Business Roundtable

Meeting the Challenges of Economic Growth and Deficit Reduction Panel Three: Jobs and Economic Growth: The Role of Tax Reform Farewell: John Engler, President, Business Roundtable Moderator: Lindy Paul, Co-Managing Partner, PwC Speakers: Alex Brill, Research Fellow, American Enterprise Institute John Podesta, President and CEO, Center for American Progress Pamela Olson, Partner, Skadden, Arps, Slate, Meagher & Flom, LLP

Tuesday, September 6, 2011 3:45 p.m. Washington, D.C.

Transcript by Federal News Service Washington, D.C.

JOHN ENGLER: Well, thank you, Mr. Chairman. And we are delighted to have this back. We have a little break scheduled, but we thought wed just since some of you have been going up, getting a cup of coffee and taking a break, well just finish this up. And since its the first day back, youd rather get out a little earlier. And Lindy Paull is going to moderate this session. Shes got the hard job. They just spent all the tax revenue. I heard talk about loopholes and closures things being worked out. And this panel is entitled Jobs and Economic Growth: The Role of Tax Reform. And this is a topic that is a very key issue from the perspective of a lot of job providers in the country: How do you get deficit reduction? How do you have economic growth, job creation while improving U.S. global competitiveness? And so thats sort of is the challenge. And Lindy Paull is going to moderate this. And Lindy is somebody we worked a long time with. Shes the co-managing partner at PricewaterhouseCoopers PwC where she leads the legislative and regulatory practice at the Business Roundtable. We work very closely, and PwC has got the model of the whole U.S. economy and theyve got the tax code, so we get a lot of insight from them. And Lindys own background: She started as chief of staff of the U.S. Congressional Joint Committee on Taxation for five years from 98 to 2003; before that, several senior staff positions with the U.S. Senate Committee on Finance starting in 1986 she was one of the heroes of the welfare reform debate. So shes seen it all. But 86, that was the last big tax reform year. Here we are 25 years later. Is there any shot at doing tax reform? Well find out. This is the panel this will be the last panel in the afternoon. And Id like now to invite Lindy Paull to come forward and take the podium. Lindy, come on up, introduce your panel. Welcome. (Applause.) LINDY PAULL: Thank you, Kevin (sp). (Audio break.) LINDY PAULL: (In progress) thank you. I see one more panelist. Yes, John. So thank you, Governor Engler, for initiating this great forum this afternoon. Its been really interesting to listen to the other panels on such a timely topic. As some of the panels have discussed and were all here to talk about this joint select committee and its charge to at least

come up with 1.2 (trillion dollars) to 1.5 trillion (dollars) in deficit reduction, either through spending reductions, taxes or a combination of the two, our panel is really charged with focusing on the revenue side of this equation. Most of the analysts believe that the United States faces two big economic problems: this large structural deficit that this supercommittee is charged with trying to come up with at least a(n) intermediate-term solution and this weak economic growth and high unemployment. Its rumored that, during the debt limit discussions during the summer in July that as much as $800 billion of revenue increases were being discussed. But, in the end, the legislation did not include any revenue increases. But, as people have discussed earlier today, revenues could be on the table for this select committee. So some of the big questions that we were asked to discuss you know, what role will taxes play in this deficit reduction effort, the current effort, and whether tax reform, which many believe can be a major contributor to improving economic growth, improving our investment situation and stimulating job growth will that be part of the recommendation of the supercommittee? Weve heard some mixed views earlier today from other panelists: you know, tying taxes to, you know, entitlement reform; if youre going to do entitlement reform, tax reform needs to be a part of that; other panelists have thought that maybe tax reform would, you know, divert the main attention from dealing with the spending side of the equation. So theres a whole mixed bag of where how taxes come into play here. So we have a great panel that Id like to introduce now, who will help us sort out these questions. Let me start with Alex Brill who brings to us the economic background. He served as a tax policy adviser to President Obamas fiscal commission, which was co-chaired by Erskine Bowles and former Senator Alan Simpson. Prior to that, Alex served as senior adviser to chairman and to the chairman and chief economist for the House Ways and Means Committee under Chairman Bill Thomas, and he is now a research fellow at the American Enterprise Institute. Next to him is Pam Olson, who is a tax partner at the law firm of Skadden, Arps, Meagher & Flom (sic) hopefully I didnt murder that and she heads the firms Washington tax group. She served as assistant secretary for tax policy at the Treasury Department during the George W. Bush administration and also has a very strong tax background from serving at the IRS and before at Skadden as well. And our final panelist is John Podesta, who is a president and CEO of the Center for American Progress. John served as President Clintons chief of staff, and he also was a cochairman of President Obamas transition team. So Im delighted that we could be with you today, and what weve tried to do is set up a series of questions for our panelists and, first, Id like to start with a question for Alex who served on the presidents fiscal commission. Wed like to look back at that because many of the people in Washington discounted the likelihood that the fiscal commission could produce an agreement during a very short time frame

 not as short as the supercommittees time frame, but it was a very short time frame and while they failed to receive the supermajority that they were tasked to, they did receive a majority of the of the members of the committee. Eleven of the 18 members agreed with the co-chairs proposal, including some very significant members who are currently serving in Congress today. So you have a body of work and as the other panels have discussed, there is a lot of body of works that are out there. Theres the Bipartisan Policy Center that also has done some work and previous works under previous administrations. So, Alex, you served as a policy adviser to the Bowles-Simpson fiscal commission. What similarities and differences do you see between the supercommittees role and that of the fiscal commission in terms of the potential to the role of taxes in this entire effort and the potential to achieve tax reform? ALEX BRILL: Thanks, Lindy. Thats a great place to start. The time I spent with the Bowles-Simpson commission was definitely an informative one, and I was really quite impressed and struck by the hard work that all 18 of the commissioners put into the process though. You know, as you noted, obviously, ultimately, many werent able to support the proposal. When I compare that effort with the one thats forthcoming from the supercommittee, its almost a day and night in construction. As you noted, Lindy, the very high bar set by the by President Obama in the executive order that created the Bowles-Simpson commission, 14 out of 18 were required in order for that commission to be successful. In addition, the fact that that commission, unlike the supercommittee, was a mix of both lawmakers and non-lawmakers, which I always think is an is sort of an odd combination for any sort of commission; either, I think, we need to go outside of the political process and bring the experts together to give advice to lawmakers or we need to bring the lawmakers together in a special forum; the supercommittee is that special forum. Its as someone on the last panel noted, its much like a conference committee in essence. I think that the fiscal commission was not designed to maximize the probability of success, and I think that the supercommittee is designed in a way and thats from a number of aspects to it, on a procedural perspective, including the fact that the supercommittee can report out any amount of savings. So they have a target, but theyre successful even if they are reach half of that amount, and that also facilitates the supercommittees ability to be successful. On the substance of tax policy, I think theres both important praise and some criticism thats due to the Bowles-Simpson commission, at least from my perspective of good tax policy. With regard to praise, I think that the commission and particularly the co-chairs for their leadership on bringing forward a national debate around tax expenditures, spend quote, unquote, spending through the tax code, base broadening is basically what were talking about here they advanced that debate, and it has been echoed on the campaign trail as well as among members of Congress. Eliminating these tax expenditures is a way to basically pull out certain industrial policies that we have embedded in the tax system and lead us towards a more efficient economy over time. That is certainly one of the great benefits. In addition on the corporate side,

advocating for a lower statutory rate, along with a territorial system those are also both sound policies. I think that in terms of where the commissioners their perspectives, there was really a lot of bipartisan support for all for all those ideas, including some of the commissioners that didnt ultimately support the plan, I think, supported aspects of it on the tax side. On the criticism side, Id just make two notes. One, the Bowles-Simpson plan does increase the tax rate on capital gains and dividends, which is because of the sensitivity of capital to capital taxes to capital formation; thats a concern to me. And two, I think and this is a little bit wonky but I think its important to distinguish between statutory rates and the effective rates, the actual marginal rate that one could compute and the rate thats written in the tax code. And the base-broadening, rate-lowering approach promotes efficiency, but it doesnt necessarily reduce those effective marginal tax rates. Thats, I think was acknowledged and understood by the by the members and the people who put together the proposal and worked for the commission, but it sort of was hasnt been highlighted. In terms of the ability of the your last question, the part the ability of the supercommittee to borrow from the these recommendations, theres one piece theres sort of one chapter that was missing from the Bowles-Simpson report, and that chapter would have been titled, Transition, and that certainly was well acknowledged that that that how you get from the code we have to the code that they wanted and outlined. Its a difficult thing to do; they didnt have the time to outline that; the supercommittee would have will have trouble drafting the transition rules as those who worked on the 86 act, Im sure know better than I do. But that there are workarounds to that too. And I just I just close by noting that theres a provision in the presidents propose presidents budget its been there every year to curtail, in effect curtail tax expenditures for high-income individuals, and that could be looked at as a model and perhaps utilized more broadly. MS. PAULL: Just a just before we move on to the next question, how important is it to succeed for the supercommission to succeed? You heard the last panel say were in the territory of, you know, troubled waters from an economic standpoint. Financial markets are, you know, bouncing all over the place. Our economy is quite weak. Unemployment is still pretty high, especially when you look at it with a lot of the additional factors. So each of you, Id like to hear, you know, how it kind of sets the groundwork for the rest of our questions. How important is it for them to succeed? And Alex, you can practice our (inaudible). (Chuckles.) MR. BRILL: Sure. I mean, I just say that, one, I think that they will succeed to some level, and I think it is critical. The exact magnitude, within a budget window, I think, is less important as perhaps what the 10th year number is or what the long year the out-year trend is in terms of savings. That will be, I think, what the market is looking for is what are we doing in the 10th and beyond window 10th year and beyond part of this.

MS. PAULL: Pam or John? PAMELA OLSON: I think its I think its very important that they reach an agreement of some sort, and Im sorry to hear the low statistics at the end of the last panel because I do think its important that they succeed. And I think its important because I think what we need is a showing of some bipartisanship, and I think one of the things thats troubling the economy right now is the uncertainty about whether or not our political system is up to the challenge of dealing with the deficit and dealing with some of the difficult decisions that have to be made. And so a success at some level, I think, would be a tremendous benefit to the economy for the certainty that it might provide. JOHN PODESTA: Well, I think you only have to look back at what happened over the course of the summer and the effect of a kind of gridlock and dashed expectations and what that did to confidence and what it did to the economy to say that if we go through three more months of that with an outcome you know, and even that ended in a trillion dollars worth of savings, but it still had a tremendous impact, I think, on the real economy. I think if we go through three more months of that with nothing to come out the other side, I think it would have an probably even a more negative effect on the real economy. So I think theres a very high premium on putting a deal together. I think Alex made a very important point, which is that this committee is charged with it doesnt have a predetermined level in which it can it can come together. So it think theres a fairly high probability theyll do something. Theyll agree to a package that will further reduce the long-term deficit and debt outlook, although well get to this but my expectation is that a big deal, if you will, is probably beyond the scope of what the committee is likely to produce in over the course of the next what really amounts to 10 weeks. MS. PAULL: Well, now that youve mentioned big deal, and people have all talked about the need for a big deal today, its reported that the president will lay out a $4 trillion deficit reduction plan in the near future; kind of not sure if this is the Thursday night proposal or if its or if these are in separate tracks. You know, so far the president has been advocating a revenue component as part of deficit-reduction solutions and has identified both in his budget and publicly some, you know, ways to raise revenues, both from upper-income individuals; from the oil and gas industry; from, you know, taxing corporate jets and other things. So and some have suggested that this is the opportunity for the president to lay out a more comprehensive way to achieve all those things. So, John, if you were advising the president and I know youre not or, if you are, youre not on a youre not speaking to that, what would you recommend regarding potential tax reforms as part of a deficit-reduction package and what on the revenue side is really the best way to grow the economy and produce revenue at the same time as trying to grapple with this deficit situation?

MR. PODESTA: Well, let me I want to I want to answer that question, but I want to give it a little bit of context MS. PAULL: Sure. MR. PODESTA: if I could, which is that, you know, Id think wed all agree, whatever our politics, that the tax code today is riddled with inefficiencies and loopholes, and its the its simply, in my view, that we may not all agree about this but its simply in my view not raising enough revenue. And I generally try not to be too nostalgic to my era in the Clinton White House, but it was three years in which we not only balanced the budget but created a surplus, and so I think it bears some points of reference to where we are today. In the Clinton code that produced very strong job growth and very strong levels of business investment, we were raising about 20 percent of GDP in those in those years at the end of the 90s in the last year, 20.6 percent of GDP coming in as federal revenue. Last the in the last three years we were raising 15 percent of GDP. So that clearly is an intolerable situation that needs addressing, and I think thats why the president has said we need a balanced program, and thats why, in terms of the ideas he put on the table with in his discussions with speaker Boehner, he said, weve got to have revenue as part of this package as part of a balanced package going forward. We also have looking out into the future, we have still remaining high security demands, and weve got an aging population which was discussed in the last on the last panel. With respect to complexity, if you if you take it from that perspective, the tax code is three times longer than when I walked out of the White House. And there are according to the joint tax committee, there are nearly twice as many tax expenditures now in the code. So, again, I think, probably we have a lot of agreement on the panel that theres clearly a need for broadbased tax reform to get rates that create a competitive economy and that end up leveling the playing field and eliminating the distortions that clearly are in the code. One other just point of reference, because people like to make it, we have the second highest corporate tax rate in the OECD, and we have the fifth lowest receipts as a percentage of GDP in the OECD. Thats a tax code thats probably not working, in my view, if you think about those two things working together. So should the supercommittee tackle comprehensive tax reform and should the president press to have comprehensive tax reform as included in this process that will unfold over the next, as I noted, 10 weeks? There, I think, Im a bit more skeptical because I think it is really critical, as I noted earlier, that the supercommittee succeed in its primary mission, which is to find additional deficit reduction over the 10-year window. And I think that if you set the bar too high for this committee, its more likely its actually more likely to not succeed at its primary goal, which is to come up with a balanced package of some revenue increases, some additional spending reductions, primarily on the mandatory side, and I think that it that 10 weeks is a pretty a pretty tough time line in which to produce comprehensive tax reform. So I favor, I think, the two-step process that I guess Bill Hoagland talked about in the first panel or and that Alice Rivlin endorsed in the second panel, which is, get done what you can get done between

now and December. And thats going to require, I think, closing some loopholes, raising some revenue along with further spending reductions and set the stage for more comprehensive tax reform going forward. I think the other factor that I would lay into this and some principles maybe for the committee to consider is we need to improve the prospects for short-term growth and job creation. Thats what the president is going to talk about on Thursday night, and I think the committee needs to be attuned and attentive to that. John Larson suggested actually changing the mandate of the committee to include that the in the and is pushing to have a an amendment to the committees charter, if you will, to include that as part of the thing that theyre looking at. I think any near-term tax relief that is included in that need for job creation needs to be paid for over the 10-year window. As I said, I think there has to be more revenue, not less, and I think the reformed code has to raise adequate revenues taking into account those changing demographics. So we need to broaden the base, end distortions and create a competitive code, but I think that the chances of actually accomplishing all that and the one thing thats different between Simpson-Bowles and this committee is they actually have to write legislation. Simpson-Bowles only had to give notional ideas about what a rate might look like and think about all the tax expenditures were in the code and say, well, you could get rid a bunch of them and get that rate down. These guys actually have to and one woman, if I think if I remember right (chuckles) have to actually write the legislation that would accomplish that, and I think thats very hard to do over a 10-week window. MS. PAULL: I mean, I think Im (inaudible) I and talked to Bill didnt have a chance to talk to Bill after he spoke, but this two-step process that he suggested was, I think, the notion of this expedited bill would include a process for dealing with tax reform. Im not sure if it was on an expedited basis like this deficit reduction would be or not. Would an expedited tax bill be something that is worthwhile considering as part of this process? Or, you know is that what you were suggesting or MR. PODESTA: Well, I think thats, you know thats essentially where the Gang of Six which became the Gang of Five was headed MS. PAULL: Yeah, yeah. MR. PODESTA: which is, do one tranche now now thats already happened in the summer with respect to discretionary spending and weve already taken a trillion dollars 8.5 percent cut in domestic discretionary spending; that has already been enacted. But do one tranche now, add revenue, add some mandatory savings, and then go forward with a process and an expedited MS. PAULL (?): Right. MR. PODESTA: process, with an up-or-down vote.

MS.

: (Inaudible.)

MR. PODESTA: Get rid of the 60-vote requirement and use essentially a budget reconciliation process to try to get tax reform that will raise revenue through the Congress and perhaps even additional mandatory cuts. MS. PAULL: OK. All right. So wanted to turn next to Pam and have a discussion around and John teed this up as well the fact that our corporate tax system is well known to have, you know, the second highest corporate tax rate, at least in the OECD world of developed countries, and we also have a pretty much out-of-date international tax system when you compare to the majority of not exclusively, but the majority of the countries in the OECD who have been moving very rapidly towards exemption systems or territorial-style systems for business activity thats earned outside of the jurisdiction of the home country. So, Pam, I think what wed talked about is that you would cover the key elements of tax reform that would improve the United States from an economic standpoint and discuss somewhat the impediments of the current tax system have to, you know to continuing the, you know, robust investment that we have experienced in the past from foreign sources and that could be corrected through a comprehensive tax reform effort. Pam is our resident deep-dive tax lawyer who works with clients all the time on these kinds of issues. MS. OLSON: But we wont try to do that deep a dive MS. PAULL: OK. MS. OLSON: in the time remaining. That would probably be a little bit like trying to do comprehensive tax reform in the 10 weeks that the supercommittee has. MR. : In the 10 weeks. (Laughter.)

MS. OLSON: Yeah, I think important to recognize that all taxes distort. They distort decisions about saving, working, investing and that the current tax system is particularly distortive for the reasons that Alex and John have both already alluded to. Weve got a narrow base, relatively speaking, made more narrow by deductions, exclusions and credits, and weve seen, as John mentioned, a particular growth in tax expenditures in the last few years. We have added credit after credit and exclusion after exclusion, deduction after deduction, to the code and all of those things distort the economy because they distort peoples decisions about where to invest. Thats theres tremendous national income benefit to getting rid of some of the distortions because every time we push an investment dollar in a different direction than the direction it would otherwise go, the effect is to alter the return on investment that would

otherwise come about and that reduces national income and the more we reduce national income, the less that we collect through the tax system, whatever the tax system is. So its really important for us to address some of those tax expenditures. You know, we could start by taking a hard look at some of the things that we keep routinely extending and asking whether or not those are things that we have to continue to extend. But, you know, in the final analysis, weve got to take a much harder look at the tax code if were going to bring things into balance. As Lindy noted, weve got a particularly high rate of tax on certain kinds of income; that would be the corporate income in particular, when you take into account the double level of tax on dividends and capital gains from the sale of corporate stock. Its about 45 percent under current law, 60 percent if the can we call them the Obama tax cuts now since he presided over the extension? (Laughter.) If the Bush tax cuts or Obama-extended tax cuts expire at the end of next year, then it goes to about 60 percent. So a very, you know, high rate of tax and that doesnt take into account estate taxes either, of course, which when you add them in push our tax level to the second highest in the OECD. But so theres tremendous potential benefit of undertaking a comprehensive look at the corporate system and looking at some things that would allow us to bring the rates down, and that does mean that we have to do some base broadening. One of the things thats sort of odd is that the corporate income tax enjoys so much popularity in the in the general public because it is perhaps the worst form of a tax. Its invisible. The more recent economic studies suggest that the burden of the corporate tax is actually borne by workers to a substantial extent and perhaps a growing extent as the as capital becomes more mobile and as the world becomes a much smaller place in which to do business. Our worldwide system of taxation, as opposed to the exemption system or territorial system that Lindy mentioned, is a particularly peculiar way of taxing corporate income or not taxing corporate income because of its lockout effect, what has sometimes been described as an investment tax credit to keep your money invested offshore. Its a system that really does not make any sense and one that should definitely be reconsidered. You know, I think its important, as we look at all this we keep talking about doing things on a revenue-neutral basis and I happen to be in Johns camp. I think we actually need to raise more revenue than were currently raising. On the other hand, Im very skeptical of the notion that we ought to try to do it on a revenue-neutral basis in the corporate community, as perhaps Alex would suggest. That would that would not be doing the right things with effective marginal rates. But, you know, I think we need to look hard at what other countries are doing and recognize the fact that theres a global competition for capital, theres a global competition for jobs, and other countries are willing to do things to attract capital that they know will bring jobs to their country and ultimately do good things for the economy and generate more tax revenues

in their countries by reducing rates, by putting in fairly dramatic ways of attracting innovation and intellectual property, research and development. So we need to look at all those things. Now, that always suggests to me that we ought to be looking at another tax base as well. And I think as we look at what we ought to be doing on the corporate side we need to take into account whats going on in the rest of the world, whether the tax system is the best tax system or whether we ought to be looking at another base that might be more conducive to economic growth than our current income tax system. And that would, of course, be some form of a consumption tax. MS. PAULL: Thank you, Pam. Thats any other comments from the panel? MR. PODESTA: Well, I think that the one question is, if were going to try to move towards a territorial basis, is getting the balance right so that you dont have a circumstance where profits essentially take flight to tax savings in low-tax countries. And I think most of the countries, or at least the major industrial countries that have moved to a territorial basis, have also increased protection on the on those kinds of questions. And I think that, you know, thats what really needs to get on the table and we need to take, I think, a hard look at. Thats again, Im going to come back and say it one more time, thats why Im skeptical that you can actually get this done in 10 weeks, which is that if you what you want is to strengthen the competitiveness of the United States economy, you want to you want to create strong incentives for investment here. You want to make the United States the best place to invest in the world. That doesnt necessary mean taking the corporate tax rate to zero. What it means is it to have a competitive tax system that but one that guards against abuse of profit sort of being artificially posted in tax-haven countries. So thats not an easy, I think, task for the Finance and Ways and Means Committee. Alex lived that through that. I commend anybody who actually survived Bill Thomas for a couple of years. But, you know, I think that getting that balance between a you know, the states do that through a formulary system. How thats going to work globally, whether that needs to be coordinated with our other, particularly OECD partners, but our G-20 partners I think are all questions that really havent been explored in great depth. And I would guess maybe a few members of the Ways and Means and Finance Committee understand that, but virtually no other members of the of the Congress probably have a good appreciation for what the trends are that Pam talked about, which are you know, which are the global trends on taxation. MR. BRILL: Id echo one part of Johns comments. And I agree theres a complexity in making these changes, and the time is certainly a challenge. It would be a challenge for the Ways and Means Committee; its going to be a challenge for the supercommittee. These international aspects are critical, but to be able to figure out you know, earlier I was talking about the transition rules for eliminating tax expenditures. The questions that Johns raising about enforcement and things like that are difficult. The Treasury Department spends years

thinking about ideas along these lines, not weeks and certainly true for the tax-writing committees as well. To the point that weve all made about the high rate that on the corporate side I just note that a lot of the not all, but many of inefficiencies and inequities and distortions in the corporate code are mitigated with a lower corporate tax rate. So that may not be a you know, a complete solution. Its certainly not. There are certainly other inefficiencies that will remain. But some work that Ive work that Ive done with a colleague of mine at AEI as well as some other research suggests that there is certainly a relationship between and an inverse one at times between the statutory rate and the tax collections on the corporate side. And so we could both address some of these debt-equity distortions and some of these domestic-international distortions by simply focusing on the rate. The rate, if that if that is something that the supercommittee chooses to examine, it certainly is something that they could draft a change in the rate. That would be that would be draftable. MS. PAULL: All right. Thank you, Will. I wanted to go back to the economics of tax reform and what key elements of tax reform might measurably improve economic growth in the United States and, you know, provide some potential gains to the economy here and what would those gains be. Also, you know, discussion earlier today and kind of a little bit underpinning here is that theres often a discussion about doing tax reform on a revenue-neutral basis. And are there some economic gains that can be achieved even though the bill is done on a revenue-neutral basis? And kind of, you know, from an economic standpoint, incremental reforms versus permanent reforms you know, what do you achieve on each of those. So, Alex, if you could spend a couple minutes on that? MR. BRILL: Sure a couple thoughts, first with regard to the job question in general. I think that its important to remember that tax reform, structural changes to the tax code that make it more competitive or more pro-growth, are about long-term economic growth and longterm job creation, not short-term stimulus issues. And those are actually, I think, likely in conflict. I think its difficult to both jolt the short-term economy and have changes that are long term. That seems a bit too far. The comment about the notion of offering an amendment to alter the mission of the supercommittee I think that would just certainly definitely make their job more difficult. To both pursue long-run, fundamental, economic growth policies and reduce the deficit and jolt next quarters GDP would be particularly difficult. More broadly to that topic of short-run versus long-run tax policy, Pam noted the number of provisions that are frequently expiring I think were all well familiar with that list. You know, my view is, is simply stop. I think we need to stop the temporary tax policies. Its all or nothing do them or dont do them. Thats true thats my view with regard to the payroll tax

holiday, which obviously were going to be debating over the next weeks and months. Thats my view with regards to the R&D tax credit: Either do it and make it permanent or forget it. But to do it retroactively is just to throw money at decisions that have already been made. Thats more uncertainty for those who are trying to make business decisions by interfering by injecting tax variants, basically. My view here is actually a little bit differently different than it once was. I used to advocate and in the last recession I was an advocate (chuckles) of a temporary tax provision the expensing provision. In fact, I argued strenuously to extend and beef up that provision when it went from 30 percent to 50 percent. There is some evidence that that policy can change certainly change the timing of investment and may change the aggregate amount, but the costs that are associated are not insignificant. And I think that as a general principle, if we had to pick one, it would be that we should have zero temporary policies instead of trying to figure out which ones are more effective and also when to turn them on and when to turn them off and how many times to renew them before we finally let those temporary policies lapse, if they are. Tax reform should be about permanent changes and about growth that were fostering over the long run. And the road to that tax reform within the income tax framework would be one that, as others had mentioned, move away from industrial policy. And so our largest tax expenditures are industrial policies. Weve identified preferences preferred industries sometimes for good reason, sometimes for not. And to the extent that the tax code focuses on its core principle, which was to raise the amount of revenue necessary, whatever that may be 15, 21, 18.8 everyone has a favorite target but that should be the goal. And so we can transition out of that industrial policy towards a system that, as an income tax, at least would be, you know, a broader income base and one thats simpler. And the other two things that I would just note in terms of sort of goals one would be just the notion that its an empirical fact that when you tax things that are very sensitive to tax, meaning that they respond to people shift their behaviors very quickly or very easily, those are the things that we dont want to tax. We want to tax things that are less responsive. And the evidence has been that when we tax capital, capital tends to be very sensitive. Capital formation tends to be very sensitive to the cost of capital and therefore its not ideological that I advocate for low taxes on capital, its that by reducing the taxes on capital we tend to have more capital formation. And the benefits of that actually accrue, as Pam noted, across the whole economy particularly they accrue to wages as well as to owners of capital. And finally, you know, Ill just add this as Pam described in greater detail you know, our economy today compared to, say, 1986 when it was last when the tax code was last reformed is far more global. And we need to recognize that as we sort of move towards any new system, whether it be an income tax system or another type of reform.

Recognizing the mobility of capital across borders and the ease with which managers and executives can utilize the tax code to minimize tax burdens in a global structure is a reality that we face today. And so we need to sort of embrace that reality and sort of go with the tax system thats going to generate the revenues while minimizing those distortions. MS. PAULL: Thank you, Alex. One point that Pam I would like to follow up on one point that Pam made in her discussion, and that is that some of the recent work of economists have indicated that the corporate tax burden may well be borned (ph) more by workers than in the form of lower wages than was originally thought. Since theres capital flow it will flow internationally where it can earn its highest aftertax return if you know, in the whole mix of corporate decision-making. And that as Pam noted that is that came up on the campaign trail. I think the presidential candidate Mitt Romney mentioned that recently, and the general public is not you know, because the corporate tax is invisible, as Pam said you know, did not really resonate with the general public. But I wanted to see if, John, you could weigh in on this point in terms of what the Democratic policymakers are thinking with respect to corporate tax reform and whether or not, you know, in light of the recent period long period that we have of unemployment so high and a weak economy whether or not theres a shift in view that a reduction in corporate income taxes might be beneficial at this point to help both with the economy and with employment in the United States. MR. PODESTA: Well, I think look, theyre concentrated on trying to get job growth going again in the U.S. And I think that this overall effort at corporate tax reform is one thats aimed at and I think Democratic lawmakers as well as Republican lawmakers are interested in it because it will create a more competitive economy. But this idea that theyre focused on it because the corporate tax is really burdening workers I think probably doesnt cross their mind that much. I think its kind of a fancy version of trickle-down. That and I think if they look at how the economy has performed overall particularly over the last decade wages have been stagnant; job growth was weak before the Great Recession; the tax breaks concentrated on high-income earners produced very low growth, low job creation, low business investment. And I think that so that argument, I think, is not particularly compelling to lawmakers who are kind of looking at history and looking at the facts and trying to make judgments about what they about where they need to make appropriate changes in the code. I would say that if anything, the concentration is going to be, again, on creating the conditions for demand amongst the middle class so that we can get more demand in the U.S. based economy and see stronger patterns of growth in the overall U.S. economy. And therefore, I think theyre probably going to concentrate on and I suspect what when the president talks tomorrow hes going to concentrate on direct inputs in the short term, in the sense that challenges Alexs view of the world, to try to get job growth growing right now both through demand

mechanisms and conceivably through business investments that are putting people back to work rather than worrying about rather than assuming the indirect effects of a lowering of the corporate tax rate without concomitant increases in revenue someplace else could take effect of that, which would only deepen the deficit problem. And so I think that theyre going to look for balance; its going to be concentrated on the middle class or direct job production through you know, a version of a credit for businesses that hire additional people. MS. PAULL: Any concern about raising taxes while the economy is so weak still? MR. PODESTA: Well, I think that you know, I think the chances of our raising taxes in through this committee process in the fiscal year 2012 or 2013 are pretty low. (Chuckles.) I dont know if my colleagues would agree with that. I think what the committee needs to do, again, is find a way over the 10-year window to significantly provide a revenue base thats going to support the government. But I doubt that well I think, to some extent, parallel to where the spending reductions are likely to increase over that 10-year window, I think the tax receipts will also be minimal in the short term but increase over the over the you know, over the longer period of time. MS. PAULL: And do you think the target should be as you mentioned, when you left the Clinton administration it was roughly 26, because thats thats higher than the historical average for revenues. MR. PODESTA: Well, and Alex said, you know, whether its 18, 21 percent, something in between, those are big differences those are big numbers. And I would just note that the last time 18 percent of revenue which is now the favorite figure amongst the at least amongst the tea-party gang on Capitol Hill would have balanced the federal budget was in 1966 before Medicare and Medicaid kicked in as spending, before the big Vietnam build-up. I mean, that is a very, very low revenue base if you want fiscal balance. Now, if youre prepared to run, you know, structural deficits that keep the debt about where it is and, you know, its still, I think, very low given the demographics of the aging population. In 1966 we had 9 percent of the population was over 65; by 2030 its going to be 20 percent. So I think you have to take account of both the changing demographics of the country, the commitments weve made to keep people out of poverty. Before Medicare and Medicaid passed 25 percent of elderly Americans lived in poverty. That was reduced to 10 percent during the Clinton and Bush years. Do we want poverty amongst elderly Americans to go back to 25 percent? I dont think so. So I think its going to weve got a different country, different commitments at the federal level, an aging population. Its going to require a revenue base thats with fiscal balance, thats going to require something on the order of where we were under Clinton or maybe even a little bit higher than that by the time we get to 2020 and 2030. MS. PAULL: Alex?

MR. BRILL: Yeah, I didnt mean to imply that 18, 20, take your pick, these are small differences. Johns absolutely right, these are huge differences, right? A percentage point is, you know, $140 billion. So its a trillion-and-a-half (dollars) over 10 (years) if we just wanted to argue between 18.5 and 19.5 and so it magnifies significantly, you know, when you start to talk about two or three percentage points, you know, outside of the norm. Weve certainly had large swings in receipts. Now receipts are very low as the economy is very weak and employment is very low as well. If in a strong economy those receipts would be higher and they wouldnt be back to the levels that they were at the end of the Clinton administration where particularly capital gains receipts were very high at that time. The other thing Id just note, and John will correct me if Im misinterpreting, but with regard to Lindys question as to the economics of the burden of the corporate tax I think that research is really quite interesting. A lot of it is new in just the last few years. And I guess the takeaway for me is that economists really have their work cut out for them to convince the lawmakers that thats that thats true. And it is new work. And its based on new techniques and new data thats available. But, you know, I think its helpful to hear what you said, that you know, that sounds, I think you said, like a fancy version of trickle-down. I think its not, but what matters is what the perception is among the lawmakers. And so if people want to advance that case, theyre going to have to do a lot more educating. MS. PAULL: Let me do one more follow-up question, and then were going to go to the audience, so start thinking of your questions. Many commentators recently and theres been testimony before Congress as well believe that ultimately addressing our fiscal situation involves a new source of revenue, which Pam alluded to as well, going to consumption tax. I mean, we had some you get almost a weekly discussion in the media on one of the differences between the United States and the OECD countries and most countries around the world is that they do have some sort of a broad-based consumption tax. So does the panel see any serious consideration of a broad-base consumption tax on the horizon here? And Pam, well start with you since you (inaudible) MS. OLSON: OK. As part of the supercommittee I would say no. I dont see it as part of the discussion. But I do think that over the course of the next few years our fiscal situation is going to compel us to look at it and thats because of the promises that weve made to seniors that John referred to. Weve got to look hard at the promises that weve made as I think the panels before us discussed because those costs are growing out of control and weve got to find some way to bring them back into control. But even if we bring them back into control, one of the advantages that a lot of other countries have relative to the United States today is that they do have a strong consumption tax base on which they rely for a significant part of their revenue. And if the economists are right, and that is as much better a tax way of taxing the economy than an income tax, then they have

an advantage over us in funding the same kinds of long-term needs that we do. So I think we need to take a hard look at it. Now, there are obviously other kinds of taxes that could be considered. I think AEI did a study a couple of years ago on an energy tax as an alternative to cap and trade. And I think AEI was careful to say they werent advocating one but its it is an example of another kind of base that could be looked at as a way of raising some revenue. MR. PODESTA: Well, its really, really unpopular. And its, I think, really, really hard to get it through the American political system. Thats the conclusion Ive drawn. We actually when the center proposed a comprehensive health care reform plan, we suggested it be paid for with a small value-added tax a slightly more progressive version of the value-added tax value- added tax. Most of the ideas that were included in that tax in that health care reform plan ended up one way or another finding their way into the Affordable Care Act, except for the tax (laughter) which was just its just really, really unpopular. Its easy to demagogue. Its very, I think, tough to get it through the system. I think its economically from the perspective of tax and consumption and creating a better platform for investment for the long term, theres a lot to recommend it but I think its very, very hard to do it politically without the demagoguing. I would say that I think the chances of that happening really do come down to two things. One is an energy tax we both AEI, CAP, several other think tanks participated in an exercise that was encouraged by the by Pete Peterson and his organization. I think left and right I think maybe four or five of the plans that actually ended up either stabilizing the debt or balancing the budget included a tax on energy. I favor an oil import fee I thats controversial, but I think it would be I think it makes sense and taxes something that we that we that we end up wanting to depress, if you will. Its I recognize that its social engineering, but 50 percent of our trade imbalance comes from importing oil. And I think it would it would push the overall economy towards more efficiency, particularly in the transportation sector. So I think thats a kind of vehicle thats a consumption-like tax a broad-based energy tax may be in the offing. It could be set relatively low and raise a significant amount of money, I think. But I think trying to move to a broad-based VAT now, I think it would be just very, very politically difficult. MR. BRILL: The politics is certainly interesting. So it seems that the Republicans have concerns about a VAT because the fear it fuels big government and Democrats have concerns about a lot of consumption taxes because theyre perceived as being regressive. And so they sort of can come together and agree that they dont like this idea. Now, on the other hand, when you look at the debate on consumption tax it seems to be a theres a voice out there that is suggesting these are non-lawmakers, but partisans nonetheless there are those who advocate for an add-on VAT of some sort and they say, well, it can be

small; we could have an exemption for it or something like that, but its needed because its the most efficient way to tax and because of the shifting demographics were going to need more revenue. That tends to be from the left. From the right theres a voice that says the current system we have is so anti-growth what we need to do is rip that code out of the system and replace it with and then you fill in the blank. You know, national retail sales tax or (inaudible) tax. Im an advocate of whats known as the Bradford X tax, which is a progressive consumption tax. You know, ultimately it ends in gridlock, I think. But I would note that there is, in a sense, a third way which are changes within the current system. You know, the system itself today is a bit of hybrid. We have 401(K) accounts and savings accounts that provide preferential treatment for savings. We do have a preferential treatment for cap gains and dividends despite the fact that so we dont quite have two layers of tax and corporate income; we have sort of one and a half. So there are reforms that could be pursued within the current context which is taking us in the direction of a consumption tax from an economist perspective of course, still leaving us with all the complexities and inefficiencies of the current system at the same time. MS. OLSON: Or maybe adding to it. MR. BRILL: (Chuckles.) Or maybe adding to it. MS. PAULL: So, do we have any questions from the audience, because we have just, like, two minutes here, so not over here David? Q: Im David Morgan with American Express. This is a question for John. You mentioned that you saw that some sort of tax provision should be in this package thats committed even in the short term. Do you have a sense of sort of the level a hundred billion (dollars) sort of what would sort of make sense or MR. PODESTA: Well, you know, hope springs eternal in my heart. You know, I think that the president Alex will correct me I think Simpson-Bowles was two-to-one two parts spending reduction, one part taxation. If you take that as a formula, and I think the president, sort of maybe it was three-to-one but if you take that as a formula, and weve done a trillion in the summer round then youd probably end up if youre in that 1.2 to 1.5 (trillion dollars) range, youre looking for a 50/50 balance. Now that passing the House of Representatives is with Republican votes is probably a you know, may be a tall order. But I think that thats probably where that would be at least beginning to add balance into what the deficit reduction short-term program looks like. And then over the long term I think we you know, youd accomplish that with revenue for mandatory spending reductions if youre in a two-step process. MS. PAULL: Right here.

Q: Bill Lane with Caterpillar. To be just a little self-serving, the MS. PAULL: Do you need the microphone in order for it to be on the yeah, sorry. Sorry. Q: Bill Lane with Caterpillar. Its going to be a self-serving question, so Ill repeat that too. (Laughter.) The you know, clearly when the president speaks in a couple nights its a big push on infrastructure. Now, the commission did a good job talking about a gas tax being increased. Do you see any I mean, recognizing there really is a bipartisan appetite for more infrastructure, at least in the abstract, whether you know, when you get down to what that actually means, it becomes a little bit more problematic. But do you see, at least as it relates to making a down payment on infrastructure, anything that would follow the commissions lead as far as you know, its actually pretty responsible as far as stopping the diversion and increasing the gas tax and (inaudible). Any room to maneuver there because, I mean, thats the one aspect that people are, you know genuinely supportive of on both sides of the aisle? MR. PODESTA: Well, Ill start but I think well see that play out in the next few weeks. Even you know, were talking about this 10-week window. We got a surface transportation bill thats pending; we got the FAA bill that got, you know, pushed over and delayed. And so I think the appetite for infrastructure investments, the presidents determination to get more infrastructure spending going over the in the near term over the course of the next two weeks, whether theres an appetite for a new round of Build America Bonds, et cetera we may know that in the next several weeks, not between now and December, because I think that how that fight plays out, particularly on surface transportation, the extension of the gas tax, et cetera its going to happen before the end of September. And I hope I hope the presidents successful in convincing the Congress tomorrow or Thursday that MS. PAULL: Tomorrow. (Chuckles.) MR. PODESTA: No its no. MS. PAULL: Oh, todays Tuesday youre right. You said that, right. (Laughter.) MR. PODESTA: No, we had that fight. We already had that fight. Were not interfering with the with the with the opening of the NFL. MS. PAULL: Yeah. MR. PODESTA: So I hope hes able to convince the Congress that, A, they need to move forward with those with that legislation and do it in a way that actually accelerates infrastructure investment right now because thats going to put people back to work and, again,

that needs to be paid for so that we need to at a minimum we need to extend the gas tax Simpson-Bowles called for an increase in the gas tax. I guess I would say that I still favor the oil import fee. MS. PAULL: OK. So were over time, so I cant take any more questions. Please join me in thanking the panel; they were great. Thank you so much. (Applause.) And its time for us to turn it back over to Governor Engler for his wrap-up here. MR. ENGLER: Well, thank you very much, Lindy, and to the panel, I echo Lindys thanks and appreciation for your participation here. And to the audience, thank you for joining us. This has been a very quick afternoon three panels three excellent panels. For the supercommittee, if theyre paying attention today, its been all laid out. All theyve got to do is become, as Chairman Nussle said, a committee of courage. And theyll have their opportunity over the next 10 weeks. But we wanted to start the session off in the fall with everybody kind of on the same page. And I think the panels have done that today. And youve been a great audience. I wish we would have had time for more questions, but the questions that have been going back and forth among the panel members actually have been very enlightening and very useful. So thanks for participating, enjoy the rest of the day, and good luck to the country over the next 10 weeks. Thank you. (Applause.) (Music plays.) (END)