Penny a point, ain’t no one keeping score………..

With fascination I anticipated this meeting of great minds, putting forward great ideas for a new dynamic to redo our Federal Debt….

Here is the C-Span version but it pales when compared to the live performance.

The over all take was that these were all old men, prominent during the Reagan era of the 80’s… and that everything that has happened since, was being ignored as we attempted to roll together a new policy to guide us through the next century.

In fact, one of these men was the author of the tax laws that went into effect in 86…

No one mentioned these same tax breaks were responsible for the crash of 90, and that it was only after taxes were raised in 92, that we began our climb out of the recession with unemployment levels equal the one today.

No one mentioned that the Clinton years, gave us great prosperity, that his higher taxes had economic stimulus potential, and were partly responsible for the dissolution of the budget deficit.

No one mentioned that the Bush Tax cuts, and the abandonment of the Democrat’s pay as you go policy, as caused our national debt to soar.

These old men were stuck in their time warp of the 80’s.

That is to be expected. We all tend to relive our high points.

But what was scary was those members on the Super Committee, many of them democrats, who were advocating extending the Bush Tax Cuts to stimulate the economy.

The problem is,… that doesn’t work. Proof?… The Bush Tax Cuts resulted in a net lost of jobs over the 8 years of the Bush administration. These same Bush Tax Cuts are in effect now! And how is our economy?

When Clinton announced his policy pursuit in the raising of the marginal tax rate from 25% back up to 39%, the markets took off, the economy took off, and every income level was making more money at the end of the year then they did the previous one.

And amazingly none of these old men, even brought that up!

“The whole nation is getting older, you have to look no further than this panel for verification.” Edward Kleinbard- Former chief of staff of Congressional Joint Committee on Taxation

“Any disagreement, that on the corporate side, the reforms should be revenue neutral?”
Senator Mark Crappo (R Id)

To reduce the debt we have to run a surplus… first thing is to get the deficit down, then approach the issue to cut spending, then once cutting spending, cut taxes. it doesn’t pay to cut taxes funded by borrowed money.–

The Panel:

Alan Greenspan.

Edward Kleinberg: Committee on Tax Law; Southern California University professor of law.

John Taylor:
Economic Advisor in two Bush administrations and currently a Stanford professor

Martin Feldstein: economic advisor in Reagan administration now at Harvard.

John Engler: 3 term governor of Michigan.

Chairman Bill Nelson
D-FL star spangled panel…on this week three years ago, occurred the collapse of Lehmann Bros. We have yet to recover…

Our purpose is to overhaul of Federal Income Tax Code. There are over 250 entitlements “cooked into” the tax code…It’s as if you’re eligible, you can claim that benefit, with no application process, no annual review. Tax expenditures (credits, deductions, exclusions) are “entitlement spending without accountability”. Oil and Gas credits which relate back to early 1900’s… have outlived their justification.. The ‘Tax Act of 1986’ took a hatchet to special interests, then lowered rates to 28% from 50%… Since 1986, Congress has enacted 158 new tax expenditures creating as of 2008, over $1.2 trillion dollars in lost revenue.. greater than amount raised by individual income taxes in one income tax-year… greater than all of federal discretionary spending… twice as much as non defense discretionary spending. Simply returning to 1974 level of tax expenditures would net $400 billion per year towards our deficit.

Senator Crappo: R-ID : Over history, America has averaged 18.2% revenue per GDP, despite its top marginal rates being an assortment of 70%, 28%, 35 % ; over time the historic average holds steady, irregardless of what Congress did… Only three times did annual revenue cross over 20@…Twice after WII, and once in 2000, when revenues peaked at 20.6% of GDP at height of stock market bubble. (no at height of growth in the economy).. Even if we cut trillions in spending, for as long as economy is bust, we will continue to have problems with revenue coming into the Treasury.

Greenspan: The Fiscal success we achieved in the early 1990’s was essential, to contain budgets that seemed inherently prone to excess. That surplus however, undermined the fiscal prudence of the Republicans 2001, who opted for tax breaks instead of getting their financial house in order. The economy is bound to slow. Professor Gorden Northwestern University concluded this most recent 20 year forecast of per capita GDP will be the slowest growth of American measured standard of living in history. My preference is to Paul Ryan budget. European current experience underscores that delays to reform can be destabilizing. Of the proposals on table, that proffered by Boyle Simpson cuts subsidies. cuts in outlays, rather than reduction in revenues. If we presume we have time, and we are wrong, the impact will be devastating. If we are overly cautious, we can solve it readily.

DR. Taylor. Higher growth and lower unemployment is our most immediate focus. Budget strategy versus tax reform strategy. Recommends rolling spending levels back to 2007.. Allows tax increases to be taken off the table.. lower marginal rates and broadening the base. essential to raising economic growth. Drops spending levels from 24.2% (today) down to 22% by 2021. From 2000 to 2021 we’ve seen a gigantic increase from 18.2 to 24% estimated in 2021. We were at 19.5% in 2007.

Dr Taylor: If you want a change without tax increasesm you’ve got a little ways to go.

Dr. Feldman: Does not favor the elimination of tax expenditures proposed by the President. His plan uses revenue to cover new programs instead of putting it towards deficit and achieving lower tax rates. Combination of taxes, yields a 50% tax rate on middle income families. income taxes, payroll taxes, state and county taxes, school taxes, gasoline taxes, sewer and utility taxes. Keep, do not eliminate tax expenditures but limit loss in the form of a percent of that individual’s deduction… limit medical to 2% as opposed to 7% would raise $275 billion a year at current income levels or $3 trillion over next decade. The cap could be started at a higher rate and gradually reduced to a 2% cap. Even 5% cap would generate $100 billion a year. The 2% cap is applied to tax expenditure benefit, and not to the total amount deducted or excluded . Someone with a 30% marginal tax rate who pays $5000 in annual mortgage interest currently deducts $1500 and 2%/5% cap would apply to that… (Applying the 2%/5% cap on $30,000 would limit the deduction to $600/$1500..) This should cause 75% of individuals who currently itemize, to shift over to standard deduction, which would result in a massive wave of tax simplification. Corporate taxes reform basically lowering tax rates and shifting to territorial system used by every other industrial country.

Gov. Engler: I got Michigan back to triple A rated state. Corporate business tax reform should be designed to maximize economic growth over time and while creating permanent jobs with good wages. If sound corporate tax reforms improves economic growth by half a point it generates millions of new jobs for Americans… Our country is disabled by our current tax laws at a time when capital is more mobile and the world’s economies are more interconnected than anytime in our history. Current laws discourage investment in the United States. IT is quite possibly the least competitive tax system among in the OECD nations. Today we need a simpler, flatter, lower rate system. First, changes need to be made in achieving a territorial system where foreign earnings are exempt from domestic tax; these are the predominate practices within the OECD. Territorial systems allow domestically headquartered businesses to compete on a level playing field in foreign markets where they do business. Currently the corporations are taxed in the nation they do business and again when they bring those profits back home. Overall, US taxes are 50% greater than those of competing countries.

Tax changes should be used to lower one of the highest corporate tax rates in the world, which are needed to provide sustained economic growth and sustained job creation.

Edward Kleinbard: The US today is a low tax country by world standards, the fourth lowest in OCED. Even by our own standards we are collecting historical levels of low tax, under 15 percent of GDP for the last three years, while spending more than we collect. Spending,… determines the level of revenues we require. We spend more on health-care than any nation. If the US spent per capita on health care what Norway spends, our aggregate health-care spending would decline $800 billion dollars a year. The US spends as much on its military as do the next 14 countries combined; we spend 42% of the entire world’s military expenditures. We simply can’t spend this much. The US can afford to increase taxes. Just the last decade, we ran surpluses and had a robust economy and job growth, while tax revenues exceeded 20% of GDP. Extend the Bush Tax Credits, and we would add $4.6 trillion to the cumulative deficit. We have no practical choice but treat Congressional Budget Office baseline, which assumes the elimination of the Bush Tax Cuts, as our minimal tax rate. We have to abandon our nostalgia for tax cuts. The Tax Cut Act of ’86 could afford to be revenue neutral But it was preceded by tax hikes and followed by tax hikes, both undermining the credibility of such a tax cutting policy.

Itemized home deduction is a loss of $220 billion a year in forgone tax revenues. Corporate tax at 35% is too high, but most corporations know how to game the tax system and create what is known as “state-less” income. Income that is taxed ‘no where’. Using the Territorial system as recommended by the Business Round Table, would make and exacerbate the problem worse. Instead, eliminate business tax expenditures, drop tax rate to 25%, and tax multinationals on their overall world wide income.

Alan Greenspan: What we are dealing with, what we have promised, is in physical volume terms more than the American economy can produce. Our spending is already committed to more than we have the capacity of achieving. Unless we understand our problem is spending, and not taxes, we will be led astray. Taxes are a major factor of economic stimulation. The revenues engendered are going to be less than projected by CBO. We need to recognize we have a major spending problem in entitlements. It is politically very difficult to cut entitlement spending, and we need to determine first what we are willing to spend. Taxes are there to fund spending. The lower the spending, the easier to meet that budget.

Over 14 Trillion in Tax expenditures over 10 years… What is realistic to bleed out? Actually, tax expenditures should not exist. Boyles-Simpson would start with the premise that expenditures should start at 0 and work backwards from there. All expenditures should then, go through budget negotiation (appropriation) process instead of often being created to get around the legitimate budget negotiation process. Tax expenditures are illegitimate means to get around the budget system.

John Taylor:
Must change marginal rates. If you have strong growing economy, like after the tax act of 1986, a 6.5 percent, you get a lot more revenue and you can get a lot more done. Its the growth that’s most important. So just concentrating on removing the tax expenditures, and not consider dropping the marginal rate simultaneously, will not grow the economy and disappoint in the amount of revenues raised.

Martin Feldstein: 2% cap on individual and corporate expenditures would save $3 trillion over 10 years, meaning you don’t have to pick and choose which ones you want and don’t want. Incentives for saving and investment, contributions to IRA or interest free pro saving features like IRA deductions would continue to be allowed. The $3 trillion is from just personal deductions and employer medical deductions.

John Engler: Remind the committee back in 95 and 96 when doing welfare reform, we saw that when incentives got changed we had people going back to work that people said would never work. We had entire counties empty their welfare roles and all its recipients going off to work. simple as changing how we handled income. Get incentives lined up, getting additional revenue lined up, using the dynamism of this tax code… Lack of economic growth. We need to be a jobs engine again.

Edward Kleinbard: $4.5 trillion over 10 years… personal itemized deduction $2.5 trillion/10, employer sponsored national health insurance, one tax expenditure that has affect on social security payments $1 trillion/10, then another trillion dollars in removal of business tax expenditures. Every other country that has lowered its rate has gotten rid of the expenditures such as accelerated depreciation previously written in their tax code. That trillion dollars should be used to reduce corporate tax rate.

Senator Crapo: That leaves $9 trillion of expenditures still contained in the tax code. Most of which would be on the capital investment side. On the corporate side, should the reforms be revenue neutral?

On the debate on revenue savings. As I see it we have three options: Reduce rates, justify more spending, or reduce deficit. Reducing rates would be the most effective way of savings.

Alan Greenspan. Ordinarily I’d agree with you, but we are in such a precarious stage, that our first step is to get a hold of the deficit. Every day that trillion-plus annual rate sits there, it generates a new expense (interest) that must be paid for. That to reduce the debt quickly, we have to run a surplus… The first thing is to get that deficit down, then approach the issue of cutting spending, then once we’ve cut spending, cut taxes. It doesn’t pay to cut taxes funded by borrowed money.

Leaving aside the issue of stabilizing the fiscal system by having the debt a certain percentage of GDP is economist’s fiction.

What can happen is that interest rates go up and that whole concept breaks apart. A combination of slow growth coupled with issue of difficulty of cutting spending, the first thing is to get the deficit down, and once down, cut spending and than cut taxes. I don’t think it makes since to cut taxes by borrowed money. We underestimate how serious this problem is OMB and CBO seem to come out the same making the same assumption. Lets get our house in order. Taxes are here to fund spending and decide what level this country can afford. not what it would like, but what it can afford.

John Taylor: Use savings to reduce the rates. That should be first priority. Extend the base by lowering the rates in a revenue neutral way.

Martin Feldstein: I think the Simpson-Boyles focuses too much on rate reduction and not enough on deficit reduction. I think we do have to get back to annually balanced budgets. Here’s the good news After WWII, we had a 110% of GDP ratio and in fifteen years we had it down to 50%.. That happened because over those fifteen years on average there was no deficit. Some years plus, some years minus, overall the economy grew 2-3% and inflation grew 2-3% meant that nominal GDP kept growing while debt remained unchanged and we got back from this very high ratio to something we could live with for 50 years… until recently.

John Engler: Simpson-Boyles from the business side, would be the right baseline. On the business side, rate reduction has a positive effect towards economic growth and deficit reduction. Definitely no additional spending. that goes in the opposite direction.

Kleinbard: “To spend is to tax”,, Milton Friedman. The country is getting older just look at this panel as proof. Our health care expenditures are growing at a rate that exceeds our GDP.. We need to rethink our spending our long term entitlement, to more sustainable, and whatever is left, we have to finance. that that is taxes. I do not see any alternative to higher taxes being used to reduce the deficit or at the worst, not increase it, as we make the transition towards this other path.

Senator Jeff Bingaman (D NM): Do we need additional revenue? Kleinbard says we do, Greenspan says we do, the rest say we do not, or maybe we do, Feldstein could clarify his view. If we cap expenditures we should use some to reduce marginal rates and reduce deficit. We should give some back in lower rates but no all of it. Taylor, your view is to cut rates, what we did in the 80, 86 reform, Growth is so important, classic tax reform is what you’d suggest. Greenspan, you said we’d first need to bring down deficits, which means we are going to have to raise revenue to get back to a balance budget.

Greenspan: It is senator. Recommend we realize that the tax cuts of 2001 and again in 2003 rested on looking at surpluses. and an unbelievable amount of surpluses “as far as the eye can see”. The tax cuts were one means to take advantage of that, meaning, get the tax cuts and reduce the surplus. I think at this particular stage we go back to the tax structure that existed before 2001 and start again. meaning that we want to get the level of taxes down, which you can only do if you bring expenditures down. Get ourselves first to a stable position, get all of the Bush tax cuts rescinded, and we then can start to get to a point of balance within the system. This is not like WWII with 110% debt to GDP ration. That was very easy to cure. You stop WWII and the spending goes down. It is also easy if it all deficit spending is discretionary. You stop spending. But we are locked into entitlements and everyone who receives the money listens to the government when it says, “this is your right”. We have promised to 55 year old today, a level of Medicare benefits, that is more than our economy can deliver. Not delivering what a government promises, is the worst thing a government can do. That person aged 55 who retired on the assumption that these benefits are real, could have worked two more years if he’d known the truth..

Senator Wyden (D OR): I want to zero in on jobs issue. Mr. Feldstein, I’m sympathetic to the ideas you are advancing. Looking at Bureau of Labor statistics on the ’86 tax cuts the nation created 6.3 million new jobs. 6.3 million new jobs. The study you did on that bill has affected my thinking, looks to lower marginal rates, while keeping progressivisity you are on a path to stimulating the economy and creating family wage jobs.

How do we make sure in corporate tax reform we get as many jobs as possible in the United States. A lot of companies would like to put their focus here, a lot of companies would like to get that done. If you cut corporate rates to mid twenties, your theory is that it could create jobs here in the United States for companies already here, companies that are looking around the world to invest her, and fir multinationals. It would allow us to run the table and do everything to have pro growth tax policy.

Kleinbard: Pleas of a territorial system would work to erode the domestic base even further. Domestic firms are left out of this discussion.. Correct approach is to lower rates only on domestic firms, in order to attract capital and jobs, and then offer multinational firms a relative fair system of taxation. . OCED country rates are in high twenties, so if we offered US firms a world wide rate in mid 20 we would be smack dab in the middle. Last footnote, when we throw in state and local taxes. Multinational firms don’t pay state and local on their foreign income. We are not talking about 39%. We starting with 35% need to get it down to 25%… Win, win domestically, and fair environment internationally.

Senator Wyden: Where is that sweet spot? Territorial issue, you thoughts? Do competitive rates solve a lot of problems?

Feldstein: I served on Obama’s tax study. I was impressed by the fact that the US is the only OECD country that does not have a territorials system… When it is easy for French or German to do cross border investing, they do it they find it favorable, the create manufacturing jobs in their own economy. I can see the pros and cons and complexity yet I am struck that all these other countries have chosen to go the territorial route.

John Engler: Let’s, whatever we do, make it permanent. The complexities of scoring things , of guessing how long this will last, creates uncertainty. If I know where we are going and it’s permanent, even though we are going there, the path still has some options. German headquartered company and a US headquartered one …This makes no sense. German company pays China and brings the money home. American company pays China and leaves it over there because if they bring it back, they will they have to pay tax again on it over here… Why would we not want to bring the money home? Just on the off chance we might spend it here once it is here? The Germain economy says come buy something here. The American company must take tax hit out first before making purchases. That’s why the Clydesdales get bought by InBev, and not InBev get bought out by Clydesdales.

Kleinbard: Difficult issue. We want money to come home. $1.4 trillion trapped overseas is silly. Two solutions. Territorial is one. Worldwide tax consolidation is a second. If we reduce rates to 24 percent, China has 25 percent of a tax rate, so no burden would occur to a company doing business in China. Trouble is not in the theory but the practice if territorial systems. Territorial companies like those in Germany have imposed restrictions for example on the deductibility of interests all over the world, including the parent company in Germany, that the business round table would find restrictive and troublesome. A well designed territorial system would raise revenue but would do so in ways that would be troublesome to an international firm.

Senator Wyden: Singapore has 10% tax rate.. Can we have a competitive rate, coupled with certainty and predictability so businesses can plan. Get away from this one year thing, Colleagues, If we don’t fix this we will have the same discussion in the lame duck session of 2012 as we did with the lame duck session of 2010.

Senator Crapo: We have to get deficit under control We have committee to get 1.4 trillion. That is not enough. The Boyle Simpson would reduce deficit by 4.7 trillion, which barely keeps head above water. National debt still 12 trillion or more. Our nation needs 4 5 trillion in deficit reduction.
What should be our target?

Greenspan: $4 trillion is minimum. History shows us: budget creators tend to overestimate, to be optimistic. Reality doesn’t work that way. Non financial corporations in the USA will usually spend approximately what their cash flow is, Today they are in lowest level to long term ill-liquid investment relative to cash flow since 1940. Uncertainty is reflected in equity prices. Equity premium is the measure of the extent that those issuing stock require in order to sell an issue, is the highest level in 50 years according to JP Morgan. Uncertainty is deep. It is partly related to tax issue and especially the impermanence which makes 20 year investments very difficult to do. The degree of stability of long term tax expectations plays an very important role not in the average expected rate of return of an investment, but in its variance. Once you start putting variance on investments, risk premium becomes prohibitive. Let us get a non changing structure of investment. Focus has got to be on a structure of taxation not subject to change and especially resorting to tax expenditures being used to fund everything you can think of, because it is too hard to get passage through a committee…

John Taylor: 6.2 trillion.. but if the joint select committee gets its 1.2, then 3 trillion is left. Take it to 90% GDP. These trillions are hare for many to fathom. But holding spending to 2007 level is what most people can understand. Over two years ago, when case was made for temporary targeted tax cuts, the word permanent came out for tax cuts.

Feldstein: CBO number takes us to 90% debt to of GDP. 60% is reasonable goal. To hit that requires taking out 30% GDP over this period of time meaning $6 trillion less debt than currently is predicted. Budget deficit would need to get down to annual growth of 3% ….

Engler: Employers are ready to their part to get growth rate up. It will take a growing economy. It can’t be met with just tax cuts.

Kleinbard: 1:39:27 CBO estimates deficits run would run in 2021 at 1 1/2 percent of GDP and that is the ball park of where we need to be. The CBO is assuming the expiration of all tax cuts and all expenditures. It is assuming continuous growth. Since these will probably not all happen, if building in a rainy day fund, we are then looking at a 6 Trillion deficit that needs to be made up.

Nelson.. What do we do with the Bush Tax Cuts?

Feinstein. Tell me what the economy will do. I’m afraid the economy is going to be very weak. We have to do the timing so we don’t take a weak economy and push it down even more. There’s a 50 percent chance we go into a new recession. Business is not inclined to spend. If that is were we are It would be a mistake to let the tax cuts pass.

Do you have any expenditures you would like to get rid of?

Greenspan: List one, the obvious one is ethanol. Makes good deal of sense. We have an impossible problem of sluggish economy and need to get more revenues. Both IMF and academics have concluded that increase in taxes causes a drag to the economy and so do cuts of spending , but not as much. Raising taxes is a problem but if someone says we will cut spending by the amount of the Bush tax cuts and that would be great. Remember, if we went beck to where they were before they were enacted, before the surpluses stopped in 2001, dealing with that sort of thing, you realize you have a tough decision.. If we could cut spending to prevent tax cuts from going up, that is best solution. As bad as economy is, it would be worse if we end up with a debt at 110% to GDP. Letting all the tax cuts expire overnight, is more than I think the economy could stand. But at least put in place, a phased-in program. As I said before, taxes are to cover spending. Until we get spending down, all the discussion of finding the appropriate level of taxation, is irrelevant.

Feldstein: I follow what Alan says. Cutting spending is less contractionary than raising marginal tax rates and business taxes. both of which are very different from reducing tax expenditures. Raising the question, does cutting tax expenditures fall on the macroeconomic side of cutting a deficits expense, or on the macroeconomic side of raising taxes… When pressed the authors say we really do not have enough information to know at this point. I would say that cutting expenditures has less effect than changing the top marginal rate because it doesn’t hurt incentives… (A family will not change their behavior if they lose the personal deduction, as much as they would change it, their tax rate were to climb. I would say treat it as a cost. Cutting an expenditure is the same as cutting a program. )

Engler: People are mobile. Taxes on certain income levels cause those people to move to another state. Their fleeing, causes total incoming revenue, to decrease. Put all on the table. If you start poaching on these expenditures, you’ve got to protect them to drive the rates low. We are counting on this committee to cut expenditures thereby allowing the rates to go down. None of these expenditures got here by themselves: they were voted on. Put them all on the table to see if we can get a lower corporate rate.

John Taylor.. Reducing spending growth .. Even at my suggestion to take to 19.5% GDP, spending keeps growing. The Federal budget keeps growing. Fixing that is not draconian, it is not austerity. Just something the American people would like to happen. Cut spending first, then worry about extra revenues to meet the gap. The 1986 tax reform is where we need to go, revenue neutral, lowering rates, stimulating growth.

Senator Nelson: At the same time you got to have a tax code that the people consider FAIR.

Feldstein: I would not eliminate the standard household deduction for savings and investment, and I wouldn’t eliminate it for giving to charitable contributions President’s proposal to limit the deduction at the 28% marginal tax rate level, would be a bad idea. Studies show that although the government gets addition revenue, it all gets paid by the charities. The change would not cut consumption by the taxpayer at all. The tax payers would cut back their charitable contribution by an equal amount to make up the difference. That strikes me as a bad change.

Kleinberg: Not all tax increases are the same. Some, like tax expenditures, are spending cuts. That’s the whole point of this tax expenditure hearing. We need to cut spending, but the way to do that is to cut expenditures It is just accounting that we call that a tax increase. Eliminating will not change behavior the way raising rates will, why coming back to idea for better or worse, they need to be eliminated as a way to do the least amount of damage in and economic sense to raise the revenues we need, to embark on to meet the spending we already have.

Greenspan: Following the 1986 tax legislation, I recall elaborate discussions to expand the base, and bring the rates down. Almost immediately we began to erode that process. We need to get rid of expenditure, then find a legislative vehicle to prevent their erosion. We may solve the big problem now then find in 10 15 years we are back again resolving this problem. It didn’t take very many days for them to come back. They were small and no one recognized them for what they were.

Senator Ron Wyden: No current Congress can bind a future Congress. But we can find some hoops that someone would have to go through if it got passed. If you have ideas how we can prevent a new tax expenditure from occurring every working day, it would be appreciated.

Senator Nelson: We are at a moment in time that the body politic is poised to allow us to get out of our individual selfish interest, because we have to, to look at the common will, the common good, and if this hearing serves to advance that possibility, this year, this been a worthy process. The hearing is adjourned. …. is adjourned.