[Senate Hearing 118-73]
[From the U.S. Government Publishing Office]


                                                      S. Hrg. 118-73

                 A RIGGED SYSTEM: THE COST OF TAX DODGING
                     BY THE WEALTHY AND BIG CORPORATIONS
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                                HEARING

                               BEFORE THE

                        COMMITTEE ON THE BUDGET
                          UNITED STATES SENATE

                    ONE HUNDRED EIGHTEENTH CONGRESS

                             FIRST SESSION

                               __________

                             April 18, 2023

                               __________

           Printed for the use of the Committee on the Budget
           
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]           

                            www.govinfo.gov
                            
                                 __________

                                
                    U.S. GOVERNMENT PUBLISHING OFFICE                    
53-164                     WASHINGTON : 2023                    
          
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                        COMMITTEE ON THE BUDGET

               SHELDON WHITEHOUSE, Rhode Island, Chairman
PATTY MURRAY, Washington             CHARLES E. GRASSLEY, Iowa
RON WYDEN, Oregon                    MIKE CRAPO, Idaho
DEBBIE STABENOW, Michigan            LINDSEY O. GRAHAM, South Carolina
BERNARD SANDERS, Vermont             RON JOHNSON, Wisconsin
MARK R. WARNER, Virginia             MITT ROMNEY, Utah
JEFF MERKLEY, Oregon                 ROGER MARSHALL, Kansas
TIM KAINE, Virginia                  MIKE BRAUN, Indiana
CHRIS VAN HOLLEN, Maryland           JOHN KENNEDY, Louisiana
BEN RAY LUJAN, New Mexico            RICK SCOTT, Florida
ALEX PADILLA, California             MIKE LEE, Utah

                   Dan Dudis, Majority Staff Director
        Kolan Davis, Republican Staff Director and Chief Counsel
                   Mallory B. Nersesian, Chief Clerk 
                  Alexander C. Scioscia, Hearing Clerk
                            
                            C O N T E N T S

                              ----------                              

                        TUESDAY, APRIL 18, 2023
                        
                OPENING STATEMENTS BY COMMITTEE MEMBERS

                                                                   Page
Senator Sheldon Whitehouse, Chairman.............................     1
    Prepared Statement...........................................    31
Senator Charles E. Grassley, Ranking Member......................     3
    Prepared Statement...........................................    33

                    STATEMENTS BY COMMITTEE MEMBERS

Senator Tim Kaine................................................    13
Senator Patty Murray.............................................    15
Senator Ron Johnson..............................................    17
Senator Mike Braun...............................................    19
Senator John Kennedy.............................................    25

                               WITNESSES

Dr. Kimberly Clausing, Eric M. Zolt Chair in Tax Law and Policy, 
  University of California, Los Angeles School of Law............     5
    Prepared Statement...........................................    35
Dr. Danny Yagan, Associate Professor of Economics, University of 
  California, Berkeley...........................................     7
    Prepared Statement...........................................    45
Dr. William McBride, Vice President of Federal Tax Policy & 
  Stephen J. Entin Fellow in Economics, Tax Foundation...........     9
    Prepared Statement...........................................    53

                                APPENDIX

Responses to post-hearing questions for the Record
    Dr. Clausing.................................................    69
    Dr. Yagan....................................................    75
    Dr. McBride..................................................    79
Document submitted to the Record by Senator Tim Kaine............    92

 
    A RIGGED SYSTEM: THE COST OF TAX DODGING BY THE WEALTHY AND BIG 
                              CORPORATIONS

                              ----------                              


                        TUESDAY, APRIL 18, 2023

                                           Committee on the Budget,
                                                       U.S. Senate,
                                                    Washington, DC.
    The hearing was convened, pursuant to notice, at 10:00 
a.m., in the Dirksen Senate Office Building, Hon. Sheldon 
Whitehouse, Chairman of the Committee, presiding.
    Present: Senators Whitehouse, Murray, Kaine, Van Hollen, 
Grassley, Crapo, Johnson, Braun, Kennedy, and R. Scott.
    Also present: Democratic staff: Dan Dudis, Majority Staff 
Director; Dan Ruboss, Senior Tax and Economic Advisor and 
Member Outreach Director; Tyler Evilsizer, Senior Budget 
Analyst; Sion Bell, Tax Policy Advisor.
    Republican staff: Chris Conlin, Deputy Staff Director; 
Erich Hartman, Director of Budget Policy & Review; Nick Wyatt, 
Professional Staff Member.
    Witnesses:
    Dr. Kimberly Clausing, Eric M. Zolt Chair in Tax Law and 
Policy, University of California, Los Angeles School of Law
    Dr. Danny Yagan, Associate Professor of Economics, 
University of California, Berkeley
    Dr. William McBride, Vice President of Federal Tax Policy & 
Stephen J. Entin Fellow in Economics, Tax Foundation

          OPENING STATEMENT OF CHAIRMAN WHITEHOUSE \1\
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    \1\ Prepared statement of Chairman Whitehouse appears in the 
appendix on page 31.
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    Chairman Whitehouse. If we could call the hearing to order. 
We'll proceed in the usual fashion with opening statements by 
myself and Ranking Member Grassley, followed by my introduction 
of the three witnesses, and then each of you will have five 
minutes to make your opening statement.
    Your full testimony will be made a part of the record. I 
urge you to confine your remarks to those five minutes so we 
have a chance to engage with you, and I also want to welcome 
Chair Murray and Senator Braun to the Committee hearing.
    This is about the tax injustices that are presently baked 
into our Tax Code. As everybody knows, there are two sides to 
the budget, spending and revenues. And while some of our 
colleagues only want to look at the spending side, the U.S. has 
never run a balanced budget in the modern era without revenues 
nearing 20 percent of GDP, and of course, most revenues come 
through the tax system.
    Today's hearing will tell of two distinct sets of tax rules 
that produce a rigged, corrupted and deficient tax system. 
Under one set of rules for most Americans, paying taxes is 
immediate and automatic. Taxes are withheld from every paycheck 
to fund the public goods that contribute to our happiness and 
security, roads, schools, parks, veterans care, the military.
    Under this set of rules, taxes also are paid on all income 
for Social Security and Medicare, programs that let Americans 
retire with dignity and afford medical care. Under these rules, 
a typical teacher or ironworker in Rhode Island might pay a 
federal tax rate over 200 percent, as would a married couple 
running a small business, earning salaries of $150,000 a year.
    But it's different rules for the wealthy and well-
connected. Billionaires and large multinational corporations 
get special rules that let them pick when and even if they pay 
taxes. This corrupted Tax Code lets billionaires pay an average 
tax rate of just 8.2 percent, less than half the rate of a 
typical teacher or firefighter.
    Thanks to the Trump tax law, large multinational 
corporations average even less, just 7.8 percent. Some pay 
zero. Simple fairness is reason enough to end this rigged 
system. But the tax-dodging also blows a hole in our federal 
budget. The Center for American Progress reports that tax cuts 
for the wealthy have been a primary driver of deficits for 
decades, accounting for more than half of the debt increase as 
a share of the economy.
    Letting wealthy business owners avoid Medicare taxes on 
their full income costs Medicare $250 billion in lost revenue. 
Letting billionaires pay low or zero tax rates costs America 
$550 billion. Letting multinational corporations shift profits 
to tax havens leaves a trillion dollar bill for everyone else 
to pay.
    Common sense reforms can make our Tax Code fairer, while 
reducing the deficit. First, to protect the long-term solvency 
of Social Security and Medicare, I'm filing legislation to 
require contributions to Social Security taxes on high end 
income.
    Right now the cap on contributions means someone making a 
million dollars effectively stopped paying into Social Security 
February 28th of this year. People living on investment income 
pay no Social Security contribution. Respecting the Biden tax 
pledge, my Medicare and Social Security Fair Share Act will 
require Social Security contributions on all income above 
$400,000 however earned.
    This legislation includes the Biden budget tax plan we saw 
to extend the solvency of Medicare by 20 years. Second, 
billionaire Warren Buffet famously highlighted the rigged Tax 
Code by pointing out that he paid a lower tax rate than his 
secretary. So I'm also reintroducing the Paying a Fair Share 
Act, to codify the so-called Buffet rule, with a minimum 30 
percent tax rate beginning on income over $1 million per year, 
whatever the source.
    Third, American multinationals recently reported $60 
billion in profits in the Cayman Islands in a single year, ten 
times the size of that entire economy. That is a scam. It costs 
American jobs, and it's very unfair to American businesses 
large and small that don't engage in overseas tax games.
    My No Tax Breaks for Outsourcing Act would make offshore 
companies pay the same tax rate domestic companies pay here at 
home. House MAGA Republicans have yet to release a budget for 
the American people to see, but they sure made clear who they 
want to protect.
    Their first vote was to protect wealthy tax cheats by 
hobbling IRS enforcement, adding $114 billion to the debt. Then 
they filed legislation to make the Trump tax cuts permanent, a 
$3 trillion cost, with over 40 percent of the benefit to the 
top five percent in income. Some have even proposed a new 30 
percent sales tax on everything.
    The conservative American Enterprise Institute says this 
all could add $18 trillion of debt. Behind all this secrecy and 
mischief lurks a crew of Republican dark money donors who don't 
want to pay taxes, and are so rich they don't care about 
Medicare, Social Security or the economic well-being of wage 
earners.
    Selling their poison to the public is hard. But if you put 
Americans' priorities first, it gets pretty easy, and the math 
works. So I look forward to hearing the testimony today about 
fixing a tax system rigged for wealthy political donors. I turn 
now to our distinguished Ranking Member, Senator Grassley.

           OPENING STATEMENT OF SENATOR GRASSLEY \2\
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    \2\ Prepared statement of Senator Grassley appears in the appendix 
on page 33.
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    Senator Grassley. Republicans know that Social Security and 
Medicare are a part of the social fabric of America, and we're 
committed to maintaining it as that part of social fabric. We 
also know that it needs to be dealt with sooner than later, 
because the sooner it's dealt with, the easier it's going to be 
handled than if we wait too long as Reagan and Tip O'Neill did 
in 1983, when it was about busted.
    But they made a bipartisan decision that probably at the 
time they thought it was maybe only good for a couple of 
decades. But it's turning to be an agreement that has kept 
Social Security as a sound program through at least 2033. So 
let's hope that we don't wait as long as they did to find a 
solution to it, and when we do find a solution to it that it's 
good for the next 60 years.
    So Mr. Chairman, I thank you for holding this hearing 
today. Revenues to the federal government are a fundamental 
part of the budget, and a subject that is--that this Committee 
ought to be studying. However, I want to stress that the 
fundamental problem that we have in the federal budget is not 
one of under-taxation but overspending, and I hope through this 
day that I'll be able to show that as a necessary part of what 
we're doing.
    The last time the federal budget was balanced was in 2001. 
Revenues at that time were 18.9 percent of gross domestic 
product. Last year, federal revenues amounted to 19.6 percent 
GDP. Yet we still managed to run a deficit of 1 and 4/10ths 
trillion. That's because even though tax collections have 
increased by 2 and 9/10ths trillion since 2001, spending has 
grown by 4.4 trillion.
    Another issue that we should address is the difference 
between tax avoidance and tax evasion. Tax avoidance is the 
legal minimization of tax liability. Tax evasion is the failure 
to pay taxes that you--that everybody knows you owe, including 
the taxpayer. Tax evasion is a crime. Tax avoidance is legal, 
and frequently encouraged by Congress.
    The Tax Code is full of various credits, deductions and 
other incentives that are usually tied to a behavior Congress 
decided to incentivize. In fact, taxpayers have a right to pay 
only what tax is legally due. It's also important to remember 
that a tax loophole is an ambiguity in the law exploited in a 
way not intended or foreseen.
    It's not simply a policy with which one disagrees; when it 
comes to closing actual loopholes and cracking down on tax 
cheats, my record as a former chairman and/or ranking member of 
the Finance Committee is second to none. One only needs to look 
at my investigation uncovering tax cheats in the conservation 
easement program, and my creation of the IRS Whistleblower 
Office has reclaimed billions from tax fraud, to name just two 
examples.
    That bill passed in 2005 I think would add up to about $6 
billion coming in as a result of that legislation. I also want 
to stress that the U.S. has a progressive tax system, nothing I 
think members on the other side of the aisle is willing to look 
at.
    But we have an analysis published by the Biden Treasury 
Department that quote-unquote has these words in between the 
quotes. ``Total federal taxes are progressive.'' Families at 
the bottom of the income spectrum often have a negative federal 
tax liability due to refundable credits.
    In contrast, those in the top one percent pay close to one-
third of their income in federal taxes. Nonpartisan experts at 
the Congressional Budget Office and the Joint Committee on 
Taxation have to come similar conclusions. So have outside 
groups like the Tax Foundation and the Tax Policy Center.
    IRS data also bears out the progressive nature of our tax 
system. Based on tax year 2020 returns, the top one percent of 
the taxpayers by adjusted gross income paid more than 42 
percent of the total federal income tax. Now some people would 
say 42 percent isn't enough.
    I'd like to have somebody that says it's not enough, when 
is enough enough? I have a hard time getting an answer to that 
question. If it's 43 percent, maybe we'll join in doing it if 
we can have a stop to the demagoguery that goes on arguing 
about that.
    Congress should regularly examine tax incentives, just as 
we should review spending programs, to ensure that we're 
working--that they are working as we intend. If my Democratic 
colleagues are on the hunt for tax subsidies that benefit large 
corporations and the wealthy, they need look no further than 
legislation that was enacted on a purely partisan basis just 
last August.
    Their ill-named Inflation Reduction Act included hundreds 
of billions of dollars in new or expanded tax incentives. 
Included in this legislation are novel new tax features such as 
quote-unquote ``direct pay,'' and quote-unquote 
``transferability.'' We had a deal that was added in the 1980's 
and intended to be a really bad policy that two years later we 
changed. That actually made now--this direct pay and 
transferability actually made it easier for corporations and 
wealthy investors to pay little or no tax.
    These provisions will not only further complicate the Tax 
Code and primarily benefit the affluent, but recent estimates 
suggests that costs could be far greater than Congress was 
originally led to believe. We helped create the tax avoidant 
problem, and last year's Democrats made it even worse.
    As one former Finance Committee Chairman used to say ``Many 
taxpayers accept complexity that favors them.'' If we really 
want to diminish the advantage that wealthy taxpayers and large 
corporations have, we should address the complexity of the Tax 
Code. This is a bipartisan problem, but fortunately solving it 
is within our control. Thank you.
    Chairman Whitehouse. Thank you Senator Grassley, and agreed 
on the complexity problem. I want to welcome the witnesses. Dr. 
Kim Clausing is the Eric M. Zolt Chair in Tax Law and Policy at 
the University of California-Los Angeles. Clausing is an 
economist who previously served as the Deputy Assistant 
Secretary for Tax Analysis at Treasury.
    She is an expert on international corporate profit 
shifting. Kind of unfortunate there has to be expertise in that 
particular behavior, but there we are.
    Our second witness is Dr. Danny Yagan, who is an Associate 
Professor of Economics at the University of California-
Berkeley, and Research Associate with the National Bureau of 
Economic Research. Yagan previously served as the chief 
economist at the Office of Management and Budget. His research 
focuses on the individual income tax and taxation of capital 
gains.
    Dr. William McBride is the Vice President of Federal Tax 
Policy and Stephen J. Entin Fellow in Economics at the Tax 
Foundation, where he leads efforts to research, model and 
reform the U.S. Tax Code. While at PriceWaterhouseCoopers, Dr. 
McBride conducted economic impact and general quantitative 
analyses and researched the economics of taxation and issues 
related to tax reform at the state, federal and international 
levels.
    In a prior stint at the Tax Foundation, he wrote 
extensively on the economics of taxation, particularly 
regarding business investment. Dr. McBride holds a bachelor of 
science in Electric Engineering, and a bachelor of science in 
Physics and a Ph.D. in Economics. I welcome you all, and why 
don't we begin with Dr. Clausing and proceed across the table?

 STATEMENT OF DR. KIMBERLY CLAUSING, ERIC M. ZOLT CHAIR OF TAX 
LAW AND POLICY, UNIVERSITY OF CALIFORNIA, LOS ANGELES SCHOOL OF 
                            LAW \3\
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    \3\ Prepared statement of Dr. Clausing appears in the appendix on 
page 35.
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    Dr. Clausing. Chairman Whitehouse, Ranking Member Grassley, 
Members of the Committee, thank you so much for inviting me 
today to share my views on corporate tax avoidance. In my 
testimony today, I will discuss four key flaws in U.S. law, and 
I will suggest simple reforms that can improve the tax system 
across those dimensions.
    First, current law contains large tax preferences for 
offshoring and profit-shifting. Imagine the incentives of a 
U.S. multinational company. If it earns income in Iowa or Rhode 
Island, it pays tax from the first dollar at 21 percent.
    On the other hand, if it earns income in a zero tax rate 
jurisdiction abroad, the first ten percent return on tangible 
assets is completely free of U.S. tax, and the return above 
that is taxed at a 50 percent discount relative to U.S. income.
    This provides a large incentive to earn income offshore 
rather than in the United States. Somewhat astonishingly, 
there's even an incentive to earn income in France or Japan 
relative to the United States, and those are both countries 
with a higher corporate tax rate. The reason is that if you 
earn income in France or Japan, you accumulate tax credits, 
which can be used to offset the income that would have been due 
on the zero tax rate jurisdiction income.
    This means that a savvy taxpayer can blend income from high 
tax and low tax jurisdictions, and get to a rate that's 
approximately half the U.S. rate. I often call this an America 
Last tax system, since all foreign income is preferred to U.S. 
income. In my written testimony, I show that this system has 
large effects on the behavior of U.S. multinational companies.
    A second flaw in the current system is that we forego large 
amounts of tax revenue by failing to reform it. If you look at 
scores from JCT or Treasury, you'll see that there are hundreds 
of billions dollars available and left on the table from not 
fixing these offshoring and profit-shifting incentives.
    A third flaw in the current system is that it favors large 
multinational companies relative to small businesses, and these 
large companies often wield significant market power. These tax 
preferences reduce the ability of small businesses to compete 
in a fair and level playing field with big businesses. U.S. 
multinationals often pay single digit tax rates, far lower than 
those faced by smaller businesses.
    A tax system that favors the big companies relative to the 
small companies will tax economic rents, or rents, or profits 
above the normal rate at a much lower rate than the normal 
profits. And economists on both the right and the left of the 
political spectrum agree that it's more efficient to tax these 
above-normal profits than to tax normal returns to capital.
    A final flaw in the current system is that corporate tax 
avoidance reduces the fairness of our tax system, and benefits 
corporate shareholders at the expense of middle class 
taxpayers. In recent decades, corporate profits have been much 
higher as a share of the economy at the same time that the 
labor share of income has shrunk, and economic inequality has 
increased substantially.
    Our tax system too often turbocharges these trends by 
lowering the tax burden on capital income and on rents, and 
disproportionately targeting tax cuts towards the top of the 
distribution. Fortunately, there are reforms at the ready that 
can address these flaws in the current law, and Senator 
Whitehouse's proposal and his sponsored legislation shows one 
promising path forward.
    For example, the No Breaks for Outsourcing Act would end 
the offshoring incentives that are baked into current law, 
raising revenue in a fair and efficient manner. These reforms 
are consistent with the spirit of the international tax reforms 
that have been suggested by the Biden administration.
    We should note that international tax reform just got a lot 
easier than it used to be because many other countries are in 
the process of implementing strong country by country minimum 
taxes. This means that U.S. reforms will not disadvantage U.S. 
companies, and they will better align with what the rest of the 
world is doing.
    Today, the United States is facing a challenging fiscal 
situation. As I detail in my testimony, large deficits and debt 
require fiscal responsibility. This means looking for new 
sources of tax revenue. Spending cuts alone will not be 
sufficient. In this regard, I would also commend Senator 
Whitehouse for his great leadership on climate, alongside 
several of his peers on this Committee.
    Congress took important action on the climate through the 
Inflation Reduction Act. These policies are an important step 
forward for climate change mitigation. In the future, these 
steps will be even more effective if they are accompanied by 
legislative measures that levy a fee on carbon emissions, and 
that end the fossil fuel subsidies that are already in our 
current Tax Code.
    A carbon fee can easily be designed to avoid adverse 
consequences on consumers, and it would be an enormously 
effective tool to combat carbon emissions, while raising much-
needed revenue at the same time. Thanks.
    Chairman Whitehouse. Thank you very much, Professor. Dr. 
Yagan.

STATEMENT OF DR. DANNY YAGAN, ASSOCIATE PROFESSOR OF ECONOMICS, 
             UNIVERSITY OF CALIFORNIA, BERKELEY \4\
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    \4\ Prepared statement of Dr. Yagan appears in the appendix on page 
45.
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    Dr. Yagan. Chairman Whitehouse, Ranking Member Grassley and 
Members of the Committee, thank you for the opportunity to 
testify before you. Today on Tax Day, I describe two simple 
ways that the wealthy legally avoid taxes, and how curbing them 
would raise three-quarters of a trillion dollars to pay for 
Congressional priorities and protect our fiscal path.
    First, the wealthy often label their income in ways that 
trigger less tax. The ``Gingrich-Edwards loophole,'' so named 
after two prominent users, is a focus of Chairman Whitehouse's 
new bill today, and also my academic research.
    The Gingrich-Edwards loophole enables high end workers to 
classify their labor income as what is called ``passthrough 
income,'' and thereby escape Medicare taxes. Co-authors and I 
have shown that U.S. top earners are dominated by lawyers, 
consultants and also managers of everyday medium-sized 
businesses like car dealership chains and beverage 
distributors.
    If you're a lawyer, consultant or a business manager and 
get paid in W-2 wages like the rest of us, you owe Medicare 
taxes on that income. But if you do that same work and also own 
part of the business you work at, you can get paid in Schedule 
E passthrough income and thereby escape Medicare taxes. Same 
labor income, but labeled in a way that triggers less tax.
    The result is what the Treasury Inspector General has 
called a ``multi-billion dollar employment tax shelter'' that 
is unavailable to everyday Americans. Closing the Gingrich-
Edwards loophole for high end workers would raise $306 billion 
over the next ten years.
    Second, in research now forthcoming in the Oxford Review of 
Economic Policy, Greg Leiserson and I estimated that the Forbes 
400 wealthiest Americans from 2010 to 2018 paid an average 
federal individual income tax rate of eight percent on their 
full income, including capital gains on unsold stock.
    How is that possible? Top business owners make most of 
their income in the form of rising stock values. They do not 
pay individual income tax on that income until they sell, and 
if they never sell and instead bequeath the stock to their 
heirs, no one ever pays income tax on those billions of 
``unrealized capital gains.''
    Think of two people who created enormous personal wealth 
during their lifetimes, entertainer Frank Sinatra and Walmart 
owner Sam Walton. At current federal tax rates, Frank Sinatra 
would pay about 40 percent in federal income tax on his wage 
income, much more than Sam Walton would pay on his stock income 
under low effective individual tax rates, even after factoring 
in corporate income taxes.
    Congress has three options for raising effective top rates 
on top business owners and closing the gap between a Sinatra 
tax burden and a Walton tax burden. It can raise effective 
corporate income tax rates, raise dividend and capital gains 
rates, or broaden the capital gains tax base by taxing 
unrealized gains as in Senator Wyden's Billionaires Income Tax 
proposal.
    Here, I will discuss that proposal's child, President 
Biden's billionaire minimum income tax, which has 55 co-
sponsors in the House, would cover the 20,000 households with 
wealth over $100 million and in its latest version, would raise 
$436 billion over ten years.
    My written testimony contains a plain English FAQ, but 
here's how the minimum tax would work. If the covered household 
is already paying 25 percent of their income, including 
unrealized gains like a say a star entertainer earning wages, 
they would pay no extra tax. But if tax-free unrealized gains 
allows them to pay less than 25 percent, they would owe a top-
up payment to meet the 25 percent minimum.
    Those top-up payments could be paid over five to nine 
years, and would be a prepayment of capital gains tax owed upon 
sale, gift or bequest. Charity would be exempt. Illiquid 
taxpayers could opt out of prepayments on their private stock 
gains and instead pay later with interest.
    Slow and partial prepayment on public stock gains combined 
with prepayments for liquid taxpayers on their private stock 
gains, would preserve incentives to take companies public. The 
minimum tax is flexible, and makes space for compromise. For 
example, Congress could dial the minimum tax rate down to 15 
percent. Entrepreneurs taking a company public could be granted 
20 years to pay. Thank you. I look forward to your questions.
    Chairman Whitehouse. Thank you, Professor, and Dr. McBride.

STATEMENT OF DR. WILLIAM McBRIDE, VICE PRESIDENT OF FEDERAL TAX 
POLICY AND STEPHEN J. ENTIN FELLOW IN ECONOMICS, TAX FOUNDATION 
                              \5\
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    \5\ Prepared statement of Dr. McBride appears in the appendix on 
page 53.
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    Dr. McBride. Thank you, Chairman Whitehouse, Ranking Member 
Grassley and Members of the Committee. I appreciate the 
opportunity to speak with you. My testimony will focus on the 
size and distribution of the federal tax burden. Last year, the 
federal government collected an all-time high of $4.9 trillion 
in taxes.
    At 19.6 percent of GDP, this is the highest level in 22 
years, and prior to that World War II. The largest source of 
revenue for the federal government is individual income taxes, 
which surged 29 percent last year to reach $2.6 trillion or 
10\1/2\ percent of GDP, the highest level on record.
    This is partly explained by surging capital gains revenue 
and partly by the longer-term rise of passthrough business 
income. Now about half of business income under the individual 
income tax code, as owners of partnerships, S corporations and 
other passthrough businesses report profits on their individual 
income tax returns.
    The remainder of business income is subject to the 
corporate income tax. Nonetheless, corporate income tax 
collections last year also came in at an all-time high of $425 
billion. As a share of GDP, corporate income tax collections 
reached 1.7 percent, about equal to the average level for the 
last 30 years.
    Combined, corporate and individual income taxes reached 
12.2 percent of GDP last year. That's the highest level in over 
50 years. Most of the federal income tax burden is paid by high 
earners, as is the majority of the entire federal tax burden.
    According to the latest IRS data, of all federal individual 
income taxes collected, the top five percent of individual 
taxpayers paid a 62.7 percent share, while the top one percent 
of individual taxpayers paid a 42.3 percent share, a larger 
share than the bottom 95 percent of individual taxpayers 
combined. The top one percent share of taxes is the highest in 
at least 20 years.
    High income taxpayers also pay the highest tax rates, 
according to the IRS. The average individual income tax rate in 
2020 was 13.6 percent. The top five percent of taxpayers paid a 
22.4 percent average tax rate, while the top one percent of 
taxpayers paid a 26 percent average rate, more than eight times 
higher than the average rate paid by the bottom half of 
taxpayers.
    When accounting for all federal taxes, including taxes on 
corporate income, payroll, estates and other resources, the 
federal tax code remains very progressive. According to the 
latest data from the CBO, the top one percent of households 
paid about 25 percent of all federal taxes in 2019, and had an 
average federal tax rate of 30 percent.
    In contrast, the bottom 20 percent of households paid about 
a 0.1 percent--about 0.1 percent of all federal taxes, and had 
an average federal tax rate of 0.5 percent. There's nothing 
simple about the way in which the federal government collects 
these taxes, especially individual and business income taxes, 
which in many ways are inherently complex, and various credits 
and preferences add to the complexity.
    The Tax Code currently totals about four million words, 
such that no taxpayer can reasonably be expected to fully 
comprehend it. In 2022, Americans spent more than 6\1/2\ 
billion hours trying to comply with the Tax Code, equating to 
about $313 billion a year in lost productivity.
    This does not include the cost of tax planning or of 
uncertainty in the law, which makes planning for taxes as well 
as investment and other economic activities difficult and 
costly. The increasing complexity of the Tax Code has 
contributed to an overwhelming administrative challenge for the 
IRS. Last year, for instance, the IRS answered only about 13 
percent of the 173 million phone calls it received from 
taxpayers asking for help.
    There are also the substantial and well-documented economic 
costs of high marginal income tax rates arising from 
disincentives to work, save and invest. For instance, 
researchers at the OECD examined data from 63 countries and 
concluded that corporate income taxes are the most economically 
damaging way to raise revenue, followed by individual income 
taxes, then consumption taxes and property taxes.
    One of the most problematic and economically destructive 
aspects of the U.S. Tax Code is the double taxation of 
corporate income, first by the corporate income tax and then 
also the book minimum tax, and then by shareholder taxes on 
capital gains and dividends, yielding a combined top tax rate 
that approaches 50 percent after accounting for federal and 
state, corporate and individual income taxes.
    In short, we as a country have built a federal tax system 
that is inherently complex, costly and controversial.
    To the extent it is comprehensible at all, taxpayers do not 
perceive it as fair. The IRS has real challenges administering 
such a complicated tax system, but boosting the IRS budget will 
not fix the underlying problem that causes millions of 
taxpayers, millions of taxpayer calls to the IRS every year 
seeking help.
    As top priority, lawmakers should simplify the Tax Code, so 
that taxpayers can understand the laws and the IRS can 
administer them with minimum cost and frustration.
    Second, lawmakers should reduce the economic drag caused by 
the Tax Code, particularly as economic growth is expected to 
slow to a halt this year, according to CBO.
    My written testimony outlines several revenue-neutral 
reforms that would greatly simplify the Tax Code and improve 
economic growth. I'm happy to discuss those further in follow-
up questions. Thank you for your time and attention.
    Chairman Whitehouse. Thank you very much. One of the things 
that I have experienced in my time in the Senate is the extent 
to which Congress is responsive to big special interests and to 
extremely wealthy individuals. And my experience is echoed by 
academic studies that show there's zero statistical 
significance to what the public wants and what Congress does, 
and very high statistical significance between what wealthy 
individuals and special interests want and what Congress does.
    I watched that get dramatically worse after the Citizens 
United decision, when wealthy special interests could spend 
unlimited amounts of money in politics, and even hide that it 
was them, so that money flows through anonymizers like Donors 
Trust which, Dr. McBride, is a big donor to your organization, 
and you don't know who's really behind it.
    So this combination of huge amounts of political money 
flowing into the system from big special interests kept secret 
from the American public, has dramatically added to the long-
term difficulty of trying to have fairness in Congress, and I 
see it particularly in the Tax Code.
    We fight a lot about the appropriated budget, but if you 
can get something into the Tax Code, you don't have to fight 
for that appropriation next year. It's in and it's buried in 
the complexity that Dr. McBride and our Ranking Member have 
talked about. And so it's largely hidden and rooting it out is 
extremely, extremely challenging.
    But what you end up with is a tax system that I think is 
extremely unfair. Dr. McBride just said that the top one 
percent pay 25 percent of the federal taxes. Do I have that 
number correctly? Well, they get 22 percent of the national 
income.
    If you believe in a progressive tax system, they should be 
paying a lot more than 25 percent, because when one percent of 
the population gets 22 percent of the entire country's income, 
more than the entire lower 50 percent, that is such a massive 
economic dislocation that you would think that reasonable, 
progressive tax rates would address that.
    And instead, it's the opposite. A florist in Cranston, a 
pizza shop owner on the east side of Providence, a small 
business selling goods to tourists in Newport, Rhode Island 
will pay a higher tax rate than the biggest taxpayers, and what 
rolls into this is is this question of offshoring and profit-
shifting.
    I'd like to ask Dr. Clausing to talk a little bit more 
about who takes advantage of it. Does the florist, retail shop 
and the pizza guy take advantage of being able to relocate 
profits to the Cayman Islands or like Apple to Ireland and duck 
taxes?
    Or do they have to face competition from big mega-corporate 
chains that may be selling flowers through across the Internet, 
they may be selling frozen pizza in markets, that may be 
retailing through Amazon sales and is able to charge lower 
prices because they've hidden, hidden their actual income and 
are paying lower tax rates, cheating the small business 
community at the expense of big business?
    Dr. Clausing. Yes, you're exactly right, Senator 
Whitehouse. The multinational companies can take advantage of 
their multinational structure to shift income offshore, and 
that gives them an enormous tax break relative to small 
domestic companies.
    Chairman Whitehouse. Which they can put into a pricing 
advantage and crush small businesses with a pricing advantage 
that they only got by hiding revenue offshore?
    Dr. Clausing. Absolutely, and if you look at the corporate 
community in the United States, about 500,000 taxpayers file as 
C corps, and really there are fewer than 2,000 of them that 
account for about 80 percent of the base.
    So that corporate base is also very concentrated. You 
talked about the individual income being very concentrated at 
the top. This is also true among the business community, and 
just like our individual Tax Code favors capital income by 
those who aren't at the very top, our corporate system also 
favors the income of the very few taxpayers that control the 
vast majority of the activity.
    Chairman Whitehouse. And I would argue control the vast 
majority of the political activity that creates these glitches 
in the Tax Code that disadvantage regular people in favor of 
the billionaires and the big wealthy special interests behind 
the glitches.
    With that, let me turn to my distinguished Ranking Member. 
We'll probably do a second round, and then Senator Kaine I 
believe is next, unless we have return of an earlier member of 
the Committee. Senator Grassley, you are recognized.
    Senator Grassley. Thank you. If I could, just as a matter 
of seeing how I've made my point that there's a lot of things 
in the Tax Code that anybody can take advantage of, we have the 
Gingrich-Edwards loophole, and I think I ought to point out 
that it's been very public, it's a matter of public record that 
President Biden himself aggressively took advantage of it to 
save himself as much as $500,000.
    I want to ask my first question of Dr. McBride. Some have 
argued that the Tax Cuts and Jobs Act advantaged multinational 
companies at the expense of U.S. domestic companies. However, 
recent studies by researchers at Duke University and elsewhere 
actually found tax reform primarily benefited domestic firms 
and likely reduced incentives to shift earnings overseas.
    I'd like to have you elaborate on whether or not our tax 
reform laws, that specific law, encouraged more business 
investment in the United States.
    Dr. McBride. Certainly. That was the purpose of the law. 
The Tax Cuts and Jobs Act's explicit purpose was to incentivize 
greater investment and to deal with, in particular with the 
very high corporate tax rate that existed prior to the law, at 
35 percent federal corporate tax rate. Combined with state 
corporate taxes, that gave the U.S. the highest corporate tax 
rate in the OECD.
    That corresponded to high effective tax rates as well, 
according to several studies. It resulted in all sorts of 
distortions and behaviors that were very clear showing in news 
stories of the day. I was studying tax--at the time at the Tax 
Foundation, and seeing the wave of inversions, for instance, 
that were occurring in direct response to that very high 
corporate tax rate.
    Inversions are where corporations change the location of 
their headquarters for tax purposes. So major brand name 
companies in the U.S. were changing their headquarters 
locations to exit the U.S., and get out from under the very 
high corporate tax rate, as well as the burdensome tax on 
foreign income that applied prior to the law.
    So there was also an attempt to address that effect that 
was causing, for instance, corporate profits to be locked out 
of the U.S., and a variety of games being played in regards to 
foreign income. So there were reforms there as well. Not 
entirely simple reforms as our witnesses have discussed. 
There's certainly some complicated features of the guilty 
provision in particular.
    But nonetheless, the goal was to address that very clear 
problem was recognized on a bipartisan basis by the Obama 
administration for instance. We had a real problem with 
competitiveness in the corporate tax, and the solution was to 
get the corporate tax rate down to somewhere close to the 
middle of the range found in OECD countries, and that meant 
bringing it down dramatically.
    So it's at 21 percent currently, including state level 
corporate taxes, giving the combined rate somewhere close to 26 
percent. That remains slightly above average for OECD 
countries, which in the OECD the average is about 24 percent. 
The average EU country has a corporate tax rate of about 22 
percent I believe.
    So that was an effective way, and really the only way to 
effectively deal with the very bad competitive situation the 
U.S. was facing due to our corporate tax. So the law succeeded 
in that regard, did lots of other things. But that was its 
major success I would say.
    The CBO, for instance, and several other researchers 
including us and other modelers, found that the effect of that, 
in particular lowering the corporate tax rate, as well as 
improving the base of the corporate tax and the passthrough 
business tax, improving the base by allowing companies to 
immediately write off investment in equipment, that's bonus 
depreciation.
    So improving the base of the tax and lowering rates 
combined, have the effect of lowering the marginal effective 
tax rate on investment in the U.S., on domestic investment. So 
the prediction, according to CBO, us and others, was that this 
would boost investment, and that's in fact what we saw.
    In 2018, there was a large surge in investment, 
particularly in IP investment. It faded towards the end of 2018 
and into 2019. Several other policies, of course, that confound 
the issue, other policies and other issues. One was the trade 
war that was kicked off in 2018, as well as the higher tax 
rates implemented by the Fed, interest rates by the Fed.
    And then of course in subsequent years we had all sorts of 
other confounding effects, including the pandemic. But we can 
look at the pre-pandemic year of 2019 and see that the economy 
was in fantastic shape actually by many measures. Now very 
difficult to identify what portion of that is attributable to 
the law, to the tax law.
    But there was in fact the lowest unemployment rate in 50 
years, particularly the lowest on record for minorities, and 
for instance, wages, real wages were growing at the fastest 
pace in over a decade. So very clear the economy was in great 
shape following the law, but again empirically very difficult 
to identify what portion that is attributable to the Tax Cuts 
Jobs Act.
    Chairman Whitehouse. Senator Kaine.

                   STATEMENT OF SENATOR KAINE

    Senator Kaine. Thank you Mr. Chairman. Thanks to the 
witnesses. Today is Tax Day, so let me start with a softball. 
Should policymakers be concerned about or prioritize efforts to 
enable the IRS to be more customer-responsive in helping people 
file tax returns and getting their questions answered in a 
prompt way?
    Dr. Clausing. Absolutely. I don't know if you want a longer 
answer.
    Senator Kaine. No, no. One word answer is fine.
    Dr. Yagan. 100 percent.
    Senator Kaine. Yep. Dr. McBride.
    Dr. McBride. Completely agree.
    Senator Kaine. Good, okay. So we all agree on that. Here's 
a bit of good news, Mr. Chair. The Fiscal Times today has an 
article that says ``IRS Cites Big Improvement in Customer 
Service.'' I'd like to introduce it for the record.\6\
---------------------------------------------------------------------------
    \6\ Document submitted by Senator Kaine appears in the appendix on 
page 92.
---------------------------------------------------------------------------
    Chairman Whitehouse. Without objection.
    Senator Kaine. And let me just read the most important 
quote. ``The average wait time for callers looking for help 
from the IRS has fallen to four minutes this year, the Treasury 
Department said Monday. The average wait time was 27 minutes 
last year when the tax agency earned its worse customer service 
ratings on record.
    ``The Treasury Department attributed the improvement to the 
additional funding it received from Congress this year, `thanks 
to the 5,000 new hires already made possible by the Inflation 
Reduction Act.' IRS customer service representatives answered 
more than 6.5 million taxpayer calls this year, which is 2.4 
million more live calls than during the same period last 
year.''
    The IRA provisions dealing with the IRS got some attention, 
particularly the enforcement provision. I was a strong 
supporter of those because in ten years in the Senate, I've had 
a lot of Virginians complain about responsiveness because we've 
been underfunding the IRS.
    I'm hearing anecdotally on the road in the last two weeks, 
and my staff is too that the IRS has dramatically improved. 
Dropping wait times on phone calls from 27 minutes to four 
minutes is a pretty good indication that's going on. More to 
do, but I'm heartened to see it.
    I'd like to ask a question about carried interest, and 
maybe I'll start with you, Dr. Yagan. I have never understood 
that economic rationale for the dramatically discounted tax 
rate applied to carried interest with respect to wages and 
salary. Do you agree with me that there's no good reason to 
give such a steep discount to folks who earn their income via 
carried interest?
    Dr. Yagan. Thank you, Senator. Yes, similar incomes should 
be taxed similarly. Labor income of teachers, of Senators, of 
professors, we all make income from our labor.
    We face ordinary income tax rates, and it's a principle of 
economics of taxation that if you don't tax similar incomes 
similarly, you induce economic distortions that raise the 
economic burden per dollar of revenue that the Congress, that 
the Treasury gets to take in.
    That's bad. Hedge fund managers work for a living and 
that's labor income. It should be taxed ordinary rates.
    Senator Kaine. Are others wanting to weigh in on that, Dr. 
Clausing or Dr. McBride?
    Dr. Clausing. I agree completely with Dr. Yagan.
    Senator Kaine. Dr. McBride.
    Dr. McBride. I think the carried interest issue is a 
complicated one. There are several different scenarios. 1It's 
not just hedge funds that are using this provision. I know, for 
instance, there's a local restaurant chain that used this 
provision from years ago to set up.
    It's a way to share profits for folks that fund start-up 
companies of all sizes. I think you have to be careful in 
trying to address this provision, so that it doesn't have the 
knock on effects of hurting, you know, start-ups and other 
entrepreneurship.
    But agree generally with the principle that, that one clear 
way to simplify the Tax Code would be to tax all sorts of 
income at the same rate. We do have a, recently have analyzed a 
proposal that does that. It taxes both capital income and labor 
income at the same rate, 20 percent in particular.
    This is--this has a lot of good qualities. It leads to a 
lot of simplification, a lot of administrative simplification.
    Senator Kaine. I very much support simplification 
strategies. I still think having it progressive would make 
sense, but I'd like to treat income as income, and eliminate 
the distortions that Dr. Yagan testified to. I'm a co-sponsor 
of a bill that Senator Baldwin has that would equalize the 
carried interest tax.
    I know the Chairman has a bill that would do the same thing 
in a slightly different way. I hope we might be able to do 
that. I think it would be a really efficient way to promote 
equity and also raise revenue that could be used for valuable 
priorities like childcare or other things that are frankly very 
needed to get people back in the workforce today. With that, 
I'm at the end of my time. I yield back to Mr. Chair.
    Chairman Whitehouse. Senator Murray.

                  STATEMENT OF SENATOR MURRAY

    Senator Murray. Thank you very much, Chairman Whitehouse, 
for really--for holding this important hearing. I know there's 
a lot of hard-working families in my home state of Washington 
who are doing their part. They're playing by the rules, paying 
their fair share in taxes. They deserve to know that everyone 
else is as well.
    There really is no reason that an investor on Wall Street 
should be paying less in taxes than a firefighter in Spokane or 
a nurse in Seattle, and there really is no reason that 
companies making billions in profit should pay less in taxes 
than mom and pop stores across Washington state or across the 
country.
    It's not fair and I don't think it's American. We really 
need to close the loopholes and make sure that the wealthy pay 
their fair share, and we need to make sure that they play by 
the same set of rules as everyone else. I just don't think 
that's controversial.
    And yet some Republicans, as we know, have constantly 
pushed for bigger corporate handouts and bigger loopholes and 
giveaways to the wealthy that they can take advantage of. In 
fact, the Trump tax bill was chocked full of freebies and 
handouts for those at the top, lined the pocket of Wall Street 
and loaded the national credit card with trillions in debt.
    And still after that debacle, when it came time to raise 
the debt ceiling under the last President, Congress did the 
responsible thing. We worked together in a bipartisan way to 
raise the limit like we've done so many times before and like 
we should do again now.
    The full faith and credit of the United States should never 
be held hostage to score political points, period. Now in stark 
contrast to the Trump tax giveaway for the rich and wealthy, 
I'm very proud that Democrats were able to pass steps in the 
Inflation Reduction Act to help working families by lowering 
costs and leveling the playing field.
    That included steps like making sure billion dollar 
companies who are paying at least the same 15 percent tax rate, 
as small businesses already pay, taxing stock buyback schemes 
that enrich Wall Street executives, and getting the IRS, as my 
colleague just alluded to, the funding it needs to enforce the 
law, close the tax gap and make sure that wealthy taxpayers are 
complying with the same rules as everybody else does.
    I should note, that funding is improving customer support 
for everyone, making it easier for our constituents to get 
help, to get answers and to get their tax refunds. What we're 
talking about here is common sense and basic fairness. You 
don't get to ignore the law just because you're rich.
    Those big billion dollar companies, I don't know about 
anybody else, but I never want to see a list of the largest 
companies in America that pay nothing in federal corporate 
income taxes again. It is just not fair. Wealthy Wall Street 
investors, they should pay taxes and play by the rules, just 
like the hard-working people in this country.
    Everyday Americans, they should not be stuck footing the 
bill for billionaires who can pay lawyers to run circles around 
the IRS, instead of paying their taxes like everybody else. So 
I'm really glad, Mr. Chairman, that President Biden has put 
forward a road map to help move us even closer to a tax system 
where everyone pays their fair share, and I look forward to 
hearing more from the witnesses today about how we can do that.
    My question would go to Dr. Clausing and Dr. Yagan. The 
economic theory behind the Trump tax cuts was that cutting 
corporate taxes would rev the economy because these cuts would 
allegedly trickle down to benefit workers. Well, it's been 
almost six years since that legislation was passed. Do you 
think the Trump tax cuts are working as promised?
    Dr. Clausing. I'm happy to start. Thank you for that 
question Senator, and I appreciate your earlier comments as 
well. The Trump tax cuts did raise deficits a lot. That's one 
thing we know for sure. If you look at the revenue intake from 
both the corporate and the individual level, it's much lower 
than it would have been.
    If you search for positive effects on investment or on the 
economic growth, they're very difficult to find. Research by 
the IMF and by academics has looked through the time series, 
and it's true that those tax cuts were passed during a time of 
very robust economic growth, and that robust economic growth 
continued.
    But you can't see an incremental effect of the tax cut on 
spurring investment, and that's particularly surprising because 
there were expensing provisions included as well as those 
massive corporate tax cuts. But I think one reason that we can 
point to for why it didn't have the--any positive effects on 
investment or growth is that is companies that were really 
benefiting from this tax largesse are companies that already 
had more than enough cash on hand to undertake any worthwhile 
investment, right?
    So if you've got a company that's earning above normal 
profits, and you give them an even greater return, they're not 
going to have any reason to take that and invest it. Instead, 
we saw record stock buybacks and we saw a big run-up in the 
stock market in anticipation of that legislation. So really, 
the shareholders are the ones who benefitted from that.
    Senator Murray. Yeah. Dr. Yagan, you want to add anything.
    Dr. Yagan. No.
    Senator Murray. Okay. Thank you very much, Mr. Chairman.
    Chairman Whitehouse. Senator Johnson.

                  STATEMENT OF SENATOR JOHNSON

    Senator Johnson. Thank you, Mr. Chairman. I think Dr. 
McBride pretty well laid out the solution here. It would be to 
simplify and rationalize our Tax Code. Unfortunately, we've 
done a pretty miserable job here in Congress of attempting to 
do that. But Dr. Yagan, you know, Dr. McBride also laid out, 
you know, the facts, according to the IRS in terms of what 
percentage of the total income of the top one percent versus 
the bottom 50 percent make, so I won't repeat that.
    It is interesting that JCT looks at it slightly different. 
The top one percent of the floor of the income level there is 
$548,000 worth of income. JCT looks at people making over 
$500,000 and they say that they make about 22.7 percent of 
income, pay about 51.8 percent of total income taxes, 32.6 
percent of total taxation, okay?
    So the question I have for both Dr. Yagan and Dr. Clausing, 
assuming the top one percent makes about 22 percent of the 
income, what percent share of the total income tax should they 
pay? What would that be a fair share, because we obviously hear 
from the other side. What would be fair?
    Right now, they're paying, you know, almost double. Well 
according to JCT, they're paying more than double taxation 
versus income. What would be fair? When are you going to be 
satisfied?
    Dr. Yagan. Thank you, Senator.
    Senator Johnson. And I want a percentage. I don't want to--
really, what percent? Should be 51.8 percent? Should it be 60 
percent, 70 percent, 80 percent?
    Dr. Yagan. You and your colleagues have earned millions of 
more votes than I have. I'm an economist and I can speak to the 
economics of the policies. One key thing is that state and 
local taxes are actually regressive and so when we talk about 
total tax burdens, that would be flat over the income 
distribution.
    Senator Johnson. Dr. Clausing. Dr. Clausing, would you give 
me a figure on that then? I can never get this out of people. I 
mean what, what would be a fair share? If you're making 22 
percent of income, how much percent of the income tax should 
you be contributing?
    Dr. Clausing. A lot of the statistics that you and others 
have raised on this issue concern labor tax burdens, and one of 
the things that both Dr. Yagan and my own testimony point to is 
that there's a vast discrepancy between how we tax labor income 
and how we tax capital income.
    Senator Johnson. Okay, okay. So moves into my next----
    Dr. Clausing. So the capital----
    Senator Johnson. So again, JCT shows 30, 23 percent of 
income, but about 33 percent of total tax.
    Dr. Clausing. Yeah.
    Senator Johnson. So should that 50 percent of what?
    Dr. Clausing. The top, according to Treasury data, the top 
one percent of taxpayers have 52 percent of the positive 
capital income, and that's the income that's really undertaxed, 
both at the individual level as we see in Dr. Yagan's----
    Senator Johnson. Okay. Well so I'm not, I'm not going to 
get answers. So let me move on. I think Dr. Yagan, you were 
talking about turning what you don't think is passthrough 
income; it's really salary type of income, and turning it into 
passthrough and avoiding the Medicare tax. I mean is that 
correct?
    So I mean an example of that would be let's say you're 
being paid royalty on a book, which in that case I would 
actually from my standpoint, having been a manufacturer 
operating passthrough income businesses, and when you're making 
income off of manufacturing, I would think that's like real 
business income and should be treated as passthrough.
    But a royalty on a book, I would say that probably should 
be attributed to people as real like salaried income, would you 
agree?
    Dr. Yagan. Yeah, labor income.
    Senator Johnson. So what you're talking about in terms of 
that tax dodge is exactly what President Biden did when he 
turned royalty income into, I think it was Subchapter S into 
passthrough income and didn't pay the Medicare tax; correct? 
Now that's what you're talking about in terms of people turning 
what should be Medicare taxable income into passthrough income, 
right?
    Dr. Yagan. Yes, and same for, you know, a private practice 
physician or others. They're all legally using the Tax Code and 
it's just----
    Senator Johnson. So let me ask you this question. Social 
Security is--we tax that, and there's a limit to it because the 
deal on Social Security you're basically pre-funding your own 
retirement fund. That's the--I know it's not really what 
happens, but I mean that's sort of the----
    Wouldn't you say that's sort of the same thing true for 
Medicare? You're paying--all your lifetime, you're paying the 
Medicare tax to provide your Medicare benefit, but we don't 
limit the Medicare tax, so I would argue that's somewhat 
unfair. If you want to, you know, change the deal, this isn't 
really a payroll tax for your retirement. You're, you know, 
Medicare then ends up just being a general fund type of a 
program; correct?
    Dr. Yagan. If I understood the question right, so Social 
Security benefits are a function of how much you pay in, so the 
more I pay in, the more I get. Medicare is a flat benefit, and 
so you know, that has different----
    Senator Johnson. Yeah, but again if you're turning 
passthrough income where it could be, in a business could be 
millions of dollars with no limit on that, you're paying an 
awful lot for health care in your retirement age.
    But let me just move in, because I think the other 
solution, in terms of what you're talking about, trying to tax 
capital gains, which I think violates a basic principle of 
taxation, wherewithal to pay, Senator Kaine I think wrote 
favorably about what I was talking about in 2017, a true Warren 
Buffet tax, where we convert all business income into 
passthrough income and tax business income at the shareholder 
level.
    I would do it based on a cash basis income, but wouldn't 
that also solve the problem? Now you're not going to have this 
build up inside C corps of, you know, non-distributed income. 
So if you just tax all business income at the shareholder 
level.
    By the way, I've talked to Warren Buffet about this. I 
talked to the shareholder service, it's entirely possible. You 
collect the tax on a backup withholding like you do the payroll 
tax, and would you agree that that would be something we really 
ought to explore, some system like that?
    Dr. Yagan. There are multiple ways to skin the cat here, 
and you know, the Sinatra tax burden and the Walton tax burden 
is different now. What you can't do to equalize those tax 
burdens is both lower corporate tax rates and keep individual 
tax rates low. But as you say, if you would tax all corporate 
income in the year it's earned as ordinary income, that would 
equalize.
    Senator Johnson. To the shareholders. Again, tax at the 
shareholder level as we do with 95 percent of American 
businesses. So I'd love to work with the Chairman in terms of 
working on that type of proposal, because it solves an awful 
lot of the problems that you're talking about here. So I'll 
look forward.
    We've got a couple of years to work on this because 
unfortunately, 95 percent of American businesses are facing a 
severe tax increase in 2026, and that's also small businesses, 
you know, the people that are engines of innovation in our 
economy. So thank you Mr. Chairman.
    Chairman Whitehouse. Senator Braun.

                   STATEMENT OF SENATOR BRAUN

    Senator Braun. Thank you, Mr. Chairman. When I was here 
earlier, the discussion was about the fact that 20 percent of 
GDP is maybe some magic number in terms of where we should be 
generating revenue. I look at statistics. The most salient one 
I've seen is that over 50 years, regardless of the tax rate, we 
average about 17\1/2\ percent, maybe 18 percent of our GDP.
    Our system is such that high tax rates, you're going to get 
a better fiscal out of it out the gate. But you generally kind 
of attenuate into a one to one and a half percent economic 
growth rate. Lower rates out of the gate have a negative fiscal 
to it, which I almost got the CBO to acknowledge.
    We were paying for the Trump tax cuts, which were chump 
change back then, $150 billion per year for ten years, 1.5 
trillion. There you get a two to three percent growth rate. But 
how can we expect to tax into a level that other than a couple 
of years during the Clinton administration, it is so 
statistically stubborn that with our system as it is, we 
generate 17\1/2\ to 18 percent of our GDP in federal revenue?
    Start with on the left and move to the right, and in like 
about 30 seconds to 40, because I've got another question as 
well.
    Dr. Clausing. It's quite clear--sorry. It's quite clear 
that our Tax Code does have a big impact on revenues. So if you 
look at both the Bush tax cuts and the Trump tax cuts, in both 
cases they had persistent effects on deficits and debt in the 
long run. There's a recent analysis at the Center for American 
Progress by Bobby Kogan that traces through those.
    If you look at the big contributors to debt in this 
country, there are two factors. There's the big one-time shocks 
of responding to the 2008 financial crisis, but also responding 
to the COVID crisis. Both of those caused level changes in the 
amount of debt. But also these persistent tax cuts have helped 
contribute to the fiscal imbalance that we see before us.
    Senator Braun. So are you saying that you would be able to 
generate consistently 20 percent of our GDP in federal 
revenues, where that's not been the case other than just a 
couple of years when rates have been, you know, higher?
    Dr. Clausing. I think there are very sensible tax policy 
reforms that can generate additional revenue to help balance 
the budget, and I think 20 percent of GDP would be a good 
target, you know. It's a political process that determines 
exactly where you want to land that.
    But I think one thing to bear in mind is that the United 
States is a very low tax country, relative to our peer nations 
and a very high deficit country right now. So we really need to 
look at all solutions to that, and that includes a more robust 
fiscal system that raises the tax revenue that's needed, and 
that's partly about funding the IRS, it's partly about leveling 
the treatment of labor and capital income, it's partly about 
leveling the treatment of domestic and offshore income, and all 
of those would contribute to reducing the deficit in a helpful 
fashion.
    Dr. Yagan. Yes. I would just echo that the United States, 
you know, is below the median in terms of total tax revenues as 
a share of GDP among other peer industrialized countries.
    So you know, it can be done, and actually Congress had 
enacted a pre-programmed rise in expenditures with an aging 
population, you know, from my generation and actually had done 
the same for taxes too, the way that tax brackets were set up 
and other features of the Tax Code.
    Which were then undone through legislation in the 2000's 
and 2010's. So I think there would have been a pre-programmed 
rise in revenues as a share of GDP had it not been for those 
acts, that would have risen, you know, above those historical 
levels.
    Dr. McBride. Referencing the cross-country comparison here, 
the ways other countries are raising so much revenue than us, 
particularly in Europe, is primarily through the value-added 
tax, not through income taxes. This is--we don't understand 
this concept here of course, but we don't have a value added 
tax. We have, we have retail sales taxes at the state level.
    Value added tax is essentially the same idea, but it's 
designed better so that it doesn't result in taxes on business 
inputs. It collects a ton of revenue as the primary revenue 
source in most European countries.
    The second way they do is through higher payroll taxes than 
we have. So these are, these are both taxes on essentially on 
labor income at the end of the day, rather than capital income. 
So that is where the money is----
    Senator Braun. So Dr. McBride, do you think we can generate 
20 percent of GDP in federal revenues without depressing the 
economic growth rate? And then what's the trade off there in 
statistically again, even before the Bush tax cuts and the 
Trump tax cuts, if you go back 50 years, we still only generate 
18 percent of GDP in tax revenues?
    Dr. McBride. I agree with you. There's an amazing sort of 
regression to that level. No matter what the top individual 
rate is for instance and it's fluctuated quite a lot through 
the 80's and the 90's and through today. I think it does point 
to a lot of behavior responses to those top tax rates and, you 
know, one is what I described in my testimony about the 
economic incentives to work, save and invest that are related 
to that marginal tax rate on those activities.
    The other is reporting of income. So there's, you know, 
particularly with the higher capital gains rates we saw in the 
80's, and the changes in the 90's that brought the capital 
gains rate down, there was a huge response----
    Senator Braun. I'm out of time here, and I might note that 
our current spending is now not at 20 percent. It's about 25 
percent of GDP, and when you look at nearly seven trillion in 
our total federal budget, there's nothing that that's going to 
lead to other than chronic deficits that regardless of the 
rate, we've got to get that back down to where it is normal.
    I've got another question regarding Medicare. Go ahead? 
Okay. So I've been probably the most outspoken Senator that 
we've got a broken health care system. It's like an unregulated 
utility in my mind. One side of the aisle maybe wants 
government to take it over completely. You're still going to be 
dealing with a broken system, just a payor that may have a 
little more clout.
    I found in my own business and did this nearly 15 years 
ago, that there are ways, even though it's opaque, even though 
there are barriers to entry. There's not inherent competition 
built into the system. I did it from the demand side, and 
number one, we became the insurance company and saved about 25 
percent.
    That's how much insurance companies were making on small 
businesses, but the biggest thing I did was turned all my 
employees into health care consumers, trying to draw out value 
in a system that doesn't offer it. That's the biggest part of 
our GDP, it's the part that has grown the most, and whether 
it's a private payor or a government payor, it's a broken 
system.
    What could we do, in your opinion, to take--reform health 
care, not by giving more of it to government or giving more of 
it to the private sector in terms of how you pay for it? What 
could we do by getting rid of all barriers to entry, full 
transparency, full competition to actually bring the cost down 
to where instead of being 18 percent of our GDP, imagine if we 
just got it halfway to the world average, which is about 12 
percent?
    We're freeing up four percent of our GDP. That would pay 
for all of our deficits that we currently run as a country, 
probably federally and in terms of benefitting the private 
sector as well. Start on the same end and tell me what you 
think about that.
    Dr. Clausing. I think there's a lot of low-hanging fruit 
with respect to reforming the health care system to save money. 
I think there were some important steps in the Inflation 
Reduction Act to lower costs for seniors in Medicare and also 
for those consuming drugs like insulin, and I think those are 
important steps forward.
    I think there's a lot more that could be done, and that 
there are proposals the Biden administration has but also 
others, you know, in think tanks and elsewhere that I think 
should be thought of. I think you're right, that insurance 
companies are responsible for a lot of those costs, and if you 
look at the difference between the American system and those 
abroad, that extra layer of cost is very salient.
    And unfortunately, our health care outcomes are also worse 
than we see in other countries. So I wholeheartedly agree that 
this is an area where we need more reform.
    Dr. Yagan. And I'll agree with that. How much of my own 
time have I wasted on the phone talking to a health insurance 
company? There are definitely ways to align incentives, reduce 
paperwork burden, make sure that the plumbing works so that 
electronic records can save the time of insureds and physicians 
and their staffs.
    And competition does play a role. There is evidence that in 
locales with only one hospital system that consumers are hurt 
by that. So there's many ways to look at this, and we'll have 
to look at all of them.
    Dr. McBride. Well, sticking to the tax base, the single 
largest tax expenditure, as documented by the Joint Committee 
and Treasury, is the exclusion for employer-sponsored health 
insurance. And so this is a full exclusion of any tax, any 
income or payroll tax paid at the entity level, the business or 
at the individual level.
    This is the way it's been for decades. It's grown to be a 
tax expenditure that is costing several trillion actually over 
a decade. So this is a huge, a huge pot of money here. I 
don't--I think we have to be careful with how we address it, 
but the--in my written testimony, I outline a reform that fully 
eliminates it, along with several other reforms.
    It is a large tax increase to subject that fully to income 
and payroll tax. We estimate it would raise about $4 trillion 
over ten years, for instance. You need to offset that with some 
other reforms, tax cuts that smooth that transition for 
workers. But the problem with the current exclusion is that it 
creates a huge distortion in the health care market, in which 
employers or health insurances for most Americans, it's tied to 
our work.
    Furthermore, it incentivizes insurance companies and third 
party payors have a larger role than they otherwise would play.
    Senator Braun. And with as hard as it's been to hire 
people, it's a very tricky area when you start messing with 
fringe benefits. I'd love for the Senator and I to look at--in 
my own business, a key was minor health care. That's done 
through insurance.
    Scratches and dents were never meant to be part of an 
indemnification, and the key, when the insurance companies told 
me that almost all of the excess in health care is due to over-
utilization and the fact that you're paying insurance for minor 
repair.
    That should be directly between the provider and the 
individual, only qualified by those that can't afford it, to 
where you'd have maybe some type of health savings account. But 
the key was when we took minor health care out of being part of 
insurance, it started cascading all kinds of positive benefits, 
and insurance was never intended to pay for, in anything, minor 
repairs. We need to think about that in terms of a way that 
would easily lower health care costs.
    Transparency, competition, low skin in the game from those 
that can afford it on their minor health care. I think you and 
I could singlehandedly put a bill out there, Sheldon, that 
might get the movement in the right direction. How about that?
    Chairman Whitehouse. Mike, I would actually really like 
working with you on this. As you know, there's substantial 
overlap in our thinking and in our experience. Mine had a lot 
to do with reform work that changed the incentives for the 
industry and for the participant, and in particular the one 
that flags for me is the accountable care organizations that 
were set up.
    I'm particularly proud of Rhode Island's two lead 
accountable care organizations. They were called Integra, 
originally Rhode Island Primary Care Physicians, and then 
Coastal Medical. Both of them were complete champs at lowering 
cost and delivering better care, and dramatically improving the 
experience of their patients.
    In a small state like Rhode Island, if you've got a major 
private practice group that is improving the experience of its 
patients, you know about it. For these two to be competing to 
be the best in the country essentially at all of this, they 
returned millions of dollars to Medicare as a result of these 
improvements.
    So I think there's an enormous opportunity here. A lot of 
it involves getting off of fee for service, getting skin in the 
game at a whole variety of levels, and I think the ACO model is 
one that has really proven itself.
    So let's keep going. I will share with you something we've 
talked about privately, that we are trying to make sure that 
CBO, which this Committee has some authority over, pays more 
attention to taking a look at how health care savings of that 
nature can be scored, because as you know, I've got my little 
chart that I use that projects $7 trillion in health care 
savings.
    That's a pretty big number. I want to know why that 
happened, and I want to be able to do more of what caused it to 
happen. I think ACOs, health care reforms, getting away from 
the fee for service treadmill, paying more attention to quality 
and outcomes, all of that has had a role in savings.
    And you're absolutely right about the numbers. You're 
absolutely right about the comparisons to our foreign OECD 
competitors. We pay way more than our second, than the second 
worst one, we being the worst one, and we have just below 
average outcomes----
    Senator Braun. Right.
    Chairman Whitehouse [continuing]. For that huge, huge cost. 
So and it's a huge part of our deficit, and if we play this 
right, you're not taking benefits away from people.
    Senator Braun. No.
    Chairman Whitehouse. You are providing them better health 
care.
    Senator Braun. In our own business, we did not, because we 
took what we had then, lowered family cost by 50 percent and 
have not had a premium increase in 15 years, and we have a 
healthier bunch of belly buttons, which they call it in the 
health care business, employed. So it can be done.
    Chairman Whitehouse. Yep. I had a similar experience with 
our workers compensation system in Rhode Island years ago 
reforming that, and half of that is wages, but half of that is 
health care.
    We made, it worked for both. We're 50 percent, 5-0 percent 
cheaper than we were beforehand, without taking benefits away 
from people, just by making systems work better. So I really 
look forward to working with you on that, and I'm glad we had 
the chance with just the two of us here to have a longer 
exchange than hearings regularly permit.
    I want to add a couple of points in closing. The first is 
with respect to Senator Kaine's point. I met with our Taxpayer 
Advocate while we were back over the break, and the Taxpayer 
Advocate has new employees because of the bill, so they're able 
to take more calls from taxpayers who have problems.
    Now it's fine they hired up quickly, but they're an 
intermediary with the IRS. What they're seeing is that the IRS 
is staffing up now, so that they're getting quicker responses 
and they can serve Rhode Island taxpayers better. It's not 
enough to have more people in the Taxpayer Advocate's Office if 
you still have jam-ups in the IRS divisions.
    And they are seeing, as the hiring takes place, those jam-
ups in the IRS divisions beginning to clear. So I am seeing 
what Senator Kaine talked about also in Rhode Island, that 
service by the IRS is immediately and noticeably improving as a 
result of those added resources. I wanted to add that to the 
record.
    I also wanted to get some more clarification from Dr. 
Clausing. You were talking about the difference between 22 
percent of labor income and 52 percent, I think your phrase was 
``positive capital income,'' and you got cut off in your 
answer. If you'd like to finish while Senator Kennedy gets 
himself in his seat. I'll turn to him as soon as you're done 
with your answer.
    Dr. Clausing. Thank you for that, Senator. The data I refer 
to are available on the Treasury website, and it looks at the 
distribution of different forms of income. The top one percent 
of the distribution has 52 percent of the positive capital 
income.
    Chairman Whitehouse. Meaning what? Positive capital income 
is what?
    Dr. Clausing. Positive capital income is income that 
originates not from labor, but it also takes away in the 
analysis people who may have had losses. So if you just focus 
on those, that are earning above zero as opposed to losing 
money, which is a nice kind of snapshot of those who have 
gained from positive capital income.
    I think one thing the testimony of both Dr. Yagan and my 
own testimony point to is the ways in which our tax system as a 
whole fails to tax capital income adequately. It's a difficult 
problem to fix. I think the entity level of taxation, or 
corporate taxation, has an important role to play, because a 
lot of capital income isn't taxed at the individual level at 
all.
    If you look at income that's held in pension or retirement 
accounts that are tax-deferred, or income held in foreign hands 
that may or may not be taxed by the foreign government, the 
U.S. government doesn't reach any of that capital income for 
individual taxation. When it does reach taxed accounts, that 
tax is often deferred indefinitely or perhaps forever due to 
step-up in basis at death.
    So if you can first tackle capital income by looking at the 
business layer of taxation, that's your first attempt to take a 
wholesale approach to reaching this income, and reforms at the 
individual level are helpful as well.
    But that can help raise the amount of revenue that we can, 
achieve and close deficits without resorting to higher labor 
tax burdens, because that differential between labor and 
capital is causing a lot of the problem, because it leads to a 
lot of avoidance and less revenue than you would get otherwise.
    Chairman Whitehouse. Senator Kennedy.

                  STATEMENT OF SENATOR KENNEDY

    Senator Kennedy. Thank you, Mr. Chairman. Dr. Yagan, am I 
saying your name right? Tell me if you were king for a day and 
you could rewrite America's Tax Code, tell me the three changes 
you would make?
    Dr. Yagan. Number one, I would equalize labor and capital 
tax burdens at the top. There are a couple of ways of doing 
that. The billionaire minimum income tax is one that would move 
in that direction. I won't rehash those details. Senator 
Johnson actually talked about a corporate tax integration type 
of----
    Senator Kennedy. What's number two?
    Dr. Yagan. Sure. Number two, part of closing the labor and 
capital disparity is closing the Gingrich-Edwards loophole, and 
number three is ending abuse of trusts. So the estate tax has 
been eviscerated. Many of those you take assets that you know 
are worth a lot, right now they're purportedly worth a little 
because you haven't taken the company public. You put them into 
a trust----
    Senator Kennedy. Do you support a wealth tax? Do you know 
what I mean by a wealth tax?
    Dr. Yagan. I know what you mean by a wealth tax. The 
billionaire minimum income tax taxes income, and that I think 
is the way forward in that space.
    Senator Kennedy. Well, let me be a little more precise. Do 
you think appreciation of assets that are not sold, unrealized 
gain, should be taxed?
    Dr. Yagan. I think you should have to prepay tax on it that 
will eventually be due at sale, gift or bequest.
    Senator Kennedy. What do you mean ``prepay the tax''?
    Dr. Yagan. Sure. If I have $5 billion of unrealized capital 
gains, I have $5 billion of taxable income. I'm currently 
paying 1\1/2\ billion on that, so that's a 15 percent overall 
tax rate.
    Senator Kennedy. Well now let's make--no, no, no. Let's not 
complicate this. I want to understand what you're saying.
    Dr. Yagan. Sure.
    Senator Kennedy. Let's suppose an American owns a piece of 
real estate they inherited from their father or their mother, 
and it was--when they inherited it, they get a step up in 
basis. It's worth $100,000, and all of the sudden the 
interstate came through, and the property is now worth a 
million dollars if they sell it.
    But they don't plan to sell it. They're going to leave it 
to their kids. Do you think that, that Americans should have to 
pay tax on the unrealized gain, the increase in value?
    Dr. Yagan. In general no. At that level of wealth, for 
example housing----
    Senator Kennedy. You think only wealthy people should.
    Dr. Yagan. At the very top, it's hard to tax, you know----
    Senator Kennedy. Well, let me be sure I understand what 
you're saying.
    Dr. Yagan. Sure.
    Senator Kennedy. All right. Let's suppose that's not just 
an average American. Let's suppose that's an American--what do 
you define as ``rich''?
    Dr. Yagan. In the minimum income tax, it's $100 million of 
wealth or more. That's the----
    Senator Kennedy. Okay. So you think if you're really 
wealthy, you should have to pay a tax on your unrealized gain?
    Dr. Yagan. I think you should have to partially prepay if 
you're liquid, if you have liquidity to pay, and then----
    Senator Kennedy. Do you think, do you think somebody--why 
can't you economists answer questions? Should someone, should 
any American have to pay tax on unrealized gain, or can't you 
just answer me?
    Dr. Yagan. Yes, there are some who should.
    Senator Kennedy. Who?
    Dr. Yagan. The ultra-wealthy who have liquidity should 
prepay some taxes.
    Senator Kennedy. What if they don't have liquidity?
    Dr. Yagan. They should not have to pay, and they will owe 
at sale, bequest or gift.
    Senator Kennedy. So if you have cash, you ought to have to 
pay, but if you don't, you don't have to pay?
    Dr. Yagan. To prepay. I have a--in my testimony there are 
examples of how this works, so that you can preserve incentives 
to build a new company, take it public while----
    Senator Kennedy. Okay. What do you think Dr. McBride? Do 
you think we should start taxing unrealized gain, and what do 
you think that will do to the economy?
    Dr. McBride. Well, I have several concerns about the 
approach, the first of which is it's completely untested. It's 
never been tried in this country. We have 100, more than 100 
years of history with the income tax and----
    Senator Kennedy. Europe has tried it, haven't they?
    Dr. McBride. No. They're tried wealth taxes. Their 
experience of wealth taxes has been----
    Senator Kennedy. Yeah. How did that turn out? How did that 
turn out?
    Dr. McBride. Bad.
    Senator Kennedy. Why is that?
    Dr. McBride. It resulted in a lot of taxpayers exiting the 
country for one thing. In France, for instance, other countries 
that have tried it, and you suddenly lose a big chunk of your 
tax base that you're trying to tax there.
    We have that option in this country as well. The result has 
been that most of those countries in Europe that have tried a 
wealth tax have rolled them back, including France, because 
they were administratively challenging. The basic challenge is 
trying, is what you're describing, trying to value assets 
without real market transactions.
    So this is a valuation dispute. It means we get the IRS 
engaged in yet another challenge. We're currently doing this 
with the estate tax. Those estates that are--that are the 
subject of the estate tax, those valuations----
    (Simultaneous speaking.)
    Senator Kennedy. I need to ask--I need to ask one more. Can 
I have 30 more seconds?
    Chairman Whitehouse. Proceed.
    Senator Kennedy. Dr. you said Clausing?
    Dr. Clausing. Yes.
    Senator Kennedy. Clausing.
    Dr. Clausing. Yes, yeah.
    Senator Kennedy. Why do you--why do you and Dr. Yagan, why 
do y'all want to punish wealthy people?
    Dr. Clausing. I think I can speak for both of us, that 
we're not interested in punishing anyone. We're interested in 
having a fiscal system----
    Senator Kennedy. Well, you're interested in taxing the hell 
out of them more than anybody else.
    Dr. Clausing. I think the reforms that----
    (Simultaneous speaking.)
    Senator Kennedy. What makes you think--what makes you think 
that making tax policy on the basis of class or status makes 
sense?
    Dr. Clausing. I think it's a very American phenomena 
throughout the history of the income tax. We have valued 
progressivity and our current income tax does that. We used to 
rely on things that tariffs to raise revenue. Tariffs are 
regressive consumption taxes that disproportionately hurt the 
poor.
    We believe in this country that those with the greater 
ability to pay should pay more of the burden, and that's part 
of what a healthy capitalism does, is it enables people to gain 
from things like trade and technological change and business 
innovation, and to contribute a little more to the fiscal 
system when they are very successful in doing so. I think that 
that's a very legitimate way to structure the tax system.
    Senator Kennedy. Let me ask you a question.
    Dr. Clausing. Yes.
    Senator Kennedy. Why do you think so many wealthy people 
are leaving New York City?
    Dr. Clausing. New York City is, you know, an incredible 
city of innovation, immigration, entrepreneurship.
    Senator Kennedy. Yeah, but why are so many wealthy people 
leaving?
    Dr. Clausing. I think there are big advantages to living 
near centers of entrepreneurial activity, and we see that on 
the----
    Senator Kennedy. Do you think they're leaving to be nearer 
to centers of entrepreneurial activity do you?
    Dr. Clausing. Well, I don't think there are a lot of 
people, you know, fleeing New York City. New York City has----
    Senator Kennedy. Sure there are, there are thousands. I 
mean there have been study after study after study. Why are so 
many wealthy people leaving New York City?
    Dr. Clausing. I think there's an enormous number of wealthy 
people who are in New York City and continue to live there.
    Senator Kennedy. But why are so many leaving?
    Dr. Clausing. I can't speak to why particular people are 
leaving.
    Senator Kennedy. I can tell you why, it's taxes. You know 
that as well as I do. It's taxes.
    Dr. Clausing. I think if you look at the economic----
    Senator Kennedy. Some of it's crime, but most of it is 
taxes.
    Dr. Clausing. Well----
    Senator Kennedy. People vote with their feet. The same 
reason that people are leaving California and moving to Austin.
    Dr. Clausing. If you look at Californians, one of the most 
successful economies in the world, and it continues to be so. 
It attracts people----
    Senator Kennedy. But they're losing people.
    Dr. Clausing. I don't think it's in any danger of decline, 
nor is New York City, and these are very vibrant places----
    Senator Kennedy. Okay. I don't think we're going to ever 
agree. I don't think we're going to ever agree, but I 
appreciate the time of all three of you.
    Dr. Clausing. Thank you.
    Chairman Whitehouse. To be fair, there also are people 
moving the other way. There are people who move to New York. 
They just don't all leave from New York. It's a two-way street, 
in and out of New York, and it's a two-way street between 
Austin and California. People leave Texas and go to California, 
and some of them do very well.
    Senator Kennedy. Well, that's true Sheldon, but I can show 
you study after study after study, as you well know, and as the 
professor knows. It shows that people are leaving high tax 
states and moving to low tax states. All you have to do----
    Chairman Whitehouse. Well, they have to leave----
    Senator Kennedy. All you have to do is look at the 
demographics. Take, pick the nine states that have say a state 
income tax, and compare that--or that don't have a state income 
tax, and compare that to the states that do. It's called tax 
avoidance, and there's nothing wrong with it. It's perfectly 
legal.
    Dr. Clausing. People have different preferences, you know. 
If you look at where immigrants choose to live in the United 
States, they often go to those same places that you were 
talking about. You know, so I do think that, you know, there's 
movement in both directions.
    Senator Kennedy. Yeah, but here's what--here's my point. 
Here's what I think rational people do, and here's what I bet 
all three of you would do, and I bet Sherrod would do, I mean 
Sheldon would do it because he's a smart guy, okay.
    If he, if he won the lottery tomorrow and won $10 million 
and paid his taxes and has $6 million left, he's going to at 
least consider, you are too, moving to Florida, because they 
don't have a state income tax.
    Chairman Whitehouse. For the record, no I wouldn't. Never 
crossed my mind.
    Senator Kennedy. Well most rational--well, I don't mean 
you're irrational. No, you know that.
    Chairman Whitehouse. It could be quite rational to not want 
to move to Florida right now.
    Senator Kennedy. But when you're liquid, when you're liquid 
and you don't have to pay a six percent off the top versus zero 
percent, it's a rational economic move, is it not?
    Dr. McBride. Yeah, I agree it's rational. I mean the thing 
about taxes that we're talking about is they're a cost or 
price, and so claiming that this cost or price doesn't matter 
is essentially throwing out the very basic law of demand 
basics, the basic fundamental idea in economics that prices 
matter, that cost matters.
    Senator Kennedy. See, this is what this always boils down 
to and there's no--there's no way we'll ever agree, okay? But 
at least two of you believe that government, all things being 
equal, can spend a dollar better than people can. And that's 
your--this is America. You can believe that.
    Chairman Whitehouse. For the record, that's not in their 
testimony.
    Senator Kennedy. I just--I just don't agree with you. I 
think people can spend a dollar better, all things being equal, 
and all you have to do if you know the history of government, 
you know that I'm right. But I don't expect you to agree with 
me, because you're professors, okay? Thanks Sheldon.
    Chairman Whitehouse. Always entertaining. Senator Kennedy, 
thank you so much for being here. Which kind of just to close 
out the loop here, takes us back to the question of offshoring. 
If we allow companies and wealthy Americans to avoid paying 
taxes by going offshore, we can assume that they will follow 
that incentive, at least manywill.
    And where there are negative effects on the country by 
allowing that to happen because jobs have moved offshore and 
revenues that would otherwise support American initiatives are 
lost, that's a problem that needs solving. I think that's a 
large part of what Dr. Clausing's testimony is about.
    Dr. McBride, we have had a witness from the--chosen by the 
Republican side say that it's very important that in order to 
evaluate a witness' testimony, you have to know who's funding 
their organization and their research.
    So I think that's a logical thing to follow up on, and it's 
my understanding that the Tax Foundation almost inevitably 
argues for lower corporate tax burdens; is that correct?
    Dr. McBride. That's correct. As my testimony describes, the 
corporate tax, according to many studies, is very economically 
destructive. That's the primary reason why we argue against it. 
This is dozens and dozens of studies by OECD researchers and 
others that find this the most damaging tax.
    Chairman Whitehouse. And your board is made up almost 
entirely of corporate executives and corporate lawyers?
    Dr. McBride. I have to think about that. We have a variety 
on our board. It's on our website.
    Chairman Whitehouse. And it's not clear who funds your 
organization, because there's a lot of non-transparency.
    So I'm going to ask the question for the record, if you'd 
go back and let us know where the financial support for the Tax 
Foundation comes from. I don't expect you to have that off the 
top of your head, but when donations come in from groups like 
Donors Trust, you don't know who the real donor is because 
Donors Trust is simply a passthrough vehicle for removing the 
identity of the true donor and masking it behind the label 
``Donors Trust.''
    So if you could take that question for the record and 
answer it how you wish.
    Dr. McBride. Happy to review that request when it comes in.
    Chairman Whitehouse. Very good. With that, I think we have 
an additional--so your questions for the record are due by noon 
tomorrow, and if you can take mine as a QFR, we'll also get it 
to you. The answer we've asked witnesses to get within seven 
days of receipt when we get it to you.
    I want to thank the witnesses for appearing. Their entire 
full testimony will be included in the record. I think it is 
extremely important that we decorrupt and derottenize our Tax 
Code. And where it has been structured over many, many years to 
favor the wealthy and allow them to pay lower tax rates than 
regular working Americans, I think we have a problem on our 
hands of propriety. I just think it's wrong.
    I think we have a problem of economic injustice. I think we 
have a problem of an unfortunate circularity between wealth and 
political influence, using political influence to create more 
wealth for those people who already have it, and as we pointed 
out, there's also a problem of revenue.
    And while we're running deficits, to run an unjust tax 
system that creates bigger deficits for the sake of wealthy 
political influence is not a good place for the United States 
of America to be. So with that, we are concluded. I thank all 
the witnesses.
    [Whereupon, at 11:39 a.m., Tuesday, April 18, 2023, the 
hearing was concluded.]

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                            [all]