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Corporate Tax Reform: Is Change in the Air?



TAX ANALYSTS
CORPORATE TAX REFORM: IS IT IN THE AIR?

Washington, D.C.
Friday, March 25, 2011


PARTICIPANTS:

Moderator:
    CHRISTOPHER BERGIN
    President and Publisher, Tax Analysts
Panelists:

    MARTIN REGALIA
    Senior Vice President, Economic and Tax Policy
    U.S. Chamber of Commerce

    ERIC TODER
    Co-director, Tax Policy Center

    DAVID WESSEL
    Economics Editor, The Wall Street Journal

    MARTIN SULLIVAN
    Contributing Editor, Tax Analysts
Others Invited to Table:

    BRUCE BARTLETT
    Former Treasury Deputy Assistant Secretary for Economic Policy

    DAVID BRUNORI
    Tax Talk Today

    JOSEPH CALIANNO
    Grant Thornton, LLP

    ELLIOTT DUBIN
    Multistate Tax Commission

    MEREDITH FATH
    Tax Analysts

    HOWARD GLECKMAN
    Urban-Brookings Tax Policy Center

    ROBERT GOULDER
    Tax Analysts

    JANE GRAVELLE
    Congressional Research Service

    JOE HUDDLESTON
    Multistate Tax Commission

    MONTE JACKEL
    PricewaterhouseCoopers

    DAVID CAY JOHNSTON
    Tax Analysts

    JAMES KEIGHTLEY
    Keightley & Ashner, LLP

    MARTIN LOBEL
    Lobel, Novins & Lamont, LLP

    TOM NEUBIG
    Ernst & Young LLP

    DANIELLE ROLFES
    Ivins, Phillips & Barker

    ROBERT ROZEN
    Ernst & Young, LLP

    JOSEPH THORNDIKE
    Tax Analysts

    MARK SILVERMAN
    Steptoe & Johnson, LLP

    JAMES WHITE
    Government Accountability Office
* * * * *

PROCEEDINGS

(9:05 a.m.)

MR. BERGIN: Good morning, everybody.

GROUP: Good morning.

MR. BERGIN: Thank you for coming. Welcome to the latest in Tax Analysts' series of discussions on key issues in tax policy and tax administration. Today's topic is corporate tax reform. As I'm sure you all know, corporate tax reform is in the air in Washington. You can feel it. The question is whether corporate tax reform advances from something in the air to a reality.

I'm Chris Bergin, the president of Tax Analysts, the nonprofit publisher of Tax Notes, Tax Notes Today, State Tax Notes, Tax Notes International, and many other fine print and online products on federal, state, and international taxation.

This is our ninth year of conducting discussions on tax policy and if you are new to our discussions, let me say it's great to have you here. Let me also take just a moment to explain our process today. I will open things up with some brief remarks to introduce our topic. I will then introduce our distinguished panel of speakers. Each of them will address aspects of our topic. After that we will open up the discussion to all of you and we encourage all of you to participate; that's what this is all about.

Whether you are seated at the table here or just a bit away from it, just wave and I'll find you. Now, we're streaming audio of this event on our website, and we will post both the audiocast and a transcript there. Also, for media purposes, we are on the record, so when I recognize you, please tell us who you are. Also, please speak into a microphone. I think everybody at the table has one, and for those away from the table, we have handheld mics that we will quickly get to you.

I will moderate the discussion and we will end at 11:00.

Now onto our topic, which based on several meetings and panel discussions that I've attended or participated in recently, is hot and getting hotter. I must admit, however, that I'm a bit confused about our topic. What exactly do we mean by corporate tax reform? It's hard to argue with the complaint from my friends at the Tax Foundation and elsewhere that the U.S. corporate tax rate will soon be the highest in the world. That, of course, depends on what Japan does and, as we all know, the Japanese have a few things on their mind these days as they deal with a tragic situation.

But does corporate tax reform simply mean cutting the top corporate marginal tax rate? If so, we can all go home now. Of course, it's more complicated than that. Even if everyone in this room agrees that we should cut the top corporate tax rate, I'm not sure that we all agree on how to do it or on the price we should pay for doing it.

For example, should we broaden the tax base to offset the cost of the lower rates? And can scaling back the so-called tax expenditures on the corporate side do enough to get us to a favorable -- whatever that means -- top corporate tax rage? Or should we follow the example of some other countries and pay for a rate cut by creating a value added tax? Should corporate tax reform be revenue neutral to begin with? And what does that mean exactly? What about flow-through businesses? Is it fair to leave them out of tax reform? Should we move to a territorial system? And what lessons can we learn from the effort that produced the last major tax reform, which was the Tax Reform Act of 1986? Should the experience of 1986 give the corporate community pause?

These are just some of the issues to consider because corporate tax reform raises a lot of questions. We've put together an excellent panel today to help us work on the answers. Let me introduce the order on which they will speak.

Martin Regalia is the senior vice president for economic and tax policy for the U.S. Chamber of Commerce. Eric Toder is institute fellow at the Urban Institute and co-director of the Urban-Brookings Tax Policy Center. David Wessel is the economics editor for The Wall Street Journal. Marty Sullivan is an economist and contributing editor for Tax Analysts. He'll also be on 60 Minutes this Sunday so you can check that out.

So, Marty Regalia, would you lead us off, please?

MR. REGALIA: Thank you very much. I think my assignment this morning was to summarize what the business community is looking for in tax reform and I will try to do that succinctly.

What the business community is looking for is a tax code that works, a tax code that generates the required necessary revenue but does so in a way that is least damaging to economic and job growth. The business community, both corporate and passthrough, is looking for a tax code or a tax reform that is true reform and not just a tax code that nibbles around at the edges and gets rid of a few expenditures and lowers the rate to a rate that still probably wouldn't be competitive on a worldwide basis.

We're looking for a tax code that is characterized by relatively low rates, a tax code that has a broad base, and not necessarily just a broader income tax base. If we're going to do tax reform, we really have to examine the quality of the base, the type of the base, not just the size of an income tax base.

I think we have to look at the international competitive environment and provide businesses, large and small, with a tax code that allows them to be competitive in that environment. It's important, I think, to remember in tax reform that the U.S. tax code has a limited ability to allocate world capital. World capital will go where it's going to go. What the U.S. tax code plays a major role in is whether U.S. corporations and U.S. individuals can play a role in that world allocation of capital.

I think that it's important to provide a tax code that eliminates the bias against capital investment; we tax capital numerous times, we tax savings multiple times. We need a tax code that fosters investment by lowering the rate of the -- by increasing the rate of return on capital, and by lowering the cost of capital. We would like to see a tax code that addresses more effectively the cost recovery of that type of investment. We've seen changes recently in the tax code that have sought to increase the rate of return on capital and therefore spur capital investment, but they tend to be temporary, things like the 50 percent expensing and bonus depreciation credits. We'd like to see something in the tax code more permanent in that regard.

We think that a territorial tax code in this world environment makes sense. We compete, for the most part, with companies -- worldwide companies -- that operate under a territorial tax code or an exclusionary tax code of some sort. Many different ways to do that, to affect that. We believe the way we do it now is probably the least efficient and one that addressed it more directly would be an improvement.

We think the tax code should be comprehensive; one that looks at the corporate code also has to look at the individual code. Over half business income is taken in by entities that pay taxes as passthroughs and, as a result doing just corporate tax reform or changing just the corporate code will leave out a whole segment of business income.

We think that the deficit and the debt, while very important problems, should not be the driver of tax reform. Tax reform certainly can be a component of addressing our deficit and debt problems, but we ought to pick the goal for tax reform being to get a tax code that works, a tax code that raises the needed revenue, but a tax code that looks first and foremost on what its impact on the economy is going to be, therefore, establishes an appropriate base, figures out how much taxes have to be raised, and then sets the rates accordingly. A code that works in that way and is reformed that way, we believe, will have a better outcome at the end.

We think that the tax code should be neutral with respect to industries. We try to use our current tax code to allocate capital flows all over the place and it doesn't work. Every time we do that we create incentives and unintended consequences. A tax code is neutral, we believe, is one that is best.

In the course of reforming the tax code there have to be sufficient transition rules. We have to be able to get from here to there without doing damage to our corporations, our businesses in general, and our economy. So transition rules are vitally important and I think transition rules are one of the things that we see left out of virtually every proposed -- I mean, the Wyden-Gregg proposal didn't have them, we looked at what was happening with the Simpson-Bowles and there are no transition rules, and the deficit commission's report had very little in the way of transition rules.

So, if you're going to do tax reform I think that looking at how you get from here to there when you specify tax reform is vitally important.

You know, the current code is characterized by higher relative rates, a fairly narrow base, double and triple taxation of saving, lack of full cost recovery on investment these are the kind of provisions that have a tendency to retard economic and job growth and if you're going to do true tax reform, you know, that's kind of a hit list of what ought to be on the agenda to fix.

So, I'll stop there.

MR. BERGIN: Thanks, Marty. Eric?

MR. TODER: Thank you, Chris, and thank you, Tax Analysts, for holding this and inviting me and I'm very honored to be on such an outstanding panel.

I'm going to make three points and they'll run into each other. First of all, this is not 1986. We can't repeat the model of the 1986 Tax Reform Act. Second, tax reform should not focus on the corporate income tax alone, that can't be isolated in a sensible way. And third, which follows from that, we should think about shifting taxes on corporate profits from the corporate to the shareholder level. So, I'll go through all those.

First, why can't we repeat 1986? First of all, revenue neutrality is not enough. We're going to need more revenues to pay for an aging population. That may require a different tax source such as a VAT, but I'm not going to go there today.

Second, in a globalized economy, it's really hard to raise more money from corporations so we're not going to repeat the experience that we did in 1986 of raising corporate revenues to pay for reduction in individual revenues.

Third, we can't even have revenue-neutral corporate reform and get the rates down very much unless we're going to do things have much broader consequences. The targeted preferences that everybody talks about, I calculated they might pay for about 3 to 4 percentage point reduction in corporate rate. The Obama budget proposals actually would only pay for about a 1 percentage point reduction if they were all enacted.

We would have to touch things like deferral of foreign-source income and accelerated depreciation of machinery and equipment if we're going to get real money, and for various reasons I don't think we want to go there, but that's another conversation.

The biggest source -- unlike in '86, the biggest sources of corporate avoidance come from exploitation of inconsistency in international rules, not from explicit tax benefits that Congress legislated. Marty Sullivan, I'm sure, has written a lot about that and I'm sure he'll say how that works better than I can.

But taxing corporate income in a global economy is challenging. A source-based taxation, which is favored by those who are supporting a territorial tax, is very hard to enforce because the source of income is ambiguous especially when the income comes from intangible capital and is very easily manipulable.

Residence-based taxes -- advocated by those who favor ending deferral -- also hard to enforce because in a world where corporations operate in different economies, they have owners in different places in the world, corporate residence itself, the location of the front office, really no longer has much economic meaning and that too can be adjusted easily over time.

So, I would say, probably the best we could do is to aim for some kind of a system like ours that -- with rates not too much above those of our major trading partners, but it's really hard to get this right.

So, that flows into the second point. Tax reform can't look at the corporate tax alone. A couple of reasons: Significant amounts of business income in the United States, as we all know, come from firms that are taxed on a flow-through basis. So, any reform has to look at how you tax those firms as well as C corporations.

Second, recognize that taxes that are imposed on corporate income come from both the corporate and shareholder levels. The current corporate tax can be described as an imperfect tax on corporate income originating in the United States, whether by U.S. or foreign-owned corporations. Very little additional tax is collected on the foreign-source income of U.S. companies but taxes that shareholders pay on their dividends and capital gains are not related to the source of the corporate income where the profits originated, and they're not related to the corporate residents of the company that's paying the dividends or seeing an appreciation of stock. Instead these taxes largely fall on U.S. residents who own corporate shares.

So, that leads me to my last point. I think we should be thinking about shifting tax liability from the corporate level to the individual shareholder level. That's the opposite of the direction we've moved in the last decade. Since, in economists terms, the corporate tax base is more elastic, more shiftable, it's better to tax more at the individual than the corporate level. This involves reducing tax preferences we have in the code for capital gains and dividends and lowering the capital gains rate. So, I would argue for considering that conversation.

And lest you think that is an idiosyncratic position by me, if you look at some of the tax reform plans out there, they're actually doing that. The Wyden-Gregg plan lowers the corporate rate to 25 percent, raises tax rates on capital gains and dividends a bit, and relative to current policy baseline, according to our scoring, reduces corporate revenue and increases individual revenue.

The Bipartisan Policy Center plan, the Rivlin-Domenici plan that was introduced last year, goes a lot further. It reduces both the corporate and individual rates, eliminates capital gains and dividends, and reduces corporate preferences and individual preferences, but not enough to keep corporate revenue from falling. And the Simpson-Bowles plan is quite similar.

So, my conclusion is, we really shouldn't be isolating corporate tax reform. We should think more broadly about how business income and corporate income are taxed and who is paying those taxes, and fix that in a way that does the least harm to the economy and has the best distributional consequences. Thank you.

MR. BERGIN: Thanks, Eric. David?

MR. WESSEL: I ask you one question and make sure I understand you right? So in your perfect world, lower corporate tax revenues and higher tax revenues from interest -- yeah, from dividends and capital gains?

MR. TODER: I would say that's correct, other than the phrase "perfect world." (Laughter)

MR. WESSEL: Well, I'm very pleased to be here -- and much more honored than Eric -- to be in a group of people who know so much more than I do and who've been such good teachers to me over the years. I could tell that this is a high-level conference because no economist has yet started with the "well, if we were starting from scratch," which always turns me off when tax policy comes up.

But I think Marty has fallen into one trap that drives me nuts. I believe that -- and there's nothing wrong with this -- that business wants a tax code that works, in which they pay less taxes. And I'm always a little skeptical when business --

MR. TODER: Absolutely.

MR. WESSEL: All right, so my assignment is to talk a little bit about the politics of this. And there are a lot of actors in this.

I think the first actor, of course, is Congress. And I think this is a very difficult lift for Congress for a number of reasons. One is there's very little short-term pleasure here, a little bit of short-term pain. And if they do it, it's only because they are led to believe we will get some benefits in the future and higher economic growth, but we're not sure those will be very great. That's a tough thing to do.

The people are not clamoring out there for corporate tax reform. Most people who do their taxes are not concerned about the fact that it takes a lot of corporations a lot of people to figure out how to either pay or avoid their taxes.

And I can't imagine that there are very many constituents lining up in Congress and saying, "well, for the good of the country, you know, we have a very low effective tax rate in our corporation. For the good of the country, and because we prize certainty, we would like that to go up a little bit as part of this deal." Somehow I believe that those words have not been uttered to the chairman of the Senate Finance Committee or House Ways and Means Committee.

So you don't see any great -- there's no magic here in Congress. The business community, I think, is incredibly important. The losers will be against this. If you pay a low corporate tax rate, it's not in your interest to say we're going to close a lot of loopholes and a lot of deductions and preferences so you can pay more. And the winners, -- and they have yet to emerge -- I haven't seen a lot of people come forward and say, you know, in my industry we pay a very high effective tax rate and we'd be better off if the other guys had to pay more.

So without a strong -- there's only two ways this works, it seems to me. One is there's a divide-and-conquer strategy. You know, in the old days, I remember Michael Graetz, who was at Treasury, telling me that it was great to be part of the 1990 budget deal, because the stock companies, the stock life insurance companies would come in and say the mutual companies are getting an unfair break. And the mutual companies would come in and say the stock companies are getting an unfair break. So when the deal was done, Treasury managed to hit them both.

So there's the divide-and-conquer strategy or there is a chance that the business community says, "look, this system isn't working." And that they come together and present a united front that does lobby Congress to fix a lot of things that are broken, even if it means that some of them do get hurt. I think that's unlikely, but I see those as the only two ways this happens. A divide-and-conquer strategy on the business community or business community decides that the current system is so broken that we have to do something.

Why would Democrats or Republicans want to engage in this? Well, I think Treasury was actually fairly clever in talking about "revenue neutral." And my understanding when they say revenue neutral is they understand well what Eric said. They are not talking corporate revenue neutral; they are talking business revenue neutral -- both corporate and noncorporate form. But that allows them to say to the Republicans, look -- and the business community -- do it this way -- do it as revenue neutral, and you won't pay more taxes when we get the grand deficit deal, which will cut spending and raise taxes. And to the Democrats, they can say, look, do this now and we'll stop a steam roller from saying we have to reduce business taxes to make the economy grow better.

So if this works, it will be because revenue neutral is seen as the second-best alternative by both sides. I think that bringing the noncorporate business community into this thing adds enormously to the political complexity.

In case you haven't noticed, the small business community seems to have a huge impact on policy and politics. And if they figure out that this is a way for GE to pay even less taxes and them to pay more, well that's a little bit like taking on the community banks, the real estate brokers, and the life insurance salesmen. There are just a whole lot of them out there, and they tend to be people who are influential with individual members of Congress.

I think the campaign contribution thing can never been ignored. I think it cuts in many ways. Obviously, people who have preferences in the tax code will spend heavily to protect them. And people who benefit from this may not spend heavily to advance their interests. That's a problem. And I think also there's the dilemma in Washington, which unfortunately cynics like those in this room know too well, that the big advantage of temporary tax credits is that they are like an annuity for members of Congress.

So, everybody in Washington is in favor of making the R&D tax credit permanent, but it never happens. There's a message there.

I think, though, that there is -- it's a mistake to say that -- so, before all these reasons, nothing will happen. I wouldn't put a lot of money on corporate tax reform happening. But I do think that miracles happen. And where I think that the '86 act is instructive is -- not -- is exact -- I agree exactly with what Eric said. If the '86 act worked because it was revenue neutral and it shifted revenue collection from individuals to business, that's not going to happen this time. We are going to have a tax increase and you can't have a tax increase and have revenue neutral corporate and individual tax reform. Even in Washington you can't do that.

But what tax reform was, was an amazing harmonic convergence of economic and political forces. It takes a lot of leadership, which I don't see at the moment. It takes a lot of groundwork, which I also don't see at the moment. Let's remember, tax reform in '86 was preceded by lots of blueprints and white papers. And it takes a level of sophistication of the players on the Hill, both the elected leaders and the staff, that I'm afraid has atrophied over time. These things are hard to do.

I was at a forum the other day at the Urban Institute on the CLASS Act, the long-term care -- the insurance thing -- and one of the speakers said, I thought quite rightly, that this was a piece of legislation that was passed from the heart with political influence and didn't have as much of the technical drafting expertise as we might have liked. Well, I think that the problem is that neither the members -- particularly the new ones -- or the staff are quite ready for this kind of thing with many moving pieces. So that makes it hard to have a miracle. But it's a possibility.

I think it was a very significant moment in Washington this week for the people who would be interested in this subject -- not for anybody else, of course -- when there was talk among some of the Republican leadership of doing a repatriation holiday, to have the revenue come home, which is very attractive to business and to people who like to see an increase in revenues now. But Dave Camp, the chair of the Ways and Means Committee, said no. He said: "I'm not doing repatriation, except as part of a broader package." Well, that's a sign that at least somebody on the Hill is thinking these are not isolated issues.

The second thing that can happen, I think, is that the international weight may crack our tax system. Two things cannot be overlooked. One is, as Eric said quite well, a lot of the companies are exploiting the international -- doing international tax arbitrage. And that's a talking point. People understand that. People understand the story on the front page of The New York Times today that says that GE has enough money to hire enough tax experts so they can book their income in the lowest tax place. That can become a catalyst for a broader conversation. Let's not forget one of the instigators of tax reform in '86 was Bob McIntyre and the Citizens for Tax Justice with their campaign that said that GE pays a lower tax rate than the cleaning ladies of GE. So that stuff can work.

And secondly, you know, people see what's going on, whether it's in Ireland and Europe and Japan -- that other countries are doing things, and they are much more aware. Ordinary people are much more aware that we live in a global economy. And there is a deal to be done here where big businesses take some responsibility for helping to reduce our debt burden and get something out of it that makes for a somewhat more level playing field in corporate taxes. If people think that business wants is to make it easier for them to pay less taxes, it's not going to work. That's the beauty of revenue neutral.

And then a third way this could happen, it seems to me, is if we do get into a conversation about comprehensive deficit reduction, where everything on the table becomes more than a slogan, but a reality. And once you get to that conversation, there are a lot of interesting things to say about reorganizing the way we think about this.

I think that one political reality will be that if Congress has any Democrats left, which I understand is an "if," and if public opinion polls have anything to say about tax reform, which is also an "if," then it may be easier to get a lighter corporate tax burden, a more rational tax system, if it's coupled with what is perceived as raising taxes on the rich. That's why I was asking Eric about his shareholder proposal. I think that's one way to do it.

I think it will be very hard to get a comprehensive deficit reduction program together that lowers the business tax burden, that is perceived -- whether it is or not -- lowering the tax burden on the upper-income people, but raises more revenue by something like a VAT. I think that is a political nonstarter. I'll stop there.

MR. BERGIN: Thanks, David. Marty?

MR. SULLIVAN: Thank you, Chris. I've been asked as the cleanup batter to fill in the gaps for the prior three speakers. And they didn't leave me many gaps.

Marty Regalia I think did a very good job of laying out the international concerns and the need to look beyond the corporate tax base per se.

Eric Toder, if you haven't read his paper coauthored with Rosanne Altshuler and -- who was your other coauthor?

MR. TODER: Ben Harris.

MR. SULLIVAN: Ben Harris, from last year, raising this possibility of raising shareholder taxes to pay for corporate rate reduction, I highly recommend it. I think it's a fascinating possibility. And what Eric neglected to mention is this where -- and picking up on Marty's comments -- this is where the rest of the world is going. The rest of the world are raising shareholder taxes, raising capital gains taxes, moving away from shareholder credits, and lowering their corporate rate.

So if we are -- not only are you recommending it, and our panel, you know, our expert panel is recommending it, but this is how the rest of the world is dealing with their corporate competitiveness problem. And so I think this is something that deserves a lot more attention.

David's point about winners and losers and the real politics, of course, can't be overlooked. You know, Marty mentioned he wants -- I mean, the business community would like neutrality, and we all, I think, share that goal. But neutrality would imply raising taxes on the manufacturing sector and lowering taxes on the financial sector. And the reason is that most tax expenditures now are targeted toward the manufacturing sector. Those include accelerated depreciation, R&D credit, section 199 domestic manufacturing deduction. So, neutrality is an admirable goal, but it's probably politically impossible.

What I would like to add is -- and just reinforce what Eric was saying -- as long as we play the game as President Obama has laid it out, we're not going to get anywhere. Revenue neutral reform within the corporate sector, we'll be lucky to get the rate to 32 percent and have all these winners and losers. This is never going to happen.

So we need to be thinking outside of the box. And I am going to emphasize something that seems like a diversion from the true topic, but I just think it's the 600-pound gorilla, which is the budget deficit. And let me just -- I did a lot of calculations. I know you're all excited by that. (Laughter)

MR. WESSEL: I'll dance to that.

MR. SULLIVAN: By that.

MR. WESSEL: A few places in Washington.

MR. SULLIVAN: Because I couldn't find them anywhere, I did them myself.

Let's play a little game. Let's imagine the Republicans get everything they want on discretionary spending cuts, which I will interpret to mean they get discretionary spending to 6.2 percent of GDP, which is the lowest it's ever been in the last 20 years. That was 1999. That was before we were engaged in major wars and before we had the additional security concerns of 9/11. But let's say we can get down to 6.2 percent, which would be a monumental achievement. Even if that were achieved, we would still need a deficit reduction of about $400 billion a year.

So, now what, tea partiers? Now what, Republicans? What are we going to do? And I did a little more math. Here are your options. You can cut mandatory spending by 16 percent. That's Social Security and Medicare. You can cut defense spending by 61 percent. Or you can increase individual taxes by 25 percent. Now all of those are not attractive options. The point -- and Bill Gale said it at one of our forums last time -- is something impossible has to happen, because it's very easy -- and this group is so cynical talking to everybody beforehand. Everybody's going, "No, tax reform's never going to happen," and I think we all know it's practically impossible. It's easy to be cynical. It's safe to be cynical. But I sort of like David's comment, "Miracles can happen." It's only because miracles have to happen for a budget deficit to be handled.

So, I'm going to talk about the value added tax as a game changer, as something that we need to have happened unless somebody can tell me how we're going to cut defense spending by 61 percent or increase individual taxes by 25 percent or cut Social Security and Medicare by 16 percent.

We would need something like a 10 percent value added tax to stabilize our deficit if the Republicans get everything they want, and if they don't we're going to need something higher.

And while we're at it, I think if we're going to have a VAT for deficit reduction, we should also have a VAT to improve our international competitiveness by reducing our corporate tax rate. And if we wanted to get our corporate tax rate to 20 percent, which many recommend, that would require a value added tax of about 3 percent. So, looking in the long run, I just -- I think the deficit is number 1, number 2, and number 3. I think, although I recognize that in the current environment a VAT is politically unthinkable, I think eventually we're going to get there. And while we're at it, while we're using the VAT for deficit reduction, we should be using it for corporate rate reduction. And I'll leave it there.

MR. BERGIN: Well, he said it -- VAT. Ok, I'm going to open it up to discussion now.

MR. BERGIN: I know most of you, but please just state your name so that we can get it on the audiocast. So, Jane's up first? Ok.

MS. GRAVELLE: I'll be -- I'm usually very shy.

MR. BERGIN: I know. (Laughter) I know.

MS. GRAVELLE: So, I just -- and I'm not --

MR. BERGIN: Say New York.

MS. GRAVELLE: I'm Jane Gravelle from the Congressional Research Service, but I'm not speaking for the Congressional Research Service.

I do think we ought to put this whole issue about the economic effects of corporate rate cuts in perspective. I've just done some calculations for some things that I'm working on to try to estimate a cut in the corporate rate from 35 percent to 25 percent under the best of circumstances. No other countries follow or react to us by cutting their own rates. There's no base broadening to offset the revenue and affect the cost of capital. Nothing like that. And what I get is that national income or national welfare will rise by 2/100ths of 1 percent of GDP. That's 2/100ths of 1 percent of GDP. I get a 2/10ths increase in GDP, but most of that either already belongs to us as for income that was earned abroad and has moved to the United States, or it belongs to foreigners who are going to earn income on increased inbound capital.

So, I don't think we're talking about anything that would shake the Republic. I do think the deficit is, I would say, 1, 2, 3, 4, and 5 -- but wait till the economy recovers a little bit.

Then one other thing. I do think profit shifting -- I can't tell how big it is. I think it is something to be worried about. But I disagree with Eric. I agree with him on almost everything, except I think it's a lot easier to profit shift than to resident shift.

And I think Google can continue their operation quite freely under a territorial tax -- their Dutch sandwich that gets them out of both the Irish and the U.S. tax. I think they'd have a hard time doing it under a worldwide tax system or even an end of deferral. Or maybe we should try to look at formula apportionment. But I think that's an issue that we might want to worry about, and crafting an international tax system -- I think we've been very successful in finding rules that limit residence shifting. I think our anti-inversion wheels are working very well, and if you don't think they're working well, I can tell you how to really make them work.

So, I think this love affair we have with the territorial tax -- we need to come back and look at some of the real issues involved there.

MR. BERGIN: Thanks, Jane. Jim?

MR. WHITE: Jim White from GAO with a question for several of the speakers, including Jane.

If transition rules are included, what happens to your estimates of the growth effects of corporate tax changes? And, similarly, what happens to the impact of corporate reform on neutrality if you start building in transition rules? Don't we end up giving up some of the benefits if we build in significant transition rules?

MR. DUBIN: Well, I mean, if you build in significant transition rules, it depends on what you're looking for in a tax code. If all you're looking for in a tax code is to raise more revenue, then let's call it tax increases and not tax reform, and transition rules have a tendency to reduce the tax take in the near term. So, if what you're trying to get is a tax increase, then, no, you wouldn't want to put transition rules into a tax increase. If you're talking about tax reform and getting from here to there with the least economic damage, in the first place believe, with all due respect, Jane's estimate of the impact on the U.S. economy. If you don't believe that internal rates are returned matter investment, you can get those kinds of very, very low elasticities on the economic effect. I'd like to see the model to start with. I mean, there's a difference of opinion on the modeling, and springing an estimate from a model that nobody's seen, you know, I think is a little bit disingenuous in the scientific sense.

MS. GRAVELLE: I think my research will be out shortly.

MR. WHITE: Well, then, good. I will read it with interest when it comes out.

MR. BERGIN: Hopefully in Tax Notes. (Laughter)

MS. GRAVELLE: Jim, let me just say I do think that it's important when you're changing things dramatically to think about transition rules, because companies can be harmed by that. But it's true. If you spend money on transition rules, it takes a while. But my estimates were, for the long run, steady state. I mean, the notch should be smaller in the short run. So, you get to the same long-run with, you know maybe some more crowding out, which I didn't include in this calculation.

MR. BERGIN: Let me get this here first and then --

MR. SILVERMAN: Mark Silverman with Steptoe & Johnson in Washington, D.C. Fascinating discussion. I've been doing this for 40 years, and it just never changes. (Laughter) Sort of a couple of observations from a practitioner's perspective. First we tried this whole notion of switching from income to consumption taxes cold turkey. The biggest problems for joint committee and the chairs of the committee were, one, the transition rules, which they concluded were basically impossible, and second was the impact that it may be revenue neutral in the aggregate but it isn't revenue neutral on the different segments of the economy, which makes it extremely difficult, which suggests that you can't do a consumption tax all at once, at one time, and so it would have to be, in my view, phased in.

Just a couple of other comments. All this corporate tax stuff is a tax on the individuals. The corporation is just a vehicle for it. We supposedly have a two-tier tax system, and since the repeal of General Utilities in 1986, they pushed that notion further along. We have "the highest corporate tax rate in the world" -- put aside Japan for the moment -- but we also have a lot of self-help that's dead inequity. You use that to drive your tax rate down. So, we may have a high rate, but our effective rate is a lot different.

So, what do you do about it? Well, there are about four or five times that this city has considered a number of things, and it, in my view, comes back to it once again, and that is integration. As opposed to suggesting that passthroughs should pay tax at both levels, we ought to move in the direction of integration so there's a single of tax, and there has to be a real single tax, which means you have to get to dead equity disparity, which exists. You have to decide how you want to do it -- eliminate the interest deduction or provide the dividends paid deduction. Then there are papers out there on all of these subjects.

There's no doubt, as will be noted economically, that an integrated system will -- and you've got to bring in an international tax and that's an entirely different discussion and a more difficult one -- you're going to lose money. And so where do you end up moving? In my view, I think it's apparent that eventually we will get to what's been discussed, which is some form of consumption tax.

To me, the only way that you can realistically do that is to do it on a stepped basis. You increase on one side and you decrease on the other, and you mess with the problems that are created. You cannot do this, in my view, all at one time.

As I understand the most immediate focus of the joint committee at this point, putting aside the discussion of corporate tax reform, there are two issues. One is transfer pricing, which is the problem of how you manage to get all of the revenue into tax havens; and the second is what's referred to as the Section 163(j) rules, which basically are eliminating the "U.S. tax" by paying interest on your loans from affiliates outside the United States.

Now, we have certain rules on that subject. Germany has, for example, revised their rules to make them even more difficult. But on a more immediate basis, it's my understanding that those are the two focus points that no matter what you do, whether you want to go to territorial systems or anything else, you've got to deal with the transfer pricing, because there's this perception that all multinationals are just beating the system day in and day out. Now, my personal view is I don't see that in my practice, but just put it aside. I mean, that's the perception. You've got to do something about it, so somebody's got to focus on transfer pricing, and you've got to deal with this immediate issue of can you eliminate the U.S. tax by just paying interest?

So, to me, I think the most important thing we ought to focus on is will people really seriously consider integration so that this really is a tax on people? And let's just -- if you want to do it as a credit imputation system, like the rest of the world uses, which is the corporation pays the tax on behalf of the owners, great, you can do that. There are lots of other approaches that you can use as well.

And, second, in order to deal with that, you've got to deal with that equity to have a real single tax system, and you've got to deal with some form of consumption tax.

MR. BERGIN: Marty, you said something that I may have misunderstood. In the business community, does tax reform mean a rate cut?

MR. REGALIA: No, it means more than a rate cut.

MR. BERGIN: But it includes a rate cut?

MR. REGALIA: It would include a rate cut, yes, and I mentioned that. I said that the high marginal rates that the business community finds problematic in today's world economy.

MR. BERGIN: We're using words like reform and revenue neutrality maybe to avoid the fact that somebody is going to have to get a tax increase.

MR. REGALIA: I think when you look at revenue neutrality, if we talk about a tax code as having some beneficial effect on economic growth, if that is part of the goal for businesses, most of the time that's the premise we start with, that we're looking for reform that improves economic activity. Then the revenue neutrality is on a different measure than it is when you're using a static estimate or zero-sum game. Certainly if you're robbing Peter to pay Paul, then Paul is happy and Peter isn't. If you look at revenue neutrality and say what we're trying to do is raise a certain block of revenue from an economy that we expect to be bigger, then that brings in problems with the impact estimators and we have differences of opinion on what that's going to be. But that does provide some additional revenue to be divvied up or to be used for deficit reduction or the like, and since we don't use any form of dynamic or very limited forms of dynamic analysis whether you're talking about Joint Tax or CBO or anybody else, there seems to be a revenue stream that's left on the table and if we're not doing tax reform to achieve some additional growth in the U.S. economy, then we think that you're just moving deck chairs on the "Titanic."

MR. BERGIN: Thank you. David?

MR. JOHNSTON: I'm David Cay Johnston and I'm a columnist for Tax Notes. Marty, let me ask you first and then anybody else who wants to come in. Let's take this to the logical endpoint. As you pointed out, half of business income in America is in passthrough entities. There is no reason we have to wed our society to the idea of a C corp and a tax structure that's separate for it. We could have a complete passthrough. If we did that in the way that Eric and Rosanne and other coauthor, Ben, have described, it would undoubtedly lead certainly if not immediately, over time to pressure to have a graduated tax on the income people receive out of the business, whereas now we have with the exception of very low-income people who get very little capital income a 15-percent rate on dividends and long-term capital gains. But if we went to a zero tax on corporations by making them all passthroughs it strikes me that so would every one of our economic competitors, and you raised this very issue of our competitors and Jane has raised the question of how the rest of the world would adapt. It seems to me that to get away from moving deck chairs around, we do need to have a -- if we started from the beginning conversation that David Wessel didn't like about how we do that. What if we in fact did that, Marty? What if we went to a zero corporate income tax? We would obviously have to have some rules about retained earnings, about living off your business. Maybe that's not true for the principal influential members of your organization, but certainly many, many prosperous businessmen out there, people with more prosperous business than my business, would live off their business and we'd have to have some rules to adjust to that but those are relatively minor compared to what we have. Why not just go to making everything a passthrough entity and what are the problems that you see with that?

MR. TODER: I'm happy to take that one. Those of us who have looked at tax and economics for a long time actually like that model as a theoretical model. I think even Jane would agree with me on that, that that's the ideal, you just tax all the income once you attribute it to shareholders. There was such a proposal in 1976 in the Blueprints report that Treasury put out. I think the problem with it is it's a question for the lawyers and for the economists. How do you allocate income to individual shareholders when you have a frequently traded company and the shares are constantly changing hands? I don't know that anybody has ever worked that out. I don't think it's done for some partnerships.

MR. JOHNSTON: Eric, just to be clear. I'm not saying about passthrough the way we do with S businesses. The only time you would pay a tax would be if there's a dividend paid to you or you have a capital gain. If we let the corporation hold on to its money, we would have to have some rules on how much retained earnings, but it continues to be a tax-exempt wealth-building vehicle and we tax whatever gets removed from it with rules to make sure -- not for giant corporations but Eric Toder Enterprises -- that you can't live off of your expense account.

MR. SILVERMAN: That's what integration is all about --

MR. JOHNSTON: No, I understand that.

MR. SILVERMAN: to try to deal with that practical issue and T. Boone Pickens did it in 1986 when he took his oil company and converted it into a passthrough before General Utilities was repealed so that there was on corporate-level tax on the liquidation, it was a publicly traded partnership. The articles were then written about the disincorporation of America, and so what happened? They enacted section 7704 says publicly traded partnerships are taxed with certain limited expectations. All we're doing with integration depending on the approach you take is to get exactly to what you're talking about which in my view makes eminent sense.

MR. JOHNSTON: That's the reason when I started out, Eric was asking Marty what happens if we do that because the rest of the world will respond? I'm sorry, Eric.

MR. TODER: Jane, do you have a handle it, because I'll let you jump in.

MS. GRAVELLE: I agree with Eric. I think that most economists would like corporations to be taxed as other income with passthroughs, but from when I worked on the Integration Project at Treasury it was clear from everybody, I heard from the lawyers and the administrators that you cannot do that because of the changing of shares. If you did what I think you're saying, you would tax dividends in full. We used to do that anyway. I think what you're talking about would be a big revenue loser unless we had an undistributed profits tax, which we have done in the past and of course we almost had warfare over it when we did it. But I think unless you do that you're talking about big revenue losses.

MR. JOHNSTON: You have to have some kind of rule.

MR. TODER: But the undistributed profits tax then is restoring the corporate tax.

MR. JOHNSTON: But for the last 10 years the average corporate income tax revenue to the federal government has been $213 billion. Marty, tell me what happens from the business point of view if we were to do this?

MR. REGALIA: It's not if you were to do it, it's how you were to do it. The discussion suggests that if you do it with a retained earnings tax then you haven't achieved your end result. If you do it as a complete passthrough then you leave tax uncollected on the table, which would require taxes to be raised somewhere else. So in a situation like that, the devil is in the details and for me to sit here and give you a "business community response" would be the epitome of hubris. There is absolutely no way to tell how the business community would respond to a theoretic construct for which there is no detail.

MR. JOHNSTON: It would be interesting, Marty, for the chamber to ask its members -- given a choice between your corporation becoming a passthrough entity but there's a graduated income tax.

MR. REGALIA: I would be happy to do that if you'll give me the details. If you'll give me the details as to how you address these problems, we'll be happy to ask. Without the details I would get no answer because it is unanswerable from a corporate point of view. There is another way to achieve this kind of broad base and that is to look beyond the taxation of income to the taxation of a fundamentally different base.

MR. BERGIN: Howard? I'm going to go there next. David, do you want to go after that?

MR. BRUNORI: I wanted to say one brief thing. David Brunori, Tax Analysts. To respond to David, I'll tell you one group that would not like the repeal of the corporate income tax and that's the tax bar in this country many of whom are represented today. I gave a speech once calling sort of in jest the repeal of the state corporate income tax because it's in much worse shape than the corporate income tax before an ABA tax meeting and I was booed. I was booed soundly, and it's very hard to get heckled in a tax conference.

MR. BERGIN: There's one distinguished member of the tax bar over here.

MR. SILVERMAN: The tax bar has been working toward integration for as long as I've been practicing and in my mind there is no other alternative. It's the thing that could potentially make us competitive against the rest of the world and I assure you there will be plenty left to do.

MR. BERGIN: Howard? I'm sorry. It took me a while to get to you.

MR. GLECKMAN: Howard Gleckman, the Tax Policy Center. I want to try to refine the issue that David was talking about, and for Marty, it may be a good time for you to jump in this too. What would you all think rather than full integration, the kind of idea that Eric has been talking about, say a corporate rate of 20 to 25 percent and tax gains and dividends as ordinary income?

MR. BERGIN: Is that politically possible, David?

MR. WESSEL: I think it's very tough in the current circumstance because people have been led to believe that cutting capital gains tax rates is good for growth so it seems to me it's a tough political sell. Jane whispered in my ear that there's a revenue problem and the revenue as people have said really matters. But I think that -- not the distribution tables that are very complicated and I understand there are lots of ways to allocate tax burden -- but the distribution perception thing is pretty important. It's hard for me to think about that in isolation and the conversation about shifting to reducing corporate taxes and increasing of, VAT, the game I play with myself is how long would it take me to come up with a TV commercial to argue against any given tax policy proposal? That would be a relatively short period of time. We're going to cut rates on American companies so that people who go shopping at Wal-Mart will pay more taxes. It doesn't seem to me like a winning political strategy.

MR. BRUNORI: I wasn't asking about a VAT.

MR. WESSEL: I know, but I was using this as an opportunity to respond. I think on the corporate individual income tax thing it's that economists think that corporations don't pay taxes. People don't think that. And I don't even know about the pension funds and endowments and how that all fits into this. But just as a matter of the political thing, I'm going to pay more taxes on my mutual fund in order for the Fortune 500 to pay less taxes. I think that's not impossible but it's a very hard sell unless you can convince me that somehow there are going to be more jobs because of this in the end and I think that's a hard argument to make.

MR. BERGIN: I think this above-the-fold column in The New York Times is going to get play all weekend on GE doesn't pay taxes even though GE doesn't really pay taxes.

MR. WESSEL: I think we've seen this movie before.

MR. BERGIN: Yes, we've seen this movie before about every 10 years. Marty, do, have a response?

MR. REGALIA: On this story, I looked at it at 7:00 a.m. this morning, I guess it's about 12 hours old, it had 180 comments and all of them were the perception why should GE not pay tax and I have to? The common perception is that corporations pay taxes. It's overwhelming in the comments.

MR. WESSEL: I recommend that -- as a general matter of public policy, looking at the comments on newspaper websites. It's just -- depressing, particularly when they're in response to your own stories that you think are clearly written but the point is taken.

MR. BERGIN: Especially if the comments are made before 7 o'clock in the morning. For those of us who blog, we are very familiar with that. I'll never write about breast pumps again. I apologize to all the mothers of the world. I had no idea I was going to get that reaction. Marty?

MR. LOBEL: I'm Marty Lobel. I'm Chairman of Tax Analysts but I'm speaking for myself. I'd like to put the discussion to a little broader context. Everybody I've ever talked to in the corporate world or the personal world complains about the complexity of our tax code, except maybe some tax lawyers who are billing $1,200 an hour to tell them how to avoid it. The problem we have to look at is to make it fairer, simpler and what impact is it going to have on the economy. If you take a look at the distribution of income in the United States, the middle class has been raped for the last 30 years. It has declined as a proportion of the amount of income it's had and the amount of tax it's paid. The top one-tenth of 1 percent -- if you take a look at Pickety-Saez's analysis, which is the gold standard has increased dramatically. Forty percent of the total income in the United States went to Wall Street in one year. Hello? What's wrong with that picture? Then you're talking about putting a VAT which is going to hit most heavily on the middle class built on a structure that is so complex that Rube Goldberg couldn't have come up with it.

We hear a lot of talk about discouraging investment and so forth, and yet there is $2 trillion of liquid assets in American corporations today. The problem is lack of demand. One of the things that nobody has mentioned here is how do you encourage a shifting of income to those who are going to spend it and get our economy moving again creating jobs? I haven't heard one word about that. One of the real problems we have is that we focus so narrowly on one particular item or another, and I can tell you the only way that tax reform is going to happen is do it en masse so that everybody doesn't know how badly they're hurt or how much they're going to benefit. We did that in 1986, and I remember some of the discussions, and we scrambled the eggs and hid the ball so that many people didn't figure out what had happened to them -- but they heard lower rates. David?

MR. WESSEL: I think you make a lot of good points, but I'm not sure I would put them together the way you did. First, I don't think there's anybody here who says that tax reform is a solution to today's 9-percent unemployment problem. The only reason to do tax reform is because you think that when our kids meet in this room to talk about taxes in 10 years they will speak about what happens this year with the same reverence that people talk about 1986. We have to do short-term and long-term things, and I think Jane said quite clearly you wouldn't want to do all this raising revenue when the economy is weak, but there's nothing wrong with talking about raising taxes.

Secondly, I sometimes wonder about simplicity as a goal and a virtue. Two things about that. One is the tax code is pretty complicated. I do my taxes on Turbo Tax and it's not that tough. Secondly, when some people say simplicity they mean simpler but don't touch any of my tax breaks, so that there is a real tension there. Third, I think you raise a really interesting question which we haven't talked about, which is what is the role of the tax system? Two things have been put on the table. One is obviously to raise revenue. That's definitely part of it. And two is to raise that revenue in a way that maximizes economic growth. I think there is a third issue, and it's one that is very hard to deal with, which is do we want the tax system to be the way that our government leans against these market forces to be creating a bigger gap between winners and losers in the economy? I think that's an important question. I don't think the answer is obvious because everything you do in the tax code to make the distribution of income a little less unequal is going to have some costs on the other two things. But I think you're wise to raise it because it's not only part of the policy discussion, but it's very much part of the political discussion because somewhere people want to believe that the tax code is fair and if they perceive it not to be fair, it will hardly get political support for the kind of reform that people in this room would like to see.

MR. LOBEL: Yeah, the only way we're going to get any reform is if you have a crisis and the army of lobbyists -- I don't know -- GE had 50 lobbyists working, according to the New York Times article, on tax benefits or subsidies or expenditures or whatever. And until the public is aware of what's going on or a small business, which is competing against multinationals with all these tax breaks, is aware of what's happening to them because they're competing without the tax breaks against the multinationals who have the tax breaks. I mean, until the public is aware -- and part of it is our fault. We've tried very hard to present these issues in intelligent, easily understood ways, as easily as they can be, but the general press, until they realize what the impact is on the middle class and on the very rich -- they're doing a much better job of pointing out all these guys hiding their carried interest offshore where they paid 15 percent when they repatriated. But aside from that, the general public is hearing what the tea baggers are arguing, oh, we've got to cut, we've got to cut, we're going to create jobs. That's not going to create jobs. I don't know one economist who believes that outside of Newt Gingrich --

MR. REGALIA: Well, actually, John Taylor wrote an interesting article just on that exact subject just a few weeks ago. You might want to take a look at it --

MR. LOBEL: Yeah, I saw it, I saw it.

MR. REGALIA: Because actually, I mean, he is generally reputed to be a reputable economist, and it was an interesting article as to the impact of these kinds of cuts on economic growth.

MR. LOBEL: Well, it's assumptions, yeah.

MR. REGALIA: But the -- well, it's always as you take as assumptions. In economics it's always that way. And if you really believe that tax changes have no economic impact --

MR. LOBEL: Well, they do, that's what I'm saying.

MR. REGALIA: then a lot of the discussion that went around the table here becomes moot.

MR. LOBEL: But the point -- I'm sorry --

MR. REGALIA: So the point is that I think that David brought in an interesting point, and that is what is it that you want your tax code to achieve. If you believe that the tax code has some impact on growth, then I think most people would say, hey, we'd like it to have more growth rather than less growth. Growth is generally perceived to be a good thing. If you're looking for the tax code to fix all the social problems, then I think you're barking up a tree that isn't going to be very fruitful. For instance, if you actually look at the income distribution numbers and you actually look at the Gini coefficients, you go back and you look at the Clinton Administration and the Gini coefficient actually rose. Because he cut taxes? No. Because we had a very, very strong high-tech economy that had a tendency to allocate income and wealth to the class that was able to take advantage of that -- the educated, skilled, high-tech class. During the Bush Administration where we cut rates, but actually had a fairly weak economy over time, the income distribution actually became less disparate. The Gini coefficient actually fell. Look up the numbers before you start criticizing the people that point them out. Those are the numbers. So if you're looking at the tax code as a prime mover of income distribution, I think you've got a lot of work to do in order to make that case scientifically. It certainly is a component, but is it the component that -- I mean, when you're trying to affect the income distribution via the tax code, primarily or solely via the tax code, you really do have the tail wagging the dog.

MR. LOBEL: Well, I didn't say solely. I said impact and quite frankly, Pickety and Saez numbers do not support your --

MR. REGALIA: What's that?

MR. LOBEL: Pickety and Saez, the economists --

MR. REGALIA: No, I'm just looking at the Gini coefficients that the federal government puts out, which are their measure of the skewed-ness of the income distribution.

MR. BERGIN: Let me go to Jane and then David.

MS. GRAVELLE: Yeah, before we get too excited about moving to the individual level, let me -- I do love numbers, so let me give you some numbers. I calculate if we roll back the 2003 rates using the Treasury estimates and realizations response, which is very big, you could cut the corporate rate by 2.3 percentage points.

MR. WESSEL: Just to be clear, you're talking about -- when you say roll back 2003, what do you mean?

MS. GRAVELLE: Tax dividends at full rates, tax capital gains at 20 percent. If you use my elasticities, which I believe in a little more, I think they're smaller, I get about 4 percentage points. You might be able to get another percentage point or two if you tax capital gains at ordinary rates. What's the problem? The problem is that half of the corporate income is not taxed at the individual level at all because it's held in pension funds or Harvard has it or somebody like that. And also, about half of capital gains by my estimates are never realized; they're passed on in death. So unless you want to make those kinds of changes, in other words -- and there's no reason we couldn't tax pension funds or tax Harvard's earnings. There's no reason we couldn't actually do some sort of accrual or look-back accrual taxation of capital gains, but those are much more dramatic changes than simply raising the rates on capital gains and dividends. So always be -- I love little numbers because they keep showing up in my life -- but this is another little number that we have to accept if we're going to think about these changes.

MR. BERGIN: David?

MR. BRUNORI: I had a question for our economists on the Panel and Jane and other folks who might want to weigh in. We were talking -- the VAT has come up a couple of times in this discussion, which I find very interesting. And it's been criticized because it's regressive and it will fall on lower-income folks and all that other stuff pretty widely known. The corporate income tax, though -- does anybody have any -- is there any new research or new thinking on where the incidence of the corporate tax falls these days? I see Jane laughing over there. I mean, is it falling on labor? Is it falling on shareholders? Is it falling on consumers?

MS. GRAVELLE: I believe it largely falls on labor, largely.

MR. BRUNORI: You believe it largely falls on labor, which --

MS. GRAVELLE: I mean -- sorry -- largely falls on capital.

MR. BRUNORI: You believe it largely falls on capital.

MS. GRAVELLE: I think about 80 percent of it or maybe more falls on capital. And, of course, the problem is we keep looking at this as if we're the only country in the world with a tax. There's a nice CBO working paper that makes the point that the worldwide burden of corporate tax tends to fall on capital. So if you take into account what other countries' taxes are as well as your own, you'll get over 90 percent falling on capital.

MR. BERGIN: Let me go over here.

MR. TODER: I just want to point out there are diversities on that and it's not just from --

MS. GRAVELLE: That's just mine.

MR. TODER: That's Jane's view. Just as a point of information, the estimating agencies all allocate the burden 100 percent to capital, but that may change in the next year. It's still going to be a large share to capital, so thanks. People are starting to think a little bit differently about it.

MR. SULLIVAN: Let me just add that when our children sit around this table 20 years from now, we still won't know.

MR. BERGIN: Good point -- I'm sorry --

MR. CALIANNO: Joe Calianno, Grant Thornton. I want to throw out a question to some of the Panelists, especially Martin. And I think it was mentioned earlier that there's been some bills proposed for Repatriation Holiday 965, and the administration doesn't support it except in -- they're looking at larger reform. And we talked about social change or effecting change to the tax code, and right now there's a big push to try to stimulate the economy and create jobs. I wanted to get the thoughts on the role of a repatriation holiday, especially if it were tied like 965 was to jobs, maybe even tighten it a little bit, what the thoughts are and the effectiveness of something like that.

MR. REGALIA: This is probably going to get me into more trouble than anything else I've said today. There is a split in the business community among those that favor a repatriation window and those that feel that repatriation ought to be done, but in conjunction with fundamental tax reform because it provides an apparent revenue source that can pay for something else. The Chamber has supported repatriation windows in the past. We -- in fact, when we met with the Obama Transition Team back during the depths of the downturn when liquidity was such an important issue, we said we thought a repatriation window would be a good thing because, as in 2004, some of it, a relatively small portion, went to direct investment, but a bigger portion went to stock buybacks, propping up the stock market, dividends, providing individuals with liquidity, and also was used to increase the liquidity in companies at a time when they were having trouble with liquidity problems. In this environment, that liquidity argument is still valid, although probably to a lesser degree. I don't think a repatriation window is something that necessarily hurts the potential for long-run fundamental tax reform. I think that the two can occur -- that both could occur -- but I think that the general perception in the business community is favorable towards repatriation. The issue comes up as to whether now or in the context of fundamental tax reform would be a better way to go. I don't think that -- again, there will be a wide difference of opinion on whether repatriation is a positive or a negative on the basis of how you feel towards a territorial tax system and the payment of foreign source income. So if you believe that that should be taxed under all costs at a very high rate, then you're not going to like repatriation. If you believe that we shouldn't tax it at all, then you're generally a proponent of repatriation.

MR. CALIANNO: A step in that direction.

MR. REGALIA: So it is a step in that direction and we have supported it and we continue to support it and we have supported it in the context of doing it now in addition to using it as a piece later on if you don't do it now. But we have not -- we are not the -- now versus later is not the determining factor. We are a proponent of repatriation. We think what happened in 2004 was probably sold incorrectly. I mean, I think it was sold as being a huge investment stimulus at the time and while a significant amount -- something on the order of around 25 percent -- it did find its way into direct investment.

As far as your point about tying it to investment or job creation, money is fungible in the economy and particularly in the business community. And so, I mean, that type of tie-in becomes truly Byzantine when you start looking at the leakages. So I just don't think it could be effectively achieved.

MR. CALIANNO: There could have been some greater ties, though, than --

MR. REGALIA: I think if you're going to make a case of repatriation, you make it on the case of bringing the money back and you make it on a case of varying degrees of good: If it goes into investment, great. If it goes into additional hires, better. If it goes into stock buybacks or shoring up liquidity concerns in companies, which are somewhat less now than they were then, those are all good things. So it's a menu of what we see as positives rather than if it goes into this, it's okay, but if it goes into that, it's not.

MR. JOHNSTON: Marty, just one thing. Companies are sitting on almost $2 trillion in cash. How can they possibly have a liquidity problem?

MR. REGALIA: Well, the question of a liquidity problem, now versus then, I've pointed out was different. Some of it will go into investments. Perhaps a lot more would go into investment when the liquidity concerns are not paramount as they were back in 2004 --

MR. JOHNSTON: But that's the question I'm raising. You just suggested that currently there's a liquidity problem.

MR. REGALIA: No, I didn't.

MR. JOHNSTON: Oh, oh, oh, I'm sorry.

MR. REGALIA: I think what I said was that the liquidity concerns now are different than they were in 2008. I think I prefaced my remarks --

MR. JOHNSTON: They're presumably nonexistent.

MR. REGALIA: When we talked to the Obama Administration in 2008, there were considerable liquidity concerns; that's kind of why the fed did QE1 and then QE2 and the like. I said that the liquidity concerns are different now than they were then, whether they're nonexistent or not is a debatable point. But I said, again, that we don't see liquidity as the only reason, that it would stimulate some investment and it might stimulate more investment in an environment where the liquidity is higher. At some point, American corporations are going to find that maintaining the level of liquidity that they do right now is not conducive to higher profits, and at that point they will do something else with it.

MR. WESSEL: I think the question actually was a little more interesting than you realize, Marty. You were saying like if we were going to do repatriation, should we have rules that require or somehow tighten it so it's used for hiring.

MR. REGALIA: And I answered that by saying I didn't think you could write rules like that.

MR. CALIANNO: I think there were some criticisms of 965 originally because it wasn't as tight as it could be, possibly. I mean, if you tie it more into job creation and manufacturing --

MR. WESSEL: Right, but just give me some -- like -- you mean I get to repatriate if I increase my hiring above a certain level?

MR. CALIANNO: Yeah, well I think the way 965 worked last time when it was implemented, it was -- as long as you had a net investment, it didn't matter if you had cash at home and sent some of it abroad. I think if you tie it in closer to what you're trying to achieve, perhaps it can accomplish a number of goals and maybe it will be perceived a little bit better by the general masses as creating jobs in the United States, maybe more so than the original 965.

MR. SILVERMAN: If you look at what's been published about 965, how many billion dollars came back and how many -- and of the major top ten companies, how many jobs were eliminated. Now the way you would do it in my view is to use, as we've used in the past in the code, base periods. You had X number of jobs, and now how in money did you go up from it? Whether the dollars are fungible or not fungible, you can't tie it more closely to those types of things and permit dollars to come back, and in my judgment that would be a worthwhile effort.

MR. CALIANNO: And I think that's the point I was making, that if you tighten 965 a little bit, it could maybe accomplish a lot of things, including job creation, stimulate manufacturing, maybe more so than the original version that was enacted in 2004 did. So I think that's --

MR. WESSEL: So another way to frame what you're saying is we'd like to do some kind of job creating a government stimulus program. We can't do it by borrowing because we're kind of at that limit. This is a way to kind of finance some kind of incentives for employers to hire. That's basically what you're talking about. The reason I push so much is I'm beginning to conclude that if I were a policymaker, I would never promise that anything I did would increase a certain number of jobs. I've yet to see anything where that worked out well -- NAFTA, the Obama stimulus, 965, and so I'm thinking that we could learn from that experience.

MR. SILVERMAN: Look at what's happened. It's self-help. The cash crisis, if you will, is there's a lot of money. Where is it? It's outside the United States.

MR. WESSEL: Well, it's --

MR. SILVERMAN: So you don't want to repatriate at a 35 percent rate because it's sitting -- all right, so what do you do? Companies go out and borrow in the marketplace at a very, very attractive and low interest rate. And that's what you're going to do --

MR. WESSEL: Right.

MR. SILVERMAN: -- when you figure out what's an effective way to deal with it. It may not be appropriate now, but in my judgment there's -- the effort is worth considering.

MR. WESSEL: I'm not asking, I'm not suggesting it's not a worthwhile thing to do, I'm just pointing out that there's a down side, it's in the public linking it to a certain number of jobs, unless you really think that's the way the world works, unless you have some good reason to do it.

One good reason to do it is marketing. It's the only way to sell it. The second good reason I was trying to say is you want to do something for jobs, and this is the way to frame it. I think that what you're proposing makes a lot of sense with this base thing, but I'm sure you would appreciate better than I that these things get complex and, you know --

MR. TODER: The Devil's in the details.

MR. WESSEL: -- there's a growing industry versus a shrinking industry, and so it's -- there's a cost to all these rules that try and tie everything directly to the number of jobs you create, and I'm not sure it's worth the cost.

MR. CALIANNO: But the other -- the other thing, too, is that if you're looking at going to a territorial system, it is that step in that direction.

MR. WESSEL: Right.

MR. BERGIN: But let me get to the audience here, remind everybody out here that -- I'm looking for you two over there and there.

MR. DILWORTH: I've wondered from time to time about homeland repatriation and I kind of wonder --

MR. BERGIN: Can you give us your name, please?

MR. DILWORTH: Bob Dilworth -- and I'm just curious if -- first of all I think the idea that there's $2 trillion in liquidity is probably an exaggeration. That retained earnings, that's -- some of it may be productively deployed in foreign investments.

The second point is that I've never been clear as to what 965 achieves that simply repealing 956 would not achieve.

MR. BERGIN: Over here?

MS. WILKINS: I'm Rebecca Wilkins from Citizens for Tax Justice. And we had a really good paper released this week on international tax reform. And it talked about the repatriation holiday, and a couple of points that we made is, as Marty said, money is fungible, and no matter what condition you put on it, companies will find a way around it. I mean, tell me I have to increase payroll? Well, I'll just take all the people I've been paying as independent contractors and put them on the payroll and increase my employees to my payroll.

I'll make the big bonus to all the middle level and upper managers.

No matter what conditions you put on it, you can get around it. But the most important thing to remember is that a repatriation holiday rewards the worst corporate actors because, if a multinational corporation has operations, real operations, offshore, they have assets offshore, they have plants, they have people, it's not easy to bring that many back to the U.S. But if they're only profit-shifting on paper and have their profits in the Cayman Islands, it's really easy to bring it back when we get a repatriation holiday.

Not only that, they're going to get relieved of the whole 35 percent rate whereas if I'm bringing money back from even Ireland, I've got a foreign tax credit of 11 percent. So repatriation holiday benefits the absolute worst corporate actors in the international business community.

MR. REGALIA: You know, I think there's been -- actually what's been looked at as to which company's repatriated more than others, and for the most part the companies that repatriated had considerable operations abroad and in the United States.

So I kind of disagree with the basic premise. I think that if you actually looked, it was -- when the studies were done. It was concentrated among a relatively few number of corporations. But those corporations were very active abroad. They were not shell corporations that were just hiding profits abroad; they were corporate -- corporations that had significant operations abroad.

MR. BERGIN: Let me add another layer of complexity here.

MR. WESSEL: Oh, great.

MR. BERGIN: Since you brought up simplicity and complexity, David, I'll blame you.

And I guess this is a -- more a question for you, Marty. But the corporate tax structure is incredibly complicated to comply with. And this is a two -- two-edged coin. We have Jim here that -- on the one hand, is that an element of why we need corporate tax reform, because it's almost impossible to administer from a business side. And from the IRS's side, the large business in international division, which used to be the large business, the large, mid-size, or whatever it was, LMSB, appears to be hugely struggling with trying to administer this law.

Is there another aspect to this to get it to be simpler? The IRS is going to have to start administering health care here in a couple of years, and I don't know how that division is going to do its job. But how, from the business standpoint -- maybe Jim will jump in here -- from the business standpoint is that part of your problem, too?

MR. REGALIA: Well, for the business standpoint I think that the complexity issue falls disproportionately on smaller businesses, whether they be corporate or partnerships. Today's larger businesses don't generally complain about the complexity as much because they have expert in-house and outside people they can go to. The fact of the matter is that they would love it, I think, if the simplicity allowed them less expenditures on those -- on that expertise. But at the same point that cuts every business differently.

So when you look at -- we have done something here today that I see done a lot, and I find it rather amusing, and that is that you talk the corporate community as a bloc. Now you talk about the business community as a bloc: We have big businesses, small business, we have manufacturing businesses that are quite different from service entities. They all have different tax structures, and they all have different tax problems.

So when we talk about simplicity, it's about as silly as kind of talking about fairness, because there is a different degree of fairness across every argument. Is fairness everybody pays the same? Well, no, because that would be an even tax system that would have no progressivity at all, and most people would find that not fair.

On the other hand, what degree of skewedness in the tax code constitutes a fair code? I mean, right now we have 50 percent of individuals that don't have a federal income tax liability. We have effective marginal tax rates that are quite disparate across the board. The top one percent controls about 40 percent of -- they pay about 40 percent of federal income tax as they control just over 20 percent of gross income. Now, that's a high degree of skewedness on the income side, but it's even a greater degree of skewedness on the tax side.

So discussing fairness is, you know, for us kind of like discussing angels on the head of the pin: everybody will see it differently. When you talk about complexity, you can be somewhat more definitive in terms of what is complex and what isn't, but the degree to which complexity impacts a corporation vis-a-vis to the degree to which that complexity favors a corporation has to do with their structure, their corporate tax counsel, their outside consultants, and the like.

Big businesses generally can afford that to a greater degree than small business can, so the complexity issue for us generally comes up from our small business members.

If you talk to the more, the larger corporation entities, that is an issue, but it's not -- it's not an issue that comes into the top, you know, two or three.

MR. BERGIN: But on the large side, the worst of the two acronyms in this town right now is not VAT but UPT, for Uncertain Tax Positions. (Laughter). The hue and cry over what the IRS is doing in this area which -- you know, my personal opinion is they have to -- sort of has raised the bar a little bit.

And I don't know -- Jim, do we need to help the IRS here administer this incredibly complex law?

MR. KEIGHTLEY: I'm Jim Keightley with my own firm, Keightley & Ashner, and I was at the Internal Revenue Service for 27 years doing all sorts of things, including my last job was special counsel for the whole Large Case Program. And it is clear to me that the IRS is outnumbered and outgunned. One of the trends I saw when I was there was -- what happened was you saw a great deal more organizational specialization developed, and I think the large case business structure, the whole restructuring in the late '90s was an effort to somewhat match the specialization within the Internal Revenue Service with the people outside.

There is a huge industry out there for preparing tax returns, huge accounting industries, and it's just a far more sophisticated group than the total numbers of people in the Internal Revenue Service. If you look at the complexity -- and you folks have seen it, it's just incredible -- and to have people who, inside, who can keep up with that and keep track of that and be specialized in the practitioner world, everybody's got their little niche, I see, in my experience now.

And so these are superspecialists in certain areas, and then you're dealing with, eh, generalists, and the IRS does the best it can. I think it will survive both this and it will survive the health care issues. It is a big, well-organized rational organization that will do the best it can with the resources you've given them -- and that is, in my view, not enough.

You have to remember, I was there when the IRS managed the entire economy in the stabilization program, for those of you who were around when it was a crisis, when the inflation level went to two percent, I think, or three percent. And so I think they'll survive this as well. But it is clear they are, you know, understaffed and outgunned by the huge industry surrounding the tax -- the tax world. And some simplification would be in the interest of better tax administration, but I'm not sure you can get there because there are as many lobbyists out there trying to get this loophole and that loophole, and this specialization, that it's just not -- there's no lobbyists for simplification, I'm afraid.

Anyway, thank you.

MR. LOBEL: Martin, I hate to tell the story, but I did talk to a CEO of a large corporation the other day, and I said, "Was it a good year?"

And he says, "Yeah. Our profit exceeded our legal fees." (Laughter)

MR. BERGIN: Tom?

MR. NEUBIG: Tom Neubig, Ernst & Young, CEO, and I was at the Treasury during the 1986 Tax Reform Act, and I think we all believed that lower individual and corporation tax rates would have desirable economic effects. So I guess I'm concerned, Jane, with your statement that, you know, a significant lowering of the corporate tax rate without, you know, other things would increase the cost of capital, really would have modest, if any, positive company benefits. Because I think you and others have written about all of the distortions from the double taxation of corporate income, the increase in the cost of capital, the distortion between C Corps and passthroughs, the distortion between debt and equity, and increasingly the distortion that we're seeing in terms of locating business in the U.S. versus doing activity elsewhere.

So I am very skeptical that the economic benefits would be so modest or negligible. I really do think that there would be positive effects. They may not be scored in terms of the, you know, the ultimate, you know, of legislative scoring, but -- and they probably are not as large as one, you know, would like them to have in terms of this, and so we probably shouldn't be claiming large numbers of increased jobs.

But I think it would be worthwhile to reset to see if there are people who don't see the benefit of lowering the corporate tax rate. And then the question is, how does one do that?

MS. GRAVELLE: Can I just --

MR. BERGIN: Sure.

MS. GRAVELLE: Let me be very clear about what that number was. It's not -- when I say national welfare or income, I was talking about the international capital flows. In other words, how much income capital flowing into the United States, what effect output, and, in turn, how much of that would we have as this income. I was not talking about the kinds of distortions, you know, that you were talking about, the dead equity distortion.

I do think that those are the -- are the distortions among corporate taxes. I do think those are a lot smaller than they used to be because of lower inflation and because of lower tax rates. But that 200ths-of-1-percent number, that was the gain in national welfare or in national income from the induced international capital flows, and that seems to be all anyone's talking about right now. There would be, I think, additional small gains in welfare, but still small because the corporate tax is small. It's two percent of GDP. The cut is a half of GDP. You can't let the, you know, the hairs on the tail of the dog are not going to wag the head. I mean it's just not big enough to have a big impact on the economy.

And so we need to, I think, be aware of that as we're formulating tax policy, that the nation is not going to rise or fall when they cut the corporation tax.

MR. NEUBIG: It's not going to fall, but I think when other people have looked at the economic distortions that are caused by the current system with high rates, narrow base distortions across a number of different origins, there are positive benefits. And I guess one of the things, you know, observation from the 1986 Tax Act was when Jay Mackie and Don Fullerton were running their model, they were finding the biggest economic benefits came from removing these cross-industry/cross-asset distortions as opposed to --

MS. GRAVELLE: Those were all --

MR. NEUBIG: -- the changes in cost of capital.

MS. GRAVELLE: Those were almost all eliminated by the Tax Reform Act of 1986. There's very little of those differentials anymore.

MR. NEUBIG: But you're only looking at depreciation. I think, you know, if you look at all the provisions across the code, you know, as even Marty was saying, you know, there are still areas of achieving better neutrality in our economy in terms of the current tax system.

MR. BERGIN: Howard?

MR. GLECKMAN: I think that this -- what Tom was saying I think is really important. I couldn't help as I was sitting here listening to the discussions about repatriation and the simplicity you know, the code is filled with this complexity because lobbyists got it in there. This was to the benefits of their clients, but I don't know that it's to the benefit of the economy. Think about the energy sector where we have subsidies for oil and gas producers; and then we have subsidies for green energy people so they can compete with the subsidized oil and gas producers. And it goes around and around and around, and the only thing that happens is it's a revenue drain to no good purpose.

So I think that -- you know, we talked some about the rates but I think it's really important to think about that base issue and the benefits we may get from broadening the base and getting rid of -- and here I'm with Tom and not with Jane -- you know, getting rid of some of these, these subsidies that allow, you know, one competitor an advantage over another.

MR. BERGIN: Marty?

MR. SULLIVAN: Let me weigh in in favor of the lowering rate group. You know, for economists, lowering the rate is sort of the chicken soup of tax -- it makes everything better. It makes evasion less, it makes income shifting less, it makes debt equity distortions less, it makes everything better.

I mean, think about the alternative. Are we just going to leave rates high? I don't see how that -- I know there are arguments for that, but I just don't see that as the direction we want to move in.

I just want to add a comment about -- we said perspective. This repatriation issue is a big issue. I mean I think Jane makes a good point about, you know, we're obsessing about corporate taxes, but again, corporate taxes, from an economy-wide perspective or small, it's not the beginning and the end, the economy is not going to die if we don't have corporate reform in the next few months.

But on the other hand, because I'm an economist, as Tom says, we do what we can, and the right thing to do is to make the corporate tax system as efficient as possible, and we do that by lowering the rate, that's all we can do. I can't control -- you know, I can't go beyond that, but let's keep perspective. Repatriation issue is small potatoes. It matters a lot to major corporations, it's going to get a lot of air time, but it's just a fly speck on the whole tax reform issue. And I think because of the power of major corporations, this being such an important issue to them, it gets a lot more attention.

And I agree with the comments of the CTJ, that it does help. I mean, how did the money get there? It got there because they shifted it there inappropriately, and now they want it back, and it sort of -- well, you know, it's a big problem.

We have to -- what really matters for the economy is this deficit, and if I'm a one-note Charlie, I apologize. But a deficit is so much more important to our economic growth than any of these discussions about nickel-and-diming changes to the tax law, I just have to reiterate that point.

So, therefore, if you believe, as I believe, and I don't think I'm being radical here, that eventually some tax increases are going to be likely, and if you believe, as I think many people in this group believe, I think Eric said it, I think Mr. Silverman said it, that we need to have less corporate taxes to improve our competitiveness. Okay, so we need to raise revenue, and we need more revenue to make our tax system more competitive, so where is this revenue going to come from? And 20 years ago, and 20 years from now, the answer will be the same. We need to look at consumption taxation, because it's the most efficient way to move.

And I don't know anybody that's really disagreeing with that basic view, and I think the real argument is about the politics. Oh, VAT, you can't do a VAT, that's politically impossible, don't even talk -- you're naïve for even bringing it up.

Well, I think it's where groups like this have to sort of not be followers, but be thought leaders. I know if you go on Capitol Hill and you mentioned the word "VAT," you're, you know, you're thrown out of the building. But, you know, I say let's stay outside with our signs and protest a little bit. (Laughter)

Because if we don't -- I mean, we have the answer, we have the basic answer, but the politics are not there yet. But I don't think we should be shy about continuing to push for meaningful corporate tax changes and start, as I say, thinking outside the box, because this -- again, if it was 20 years ago, we could just sort of dilly-dally and who cares, but we're heading off a cliff now, and we've got to be a little more serious about it, and we need to be innovative in our thinking.

MR. BERGIN: Thanks, Marty. Let me go to Jim --

MR. KEIGHTLEY: Speaking --

MR. BERGIN: -- David, and then Elliott.

MR. KEIGHTLEY: Speaking -- my -- to the IRS, the idea of a transition to evaluate a tax probably will keep the current tax, for some extent, as Mark says, they'll do a phase-in, and so now you're running two systems at one time, it's an administrative nightmare, and they keep contracting the IRS, not making it bigger, relative to the size and the number of the taxpayers and the complexity of the world.

So speaking at least -- you know, it would just be an administrative nightmare, in my opinion. And that's one of the reasons you will get a hard push-back saying this is not such a good idea, because even I think the private world would say this is administratively hugely difficult to make happen.

MR. SULLIVAN: But is that really a fundamental objection, that we can't spend a few extra billion dollars on administration to do something that every other country in the world does, is that really -- should that really stop us? Should that scare us? If you believe it's the right direction to go in, is that a fundamental objection?

MR. KEIGHTLEY: Well, I don't necessarily agree it's the right direction to go, let me start with that one. I wouldn't -- the argument is, it's so burdensome and complicated, when you can raise taxes by -- raising taxes. This is not complicated, folks, you just move the numbers up and down, and sooner or later, that's going to happen as sure as I'm sitting here.

MR. SULLIVAN: The fundamental question is, if we do raise taxes, should we do it within the context of the current system, which everybody I think agrees is inefficient, unfair, or look towards a more efficient --

MR. KEIGHTLEY: Well, I'll go back to your deficit saying, that's -- there are two big issues in this world: One is a deficit and one is making people get back to work. In the pension world I see everybody getting -- their pensions are getting dumped, we're cutting everybody's salaries basically is what's going on. In the public sector now, what are they doing, they're just reducing salaries by reducing the pensions. They've already reduced the salaries of the manufacturing community or eliminated their jobs completely. So it's -- you know, you have to have some sense of fairness in this system, and I would reiterate that as being a big issue in the world.

MR. BERGIN: David.

MR. WESSEL: Three quick points. One, I think it's not useful to continue to talk about this as corporate only, I think it really has to be the business sector as a whole, and it's hard to make that shift in the conversation, but I just think it's worth doing.

Secondly, as Marty points out, it's really hard to spend a lot of time on something that's revenue neutral if you decide the real problem is we need more revenue. I think that's kind of a fundamental problem with the conversation.

And then to Tom and Jane's point, I've been thinking of this a little bit differently, which is, okay, it would be good to get a faster rate of growth in the United States, that would make living standards higher, provide more -- make it easier for us to pay back our debt. Nothing we can think of does very much, so it's this compared to what. And I know that one of the attractions to the administration and the corporate tax reform was that, since it doesn't cost anything if it's revenue neutral and it increases growth, it rolls to the top of their list, because everything else they could think of cost something.

So when we talk about raising the rate of growth, we don't know how to do it, we don't know how much is taxes, all we're trying to do is push the lever a little bit in the right direction and hope it works, and we have to be modest about our claims.

MR. BERGIN: Before I go to Elliott, let me just warn the panelists. We've got about 10 minutes left, and I'm going to close by polling the panel and asking, after everything we've heard today, so why is corporate tax reform in the air? So it gives you a couple of minutes to think about it, and I'll go in the same order that we started. You've got to tell us who you are.

MR. DUBIN: Okay. This is -- I'm Elliott Dubin, Multistate Tax Commission. Marty, one of the -- we keep coming to a VAT, yet we have a hybrid personal income tax now, a lot of consumption tax, a lot of income tax. What would you say if we just, instead of it, just go to a very progressive consumption tax based on current income -- what we consider an income tax?

MR. SULLIVAN: I think --

MR. DUBIN: In other words, you can make the rates a lot more --

MR. SULLIVAN: Well, the progressivity issue I think is something that -- it just, you know, look what's happening around -- there's protesting in the streets in the UK. We don't have that here yet because we haven't really started cutting yet. When we start -- when the Republicans start really cutting, cutting into food programs -- and I'm not trying to be a bleeding heart liberal here, I'm trying to be a political realist. When you start cutting into those programs and at the same time start talking about cutting corporate taxes, you're going to have protests in the street.

And now that has nothing to do with economics or what's the right thing to do, but it's a political -- a reality. The, you know, going to a progressive consumption tax --

MR. DUBIN: Well, I'm thinking if you need -- a consumption tax is a bad way to go when, like I've said, you've eviscerated the middle class, now you want to hit them with a VAT.

MR. SULLIVAN: Well, let me --

MR. DUBIN: Randy (phonetic) saved all her life and now she withdraws --

MR. SULLIVAN: -- as in socialist Europe, where they have 20 percent value added taxes, we're looking at cutting social programs. I think Len Burman and others who have -- look at it the right way. The revenues from the VAT would primarily be used for social programs which will help the lower income families.

So you can't just look at one tax or even the entire taxes. I mean, you have to look at the entire government. And I think on -- something could be worked out where it would not necessarily be hurting lower and middle income families.

MR. DUBIN: Okay.

MR. BERGIN: Anybody?

SPEAKER: The way that -- what you learn about VATs from Europe is that they're very complicated, they're reggressive, so what do you do and what's been written? You use the same type of systems of earned income credits. You file your -- file forms, people that can't afford it file and get the money back, so you eliminate part of the complexity and try to eliminate the regressivity aspect of the VAT. And I think that there's some real potential in that approach to VAT. And if 51 percent of the people are not paying income tax and you need more revenue, you need to figure out where you're going to get it from. And so we need additional revenue. How do you go about doing that? You make the income tax system more efficient, lowering the rates, and use a VAT system and make sure that you figure out the best way to get the dollars back to the people that need it.

MR. BERGIN: All right. Since we're talking about VATs, before I poll the panel here, let me take a commercial interruption. Tax Analysts has a book on VAT. It's an excellent book and its price does not reflect its value, it's free. So you go on our web site, call our customer service, and we will send you one. We should have brought them actually. But it's a good primer on the VAT, and from all sides. As an organization, we don't support any particular tax system, including a VAT, but it's informative.

Let me close by Marty, let's start with you, why is it in the air, why are we talking corporate tax reform and I keep hearing it's all small? So I remain confused, which is a normal state for me.

MR. REGALIA: I think that the major driver of the discussion of tax reform, of which corporate tax reform is a piece, is, in fact, the debt and the deficit situation, which over the long run, are unsustainable. We would contend there's two edges to, you know, two cutting edges to that scissors, one is the spending side and one is the tax side, and we don't see them as equal. So we think if you're going to go down the road of using the debt and deficit as the primary driver for tax reform, not just corporate tax reform, then, you know, you have to look at that balance, and, you know, that's the discussion -- for a whole host of additional roundtable discussions.

But I don't believe that -- I think we're moving away from the corporate tax reform, per se, the narrow corporate tax reform. I think we're already into the business tax reform, and I honestly think we've moved beyond that. I don't think we're going to see anything come out of this Congress that is just corporate reform, probably nothing that is just business reform, but it's going to be a broader change to the tax system.

MR. BERGIN: Great. Eric.

MR. TODER: All right. Well, you asked why this topic was in the air, I think David Wessel explained it the best. People think that -- unlike economists, who would say corporate taxes are paid by some people, either shareholders or workers or somebody else, most people think corporate taxes aren't paid by any people, they're paid by corporations.

And so it's -- and they're particularly upset about stories like the one that appeared in The New York Times that shows GE not paying any taxes, I think that's what it said.

MR. BERGIN: Yeah.

MR. REGALIA: And so the -- I think the idea that somehow you could lower rates on good businesses and tax the bad businesses is a politically attractive sound bite. I've tried to argue that that isn't a good policy approach, and it's not a practice policy approach, and we don't have a set of loophole closers available that will really address those problems, but nonetheless, I believe that's the motivation behind it.

And Obama mentioned this in the State of the Union Address, and I know people weren't sitting together -- were sitting together this year, so it was a little hard to tell who was who, but my perception was, he got a lot of applause from both sides for that.

MR. BERGIN: Yeah, and he did say it. David.

MR. WESSEL: Well, I think -- I agree with everything Eric said. I think the reason it's in the air is because the President put it there, otherwise, it would be the same people who've been talking about corporate tax reform for the last 50 years.

But secondly, I do think there's a perception that -- one, that, as Eric said, it's unfairness, although I think I would phrase it slightly differently, they think there's a corporate tax and business is somehow dodging it by going overseas. And secondly, there is this mounting tension to the extent that we're increasingly meshed in the global economy, we're seeing friction points between the way we do things and other people do things, and this is one that keeps rubbing, and when things rub, they tend to get attention.

MR. BERGIN: Excellent point. Marty.

MR. SULLIVAN: Thank you. I just want to pick up on what David said. It's a front-burner issue now because the President has made it a front-burner issue. Then we ask the question, why did the President make it a front-burner issue? And I think it serves its political purposes right now to carry him through the 2012 election without talking about serious tax increases or deficit reduction. You know, as a former Hill staffer, you know, why is the Ways and Means Committee chairman in favor of tax reform? Well, it makes him a bigger fish. Why is Eric Cantor all of a sudden in favor of tax reform? Well, I think -- not all of a sudden, but why is he making it a big issue? Well, he's trying to distract us from the main issue of what this year's budget is going to be.

These are all bad reasons to be for tax reform, but again, as being a former Hill staffer, I'll take any excuse to go in the right direction, even if it's not a good one.

Ultimately, right now tax reform is being used as a -- it's a phony name for tax increases. I mean, why are we talking about tax reform in the context of deficit reduction? Well, it's because Erskine Bowles and Simpson are afraid, and they don't understand that if they said we're going to have tax increases, this thing would be dead in the water.

That's good, it helped them get through this year, but next year -- they really did us all a disservice by taking -- by hiding the real issue, which is for deficit reduction, we probably need tax increases. But again, I'll take a good discussion about tax reform under false pretenses any time.

MR. BERGIN: Yeah, and this was a good discussion of tax reform. This was a lot of fun. Thank you to the excellent panel we had and thank you all for coming.




(Whereupon, at 11:00 a.m., the PROCEEDINGS were adjourned.)

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