22 percent in 2012 from roughly 7 percent
    in 1979. That's a 3-times increase in the share of wealth held by the
    top 10 percent of the top 1 percent. The reason for this rise? The rich
    have a much higher savings rate than the rest of population and the
    increase income inequality appears to be calcifying into wealth
    inequality as the rich save their incomes.\2\
    ---------------------------------------------------------------------------
        \2\ Emmanuel Saez and Gabriel Zucman, Wealth Inequality in the
    United States since 1913: Evidence from Capitalized Income Tax Data
    (National Bureau of Economic Research, 2014), http://www.nber.org/
    papers/w20625.

        According to data from the Congressional Budget Office, the pre-
    tax, pre-transfer income of the median U.S. household grew by an
    average of 0.9 percent a year from 1979 to 2007, the last year before
    the Great Recession. That growth rate is considerably slower than the
    4.7 percent a year for the average income of the top 1 percent of
    households.\3\
    ---------------------------------------------------------------------------
        \3\ Congressional Budget Office, The Distribution of Household
    Income and Federal Taxes, 2011 (Washington, DC, November 12, 2014),
    https://www.cbo.gov/publication/49440.

        For those at the bottom, the reductions in poverty over the past
    several decades have been driven almost entirely by tax-and-transfer
    programs.\4\ This means that our anti-poverty programs are working to
    reduce material hardship. Whether they have reduced it enough is
    another question. But this research also raises concerns about how the
    labor market is working for those at the bottom of the ladder.
    ---------------------------------------------------------------------------
        \4\ Christopher Wimer et al., Trends in Poverty with an Anchored
    Supplemental Poverty Measure, IRP Discussion Paper (Madison, WI:
    Institute for Research on Poverty, December 2013).

        Another shift toward inequality has been the shift of income from
    labor income (salaries and wages) toward capital (business income and
    capital gains). This shift matters for inequality because the
    distribution of capital income is far more unequal than the
    distribution of labor income. Households at the bottom and the middle
    of the income ladder rely much more on labor as a source of income than
    capital.\5\ And capital income is concentrated much more at the top of
    the income ladder.
    ---------------------------------------------------------------------------
        \5\ Congressional Budget Office, Trends in the Distribution of
    Household Income from 1979-2007 (Washington, DC: Congressional Budget
    Office, 2011).

        As these shifts in inequality occurred, the federal tax system was
    doing less to reduce inequality, though the federal tax system is still
    progressive. A quick look at Figure 1 below shows how much the top
    marginal tax rate for labor income has been declining since the early
    ---------------------------------------------------------------------------
    1980s.

        However as the top rate has decreased, the improved economic
    performance that we might expect given the conventional wisdom doesn't
    show up in the data. Figure 2 shows no discernible relationship between
    employment growth and the level of the top marginal tax rate. If
    cutting taxes resulted in stronger employment growth then there would
    be a discernible pattern in the years between 1948 and 2014,
    represented by a green dot in Figure 2. There is no pattern.

     Figure 1

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

     Figure 2

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        The lack of any obvious relationship isn't the case for just
    employment growth. Figure 3 below shows that there is no clear
    correlation between the growth in labor productivity, one of the key
    sources of long-run economic growth, and the top marginal tax rate.

     Figure 3

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        A more in-depth treatment of the relationship between tax rates and
    macroeconomic growth can be found in a 2012 Congressional Research
    Service report by Thomas Hungerford.\6\
    ---------------------------------------------------------------------------
        \6\ Thomas L. Hungerford, Taxes and the Economy: An Economic
    Analysis of the Top Tax Rates Since 1945 (Updated) (Washington, DC:
    Congressional Research Service, December 12, 2012), https://
    www.fas.org/sgp/crs/misc/R42729.pdf.

        Now it's true that the federal income tax has become slightly more
    progressive by some measures. But more tax revenue has come from
    payroll taxes, which have become less progressive. And those at the top
    of the distribution are paying a large share of federal income
    taxation. According to Congressional Budget Office data, the top 1
    percent of earners had 14.2 percent of federal tax liabilities in 1979.
    By 2011, that share increased to 24 percent.\7\
    ---------------------------------------------------------------------------
        \7\ Congressional Budget Office, The Distribution of Household
    Income and Federal Taxes, 2011.

        Yet over that same time period, the top 1 percent's share of pre-
    tax income increased from 8.9 percent to 14.6 percent.\8\ So if
    progressivity is measured by the distribution of taxes paid, then
    progressivity has gone up. But that measure doesn't account for the
    rising inequality in the distribution of income. The result of
    inequality increasing as the tax system does less to reduce inequality
    (as a CBO report points out) is that the inequality of incomes after
    taxation has increased more than the inequality of income before
    taxation.\9\
    ---------------------------------------------------------------------------
        \8\ Ibid.
        \9\ Congressional Budget Office, Trends in the Distribution of
    Household Income from 1979-2007.

        Why should we care about the rise in inequality? There's an
    emerging consensus in economic research that high levels of inequality
    can threaten economic growth. My colleague Carter C. Price and I went
    through the research literature on the relationship between inequality
    and growth and found that research points toward a negative
    relationship.\10\ As inequality goes up, economic growth tends to go
    down. A recent paper by researchers at the International Monetary Fund
    further finds that redistribution does not necessarily hamper
    growth.\11\ The exact reason for this apparent relationship is unclear
    and my organization was founded to help better understand it. But the
    evidence as it stands is cause to seriously grapple with the negative
    effects of inequality.
    ---------------------------------------------------------------------------
        \10\ Heather Boushey and Carter C. Price, How Are Economic
    Inequality and Growth Connected? A Review of Recent Research
    (Washington, DC: Washington Center for Equitable Growth, October
    2014),http://equitablegrowth.ms.techprogress.org/
    ?post_type=work&p=6900&
    preview=true.
        \11\ Jonathan D. Ostry, Andrew Berg, and Charalambos G.
    Tsangarides, Redistribution, Inequality, and Growth, Discussion Note,
    IMF Staff Discussion Note (Washington, DC: International Monetary Fund,
    February 2014),
        http://www.imf.org/external/pubs/ft/sdn/2014/sdn1402.pdf.
    ---------------------------------------------------------------------------
                         academic research on taxation
        Given the rise in inequality, what can tax policy do about this
    trend? One potential concern about taxation is that in an effort to
    reduce inequality, it can reduce economic growth and cause more
    problems than were already there. An increase in labor taxation might
    cause some workers to work less or an increase in capital taxation
    might cause a reduction in savings, both of which are important for
    economic growth.

        These assumptions are widely held by policymakers and economics
    commentators. And to a certain extent they are true. But the level of
    taxation at which these problems would occur is much higher than
    usually expected.

        On the subject of income taxation, a body of new research shows
    that labor income taxes for those at the top of the income ladder have
    no adverse effect on economic growth. A paper by Nobel Laureate Peter
    Diamond and UC-Berkeley economist Emmanuel Saez reviewed the research
    literature on income taxation and finds that progressive taxation is
    well-supported by the research.

        When it comes specifically to top rates, another paper by Saez
    along with Thomas Piketty and Harvard University's Stefanie Stantcheva
    look at the underlying forces that determine what the optimal level of
    taxation could be. After accounting for a variety of factors, the three
    economists find that the top marginal rate could be as high as 83
    percent without affecting economic growth.\12\ I wouldn't take this
    paper as evidence that the United States could increase its top income
    rate to such a level. Rather, the result is instructive that tax rates
    could be significantly higher without major adverse effects.
    ---------------------------------------------------------------------------
        \12\ Thomas Piketty, Emmanuel Saez, and Stefanie Stantcheva,
    ``Optimal Taxation of Top Labor Incomes: A Tale of Three
    Elasticities,'' American Economic Journal: Economic Policy 6, no. 1
    (February 2014): 230-71, doi:10.1257/pol.6.1.230.

        Research also shows that reducing certain tax expenditures wouldn't
    negatively affect the economy either. Research that shows tax
    incentives are often ineffective at incentivizing behavior. The tax
    code may provide a tax break for a certain behavior on the belief that
    this economic incentive will dramatically change behavior, but some
    work casts doubt on how much behavior is changed by these kind of
    incentives. Take, for example, Harvard economist Raj Chetty's work on
    retirement savings decisions. He and his co-authors look at millions of
    data points on changes in retirement savings after a change in tax
    policy in Denmark. What they found is that 85 percent of workers were
    non-responsive to changes in tax incentives and savings rates didn't
    decline.\13\ Of course, this result isn't perfectly applicable to the
    U.S. situation. But its results are suggestive and should be considered
    in the U.S. policy situation.
    ---------------------------------------------------------------------------
        \13\ Raj Chetty et al., Active vs. Passive Decisions and Crowdout
    in Retirement Savings Accounts: Evidence from Denmark, Working Paper
    (National Bureau of Economic Research, November 2012), http://
    www.nber.org/papers/w18565.

        New research also challenges the idea that capital taxation will
    invariably result in lower savings and consequently lower economic
    growth. Recent work that shows the long-held belief that capital income
    shouldn't be taxed at all is flawed. A paper by Piketty and Saez shows
    the flaws with the famous Chamley-Judd assumptions.\14\ Chamley-Judd
    assumptions imply that savers have infinitely long-time horizons when
    thinking about saving for the future. If I care about the returns on my
    savings very, very far in the future, then a tax on savings would end
    up compounding to a point where the burden is immense. Taxing capital
    in this situation would drastically reduce savings. But Piketty and
    Saez show that this assumption doesn't hold up under scrutiny. And a
    recent paper by Ludwig Straub and Ivan Werning of the Massachusetts
    Institute of Technology shows that the zero taxation result doesn't
    even hold up within the Chamley-Judd framework.\15\
    ---------------------------------------------------------------------------
        \14\ Thomas Piketty and Emmanuel Saez, A Theory of Optimal Capital
    Taxation, Working Paper (National Bureau of Economic Research, April
    2012),
        http://www.nber.org/papers/w17989.
        \15\ Ludwig Straub and Ivan Werning, Positive Long Run Capital
    Taxation: Chamley-Judd Revisited, Working Paper (Cambridge, MA:
    National Bureau of Economic Research, August 2014), http://
    www.nber.org/papers/w20441.

        There is also the assumption that reducing capital taxation will
    induce corporations into investing more. The reduction in taxation
    supposedly will increase the return to investment. But research by the
    University of California-Berkeley's Danny Yagan finds that the 2003
    dividend tax cut didn't have any effect on investment or employee
    compensation. Yagan compares the investment behavior of public
    companies, which would were affected by the tax cut, with the behavior
    of privately held companies. What he found was that the public
    companies, which should have invested more due to the tax cut, didn't
    invest more than similar privately held companies.\16\
    ---------------------------------------------------------------------------
        \16\ Danny Yagan, Capital Tax Reform and the Real Economy: The
    Effects of the 2003 Dividend Tax Cut, Working Paper (Berkeley, CA, May
    2014),
        http://eml.berkeley.edu/yagan/DividendTax.pdf.

        Another possible form of capital taxation is increased taxation of
    bequests and inheritances. A 2013 Econometrica article by Piketty and
    Saez argues that the optimal tax rate for inheritances for the United
    States may be as high as 60 percent. And that the rate would be even
    higher for those at the very top. In their paper a high inheritance tax
    is optimal if those bequeathing wealth are relatively unaffected by
    taxation, inheritances are very unequally distributed and society
    favors work over inheritance. And the United States fits this
    description, hence the high level of taxation found in their paper.\17\
    ---------------------------------------------------------------------------
        \17\ Thomas Piketty and Emmanuel Saez, ``A Theory of Optimal
    Inheritance Taxation,'' Econometrica 81, no. 5 (2013): 1851-86,
    doi:10.3982/ECTA10712.

        With this knowledge, what can we say about tax policy moving
    forward?
                             possible policy steps
        So we know that inequality has risen in the United States over the
    past several decades. At the same time we have learned from research
    that there is more room to make the tax code more progressive to help
    reduce inequality. There are quite a few policies that could move the
    tax code in that direction.

        There are many examples of changes that would be consistent with
    the literature. Two that are on the table right now would be
    eliminating the ``stepped-up basis'' for taxation of bequests and
    expanding the Child Tax Credit and making it permanent. A rather large
    loophole currently exists when it comes to the taxation of capital
    gains. When a person inherits, say, a large amount of stock holdings
    from a parent, the inheritor is only taxed on the gains made after they
    inherit the stocks.\18\ So if a parent bought a stock at $1 and it
    appreciates to $99 before the child receives the stock, then the child
    would only be taxed on the gains over $99. So the capital gains that
    occurred over the lifetime on that asset since it was first purchased
    aren't taxed as income.
    ---------------------------------------------------------------------------
        \18\ David Kamin, ``How to Tax the Rich,'' Tax Notes 146, no. 1
    (January 5, 2015): 119-29.

        If we are concerned about the possibility of families passing along
    large estates to children and the potential damages that could have on
    the vitality of the economy, this seems like a loophole we should
    close. There are a variety of other ideas for taxation in this area,
    including eliminating the carried interest loophole, whereby hedge fund
    managers do not pay the ordinary income tax. David Kamin, a professor
    at New York University School of Law, outlines a menu of options for
    taxing the wealth of the very wealthy, including transfer taxes,
    raising the ordinary income tax rates or limiting deductions and
    exclusions.\19\
    ---------------------------------------------------------------------------
        \19\ Ibid.

        But we can also do a variety of things at the low end of the income
    ladder. One example is the Child Tax Credit, which provides workers
    with children a tax credit of up to $1,000 per child in hopes of
    offsetting the costs of raising a child. The tax credit is currently
    partially refundable for a set percentage of income (15 percent) over a
    set threshold (currently $3,000). The value of the tax credit has been
    increased and the threshold decreased, both temporarily, in recent
    years.\20\ I recommend making these reforms permanent. Given the rising
    costs of child care and the incredibly important role of children and
    the development of their future talents for the future growth of the
    economy, giving parents more funds to help raise children makes
    sense.\21\
    ---------------------------------------------------------------------------
        \20\ Tax Policy Center, Taxation and the Family: What Is the Child
    Tax Credit? (Washington, DC, n.d.), http://www.taxpolicycenter.org/
    briefing-book/key-elements/family/ctc.cfm.
        \21\ Heather Boushey and Alexandra Mitukiewicz, Job Quality
    Matters: How Our Future Economic Competitiveness Hinges on the Quality
    of Parents' Jobs (Washington, DC: Washington Center for Equitable
    Growth, June 2014),
        http://ms.techprogress.org/ms-content/uploads/sites/10/2014/06/
    062014-parental-jobs.pdf.
    ---------------------------------------------------------------------------
                                   conclusion
        The past four decades have been a period of high and rising
    inequality in the United States. Tax policy has an important role to
    play in the policy response to this major shift in our economy. It
    cannot, and should not, be policymakers' sole response. But changes are
    needed.

        Our economy currently isn't creating prosperity that is broadly
    shared. And it hasn't for a while. Today's hearing is an important
    contribution to the conversation about how to get our economy on a
    track to creating shared prosperity for all Americans.

                                     ______

          Questions Submitted for the Record to Heather Boushey, Ph.D.
                   Questions Submitted by Hon. Orrin G. Hatch
        Question. Dr. Boushey, would you explain your statement that there
    is no correlation between growth in labor productivity and the top
    marginal tax rate?

        Answer. A 2012 Congressional Research Service report by Thomas
    Hungerford analyzed the relationship between the 65 year decline in top
    statutory tax rates and economic growth. He found that top tax rates
    had little association with savings, investment, and productivity
    growth. It is often argued that lower tax rates increase investment,
    innovation, improvement in labor skills, entrepreneurship, and enhanced
    competition, which are factors in increasing productivity. Thus, it
    would seem that lowering tax rates would have a positive effect on
    these factors and would enhance productivity growth. The figure below
    shows that no positive or negative relationship exists between the top
    marginal tax rate and productivity growth.

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        Question. In your testimony you state that ``as inequality goes up,
    economic growth tends to go down.'' Indeed, I think it would be fair to
    say that that is a theme in your testimony. So, can you please explain
    that? Dr. Lindsey emphasizes the importance of economic growth and
    growth in labor productivity. You emphasize that to get growth, we need
    to address the problem of inequality. So, please explain why rising
    inequality harms economic growth.

        Answer. The most cutting edge studies show that higher inequality
    is associated with slower income gains among those not at the top of
    the income and wealth spectrum. The newest research, ``Redistribution
    Inequality, and Growth,'' by Johnathan Ostry, Andrew Berg, and
    Charalambos Tsangarides, analyzes inequality across developing and
    advanced countries and within the United States and finds that, in the
    long term, inequality is negatively related to economic growth. It also
    finds that countries with less inequality and a larger middle class
    have stronger and more stable growth.

        Economic theory suggests that this may be because inequality may
    inhibit the ability of talented, but less fortunate individuals to
    access opportunities or credit, dampen demand, create instabilities,
    and undermine incentives to work hard, which may reduce economic
    growth. As inequality grows, it may also create a relatively larger
    group of low income individuals who are less able to invest in health,
    education, and training, which may also slow economic growth.\1\
    ---------------------------------------------------------------------------
        \1\ Heather Boushey and Carter C. Price, How Are Economic
    Inequality and Growth Connected? A Review of Recent Research
    (Washington, DC: Washington Center for Equitable Growth, October 2014),
    http://equitablegrowth.ms.techprogress.org/
    ?post_type=work&p=6900&preview=true.

        Question. In your testimony you embrace a study of the retirement
    system in Denmark that concluded most workers there are not responsive
    to changes in tax incentives, although you also acknowledge that the
    result in Denmark may not apply in the U.S. system. The Finance
    Committee has held hearings on the U.S. retirement system. The evidence
    we have received in the committee indicates that business owners are
    motivated to help their employees save, but also are motivated to save
    for their own retirement. And business owners use the cash flow
    generated from the tax breaks for sponsoring plans to pay for matching
    contributions that go to their workers accounts. If the tax incentives
    are too low, owners won't bother to have a plan at work and workers
    will lose out. Now, owners can find other ways to save. But it is much
    harder for low wage workers to find good alternatives to a plan at
    work. And a plan at work is the best place for average workers to save.
    If we reduce the tax incentive in the U.S. as you seem to suggest, what
    will we do to counter the reduction in coverage for average workers
    ---------------------------------------------------------------------------
    when owners close retirement savings plans?

        Answer. I pointed to the paper, ``Active vs. Passive Decisions and
    Crowd-out in Retirement Savings Accounts: Evidence from Denmark,'' by
    Raj Chetty because it questions whether policymakers are indeed having
    the desired outcome they want. Their research finds that 85 percent of
    individuals are passive savers and do not respond to tax subsidies. The
    other 15 percent of individuals in the study are active and respond to
    tax subsidies by shifting assets.

        If owners decide to stop offering retirement plans, there are
    solutions, consistent with this literature, that will allow workers to
    continue saving. For example, policymakers may want to look to
    solutions like the myRA program or the Illinois Secure Choice Savings
    Program to find how pieces of these programs might be implemented to
    serve savers across the country.

        Question. Common sense tells us that if the lion's share of an
    additional dollar of income is extracted by the government in taxes,
    leaving little to the income recipient on an after-tax basis, the
    incentive to perform whatever activity it is that generates the income
    is dulled. And this is true up and down the income scale in our
    existing tax code. At the lower end, for example, some earners can face
    marginal tax rates above 100 percent, once phase-outs and eligibility
    rules for various programs are taken into account. To be clear, I don't
    like high effective marginal tax rates facing anyone, because of the
    undesirable incentives they put in place. And, I believe that there are
    federal programs with eligibility rules that are confusing and serve as
    silos, without any sense that they were designed to account for how the
    various rules can adversely interact. My question is whether there is
    room in tax reform to consolidate, streamline, and simplify the myriad
    of low- and moderate-
    income support programs to at least reduce high effective marginal tax
    rates facing many low-income earners and thereby improve the tax system
    for those earners?

        Answer. Yes, conceivably there is a way to streamline these
    programs, but, if the concern is high effective marginal tax rates, the
    concern cannot be wholly addressed using the tax code. Some of these
    high effective tax rates are driven by means tested spending programs.

        Question. In reviewing today's testimony and the dialogue between
    members and witnesses, you could get the impression that Democrats are
    solely concerned with vertical equity. Vertical equity is measurement
    of the tax burdens among income cohorts. Distribution tables are
    treated as a fetish. Republicans, on the other hand, are delving into
    the issue of horizontal equity. I find it curious that Finance
    Committee Democrats weighed in on aspects of horizontal equity in a
    letter to the Chairman, dated January 29, 2015. The sentence is as
    follows: ``Any reform package must take into account the varying cost
    of living differences among States and regions, and ensure all middle
    class families are protected regardless of where they live.'' Should we
    exclusively look at distribution tables?

        Answer. The U.S. tax code could be improved in a variety of ways.
    We should be concerned about the effects about on the distribution of
    income and wealth. But at the same time, concerns about horizontal
    equity are also important. Not only on a geographic basis like in your
    example, but also based on other characteristics. Two households with
    the exact same income could have very different tax liabilities because
    one household owns a home and the other does not.

        Question. Dr. Boushey, you assert in your testimony that higher
    levels of tax on income from capital may not hurt savings and may not
    hurt economic growth. Should capital gains be taxed at the same rates
    that ordinary income (including all income from labor) are taxed? Or,
    should capital gains continue to receive preferential treatment under
    the Code?

        Answer. Given the research I cited about the economic impact of
    capital taxation, I believe there is evidence that the gap between the
    two tax rates should be closed. A difference between the tax rates for
    capital gains and ordinary income can lead to gamesmanship of the tax
    code. Consider the carried interest tax loophole that allows the income
    of some managers of large investment firms to be taxed at the
    preferential capital gains tax rate.

        Question. You write in your testimony that there is a 3-times
    increase in savings by the super-wealthy between the years 1979 and
    2012. Is that a bad thing? Isn't higher savings associated with higher
    economic growth?

        Answer. In my testimony, I stated that there is a 3-times increase
    in the share of wealth held by the top .1 percent. This means that
    wealth is concentrated in the hands of few.\2\ It appears that income
    inequality is calcifying into wealth inequality as the wealthy have
    higher savings rates. Such wealth inequality could have important
    implications for our economy.
    ---------------------------------------------------------------------------
        \2\ Emmanuel Saez and Gabriel Zucman, Wealth Inequality in the
    United States since 1913: Evidence from Capitalized Income Tax Data,
    Working Paper, (October 2014), http://gabriel-zucman.eu/files/
    SaezZucman2014.pdf.

        Question. Peter R. Orszag, former OMB director and former CBO
    director, published ``To Fight Inequality, Tax Land'' at the same time
    the hearing was scheduled to begin--9 AM, Tuesday, March 3. See http://
    www.bloombergview.com/articles/2015-03-03/to-fight-inequality-tax-land.
    Do you have any reaction to Dr. Orszag's article? In particular, please
    share any thoughts you have on this segment from the article: ``Joseph
    Stiglitz . . . argu[es] that Piketty has misdiagnosed the problem of
    wealth and income inequality, including by ignoring the crucial role of
    land and housing. And as a result, Piketty's policy proposals may do
    more harm than good.'' Please share any thoughts you might have on this
    ---------------------------------------------------------------------------
    paragraph:

            Stiglitz also argues for imposing a land value tax, to directly
            address this source of increasing wealth inequality. Economists
            have long favored such a tax, because it does little or nothing
            to distort incentives: Since land is roughly fixed in supply,
            there's little one can do to escape a land tax. Indeed, from
            the perspective of economic efficiency, a land value tax scores
            higher than even a value-added tax, which is typically seen as
            the most efficient form of taxation.

        Answer. There are a variety of forces that have contributed to the
    rise of income and wealth inequality over the past several decades, and
    as Dr. Orzag points out, the increase in the value of land appears to
    be one such force. I think the topic of land taxation is one worthy of
    future research and debate in the context of other policies.

        Question. Your testimony displays, in Figure 1, the ``Evolution of
    the Top Marginal Tax Rate for Ordinary Income: From 1948 to 2014.'' You
    identify that the Figure ``shows how much the top marginal tax rate for
    labor income has been declining since the early 1980s.'' Were there any
    variations over that period in the level of taxable income to which
    those rates apply? If so, could you explain them?

        Answer. The beginning of the top income tax bracket has fluctuated
    over time. For a Head of Household, the dollar amount at which the top
    rate kicks in has been anywhere from $46,000 to $2.8 million, in 2013
    inflation-adjusted dollars, during the period of 1948 to 2012. The
    level for 2013 was $416,383. These levels have fluctuated over the
    years as the tax rate has been changes and brackets shifted around. But
    for the purposes of the graph I presented, these cutoffs are not a
    major concerns as the tax rate on the very highest earned dollar is the
    relevant metric.

        Question. Your testimony uses the highest bracket ``tax rate for
    regular tax'' from Internal Revenue Service Statistics of Income data
    and, in figures 2 and 3, provides scatter plots of, respectively,
    employment growth and the top marginal tax rate, and labor productivity
    growth and the top marginal tax rate. You use lack of correlations to
    argue, for example, that ``[i]f cutting taxes resulted in stronger
    employment growth then there would be a discernible pattern in the
    years between 1948 and 2014. . . .'' Do you believe that the top
    marginal tax rate measure that you use is a sufficient statistic to
    capture any measure of the concept of ``cutting taxes'' that you
    identify, and one that could adequately capture the dynamic effects of
    changes in tax rates on important macroeconomic aggregates? Are you
    aware of any analyses of changes in tax rates that provide evidence
    that the changes influenced important macroeconomic aggregates such as
    employment growth or labor productivity or account for cross-country
    differentials in labor market aggregates? Are you aware of any analyses
    of changes in tax rates that provide evidence that lower tax rates
    contributed to increased equity valuations, benefiting pension holders
    of all income levels? Do you believe that contemporaneous correlations
    between tax rates and economic aggregates, or stylized correlations of
    the type used in the Hungerford paper that you cite which are based on
    simple regressions with a few time leads or lags, adequately capture
    long-run dynamic effects of changes on economic aggregates, including
    quantities and prices?

        Answer. The correlations I presented as well as the kind from the
    Hungerford are, of course, not full blown economic analysis of the
    question between reductions in top income rates. Rather, these
    correlations were intended to show that while reduction in taxation
    might has a positive effect on economic growth depending upon the level
    of taxation, these kinds of tax cuts are not sufficient for faster
    economic growth.

        Question. You argue in your testimony that progressivity, as
    measure by the distribution of taxes paid, has gone up. Yet, you also
    argue that ``that measure doesn't account for the rising inequality in
    the distribution of income.'' Is it your belief that progressivity, as
    measured by the distribution of taxes paid, is invariant to the
    distribution of income and, hence, such a measure does not account for
    changes in the distribution of the income tax base?

        Answer. Federal income tax rates have become less progressive since
    the 1960s, when economic growth was higher, on average, than it is
    today and have not responded to the changes in the income distribution.
    Further, as more revenue has come from the less progressive payroll tax
    system, the system has become less responsive to rising inequality.

        Question. Your testimony identifies ``an emerging consensus in
    economic research that high levels of inequality can threaten economic
    growth,'' though the paper by you and Carter Price concludes that
    inequality and growth research ``may be'' approaching a new consensus.
    Your testimony goes on to identify that ``research points toward a
    negative relationship'' between inequality and growth, yet ``[t]he
    exact reason for this relationship is unclear. . . .'' And you identify
    in your testimony that ``the evidence as it stands is cause to
    seriously grapple with the negative effects of inequality.'' Therefore,
    your argument appears to be that there may be an emerging consensus on
    a negative relation between inequality and growth, though the reason
    for such a relationship remains unclear, and therefore we must now
    implement policies on the basis of a possible relation that we don't
    understand. Is that accurate? In addition, because there are various
    policies that could be used to reduce after-tax and after-transfer
    income or wealth inequality, what leads you to focus on higher death
    taxes, a $1,000 tax cut for individuals making under $100,000, and
    expanded child tax credits as the primary anti-inequality tax options
    for Congress to now consider?

        Answer. The weight of the research points away from the belief that
    economic inequality is good for the economy, and it may be time to re-
    examine our policies based on this relationship. The paper I wrote with
    Carter Price lays out the evidence for this.

        Because the hearing was focused on taxation, I focused mainly on
    tax policies that could reduce income and wealth inequality, after
    taxes and transfers. Eliminating the step up in basis for the taxation
    of bequests would be a policy intervention to consider if we're
    concerned about the possibility of families passing on large estates to
    children and the potential damages that could have on the vitality of
    the economy. I suggested expanding the child tax credit because of the
    important role of children and the development of their talents for the
    future growth of the economy.\3\
    ---------------------------------------------------------------------------
        \3\ Heather Boushey and Alexandra Mitukiewicz, Job Quality Matters:
    How Our Future Economic Competitiveness Hinges on the Quality of
    Parents' Jobs (Washington, DC: Washington Center for Equitable Growth,
    June 2014), http://ms.techprogress.org/ms-content/uploads/sites/10/
    2014/06/062014-parental-jobs.pdf.

        Question. Your testimony relies on measures of income and wealth
    inequality that show significant increases over time. There have been
    other careful analyses of data on income, by Northwestern University
    economist Robert Gordon for example, that lead at least some analysts
    to believe that, as Gordon writes, ``[t]he rise in American inequality
    has been exaggerated both in magnitude and timing.'' Are you aware of
    analyses that raise questions about your characterizations of the
    evolution of the income distribution over the past four decades? If so,
    ---------------------------------------------------------------------------
    why do you disagree with those analyses?

        Answer. The magnitude and timing of the increase in income
    inequality can change based on the data and measurement mechanism used,
    but inequality remains stark and growing throughout most research.

        Question. Some argue that the bulk of inequality in income is
    attributable to income growth for the upper .1% or even .01% of the
    income distribution. Do you agree?

        Answer. The bulk of inequality is attributed to the ever increasing
    income and wealth of those at the top of the income distribution. It is
    compounded by the fact that incomes at the bottom and middle of the
    distribution are stagnant or barely growing.

        Question. Your testimony cites a study that argues that ``the top
    marginal tax rate could be as high as 83 percent without affecting
    economic growth.'' You argue that the study may not be evidence that
    the U.S. could increase its top rate to such a level, but is
    instructive to identify that ``tax rates could be significantly higher
    without major adverse effects.'' Please summarize how the study you
    rely upon treats mobility within the income distribution, dynamics
    generally, extensive margins, and social welfare weights of differing
    types of participants in the economy. Based on your identification that
    the top marginal tax rate could be as high as 83 percent without
    affecting growth, how high do you think it should be--that is, at what
    exact value would you recommend that we set the top marginal tax rate?

        Answer. The research suggests that top marginal tax rates could be
    much higher than currently without affecting economic growth.

        Question. Your testimony identifies that recent work by Picketty
    and Saez and by Straub and Warner ``shows that the long-held belief
    that capital income shouldn't be taxed at all is flawed'' and discusses
    ``Chamley-Judd assumptions.'' Whether or not assumptions in two
    stylized models have ``flaws,'' I think that most would agree that
    there typically are sensitivities of results of stylized economic
    models to alterations in assumptions. For example, it has been known
    for some time now that with incomplete insurance markets and borrowing
    constraints, there are model structures in which a social-welfare
    maximizing tax planner would choose non-zero capital income tax rates
    even in the long run. Of course, even in those models and in the work
    by Picketty and Saez and by Straub and Warner, there exists sensitivity
    of results to variations in assumptions. Therefore, from this area of
    your testimony, I conclude that results of stylized models are
    sensitive to assumptions. Is this an accurate reading?

        Answer. Your reading is accurate. Stylized models, while important
    to economics, can be quite sensitive to the assumptions built into the
    model.

                                     ______

                  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
    on fairness in taxation:

        The committee will come to order.

        I want to welcome everyone to today's hearing to discuss Fairness
    in Taxation. I also want to thank our witnesses for appearing before
    the committee today. I'm especially delighted that one of our
    witnesses, Deroy Murdock, is a former intern of mine from the Reagan
    era.

        Welcome back, Mr. Murdock. Welcome to our entire panel.

        Speaking of the Reagan era, we all know that the last successful
    comprehensive tax reform effort took place during that time, nearly
    three decades ago. During that effort, President Reagan emphasized
    three principles for tax reform: efficiency, fairness, and simplicity.

        I've made no secret that I believe these same principles--along
    with a handful of others--should guide our current reform efforts.

        The Finance Committee had a hearing on efficiency and growth just
    last week. And a hearing on simplicity will be coming in the future.
    Today, we focus on the tax reform goal of fairness.

        If our tax reform efforts are going to be successful, it is
    essential that the final--hopefully bipartisan--product is viewed as
    fair. If the American people do not believe a tax reform proposal is
    fair, it's hard to see, politically, how it could be enacted.

        Quite simply, fairness, in the context of the tax code, means that
    similarly situated taxpayers should be treated similarly. The tax code
    should not pick winners and losers. It should, instead, be crafted to
    allow people to prosper with as little interference from the government
    as possible.

        Since the 1986 reforms, our tax code has become riddled with
    credits, deductions, exclusions and exemptions, many of which serve to
    benefit certain taxpayers at the expense of others. A fairer tax code
    would be one that eliminates many of these tax expenditures, allowing
    us to broaden the base and lower the overall tax rates.

        Fairness also means that, to the extent reasonably possible,
    Americans should make some contributions for the benefits they receive
    from the government. Clearly, we need to make exceptions for the truly
    needy. Indeed, our tax code should be progressive enough to acknowledge
    individual taxpayers' ability to pay. But, the current situation--where
    nearly half the country is effectively shielded from the cost of
    funding the federal government--deserves some attention in tax reform.

        There is no denying that some of our fellow citizens--particularly
    those with lower incomes--have been left behind. Though we've seen some
    upticks in economic growth, many are not experiencing a positive impact
    on their own situations.

        This is a concern to all of us.

        President Kennedy once said that a rising tide lifts all boats. But
    how is it that we have an economy where not all boats are currently
    being lifted?

        Part of the reason for that is that U.S. law has high hidden
    marginal tax rates--even for low- and modest-income people--that
    discourage career advancement, labor, and savings. I look forward to
    hearing more about what we can do to see that more boats are lifted by
    the rising tides.

        Fairness will undoubtedly be one of the keys to tax reform. While I
    know that, in the context of the tax code, fairness may mean different
    things to different people, I think we've assembled a panel today that
    will allow us to sift through these arguments and arrive at some
    helpful conclusions.

        Before I turn it over to our ranking member, I just want to note
    that I may have to step out from the hearing. I thank my friend Senator
    Heller for volunteering to preside in my absence.

        In addition, we anticipate the hearing closing out at around 10:20
    a.m. in order to allow members to attend Prime Minister Netanyahu's
    address later on this morning.

        With that, I now turn it to Ranking Member Wyden for his opening
    remarks.

                                     ______

        Prepared Statement of Lawrence B. Lindsey, Ph.D., President and
                   Chief Executive Officer, The Lindsey Group
                   growth, fairness, and economic well-being
        Chairman Hatch, Senator Wyden, Members of the Committee. It is an
    honor to be here today to discuss the role taxes play in promoting and
    broadening economic well-being in our country. It is no secret that
    many if not most Americans are dissatisfied with our economic
    performance and they have a right to be. Earnings are stagnating and
    people are concerned about their future and that of their children.

        Ultimately our economic well-being depends on what we are able to
    produce. Government spending doesn't create prosperity, borrowing
    doesn't create prosperity, printing money doesn't create prosperity.
    Taking the income one person produces and giving it to another person
    doesn't create prosperity, it merely moves it around. As Adam Smith
    observed 240 years ago, the wealth of a nation is driven by its
    productive capacity. Society can't consume what it doesn't produce and
    it can't redistribute what it doesn't produce, so when we consider how
    policies can create widespread economic well-being that is the place we
    must start.

        The most common measure of our ability to produce is a data series
    issued by the Commerce Department known as ``Productivity in the Non-
    Farm Business Sector.'' It shows why we are so unhappy with our
    economic performance. In the last four years productivity has shown
    average growth of just 0.7 percent per year. That is the worst four
    year performance since the Carter Administration. By contrast, average
    productivity growth over the last three decades had been much higher
    and had been accelerating, averaging 1.7 percent annually in the 1980s,
    2.2 percent annually in the 1990s, and 2.6 percent annually in the
    first decade of the 21st century. In short, our productivity growth in
    the last four years has only been about one third what it averaged over
    the previous thirty years.

        In terms of living standards for the typical person in a country,
    productivity growth completely dominates distributional considerations
    over a long period of time. Consider a thought experiment I just did
    with my son who is now taking introductory economics. If productivity
    grew as slowly as it has in the last four years, output per worker
    today would be a bit less than 5 times what it was when George
    Washington was President. By contrast, if output per worker grew as
    quickly as it did during the previous 30 years, living standards would
    be almost 80 times what they were when Washington was President. That
    is a 16-fold difference in living standards, roughly the difference
    between quality of life in today's America and that of Yemen or
    Kyrgyzstan.

        Indeed, growth wipes out distributional differences. Consider how
    the typical American lives today compared to George Washington. Most of
    us have been to Mount Vernon. Nice place. And Washington was not just
    in the top one percent in his day, he was probably well within the top
    tenth-of-one-percent. Mount Vernon has seven bedrooms and about 7,000
    sq. of living space. It had no bathrooms. No running water. No central
    heating. No air conditioning. A severely outdated kitchen that could
    only be accessed by going outside. I dare say that almost any family in
    the Fairfax County housing market today would opt for a typical home in
    a subdivision over Mount Vernon circa 1776. Mount Vernon would be
    listed as a real ``fixer upper,'' and housing is just the start of it.
    Washington died at 67, more than a decade before a typical male today.
    He had dentures made of wood--and doubtless suffered from tooth aches
    regularly. He traveled a lot for a man of his day, but never overseas,
    and probably put on in his lifetime fewer miles on horseback than a
    typical person puts on their car in a year. Not a lot of fresh fruits
    and vegetables in his diet during much of the year. Obviously no
    electronics. The simple fact is that the typical American today lives
    far better than George Washington did.

        Why is that? Although there has been some reduction in inequality
    since that time, the reason a typical American lives better than
    Washington did is productivity growth, not redistribution. Over the
    history of the Republic growth has probably been quite a bit better
    than in the last four years, but probably not as good as the previous
    thirty. Real per capita incomes are probably up by a factor of about 40
    implying real productivity growth of about 1.7 percent per year. But as
    a result, a median family today, or even one well below median, lives
    far better than someone who was in the top one tenth of one percent
    when the country was founded.

        This is a critical point. An overemphasis on redistribution at the
    expense of economic growth and economic dynamism and entrepreneurship
    is severely misplaced if what one really cares about is the well-being
    of the typical citizen of the country both today and in the future. As
    our Founding Fathers said when they wrote the Constitution, our purpose
    is to ``secure the blessings of liberty for ourselves and our
    posterity.'' It provides a basic lesson in tax design. In the short run
    an emphasis on fairness is at best a zero sum game. In the long run,
    policies that promote economic growth are almost invariably the ones
    that help the typical individual the most.

        There is a second reason why an overemphasis on redistribution as
    the goal of tax policy is a mistake: history suggests that it is not
    very successful even at achieving the narrow goal for which it is
    intended. Let us consider the historical record. Although a lot of
    political rhetoric is expended talking about redistribution, neither
    political party has been particularly effective at fostering policies
    that make American income distribution more equal. Chart 1 shows the
    change in three measures of income inequality used by the Department of
    Commerce to give a summary statistic of the state of income inequality
    in America. In all cases a positive number indicates a more unequal
    distribution of income over that Presidential term. Note that by most
    measures, income inequality has risen under every President for half a
    century, most rapidly under President Clinton, increasing more during
    his eight years than the eight years of President Reagan and the eight
    years of President Bush combined. And, in President Obama's first term
    income inequality rose as much or more than it did during both of
    President Bush's two terms combined. Rising income inequality was not
    the intent of any of these Presidents; it just has not been something
    that has proven very tractable to public policy. If anything, the
    historical record suggests that a political preoccupation with
    redistribution is associated with a rise in income inequality, not a
    reduction.

        In fact, data from the Census Bureau suggests that inequality has
    risen quite sharply in the last few years despite an enormous increase
    in the attention of the political process to the problem. The ratio of
    the income of a family in the 95th percentile relative to the median
    has risen to a new historic record in the last six years, from 3.58 to
    3.78. The ratio of the income of a family in the 95th percentile
    relative to a family in the 20th percentile has risen even more, from
    8.69 to 9.38, also an historic record. The share of income received by
    the top 5 percent has risen from 21.5 percent to 22.3 percent over the
    same time frame. Yet, I cannot remember a period in my life when so
    much political effort and legislation was devoted to the topic of
    inequality.

        Chart 2 shows how much more progressive income taxation has become
    since 1980. The first column shows the share of income received by the
    top 5 percent of the income distribution according to the Department of
    Commerce. The second column shows the share of income taxes that they
    pay. Note that both columns have grown. The share of income received by
    the top 5 percent has risen a little over 5 percentage points in the
    last 30 years. The share of income taxes paid by the top 5 percent has
    risen a bit more than 20 percentage points over the same time. The
    third and fourth columns compare the taxes paid and income received by
    the top5 percent and by the other 95 percent of households. In 1980,
    for example, the share of taxes paid by the top 5 percent of the income
    distribution was roughly 2\1/4\ times their share of the income they
    received. For the remaining 95 percent, the share of taxes they paid
    was about \3/4\ their share of income. Thus, by comparing these ratios
    we get a sense of how much the average taxes paid by the top 5 percent
    compares with the share of taxes paid by everyone else. In 1980 the top
    5 percent paid about three times what everyone else paid in terms of
    their share of income. By 2010, the share of taxes relative to the
    share of income for the top 5 percent had risen to about 2\3/4\ while
    the same ratio for everyone else had fallen to about \1/2\. This means
    that by 2010 the relative tax burdens had risen from 3 times to 5\1/4\
    times.

        The chart is illustrative for two reasons. First, the top marginal
    tax rate generally declined during that period. It was 70 percent in
    1980 and fell to just over 35 percent by 2010. Despite this, the share
    of taxes paid by the top 5 percent rose consistently, and it also rose
    consistently faster than their share of income. Second, despite an ever
    increasing share of income taxes being paid by the top 5 percent,
    income inequality continued to rise. In other words, higher taxes are
    simply not an effective means of leveling out the income distribution.
    I suspect that when the data come out for 2015 the trend will have
    continued. The average tax rate on higher earners will have risen
    relative to others as will have their share of income. The policies of
    the last few years have been ineffective at best, and possibly
    counterproductive, at producing a more equal distribution of income.

        The other important indicator about the inability of government
    policy to affect income distribution is that income inequality has
    risen despite a massive increase in the share of income that government
    redistributes. Consider the third chart in this presentation. It shows
    the shares of personal income that come from government transfer
    payments to individuals and the share of income coming from what the
    national income accounts call property income--interest and dividends.
    Despite the indications of rising income inequality over the last half
    century or so, the share of personal income coming from transfer
    payments has roughly tripled, from six cents on the dollar to eighteen
    cents on the dollar. It is almost incomprehensible that one can move a
    full twelve percent of income around in an effective matter and not
    make income distribution more equal if that is the intent. The other
    line on the chart shows the share of income that is property income.
    That shows a more complicated pattern, rising until 1980 and then
    falling after 1990. Today transfer payments are a more important source
    of personal income than are interest and dividends, an enormous change.
    If anything, the decline in property income relative to transfers makes
    the failure of redistributionist policies even more compelling.
    Politically inspired policies may sound good rhetorically on the
    evening news, and certainly promote a narrative the news media finds
    compelling, but the success of this rhetoric or the policies they
    advance is not borne out by the facts.

        In conclusion, I would leave this committee with three points.
    First, rising income inequality probably cannot be successfully
    addressed through the tax code or through other intentional
    redistributionist policies. Second, the best way to increase the well-
    being of the typical citizen is to focus on productivity and economic
    growth, not on redistribution. Finally, I would strongly urge this
    Committee to focus on the simplification of taxation. Complex taxation
    neither promotes economic growth nor redistributional objectives. Those
    with the greatest resources have the greatest ability to promote
    complexity and to exploit it once legislation is passed.

        Thank you and I would be happy to answer any questions.

                                  Chart 1 PNeither Party Has Reduced Income Inequality

                                                               Change in  Mean-Log
          Presidency         Change in  GINI Coefficient           Coefficient          Change in  Theil Coefficient

    Nixon/Ford  8 years                          +0.012                        +0.005                        -0.002
    Carter  4 years                              +0.005                        +0.014                        +0.003
    Reagan  8 years                              +0.023                        +0.026                        +0.040
    Bush-41  4 years                             +0.007                        +0.015                        +0.019
    Clinton  8 years                             +0.029                        +0.074                        +0.081
    Bush-43  8 years                             +0.004                        +0.051                        -0.006
    Obama  4 years                               +0.011                        +0.045                        +0.025

    Source: U.S. Dept. of Commerce, The Lindsey Group, See Also Lindsey The Growth Experiment Revisited (2013) p.
      208.

                                           Chart 2 PShare of Taxes Paid by Rich Rose Faster Than Their Share of Income

                                                                 Top Five Percent                       Tax Share/Income Share           Ratio of Tax/Income

                                                       Share of Income    Share of Income Tax         Top 5%           Everyone Else      Shares Top/Bottom

    1980                                                           16.5                 36.9                 2.24                 0.76                 2.95
    1990                                                           18.5                 43.6                 2.36                 0.69                 3.42
    1995                                                           21.0                 48.9                 2.33                 0.65                 3.58
    2000                                                           22.1                 56.4                 2.55                 0.56                 4.55
    2005                                                           22.2                 58.9                 2.65                 0.53                 5.00
    2010                                                           21.7                 59.1                 2.72                 0.52                 5.23

    Source: Bureau of Census, Internal Revenue Service.

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

                                     ______

        Questions Submitted for the Record to Lawrence B. Lindsey, Ph.D.
                   Questions Submitted by Hon. Orrin G. Hatch
        Question. Dr. Lindsey, this question is for you. Dr. Boushey says
    in her testimony that there is no clear correlation between growth in
    labor productivity and the top marginal tax rate. It frankly surprises
    me, but she is clearly a very intelligent and informed woman, so I
    wanted to get your thoughts on that. Do you have a response to that? Do
    you agree?

        Answer. The use of the simple ``top marginal rate'' in such a
    calculation is what statisticians would consider a mis-specified
    variable, meaning in plain English that it doesn't measure what it
    purports to measure. For example, in 1960 the top rate was 91 percent,
    but only 8 taxpayers in the country paid at that rate, so it was kind
    of meaningless. Very high rates have usually been accompanied with
    ample ability to avoid those rates and in this period business losses
    were generally deductible against other income; rental real estate and
    other forms of business activity were widely used. If the rates and the
    rules were stable for a long period of time, and they were, the change
    in productivity would not be affected by the level of rates since other
    factors, and not the tax rate, were at play. The reduction in the top
    tax rate from 91 to 70 percent--the so-called Kennedy Tax Cut--was
    accompanied by an enormous boom in economic growth.

        Moreover, broad based rate reductions may have the effect of
    dramatically increasing the supply of labor thereby temporarily
    depressing the measured labor force productivity. A prime example of
    this was the Reagan cuts in the early 1980s which sharply increased the
    labor force participation rate of middle and upper middle class married
    women. In 1980 the 49 percent bracket hit a married couple at a taxable
    income of just $41,500 making participation by a second earner in a
    middle class household fairly unattractive. Reagan not only cut that
    rate by 25 percent, he added a ten percent deduction for the earnings
    of the lower-earning spouse. Female labor force participation, which
    had been relatively stagnant in the late 1970s surged beginning in
    1982. The immediate effect was a slowing in productivity, but
    ultimately, the addition of these workers led to a productivity and
    economic surge that lasted for several decades.

        Question. Common sense tells us that if the lion's share of an
    additional dollar of income is extracted by the government in taxes,
    leaving little to the income recipient on an after-tax basis, the
    incentive to perform whatever activity it is that generates the income
    is dulled. And this is true up and down the income scale in our
    existing tax code. At the lower end, for example, some earners can face
    marginal tax rates above 100 percent, once phase-outs and eligibility
    rules for various programs are taken into account. To be clear, I don't
    like high effective marginal tax rates facing anyone, because of the
    undesirable incentives they put in place. And, I believe that there are
    federal programs with eligibility rules that are confusing and serve as
    silos, without any sense that they were designed to account for how the
    various rules can adversely interact. My question is whether there is
    room in tax reform to consolidate, streamline, and simplify the myriad
    of low- and moderate-income support programs to at least reduce high
    effective marginal tax rates facing many low-income earners and thereby
    improve the tax system for those earners?

        Answer. Senator, your observation about high rates affecting the
    economic decisions of everyone is spot on. And it is not just the
    legislated tax rates that matter--the withdrawal of benefits also acts
    like a tax. The Congress has recognized this in the case of social
    security payments and has reduced or eliminated the reduction in
    benefits paid to older workers--thus helping older workers participate.
    Last year 45 percent of the net increase in the labor force was by
    individuals over age 55--an amazing number. The biggest deleterious
    effect of recent expansions in the availability of benefits has been on
    married families with children in the $25,000-$50,000 range. Numerous
    studies, including by center-left think tanks like the Urban Institute
    and the Hamilton project have noted that work by the second spouse in
    these households often leads to 50-80 percent marginal tax rates. Labor
    market data suggests that roughly 2\1/2\ million middle aged workers
    have left the workforce since 2007 and not re-entered as a result. The
    Congressional Budget Office estimated that more than 2 million fewer
    workers would be in the workforce just because of Obamacare.

        The right way to fix this is, as you note, a simplification of our
    overly complex and overlapping benefit structure. Much of this is
    within the jurisdiction of the Committee. The easiest reform is not by
    adding another tax provision, but by tackling these other programs
    directly and ideally integrating them into a combined tax/transfer
    structure.

        Question. In reviewing today's testimony and the dialogue between
    members and witnesses, you could get the impression that Democrats are
    solely concerned with vertical equity. Vertical equity is measurement
    of the tax burdens among income cohorts. Distribution tables are
    treated as a fetish. Republicans, on the other hand, are delving into
    the issue of horizontal equity. I find it curious that Finance
    Committee Democrats weighed in on aspects of horizontal equity in a
    letter to the Chairman, dated January 29, 2015. The sentence is as
    follows: ``Any reform package must take into account the varying cost
    of living differences among States and regions, and ensure all middle
    class families are protected regardless of where they live.'' Should we
    exclusively look at distribution tables?

        Answer. There are numerous statistical problems with distribution
    tables. For example, transfer payments, which now constitute nearly one
    dollar in every five of personal income, are excluded from the measure
    of income as well as from the net distributional effect of our tax/
    transfer system. Capital gains is counted as ``income'' in the year the
    asset is realized. Note first that capital gains is NOT considered as
    ``income'' in the National Income Accounts and is not income in most
    accounting. Note also that since many such gains are realized in a
    large amount in a single year and are not recurring, they by their very
    nature exaggerate the tax effect in the income distribution.

        But most important, as the tables I present clearly show, the
    distribution of the tax system has become enormously MORE progressive
    over the past few decades and DESPITE this there has been very little
    impact on the measured distribution of income. At best therefore, one
    could describe the over emphasis on this type of statistical analysis
    as misplaced.

        Question. Dr. Lindsey, you say that ``higher taxes are not an
    effective means of leveling out the income distribution.'' But why not?
    It would certainly seem like they would be. That would be my intuition.
    And if taxes aren't effective, then what is effective at leveling out
    the income distribution?

        Answer. The most important effect of high marginal tax rates is to
    reduce social mobility--they are like a high entry fee to join a club,
    in this case, the club of the well-to-do. If I start as an ordinary
    American but want to be well-to-do and the government taxes my efforts
    to earn, save, and accumulate, I have very little prospect of ``making
    it.'' Enhanced regulation has the same effect, as does limiting choice
    in education. Big government involvement in our economic lives has the
    effect of locking in the status quo, not trying to change it.

        Question. Dr. Lindsey, you say, and I agree with you, that the
    Committee should focus on simplification. You also say that the tax
    code does not advance re-distributionist goals well. Could it be that
    the tax code's redistributionist goals are stymied by its own
    complexity? That is, lower-income people aren't helped by many of the
    re-distributionist provisions in the Code, because they can't
    understand them, and the upper-income people are able to plan around
    the re-distributionist goals because they can afford to hire experts to
    navigate their way through the complexity?

        Answer. Senator, your question is right on point. Complexity is the
    enemy of fairness. Complexity favors those who can hire lawyers and
    accountants to figure out how to minimize tax. Complexity also acts
    like a lump-sum tax on anyone who has to prepare a tax return and has
    to figure out what to do. Complexity also has the effect of moving
    resources to non-economic professions like lawyering and accounting and
    lobbying--groups that tend to be fairly far up on the income ladder. It
    was interesting that both Dr. Boushey and I stressed the problem with
    rent seeking behavior. But it is the combination of high rates and
    complex rules that maximizes the reward to rent seeking at the cost of
    real and productive economic activity.

        Question. Dr. Lindsey, you state that in recent decades income
    inequality grew the most when Presidents were seemingly trying to do
    the most to curb the growth of inequality. That is, efforts to curb
    growing inequality have backfired. But why would that be?

        Answer. Having served in government over a span that encompassed
    three decades I have come to view the Law of Unintended Consequences as
    one of the most powerful there is. Speculating as to why it is so
    powerful is more difficult. My view is that when government tries to do
    something it does so in a way that makes the lives of ordinary
    individuals more complicated and also moves power from individuals to
    Washington. Thus ordinary individuals are more burdened, opportunity is
    reduced, and those ``rent seekers'' who make their living off of
    government imposed complexity are the big beneficiaries.

        Question. Peter R. Orszag, former OMB director and former CBO
    director, published ``To Fight Inequality, Tax Land'' at the same time
    the hearing was scheduled to begin--9 AM, Tuesday, March 3. See http://
    www.bloombergview.com/articles/2015-03-03/to-fight-inequality-tax-land.
    Do you have any reaction to Dr. Orszag's article? In particular, please
    share any thoughts you have on this segment from the article: ``Joseph
    Stiglitz . . . argu[es] that Piketty has misdiagnosed the problem of
    wealth and income inequality, including by ignoring the crucial role of
    land and housing. And as a result, Piketty's policy proposals may do
    more harm than good.'' Please share any thoughts you might have on this
    paragraph:

            Stiglitz also argues for imposing a land value tax, to directly
            address this source of increasing wealth inequality. Economists
            have long favored such a tax, because it does little or nothing
            to distort incentives: Since land is roughly fixed in supply,
            there's little one can do to escape a land tax. Indeed, from
            the perspective of economic efficiency, a land value tax scores
            higher than even a value-added tax, which is typically seen as
            the most efficient form of taxation.

        Answer. Both Director Orzag and Professor Stiglitz are correct in
    pointing out the flaws in the Piketty argument. Serious economists have
    pointed out numerous statistical and analytical flaws in his approach.
    This has not seemed to diminish his attraction to the mainstream media
    however. Narrative tends to trump truth more and more these days. As to
    the land tax, I would note that this has traditionally been the
    province of local government and that land (and improvements) are taxed
    at a reasonable rate already. If one considers the real return to
    capital as about 5 percent, a 1 percent of value property tax (such as
    I face in Virginia) is roughly a 20 percent tax on the imputed income
    generated by that property. I know by experience that my late mother's
    tax on her house was closer to 2\1/2\ percent of value--the equivalent
    of a 50 percent tax. So I think that taking this into account is very
    important in the context of the case that Stiglitz and Orzag make.

                                     ______

         Prepared Statement of Deroy Murdock, Fox News Contributor and
                          Senior Fellow, Atlas Network
        Good morning.

        Thank you very much for inviting me here today. I am thrilled to
    participate, and especially delighted to appear before Chairman Hatch,
    for whom I interned while a student at Georgetown University. Who would
    have imagined 30 years ago, Mr. President pro tem, that we would be
    here today, in such elevated circumstances?

        As I thought about today's topic, I imagined someone weighing two
    job offers: Company A offers $50,000, but the boss makes $55,000. That
    represents an income gap of just 10 percent. I think even the Occupy
    Wall Street people could live with that. Now Company B offers $500,000,
    but the boss makes $1 million. Imagine that! Income inequality of 100
    percent. Who does the boss think he is?

        Now would you prefer job offer A? How about job offer B? Most
    people would grab the half million dollars and laugh all the way to the
    bank--never mind the 100 percent income gap. And that's the point. Too
    much of our political rhetoric these days revolves around envy,
    resentment, and sometime even violence towards the affluent, all in an
    effort to take what they have and redistribute it to those who have
    less.

        Obama's words from September 27, 2011 illustrate this point. He
    said: ``If asking a millionaire to pay the same tax rate as a plumber
    makes me a class warrior--a warrior for the working class--I will
    accept that. I will wear that charge as a badge of honor.''

        The American Left has made plenty of hay about the notion that the
    wealthy do not pay ``their fair share'' of taxes. This is an exciting
    slogan. Too bad it is unsupported by facts. According to Internal
    Revenue Service data, in 2012, the top 1 percent of tax filers earned
    21.9 percent of all adjusted gross income. They also paid 38.1 percent
    of all federal income taxes. That looks to me like more than their
    ``fair share.'' The top 10 percent of earners made 47.9 percent of AGI
    and paid 70.2 percent of income taxes. What about the bottom 50
    percent? They made 11.1 percent of AGI and paid just 2.8 percent of
    federal income taxes.

        So, rather than berate top income earners, we should thank them for
    paying more than their fair share to keep Washington so generously
    funded. Rather than obsess over how to squeeze, humiliate, and punish
    the wealthy, let's focus on how to lift the incomes of those at the
    opposite end of the income distribution. Rather than drag the wealthy
    from their penthouses, let's figure out how to bring those on the
    sidewalk up to the third or fourth floor, and help them move up from
    there.

        I would make three suggestions:

        First, America needs a tax code that is geared towards dynamic,
    robust economic growth--the kind of expansion in national output that
    enriches the poor and middle class, as well as the affluent. I
    recommend scrapping the U.S. Tax Code in its 72,000-page splendor and
    replacing it with a flat tax. While this idea needs deeper study and
    proper scoring, the National Taxpayers Union has estimated, very
    roughly, that a 10 percent tax with no deductions paid by all American
    adults would generate about as much income as today's convoluted
    system. I call this the 0-10-100 Plan, and we can discuss it further,
    if you like. The fairest tax would be one universal rate. Everyone
    would pay his fair share.

        Second, America's 35 percent corporate tax is the OECD's highest.
    This is absurd, self-destructive, and a national disgrace. The
    corporate tax should be slashed dramatically, if not scrapped
    altogether. Shrinking or eliminating the corporate tax would be a small
    price to pay for the far, far greater benefit of seeing American
    companies remain here, rather than move offshore and haul jobs with
    them. And if a far more competitive corporate tax system actually
    attracts foreign firms to relocate here, all the better for Americans,
    especially those with low incomes.

        Third, disadvantaged Americans need to make themselves globally
    competitive. Good luck doing so with the often calamitous government
    schools that hermetically seal the minds of too many low-income and
    minority children. Higher standards, charter schools, and initiatives
    like the Washington, DC voucher program and the private Harlem
    Educational Activities Fund will help these children develop the
    intellects and skills that they need to prosper in a world where the
    Internet ships talent cross borders at the speed of light.

        Thank you very much, Mr. Chairman, ranking member Wyden, and the
    other members of the Committee. I look forward to your questions and
    comments.

                                     ______

     [From The Wall Street Journal, Updated November 20, 2014 8:42 a.m. ET]

                    What the Inequality Warriors Really Want
    Confiscating Wealth is Ultimately About Political Power. Koch Brothers,
                                      No.
                          Public-Employee Unions, Yes.
                              By John H. Cochrane
        Progressives decry inequality as the world's most pressing economic
    problem. In its name, they urge much greater income and wealth
    taxation, especially of the reviled top 1% of earners, along with more
    government spending and controls--higher minimum wages, ``living''
    wages, comparable worth directives, CEO pay caps, etc.

        Inequality may be a symptom of economic problems. But why is
    inequality itself an economic problem? If some get rich and others get
    richer, who cares? If we all become poor equally, is that not a
    problem? Why not fix policies and problems that make it harder to earn
    more?

        Yes, the reported taxable income and wealth earned by the top 1%
    may have grown faster than for the rest. This could be good
    inequality--entrepreneurs start companies, develop new products and
    services, and get rich from a tiny fraction of the social benefit. Or
    it could be bad inequality--crony capitalists who get rich by
    exploiting favors from government. Most U.S. billionaires are
    entrepreneurs from modest backgrounds, operating in competitive new
    industries, suggesting the former.

        But there are many other kinds and sources of inequality. The
    returns to skill have increased. People who can use or program
    computers, do math or run organizations have enjoyed relative wage
    increases. But why don't others observe these returns, get skills and
    compete away the skill premium? A big reason: awful public schools
    dominated by teachers unions, which leave kids unprepared even to enter
    college. Limits on high-skill immigration also raise the skill premium.

        Americans stuck in a cycle of terrible early-child experiences,
    substance abuse, broken families, unemployment and criminality
    represent a different source of inequality. Their problems have proven
    immune to floods of government money. And government programs and drug
    laws are arguably part of the problem.

        These problems, and many like them, have nothing to do with a rise
    in top 1% incomes and wealth.

        Recognizing, I think, this logic, inequality warriors go on to
    argue that inequality is a problem because it causes other social or
    economic ills. A recent Standard & Poor's report sums up some of these
    assertions: ``As income inequality increased before the [2008
    financial] crisis, less affluent households took on more and more debt
    to keep up--or, in this case, catch up--with the Joneses.'' In a 2011
    Vanity Fair article, Columbia University economist Joe Stiglitz wrote
    that inequality causes a ``lifestyle effect . . . people outside the
    top 1 percent increasingly live beyond their means.'' He called it
    ``trickle-down behaviorism.''

        I see. A fry cook in Fresno hears that more hedge-fund managers are
    flying in private jets. So he buys a pickup he can't afford. They are
    saying that we must tax away wealth to encourage thrift in the lower
    classes.

        Here's another claim: Inequality is a problem because rich people
    save too much. So, by transferring money from rich to poor, we can
    increase overall consumption and escape ``secular stagnation.''

        I see. Now we need to forcibly transfer wealth to solve our deep
    problem of national thriftiness.

        You can see in these examples that the arguments are made up to
    justify a pre-existing answer. If these were really the problems to be
    solved, each has much more natural solutions.

        Is eliminating the rich, to eliminate envy of their lifestyle,
    really the best way to stimulate savings? Might not, say, fixing the
    large taxation of savings in means-
    tested social programs make some sense? If lifestyle envy really is the
    mechanism, would it not be more effective to ban ``Keeping Up With the
    Kardashians''?

        If we redistribute because lack of Keynesian ``spending'' causes
    ``secular stagnation''--a big if--then we should transfer money from
    all the thrifty, even poor, to all the big spenders, especially the
    McMansion owners with new Teslas and maxed-out credit cards. Is that an
    offensive policy? Yes. Well, maybe this wasn't about ``spending'' after
    all.

        There is a lot of fashionable talk about ``redistribution'' that's
    not really the agenda. Even sky-high income and wealth taxes would not
    raise much revenue for very long, and any revenue is likely to fund
    government programs, not checks to the needy. Most inequality warriors,
    including President Obama, forthrightly advocate taxation to level
    incomes in the name of ``fairness,'' even if those taxes raise little
    or no revenue.

        When you get past this kind of balderdash, most inequality warriors
    get down to the real problem they see: money and politics. They think
    money is corrupting politics, and they want to take away the money to
    purify the politics. As Berkeley economist Emmanuel Saez wrote for his
    2013 Arrow lecture at Stanford University: ``top income shares matter''
    because the ``surge in top incomes gives top earners more ability to
    influence [the] political process.''

        A critique of rent-seeking and political cronyism is well taken,
    and echoes from the left to libertarians. But if abuse of government
    power is the problem, increasing government power is a most unlikely
    solution.

        If we increase the top federal income-tax rate to 90%, will that
    not just dramatically increase the demand for lawyers, lobbyists,
    loopholes, connections, favors and special deals? Inequality warriors
    think not. Mr. Stiglitz, for example, writes that ``wealth is a main
    determinant of power.'' If the state grabs the wealth, even if fairly
    earned, then the state can benevolently exercise its power on behalf of
    the common person.

        No. Cronyism results when power determines wealth. Government power
    inevitably invites the trade of regulatory favors for political
    support. We limit rent-seeking by limiting the government's ability to
    hand out goodies.

        So when all is said and done, the inequality warriors want the
    government to confiscate wealth and control incomes so that wealthy
    individuals cannot influence politics in directions they don't like.
    Koch brothers, no. Public-employee unions, yes. This goal, at least,
    makes perfect logical sense. And it is truly scary.

        Prosperity should be our goal. And the secrets of prosperity are
    simple and old-fashioned: property rights, rule of law, economic and
    political freedom. A limited government providing competent
    institutions. Confiscatory taxation and extensive government control of
    incomes are not on the list.

                                     ______

                    [From the National Review, May 4, 2012)

                             Ignore the Income Gap
        Rather Than Lift the Lobby, the Left Would Plunge the Penthouse
                                By Deroy Murdock
        ``Every time a bank fails an angel gets its wings.'' So goes a
    graffito in Manhattan's East Village. One block away, as marchers
    occupied Broadway on May Day, their picket signs proclaimed,
    ``Millionaires must pay their fair share'' and ``No free ride for Wall
    Street.'' Lacking capital letters, another oddly stated: ``i put all my
    books in the oven and i'll never read again.''

        Apart from that last, puzzling sentiment, the placards echoed
    Occupy Wall Street and its spiritual leader, President Barack Obama.
    Class warriors scream about imposing ``fairness'' on the rich, but
    their shouts become mumbles when asked what precise tax rate achieves
    ``fairness.''

        Liberals fall mum amid these facts: In 2009, the latest IRS figures
    demonstrate, the much-maligned top 1 percent of taxpayers earned 17
    percent of national income and paid 37 percent of federal income taxes.
    The top 10 percent made 43 percent of national income and surrendered
    70.5 percent of income-tax revenues. Meanwhile, the bottom 50 percent
    scored 13.5 percent of national income and paid just 2.3 percent of
    income taxes.

        Unfair? If so, the Left should specify what heavier tax burden on
    the wealthy or lighter tax load on the lower half of taxpayers would
    constitute ``fairness.''

        ``Fairness'' evidently does not involve augmenting tax revenues,
    either to pay down the national debt or even to fund the social
    spending that makes liberals salivate.

        As the Ethics and Public Policy Center's Peter Wehner recalled
    April 12 in a superb essay on Commentary's website, in 2008 then-
    Senator Obama advocated a higher capital-gains tax rate. He did so even
    though lowering that tax rate from 28 percent to 20 percent in 1997
    actually expanded net revenues by 124 percent--from $54 billion in
    Fiscal Year 1996 to $121 billion in FY 2000, according to a
    Congressional Budget Office report. That tax-rate cut was enacted under
    tea-party pinup William Jefferson Clinton.

        ``Well, Charlie,'' Obama told ABC's Charles Gibson during the 2008
    campaign, ``what I've said is that I would look at raising the capital-
    gains tax for purposes of fairness.''

        For too many liberals like Obama, ``fairness'' is not about
    enriching the modest; it's about impoverishing the moneyed.

        Multibillionaire Warren Buffett has energized liberals with his
    still-unverified claim that his tax rate lags his secretary's. If that
    is true, ``fairness'' could mean slashing the secretary's taxes to
    match Buffett's 11 percent effective tax rate. (Like many 1 percenters,
    Buffett chooses to derive most of his income from lower-taxed
    investments rather than higher-taxed wages.) Somehow, reducing the
    secretary's taxes never came up. Instead liberals demand the so-called
    Buffett Rule, an instrument for bludgeoning the successful rather than
    boosting the downtrodden.

        In her final appearance in the British House of Commons, Prime
    Minister Margaret Thatcher skewered this liberal mindset. Feisty as
    ever, she answered her colleagues' questions on the gap between the
    needy and the affluent: ``The honourable gentleman is saying that he
    would rather that the poor were poorer, provided that the rich were
    less rich,'' Thatcher explained on November 22, 1990. ``So long as the
    gap is smaller, they would rather have the poor poorer. One does not
    create wealth and opportunity that way.''

        Like Thatcher, American conservatives should reject the concept of
    the income gap. Who cares about the gap, provided that those on the
    bottom advance in absolute terms?

        Consider two job offers: (a) You will earn $50,000, while your boss
    makes $55,000, just 10 percent more. (b) You will earn $500,000, while
    your employer gets $1 million--twice your salary. ``Unfairness''
    suddenly looks spectacular.

        Here's how the Right should challenge the Left:

        ``If you dislike income inequality, lift those with the least.
    Let's adopt universal school choice, allow personal Social Security
    retirement accounts (to democratize long-term capital accumulation),
    radically reduce or eliminate America's anti-competitive 35 percent
    corporate tax (to supercharge businesses), and pass right-to-work laws
    (so the jobless won't fester outside closed shops). Let's build the
    Keystone Pipeline (to create 20,000 blue-collar positions right now and
    lower everyone's energy costs), frack for natural gas, and tame the
    EPA, OSHA, SEC, and other power-mad bureaucracies, so U.S. companies
    will stay here, and foreign firms will move in.''

        If liberals agree, they should enact this economic-growth agenda.
    If they do not, they should explain why they reject these proposals to
    help poor people prosper.

        Most likely, the ensuing silence would reveal liberals' true
    intentions: not to lift the lobby, but to plunge the penthouse.

                                     ______

                       [National Review, October 3, 2011]

                        Obama Proudly Declares Class War
                    But the Rich Already Are Getting Soaked
                                By Deroy Murdock
        It's official: America is at class war, and Pres. Barack Obama
    proudly leads the charge against this country's wealthy.

        ``If asking a millionaire to pay the same tax rate as a plumber
    makes me a class warrior--a warrior for the working class--I will
    accept that,'' Obama shouted Tuesday at Denver's Abraham Lincoln High
    School. ``I will wear that charge as a badge of honor.''

        ``Middle-class families shouldn't pay higher tax rates than
    millionaires and billionaires,'' Obama said. ``A teacher or a nurse or
    a construction worker making $50,000 a year shouldn't pay higher tax
    rates than somebody making $50 million.''

        These may be the harshest such comments that Obama has made, but
    they certainly are not the first.

        ``The debt ceiling should not be something that is used as a gun
            against the heads of the American people to extract tax breaks
            for corporate-jet owners,'' Obama said on July 6.
        ``We can't just tell the wealthiest among us, `You don't have to
            do a thing. You just sit there and relax, and everybody else,
            we're gonna solve this [deficit] problem,' '' Obama remarked on
            April 14.
        Most revealingly, Obama confessed on April 28, 2010: ``I do think
            at a certain point, you've made enough money.''

        Obama's assault on the affluent rests upon a sky-high stack of
    lies. Obama is too well-staffed and too well-informed not to know
    otherwise. So, maddeningly, he straight-out lies to the American
    people.

        For days before Obama opened his mouth in Denver, multiple news
    accounts and opinion pieces annihilated the casus belli of his War on
    the Wealthy. Nonetheless, Obama keeps spouting falsehoods, perhaps
    hoping that his smooth voice will hypnotize Americans into believing
    his words.

        ``Fact check: The wealthy already pay more taxes,'' read the
    headline above a September 20 Associated Press dispatch. ``President
    Obama says he wants to make sure millionaires are taxed at higher rates
    than their secretaries,'' Stephen Ohlemacher wrote. ``The data say they
    already are.''

        Nationwide, Ohlemacher and others dismantled Obama's soak-the-rich
    thesis. The rich are soaked today!

        In 2008, its latest data indicate, the Internal Revenue Service
    harvested $1.0315 trillion in income tax--of which the bottom 50
    percent of earners collectively paid just $27.9 billion. The top 1
    percent paid $392.15 billion; the top 5 percent paid $605.7 billion;
    and the top 10 percent paid $721.4 billion. Thus, the top 1 percent of
    taxpayers furnished 14 times the income taxes that the bottom 50
    percent supplied.

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        In 2009, the IRS reports, those who earned between $20,000 and
    $30,000 paid an average of 2.5 percent of adjusted gross income in
    federal income taxes. Those who earned between $50,000 and $60,000 paid
    6.3 percent; between $100,000 and $125,000, 9.9 percent; between
    $200,000 and $300,000, 17.5 percent. Those who made at least $1 million
    saw income taxes devour 24.4 percent of AGI.

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        Income, schmincome, leftists chirp. What about the payroll taxes
    that lower-income Americans pay? Counting other taxes still shows that
    higher earners pay more--Obama's dark fantasies notwithstanding.

        The Tax Policy Center--a joint venture of two liberal bastions, the
    Urban Institute and the Brookings Institution--reported on August 24
    that Americans who earn between $20,000 and $30,000 will pay an average
    of 5.7 percent of their 2011 earnings in federal income, payroll,
    corporate, and death taxes. Those clearing between $40,000 and $50,000
    will pay 12.5 percent, while those from $50,000 to $75,000 will average
    15 percent. For earners of $1 million or more, those federal taxes will
    extract 29.1 percent.

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        Dry? Yes. But these figures demonstrate that Americans who earn
    more money pay more federal tax. Those who earn less pay less. If Obama
    finds this unfair, he should define fairness.

        True, the IRS notes, 1,470 households earned at least $1 million
    but paid no federal income tax in 2009. Still, this is just 0.62
    percent of the 236,883 returns that millionaires filed. This reinforces
    the bipartisan idea of closing loopholes and lowering tax rates--but
    not Obama's crusade against ``millionaires and billionaires'' and his
    American Jobs Act's tax hikes on people earning as little as $200,000.

        All of this has started to irritate even some Democrats.

        ``You don't get people to like you by attacking them or demeaning
    their success,'' billionaire Democrat Robert Johnson said October 2 on
    Fox News Sunday. ``You know, I grew up in a family of ten kids, first
    one to go to college, and I've earned my success. I've earned my right
    to fly private if I choose to do so. . . . I sort of take the old Ethel
    Merman approach to life. I've tried poor, and I tried rich, and I like
    rich better. It doesn't mean that I am a bad guy.''

        The founder of Black Entertainment Television added: ``I didn't go
    into business to create a public-policy success for either party,
    Republican or Democrat. I went into business to create jobs and
    opportunity, create opportunity, create value for myself and my
    investors. And that's what the president should be praising, not
    demagoguing us simply because Warren Buffet says he pays less [taxes]
    than his secretary. He should pay the secretary more, and she will pay
    more.''

        ``With my investments and board seats and companies that I own, I
    am at a leadership position in concerns that employ more than 200,000
    people,'' Ted Leonsis, owner of the Washington Wizards basketball team,
    wrote on September 25. ``We do our best to be good corporate citizens.
    I know in the companies that I own personally, or am the largest
    shareholder, we support more than 500 charities.''

        ``I voted for our President,'' continued Leonsis, who also owns the
    Washington Capitals hockey team. ``I have maxed out on personal
    donations to his re-election campaign. I forgot his campaign wants to
    raise $1 billion. THAT is a lot of money-money-money-money! Money still
    talks. It blows my mind when I am asked for money as a donation at the
    same time I am getting blasted as being a bad guy!''

        ``Someone needs to talk our President down off of this rhetoric
    about good vs. evil; about two classes and math,'' Leonsis concluded.
    ``Many of us want to be a part of the solution. We aren't the
    problem.''

        When Obama accepted the 2008 Democratic nomination in Denver, he
    espoused national unity. The U.S.A. would ``come together as one
    American family,'' he declared. If Barack Obama secured the presidency,
    he suggested, the nearby Continental Divide would become this
    republic's only rift.

        How disappointing that the eloquent man who millions hoped would
    heal this land now actively pits Americans against each other--not by
    race or creed, but by income. As London's arson-scorched victims of mob
    rule learned last August, there is nothing cute about class war.

        --New York commentator Deroy Murdock is a nationally syndicated
    columnist with the Scripps Howard News Service and a media fellow with
    the Hoover Institution on War, Revolution, and Peace at Stanford
    University. Manhattan financier Brett A. Shisler contributed to this
    piece.

                                     ______

                      [National Review, December 23, 2010]

                   Merry Christmas to America's Top 1 Percent
                   The Rich Are More like Santa Than Scrooge
                                By Deroy Murdock
        In this season of giving, the words hurled at America's wealthiest
    citizens have been far from generous.

        The recent debate over the Obama-GOP tax-cut compromise featured
    language best described as ``affluphobic.''

        Senator Bernie Sanders of Vermont, a self-styled socialist, spent
    nearly nine hours on December 10 excoriating affluent Americans.
    Sanders complained to colleagues that ``when the rich get richer . . .
    they say: `I am not rich enough. I need to be richer.' What motivates
    some of these people is greed and greed and more greed.'' Sanders
    further filibustered: ``Greed is, in my view, like a sickness. It's
    like an addiction. We know people on heroin. They can't stop. They need
    more and more.''

        Sanders wailed that the top 1 percent of taxpayers (who made more
    than $380,354 apiece) earned 20 percent of America's Adjusted Gross
    Income (AGI) in 2008, according to IRS data analyzed by the Tax
    Foundation. True. They also paid 38 percent of all federal income
    taxes. The top 5 percent (with incomes exceeding $159,619) earned 34.7
    percent of AGI and paid 58.7 percent of taxes. The top 10 percent (with
    incomes above $113,799) earned 45.8 percent of AGI and paid 69.9
    percent of federal income taxes.

        So, do these rich people pay their ``fair share?'' If not, should
    the top 10 percent finance 75 percent of income taxes? Eighty percent?

        In contrast, the bottom 50 percent of taxpayers generated 12.8
    percent of AGI and paid 2.7 percent of all federal income taxes.

        High-income taxpayers also cough up state and local levies and
    often pay taxes on sales, property, capital gains, dividends,
    partnerships, and corporate income. Their wealth floods public coffers
    and flows into government programs, many targeted at low-income
    Americans.

        So what? Generosity is a snap when tax authorities demand tribute.
    How do the rich behave absent government coercion?

        ``These people who are worth hundreds of millions of dollars,''
    Sanders stated on the Senate floor, ``maybe they've got to go back to
    the Bible or whatever they believe in understanding that there is
    virtue in sharing, in reaching out, that you can't get it all.''

        Sanders should appreciate these IRS data:

        To be surgically precise, as Ryan Ellis of Americans for Tax Reform
    notes, an IRS review of Returns with Itemized Deductions (columns CI
    and CJ) indicates that in tax year 2008, Americans who earned at least
    $200,000 filed 3,912,225 tax returns or 9.96 percent of that year's
    39,250,369 total returns. This group deducted $72,336,640,000 in
    charity, or 41.83 percent of the $172,936,002,000 for such deductions
    that all filers claimed. In short, the top 10 percent of taxpayers paid
    42 percent of all charitable deductions, worth $72 billion in 2008
    alone.

        To understand wealthy Americans' ``virtue in sharing,'' consider
    The 2010 Bank of America Merrill Lynch Study of High Net Worth
    Philanthropy. Conducted by Indiana University's Center on Philanthropy
    and released November 9, this fascinating document (recommended by the
    National Taxpayers Union's Andrew Moylan) finds rich people doing what
    Senator Sanders asked.

        This survey included 801 respondents who made at least $200,000
    and/or enjoyed at least $1 million in net worth, excluding housing. The
    average respondent was worth $10.7 million.

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        Among these multi-millionaires, 98.2 percent contributed to
    charity, versus just 64.6 percent of the general population. The
    wealthy typically gave away about 8 percent of their incomes in 2009.
    This figure has slipped as the economy has slid. In 2007's survey, the
    rich donated between 9.3 percent and 16.1 percent of income.

        In 2009, 26.8 percent of Americans volunteered with charitable
    organizations. However, 78.7 percent of wealthy people volunteered--
    nearly triple the national figure. The average rich respondent
    volunteered 307 hours. Rather than merely write checks, the average
    wealthy American last year gave to charity the equivalent of 38 eight-
    hour shifts.

        The Center on Philanthropy's researchers valued each hour of
    voluntarism at $20.85. So, the average rich American's 307 volunteer
    hours equaled $6,400.95.

        ``High net worth households play an important role in the
    philanthropic landscape,'' the Bank of America study concluded. ``They
    give between 65 and 70 percent of all individual giving and between 49
    and 53 percent of giving from all sources, which includes giving from
    corporations, foundations, and both living and deceased individuals.''

        Some highly wealthy individuals give enough to rename entire
    institutions after themselves. New York University's Medical Center was
    rechristened the NYU Langone Medical Center after venture capitalist
    (and plumber's son) Ken Langone donated $200 million without
    restrictions in 2008.

        That same year, Lincoln Center's New York State Theater was
    redubbed the David H. Koch Theater after the businessman and free-
    market activist contributed $100 million to renovate the New York
    Ballet's home stage.

        Nonetheless, some remain utterly unimpressed with America's
    wealthy. According to Cape Cod cops and fire investigators, on November
    24, an arsonist torched a $500,000 house under construction in
    Sandwich, Mass. On December 2, an arson attempt almost destroyed a
    Marston's Mills home. At both crime scenes, someone graffitied ``F--
    the rich.''

        On December 14, Clay Duke opened fire on a Panama City, FL, school
    board meeting before fatally shooting himself. His online ``last
    testament,'' linked to left-wing websites, including WikiLeaks and
    mediamatters.org, and echoed today's anti-rich themes.

        ``I was just born poor in a country where the Wealthy manipulate,
    use, abuse, and economically enslave 95% of the population,'' Duke
    wrote. ``Our Masters, the Wealthy, do as they like to us.''

        While most wealthy people acquire their money legally, greedy
    crooks like Bernie Madoff exist, alas, and should be imprisoned and
    impoverished. Also, capitalism should be cleansed of the bailouts,
    subsidies, and special favors that perversely find roofers and
    waitresses underwriting financiers and speculators.

        But these are exceptions, not the rule. Despite today's destructive
    anti-rich slogans, the data demonstrate that wealthy Americans are much
    less like Scrooge and much more like Santa.

        --Deroy Murdock is a nationally syndicated columnist with the
    Scripps Howard News Service and a media fellow with the Hoover
    Institution on War, Revolution and Peace at Stanford University.

                                     ______

              Questions Submitted for the Record to Deroy Murdock
                   Questions Submitted by Hon. Orrin G. Hatch
        Question. Mr. Murdock, this question is for you. In your testimony,
    you mention that the President has explicitly called himself a ``class
    warrior.'' You also go on to state that some political rhetoric
    revolves around violence towards the affluent. Can you elaborate? Many
    politicians engage in a bit of hyperbole now and then--do you think
    some of this rhetoric has become excessive?

        Answer. Yes, some politicians engage in florid and feverish
    rhetoric. However, some comments have gone beyond that and actually
    involve threats of or references to violence. For instance:

        ``The debt ceiling should not be something that is used as a gun
            against the heads of the American people to extract tax breaks
            for corporate jet owners.''

        When Obama said this on July 6, 2011, it seemed rather odd,
    especially after the shooting of then-Rep. Gabby Giffords (D-Arizona)
    and 18 others (six fatally) that January 8.

        San Francisco area rapper Boots Riley sings a song called ``5
            Million Ways to Kill a CEO.'' Its lyrics are horrid:

              ``Toss a dollar in the river, and when he jump in
              ``If you find he can swim
              ``Put lead boots on him and do it again.''

        Actress and comedienne Rosanne Barr said this in October 2011:

        ``I first would allow the guilty bankers the ability to pay back
    anything over $100 million personal wealth, because I believe in a
    maximum wage of $100 million. And if they are unable to live on that
    amount, then they should go to the re-education camps, and if that
    doesn't help then be beheaded.''

        One wonders if Barr's proposal also applies to her fabulously
    wealthy friends in Hollywood.

        A man named Clay Duke held the Panama City, Florida, school board
            at gun point in December 2010 before turning the gun on
            himself. Police found his online manifesto. It read, in part:

        ``I was just born poor in a country where the Wealthy manipulate,
    use, abuse, and economically enslave 95% of the population . . . Our
    Masters, the Wealthy, do as they like to us.''

        Five anarchists, including three members of Occupied Cleveland,
            were arrested in May 2012 in an alleged plot to blow up a
            bridge in Ohio. The April 30, 2012 affidavit of FBI Special
            Agent Ryan Taylor said that these men wanted ``to make sure
            everyone knows that the action was against corporate America
            and the financial system, and not just some random acts.''

        Question. Mr. Rattner, in his testimony, referred to certain high-
    value Individual Retirement Accounts as an ``abusive practice.'' Now,
    it is certainly true that successful investment returns for an IRA
    owner after the legally permitted contribution has been made can lead
    to above-average IRA balances. But there is no sound policy
    justification for punishing taxpayers merely for successful investment
    results. And successful investing is certainly not an ``abusive
    practice.'' In fact, in 1997 Congress repealed an excise tax on
    ``excess'' retirement accumulations. Congress determined on a bi-
    partisan basis that limits on contributions were a sufficient
    limitation on tax-deferred savings and that additional penalties were
    not necessary. The excess retirement accumulation tax was repealed,
    with bipartisan support, because it inappropriately penalized favorable
    investment returns. Penalizing favorable investment returns is a policy
    to which Congress should not return. Do you have a comment on whether
    successful investing is an abusive practice? To say something is an
    abusive practice suggests that it is wrong and that the government
    should punish it. What do you think?

        Answer. I found Mr. Rattner's comment rather startling. He did not
    present, nor have I seen, any evidence that Mitt Romney engaged in any
    subterfuge that would qualify his high investment returns as an
    ``abusive practice.'' Unless Romney, or anyone else, engages in illegal
    or unethical investment practices, such high returns--by themselves--do
    not deserve such slanderous vilification.

        Indeed, by this measure, one could ask if Bill Gates' initial
    investment in Microsoft ($16,005, as measured by its first year's
    revenues) is ``abusive,'' given that he now is worth $79 billion.
    Warren Buffet and Mark Zuckerberg are just two among many entrepreneurs
    who have turned small amounts of seed capital into vast fortunes and
    created tremendous wealth, value, innovation, and job opportunities for
    thousands, perhaps millions, of people along the way.

        Government should do nothing whatsoever to limit healthy returns on
    investment, even up to levels that some might consider ``abusive,'' so
    long as investors behave legally and ethically. If they violate the
    law, ``cuff 'em.'' If they generate impressive returns through their
    investment prowess and good luck, applaud them, learn from them, and
    ask to borrow their rabbits' feet.

        Question. In reviewing today's testimony and the dialogue between
    members and witnesses, you could get the impression that Democrats are
    solely concerned with vertical equity. Vertical equity is measurement
    of the tax burdens among income cohorts. Distribution tables are
    treated as a fetish. Republicans, on the other hand, are delving into
    the issue of horizontal equity. I find it curious that Finance
    Committee Democrats weighed in on aspects of horizontal equity in a
    letter to the Chairman, dated January 29, 2015. The sentence is as
    follows: ``Any reform package must take into account the varying cost
    of living differences among States and regions, and ensure all middle
    class families are protected regardless of where they live.'' Should we
    exclusively look at distribution tables?

        Answer. It is not a good idea to worship distribution tables. For
    that matter, Democrats and liberals tend to focus excessively on income
    gaps between those with high incomes and those less fortunate. The
    usual thrust of their approach is to vilify the wealthy, make them feel
    guilty about their incomes, and then punish them through high taxes and
    regulations as some sort of means to advance social justice. Income
    gaps assume that an economic snapshot taken today will look exactly the
    same in 2, 5, 10, or 20 years. People move up and down the income
    distribution, based on changing education levels, the overall economic
    climate, their own shifting family circumstances, and many other
    factors. Rather than drag the wealthy off of their yachts, let's get
    the poor off the figurative docks, into rowboats, and move them up into
    motorboats, speedboats, and eventually into yachts of their own. Robust
    economic growth fosters maximum upward economic mobility. Creating a
    favorable atmosphere for such expansion should be the goal of public
    policy.

        Question. Mr. Murdock, you state in your testimony that we could
    likely raise the same amount of revenue as we do currently with the
    individual income tax by simply having a 10% flat tax on all income.
    And, in fact, we heard just recently from former Finance Committee
    Chairman Bob Packwood something very similar--he said we could raise
    the same amount of money as we do currently by having an 11% flat
    income tax. My question for you is: Do you think the American people
    would ever support such a thing? Do you have any rough estimates as to
    what percentage of the income tax the bottom 50% would then be bearing?
    Or of the top 1%? Would such a flat 10% tax be fair?

        Answer. First, here are some rough estimates of the revenue that
    would be generated by my proposed 0-10-100 Tax (Zero deductions, a 10
    percent flat rate on all income, paid by 100 percent of American
    adults). Based on the Tax Foundation's December 2014 Summary of Federal
    Income Tax Data for 2012 (the latest available figures), the results
    would look something like this:

                                                  (Dollars in millions)
    ----------------------------------------------------------------------------------------------------------------
                                                                                       Tax Paid Under  the 0-10-100
        Category                    AGI                      Tax Paid in 2012                       Tax
    ----------------------------------------------------------------------------------------------------------------
    Top 1%                                1,976,388                         451,328                         197,638
    Top 10%                               4,327,899                         831,455                         432,789
    Bottom 50%                            1,003,944                          32,915                         100,394
    ----------------------------------------------------------------------------------------------------------------

        I think this would be a fair tax structure. Everyone would pay
    ``his fair share''--10 percent of income, regardless of source. Zero
    deductions would make it impossible for wealthy people to hide their
    income inside the bitter honeycomb that is the U.S. Tax Code. And 100
    percent of American adults would pay into the system, even if they
    receive much more in public assistance and benefits than they make in
    tax payments. However, this would maximize civic participation, and
    everyone would have ``skin in the game,'' rather than something north
    of 40 percent of American tax filers not paying any tax.

        The chief benefit of such a tax system would be roaring economic
    growth. Such a low, simple, and predictable tax system--especially if
    it is mirrored with a 0-10-100 Corporate Tax--would spur business
    output and attract foreign capital from people wanting to do business
    here. That would be a huge boon for the unemployed and those with low
    incomes.

        Would the American people ever support such a radical reform of the
    tax system? This depends entirely on the willingness of free-marketeers
    in and out of office to exercise the leadership to promote this idea.
    If conservatives and Republicans run and hide as soon as liberals and
    Democrats scream their class-warfare slogans, this will go nowhere. If,
    however, free-marketeers explain in an understandable fashion why this
    would be such a massive improvement over today's calamitous tax code,
    the public could be rallied to support this system. I think those who
    pay little to no federal income tax today would be willing to pay more
    if they knew that everyone had to pay, no one could hide behind endless
    and senseless deductions, and a low 10 percent tax rate would stimulate
    badly needed, dramatic economic growth.

        Who knows? Such courageous leadership might attract the support of
    liberals and Democrats who say that they believe in fairness and
    helping the poor.

        Question. Peter R. Orszag, former OMB director and former CBO
    director, published ``To Fight Inequality, Tax Land'' at the same time
    the hearing was scheduled to begin--9 AM, Tuesday, March 3. See http://
    www.bloombergview.com/articles/2015-03-03/to-fight-inequality-tax-land.
    Do you have any reaction to Dr. Orszag's article? In particular, please
    share any thoughts you have on this segment from the article: ``Joseph
    Stiglitz . . . argu[es] that Piketty has misdiagnosed the problem of
    wealth and income inequality, including by ignoring the crucial role of
    land and housing. And as a result, Piketty's policy proposals may do
    more harm than good.'' Please share any thoughts you might have on this
    paragraph:

            Stiglitz also argues for imposing a land value tax, to directly
            address this source of increasing wealth inequality. Economists
            have long favored such a tax, because it does little or nothing
            to distort incentives: Since land is roughly fixed in supply,
            there's little one can do to escape a land tax. Indeed, from
            the perspective of economic efficiency, a land value tax scores
            higher than even a value-added tax, which is typically seen as
            the most efficient form of taxation.

        Answer. I see no need for a land-value tax, especially at the
    federal level. Landowners already pay local, county, and (possibly)
    state property taxes. Other than squeezing these people for more money,
    there is no sense in ladling on another tax for them to pay.

        Such a tax would not apply to those who own no land. This would
    create another schism between the ``pays'' and the ``pay nots.'' Rather
    than divide America further, we should tax either income or consumption
    and do so on an equal basis.

        As mentioned above, it also is vital that every American adult pay
    some tax on income (or, eventually, consumption), so that everyone has
    ``skin in the game.'' The CIA, FBI, FDA, NPR, Secret Service, and the
    Washington Monument truly should belong to all of us, not just those
    who happen to pay taxes. Removing Americans from the tax rolls creates
    this ``no skin in the game'' situation. It also makes it very easy for
    people to back politicians and causes--mainly on the Left--who support
    generous public benefits and services financed by those who pay taxes.
    Once those who do not pay into the system can vote for goodies financed
    by those who do, we will travel further along the road to serfdom.
    Orszag's scheme would speed us even more miles down that grim path.

                                     ______

      Prepared Statement of Steven Rattner, Chairman, Willett Advisors LLC
        Next year will mark the 30th anniversary of the last major piece of
    tax reform legislation that has been passed by Congress and signed into
    law. While there have been many adjustments in the code since then, it
    has been far too long since a thorough overhaul was undertaken.

        Ensuring a fair and effective tax code is a bit like maintaining a
    garden: Without constant watering and weeding, it will quickly
    deteriorate as lawyers and accountants find new ways to legally--but
    unfairly--ease their clients' tax burdens.

        Consider, for example, the tax rates borne by the wealthiest
    Americans. In 1995, the 400 highest income Americans paid just under
    30% of their adjusted gross incomes in taxes. By 2012, the most recent
    year available from the Internal Revenue Service, the tax rate for this
    same cohort had dropped to 17%.

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        Not all of that drop is due to clever tax manipulation; some
    resulted from lowering of rates on ordinary income, while most came
    from low rates on income from capital gains and dividends. (In
    fairness, the tax rate of this mega-rich cohort is likely to have gone
    up in recent years following the increase in the capital gains rate for
    the wealthy beginning in 2013.)

        Meanwhile, after plunging to low levels during the financial crisis
    and recession, tax collections as a share of gross domestic product
    have recently risen to 17.5%, still at the low end of the historic band
    of 17% to 19%.

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        To be fair, many of the most important changes made by the 1986 law
    have succeeded in reining in the most egregious tax avoidance schemes
    that operated prior to the law's passage.

        But other abusive practices remain. We learned, for example, during
    the last Presidential campaign that one of the candidates was able to
    amass an Individual Retirement Account with a balance that he listed at
    $20.7 million to $101.6 million. That occurred in the context of
    maximum allowed total contributions during the relevant years on the
    order of $500,000.

        Another well-publicized loophole is the ability for private equity
    and certain hedge fund operators to have their carried interest
    proceeds taxed as capital gains. At various points in my career
    (including at present), I have been a substantial beneficiary of these
    provisions and for the life of me, I can't understand why my tax rate
    on income from these activities was less than half of the tax rate paid
    by friends in other parts of the financial services industry.

        Other provisions allow private equity professionals to convert
    ordinary income from management fees into lower taxed capital gains on
    their investments.

        While the amounts of lost revenue to the Treasury from some of
    these mechanisms may not be huge, the significant attention around them
    contributes to resentment and a feeling on the part of average
    Americans that they are bearing an unfair burden.

        It is true that by some measures, the progressivity of the tax code
    has increased in recent years, particularly because of tax reductions
    for those at the very bottom that have resulted in 41% of Americans
    paying no Federal income tax in 2014.

        However, as we all know, pre-tax income inequality is currently at
    record levels. That disturbing trend should be considered by this
    Committee as it examines new tax proposals. Since the income tax was
    instituted in 1913, a bedrock principle has been that those Americans
    with higher incomes should pay higher rates.

        There is no rulebook for what the appropriate amount of
    progressivity should be, and I accept the notion that at some high
    level, confiscatory taxes can discourage work. But in my 32 years on
    Wall Street, I have experienced top marginal Federal tax rates as high
    as 50% and as low as 28%, and I never detected any change in the
    motivation to work on the part of myself or any of my colleagues.

        Similarly, the tax rate on long-term capital gains has ranged from
    35% in the 1970s to 15%. A tax rate of at least 28% on this type of
    income would be appropriate.

        In that regard, it is important to remember that the 1986 law
    provided that capital gains would be taxed at the same rate as ordinary
    income, a principle to which we should endeavor to return.

        The cost of this tax expenditure is substantial--on the order of
    $120 billion per year. Only the exclusion from AGI of employer-provided
    health care costs the Treasury more.

        In addition to achieving greater fairness, we need more revenue.
    While our budget deficit has come down rapidly, all reasonable
    forecasts show that at some point it will turn back up, particularly as
    the cost of retirement and health care costs for those of my baby
    boomer generation begin to mount.

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        I do not believe that society will accept the reduction in these
    benefits necessary to maintain fiscal prudence nor do I believe that
    further cuts in real discretionary spending would be appropriate--
    indeed, outlays on many of these items should be increased.

        While I was asked to focus my remarks on tax code fairness as it
    relates to individuals, no discussion of taxes and fairness would be
    complete without at least mentioning the sorry state of our corporate
    tax provisions.

        Few policy issues engender such unanimity as the consensus that the
    tax code as it relates to business is riddled with loopholes, drives
    business out of the United States instead of encouraging it to locate
    here and creates such divergent outcomes as to make the individual
    provisions look like a paragon of equity.

        In particular, the rampant use of inversions and earnings stripping
    and the even more rampant abuse of transfer pricing have contributed to
    a massive decline in the contribution of business tax revenues to the
    overall Federal tax revenues of the United States. In 1966, corporate
    taxes accounted for 23% of all Federal tax revenue; by 2014, just
    10.6%.

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        A good starting off point for the committee would be the exhaustive
    work of the Simpson-Bowles Commission, which much like the 1986 law,
    proposed reducing the number of tax rates to three, erasing the special
    treatment of capital gains and dividends, and eliminating most other
    tax deductions.

        Many other meritorious plans have been put forth, such as the
    proposal made by Senators Wyden and Coats in 2011.

        In his recent budget, President Obama proposed a few smaller
    changes that are worthy of the Committee's consideration, including a
    modest increase in the tax rate on capital gains and dividends and
    eliminating the step up in basis on assets held at death.

        The President also proposed a variety of measures to provide tax
    relief for the middle and working class Americans, importantly
    including expansion of the Earned Income Tax Credit. As the Committee
    considers both tax fairness and adequate revenues, its review should
    encompass changes that would benefit Americans whose incomes have not
    been raised by the economic recovery.

                                     ______

              Questions Submitted for the Record to Steven Rattner
                   Questions Submitted by Hon. Orrin G. Hatch
        Question. Mr. Rattner, you mentioned that the Tax Reform Act of
    1986 provided that capital gains should be taxed at the same rates as
    ordinary income and you advocate returning to that. Does that mean you
    are advocating taxing ordinary income at a top rate of 28% again? Or,
    does that mean you are advocating taxing capital gains at rates as high
    as 39.6% (or even higher), as is the case for ordinary income now? In
    answering this, please keep in mind that the non-partisan Joint
    Committee on Taxation staff has told us that the revenue maximizing
    rate for capital gains is 28%. They have said that a capital gains tax
    rate exceeding 28% will actually get less revenue for the government
    than a capital gains tax rate of 28%.

        Answer. I recognize there is a revenue maximizing level for capital
    gains tax rate, particularly if it is raised in isolation. However, not
    every expert agrees that 28% is the upper limit. As I noted in my
    testimony, the capital gains tax rate was 35% in the 1970s so I would
    recommend raising it to 28-30% while maintaining the Affordable Care
    Act surtax of 3.8% on investment income. As I also noted in my
    testimony, equalizing the long-term capital gains/dividends rate and
    the ordinary income rate is a worthy objective.

        Question. Mr. Rattner, in your testimony you refer to certain high-
    value Individual Retirement Accounts as an ``abusive practice.'' Now,
    it is certainly true that successful investment returns for an IRA
    owner after the legally permitted contribution has been made can lead
    to above-average IRA balances. But there is no sound policy
    justification for punishing taxpayers merely for successful investment
    results. And successful investing is certainly not an ``abusive
    practice.'' In fact, in 1997 Congress repealed an excise tax on
    ``excess'' retirement accumulations. Congress determined on a bi-
    partisan basis that limits on contributions were a sufficient
    limitation on tax-deferred savings and that additional penalties were
    not necessary. The excess retirement accumulation tax was repealed,
    with bipartisan support, because it inappropriately penalized favorable
    investment returns. Penalizing favorable investment returns is a policy
    to which Congress should not return. Are you advocating that Congress
    penalize favorable investment returns? Can you explain to the Committee
    what the abuse was that you referred to?

        Answer. I certainly don't advocate penalizing good investors. In my
    testimony, I gave the example of Mitt Romney's IRA. It defies any logic
    that his massive IRA could have resulted from conventional asset
    appreciation as opposed to transfer of assets to the IRA at values
    significantly below their intrinsic value. For example, he likely sold
    some illiquid Bain investments to his IRA at substantial discounts--
    thereby effectively increasing his IRA contribution. In addition, he
    may well have sold some of his Bain carried interest to his IRA. If he
    did so at the outset of the fund, he likely put little or no value on
    that transfer even though it was worth millions. The Romney example is,
    in my experience, by no means an isolated example of these sorts of
    abusive practices.

        Question. In reviewing today's testimony and the dialogue between
    members and witnesses, you could get the impression that Democrats are
    solely concerned with vertical equity. Vertical equity is measurement
    of the tax burdens among income cohorts. Distribution tables are
    treated as a fetish. Republicans, on the other hand, are delving into
    the issue of horizontal equity. I find it curious that Finance
    Committee Democrats weighed in on aspects of horizontal equity in a
    letter to the Chairman, dated January 29, 2015. The sentence is as
    follows: ``Any reform package must take into account the varying cost
    of living differences among States and regions, and ensure all middle
    class families are protected regardless of where they live.'' Should we
    exclusively look at distribution tables?

        Answer. Good tax policy should focus on both horizontal and
    vertical equity. I did not mean to leave the impression that horizontal
    equity is not important. Indeed, my comments about equalizing capital
    gains/dividends rates and ordinary income rates are per my view that
    people with similar incomes should pay similar amounts in taxes. That
    said, as a practical matter, not every tax expenditure will get
    eliminated and therefore achieving perfect horizontal equity would be
    an unrealistic goal.

        With respect to the question of different costs of living between
    states and regions, I do not believe the tax code should attempt to
    adjust for this phenomenon beyond maintain the deductibility of state
    and local taxes.

        Question. Peter R. Orszag, former OMB director and former CBO
    director, published ``To Fight Inequality, Tax Land'' at the same time
    the hearing was scheduled to begin--9 AM, Tuesday, March 3. See http://
    www.bloombergview.com/articles/2015-03-03/to-fight-inequality-tax-land.
    Do you have any reaction to Dr. Orszag's article? In particular, please
    share any thoughts you have on this segment from the article: ``Joseph
    Stiglitz . . . argu[es] that Piketty has misdiagnosed the problem of
    wealth and income inequality, including by ignoring the crucial role of
    land and housing. And as a result, Piketty's policy proposals may do
    more harm than good.'' Please share any thoughts you might have on this
    paragraph:

            Stiglitz also argues for imposing a land value tax, to directly
            address this source of increasing wealth inequality. Economists
            have long favored such a tax, because it does little or nothing
            to distort incentives: Since land is roughly fixed in supply,
            there's little one can do to escape a land tax. Indeed, from
            the perspective of economic efficiency, a land value tax scores
            higher than even a value-added tax, which is typically seen as
            the most efficient form of taxation.

        Answer. I agree that a land tax is an efficient form of taxation
    and overwhelmingly supported by economists. It also seems like a
    bipartisan proposal in that it is progressive and does not discourage
    work (by taxing labor) or savings (by taxing capital). But despite all
    its merits, it would be politically difficult to implement. For one
    thing, landowners would certainly not want to face new taxes and as a
    result, lower sales prices. There will also be concerns about how the
    tax relates to the ability of landowners to pay and how it interacts
    with existing property taxes. If a land tax is based on square footage,
    it might encourage people to build up instead of out (resulting in
    excessively tall apartment buildings and even malls). So while great in
    theory, a land tax is not very feasible in practice.

                                     ______

                     Prepared Statement of Hon. Ron Wyden,
                           a U.S. Senator From Oregon
        If there's a common economic theme to take away from the town halls
    and meetings I hold in Oregon, it's that people feel stuck. They worry
    about being able to afford necessities like childcare and college
    tuition. They say they're struggling to make ends meet, and they're
    unable to save.

        The fact is, people fear more than a daunting climb up America's
    economic ladder of opportunity. They fear losing hold of the rungs and
    sliding back into hardship. And the numbers show why. For fifteen
    years, America's middle class has been shrinking for the wrong reason.
    People are falling out of the middle class, not moving upward.

        No single piece of legislation will turn that around, but in my
    view, tax reform can help. As deeply flawed as the tax code may be, it
    reflects many of the country's most significant economic goals. There
    are policies designed to spark innovation and investment and help
    create high-wage, high-skill jobs. There are policies that fund our
    safety net, health care, and social security programs. Most
    importantly, there are policies that help hard working people grab the
    rungs and climb America's economic ladder.

        So the challenge of tax reform can go one of two ways. The first
    option is to forget those important goals and make lowering rates the
    overriding objective. But that would leave the middle class hanging
    without the means to achieve the American dream of owning their home,
    save for a secure retirement and see their kids achieve a better
    future. The better option is to fix the tax code and accomplish our
    goals more effectively--to build a stronger economy and help more
    Americans climb the economic ladder.

        That's the option I prefer. It's the fairest route to a smarter and
    more efficient system. An unfair tax reform plan would risk heaping a
    new burden on people who are already struggling to get ahead.

        Recently, there has been discussion that not enough people are
    pitching in and paying taxes. It focuses on Americans of modest means
    who aren't hit by the income tax. Let's unpack that for a moment and
    think about a young veteran just coming home from serving our country
    overseas. Let's say for the sake of discussion that this vet has health
    problems, and as soon as he gets home, the bills start piling up.

        He's fighting against a current that's forced a lot of vets into
    extreme hardship--some have even wound up sleeping in the woods in
    Oregon. But he's doing his best to grab the rungs and climb the
    economic ladder, and he's certainly chipping in by paying excise taxes.
    When he finds a job, at a minimum, there are payroll taxes. That vet's
    doing his part. And one of the tenets of the income tax has always been
    that it's paid by people who can afford it.

        So to build a fairness agenda in tax reform, let's look back at how
    the last overhaul worked. The day President Reagan signed the '86 Tax
    Reform Act into law was a landmark day for fairness. President Reagan
    celebrated the fact that reform spared six million Americans from
    having to pay any income taxes. Six million! President Reagan called
    it, ``. . . the best jobs creation bill, the best antipoverty
    legislation, and the best pro-family legislation the U.S. Congress has
    ever produced.''

        So let's try to meet the standard of fairness President Reagan set.
    I want to hone in on two important things the '86 act did, both of
    which should happen again. First, it gave fair treatment to wage
    earners, instead of punishing them by taxing their income at higher
    rates than others. And second, it cracked down on tax cheats who pry
    open loopholes and skirt their responsibilities.

        Today I'm releasing a report that sheds light on some of the most
    egregious tax loopholes around: ``wash sales'' and ``options collars''
    disguising income--``swap contracts'' shielding gains. Sophisticated
    taxpayers are able to hire lawyers and accountants to take advantage of
    these dodges, but hearing about these loopholes must make middle-class
    taxpayers want to pull their hair out.

        For people having a hard time or just making their way as best they
    can, it must feel like the tax system is rigged to make the other guy's
    climb up America's economic ladder easier than theirs.

        The 1986 Tax Reform Act went a long way to changing that, and the
    Senate version of that bill passed with 97 votes. That's a bipartisan
    route that Congress should take again: A tax reform plan built on
    fundamental fairness that makes it easier for everybody to climb
    America's economic ladder of opportunity. I look forward to discussing
    that with our witnesses here today.

                                     ______

                                 Communications

                                  ----------

              Letter Submitted for the Record by Dixie Hickman Cole

    16 Darryl Place
    Gymea Bay, N.S.W, 2227
    Australia
    2 March 2015

    Senate Committee on Finance
    Attn. Editorial and Document Section
    Rm. SD-219
    Dirkson Senate Office Bldg.
    Washington, DC 20510-6200
    Fax: 0011-1-202-228-0554

    To Whom It May Concern:

    I was born in the U.S. and came to Australia after University on a
    teacher's contract. I met my husband and decided to immigrate. I have
    had my full teaching career here, as well as my family of 2 daughters
    and now they have married and I have 2 grand-sons. I decided after the
    same number of 22 years living in Australia as I had the U.S., to
    become an Australian citizen. My life is fully here now. Both my
    parents are deceased and I only have two much older sisters in the U.S.

    I have worked very hard in my career while in Australia, teaching
    Students with Special Needs, becoming an Assistant Principal and even
    receiving an Order of Australia medal, for my work with such students.
    During that time I thought that I had planned my Superannuation to make
    sure I would be financial in retirement, not asking of the government
    in a pension, and trying to cover for possible needed nursing home
    care, my funeral, etc., as not to be a burden as well on my children,
    and not knowing how long I will live, for my Superannuation to last.

    I never expected, and certainly never planned on the U.S. government
    deciding to take 15% of it away, which over the time of the rest of my
    life, will add up to a lot of money, that I may need for the items
    mentioned above. Otherwise, I may have been able to make different
    plans in some way to cover for this, but to have it happen after you
    have retired, there is no way now to compensate for this.

    I feel this may be legal in the perception of the U.S. government,
    considering the treaty is to not double tax, citizens residing outside
    the U.S., and since in Australia, as of 60 years old, our
    Superannuation is not taxed. The U.S. then thinks they have the right
    to tax us, even in my case though I have not lived in the U.S. for
    forty years. I do not feel I owe the U.S. this tax, since I have had no
    benefits from the U.S. in anyway, in all that time.

    I feel this is grossly unjust, unfair and immoral, especially since I
    have always tried to do the right thing and file a U.S. tax report each
    year, done by a proper Accountant who deals with U.S. tax, which in
    itself has cost me quite a lot over the years.

    I understand the debt the U.S. is in, but is it so low that it has to
    hit its U.S. citizen retirees who have for most of their life resided
    in another country and who are just trying to financially live out
    their years that are left. I lost my husband to cancer 5 years ago, and
    through the grieving have suffered physical health problems as well as
    depression, and anxiety. I did not need the stress and worry of knowing
    that I was going to lose 15% of my Superannuation as well.
    Hoping the U.S. government will review this decision, when
    understanding the hardship in lots of cases that it is causing,

        Dixie Hickman Cole

                                     ______

     Statement for the Record by Dr. Roger W. Logan, Legislative Director,
            Council of Engineers and Scientists Organizations (CESO)

                      P.O. Box 118, Renton, WA 98057-0118

                    Senate Committee on Finance Hearing on
                    ``Fairness in Taxation,'' March 3, 2015

    The four panelists at the 3 March 2015 hearing provided some very
    helpful testimony which is available in PDF form online. All of the
    graphs in the written testimony materials are noteworthy and worth
    studying. What seems to be missing from the testimony, however, is an
    overall Tax and Budget plan with numbers that are fair, and that work--
    that is, a plan that ends the budget deficit, and does so in a revenue
    neutral way, without cutting defense, and while shoring up the FICA
    Contract with the Citizens of the U.S.A. We present such a plan here
    for your consideration.

    Revenue Neutral ``USA First'' Tax and Budget Plan

    CESO plan Reduces Income Inequality by Rewarding Personal
            Responsibility

    POSITION: Various world events have led to a disappearing middle class,
    and along with that a growth in Income Inequality, creating a huge
    Income Gap between hourly jobs and the upper income class. If there is
    any ``class warfare'' going on, the middle class is losing rapidly.
    Both political parties preach about the importance of the middle class,
    but whether it be gridlock or political compromise, it seems it is
    always that same middle class that ``takes one for the team.''

    PROPOSAL: Our CESO budget should receive broad appeal, since it offers
    a Revenue Neutral budget that rewards work and responsibility toward
    retirement, while achieving Revenue Neutrality and deficit reduction
    without defense cuts. We propose a solution based on ``Team Play'' (and
    we don't mean yet another sacrifice bunt by the middle class). This
    solution is based on implementation of the CESO Position Papers on Tax
    Policy,\1\ Pensions,\2\ and Infrastructure Investment,\3\ with
    supplemental proposed actions on Minimum Wage (MW) and EIC.\4\
    ---------------------------------------------------------------------------
        \1\ CESO Position Paper, Tax Policy (Oct. 2013).
        \2\ CESO Position Paper, Pension Alternatives (Oct. 2013).
        \3\ CESO Position Paper, Infrastructure (Oct. 2013).
        \4\ CESO Editorial Supplement on Minimum Wage and EIC (Jan. 2014).

    HIGHLIGHTS of the CESO Tax and Budget Solution:
        Corporate and Personal Income Tax Reform are best addressed as a
            coupled set

        Static budget balance and debt reduction with revenue neutrality
             Dynamic Economic Growth as a bonus
             Zero Corporate Tax (if profit is re-invested or
            distributed in USA)
                  Permanent solution to the Repatriation Dilemma
                  Progressive Personal Income Tax in trade for Low/
            Zero Corporate Tax
             Fair and Balanced treatment of investment income
                  Cap Gains and Interest (less CPI) as Earned Income
                  Dividends as Earned Income (but Zero Corporate Tax)
             Small (0.1%) Financial Transactions Tax, Personal IRA's
            exempt

       Reward Work and Responsibility toward retirement:
             Solid future for Social Security and Medicare (FICA
            Contract)
             Expanded 401K and Roth Limits--``build your own'' pension
              Restore EITC for single workers starting (or restarting)
            their careers
              Ability to invest in FDIC and Treasury insured products
            within 401K
             True ``PBGC'' Equivalent for annuities and public
            pensions \5\
    ---------------------------------------------------------------------------
        \5\ CESO Position Paper, PBGC for Annuities (Jan. 2014).

    Following are some details of the CESO Tax/Budget/Pension-Alternatives
    Plan, presented in 3 major parts [1] Incremental Tax Reform, [2]
    Pension Alternatives, and [3] A ``PBGC'' For Annuities.

    1. Incremental Tax Reform: Fair and Revenue Neutral

    For a dynamic economy with Job growth:

    POSITION: ``Comprehensive Tax Reform'' has come to mean ``something
    that will never happen.'' Instead, we propose here a package of
    incremental changes that should appeal to all interested parties,
    providing economic growth, flexibility for business, enable
    repatriation without any special ``amnesty,'' and provide economic
    prosperity for corporations and workers alike with a windfall to shore
    up deficits in the budget, Social Security, and Medicare.

    INGREDIENTS: Enable an effective 0% Corporate Tax Rate, combined with
    other elements, as follows:

    Allow earnings to be retained, tax free, for C- and S-Corporations, if
    those earnings are re-invested into the USA for infrastructure, hiring
    people, increasing pay and benefits (up to a max income defined as
    ``rich''), and only if the current year's profit (retained earnings)
    are reinvested as such within one year.

    Make Corporate Dividends tax deductible to the Payer
        * Tax Dividends as ordinary income (and count them as earned
    income, e.g. so that the equivalent of self-employment tax (Social
    Security and Medicare) must be paid, but so that dividend income
    provides eligibility for Roth IRA contributions).

        * To simplify and balance the impact of dividends taxed at regular
    personal income tax rates, we propose that interest (Savings, CD's,
    Bonds, etc.) and Capital Gains also be treated as ordinary/earned
    income in taxable accounts, the same as dividends above (this is
    already the case for Savings and CD's which is punitive to cautious
    older savers). However, to make this system fair:

        * Only the amount of gain in excess of the CPI (not the fatally
        flawed ``chained CPI'' \6\ but the real CPI) would be taxed. This
        way, savers earning a paltry 2% on their CD's would at least get
        that gain tax free and hope to keep up with inflation. The average
        homeowner, selling their home for double after say 25 years, would
        owe zero capital gains, because they really just paced inflation.
    ---------------------------------------------------------------------------
        \6\ IFPTE, ``Retirement Security'' Issue Brief: ``Oppose the so-
    called Chained CPI--an inaccurate inflation measure in determining COLA
    increases for Social Security recipients.''
    ---------------------------------------------------------------------------
        * Treating (INT-CPI), DIV, and (CG-CPI) as ordinary/earned income
        is a de facto tax increase on most high incomes. Therefore we
        suggest implementing the ``Romney Super Roth'' described in our
        CESO Position Paper on pensions: Triple the Roth Contribution limit
        and remove the AGI cap, but also remove all caps on FICA
        contributions, and extend the FICA 0.9% surtax to all AGI's.
        * 401k (etc), IRA and Roth dividends would be treated as per
        current law (i.e. taxed as regular income on distribution for 401k
        and IRA's, and tax free for Roth's).

    This solves the repatriation problem permanently. American corporations
    have nearly two trillion dollars of profit sitting idle overseas. They
    are reluctant to repatriate those profits and pay as much as a 35% U.S.
    corporate tax, so the money remains overseas, and remains idle,
    generating no jobs in this country. There is great concern over the
    repatriation issue, and many large companies have gone to extreme
    measures (investing and borrowing even in the face of massive retained
    earnings overseas) to avoid a repatriation tax. ``Repatriation
    Amnesty'' will ultimately fail, ensuring only that we face the same
    problem again. Our solution is stable, enduring, fair, and good for
    workers, corporations, and for the U.S. economy.

    Details:

    Since it is often a poor choice to reinvest everything within a year,
    we suggest a sliding 5-year (e.g.) scale:

        * If all the profit (earned here or repatriated) is invested within
    1 year, no tax is due.
        * Any profit held for 1-2 tax years is taxable at \1/5\ the regular
    Corporate Tax rate (e.g. 35%/5 = 7%).
        * Any profit held for 2-3 tax years is taxable at \1/5\ the regular
    Corporate Tax rate (e.g. 35%/5 = 7%, in addition to the 7% tax from the
    1-2 tax year period).
        * This continues until tax year 5-6, so any profits held that long
    will be subject to the entire e.g. 35% C-Corporation Tax rate, or to
    thee.g. 39.8% S-Corporation Tax Rate.

        The elements above would enable a 0% Corporate Tax Rate, while
            growing a dynamic economy in the USA and inevitably creating
            jobs here in the USA.
        In addition, we endorse for the most part the ``Investing In
            America's Economy'' budget blueprint \7\ of the Economic Policy
            Institute (EPI), and we feel that our added ingredients round
            out a more balanced pro-growth proposal.
    ---------------------------------------------------------------------------
        \7\ J. Bivens, A. Fieldhouse, E. Pollack, and R. Theiss,
    ``Investing In America's Economy,'' Nov. 2012, Economic Policy
    Institute, www.epi.org.

              For example, our proposal to enable a 0% effective
            Corporate Tax rate must be revenue neutral, balanced by some of
            the revenue sources suggested in the EPI reports. This may well
            involve a small further restoration of the progressive personal
            income tax rates as they existed before the 1980s, back when
            the USA was the world's largest creditor and not the world's
            largest debtor. Support for restoration of progressivity in
            income taxes has appeared recently in CRS reports and
            elsewhere.\8\,}\9\
    ---------------------------------------------------------------------------
        \8\ http://online.wsj.com/public/resources/documents/
    r42729_0917.pdf.
        \9\ http://thinkprogress.org/economy/2012/09/17/857861/study-tax-
    cuts-rich-no-growth/?mobile=nc.
    ---------------------------------------------------------------------------
              As with many leaders in the USA and world,\10\ we
            support a Financial Transactions Tax (FTT), to discourage the
            parasitic economic drain of High Frequency Trading (HFT). It's
            a drain--a leak. HFT adds nothing to the economy, it just lines
            the pockets of day traders. A tax to discourage FTT will make
            the market fairer to the average investor trying to build their
            own pension (see CESO Pension Position Paper). Various levels
            of FTT have been discussed and analyzed.\11\ Baker (2010) \12\
            and Wiberg (2013) \13\ note that FTT>0.5% have been shown to
            adversely affect investing, liquidity and volatility, and
            discuss an FTT=0.25% or FTT=0.10% as a nominal level. We must
            remember that with most CD rates <1.0%, even an FTT=0.5% is
            punitive to investors, not just HFT, so the amount should be
            just enough to discourage parasitic HFT but not enough to
            discourage investing. We suggest FTT=0.10% as a starting level
            to see if this solves the HFT parasitic drain, with levels up
            to FTT=0.25% considered. For a number of reasons, we recommend
            against FTT for individual 401k/IRA/Roth accounts.
    ---------------------------------------------------------------------------
        \10\ Center for Economic and Policy Research, Nov. 2012, http://
    www.cepr.net/documents/ftt-support.pdf.
        \11\ R. Theiss, ``Many Options Exist for Raising Revenue in a Smart
    and Progressive Manner,'' Apr. 2013, Economic Policy Institute,
    www.epi.org.
        \12\ D. Baker, ``The Benefits of Financial Transactions Taxes,'' 17
    May 2010, http://www.
    cepr.net/documents/testimonies/baker-bundestag-2010-5-17.pdf.
        \13\ M. Wiberg, opinion in ``Financial Times,'' 15 Apr. 2013,
    http://www.ft.com/cms/s/0/b9b40fee-9236-11e2-851f-
    00144feabdc0.html#axzz2UXsxIR31.
    ---------------------------------------------------------------------------
    Details of Implementation of these elements as a package:

        Enable an effective 0% Corporate Tax Rate as follows:
              Make Dividends tax deductible to the C-Corporation, then
            tax as regular income.
              Tax Interest and Capital Gains as regular income, but
            only after CPI is subtracted.
              Allow earnings to be retained, tax free, for C- and S-
            Corporations, if those earnings are re-invested into the USA
            using a [e.g.] 5-year ramp.

        Consider most of EPI's revenue and budget options
            \7\,}\11\ with our added ingredients to round out a
            more balanced pro-growth proposal.
              Added progressivity in the personal income tax to offset
            the enabling of 0% effective Corporate tax rates. (+2% for
            AGI>$1M and +4% for AGI>$10M)
              Triple the Roth Contribution Limit. Remove caps on FICA
            contributions but also on Roth Contributions. Extend the 0.9%
            FICA surtax to all AGI's for fairness.
              Implement a small (0.10% stocks, rest per EPI) Financial
            Transactions Tax (FTT) for trading in taxable accounts.

        Use the economic windfall from the implementation of this proposal
    to shore up deficits in the federal budgets, Social Security, and
    Medicare, so that each American shares the benefit.

    2. Pension Alternatives for a Dynamic Economy

    Robust, Portable Retirement = Dynamic Economy = Job Growth

    POSITION: A major ingredient in the recipe for a dynamic economy is to
    enable the American worker to be dynamic. This means things like
    Pensions and Health Care must be robust, continuous, and portable.
    Other major ingredients include Education and Tax Policy.

    INGREDIENTS: We address Health Care, Education, and Tax Policy issues
    including Repatriation in our other CESO Position Papers. Here, our
    focus will be in support of a robust, portable ``Build your own''
    pension with a fair risk-return posture.

    It is a reality that the traditional defined benefit pension is rapidly
    disappearing. We can either view this as a ``race to the bottom'' or as
    a chance to begin a new era of mobility and freedom. But that
    ``freedom'' will only be manifest if there is financial equivalence to
    the defined benefit pension era. We therefore support the maintenance
    of the FICA programs (Social Security and Medicare), and that
    eligibility age be held or even lowered, since FICA comprises most of
    the ``new individual pension'' for most working Americans. For those
    pensions remaining, we would support legislation at the federal and
    state levels for ``anti-spiking'' provisions.

    Our policies must encourage those 401k/IRA/Roth accounts to grow. With
    disappearing pensions a stark reality,\14\, \15\ the average
    American will be more and more dependent on their IRA/Roth accounts.
    Max contribution limits need to be raised to enable an actual
    ``pension'' to be built via an annuity (or self-managed annuity i.e.
    live off the interest/dividends). $5,000 or even $6,500/yr is not
    enough. If you work say 40 years and plan to live another 20, you need
    to put half your working years' annual expense into an IRA each year.
    If the average worker makes $50K gross, and about $45K after FICA etc,
    they will need to put about $15K/yr into building their IRA, i.e. live
    on $30K/yr gross while working and then live on the $15K/yr they have
    in their IRA, which works if it's only for \1/2\ as many years. We are
    aware of the fantastic return claims and assumptions that make it
    appear like only contributing $5K/yr to your IRA is enough, but in fact
    it is not nearly enough. The Roth IRA limits should be approximately
    tripled (i.e. $15K limit not $5K limit) to allow workers to build their
    own portable pension, to replace the corporate pensions that are
    rapidly disappearing anyway. Catch-up provisions should be retained as-
    is (i.e. $19,500 limit for those over age 50 but now on wages, (INT-
    CPI), DIV, and (CG-CPI) income).
    ---------------------------------------------------------------------------
        \14\ http://www.washingtonpost.com/business/economy/low-interest-
    rates-are-the-final-straw-for-many-company-pensions/2013/05/23/
    a83bf23a-adbc-11e2-8bf6-e70cb6ae066e_story.html?
    hpid=z12.
        \15\ M. Morrisey and N. Sabadish, ``Retirement Inequality
    Chartbook: How the 401K revolution created a few big winners and many
    losers,'' EPI, 2013,
        http://www.epi.org/publication/retirement-inequality-chartbook/.

    Expanding IRA/Roth limits also takes the ``Bite'' out of taxing
    dividends/capital gains as ordinary income, as we suggest below and in
    our CESO Tax Policy Position Paper. Since IRA/Roth earnings grow tax
    free and IRA gains are already taxed as regular income on distribution,
    on extra ``bite'' is taken from the average worker investing to build
    their own pension. To ensure fairness and balance our suggestions in
    the CESO Tax Policy Position Paper, we suggest to triple the Roth
    Contribution limit and remove the AGI cap, but also remove all caps on
    ---------------------------------------------------------------------------
    FICA contributions, and extend the FICA 0.9% surtax to all AGI's.

    The higher IRA contribution limits, along with the catch-up provisions,
    would accomplish much of what former Governor Romney was proposing in
    his recent presidential bid--that a large portion of investment income
    be treated as tax free (a ``Super Roth'') to help the average
    individual who is trying to do the right thing and save for the future.
    In our CESO Tax Policy Position Paper, we propose another ingredient
    that would round out this ``build your own retirement'' concept: That
    interest (Savings, CD's, Bonds, etc.) and Capital Gains be taxed as
    regular income in taxable accounts (this is already the case for
    Savings and CD's which is punitive to cautious older savers). However,
    to make this system fair, only the amount of gain in excess of the CPI
    (not the fatally flawed ``chained CPI'' \16\ aka Cat Food Diet but the
    real CPI) would be taxed. This way, savers earning a paltry 2% (if
    they're lucky) on their CD's would at least get that gain tax free and
    hope to keep up with inflation. The average homeowner, selling their
    home for double after say 25 years, would owe zero capital gains,
    because they really just paced inflation.
    ---------------------------------------------------------------------------
        \16\ IFPTE, ``Retirement Security'' Issue Brief: ``Oppose the so-
    called Chained CPI--an inaccurate inflation measure in determining COLA
    increases for Social Security recipients.''

    Three more important features are needed to make these ``build your
    own'' pensions truly secure and portable, the key to making the economy
    ---------------------------------------------------------------------------
    grow:

        The first would be to require that 401K and similar accounts
            provide options to invest in federally insured products such as
            competitive rate FDIC insured CD's and Treasury products via
            Treasury Direct and other mechanisms.
        The second would be an extension of PBGC to cover all public
            pensions,\17\ and an analog of PBGC for Annuities. Not just a
            guarantee of the Principal that you bought the Annuity with,
            but a guarantee of the Benefit. Otherwise, it is not truly a
            ``build your own'' Pension + PBGC situation, but rather a ``buy
            an annuity and hope the company survives''--more like Pensions
            before PBGC.
    ---------------------------------------------------------------------------
        \17\ The recent choice made by Michigan/Detroit to raid pension
    funds as the ``go-to'' bankruptcy solution is clear evidence of the
    need for PBGC for public pensions, the same way that PBGC is needed for
    corporate pensions.
    ---------------------------------------------------------------------------
        The third would be to protect Social Security and Medicare from
            benefit cuts and from back-door cuts like the deceptive
            ``Chained-CPI.'' With stagnant real median incomes,\18\ a large
            set of workers still won't be able to fully ``build their own''
            retirements. As Defined Benefit Pensions disappear, these
            people are highly dependent on their Social Security and
            Medicare contracts.
    ---------------------------------------------------------------------------
        \18\ L. Mishel and H. Shierholz, ``A Decade of Flat Wages,'' EPI,
    2013, http://www.epi.org/publication/a-decade-of-flat-wages-the-key-
    barrier-to-shared-prosperity-and-a-rising-middle-class/.

    Summary of potential legislation to enhance personal mobility via
            pension alternatives, in turn enabling a dynamic, growing
    ---------------------------------------------------------------------------
            economy with these elements as a package:

        Expanded 401k/IRA/Roth Limits.
        Interest, Dividends, and Capital Gains taxed as regular income in
            taxable accounts, but only after subtracting the real CPI (part
            of a package implementation in our CESO Tax Policy Position
            Paper).
        Ability to invest in CD and Treasury products within 401K
            accounts.
        Protect Social Security and Medicare from benefit cuts and from
            back-door cuts like the deceptive ``Chained-CPI.'' Social
            Security and Medicare are now the only true Defined Benefit
            Pension most American workers have left.
        A true ``PBGC'' equivalent for public pensions and annuities
            purchased from IRA's etc.

    3. A Pension We Can Count On Requires PBCG for Annuities

    Robust, Portable Retirement = Dynamic Economy = Job Growth

    POSITION: Most workers in the future will ``retire'' without a pension.
    Many will instead purchase an annuity with their 401K or other proceeds
    to create their own pension. While this path can reduce future
    liability for employers, and increase mobility for employees, it has
    one fatal flaw: Unlike the traditional pensions insured by PBGC,\19\
    there is no guarantee whatsoever of a continued monthly income from an
    annuity if the provider of the annuity fails. We feel strongly that
    PBGC should offer the option of insuring annuities so that they become
    the true, insured equivalent of the lifetime income guarantee provided
    by PBGC for pensions.
    ---------------------------------------------------------------------------
        \19\ Pension Benefit Guarantee Corporation,
        http://pbgc.gov/wr/benefits/lump-sum-or-annuity.html.

    BACKGROUND: A major ingredient in the recipe for a dynamic economy is
    to enable the American worker to be dynamic. This means things like
    Pensions and Health Care must be robust, continuous, and portable.
    ---------------------------------------------------------------------------
    Other major ingredients include Education and Tax Policy.

    We address Health Care, Education, and Tax Policy issues including
    Repatriation in our other CESO Position Papers. In the CESO Position
    Paper on ``Pension Alternatives for a Dynamic Economy,'' \20\ we
    outline a robust, portable ``Build your own'' pension with a fair risk-
    return posture. Part of that structure involves the individual
    purchasing annuities to provide their own lifetime monthly income.
    ---------------------------------------------------------------------------
        \20\ CESO Pension Position Paper, Sept. 2013.

    It is a reality that the traditional defined benefit pension is rapidly
    disappearing. We can either view this as a ``race to the bottom'' or as
    a chance to begin a new era of mobility and freedom. But that
    ``freedom'' will only be manifest if there is financial equivalence to
    ---------------------------------------------------------------------------
    the defined benefit pension era.

    Ever since 1974, the PBGC has guaranteed continuation of a lifetime
    monthly pension income in case of financial failure of the employer
    pension plan.\21\ However, the traditional pension that was the
    mainstay of America's manufacturing greatness is becoming increasingly
    scarce. The new normal encourages the individual to save, via IRA or
    401K or other means, and purchase their own annuity to build their own
    lifetime monthly pension. The missing ingredient in this new recipe is
    the guarantee. Individual Americans holding an annuity are entirely at
    risk of the health of the financial institution providing the annuity.
    Many such institutions would have failed during the depression of 2008
    if not for the massive taxpayer bailout provided to them. Since that
    bailout almost did not happen, it is clear that the long term future of
    the lifetime monthly income from a purchased annuity is at risk. This
    would cause a major disruption in the economy exactly at the same time
    as we face the next 2008-style depression. The result might well be
    more akin to a 1930s Great Depression.
    ---------------------------------------------------------------------------
        \21\ In the recent (Dec. 2014) CR-Omnibus bill, the integrity of
    the multi-employer portion of PBGC has come under attack. This is a
    dangerous new development and must be addressed separately. See http://
    time.com/money/3630348/congress-pension-cuts-retirees/ and http://
    www.stltoday.com/news/opinion/editorial-middle-class-retirees-deserve-
    better-from-congress/article_70a477f3-15af-5773-8aa5-352875630df9.html
    and http://teamsters174.net/representatives-comment-on-pension-cuts-in-
    omnibus-spending-bill-2014/ and http://www.washingtonpost.com/business/
    economy/congressional-leaders-hammer-out-deal-to-allow-pension-plans-
    to-cut-retiree-benefits/20l4/12/09/4650d420-7ef6-11e4-9f38-
    95a187e4c1f7_story.html?hpid=z6 and http://www.washingtonpost.com/
    business/economy/congressionaI-leaders-hammer-out-deal-to-allow-
    pension-plans-to-cut-retiree-benefits/2014/12/09/4650d420-7ef6-11e4-
    9f38-95a187e4c1f7_story.
    html?hpid=z6.

    The easy and compelling fix is to create a branch of PGBC that
    guarantees the lifetime monthly income from individually purchased
    annuities. The annuity would then become the true, modern, perhaps even
    equivalent pension alternative--providing less long term burden to the
    ---------------------------------------------------------------------------
    employer, and more mobility to the worker during their career.

    Currently, annuities come with no such guarantee. Even the typical
    State Guarantee Corporation (SGC), should they survive a depression
    style run of financial failures, does not provide such a guarantee. The
    State programs are not backed by the Treasury, so their guarantee is
    limited to what an individual already stressed state budget can
    provide. But it's worse than that. The State ``guarantee'' does not
    guarantee the pensioner their monthly income for life. In fact, the
    State does not even guarantee return of the pensioner's initial
    investment. Rather, the State in general only guarantees the Contract
    Value of the annuity. After only a couple of decades, this Contract
    Value stands a good chance of being exactly zero, due to provider fees
    or poor market performance, at the very time the guarantee would be
    needed. The most accurate short summary is to say that these Annuities
    effectively have no guarantee at all, in contrast to what is often
    discussed in urban legend.

    The GRA (Guaranteed Retirement Account) \22\ plan has some of the
    elements of the traditional but disappearing pension plan; employer and
    employee contributions, with a ``pension'' (i.e. purchased Annuity) for
    lifetime monthly income. The GRA concept is an integral part of the
    CESO position on retirement and pensions, but an essential missing
    ingredient is the ``PBGC'' style guarantee for Annuities as we just
    discussed.
    ---------------------------------------------------------------------------
        \22\ Teresa Ghilarducci discusses the GRA as a proposal during a
    Retirement-USA conference, http://www.retirement-usa.org/proposals-new-
    retirement-system as noted by the Pension Rights Center, http://
    www.pensionrights.org/what-we-do.

    ---------------------------------------------------------------------------
    Summary: A PBGC Guarantee for Annuities

        Annuities today carry an assumed guarantee but in reality they
            have no guarantee.
        A PBGC-style Annuity would guarantee lifetime monthly income like
            a pension.
             This is what the ``new normal'' retiree thinks they are
            buying.
        No need for taxpayer investment.
             Handle premiums like the current PBGC.
             Ability to invest in CD and Treasury products within 401K
            accounts.
        Result:
             Employers are relieved of pension future liabilities.
             Employees gain a guaranteed pension with mobility.
             Everybody wins.

    NOMENCLATURE:

    CD = CERTIFICATE OF DEPOSIT

    CG = CAPITAL GAINS (TAX ISSUES)

    CPI = CONSUMER PRICE INDEX

    DIV = DIVIDENDS (TAX ISSUES)

    EIC = EARNED INCOME CREDIT. USED TO BENEFIT SINGLE ENTRANTS TO JOB
                        MARKET BUT NOW DOES NOT.

    EPI = ECONOMIC POLICY INSTITUTE

    FDIC = FEDERAL DEPOSIT INSURANCE CORPORATION

    FICA = FEDERAL INSURANCE CONTRIBUTIONS ACT

    FTT= FINANCIAL TRANSACTIONS TAX

    GRA = GUARANTEED RETIREMENT ACCOUNT

    HFT = HIGH FREQUENCY TRADING

    INT = INTEREST (TAX ISSUES)

    IRA = INDIVIDUAL RETIREMENT ACCOUNT

    MW = MINIMUM WAGE, CURRENTLY $7.25/HR. AVERAGE FROM 1950-2013 IS $7.65/
                        HR

    PBGC = PENSION BENEFIT GUARANTY CORPORATION

    QE = QUANTITATIVE EASING

    SGC = STATE GUARANTEE CORPORATION

    UI= UNEMPLOYMENT INSURANCE

                                     ______

             Letter Submitted for the Record by Martha A. Henderson

                30 Terrigal Place, Engadine NSW 2233, Australia

                            ahe80933@bigpond.net.au

    The Honorable Senator Hatch, Chairman
    The Honorable Senator Wyden, Ranking Member
    Senate Committee on Finance
    Attn. Editorial and Document Section
    Rm. SD-219
    Dirksen Senate Office Bldg.
    Washington, DC 20510-6200
                                          March 3, 2015

                            ``Fairness in Taxation''

    Dear Senator Hatch and Senator Wyden,

    I appreciate the opportunity to submit a written statement for the
    record of the Senate Finance Committee Hearing on March 3, 2015 on
    fairness in taxation.

    The U.S. Congress is taking an important and much needed step in
    addressing tax reform, including how it relates to non-residents, as a
    top priority of the 114th Congress.

    Since much of current tax legislation was enacted the international
    economic environment has changed considerably. The economy is now
    global in nature with businesses functioning across international
    borders and record numbers of Americans taking up employment and
    residence in foreign countries--often indefinitely--as part of the
    global workforce. Tax law must facilitate the global economy by
    providing fairness for individual tax payers, including non-resident
    citizens.

    I have read with interest a number of recent publications and position
    papers advancing the concept of moving from citizen-based to residency-
    based taxation, including Comprehensive Tax Reform for 2015 and Beyond
    published in December 2014 by the Republican members of the Senate
    Finance Committee. With this approach U.S. citizens residing and
    working overseas would be taxed by the U.S. only on income from U.S.
    sources. This sensible approach would:

        provide fairness by eliminating double taxation
        provide mobility for individuals functioning the global economic
            environment
        reduce the impact of currency fluctuations
        reduce the level of financial hardship, administrative work and
            anxiety currently being experienced by non-resident U.S.
            citizens

    I write from the perspective of an American citizen living abroad who:

        has resided and worked in Australia since 1973, shortly after
            marrying an Australian citizen
        became a dual citizen of the U.S. and Australia in 1995
        has met my legal obligations by submitting annual income tax
            returns to both the Internal Revenue Service and the Australian
            Tax Office
        despite having taken a long-term and disciplined approach to
            managing my finances has been hampered by current tax law and
            international tax treaty arrangements in my efforts to maintain
            my current modest life-style and financial independence upon
            retirement
        has annually faced uncertainty with regard to the amount of tax
            that I will have to pay due to fluctuations in the exchange
            rate
        does not qualify for social security benefits

    My comments as outlined below will be limited to a number of aspects of
    the current citizen-based U.S. tax framework that have adversely
    affected me and that demonstrate the need for a move to residency-based
    taxation. In particular I will comment on:

        unfair taxation of my retirement savings leading to financial
            stress
        the impact of fluctuations in the exchange rate in relation to
            non-resident individuals
        the impact of the implementation of United States' Foreign Account
            Tax Compliance Act (FATCA) on non-resident individuals.

    Unfair taxation of retirement savings leading to financial stress

    The legislative framework of the United States, including tax treaty
    arrangements between Australia and the United States, requires U.S.
    citizens who are in the Australian workforce and have Australian
    superannuation (retirement) funds, to report and pay U.S. tax on these
    funds. It is not recognized that Australian superannuation funds meet
    Australian regulatory requirements and are similar in purpose and
    structure to American retirement funds which are not similarly taxed.
    Nor is it taken into account that the taxation of Australian
    superannuation funds by the U.S. amounts to double taxation; Australian
    superannuation funds are already taxed, albeit at different intervals
    and different time frames than retirement funds in the U.S. This is
    unfair and immoral.

    U.S. citizens holding Australian superannuation funds that comply with
    Australian legislation are subject to U.S. income tax as on the
    following:

        personal and employer contributions
        annual income of the fund
        capital gains on investments sold within the fund for that tax
            year, even if they are actually capital losses but become
            capital gains due to the exchange rate
        rollover into another fund or an annuity/pension arrangement, even
            when the fund offers no alternatives to rollover
        account based pensions set up within the Australian superannuation
            framework.

    As non-resident U.S. citizens approach retirement and the value of
    their superannuation funds increase their total assessable annual
    income as defined by U.S. law can increase significantly placing them
    in a 39.6% U.S. income tax bracket. Due to the fact that under
    Australian law they cannot withdraw money from their funds to pay the
    tax because they have not reached ``preservation age,'' they can find
    themselves facing severe financial stress.

    Over the majority of the 43 years of my working life I maintained a
    modest lifestyle as an educational professional in the largest state-
    based Australian public vocational education system, TAFE NSW. I was
    principally involved in teaching and curriculum development in the
    creative arts and business-related disciplines. I was the breadwinner
    in the household from the mid-1990s until I was made redundant in 2014.

    Throughout my working life I saved towards a retirement that would
    enable me to continue my modest lifestyle independent of governmental
    financial support. However, due to taxation of my retirement savings
    under U.S. tax law this may not be possible. Furthermore, as my
    retirement savings run down and I require government assistance the
    Australian Government will have to provide it; I did not work in the
    U.S. for the required 40 quarters prior to relocating to Australia and
    am therefore not eligible for a Social Security pension. In fact I am
    entitled to few if any benefits from the U.S. despite paying hundreds
    of thousands of dollars in U.S. income tax.

    I provide the following personal information to demonstrate the
    negative impact of U.S. tax on retirement savings of non-resident U.S.
    citizens living in Australia. It is important to understand that in
    addition to Australian superannuation funds incurring U.S. income tax
    individuals' funds are taxed under Australian tax law. Under the
    Australian legal framework individuals are not able to claim tax
    credits for U.S. tax paid.

        For my 2013 U.S. return I incurred a tax bill of approximately
            U.S. $18,600 (close to AUD $20,000 taking into account the
            exchange) on the income of my superannuation funds. This
            represented close to 40% tax on the earnings of my funds at the
            time they were earned. This money had to come from earnings
            outside of my retirement savings and represented a significant
            percentage of my in-hand income.

        The situation will be worse for 2014. I am expecting a tax bill of
            between U.S. $20,000 and $25,000 on the income of my
            superannuation funds (AUD $26,300 to $32,500).

        Because the U.S. treats superannuation funds as trusts rather than
            compliant retirement funds, rollover into a pension stream is
            treated as a tax event. Under the rules of my employer funded
            superannuation plan I am required to rollover, so I will lose a
            significant amount of the value of my retirement savings. If
            the value of the dollar is $0.77 when my tax is assessed and is
            still $0.77 I have been advised that will be subject to a tax
            bill in the vicinity of U.S. $162,000 (AUD $210,000). This
            represents a significant amount of my retirement savings.

    I am being treated as a tax evader rather than as an individual who has
    worked hard to support a family and to save towards becoming and
    independent retiree. Many other nonresident U.S. citizens will find
    themselves in a similar situation.

    While this issue could potentially be addressed through amendment to
    the Double Taxation Taxes on Income Convention between the United
    States of America and Australia, I believe such an approach would be
    inefficient and expensive when applied to a problem that is common to
    non-residents in many countries. Additionally, I understand that
    passage of international tax treaties through Congress has been blocked
    since 2011 by one Senator, so time and money invested in treaty
    negotiations would undoubtedly be wasted and non-resident citizens
    would continue to be unfairly taxed.

    The most appropriate way to address the issue of foreign retirement
    plans held by nonresidents would be through a residency-based taxation
    system.

    Impact of currency fluctuations

    Fluctuations in the exchange rate can significantly impact on non-
    resident individuals trying to responsibly manage their finances,
    including saving towards retirement.

    While under current U.S. tax law non-resident individuals are required
    to compute and pay U.S. income tax in U.S. dollars, I understand that
    U.S. owned companies operating overseas operate in the local currency.
    This is inconsistent and unfair to ordinary individuals residing and
    working overseas.

    The impact of the exchange rate on taxation of my Australian
    superannuation fund is evident from the information provided above.
    While I recognize that the exchange rate can just as easily move in the
    opposite direction, fluctuation in the exchange rate from the point of
    earning income to calculating the amount of U.S. tax due and then
    finally having to pay the tax is a source of much anxiety; I never know
    whether I will have enough accessible money to pay the U.S. tax imposed
    on my earnings.

    Currency fluctuation can also have significant impact in relation to
    capital gains and losses. If an investment is sold and makes a capital
    loss the exchange rate can transform the loss into a capital gain,
    making it subject to U.S. income tax. In the same way a capital gain in
    Australian currency can translate to a capital loss in U.S. dollars.
    This is illogical.

    The currency of the country of residence should be the functional
    currency for individuals and should be integral to a non-residency
    based tax system.

    Impact of the implementation of FATCA on non-resident individuals

    The implementation of FATCA has seriously impacted on ordinary non-
    resident citizens, including those residing in Australia.

    While I understand the logic behind and support the move to limit tax
    evasion through FATCA, I believe its implementation through The
    Agreement between the Government of Australia and the Government of the
    United States of America to Improve International Tax Compliance and to
    Implement FATCA has resulted in inconsistencies of application and a
    major reporting impost on ordinary U.S. citizens residing in Australia.

    Under the terms of the agreement Australian superannuation funds that
    are deemed compliant are excluded from the definition of Financial
    Accounts and therefore are not treated as U.S. Reportable Accounts.
    This indicates that the IRS considers these funds to be low risk in
    terms of tax evasion. However individuals are not covered by this
    agreement, and American citizens holding Australian superannuation
    funds must report on their funds as outlined above.

    The principle of excluding superannuation funds that are deemed
    compliant from the definition of Financial Accounts should also be
    applied to U.S. citizens residing in Australia. When their Australian
    superannuation funds are designed specifically for the purpose of
    providing retirement benefits and meet Australian regulatory
    requirements they should be exempt from reporting to and taxation by
    the U.S. Government.

    The requirement to report financial assets twice, once for the FATCA
    requirement and again for the FBAR requirement, is illogical and
    burdensome. Reporting requirements are complex and require submission
    of a tremendous amount of paperwork, particularly in relation to
    Australian superannuation accounts. Due to the onerous reporting
    requirements and extremely limited availability of assistance from IRS
    I no longer feel confident to complete my own tax returns. I require
    the assistance of a tax expert who is conversant with both U.S. and
    Australian tax law. It is difficult to find someone with this expertise
    and their services are understandably very expensive. It took me over
    six months to find a tax attorney who was prepared to help me rectify
    an error I made in my 2012 tax return. My 2013 U.S. income tax return
    required submissions to two different locations in the U.S. one of 116
    pages and the other 81 pages. Preparation of my 2013 return cost in
    excess of AUD $2,300.00, and expenses for printing, postage and
    conversion of Australian funds to U.S. dollars for tax payment amounted
    to a further AUD $200.

    Also of great concern are numerous reports of the financial hardship
    psychological stress individuals suffer when they suddenly and
    unexpectedly discover they have been denied access to the financial
    institutions and companies with whom they have been doing business
    because these institutions do not want to deal with the administrative
    work associated with FATCA. I cannot imagine how stressful this must be
    and I worry that it could also happen to me.

    A residency-based taxation system would address many of the FATCA
    related issues currently impacting on non-resident citizens.

    Conclusion

    Current U.S. tax law is not working for non-resident U.S. citizens: it
    is unfair with respect to its treatment of retirement savings and
    functional currency requirements, is administratively and financially
    burdensome and it is making it very difficult for non-resident
    individuals to tunct1on effectively in the global economy.

    The U.S. tax system needs to facilitate the participation of its
    citizens in the global economy and encourage and assist responsible
    financial management by non-resident individuals, particularly with
    respect to their savings and investments.

    It is recommended that residency-based taxation, including provisions
    for functioning in the currency of country of residence, be legislated
    to

        provide fairness by eliminating double taxation
        provide mobility for individuals functioning the global economic
            environment
        reduce the impact of currency fluctuations
        reduce the level of financial hardship, administrative work and
            anxiety currently being experienced by non-resident U.S.
            citizens.

    Sincerely,

    Martha A. Henderson

                                     ______

            Letter Submitted for the Record by K. Margaret Scheidler

                                33 Granger Ave.

                                Lismore NSW 2480

                                   Australia

    Senate Committee on Finance
    Attn. Editorial and Document Section
    Rm. SD-219
    Dirksen Senate Office Bldg.
    Washington, DC 20510-6200
    USA

    February 28, 2015

    U.S. Senate Finance Committee

    Re: Fairness in Taxation, scheduled for March 3, 2015

    I am a U.S. citizen currently residing in Australia and am wondering if
    the following issues could be addressed in the above meeting please:

        If a person has superannuation in Australia, it may not be taxed
            here depending on the age of that person, but it has to be
            reported to the IRS as income, so that it is taxed in the U.S.
            This amount may grossly adversely affect a person's retirement
            income and has nothing to do with earnings gained in the U.S.

        Simplification of tax returns with the implementation of FBAR and
            FATCA. The financial and administrative impact should be
            considered.

        With fluctuating exchange rates, it may mean a really hefty tax
            bill depending on the current rate. For a responsible person
            trying to manage their finances, it makes things very
            uncertain.

        There is a decided lack of benefits for expats.

    It seems that the whole system would be simplified if the person only
    pays tax to the country on the income derived in that country and if
    the income is derived from overseas, then it shouldn't be taxed.

    Many thanks for your consideration.

    Sincerely,

    K. Margaret Scheidler

                                     ______

              Letter Submitted for the Record by Gerald E. Scorse
    Re: ``Fairness in Taxation,'' Senate hearing, March 3, 2015

    My name is Gerald E. Scorse. I live at 392 Central Park West, New York,
    NY 10025. I make this statement for the record as a citizen and a
    taxpayer. I represent no organization.

    Roth individual retirement accounts (IRAs) are inherently unfair. All
    other retirement accounts--for example, regular IRAs, 401(k)s and
    403(b)s--ultimately pay taxes both on contributions and on withdrawals.
    By contrast. Roth accounts pay taxes only on contributions. All other
    retirement accounts require distributions. By contrast, Roth accounts
    do not.

    These inequities increase the tax burden on all non-Roth account
    holders; in addition, they're a continuing drain on the U.S. Treasury.
    I explored these inequities, and the fiscal consequences of the
    inequities, in an article headlined ``Roth IRAs Painting the Treasury
    Red.'' The article follows, and constitutes the balance of my
    statement. I thank the Finance Committee for the opportunity to make
    the statement. It's a great country where an ordinary citizen has a
    chance to be heard by the legislators who represent that country in
    Washington, D.C.

    Here is the text of the article, which appeared in numerous online
    publications. (Copies were also emailed at the time to all members of
    the Senate Finance Committee.)

    Imagine the government pushing a retirement plan that's guaranteed to
    raise the federal deficit. Imagine that the same plan inherently favors
    the already-favored. Far from imagining. You're describing Congress's
    growing embrace of Roth individual retirement accounts (IRAs).

    The lure of Roths is the up-front revenue they bring in. Contributions
    to Roths are after-tax, unlike the pre-tax contributions to regular
    IRAs, 401(k)s, and other traditional plans. In fact Roth accounts are
    costing the Treasury billions upon billions. Let's see what drives the
    losses, and why they'll be climbing far into the future.

    All the money in retirement accounts gets preferential tax treatment
    going forward. Capital gains grow untaxed, lifting balances year after
    year. Traditional accounts pay the country back through taxable
    withdrawals--voluntary starting at age 59\1/2\, mandatory at age 70\1/
    2\. The inflows to the Treasury square the books on a win-win bargain:
    decades of tax-free growth for retirement savings, coupled with decades
    of growth in downstream tax revenues.

    There are no downstream revenues from Roths. Capital gains are
    permanently tax-free, creating Treasury shortfalls that erase and
    ultimately far outstrip the initial boost. There are no required
    distributions (which might at least spin off some revenue). Losses from
    Roths grow endlessly; the only question is how large the final numbers
    will be. Such are the accounts that Congress has chosen to promote-most
    directly to the affluent, whose incomes once barred them from owning
    Roths.

    The red ink has effectively been flowing ever since the accounts were
    created in 1997. It turned a deeper red when Congress did away with the
    $100,000 adjusted gross income limit for Roth conversions. These are
    paperwork transactions that turn regular IRAs into Roth IRAs. To do
    this, account holders first have to pay the taxes on the converted
    amount. The tax bill discourages conversions--but for the well-off, not
    so much. Investment giants Fidelity and Vanguard reported conversion
    bonanzas when the income limit came off in 2010.

    Roth conversions were back again as part of the 2012 ``fiscal cliff''
    budget deal. The agreement opened the door to immediate conversions by
    401(k)s and the like; until then, holders couldn't convert to Roths
    before age 59\1/2\.

    Earlier this year, the Republican majority on the House Ways and Means
    Committee unveiled the most sweeping tax reform plan in a generation.
    It makes the first direct attack on traditional accounts, and would
    sharply increase Roth ownership. It would prohibit any further
    contributions to regular IRAs. It would limit annual contributions to
    other traditional accounts to $8,750 half the current maximum;
    contributions over $8,750 would be channeled into Roth accounts. The
    income limit for start-up Roths would disappear, just as it has for
    conversions. According to the GOP plan, these changes would raise about
    $160 billion over the period 2014-2023. The number is just the latest
    Roth hocus-pocus: the losses would eventually swamp the apparent gain.

    It's good to help workers save for retirement, as traditional accounts
    have been doing since the mid-1970s. In contrast, Roths are no help for
    those who need it but a windfall for those who don't. They cost the
    Treasury untold billions. They're also plainly unfair: why should Roths
    pay taxes only on contributions, while all the other accounts pay on
    gains as well? Why should the others require distributions, but not
    Roths?

    Howard Gleckman edits TaxVox, the blog of the nonpartisan Tax Policy
    Center. In 2010, with Roth conversions booming and talk of more Roths
    already in the Capitol air, he flashed a warning signal: ``This
    infatuation with all things Roth bears close watching.''

    The infatuation keeps growing, and the red ink just keeps rising.

                                     ______

                 Letter Submitted for the Record by Don Zwiers
    Senate Committee on Finance
    Attn. Editorial and Document Section
    Rm. SD-219
    Dirksen Senate Office Bldg.
    Washington, DC 20510-6200

                    Fairness in Taxation  February 26, 2015

    United States Senate Committee on Finance
    Tuesday, March 3, 2015, 9:00 a.m.
    215 Dirksen Senate Office Building
    Fairness in Taxation

    My name is Don Zwiers, retired engineer, WPI BSME 55. I represent all
    of America, single handily; nobody wants to talk about it. Either I am
    way out in front or I just don't get it. I think our leaders can't see
    the trees for the forest.

          I have a simple proposal that our President has to ask Congress
            and only he can do it. None of us can because there are too
            many of us to agree. He has to ask them; Why can't we have as
            the only revenue governments can have, is an Adjustable
            Consumption Sales Tax on all products and services, created for
            profit? Eliminates all Special District Governments and only
            allow the Federal Government, state, county and local
            governments to collect the tax. IF WE CAN; DRAW UP THE
            LEGISLATION AND PUT IT INTO LAW. (United States Constitution,
            ARTICLE I, Section. 8_Congress shall have the power to lay and
            collect taxes and to pay debts for the common defense and
            general welfare of the United States and shall be uniform
            throughout the United States) and the 16th Amendment, (tax
            spending instead of earning; since everyone spends money as
            long as they live but not everyone earns an income throughout
            their life.)

          It probably doesn't have to be any longer than this because there
            are no exceptions and everyone pays the same tax as the next
            person in line. Governments become smaller and the Free Market
            becomes stronger.

          The Federal Government has one Health Care System and they will
            pay only licensed doctors' invoice as submitted within 30 days
            and they all compete with doctors for patients. Everyone pays
            the same adjustable sales tax when they spend their money and
            the budget is always balanced because the tax is adjustable to
            stay balanced. If something is too expensive; can't do it, it's
            not ready yet. With all this data in one place; patient Medical
            History can be isolated to its own record and made available to
            patient, doctor and research costs included.

          Insurance companies will handle all accident insurances because
            they know how to place people in risk pools and charge them
            accordingly to make a profit while they compete with other
            insurance companies.

          They also fund only one retirement program that everyone belongs
            and is also funded by its own Adjustable Sales Tax; today's
            dollar pays for today's retiree and depends on how many people
            are over 55 years old. That retirement income must be the
            amount a person needs to survive without additional government
            help, where they live. Local governments have to determine what
            that is.

          They also use another Adjustable Sales Tax that will fund a
            program that every person will have a job or the local
            government will hire them at 95% their minimum wage. Since
            unemployment is a National Problem; it's OUR problem. Therefore
            the Fed will fund 40% to the local government and the states,
            30% and the county 20% leaving the balance to be paid by the
            local government. The adjustable sales tax specifically for
            this makes it sustainable forever. That person will either find
            a job soon or move where there is work. This eliminates all of
            our entitlements because they aren't needed.

        We have 4 governments and we need them all working together; like
    any man made machine. Each has its function and needs to be well oiled
    with money from its own tax payers; but without remorse. Everyone has
    to feel his/her contributions are shared equally; not some people
    getting more just because they have extra money.

        The Federal Government has to be in charge; we only have one
    President. Small states need as many votes as a big one; we don't like
    bullies. We also have more people in some states and their needs are
    different. There aren't as many farmers, but they still need their
    voices heard; we need their food.

        Local and county governments also represent everyone; therefore,
    along with the Federal Government, they also affect us all. States are
    different and have to be responsible for their land and natural
    resources, which we all share together. We have sea shores and
    mountains, deserts and forests, hot and cold climates, farming and
    mining industries; all of which are important to everyone; we depend on
    what they offer. These governments have to work as a machine; if not,
    they break down.

        This is where we are today; broken and we need fixing. We can't
    just keep giving these problems to our grandchildren. Stop donating
    your money to someone else to solve them; be part of the solution, it's
    our Children and our taxes that are needed today.

        Who says somebody can own land all the way to the center of the
    earth. People are here for one lifetime; they each have the same
    opportunity to use the land and natural resources but they are also
    responsible for POSTERITY; our grandchildren we will never meet, may
    need something we wasted years ago and its all gone. This can't happen.
    Give people a free permit to use the land for a specific purpose and
    must abide by the regulations the government establishes to insure it
    will be available for future generations. The same with our resources;
    we must recycle what we mine or create and make sure there will always
    be enough for POSTERITY. Water, air, oil, rain forest and glaciers all
    have their place; World Wide. This means we need to work with the UN to
    include us all.

                Inflation/deflation: is it good or bad?
        Employers must always be aware of the cost of doing business. The
    triple bottom line concept, being discussed today, puts profit in
    competition with ecological and social performances. Our government,
    the largest single employer in America must also be aware of the triple
    bottom line.

        Without having to keep tax records or putting up with Union
    demands, health care, pensions and work rules, companies will have more
    money to run their business. If they are working in the Free Market
    System, they will be competing with each other for profits. They also
    want to feel comfortable that other companies are playing under the
    same rules. Therefore, if they are saving all this money too, what they
    do with their savings, also become competitive. Sharing this savings
    with their employees doesn't make sense because they aren't doing
    anything different and investors are interested in PROFITS so they
    would rather see higher profits. Repair and upgrade equipment would
    decrease costs later on and could be a good use.

        Let's assume everyone just reduces the price of their products or
    services and maintains everything else, including their profit margin.
    I'm sure their customers would want to buy more, increasing the demand,
    increasing production, hiring more workers and generating more profits
    for all investors. Then since their suppliers are also doing the same,
    reducing their prices: even more price reductions are possible.

         AMERICA caused a very interesting phenomenon; CONTROLLED
    DEFLATION. Yes, the prices of all goods go down and jobs are created
    without the government, businesses or banks using their money. The
    purchasing power of everyone spending money is increased. This is their
    raise. Free Market and the laws of supply and demand take hold and
    America starts growing at an uncontrollable rate. American
    manufacturers will build new modern factories here and stop importing
    their own products back to America. They will leave their factories
    where they are and sell those products where they are. Maybe those
    countries will follow what we are doing; taking care of their people
    and let the people with the most money pay the largest portion of their
    country's cost, taking care of their people.

        Inflation could be the thing of the past. It really doesn't make
    sense anyway. What's this thing called ``COST OF LIVING INDEX''? WILL
    THIS ALSO BE ELIMINATED? Does this sound feasible? What do you think?
    Our nation must agree with this concept before we can all be winners.

        How about this $18 trillion debt? How about spending that money
    while we payoff the debt? We can even tax this additional money during
    the time we have it; saving taxpayers more money.

        What do you think?

          I spend money I don't have; like buy a house, I go to the bank
            and borrow what I need, plus the interest and pay it back in
            small payments over a designated period. In the end, I own it
            and debt free. However if I borrow a small amount from my dad
            and give him an IOU; then when I pay him back, he tears up the
            IOU. I have what I bought and I own it.

          Why can't a government do the same thing with their burdensome
            debt? Just paying the interest is hard enough. Isn't the
            Federal Reserve, also the government's bank; I think so.
            Couldn't we assume the Feds are like the government's dad? We
            are all in the same family.

          Therefore; if they would just pay all our government's debt and
            allow the taxpayers to pay the Federal Reserve back in equal
            monthly payments over 30 years; our children wouldn't have to
            pay it. Those IOUs the governments gave to the people's trust
            fund to pay their bills are now wiped out; we don't have to pay
            ourselves, we can't spend it twice.

          The Federal Reserve is everyone's bank and they are there to
            control our money supply; and doesn't need to make a profit
            like a regular bank; so they don't charge interest, we're all
            family; just make sure they receive the payment each month, A
            special adjustable sales tax to be used for 30 years only. Take
            that payment and send it back to the U.S. Treasury to take it
            out of circulation it was already spent.

          In the meantime they allow the rest of money to remain in the
            economy until it is paid back (30 years). The economy has all
            this money to spend; however people decide to spend it. The
            additional sales tax collected in all four governments even
            saves the taxpayers more money; allowing each citizen to keep
            just a little more of their money to spend someplace in the
            economy and pay the required tax; Everyone seems to be the
            winners; the wealthy just spend more, save more and pay more
            taxes.

          Yes, this money is circulating in the Free Market worldwide; with
            no restrictions, other than what money has now. Looks like a
            Win-Win.

          There are many more benefits to the Adjustable Sales Tax concept
            not mentioned here but nobody knows at this time WHY NOT? This
            has to be our Congress to determine the answer; they make the
            laws.

          Thanks for hearing what I have to say. I will be watching
            Tuesday.

          Don Zwiers, Joliet, IL. Cell 815-685-8054 uhcplan09@sbcgobal.net

                                      [all]