Prosperity. And you heard alvin just say over and over again, consumption based tax. My job on the panel is to try to explain why thats important. Its important because the current tax system treats income that you sai and invest much much worse than the income you can consume. Think about it in this very simple fashion. You make some money. You pay tax on that money. Whats left . Disposable income. Aftertax income. You have two choices of what to do tw the aftertax income. You can consume it right away, or you can consume it in the future. Whats consuming in the future . Its saving and investing. Now, lets think about how the federal tax system theets though two choices. If you consume your aftertax income right away, the federal government, by and large leaves you alone. Yeah we have a federal excise tax on gasoline. We have a federal excise tax on bows and arkansas rowrows, but theres really no federal tax on your income. What happens if you save and invest your income instead . Between the Capital Gains tax the double tax on divot dends and the death tax, its possible for the sing dollar of income to be taxed over and over enover again. M and you dont have to be a wild eyed supply cider to think if you have even low tax rates, but those impose multiple times that youre going to do something dramatically or significantly affect peoples decisions on whether to consume their income today or consume the the income in the future. Why does it matter economically . So what . So people want to consume their income faster rather than slower because saving and investing is treated harshly by the tax code. What difference does that make . It makes a big difference. Every sing economic theory. We could have a socialist or markist up here. Every single economic theory is based on the the notion you have to defer some of todays consumption to finance tomorrows growth. You have to have call toll formation. And yet our tax system as i just explained, mistreats and abuses the people who save and invest. Why . Well, because rich people tend to have a lot of saving and investing. Thats really it. Theres no underlying sensible economic theory behind it. Its something about why we rob banks. Thats where the money is. Thats why politicians double tax and triple tax and quadruple tax saving and investing. Let me try to sum this up with an analogy that i think perhaps makes it very, very clear. Imagine if you owned an apple orchard. Youre getting into the fall. Your apples are ripe. Its time to harvest them. Whats the best way to harvest those apples . Do you pick them from the tree, or do you chop down the tree . Apples are income. The trees are capital. The reason we want a socalled consumption based tax is because we dont want to mistreat capital. But you dont need to think about socialism, marxism, social theorys. Think about it this way. If you chop down the tree, or if you harvest apples by sawing off the branches of the tree, what does that do for your longrun prosperity . For your longrun income . Youre going to have fewer apples next year. So it doesnt make sense to double and triple and quadruple tax capital. On this one issue the the marxists and socialists are right because they happen to agree with sensible economists. You need it for long rungrowth. Thats why we should have a tax system that treats all income equally. That means no longer double taxing income that is saved and invested. You want neutrality. Not only in the senseover getting rid of the loopholes, but also neutrality in how you earn and how you spend your income. Thank you very much. [ applause ] david, thank you for putting the panel together and inviteing us here. Its refreshing to see the topic coming back to life after a couple of decades of neglect in this country. I think its critical that we worry about the truck strkstructure of the tax system and not just about how much were going to get at one time. This is about whats good for the economy and the country. I have a handout with some charts on it which ill put up on the Tax Foundation website later this afternoon. Dan has already done a very thorough job of going over the first thing i was going to talk to you about listing four layers of tax on savings and investment and one on income used for immediate consumption. But these extra layers of tax have an adverse effect on the call toll formation and the adverse effect on the capitol formation has adverse effect on wages. Dr. Burton talked about how economists focus on efficiency. And the reason its so bad is that it leads to horrible inequities in the fact that you are taking the bottom rungs out of the economic ladder for those who dont yet have enough saving and need to rely on the saving of others to get started and have a place to work. When you cut the Capital Stock you reduce the labor and when you reduce the productivity of labor you reduce jobs. When people were thinking of putting together the concept of income we now use today they were neglecting the adverse effect on the labor force. Now it wasnt unknown, the god father of the income tax, henry simons, admitted it would damage the economy. His current disciples dont want you to remember that. Or they have forlgten it. Heres what simons said about income taxation. Income taxation is broadly an instrument of economic control. A means of mitigating economic inequality. We shall assume the moderation of inequality is an important objective of policy and consider them as devices for affecting it. The case must be rested on the case against inequality on the ethical or esthetic judgment that it reveals a degree and or kind of inequality that is distinctly evil or unlovely. Not particularly scientific. In fact, it is reasonable to expect every gain through taxation will be accompanied by some loss in production. Upon the size of the national income. With respect to capital accumulation, the con kwenss are certainly significantly adverse. Well, the answer solution for the damage he was about to do by putting all these extra layers of tax on savings and investment t. He was going to restore by having them run large perpetual bhuch edge surpluses. How often does that happen . Even if it did happen if youre stuck in the 91 bracket youre not saving or investing anyway. So the saving that will go into planned equipment spending in the United States is still not going to occur. As you buy down the national debt, people will use if the reflow of old savings as new consumption. Or theyll sell assets to people abroad and let foreigners find capital here. So another idea perhaps the the government would have toed a low cat to certain types of investment and pushing it that way. This is the road to the government taking over far too much of the the government. Youre going over the path of argentina and chile and it was not a good idea. And he was very explicit on that. People tend to have forgotten that. David has asked me to give you estimations. But i want to make sure you realize just how bad things are under the Current System so that you can see why were getting the results that we get. Another chart i have is a discussion of what would happen if you start saving a thousand dollars a year between age 20 and 70 and had it in a pension as opposed to being immediately taxed on the earnings and the interest. At the end of the period you would end up with 400,000 in the pension and 240 in the ordinary savings account. Youve lost twothirds of the potential income because of the dabble tax on savings. The the initial double layer he was talking ability. Lets talk about the corporate layer that dan mentioned. When you add the Corporate Tax to the tax on dividends and Capital Gains, you get tax rates prior to the bush tax cuts that were about 48 on the retained earning, and over 60 on the dividend payout, between the Corporate Tax and the tax on the dividends at the upper ends of the brackets. Mr. Bush would ruse those to under 45 in both cases. But we now had increase in the individual to operate. Weve had an increase in the im sorry the rate on the Capital Gains and dividends from 15 up to 20 and then up to 23. 8 with a new tax under the Affordable Care act. When you add the Corporate Tax to that, were at almost 15. 5 . So we have taken back almost 200 of the tax gains and apparently according to some of the people running, we would like to go higher. Well, ill tell you something, theyre not going to get any money out of this. When the passive income tax increase on the Affordable Care act came in we saw big realizations effect on Capital Gains and taking an advance of the tax hike, and now were beginning to see the data from the years after. 2013 was the first year it was effective. And the last time we tried this sort of thing in the the 1986 act, it collapsed for a decade until it was lower again under the clinton administration, of all things, at the insistance of the republican house. You get no revenue from taxing something as fleeting and mobile and as time sensitive as Capital Gains. And then of course the estate taxes, 40 . Now the irs is a bunch of kindly people whoed a the obstruction of the congress were told not to let anybody feel left out. If you give the the money to your grand money instead of your children, they impose two state taxes, they take 40 and then 40 of the remaining 60 and the generationskipping a trust. And then if youre saving money in your retirement to add to your estate, youre paying the income tax on it, and if youre actually working somewhat after you have begun your retirement and are earning a little bit of money at that time, you have to pay the payroll tax on that as well, and then there are the state taxes. Well, this can get to 81 and 84 . And thats at the federal level. And you can get over 90 at the state level. Youre basically telling the elderly dont bother working. We dont want you in the labor force no matter how experienced or productive you can be. These are big effects on taxes. The other big effect is on the treatment of depreciation. And when you spend a dollar on a machine today, thats a cost today. Thats part of the cost structure. You would think you would define income as the revenue minus the cost of earning it. Thats profit. But we dont let you take the appreciation today. We make you write it off over three or five or seven years. The value of the writeoff goes down with the inflation and the time value of money. And the government is basically telling you, youre earning a profit before youre really earning a profit. And they tax you on the extra inflated profit. And that raises the cost of equipment a lot the failure to allow expensing is the biggest hit on capital in the tax system, and thats where you get the most bang for the buck if you fix it. And thats why movements towards bonus expensing yields such a high gain for the economy in our modeling. Now let me give you an example at 3 inflation a sevenyear asset arrives at 80 cents on the dollar. At 5 inflation, a building has a writeoff worth 30 cents on the dollar. You have to earn that additional money before that building really has any hope of paying its own way. Sh and a big swing in the Capital Stock means a big swing in wages and job opportunities. So what do we get if we eliminate these four extra layers these three extra layers of tax saving investment and simply have a tax consumption, or the equivalent of it over time in your saving be be behavior . Well, its about 12 to 13 on the gdp. We ran something where we went to fall expensing. Set a corporate rate at 25. We have individual rates of 15 and 25. I have taken the top rates down and left the 10 rate up. No estate and gift tax. We got a gdp boost after all adjustment, it takes a few years, five to ten years perhaps. Gdp is 2 trillion higher. Private business equipment and structures are up by 39 p kt. The 39 . We have about 3 million additional jobs. Now this would cost money initially on a static basis of about 40 billion4 0 400 billion a year. By the time you got your growth its under 40 billion a year. I think you could trim a little spending by that amount. Its not too much to ask. In addition, there would be some attempt by people to report more income in the United States, and less income abroad if you have multinational cooperation, and the joint Tax Committee seems to be guesstimating things on the order of 20 billion or so a year. They dont quite explicitly state what theyre doing. So you get a virtual balance after the growth effect from all of these tax changes. So no net cost to the government over time. And you have peoples income up about 10 and additional jobs so more people are working. Now that is close to a free lunch as you can get. And thats the damage done by the current tax system. All the neutral tax systems are a means of getting the three layers of tax. Some are collected at business level. Some collected only at retail. Now my favorite, the personal expenditure tax is put down your income subtract your savings pay tax and whats left . That way each year you sit down and fill out a form and you say, they took what . And then you dont vote for them again. Where laz the retail sales tax might be nickelled and dimed and you may not save all your sales receipts and realize what has happened to you. But there are conveniences of doing it one way or the other. We have to take a look at those. These are all efforts to get away from the horrible horrible effects of the income tax and moving to a more sensible neutral tax base. Thats where the flat tax is really the flat part. You can have one rate. You can have two rates. But the base is flat. Were not putting one layer on consumption and other the others. And ill take any of them that can get me there. Although i have my preferences. But thats really the focus we need to have. Thank you. Good morning. I want to thank david for putting this together. If you havent already realized from the first few speakers this morning, our current income tax system sucks. Best takeaway message. Its an economic term, yeah. Its called sucks. The United States tax code severely distorts market decisions and the allocation of resources. It impedes Economic Growth and potential tax revenue. Youre hearing a lot now as were getting into the president ial election cycle and theres a lot of agreement on the need for tax reform but theres no consensus between or within parties among the the specific elements of reform. Even among republican parties theres differences on where you should focus. But luckily policymakers need not fly blind when looking at what is a good, efficient fair tax system. Weve been talking about that this morning. Keep in mind a few things as you walk through various ideas. One, a tax reform should be simple. Weve been talking about this all morning. The complexity makes it difficult and costly to comply with. It also makes it easy to scam. Congress should make it simple and fair as possible to reduce compliance cost. It should also be equitable. We talked about the idea of equity. Policies intended to benefit or penalize select individuals or groups riddle the tax code. These result in a measurable, unintended consequences. Now fairness is subjective. Tax fairness reduces the number of provisions that favor one group and not the other. And the doctor talked about this this morning as well. A plan should be efficient. Economists like efficiency. But because the tax code alters market decisions and areas such as work saving, investment and job creation, it impedes the Economic Growth and reduces tax potential. It also should be predictable. The negative effects are resulting not just from what it does today but from what it may do in the future. Such deters Economic Growth, in environments conducted to growth thus increasing revenues. And requires a tax code that provides near and longterm ive often jumped because of the tax extenders you hear about that we now have a permanent state of temporary tax policy. Thats not efficient for Economic Growth. Now, weve also heard this morning about how congress prefer a broad tax base with lower marginal rates. Because the tax rates drive the decision at the margin of what to do next. You do more work more saving or me leisure because its too high. Broader its more efficient because youre not treating some forms different than others, then reating a bias. A little caveat. I say generally before a Broader Tax Base but base broadening shouldnt be a tradeoff for other provisions and evade an attempt to achieve revenue neutrality to achieve the cost of capital. For example, increasing the length of depreciation schedules, thats not a good tradeoff for lower rates. Personally, we shouldnt focus so much on neutrality at all. One of the points steve mention is the scoring. I dont want dynamic scoring debate either, but i can tell you we should focus on the right policy provisions free Economic Growth competitiveness and job creation. The taxes we have today does not do that. So we need to actually get rid of it, forget about the revenue impact and realize that down the road this will pay for itself. The current United States tax road severely distorts market decisions in the allocation of resources. Tax code hampers job creation, impedes Economic Growth and ref knew potential, and throughout the discussion today, also please keep in mind where i teach my students only people pay taxes. If you take one thing away from tax policy, corporations dont pay taxes. People pay taxes. If you tax a corporation, youre either going to have a lower rate of return for investors. Youre going to have higher taxes on the profits or higher prices on products. So consumer pays for it. Or youre actually going to be taxing play boar in the fact the labor price you pay will be lower because that money is going to taxes. They may develop countries now reducing the Corporate Tax rate and restructuring 2 Corporate Tax systems to make them simpler. The United States federal government, though appears to be taking the opposite approach. Ill note some states throughout the United States are lowerring the Corporate Tax rates and offering competitive tax brackets on bus