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February 25, 2013
Transcript Available of Tax Analysts' Forum on Income Tax at 100

Full Text Published by Tax Analysts®

Summary by Tax Analysts®

The transcript is available of a February 22 forum on the role of the federal income tax at 100 years old, featuring Joseph J. Thorndike, Robert Goulder, and Christopher Bergin of Tax Analysts, Jared Bernstein of the Center on Budget and Policy Priorities, and Columbia Law School professor Michael J. Graetz.



Washington, D.C.

Friday, February 22, 2013



    President and Publisher, Tax Analysts

    Director of the Tax History Project and Contributing Editor,
    Tax Analysts

    Senior Fellow, Center on Budget and Policy Priorities

    Editor in Chief of International Publications, Tax Analysts

    Professor of Tax Law, Columbia Law School
* * * * *


(9:00 a.m.)

MR. BERGIN: We're going to start in about a minute, everybody. If you'd please find your seats. We'll let the judge get his seat here.

Good morning. How is everybody this morning? This is a newer format for us so I can't really see you that well with the lights. But thank you for coming. And welcome to the latest in Tax Analysts' series of discussions on key issues in tax policy and tax administration. Today's topic is the federal income tax which is celebrating its 100th birthday this year. I think actually this month, Joe, right?

MR. THORNDIKE: Yes, next Monday.

MR. BERGIN: Today, we will discuss whether the income tax can and should retain its role as a prime federal revenue source. I'm Chris Bergin, the president of Tax Analysts, which is the non-profit 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.

We are in our 10th year of public discussions on tax policy. If you are new to our discussions, let me say it's great to have you here.

Let me just take a moment to explain our process today. I will open things up with some remarks to introduce our topic. I will then introduce our panel of distinguished 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.

We are streaming live video of this event on our website. That explains the presence of the camera. So, I want to welcome our virtual audience as well. Next week, we will post both the webcast and a transcript of today's event on our site

For all media purposes, we are on the record. For that reason, when I recognize you, please tell us who you are. Once I call on you, we will quickly get you one of our handheld mics. We are also tweeting this event at hashtag incometax@100 as we reach more people beyond this room through social media. We invite our listeners to send questions via Twitter. Just tweet hashtag incometax@100 with no spaces in between the words and the number 100 written numerically. For technical dinosaurs like me, that's hashtag incometax@100. We hope to hear from you.

I will moderate the discussion and we will end at 11:00. By the way, for those of you in the room, I'm sure the rich discussion of the next two hours is enough to keep you with us until 11:00. But today, we have added one more rich inducement. To celebrate the hundredth birthday of the income tax as only Tax Analysts can, we will be rolling in a big cake shortly. And we invite everyone to dig in as soon as we wrap things up. For those of you in the virtual audience, we haven't yet figured out how to get cake to you but we're working on it.

Now, on to the subject at hand, the federal income tax. As the moderator of our conferences, I try to remain studiously neutral about whatever the topic the day happens to be. But in the spirit of full disclosure which Tax Analysts is all about, I will lay my cards on the table for this one. I like the income tax. I've liked it ever since my days in law school. I like talking about it. I like writing about it. I like reading about it. I like coming to conferences about it. I think the Form 1040 is a thing of beauty. Please feel free to think I'm a little weird.

Income taxes have at least two characteristics that I find compelling. They can be progressive and they can be transparent. Over the years, I've also had an abiding faith that if the income tax went off the rails, so to speak, if it became less progressive or transparent, if it grew too complicated, if it was altered too much to help special interests instead of public interests, policymakers could fix it.

There's an explanation for my faith. After all, I was a young tax professional when I read "Treasury I," the 1984 report that played such a large role in laying the groundwork for our last major tax reform, the Tax Reform Act of 1986 which I covered and wrote about. Despite my perhaps naove belief in the income tax, I'm beginning to wonder whether it's time to retire it. For the first time, as I watch our income tax become less progressive and transparent, I'm beginning to worry that policymakers simply can't fix it.

Can you call an income tax progressive when nearly half of the people who earn income don't pay any income tax on their earnings? Under a progressive system, those who make more pay tax at a higher rate. I personally think that's fair but shouldn't everyone pay at least something as an obligation of citizenship in a free society? Further, can you call a tax transparent when virtually nobody can figure it out anymore?

In her recent report, the nation's taxpayer advocate wrote and I quote, "It takes US taxpayers, both individuals and businesses, more than 6.1 billion hours to complete filings required by a tax code that contains almost four million words and that on average has more than one new provision added to it daily." To further illustrate the complexity, there's some disagreement on exactly how many words are in the income tax code.

Can you call an income tax system fair when it's riddled with credits, deductions and other preferences that favor some groups over others? Our income tax is now a bewildering maze of winners and losers. We all know that isn't fair and that's not good for a system that relies largely on self-assessment. So, where are the leaders who will fix all this? Where's our modern day Ronald Reagan? Who's the next Bill Bradley?

We not only lack leaders, we lack basic consensus about what we mean by the term "tax reform." Liberals think it means soaking the rich to get more money while conservatives think it means cutting rates especially for the rich and broadening the base in a revenue neutral way.

Now, forgive me if I sound a little cynical, but I do wonder if the income tax no longer works in this, its hundredth anniversary year. Maybe it's time to try something else.

To examine all this from multiple sides, we have an absolutely terrific panel. I will introduce them in the order in which they will speak. Joe Thorndike is director of the Tax History Project and contributing editor to Tax Analysts. Jared Bernstein is a senior fellow at the Center on Budget and Policy Priorities. Bob Goulder is the editor in chief of international publications for Tax Analysts and Michael Graetz is a professor of tax law at Columbia Law School.

I'm going to have Joe start us off but first I'd like to remind everybody that here's Joe's new book. Now it's not printed by Tax Analysts so this is not shameless. His new book is entitled Their Fair Share: Taxing the Rich in the Age of FDR. I recommend it highly. Joe, you want to get us started?

MR. THORNDIKE: All right, well I'm very glad to see that we have a decent turnout for a tax history panel that's never given. I got asked recently by an interviewer what it's like to be a tax historian when you show up at a dinner party. And I told him it was really the worst of both worlds because it's like that awful class you had in high school mixed with April 15 and it really, it just turns people off constantly.

But this is really, truly a once-in-a-lifetime anniversary at least for the small little group of tax historians that I'm a part of. 2013 brings what I like to call a landmark in the history of civic tedium. For a century now, Americans have been wrestling with the income tax and they've been complaining about it for the entire time. And I think the real question is are we nearing the end of the line?

Complaints about the tax are really as the levy itself. From the start people called it complex. There's a guy who said it's so complicated that it's utterly impossible to understand its meaning save by consulting a palmist. And that was just two years after the tax enacted.

Americans have called the tax intrusive and unfair and even un-American but all that complaining hasn't really done anything to slow the development of the tax. And just ask the critics who tried to replace it, which is, you know, there have been efforts to do that since the 1920s. Lots of ideas. None that have really gone anywhere.

I think the question is why did the income tax survive all this if everyone dislikes it so much? There are two reasons really. The tax does two things really quite well. First, it does what a tax really has to do well. It raises money. And it always has. From the very start, it raised money efficiently and quickly and in large quantities. And that's an important thing for a tax. Without it it's really just not that useful.

The second thing it does is that it comports with popular notions of what is fair. Now, we can argue about that all day long and in fact we should argue about that all day long in a democracy. But if you take votes in Congress, the votes of elected representatives, and after the 1930s if you take polling data seriously, the income tax comes across pretty well and is regarded as irritating but largely fair.

Where does the tax come from? Like, how does it show up in the first place? Well, I mean the answer really -- the real answer is that it arises out of the failure of an older tax. The income tax movement really starts at the state level. I know that you state people here will like that and probably maybe find it surprising. But it comes out of the failure of the general property tax which is a tax that, you know, today we think of the property tax as something on real estate and maybe on cars. It used to be on everything.

As the financial world got more complicated, it became harder and harder to tax all forms of property because a lot of it was invisible. So, the property tax stopped working so well. And when a tax sort of wears out like that, when the world passes it by, something new arises. And the income tax is what came up in response to that.

The original income tax was meager with a top rate of just seven percent and an exemption of 70 --to what would be $70,000 or $100,000 in today's money. It was a light tax applied to just a handful of people. It was designed to make the tax system fairer but not raise a lot of money. Just five years later, it was a very different tax. By 1918 the top rate was 77 percent, 11 times higher in five years. Obviously that was the result of World War I and the amazing revenue needs but it does tell us something about the tax which is that when pushed to the wall, this is where lawmakers look for money. It took another war to make the tax a mass tax as they say. During World War II, lawmakers transformed the income tax. In just six years, the number of households filing returns increased tenfold. As one scholar later put it, the tax had changed its morning coat for overalls.

That transformation was important for two reasons. For one thing, it made the income tax the most important single source of federal revenue. It might have been that almost already even during the 1930s but it was really during the '40s when this tax rocketed to the top of the tax structure and became the one that we relied on the most. From that point forward, it never lost that position.

The new tax also changed the way Americans related to their government. So, for the first time, the federal government really had a tax collector that was coming into the lives of ordinary citizens and asking them for things. That was something new and in many ways Americans didn't have much connection with the federal government at all. The tax collector was their first real experience with the hand of the federal government in their lives.

After World War II, Americans across the income spectrum wanted the tax to go down but those large taxes of the 1940s, they stuck around for a long time. The highest rate, the top rate peaked at 94 percent. That's sort of a marquee number for the income tax in 1943. But what's surprising is that those 90-plus rates stayed on the books all the way through the 1950s all the way through Dwight Eisenhower's presidency, even when he had a Republican Congress to work with.

I think that the explanation for that is that the 1950s also brought loopholes into our lives in a way that they never had been before. Now, they were part of the income tax from the start. But the lawmakers managed to hold on to these high rates because they carved up the base in such a way to lower effective rates. So, nowadays we look back on the '50s and people on the left like to look at the '50s and say, hey, look. Rates were really high and the economy did just fine. So, there's no problem with high rates. And there is some truth to that.

But there's also some obfuscation in that because, in fact, those rates were sort of notionally high but the effective rate that was paid, even by people who were very wealthy, was much, much lower, thanks to things like the capital gains preference and new liberal forms of depreciation.

That was sort of an unholy compromise and it took John Kennedy, it took a Democrat actually, to lower the tax rates from where the Democrats had put them in the 1940s. The Vietnam War brought another tax increase but by the 1970s disillusionment with the income tax and especially with the sense that some people were getting away with murder and avoiding their fair share, to use a phrase that I obviously like, it set the stage for real and lasting tax reform.

So, I mean, that's the -- I'm going to leave to other people here to tell the modern history of the income tax because in '86, you know, we come in and this tax is creaky and reaching what might be approaching the end of its life and Reagan and the other tax reformers of '86 managed to breathe new life into this tax regime; to sort of rescue the income tax from its own creeping failures. The story since then is not a particularly encouraging one. All those things get undone, but that's what happens in a democracy, is that lawmakers naturally undo all the good tax policy that economists and tax lawyers can come up with.

And I think the question is are we reaching that point again? Where the tax is creaky? Where it's losing popular support? Where things like loopholes and on the other, you know, whatever the disagreements over the rate structure, have these reached the point where the income tax is in danger again? And for my money, I see it going on. I don't think it's going to stop working quite yet because it usually takes some sort of external threat or major failure to push an old tax out and bring a new tax in.

So, the general property tax failed in the late 19th century. It stopped doing what it was supposed to do. It stopped seeming fair to most people. I don't think the income tax is quite at that point yet. We don't have the crisis, we don't have the failure. Now, parts of the tax might be reaching that. The corporate income tax might be reaching that point where it can't keep up with the modern world very well. But I don't think that the individual income tax is in much danger of that over the short term.

What seems more likely to me is that the income tax may have to share the stage fairly soon. It may not do quite the whole job that it used to be able to do. So, some sort of new tax will come in and in fact that's the way these things usually happen. They didn't throw out the property tax when they introduced the income tax in the states. They began a transition and the transition eventually sort of runs along with itself.

I think that's the kind of moment that we're at now.

MR. BERGIN: Thank you, Joe. Jared?

MR. BERNSTEIN: Well, that was fascinating listening to Joe's history and I liked his characterization of how a lot of people think of the tax code today, irritating but largely fair. And I was thinking that's kind of how my 13-year-old daughter thinks about me.

I want to be brief because there is just so much deep historical knowledge in this room as well as the panel, excluding myself, that I want to very much get to our conversation. But let me just briefly from a fairly high altitude talk about what's right and what's wrong with our tax system and our debate about it. Picking up kind of where Joe stopped. A more contemporary analysis, although very much coming off of one of Joe's themes which was the durability of the system which I think is quite remarkable.

So, let me begin by ticking off things that I think are healthy and less healthy or sick about the current system. I'll largely focus on federal taxation but I'll mention state and local along the way because they're important too and shouldn't be neglected.

We have an enduring system, as you just heard, of revenue collection. And of course, not everyone loves it but its infrastructure is firmly in place. It's widely accepted and it's highly functional. Now, as Joe stressed, you can always find people who will disagree, but I think the system is broadly viewed as legitimate. I think you were kind of underscoring a similar point.

Now, I'm going to introduce, in a few minutes, a way in which I believe that legitimacy is becoming more fragile in the spirit of the introduction we heard. And what we should consider doing about that but in this regard we are just not Greece. And the people who pull their heart and say, "We're Greece, we're Greece," are wrong. I'm sure folks in this room know the anecdote about how tax collection is just so messed up in Greece that they couldn't figure out how -- you're supposed to pay a tax on your swimming pool if you have a swimming pool. And no one paid a tax on their swimming pool. The tax collectors are just extremely ineffective in that regard. So, what did they do? They got out Google Maps and looked around and found all the people with swimming pools. I think when you have to resort to Google Maps you've got a problem.

So, I think the infrastructure is solid in that regard. What else is healthy about our tax system? This is very important to me. It's very elastic to growth. I'm talking about federal taxes here. Revenues remain highly cyclical and that helps us avoid structural budget deficits and provides people with more after-tax income in recession. A structural budget deficit,of course, is a budget deficit that increases when the economy is moving towards full employment. And that's the kind of budget deficit you very much want to avoid.

I happen to be a big fan of cyclical budget deficits; the idea of Keynesian stimulus to offset demand contractions. That's very important and I think it's worked well for us. And I think, in fact, its absence is one of the reasons the economy remains in such a slog today. But the progressivity of the tax system contributes to this elasticity to growth which is essential and should also remind us how important growth is to revenue collection.

And, in fact, in my professional lifetime of studying these matters, there was really only one period where we, of course, achieved a budget surplus and that was in the latter 1990s. And that had a little bit to do with policy changes. They weren't trivial. President Clinton did raise taxes but it had a lot to do with growth as well.

Also there's been, sticking with healthy aspects, there's been throughout history though much less today -- and this is a big problem. Again, I'd be more interested in Joe's view on this if he wanted to say a little bit more about this later. There's been a linkage, I think, between paying taxes and building and protecting a better nation.

Pay your taxes to defeat the Axis, to build the infrastructure we need to fix today. To stand up our national system of public education and that again, involves a state level taxation as well. I was moved by Jerry Brown in California being slightly reductionist here but not too much, who essentially went to the electorate because everything out there is plebiscite but that's not the word for it, you know, referendum. Everything's a referendum out there.

So, he went to the electorate and, "If we want to preserve our education system we're going to need higher taxes." And the referendum passed. Now, many of those higher taxes were on the wealthy but there was also a sales tax increase in there as well. That kind of connection for the tax code to the things we get from the tax code to me is important to the legitimacy that I worry about losing.

Ok. That's all the healthy stuff I can say. Let me turn to ways in which our system of taxation isn't as healthy as it needs to be and if I have time, briefly think about how to fix it. So, I think we're at serious risk of losing the connection between what the majority wants from the government, what the majority of the electorate wants from the government in terms of investments, public goods, safety net, social insurance, national defense, and their costs. I really think that connection is seriously broken and it's dangerous.

In no small part this harks back to the Laffer curve and what I think of as going to be the extreme version of supply-side economics. We can raise more tax revenue by cutting taxes especially on the wealthy. Now, you know, not to be too harsh on supply side, there's a more sophisticated view that says you won't lose as much revenue as you think. But that's not really how it's discussed in the popular debate, in the, you know, hyperdynamic scoring. Even what we heard in the last election is we can collect more revenue by cutting more taxes. You can have your cake and eat it too. And that disconnection is fundamentally threatening the system. It also relates to me what seems to be what I would characterize as less responsible politicians and policymakers on all sides -- this is bipartisan -- of the aisle, who are comfortable promising lots of goods, but very uncomfortable paying for them. So, during the campaign, attacked Obama for, A) not being willing to tackle an unsustainable entitlement cost and, B) for cutting Medicare. Those are inconsistent.

The president, both in his inaugural address and especially in the State of the Union address the other day, talked about a robust and, I personally thought, a pretty enlightened agenda, but said not a peep about paying for it. President Obama has also created the illusion that we can raise the revenue we need on families strictly above, initially, $250,000, the top 2 percent, and now even a narrower slice. And the fiscal cliff deal made 80 percent of the Bush-era tax cuts permanent.

I cannot overestimate -- Ezra Klein has a good piece about this in the newspaper today -- I cannot overestimate how much this idea has cramped our current tax debate -- the idea that we can achieve the sustainable budget and the investments in public goods, and social insurance and safety nets, and defense that we need simply on taxing a narrow sliver at the top of the scale. I happen to believe that's the right place to start, but we can't end there.

And, that said, President Obama also deserves praise on this front because he did run on a tax increase, which these days is a bold thing to do, given the caveats I just said.

Ok, a few other problems, and then I'll stop. The system doesn't raise enough revenue. This isn't just a recessionary issue, this is policy-related, having to do with cuts in tax rates, not just on the corporate side but on the individual side, as well. It also relates to this horrific pledge that so many, particularly Republicans, have taken to never raise taxes.

Now, you might say to me, then: So, Jared, what is enough? Well, I don't know, to be honest. But historical averages, which are about 18 percent of GDP, in terms of revenue collection, don't help. We've got aging boomers, myself included; health cost pressures; obligations to veterans, which are more significant than they've been in the past -- many of whom are going to need more help than earlier cohorts -- an aging infrastructure. We have significant debt service. Education needs, to offset the inequality problem. The regulatory function, including climate, financial markets. These issues have large tail risks and can't be ignored.

So, the historical average won't work for us. We're going to have to do better than that.

The system has become less progressive. Large decline in effective rates have been mostly concentrated among the wealthy. And that's partly related to policy changes lowering the rates. But it's also related to the composition of their income. And Joe mentioned the favorable treatment of unearned income. As the top 1 to 10 percent, more of their income is concentrated in non-labor income, those preferential treatments become a larger part of the tax system and, I would argue, a bigger problem, and one that threatens legitimacy.

I'll make two more points and then stop. I mentioned that the system's become less progressive.

I've written, most of my career I've written about this issue of economic inequality. I don't look to the tax code to reverse that. The growth of income inequality is very much a pretax story. What you don't want is the tax system to exacerbate it. It's what Alan Blinder calls "unnecessary roughness."

At the same time, you can't ask the tax system to offset a pretax phenomenon year after year. I think it can help, and I think it should help. But it definitely shouldn't hurt.

But if you think the tax system should offset income inequality, you are essentially asking the tax system to ratchet up its progressivity and its redistributional function year after year. And I think that's highly unrealistic.

Corporate taxation is a mess. International is particularly screwed up, and maybe during comments we can say more about that.

I have a section on what to do, but my time is up so I'm going to stop. And if people want to ask about solutions, I have a long set -- I mean, I have a number of bullets that we can talk about later.

But I did want to raise one point, and one question. I mentioned Jerry Brown earlier, and his, just this microcosm example of his tying this to education. I wonder if part of the way forward, this reconnection of taxation to what it does for us, might work better if we actually tied tax measures directly to the benefit side -- to programs, policies, services that people want. If we had a dedicated tax that pays for health reform, if we had a dedicated tax that pays for infrastructure -- although you wouldn't want to call it "infrastructure." I'm not the messenger -- that, to my mind, is a potential way forward. I'd like to hear, perhaps, others comment on that.

And, finally, this is more of a question for Joe, I think: Are the political stars, are the dynamics any way aligned such that we could be looking at an '86 moment again? A moment of bipartisan tax reform? I don't know.

What I do think is seriously problematic, and needs to be addressed, is this issue of legitimacy, privileging certain types of income -- capital gains, the fact that the system favors debt financing, for example. That type of privileging has legitimacy costs. They came up in this election and they were very big. This is large in the public's mind. When we privilege certain types of income that go to certain types of people, we better make sure that the benefits outweigh the costs. The benefits have to be shown in empirical analysis to really lift investment and growth. And from what I've seen, they don't. The legitimacy cost, on the other hand, is very high.

That's the kind of thing I think we need to change. I'll stop there.

MR. BERGIN: Thank you, Jared. Bob?

MR. GOULDER: Thank you, Chris. I need to start with a spoiler alert. I'm going to say bad things about the income tax. Prepare yourself. It will not be pretty. But it's also not personal. I say that because I look around the room and I see many dear friends who I know are true believers in the income tax. They want to like it. They believe in it passionately, with fervor. They think the income tax is a positive force for all of humanity.

I am here to just pop that balloon. My boss is one of those people who believe in it passionately.

What you're going to hear from me is that the income tax, for lack of a better word, is a bad tax -- in the economic sense. But that is not to say it isn't necessarily a good tax in the political sense. I totally understand progressivity and fairness.

Progressivity in the income tax, really, if you think about it, it's part of the modern social compact. People just aren't going to buy into the nation-state if they think it's not fair. And so you need progressivity. I get that. But it can be good politically, but bad economically. That's where the conversation is going.

And that's why we are being so bold as to not necessarily predict the death of the income tax, but certainly hint at its demise, decay, and just disgrace. Notice, if you happen to have a copy of Tax Notes International, on the back of it there's an advertisement for this event, a poster, if you will. And we had a choice when we were doing the art design, we could have gone one of two ways. We could have had a very happy-looking birthday cake. After all, 100 years is a big deal. It should be celebratory "Bravo, income tax. You've done it. You've made it to 100 years."

We didn't put that on poster. We used a tombstone. Yes. Yes. Rather an ominous, macabre visual reference, Chris. But -- well, I'm not going to say I had a hand in that, but it's more or less consistent with what I'm going to say.

Also as another preliminary remark, when I say it's a bad tax, you have to understand the context here. I'm not suggesting that that -- I'm not talking about things that can be easily fixed. Let's say I happen to not be a big fan of the current treatment of carried interest; don't like it, don't think it works, bad. That's not what I'm talking about when I say the income tax is a bad tax economically. Congress, if they wanted to, today, could change carried interest. The House could pass it in the morning, the Senate could approve the legislation in the evening, Obama could sign it tonight. We could fix that. I see my boss, David Brunori, over here, who I suspect is not the world's greatest advocate of the itemized deductions for state and local income taxes. That could be fixed.

So, when I say the income tax is a bad tax, I am not talking about things that can be patched. We're talking more about the foundation of the house, rather than, you know, changing the color of the shutters or anything like that.

So, let me begin, after I have my Marco Rubio moment. At least I don't have to go off camera.

All right, there are two reasons why it's bad. I'm going to refer to them as the "purist's objection" and the "pragmatist's objection." And I could go on forever, but I'll try to be brief, because we want to hear what you have to say.

The purist's objection is that the income tax is a bad tax because it deters capital formation. We need capital stock. Every sovereign nation on earth needs capital stock. If you don't have capital stock, what will you get? You will get stagnation. What is the lifeblood of capital stock? It's savings. People need to save. Savings, capital formation, that gives you economic growth. That gives you job creation.

I'm saying all this -- and I believe it, but I'm not even a supply-sider, so these are not crazy arguments. We need this.

The good news is that if you are an individual participant in the economy, you have a great incentive to save, which is good for capital stock. You don't want to be broke when you retire and you're old. So, you know, let's say you earn $1 of income. What are you going to do with it? An economist would say you've got a choice. You might think there's a million things you could do with that dollar of income, but really there's only two: You could consume it now, or you could save it. And saving it really means you're consuming it later, because all money will eventually get spent, or so we're going to assume.

So the choice of how you spend that dollar is really between present consumption or future consumption. Future consumption is good. That helps maximize net welfare across the economy. We want that. And people have an incentive to do it.

But then you layer the income tax on top of this scenario I'm describing, and all of a sudden you've changed the incentives. You've distorted market choices. You've given people a reason not to save, but to spend now. That deters capital formation, that's bad. That is adverse to maximizing overall national welfare. So, the income tax actually sort of cuts in the exact opposite direction than it really should.

Now, we do not have time today to have a graduate-level course in macroeconomics. And if we were, I certainly would not be the person to teach it. I look around the room at the very high pedigree of intellectual talent here, I would not be teaching that course. But I do want to take the liberty of reading a very, very brief statement from a book that one of my colleagues, Dr. Martin Sullivan, who also works for Tax Analysts wrote -- and I'm going to paraphrase him here. I'm not sure if Marty's here, so I was going to say I won't embarrass him, but if he's not here, I'll embarrass him all I want.


    "The title of this chapter may seem a little overbearing. After all, aren't there two sides to every story? Well, when it comes to the economics -- not the politics, but the economics of the income tax -- the answer is a great big fat "No." There is no economic justification for its existence.

    "This statement boils the blood of liberals. And it surprises most of the general public. It's not often discussed. Sorry to hurt people's feelings, but there is no escaping the truth. And this is almost universally accepted among economists, both Republican and Democrat. In fact, of all the bad taxes out there, economists consider the income tax the most harmful to growth of all."

Now, I have taken -- that's the end of the quote. And I'll calm down a little. This is a forum, not a sermon, I'm told.

I've taken a bit of a liberty here, in full disclosure -- Dr. Sullivan wrote that passage specifically describing the corporate income tax. And my nuanced enhancement here is to, by extrapolation, apply it to the full income tax, because the income tax does reach savings. So the concept is valid.

So that, in a nutshell, is the purist's objection to the income tax.

There's one more. There is the pragmatist's objection. What's that all about?

Well, go back to that $1 of income we were talking about before, and instead of thinking about how you spend it, now or later, think about where it comes from. What are the sources of your income? Every single dollar that you report on your tax return comes from somewhere. And you might think there's a lot of sources, but, really, there's two: There's income from labor, and there's income from capital. That's where it comes from.

Income from labor, what's that? That's going out, working, that's your paycheck. Income from capital? That's when you save, you invest. We're assuming here that you don't save and put the money under the mattress. Very, very bad. You have to go and put it to a productive use. That will produce dividends. That will produce interest income. That will produce rents. That's income from capital.

Now, when we look at this, we're struck by something -- that one of these things is very mobile, and the other -- mmm -- not so much. Income from capital, very highly mobile -- especially today, in the era of globalization. Everyone talks about globalization, and some people say it's been going on in various forms since Marco Polo and the early explorers. So it's always been with us.

But today, it's accelerated, it's heightened. Why is that? The last few decades we've seen the free trade movement. We've seen the eradication of currency controls around the world. There's a global network of bilateral tax treaties that reduce the incremental withholding rates when you try to get money out of a country. In other words, if you're lucky enough to earn -- invest in a foreign country and earn money there, it's really cheaper to pull it out. So, goods and services, easy for them to go across borders, and if you make money, easy for that to come back.

All of this means that capital today is very highly mobile. Different dynamic than what you had in the 1950s. Joe, here, I might talk to him later about this point about how new is tax competition? How new is capital mobility? He might say that capital mobility isn't that new, and I'm not going to argue with him, because we have the preeminent tax historian on planet Earth, and therefore the cosmos right here. So I'm not going to argue with him about history.

But I will say that, you know, you tax it too much, it will flee. This is an old proverb. I think it goes back to the ancient Romans, and Cicero, who said if you want more of something, subsidize it. If you want less of something, tax it. They understood this 2,000 years ago. But that assumes the "it" that you're taxing can leave. And capital sure as hell can. I mean, you could have a million dollars in Singapore right now, and by 11 o'clock you could have that million dollars in Hong Kong. It's doable. This stuff happens.

Labor -- is labor as mobile as capital? No, it's not. It's really hard to move around. You know, a family in suburban Washington is not going to just pick up and leave, move to, you know, Arizona because they might get a better tax outcome. There's your job, there's your mortgage, there's your rent, there's your family connections, there's your social connections. You're going to pull your kids out of school just to do that?

So capital, highly mobile. Labor, not so much. There are some exceptions, I know. Let's say you happen to be a professional golfer, let's say you happen to be pulling in $60 million a year in prize winnings and commercial endorsements. And let's say you're living in high-tax California and you'd prefer to be living in no-tax Florida -- yes, you could move, and those barriers aren't so meaningful to you. So, yeah, Phil Mickelson probably needs a better tax accountant.

And for the 1 percent, sure, there's some mobility. So it's not an all-or-nothing thing. But understand that capital is mobile.

Now, what does this mean for the income tax? I have a little exercise here, and it's going to involve some questions I'm going to ask you. I'm going to pick out a country -- the United Kingdom, our British cousins, ok? -- and I'm going to ask you to think about their tax system, and their tax rates, and I'm going to ask you: Is their particular tax rate globally competitive? And I want you to think about whether the answer is yes, it's competitive, no, it's not -- that's A) it's competitive, B) no it's not, or C) we can't tell, the answer's indeterminable.

Ok. A few years ago, the U.K. tax rate -- we'll use corporate tax rates, just to make thing easy, because you don't have all the brackets that you have on the individual side. And we're going to talk about statutory rates, even though I know full well effective rates have nothing in common with statutory rates. Indulge me, it's a teaching exercise.

A few years, U.K. had a 30 percent tax rate. Is that 30 percent tax rate competitive? Think about it -- yes, no, or can't tell?

Well, compared to us, it seems competitive. We have a 35 percent corporate tax -- at the federal level. You've got to kick in something for the states. What is the weighted average, 4.7 percent? Let's just round it up and make it 5. So, 35 plus 5, 40 percent U.S. tax rate, 30 percent in the U.K. You might be inclined to say, sure, that's competitive. Ahh, but wait a minute? Just across the Irish Sea there's Dublin. What do the Irish have? A 12.5 percent tax rate.

So the answer, if you didn't figure it out, is C -- all the intelligent people in the world cannot sit down and look at a tax rate or an element of a tax base and declare it to be inherently, definitively, per se competitive. "Competitive" has no name or no face. You don't know you've lost capital until it's sprouted legs, gotten up, and left the room. That's the nature of the exercise here. That's how the race to the bottom works.

Time goes by, what does the U.K. do? They want to compete against the Irish. They lower the tax rate, first to 28 percent, then to 26 percent, then to 24. I think now they're at 23 percent. You see the direction they're going? In a few weeks, April 1st, it goes to 22 percent, and then a year from now, April 2014, it goes to 21 percent.

So, the question to you: A 21 percent corporate tax rate, is that competitive? Yes, no, or there's no way we can tell?

Well, 21 percent is almost 20 percent, and we're at 40 percent? We're talking about a tax rate that's half -- half -- of our tax rate. It's got to be competitive, right? Well, no, because, you know, capital is still going to go to Ireland because they're at 12.5 percent.

It doesn't end there. It keeps going. Tax competition is a race that has no finish line. British industry groups go to the Houses of Parliament, they say they want what? A territorial tax regime. This isn't rate manipulation per se, because maybe they thought for political reasons they could only do so much of that. They wanted, they asked for, they begged for a territorial regime that basically exempted foreign-source income. In theory, those foreign profits will be taxed by the source county, but if the source country somehow is a tax haven, it isn't getting taxed there.

So, they get a 21 percent tax rate. They get a territorial tax regime.

Not enough. They want more. Tax competition never ends. They ask for a patent box. What in the world is a "patent box"? It's an imaginary box where you take corporate profits and you put them there if they happen to be related to royalties paid on the exploitation of a commercial patent.

Well, what is the rate associated with the U.K. patent box? It is 10 percent. I ask you, same question, a 10 percent tax rate in the U.K. patent box -- can we say that 10 percent is competitive? Well, it must be, right, because we're at 40, ok? Now we're talking 10. That's a quarter of our tax rate, and -- and -- significantly, it's dropped below the Irish rate. That's probably a big deal with the English and the Irish, right, that they've finally got a lower rate than they do over in Dublin. Certainly, that must be competitive. No, the answer is still C, it's indeterminable. You could be Einstein, you could be the smartest person in the room, you still can't say with any degree of reasonable certainty a certain rate is competitive.

It's because of the structure of the income tax. Do you know why 10 percent isn't competitive? Because they look across the English Channel and there's a place called continental Europe. And in continental Europe there's a country called the Netherlands, and they have the patent box. And what's their rate? 5 percent.

That is the essence of our sad little story about the income tax. We've reached the point where a 10 percent tax rate isn't working. British pharmaceuticals are threatening to get up, leave, go over to Amsterdam where they can have a 5 percent corporate tax rate.

Where does it end? Do you go down to zero? It doesn't end there, because what's a negative tax? It's a subsidy. You could actually subsidize this type of activity.

Asking when tax competition stops is like asking when gravity stops. It ain't gonna happen. And it's because of what's being taxed. To the extent you're taxing capital, you cannot get away from this, you'll never get away from it. That's why you see these trends that are going on in the world.

And I'm just about to wrap up, this is my final point. You know, people talk about "trends," and they say: Look at what's happening. In the U.K., just like every place else, corporate tax rates are going down. The tax base is getting contorted with things like territoriality. Those have to be the trends.

I say balderdash, that's not the trend. Don't let anyone tell you the trend is just that rates are going down. That's half the story. What's happening is that all over the world, countries are purposefully dialing down their reliance on the income tax as a revenue tool, and, contemporaneously, going out and getting an alternate revenue source. It isn't just about lowering rates. I mean, government as a size of GDP and the tax take, those things are increasing. At the same time that rates are coming down and tax bases are getting narrower, a lot of countries, the tax collections are going up. How can that be? Other countries have found an alternate revenue source -- and they're doing that because of this, the tombstone -- ok? Hence, that's why we have the tombstone, not the cake. It isn't a pretty picture.

Do I think the corporate tax is going to go away? No. It serves this political purpose, which we absolutely need. As I've said, it's part of the social compact. You have to have fairness and progressivity. But eventually you're looking at an alternate revenue source.

And that's my talk.

MR. BERGIN: Thanks, Bob. Professor Graetz.

MR. GRAETZ: So I think I'll just begin by looking backwards for a moment and then looking forward. I think the birthday point is an important point. I celebrate my children's birthdays, and I thank the Lord for my own. And as you approach 100 -- which Mort Caplin, I think, is the closest in the room -- you just have to be grateful each year that you made it another year, but you don't have quite the same level of vigor that you had when you celebrate your children's birthdays or when they celebrate them. So there is some loss of vigor in the income tax; I think that's fair to say.

Secondly, when the income tax came in, it was not intended to be the major revenue source, the workhorse of the U.S. tax system. We had a tax on consumption. It was a very bad tax on consumption; it was tariffs, but we were basically taxing consumption in the form of tariffs. We now know throughout the world -- a point I'll return to in a moment -- that there are good forms of consumption taxes. There are forms that work, and we need to think about that.

Leap ahead to the postwar era and people are very happy to say oh, we had rates of 90 percent. We had growth of 5 or 6 percent. Well, Europe was a shambles. Japan was a shambles.

China was entering into a dark Communist period. And we know nobody talked about the BRIC countries. If you talked about the BRIC countries, we would have been talking about a nuclear contest with the Soviet Union and Russia, but not economic growth and so forth in these large consuming and producing nations. So let's not point to the postwar period.

The '86 act was a great moment for politics and for the income tax in the sense that our supply-siders and deregulators who wanted the income tax to be neutral, not to direct investment and so forth, got together with people who were interested in tax equity. They produced what was then a revenue-neutral and distributionally neutral tax reform. They financed, importantly, the individual rate cuts out of corporate tax increases -- which I think for reasons that Bob has hinted at is no longer possible -- but also financed the corporate rate increases by repealing the investment tax credit and depreciation allowances that had gotten incredibly generous, so there was a pot of gold from which to finance rate cuts. And there is no pot of gold today; I think that became clear in the presidential campaign even to the average American. And then the rates crept up and the base got narrower, and we have seven education exemptions and savings incentives and the like that don't work. I mean nobody could plan to save for college based on the tax breaks and so forth.

So we started using the income tax as the cure-all for every ill facing society or the economy, and we've tried that. And you can take health insurance. You can take retirement insurance. You can take housing policy. You can take education policy. And it doesn't work, and we know it doesn't work, and the evidence is that it doesn't work. And these are not narrow, special-interest loopholes. These are broad, popular things that Americans rely on for their retirement savings and their health insurance and their homes and so forth, not to mention the importance of the charitable sector to the country. So I don't think we can have a replay of the '86 act. I guess I think of it as a promise that has failed. It was good experiment, but I think it's no longer the way to think about tax reform.

So let's look forward. So the question I think -- and this is where I think we're all in agreement up here, which is sort of interesting to me. The question is, what do we have to think about when we think about reforming the nation's tax code, which everyone agrees is broken? No one defends -- there's no save-the-code movement. If you want to start one, go for it, but I don't think you're going to have a million followers on Twitter if you start a save-the-code movement.

And so the question is well, what do we need? And so I want to echo something Jared said, which is that if you look at our needs for revenue, which is what people are talking about, and you ask what is the single most important factor in generating revenues, what's highly correlated with increased revenues, the answer is economic growth. And so we have to have a tax system that is conducive to economic growth.

We also have to take the lesson of the enactment of the Sixteenth Amendment in 1913, which is that the country will not stand for just a consumption tax as the only tax in the system. The reason we needed an income tax was because high-income, wealthy people were not paying what the public regarded as its fair share and so the income tax was put in, limited to high-income people, to redress that problem and to solve a problem of concentration of income at the top. And we continue to have a high concentration of income at the top.

And I think one of the interesting facts -- this goes to a point that Jared and Bob made -- one of the interesting facts if you look at distribution of income at the very top, is, unlike the '20s, unlike the Gilded Age, a much higher proportion of that income is in wages, it is in labor income, than it was historically and that's important because that means it is less mobile than capital. And then a lot of the capital income -- people have mentioned carried interest, which I suppose is everyone's favorite example -- a lot of capital income is not really capital income, it's really wage income that should be taxed as wages. And so there's a misstatement even in the amount of capital income at the very, very top.

So we've got to deal with the inequality, particularly at the top. So we've got to have fairness of the tax system. We've got to have economic growth. We have to take into account -- and this is a very recent phenomenon. When I was at the Treasury in the '90s and we were thinking about tax reform for corporations, we thought well, for administrative reasons and to make it simple for people, put a single tax at the corporate level rather than at the individual level. And this was in 1992. Whether that was right then, and I don't want to confess it was wrong. I might under pressure, but I don't want to confess it immediately. If it was right then, it's clearly wrong now. That is to say, the interrelationship -- I mean you talk about globalization, it doesn't have any meaning. The interrelationship, the ability to move money around, to move intangible income around and so forth that exists today just didn't exist in 1992 and that's only 20 years ago.

And so we've got to have a system that works well in a global, technologically sophisticated, mobile world economy, and I think it's a mistake to think otherwise. And we have to have a system that fits well with international relations. The economists, just to pick another historical moment, beginning with my late good friend David Bradford, urged unique forms of consumption taxes. His ultimately became the X tax, which is a variation of a subtraction method, value-added tax. I'll spare you all of that. The point is we cannot have a unique consumption tax. President Bush's panel in 2005 proposed a form of this tax, which they called the growth and investment tax. It wasn't a tax on growth and investment. It was a tax designed to achieve growth and investment. It was this form of a value-added tax essentially. But because of the way it was done, they acknowledged that it would require the renegotiation of all of our multilateral trade treaties and all of our bilateral income tax treaties. So they proposed a reform that basically said not only do you have to get it through Congress, signed by the president, but we've got to also get it through the multilateral world in order for it to take effect. And then somehow John Breaux, who was the co-chair of that committee, found himself in the Oval Office, opening cabinets -- he tells this story -- looking for his panel's report and saying the president said -- this was President Bush, George W. Bush -- "What are you looking for, John?" He said, "I'm looking for my panel's report. I've never seen any mention of it around the White House." And the reason that it was consigned to the dustbin is that it did not take seriously the need to mesh well with international arrangements.

And so if you're going to think about a consumption tax, you have to think about a border-adjustable, destination-based consumption tax. That is a form of a goods and services tax or a value-added tax, which is used in 153 countries, by last count, in the world, including every OECD country except for the United States. So we have to have a system that is conducive to economic growth, fair, meshes well with international arrangements, and produces an adequate amount of revenue.

And I want to also echo something that other panelists have said. I don't think 18.9 percent, which is our historical revenue, is going to be enough to finance the nation that we are moving toward. Given the demographics, given the distribution of income and wealth, and given the international economy, I think we're going to need something higher than that. Is it 20? Is it 21? I don't know, but you are putting a huge amount of pressure on the income tax if you are going to rely only on the income tax or mostly on the income tax and payroll taxes to produce that much revenue.

So it should come as no surprise that I think we need an alternative revenue source. Now, if I had known that Chris was willing to plug books that were not published by Tax Analysts, I would've brought a couple. I've got two or three, but the one that I would have brought for today is a book called 100 Million Unnecessary Returns, in which I discuss -- and you can get it I think, as low as 1 cent from some of the Amazon marketplace people. You have to pay shipping and handling, so it's not like I'm going to get rich off of this plug. But it basically goes through the tax reform proposals, but it also says, here's where we ought to go.

Since the book was published, the Tax Policy Center -- and this is unusual for the Tax Policy Center -- through a grant from The Pew Charitable Trust, actually estimated the parameters of the plan I proposed, which was essentially a plan to return the income tax to its function pre-World War II, after 1913 but before the Second World War, as a relatively small tax on a thin slice of Americans because I think you have to have an income tax and you have to tax capital in order to achieve the kind of fairness that we believe in.

And so here's what the Tax Policy Center said. I was grateful, I should add, that they estimated that it would eliminate 111 million tax returns. Had it, for example, come out to be 98 million, it would have created embarrassment, given the title of my book of 100 Million Unnecessary Returns; but more importantly are the numbers they came up with. So what did they say? The question I put to them is: How can we have a tax system that is distributionally neutral compared to the current system and raises as much revenue? The idea is to create a system that would allow us to have, if you want more progressivity at the top, to have a little more progressivity at the top, that, if you need more revenue, that would give us more than one option for finding revenue. And here's what they concluded. They concluded that a 12.3 percent value-added tax would finance a $100,000 exemption. Let me add, for those of you who have experienced the alternative minimum tax indexed for inflation, a $100,000 exemption from the income tax. It would eliminate 111 million returns, which is about 175 million people, from the income tax because many of those are joint returns. It would allow you to have a 16 percent tax rate between $100,000 and $200,000 and a 25.5 percent tax rate above $200,000. Now, this was done before the fiscal cliff. They have assured me they're going to rerun it with the new baseline and so forth. And I suspect, when they rerun it, you're going to need a 30 percent rate above $400,000 or $450,000 or something like that. So you may need a higher rate to keep it distributionally neutral at the very, very top, but the point is that you can have lower rates.

The other pieces of this are that you have a 15 percent corporate rate. And I really have to say I do not believe that you can have high corporate tax rates, and I'm not talking about movement of real assets. I'm just talking about where am I going to have my intangible income taxed? Where am I going to have my business risks taxed? And the answer is I can have them taxed anywhere, and there are lots of countries -- think of nice islands in the Caribbean or off the shores of Europe or even Africa -- that are perfectly happy for you to have it taxed there. Or even Luxembourg, Switzerland, and Singapore, just to mention three landlocked nations, that are perfectly happy if you'll just run some income through there -- they'll take a little share of it and they'll call it their income. That's well and good. So income flocks to low-taxed countries and deductions flock to high-taxed countries. So all the borrowing is occurring here against our 40 percent tax rate, and the income is showing up somewhere else.

I've got a 90-page article about to come out in the Columbia Law Review. I have to say as a footnote -- there are now 450 footnotes due to the Columbia Law Review editors. And I've come to think now of Law Review editors doing footnotes in Columbia Law School the way I think about midnight basketball in Harlem, which is it keeps people off the streets at night and it doesn't do any harm, but it's not doing anybody any good either. So I apologize for its length. I would've wished it to be shorter in all sorts of ways. But the taxation of international income, patent boxes, R&D incentives, manufacturing incentives, and the shifting of intangible income are brought in, so I'm happy to talk about those issues.

I think you have to have a low corporate tax rate. I've said 15 percent. I think that's about as low as you can go. And I think that would actually -- given our advantages, the size of our country, and our resources and so forth -- be competitive. It certainly would be a lot more competitive than anything anybody else is talking about.

And then there is the debit card -- again, I'll talk about this if people want to. I just want to mention it. There's a debit card and payroll tax offsets to keep middle- and low-income people free. And the work that the Center onr Budget and Policy Priorities did on the carbon tax offsets actually provides a lot of guidance as to how those debit cards would work. But the short answer is you go to a checkout counter and you're exempt from that because you've got a debit card that gets filled up the way we fill up debit cards for food stamps. So this is distributionally neutral and revenue neutral, but it creates a system that would allow you -- if you need to tax more than 53 percent of the people or whatever the income tax now gets -- it would allow you to do that. It can be transparent. And I want to mention something about transparency, and that is, I insist that the amount of value-added tax be shown on the receipt and not buried in prices the way it is in Europe.

And people talk about how transparent the income tax is, so when I was at the Yale Law School, I conducted a survey. I walked the hall. This was not a scientific polling survey. I walked the hall. I asked students, staff, secretaries, laborers, faculty of the Yale Law School, and a couple of economists how much income tax they paid last year. This was in late April. And the overwhelming answer I got was: "I got a refund of $1,000." And so nobody knows how much income tax they pay. And you think about it yourself. Do you know how much income tax you paid last year? And the answer I think is since we've gotten withholding, probably not so much.

The last thing I want to say -- and I think this is important -- is I want to say something nice about Google Maps, which Jared has really said something not nice about it.

MR. BERNSTEIN: I don't think they should be your tool for tax collection.

MR. GRAETZ: I understand. I own no Google stock, I should say, and no Google products except the one that I use all the time, as we all do searching.

I told my children, and my children were talking about politics. My children are in their 20s and 30s now. And they were talking about politics in the United States. And I said, here's an experiment I want you to conduct to show you how much politics matters. I want you to look at Google Maps and look at a map of Korea at night, and you'll see North Korea in darkness and you'll see South Korea blazing like the sun. And the reason for that is that South Korea has been well governed and South Korea made the transition from textiles to Samsung and Hyundai and sophisticated, highly technological products and the North Koreans are in darkness. And this is not -- and I don't mean to say that character and history and culture are not important. They're extremely important. But there you have a nation where the character and the history and the culture of the people are essentially the same and the big difference is in their politics. And we the people need to reassert ourselves in making our politics work because there are many risks for American prosperity and well-being in the global economy, and I think the one that is the biggest at the moment is our broken political system.

MR. BERGIN: See why I like having income tax conferences? Get your questions ready if you would, please. I wanted to address a couple of things. Michael's book is worth a whole lot more than one cent, so I would recommend that you get that as well. And if the income tax were in as good shape as Mortimer Caplin is, we'd be better off. Perhaps to put some air back in the balloon, although the income tax has taken quite a beating here, I wanted to add a question if I could of the panel members. Is there a chance for '86 tax reform anytime soon? I think I know Michael's answer. He gave it to us. Mine you can sort of tell from my remarks. I would say not in the next five years at least. But Joe, you're the historian on the panel.

MR. THORNDIKE: I'm not inclined to think that '86 reform is likely to happen or even really that it should happen because I think revenue neutrality is not the name of the game anymore. I think all the panelists have agreed. We're looking for more money going forward in any reasonable scenario, and '86 reform might be part of that, but it's not the whole story. I do want to say that I think Professor Graetz's idea of plausible reform, that is one of the most sensible paths to tax reform open to us at this point and historically plausible as well because it doesn't involve this ridiculous rip-it-out-by-the-roots-and-replace-it; it involves introducing something new which can solve some of the existing problems without tossing out the whole. I do think you've still got plenty of political challenges with it. It does harken back to the 1920s kind of income tax, but it sort of undoes everything of the postwar income tax, which is pretty deeply rooted, this mass income tax in which we all see it as like a shared responsibility. I think it would be hard to recharacterize the income tax now as something just for the rich. It did definitely start that way, but there's been a lot of water under that bridge since, so I'm not quite sure exactly how we get from one to the other.

I will finish up by saying that I think Jared makes an interesting point here. Part of whatever tax reform we might pursue in the future or tax replacement, or any kind of major tax change, is going to require a very strong affirmative case on behalf of taxation. That's something that's atrophied in the last 40 years. It's come back a little bit. I would say that Barack Obama has given us about 20 percent of an affirmative case for taxes, but it's not a persuasive case because if the answer is we need more money and we're not going to just get it from the rich, it's really got to be a package deal. I think you squander your opportunity when you spend a lot of time raising taxes a little bit on very rich people. That's best packaged with a more important tax reform that raises money from everybody. And I think it's not just a matter of atmospherics. I think if you're going to go to the country and say, we've got some challenges, we've got some opportunities, we want more money to accomplish these things, you've got to go with a comprehensive package that says there is plenty of room on the high end to raise taxes, let's do that. At the same time -- shared sacrifice, civic republicanism, whatever you want to call it, there are all sorts of little buzz words -- the rest of us are going to have to pay more too. You're never going to sell that by itself. You need to sell it with the progressive, style tax reform. I do think the Obama administration has wasted a great opportunity here also in the context of healthcare reform. I think this notion of earmarked taxes -- certainly Social Security or Medicare, Medicare is not as good an example, but if Social Security is our model, this kind of earmarking for taxes is very politically powerful. There was an opportunity for that in healthcare reform and I think again we kind of squandered that with a bunch of small-bore, shall change sorts of tax increases to try to pay for it. We would have been better off using that as an opportunity to say, "I'm going to give you something big and new and I'm going to need something reasonably big and new to pay for it."

MR. BERNSTEIN: I should have been more precise. I was not thinking in terms of '86 as a revenue-neutral reform where you buy off points with a broader base. I was thinking more of very partisan groups somehow coming together and implementing the kind of reform that Joe stressed and Michael has elaborated many times. What I would consider a very healthy tax policy and a very healthy tax debate is very different from what we have now. I don't have to say much here because I totally agree with everything Joe just said. I guess I would add only the following. First of all, we are very, very, very far away from that kind of consensus as I see it, answering the question that I posed. The title of my talk was something about what's right and wrong with the tax system and the tax debate. The debate is at least in Washington -- and maybe I'm very DC-centric because I'm here and maybe it's better outside, people should tell me, outside the bubble -- but here the notion that anybody -- and Democrats and Republicans contribute to this -- the notion that anybody other than the filthy rich shouldn't have to pay another cent in taxes for anything, and then there's a group who say even the rich shouldn't have to pay anymore, is deeply, deeply embedded in ways that I've never seen it in decades of following this. I do think that it is partly a function of the lack of tying the benefits of the tax system into the costs. The thing that bothered me about Bob's talk, which I thought was interesting and provocative, was it's all costs and no benefits. I don't think the evidence supports the kinds of costs to even the current system that Bob was elaborating, although the theory does. The tenor of the debate would have to really change very seriously until we could get to the kind of outcomes that Joe described. I frame them as "we're in this together" versus "you're on your own." And when "we're in this together" which is a phrase the president has used, the kind of reforms that Joe mentioned, the kind that Michael has elaborated, actually flow from the idea that we're in this together; we have to contribute to an economy and a polity that we share. If you're on your own, then anybody's taxes should be cut to the bone because the whole thing is broken and it doesn't work. Here's a voucher. Here's zero taxation on capital income. Good luck. Go out there and do your best in a free market. I don't think that's realistic.

MR. BERGIN: Anybody else on the panel? I'm going to have a little trouble seeing so try and help me out. I saw a first hand over here. The microphone is coming.

MR. HANKIN: My name is Steve Hankin and I'm a recovering tax attorney. I heard all of you mention the word "fairness" and not one of you make any attempt to define it. In my opinion, what's fair about somebody paying more for government services, which I assume is the purpose of any tax, to pay for the government services that you receive? And the fact is that people are paying far more than the government services they receive. My point is that fairness should be what is fair is paying your fair share for the services you receive and you guys are saying, "No, that's not fairness," apparently. I'd like your comment on what you think fairness is. That's my definition of fairness.

MR. THORNDIKE: I'm going to duck that question entirely, but I think convincingly. Here's the answer: You have a very plausible definition of fairness in mind. I'm sure if we polled the audience here we'd come up with about 30 or 40 other equally plausible definitions of fairness. The only way to answer those questions ultimately is a show of hands and when we do that show of hands in this country, we end up historically -- and I think even right now with a progressive tax system -- with the income tax system actually. It may be wrong but it's ours and we created it. So I'm not disputing whether your notion of what's fair is right or wrong. I just don't think that in many ways any individual's understanding of that is relevant. It's the collective vision of it as expressed through democratic politics that matters.

MR. GRAETZ: I would say two things in answer to your question. One is it's not fair to pay 25 cents for every 40 cents we're spending and borrow the rest in a circumstance where the borrowing is pledging assets of future generations, not to Americans but elsewhere, so that our debt after the Second World War was at a level which is now approached as a share of the economy but after the Second World War the debt was owed 95 percent to Americans. Today the debt is owed less than half to Americans. So we have basically said we're going to fund our consumption today -- including government, consumption that runs through the government -- through borrowing abroad, and so that is not fair. So the idea that you can sit here and say we're only going to have 20 percent of GDP in taxes and we can't have any more but we want a government that's going to provide 23 or 24 percent of GDP, is not fair. That's really not fair. We've got to pay for what we get. So even on your metric, I think we need to move forward. Then, the second thing that I really -- I want to underline a second point. That is that Jared makes the point of inequality in income, and here I think there are two pieces of the inequality that are very important. One is the tamping down of wages below the top 10 percent or 5 percent because of the unprecedented competition for labor wages in the world. That is, I can have Corning manufacture the glass and have it put on my iPhone in a very low-wage country. So there's a huge amount of pressure in the economy that's keeping wages from growing in the bottom 80 percent. And on the other hand, there are opportunities for wages and non-wage income that have benefited the top 1 or 2 or 3 percent or however you want to characterize it in a sort of unprecedented fashion. I thought that Jared's point was important which is, you can't have a tax system that makes that worse and you need to have a tax system that makes that a little better without hampering the ability of the economy to grow. Then I think the other point which is an important point is the FDR point that Joe just raised, which is that, think about FDR and think about John Kenneth Galbraith, who insisted that the problem of progressives in the U.S. is they're only looking to progressivity in the tax system and they're not looking to what it pays for. The genius of Franklin Roosevelt was that he created a system that was very progressive but he financed it with a tax that is not. He financed it with a tax that's actually regressive, but the system as a whole, if you look at Social Security, is actually a progressive system, and there is, I think, in the country a commitment to a progressive distribution of government's resources.

MR. HANKIN: Your first response, I thought, was you were really applying a collectivist view of fairness and my point is fairness has to be defined by the individual taxpayer, not some amorphous collectivist view; and that's the first opinion you gave.

MR. BERGIN: Let's move on to the next question.

MR. BARTLETT: I'm glad that Ayn Rand was represented here today. I have a question for the panel.

MR. BERGIN: Bruce, tell us who you are.

MR. BARTLETT: I'm Bruce Bartlett and I write for Tax Notes among other publications. I think the panel would probably agree with me that there's been a deterioration of quality of tax policy over the last 25 years, and I think one reason for that -- and this is my question -- is I think there's been a deterioration of quality of the economic analysis of taxation over that time period. There were many great studies of the Kennedy tax cut that I studied when I was drafting the Kemp-Roth bill in 1977. There were many great studies of the 1978 capital gains tax cut. There were many, many good studies of the Reagan 1981 tax cut. But a couple of years ago, when I was writing a piece for Tax Notes about the economic effects of the Tax Reform Act of '86, I was shocked at the paucity of analyses because everybody in 1986 thought this was going to have a huge, massive effect on the economy. Some thought it would be good, some thought it would be bad, but everybody thought it would be big. And the consensus view expressed in the one major article I know of which was [Alan J.] Auerbach and [Joel] Slemrod in 1994, said that it didn't have any effect at all, shuffled a lot of money around, changed the names of certain types of income, but it had no discernible macroeconomic effect one way or the other. It didn't affect jobs. It didn't affect growth. And there has been to my knowledge, Jared, correct me if I'm wrong, no really serious analysis of the 1993 tax increase, which every Republican on earth thought was going to crash the economy and create a massive recession. It obviously didn't. One could even reasonably argue that it raised growth, but you don't even have to make that argument. Clearly it didn't depress growth. This is unquestionable. Yet today there are many, many people who will assert it as if it's just obvious.

MR. BERGIN: Finish up.

MR. BARTLETT: It's obvious that any tax increase, no matter how tiny, would have a massively negative burden on the economy. Finally, we have the more recent experience with the Bush tax cuts, which were supposed to massively increase growth, and my friend Glenn Hubbard swore to me up and down that this was going to have a massively positive effect. It had no effect at all and arguably a negative effect. But there are no serious analyses. I read Tax Notes regularly. I read the National Tax Journal regularly. I'm looking for articles by economists better than me, which is all economists, explaining this stuff and I'm just wondering, "is this a source of our difficulties that the economists have kind of fallen down on their job of analyzing major changes to the tax system?"

MR. BERNSTEIN: First of all let me say that I don't want to speak to your quality as an economist. I think you're writing some of the most interesting stuff about everything we're talking about here today. So whatever you're doing, keep doing it, because you're making a great contribution. I completely share everything you just said and I am slightly befuddled by it. When the payroll tax break was about to be allowed to expire a few months ago, I was getting lots of inquiries as to what the economic impact of this tax was and what it would be if it went away. I could not find one study. This is $120 billion of a tax cut per year that had been in place for a couple of years. We have more and better data, more and better econometric methods, and I could not find one study. There is one now and it shows that the measure was helpful. But what you end up with, and if you look at today's front page of The Wall Street Journal, is journalists kind of making a lot of phone calls to people like you and me who say, "I think it's probably pretty helpful -- or not," and our perspective comes from our background or our ideology or for the most part from plugging numbers into macro models and saying, "According to my macro model if you add $120 billion to government spending at a time when the economy is at a zero, et cetera, you're going to get a half a percent of growth or in this case probably more than a percent of growth and it's going to be more than a million jobs." That's the state of the knowledge. And your complaint is also historically correct because there was a time when empirical economists actually used to get into the data and look at what it did and I don't really understand why there is so much less of that now. I recently read with great fascination this article by Peter Diamond and Emmanuel Saez about optimal taxation and it was excellent and interesting and all purely theoretical. The comments that were made on the panel today, I thought that some of the comments that were made on the panel today fell into what I would consider a trap that you very well articulated, which is this idea of large responders versus small responders. You can easily think that tweaking the tax code a tiny bit or for that matter tweaking the minimum wage a tiny bit has cataclysmic effects or wonderful effects, and the history of the empirical evidence is really much like Bruce summarized it. So I'm very much a small responder. I think we're way overdue on what we think these impacts will be, but I no longer have the data and empirical analysis I need to make that case. So all I can say is you're right and I would hope that economists would be listening to the critique you've just raised.

MR. BERGIN: We have several questions from Twitter, so why don't we take one now?

SPEAKER: This question is from @MaryAtsage. Is there a way to simplify the tax code and ensure it remains simple without changing the legislative process?

MR. GOULDER: Mary, the legislative process is probably the biggest problem there. If there's any way we could bypass it entirely like the Chinese do -- I'm not suggesting democracy is overrated -- but in the People's Republic of China they don't have debates or filibusters or things like that. If they want to raise taxes, they raise taxes.

MR. BERGIN: And following the Tax Reform Act of 1986, I think it was 1988, they came up with a law called the Technical and Miscellaneous Revenue Act. That is what it says. Just a whole bunch of junk they added back into the tax code.

MR. GRAETZ: I'm more optimistic than this. I have to say I think that the country responds when it is told what it needs to do and the legislative process will get together. The '86 act, all the smart money was it wasn't going to happen until it happened, and it happened because of the courage of a handful of legislators who were not obvious people for making the kinds of changes they did before they did it. Afterwards, it was easy to say that Bob Packwood and Dan Rostenkowski and so forth had gotten together and done this for the country and you just wouldn't necessarily have thought that they would have going into it. I think we have to remain optimistic. I think that politics can only stay broken so long. I will say, and this goes back to something Jared said about the Democrats, I lived through the '90 Budget Act when George Herbert Walker Bush knowingly put at risk his second term in order to solve the budget crisis and broke what was his most visible and most important political promise to the American people, and he did it for what he saw as the good of the country, and having been in the room, I can tell you he did it knowingly and willingly. It wasn't what he wanted to do, but it's what he did and he did it because he thought he had to do it, and he came together with George Mitchell and Tom Foley and a group of others to produce the '90 Budget Act, which actually led to the '93 rules, which led I think in important ways to the surpluses that we had in '93. So people will exercise political courage when they need to and when they see that they will. One of the things that I cringed, and I know George Stephanopoulos cringed at the same moment, was when I was watching the Philadelphia debate between Hillary Clinton and Barack Obama and they both promised not to raise taxes on anybody below $250,000. And George Stephanopoulos said, "Is that a read-my-lips" harkening back to George Herbert Walker Bush "is that a read-my-lips-pledge?" And they both basically said yes. And I think that to the cost of the country, Barack Obama has insisted on that pledge and continues to insist on it even today when he's on longer running for office. And it is true, it's like a Bill Clinton moment on Law and Order where you had an issue that was a Republican issue and Bill Clinton took it away in the '92 campaign by saying he's going to put 100,000 policemen on the street and so forth, and Barack Obama and Hillary Clinton decided that they couldn't leave the antitax issue to the Republicans. It had been the centerpiece of the Republicans' political platform, it had been the glue that held the Republican coalition together, and they were going to break through it, particularly in the middle class, by making this pledge. But it is a problem when the president of the United States limits himself or herself to taking something that's that important off the table for the future of the country. Joe talked about the healthcare thing. He couldn't say I'm going to put in a 5 percent value-added tax in order to fund universal health insurance because he had promised the country he wasn't going to do a tax that applied to middle-income people even if the spending was going to make them much better off in the aggregate. And so I think the legislative process will adjust and that we'll make some progress, but I'm worried about what's happening in the interim. I'm not pessimistic over the long term, but I'm very pessimistic over the middle term, and I have to say I'm very concerned about what we might do to ourselves in the interim.

MR. BERGIN: I think that's right. Mr. Caplin?

MR. CAPLIN: I'm Mortimer Caplin. I still practice tax law with the Caplin & Drysdale and I was in government during the Kennedy years, which is really my theme on reacting to this panel. Kennedy came out of World War II as I did, and there was a lot more patriotism in the air and questions of obligation to country and loyalty. Kennedy, in early March 1961, made a special speech to Congress, a tax speech. He called upon the country, he said a strong tax system is essential to a strong democracy. And that was kind of the theme, that this was sort of an obligation of everybody to support the tax system somehow. The Internal Revenue Service at that time had a different function. A lot of it was really selling to the American public the importance of compliance with our tax laws. And that's why Michael and I disagree so much. I think that everybody should file a tax return below $250,000. Part of the price of citizenship. I go along with the idea that while the federal income tax law -- how old is it? One hundred years?


The IRS had its hundredth birthday while I was there. It went back to Abraham Lincoln. He started the IRS and the Commission for Internal Revenue. But I do think we're going to have to have some additional tax -- some form of value-added tax in addition to the income tax. We'll have to face that. And I think President Obama may have to modify his pledge.

MR. BERGIN: Over here.

MS. LIM: Hi, I'm Diane Lim, formerly Diane Lim Rogers, formerly of the Concord Coalition, now at The Pew Charitable Trust. So I thought I'd take this opportunity so people can find me now. I wanted to speak as a tax economist who has modeled the effects of tax policies before. I think that Bruce described the Tax Reform Act of '86 and the tax increases in the Clinton era and I think of those two tax changes as very different. The big difference being Tax Reform of '86 was revenue neutral. And the Reagan tax increases were not the kind of tax reform that economists like, to study at the time. So when you think about the Tax Reform Act of '86, everyone had really high hopes for it in terms of -- the economists thought that it was changing all sorts of incentives; it was improving incentives to work and to save and reducing the distortions of the income tax system and economic behavior in general. And that was in the heyday of general equilibrium modeling where we could do anything as long as it fit in the revenue-neutral framework and we could measure substitution effects and how big these excess burdens of the tax system were.

Well, you know, after the Tax Reform Act of '86 people started looking at those margins and how big these effects were, most models had to assume elasticity, so you kind of made up how big of a story you had. But those who actually carefully tried to parameterize the models, like Auerbach and Slemrod came up with the conclusion that all those effects that economists get all excited about and put bells and whistles in their models about, they're really small. So people like me who -- I was building these gigantic models of bells and whistles -- I got a little discouraged.


And I realized I was intentionally shrinking all the elasticities in my model to reflect reality. In the end if you reduce elasticities to zero you don't need the model anymore.


And it becomes sort of a silly exercise. Instead, what we learned with the Clinton-era tax increases -- because I was working at the Council of Economic Advisers at the time at the end of the administration -- was that income effects seem to matter a lot more than substitution effects of tax policy. So whether you're raising revenue, not raising revenue, or even loosing revenue, seems to be much more important from a macro economic standpoint than whether you're reducing a marginal tax rate here and raising one there and creating some difference in the playing field but still raising the same amount of revenue.

So that's why I think we don't have really great models that capture both the substitution effects and the big macro effects and so that's why there hasn't been a lot of work that accounts for every possible economic affect of a tax policy change. But I think the good news is that you don't need fancy models to be able to figure out that a revenue increase, for example, may not actually hurt economic growth and in many cases can help because it raises national saving. It raises private saving more than it reduces -- it raises public saving more than it hurts private saving.

MR. BERNSTEIN: I want to make a comment about that. First of all, it is interesting, one of the things you said which I thought showed a lot of candor was the idea that a lot of economists in this research are looking for big elasticities because it makes you feel like you found something -- there's like a bias in the method. And in fact, if you look at the tenor of the debate today, it still is, as I said before, it still is revolving around huge behavioral responses. I think that's fundamentally wrong and dangerous.

Now, one of the most important, I think in the sense of actually moving debates in big ways and influencing the country politically, influencing the outcome of the last election one of the most important bits of research was the Tax Policy Center's analysis of Mitt Romney's plan that he could pay for his tax cuts by closing some loopholes or lowering deductions on a fairly restricted sliver of the income distribution. So that Tax Policy Center got together and crunched a few numbers and showed that in fact that was mathematically impossible to do; the tax code couldn't be paid for with that kind of a thing. That, to me, was actually an example of very solid simple research that had, as I understand it, probably zero behavioral responses built into it.

And I actually think that that is in part the way forward. We can't give up on the elasticities; they exist, they're real. Perhaps income elasticities are larger than substitution ones, and if that's true the literature certainly doesn't reflect that. Most economists who do even the theoretical research just ignore income effects.

So I think the recognition that the elasticities are small is not a bad thing; it's a really good thing because it gives us a lot more oxygen in terms of the policies that we can think about implementing without unnecessarily freaking out about behavioral effects.

MR. BERGIN: I'll take one from Twitter.

SPEAKER: This is from @brashTax. Is tax reform possible without a detailed White House proposal, i.e., Treasury I and II?

MR. GRAETZ: I guess I'm the one to answer that. I think that what Chairman Dave Camp is now doing, which is putting out important ideas which he has done himself in international taxes and in taxing financial instruments and creating a set of working groups across the aisle to study other issues, is an important step. And the reason I think that Chairman Camp has moved in that direction -- and I wouldn't be surprised if the Senate Finance Committee decides that it needs to do some similar kinds of work -- is that the Treasury has not put forward the kind of analyses that it did.

Going back to 1968, 1977 I guess is when David Bradford's blueprints for tax reform came out, 1984, 1986, I would say 1992 when the Treasury put out a very important report on corporate tax integration which still, I think, is important when one thinks about the taxation of passthrough entities, large passthrough entities and corporations and so forth. The Treasury just has not been doing a lot of that lately, and so it has to come from somewhere else.

I do want to applaud the work -- I don't like to enter into economists' debates especially when they are berating themselves as well as they have -- (laughter) -- but I do want to underline the importance of the creation of the Tax Policy Center, the funding of the Tax Policy Center, and the ability of the Tax Policy Center to tell us something quickly about a whole series of ideas. I think a lot of good economists that were at the Treasury for a number of years are at the Tax Policy Center. And it is a very interesting joint venture which has produced some very important work. As I say, I'm particularly grateful for them and The Pew Charitable Trust that they took a plan by a private person not running for president and analyzed it. I do think it is an important gap-filler in the way that I think what Camp is doing is something of a gap-filler and that you'll see more work filling gaps.

Part of the problem, I think, with this administration and to some extent the previous administration is that tax policy has become such a highly charged political issue that the tax policy decisions are being made out of the White House. And so for the first time in history we had a full presidential term without a Senate confirmed assistant secretary for tax policy who is described in the Treasury delegation orders as the administration's key spokesman on tax policy. So that tells you what's happened to the Treasury department as an institution in this and I think that's a big problem. I think it's an important question.

MR. BERGIN: David?

MR. BRUNORI: My name is David Brunori, I'm with Tax Analysts. We have some students in the room and I want to encourage you to read Professor Graetz's book, 100 Million Unnecessary Returns. It is bold thinking and it's eye-opening, so I would encourage you to do that.

I have one comment and question for Jared. My comment is, and it's something in response to the first questioner: the issue of fairness in the income tax, I think, is a legitimate question because the president during the campaign must have said a million times, we want to get people to pay their fair share; people like me to pay their fair share or people like Mitt to pay their fair share. We do not have a definition of what that means, in all honesty. And I think that is a legitimate question about what we're talking about because Joe more than implied that this is a collective decision about what is fair, which means it's a political decision. And that's fine, but we should recognize that there is no principle involved; it's what we decide is fair is going to be fair, and that's fine. But I think it's a legitimate question to be asked.

My question for Jared is this: I think you said that you would be in favor of -- I don't know if you used the term earmarking, but dedicating tax revenue to specific government services. I believe, and it's not really news to anyone, Americans want a lot more government than they're willing to pay for, as we've experienced over the years, and we all know that. My question is, is it possible that if you actually ask people to pay for those services they were getting, they would want less?

MR. BERNSTEIN: Great questions. First of all, on the fair share thing, I think all the president was saying -- by the way because at the level of campaigns I don't think you can get too complicated -- I think what he was saying is it's not fair for very rich people to have a lower effective tax rate than far less rich people. That's all he was saying. And I think that at a first-order blush we would probably all agree that that would fit into most people's definition of what's fair and not fair.

I hope my comments, at the core of Michael's comments, and really all of ours, Bob and Joe's as well and Chris mentioned this, so all of us, I think is this point that you were getting to and that we've all stressed and that this $250,000 thresholds vitiates, and that these huge response fantasies vitiate, is that if people are disconnected between what they're willing to pay for and what they get, our tax system can't survive in terms of legitimacy, fairness, providing the kinds of revenues and services and protections that an advanced economy needs in this century. So I think that it is critical to reconnect. And Mort said the same thing; he put it in terms of patriotism. I think it's critical to reconnect paying for what you want with a tax system that collects that revenue. If that leads to people saying they want less -- my gut instinct, to answer your question -- is it probably would to some extent, if that goes there then so be it. I'm ok with that. I think that the ultimate conclusion is going to be much like Joe's description of the fairness, some aggregation of what you want and what I want and what everyone wants. But what you can't have is a majority wanting a bunch of stuff that they want a minority to pay for.

MR. BERGIN: I hear the cake has arrived.


I've got a secret. The idea for the cake was Bob's. So knowing Bob to be a generous person, I know he would prefer to celebrate the 100th birthday of the income tax before we bury it.


We're running out of time, so I want to give each of the panel members just a couple of minutes if they want to sum up anything. Michael?

MR. GRAETZ: I want to say one more thing about the international conversation that Bob raised because I don't think we've said enough about it in the following sense. And I'll just make the point briefly, and that is that the U.S. has a very large market. We have a lot of consumption that is occurring here. And what we're taxing when we tax income is we're taxing production, which occurs here, and we're not taxing production that occurs abroad because we're not taxing imports that are consumed here; somebody else is taxing imports that are consumed here. The economists tell you, well, this border adjustment doesn't matter economically because currencies will adjust. Well, I'm not so confident, for example, that the Chinese currency is going to adjust with market forces, but that's neither here nor there. And now that the Europe economy is as linked on currencies as it is, you've got great distortions because the Deutschemark got to be a lot more expensive than the Italian lira but they're both the same price.

So currency markets have become complicated. But the point that I want to make is that I think in terms of taxing the business results, we need to think about taxing on a basis that takes advantage of our market and our market power and our consumption ability. And if we can't do that politically directly, we're going to have to start thinking about ways to do it indirectly. For example, if you look at the problems of international income shifting, which Bob is so concerned about, what you find is that those U.S. multinationals that have been in the press are paying a much smaller share of their worldwide income taxes -- they're paying less income compared to the worldwide income than there are sales. That is, if you just aligned their income with their sales, you'd get a lot more tax.

Now, there are problems with that under both the WTO and under our income tax treaties, and there are a whole series of issues that have to be unpacked. But if we're thinking incrementally -- I mean, I'm a person who believes that we really need to make a big shift -- but if we're only thinking incrementally, I do think we have to start thinking more about things that don't move. And we talked about workers and we talked about capital but we didn't talk about consumption. And I think if you're going to think about that, this is an important issue that didn't get raised to the level that I think Bob's earlier comments required us to talk about a bit more, so that's a different point but I think it needed to be made.

MR. GOULDER: Certain things are inevitable. We need an alternate revenue source. It can be a VAT, it can be a carbon tax; pick your poison. Read Joe's book, read the professor's book, and read WorldWide Tax Daily so you're well informed.

MR. GRAETZ: Can I just say one thing about a carbon tax? I did a book on energy policy in which I said you need a carbon tax instead of cap and trade. I think there are great advantages of a carbon tax instead of cap and trade. But I think because of the regressivity of the consumption of energy that you're not going to get a lot of revenue out of a carbon tax. You ought to think about a carbon tax as energy policy and not as tax policy. Sen. Maria Cantwell's (D-Wash.) proposal for a carbon tax and then giving it back on a per capita basis may make some sense, or giving it back in the way that the Center on Budget and Policy Priorities wanted to give it back. I think there is much less revenue for general purposes or for earmarking or whatever you want to do in a carbon tax than there is in a much broader based consumption tax.

MR. GOULDER: Yeah, carbon tax shouldn't even be about the revenue; it should be about capturing the externality.

MR. GRAETZ: Exactly; it should be about energy policy and not tax policy.

MR. BERGIN: Jared?

MR. BERNSTEIN: I kind of gave my summary, thematical comments, a second ago about the importance of tying the tax -- reconnecting the tax system back to what it pays for and what that means to people -- so let me just take a minute to talk about very briefly two current events that I think have bearing on where the debate is headed. Actually, if I were talking about really current events we'd talked about this sequestration silliness which amazingly hasn't come up, which is a good thing, so we've had a little bit of a respite from that. I just want to say that in any tax reform measures, whether they're big or large, that come up, there should be virtually no distinguishing between spending through the revenue we collect or the deficits we borrow and tax expenditures. Tax expenditures are nothing more than spending through the tax code. And if Republicans truly believe we have a spending problem, as they like to say all the time, then they also believe we have a tax expenditure problem. I think that logic is important and correct.

Given some of the discussions around the panel today and all the lobbying that goes on in this town, it's probably a lot harder to close loopholes than we may have made it sound. That's why I think the president's idea of a cap on deductions -- there is a 28 percent cap on deductions of course just for $250,000 and above and we've already talked about that -- but the idea of capping on deductions does seem like to me a more streamline -- way to get at this issue of claiming you're not a big spender by just passing tax expenditure after tax expenditure.


MR. THORNDIKE: I'm really just going to repeat what has already been said, particularly by Jared, but I think that the theme here that has emerged for me and which I think we all share, and Mort Caplin shares as well, is this notion that what we really have here is a crisis of government and governance, not really a crisis of the tax system. And that if there's a rule that comes through -- there are many rules that come through from tax history, but one of them is you have to sell the government before you can sell the taxes that pay for it. And what we've had over the last 40 years is a crisis in the faith in government. So that's really the first order of business. We're never going to get real tax reform, the kind of tax reform that solves big problems rather than little small problems -- we're never going to get that until we restore this faith in government, whatever that takes. Changing government, downsizing it, upsizing it, whatever it is -- we have to restore the faith in it.

I think the Obama administration -- President Obama in particular as a person -- has gone some distance in that direction, but there is plenty of work left to be done. And that's the foundation that all tax reform ultimately is going to be built on.

MR. BERGIN: Ok. On that note, thank you all for coming.


And thanks to this magnificent panel. My job is very easy; I get to sit here and listen to them. And have a piece of cake on Tax Analysts.

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

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