Hearing of the Senate Budget Committee - Tax Reform to Encourage Growth, Reduce the Deficit, and Promote Fairness

Statement

I want to welcome everyone to the Senate Budget Committee. I very much appreciate the participation of these witnesses. Today's hearing will focus on tax reform. Our hearing is titled: "Tax Reform to Encourage Growth, Reduce the Deficit, and Promote Fairness." We have three really outstanding witnesses this morning.

Dr. Len Burman is the Daniel Patrick Moynihan Professor of Public Affairs at the Maxwell School at Syracuse University. Dr. Burman is a former Director of the Tax Policy Center at the Urban Institute and Brookings Institution, and a former Deputy Assistant Secretary for Tax Analysis at the Treasury Department during the Clinton Administration.
Dr. Diane Lim Rogers is the Chief Economist at the Concord Coalition. Dr. Rogers previously served as the Chief Economist on the House Budget Committee and the House Ways and Means Committee, and has a distinguished background as well.

Dr. Daniel Mitchell is a Senior Fellow at the Cato Institute. Dr. Mitchell was an economist for Senator Bob Packwood and the Senate Finance Committee. I can tell you, Senator Packwood is somebody that I worked with very, very closely. For many years, we co-chaired a Deficit Reduction Caucus here in the Senate. We met very faithfully for many years, and I think played a constructive role in the deficit reduction plans that actually produced a balanced budget, and there was no more faithful participant than Senator Packwood. I have never forgotten that. So, Daniel, I don't know if you staffed him at some of those efforts, but I am forever grateful.

Welcome to all of you. We look forward to your testimony.

I believe tax reform has to be part of the solution to the nation's long-term budget crisis. We need a comprehensive deficit reduction plan. We need to address discretionary spending. We need to reform our entitlement programs. We need fundamental tax reform that makes the tax code simpler and more fair, improves U.S. competitiveness, lower rates, and, I believe, raises additional revenue for deficit reduction.
The state of the tax code is simply indefensible. This current code was originally designed in the 1920's, when we faced a very different global environment. It is completely out of date. It is inefficient. It is hurting our ability to compete on a global basis. In addition, it is, I believe, hemorrhaging revenue from the tax gap, tax havens, and abusive shelters. It is riddled with expiring provisions, which create enormous uncertainty for citizens and businesses, and makes it more difficult for all of us to plan. And by simplifying and reforming the tax code, we could actually reduce tax rates, as the Simpson-Bowles Commission recommended, while still raising additional revenue to address the long-term fiscal imbalance.

I believe it is clear we need more revenue. Revenue in 2011 was about 15 percent of GDP, near the lowest level in 60 years as a share of our national income.
Some of my Republican colleagues have argued that revenues should not exceed 18 percent of GDP, because that is the historic average. But, I would remind them, on the five occasions when the budget has been in surplus since 1969, revenues have not be 18 percent. Revenues have ranged between 19.5 percent of GDP and 20.6 percent. We will likely need even higher revenue levels in the future, because the country now faces an unprecedented demographic situation with the retirement of the baby boom generation.

Adopting fundamental tax reform would also help spur economic growth and create jobs. Here is how the CBO Director, Doug Elmendorf, described the economic benefit of tax reform in his testimony before the Senate Budget Committee last month, and I quote:

I think analysts would widely agree that reform of the tax code that broadened the base and brought down rates would be a positive force for economic growth, both in the short term and over a longer period.

Scaling back tax expenditures should be at the heart of any tax reform we consider. Tax expenditures are the countless preferences, loopholes, credits, deductions, and exclusions that have been added to the tax code over the years, both for individuals and corporations. Tax expenditures are really just spending by another name. Much of the complexity of the current code can be traced to the proliferation of these provisions. And I can say to you, I'm on the Finance Committee as well, they get very little review. They get much less review than the appropriated accounts. By scaling them back, we could simplify the code, reduce rates, and vastly improve the economy's efficiency, and I believe our competitive position.

The cost of tax expenditures is simply staggering. In 2011, we spent one trillion, 200 billion dollars on tax expenditures. That is almost as much as we spent on all of discretionary spending, and more than we spent on Medicare, on Medicaid, and Social Security.

Here is how conservative economist Martin Feldstein described tax expenditures in an opinion piece in the Wall Street Journal, and I quote:

Cutting tax expenditures is really the best way to reduce government spending.... [E]liminating tax expenditures does not increase marginal tax rates or reduce the reward for saving, investment or risk-taking. It would also increase overall economic efficiency by removing incentives that distort private spending decisions. And eliminating or consolidating the large number of overlapping tax-based subsidies would also greatly simplify tax filing.

I am just in the midst of working on my own tax return. Anything that would simplify that, hallelujah. "In short," this is going back to Mr. Feldstein, "cutting tax expenditures is not at all like other ways of raising revenue." I think Dr. Feldstein has it about right.

Scaling back tax expenditures also has the benefit of improving the fairness and, potentially, the progressivity of the tax code. Tax expenditures are clearly worsening the disparity between how those who are the best off among us are taxed compared to everyone else. If we look at the increases in after-tax income from tax expenditures, we can see that the top one percent will receive about $255,000 from tax expenditures in 2012. In comparison, the middle quintile, the 20 percent that are in the middle of the income distribution, will receive about $3,200 from tax expenditures.
One of the results is that the effective tax rate for the wealthiest in the country -- the rate actually paid after factoring in exclusions, deductions, credits, and other preferences -- has fallen dramatically. The effective tax rate for the 400 wealthiest taxpayers fell from almost 30 percent in 1995 to 18.1 percent in 2008.

I believe the Fiscal Commission provided a useful framework for the kind of fundamental tax reform that we need to consider. Here are the key elements of the tax reform included in the Simpson-Bowles plan. One, the plan eliminates or scales back tax expenditures, and lowers tax rates. Two, it promotes economic growth and improves America's global competitiveness. Three, it makes the tax code more progressive. Four, the Commission's report included an "illustrative" tax reform plan that demonstrates how eliminating or scaling back tax expenditures can actually lower rates. Instead of six tax brackets for individuals, the plan includes just three: 12 percent, 22 percent, 28 percent. The corporate rate would also be reduced from 35 to 28 percent. Capital gains and dividends would be taxed as ordinary income. The mortgage interest and charitable deductions would be reformed, better targeting these tax benefits. The Child Tax Credit and the Earned Income Tax Credit would be preserved to help working families. And the Alternative Minimum Tax would be repealed. Hallelujah again. The Commission's plan also increased revenues to 21 percent of GDP by 2022.

That is the kind of tax reform framework that I believe we need to consider. We simply will not be able to solve our nation's long-term fiscal and economic problems without fundamental tax reform -- tax reform that improves our economic efficiency, while also bringing more revenue.

And again, I want to go back to the fundamental question of economic growth, economic growth. We need to focus like a laser on what will help grow our economy, what will help us be more competitive as a nation.

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