[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

                               __________





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                          COMMITTEE ON FINANCE

                     ORRIN G. HATCH, Utah, Chairman

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

                     Chris Campbell, Staff Director

              Joshua Sheinkman, Democratic Staff Director

                                  (ii)




















                            C O N T E N T S

                               __________

                           OPENING STATEMENTS

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

                               WITNESSES

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

                        [email protected]

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 [email protected]


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