Transcripts For CSPAN2 Key Capitol Hill Hearings 20240622

Your apples are ripe. It is time to harvest them. What is 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, consumptionbased tax because we dont want to mistreat capital. But to understand why it is so foolish, dont think about marxism, socialism, free market theories think about it this way, if you chop down the tree or more accurately what the current tax system does if you harvest apples by sawing off branches of the tree, what does that do for your longrun prosperity, your longrun income . You obviously will have fewer apples next year. It doesnt make sense to quadruple and triple tax capital. On this issue marxists and socialists are right they agree with sensible economist. You need capital for long run growth. We should have a tax system treats all income equally. No longer tax income saved and invested. You want neutrality in getting rid of all the loopholes but also neutrality in how you earn and how you spend your income. Thank you very much. [applause] david, thank you for bringing the panel together and inviting us here. It is refreshing to see the topic coming back to life after couple of decades of neglect in this country. I think it is critical we worry a little bit about the tax base and the structure of the tax system and not just how much were trying to get at any one point in time this is not about budget deficit and budget resolutions in congress. It is what youre doing in the congress and the country. I have a chart that i put up on the Tax Foundation website. Dan did a good job talking about the first tax i was talking about, one layers of tax on income used for immediate consumption. But i want to make the point that these extra layers of tax have an adverse effect on the Capital Formation and the adverse effect on the Capital Formation as an adverse effect on employment and wages. Dr. Rabushka talked about how economists focus on First Quarter system weve been talking here now about efficiency and why it is inefficient to distort things in this way the reason it is so bad it leads to horrible inequities to the fact you are depressing wages and taking the bottom rungs out of the economic ladder for people dont yet have enough saving and need to rely on saving of others to get started to have a place to work. When you cut the Capital Stock you reduce the demand for labor and reduce productivity of labor you reduce wages and jobs. People thinking in terms of soaking the rich in the 1940s, putting concept of income we use now today under the income tax they were neglecting the adverse effect on the labor force. It wasnt unknown. The godfather of the income tax henry simons, one of the two leading godfathers, haig and simons admitted it would damage the economy. His current disciples dont want you to remember that or they have forgotten it. Here what simons said about income tax saying. Income taxation is broadly instrument of economic control. A means of mitigating mitigating economic equality, assumes moderation of inequality is important objective of policy and proceed to income taxes as devices for effecting it. The case for drastic progression in taxation must be rested on the case against inequality or ethical or aesthetic judgment reveiling institution of wealth and income reveals degree or kind of inequality which is distinctly evil or unlovely. Not particularly scientific. In fact it is reasonable to expect every gain through taxation and better distribution will be accompanied by some loss if production. In optimum degree of progression distinctly adverse effect on size of National Income with expected capital accumulation the consequences are certainly significantly to be averse. Well he had a solution for the damage he was about to do putting extra layers of tax on savings and investment. He was going to restore National Saving but having the government run large perpetual budget surpluses. How often does that happen . Furthermore, even if it did happen, if youre stuck in the 91 bracket you will not save or invest anyway. Saving that is going to go into plant and equipment spending in the United States is still not going to owecure. As you buy down the national debt, people will use the reflow of their oil savings as new consumption or they will sell assets to people abroad and let foreigners finance capital here but our people wont. So simon said another idea that perhaps the government would have to start allocating things to certain types of investment pushing it that way. This was going to be the road to the government taking over far too much of the economy and youre going down the path of argentina and chile and so on here. This is not a good idea. And he was very explicit about that in his big book on income taxation. People tend to forgotten that. David asked me to give you estimations magnitude but i just want to make sure you realize how bad things are under the Current System so that you can see why were getting results we get. Another chart i have here is the discussion of what would happen if you start saving 1000 a year between age 20 and 70. Had it in pension as opposed to ordinary tax situation immediately taxed on earning and interest as it built up. At the end. Period you would end up with 400,000 in the pension and 240,000 in the ordinary savings account. Loss 2 3 of the potential Retirement Income because of double tax on savings which is initial double layer of tax dan was talking about. 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 bushs 2003 tax cuts that were about 48 on the capital gain retained earning and over 60 on the dividend payout between the Corporate Tax and the tax on the dividends at the upper end of the brackets. Mr. Bush reduced those tax rates to under 45 in both cases. Put weve now had increase in individual top rate. Weve had an increase in the top rate on the Capital Gains and dividends from 15 up to 20. Then up to 23. 8 with this new tax under the Affordable Care act. When you add the Corporate Tax to that, were at almost 50 1 2 . So weve taken back almost 200 of the tax cut on Capital Gains under bush and weve taken back a third of the dividend tax cut under bush. 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, Affordable Care act came in we saw big realizations effect on Capital Gains and taking in advance of the tax hike. Now were beginning to see data from years after it. 2013 was first year it was effective. Well see a crash in Capital Gains realization. Last time we tried this sort of thing in the 1986 act Capital Gains collapsed until they were lowered again under the Clinton Administration of all things at insistence of Republican House and Capital Gains realization came back up. You get no revenue from taxing something as fleeting, mobile and time sensitive as Capital Gains. There are the estate taxes. 40 . Now the irs is a bunch of kindly people who at direction of the congress were fold not to let anybody feel left out f you give money to grandchildren instead of children they impose two estate taxes. They take 40 . They take 40 of the remaining 60 in the Generation Skipping trust. And then of course if youre saving money in your retirement to add to your estate youre paying income tax on it. If youre actually working somewhat after you have begun your retirement earning a little bit of money at that time you pay the payroll tax on that well and there are estate taxes. On binded effects can be 81 , 84 . That is ad federal level. You can get over 90 at the state level. Youre telling elderly dont bother working we dont want you in the labor force no matter how experienced or productive you may be. These are big effects on taxes. The other big effect is on treatment of depreciation. When you spend a dollar on a machine today, that is a cost today and it is part of your cost structure. Would you think that you would define income revenue minus the cost of earning it. Thats profit. But we dont let you take depreciation today. We make you write it off 3 5 7 years or building over 39 years. Value of writeoff goes down with inflation an time value of money, and government basically telling youening a profit before youre realliening a profit and tax you on the extra inflated profit. And that raises the cost of plant and equipment a lot. The failure to allow expensing is the biggest hit on capital in the tax system and that is where you get the most bang are to the buck if you fix it. Movements things like bonus expensing yield such high gain for the economy in our modeling. Let me just give you an example. At 3 inflation a 7year asset has writeoff only worth 85 on the dollar. At 5 inflation the building has writeoff worth 30 cents on the dollar. You have to earn additional money before the building really has any hope of paying its own way. That results in a very big swing in the Capital Stock. And a big swing in the Capital Stock, means a big swing in wages and job opportunities. So, what the do we get if we eliminate the four extra three extra layers on tax and savings an investment and simply have a tax on consumption or the equivalent of it over time in your saving behavior . Well it is about 12 to 13 on the gdp. We ran something where we went to full expensing. Fed a corporate rate of 25 but didnt Capital Gains or dividends on top of that. Individual rates of 15, 25. Taken the top rates down 10 rate up. No amt, no estate and gift tax. Gdp boost after all adjustments take as few years, five to 10 years, perhaps for the Capital Stock to buildout of 12. 7 . Gdp is 2 trillion higher. Private business equipment and structures are up by about 39 . The wage rate is up about 10 . Hours worked up 3 . Three million additional jobs. This would cost money initially on static basis of 400 billion a year. By the time you got your growth it is under 40 billion a year. And i think you could trim a little spending by that amount. 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 corporation. 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 would get virtual balance after the growth effect from all of these tax changes. No net cost to the government over time. And you have peoples incomes up about 10 . And additional jobs so more people are working. Now that, this is close to free lunch as you can get. That is the damage under the current tax system the all neutral taxes that david mentioned are a means of getting rid of these additional three layers of tax. Some are collected at business level. Some only collected at retail. Some are collected business level and partly business tax form. Put down your income, tax your saving, tax what is left. You fill out a norm and you say they took what . Then you dont vote for them again. Whereas the retail sales tax perhaps might be nickeled and dimed you might not save all the sales receipts and not realize what happened to you. There are compliance and enforcement conveniences doing it one way or other. This well have to look at those. These are effort to take away horrible effects of income tax and moving to central tax base. The flat tax is the flat part. Have one rate, two rates but base is flat. Not putting one layer of tax on consumption and all layers of tax on investment. That is the flatness of matters. I will take any that can get me there. I have my prevalences. That preferences. But that is really the focus we need to have. Thank you. [applause] good morning. Want to thank david for putting this conference together. If you havent already realized from the first two speakers this morning our current income tax systems sucks. That is the message. Economic term. Called sucks. The United States tax code severely distorts market decisions and allocation of resources. Impedes Economic Growth and potential tax revenue. Youre hearing a lot going on now as we get into the president ial election cycle there is a lot of agreement on the need for tax reform but there is no consensus either between or within parties on specific elements of reform. Even among Republican Party there is differences where you should focus. Luckily policymakers need not fly blind to look with at a fair efficient tax system. Were talking about this morning. Keep in mind a few things as you walk through various forms ideas. One a tax reform or tax plan should be simple. The complexity of the tax code makes it difficult to comply with and makes easy to scam. It shoulds be equitable. Talk about equity. Policies benefit penalize individual or groups riddle the tax code. These policies result in measurable unintended consequences. Fairness is subjective. But tax fairness would at least the number of provisions in the tax code favor one Group Economic activity in the other. Dr. Ba rush can talked about this morning as well. Economists like efficiency. Because the tax code alters work saving investment and job creation it impedes Economic Growth and reduces potential tax revenue. It also should be predictable. Negative effects of current tax code result not just from what it does today but also what it may do in the future. Such uncertainty deters Economic Growth and environment conducive to growth and decreases revenues from larger economy as steve talks requires a tax code with near and long term predictability. I talk about the tax extend terse you hear talked about we have permanent state of temporary tax policy. That is not efficient for Economic Growth. Now, we also heard this morning how economists prefer a broad tax base with lower marginal rates because it is tax rates that drive decision at the margin of what to do next. Or at the margin. You do more work, more saving, more investment in plant, labor around equipment or more leisure pause marginal tax rates are too high. Broader base is more efficient because youre not treating some forms of expenses different than others and creating a bias. A little caveat. I generally prefer Broader Tax Base but base broadening shouldnt be tradeoff in other provisions in vain attempt to achieve revenue neutrality that would raise cost of capital and undue benefits lower margin rates on businesses. Decreasing length of depreciation skied us always that is not tradeoff. I think we shouldnt focus on neutrality at all. Steve mentioned dynamic scoring. I dont want to do a dynamic scoring debate either. We should focus on right policy provisions or Economic Growth and competitiveness and job creation. The tax system we have does not do that. Forget about it. Forget about revenue impact and realize down the road it will pay for itself is. The current United States tax codis torts market decisions in allocation of resources. Impedes potential Economic Growth and potential revenue. Throughout the discussion today, please keep in mind from teaching my students only people pay taxes. It if you take one thing away from tax policy corporations dont pay taxes, people pay taxes. If you tax a corporation you will have lower rate of return for investors. You will have higher taxes on the product or higher prices on products so consumer pays for it or youre actually taxing labor in the fact that labor price you pay will be loyer or less in the future because that money is going to taxes. So the doctor mentioned that many developed countries restructuring their Corporate Tax systems to make them simpler. The United States federal government appears to take the opposite approach. I note that some states throughout the United States are lowering Corporate Tax rates to offer tax packages to attract businesses. That is going on in southern states. Temporary tax provisions reincrease uncertainty and cost for businesses. Minimize tax exposure and reincorporate outside the u. S. Even worse some u. S. Companies take out debt in order to pay dividends to shareholders to maintain income overseas to avoid the high u. S. Tax rate. Unless we reform tax rate by lowering the tax rate this country falls further behind in global competitiveness. With the tax rate so much higher than other countries corporations must turn to accounting departments. We talked about hiring lawyers and accountants. These become profit centers. For some corporations the Tax Department is the most profitable section of their business. Complex engineering tactics using tax code preferences. Accountants can allocate income and capital to difficult countries to minimize tax liabilities to improve their competitiveness. Most basic effect the more you tax capital or labor the less you get. It also makes it clear that incentives matter. Successful reform willower current Corporate Tax rates. Fundamentally you got it you know it. If you tax something you get less of it. For all the reform plans from potential candidates if theyre trying to raise the Corporate Tax rate they obviously want less corporations f theyre actually trying to raise the Capital Gains rates they must obviously want less capital and savings. If theyre trying to raise marginal tax rates were working too much, take more time off and not work. That is the basic theory of economics. Unfortunately some people dont seem to get it. Talk about special interest loopholes. We should not be raising taxes. We should lower them, not raise tax rates. Should we raise things, lower them. We havent having discussion we need to have, to have a better tax system that encourages job and growth and focus on spending side. What does it say to the American People how much taxes are you willing to pay and how do you get the best revenue system and best spending system that meets your demand. We have politicians tax you here but give you this much benefits. So we have giant deficits as a result. What are you willing to pay in taxes. Well live within our means. Were not having that discussion. This idea of economic plans look attacks increase of 1 of gdp reduces output next three years by 3 . Raising taxes results in less economic output. Point out something david asked me to about tax rates. I have a chart so cspan can see it. Forward it around. Realize excess burden of taxation varies with the square of the tax rate. Get disproportionate benefit of economic gains from reductions and, economists talk about dead weight loss. If you double tax rate, you dont double dead weight loss, increase exponentially. Think about tax policy in the form of exponential benefits. Steve talks about the idea of raid reductions and capital accumulation we do on the tax code. Give you one for one tradeoff. It is multiplier that benefits greatly and very important to keep in mind. I would also sort of the point out that there are a lot of legislative efforts right now attempting to treat the symptoms and not the cause. Those that do are doomed to fail and only exacerbate our existing problems. Policies trying to prevent corporate inversions trying to penalize them will only exacerbate the problem with corporations moving overseas. U. S. Competetiveness will continue to languish and troublesome resource outsourcing of Economic Activity and loss of american jobs and sale to multinational corporations and further erosion of Corporate Tax base. Conflict to tax policies, savings investment, job creation that hurt Economic Growth. To sum up and conclude there is broad consensus amongst Academic Research which key policies are most likely to promote solid, sustainable Economic Growth and revenues. In which policies are most likely to fail. Lower rate are key. Exhaustive research repeatedly proves most basic effect. More you tax capital and labor less you get. Incentives matter. Always lower corporate rate individual rate on both sides. Broaden base, eliminate loopholes. One of the keys to successful fiscal reform move away from spending that depends on easily manipulated tax system. Tax reform should lower rates and eliminate loopholes. That will lead to stability and greater Economic Growth and added employment and perhaps most likely increase revenues. As steve, dan and doctor rabuska should have no double taxation. Only tax one. Lastly reduce bad incentives. No more temporary tax policy. Lets make it permanent. Make it reform and do that for the sake of the country for Economic Growth and for revenues, thank you. [applause] good morning. David introduced me as a recovering tax attorney and you probably think that im going to start off with a lawyer joke. I know a lot of them but i quit using them because i found two things to be true. One is it irritated any lawyers in the audience. And the second is everybody else thought they were true. So i am here as a proponent and have been for 25 years of getting rid of the income tax system we now have both corporate and personal, gift tax and estate tax, going to a National Retail sales tax. It started off in the 90s with the Tauzin Schaefer plan. Then we went to the fair tax which is a 23 National Retail sales tax on goods and services. And you can learn about it if you want at fairtax. Org. I go into the mechanics. I will be happy to answer questions as they come about, but were all talking about taxing consumption. Im talking about what i consider to be the purest way of taxing consumption which is the at retail level. Now there are a couple of things that have been said that i really believe are important. Most of the other in fact all of the other plans which involve using the income tax as a part of a way to do this require each of you in the audience as individuals to file a return. I dont know whether you remember dick armey used to hold up, i debated him his onepage tax return. I would hold up mine. Because individuals dont have a tax return. Corporations no longer have the dead weight cost of having to comply with either a vat, which theyre doing in europe, or the income tax because again this was a tax collected by retail providers of goods and services. Not the people that provide the inputs. As far as the Economic Growth i think the Economic Growth from all of these plans are very similar. Im not an economist. But i can read and i have read each much these gentlemen written very well on the topic and i believe there is no question well have more Economic Growth. I think one of the issues that we probably should look at, and dr. Rabuska brought it up because it was one of my initial problems with the consumption tax back in the 80s and that was complexity. In the 80s, i was as a tax attorney very very, very concerned with the enormous cost to Economic Growth and to frankly the sanity of some of my clients from the tax code. And i was in favor of a flat tax. And i have stayed that way and still, i started to coming to washington and following what congress did. And i began to believe that it may not be the way to go because any kind of an income tax can always be tinkered with. They have done it every time they reformed it. But one of the issues back in the 80s also was compliance. And it really was a concern because obviously a lot of people evading income tax but do you want to have a system that can be evaded even more easily . Well times have changed. Over 90 across the country of retail sales are actually collected by anybody want to take a guess . Less than 10 of the merchants. 90 . Think about it a minute. The walmarts, the targets amazon. Com all of these people are collecting. For most of these for all of them, it is an accounting situation that is most important. They will collect the tax. You look at the other thing you say, what about the remainder of that 90 . Well, back in the 90s ernie droneburg, vice chairman of board of equalization in california which is the agency that collects the tax was telling me they were getting in the high the 0s of compliance. 90s. I thought that was interesting. Last friday i had a conversation with George Runner who is now in the same position. He is commissioner on the board of equalization, the vice chairman. And he sent me, because i asked him, send me an email. I would like to get this and also a site to a study. But he says they collect 98 of the sales tax that is owed in california. 98 . Now do i think a retail sales tax of 23 is going to result in the same type of collection . Probably not. What is your reagent factor . Let me ask you a quick question. How many people in the room in the last six months or year have had an opportunity or know of one to get a service or product at a substantial discount for cash . How many . Anybody . Some hands are going up. Do you think that is because it is easier economically to accountingwise . No. In most of the groups i speak to almost all the hands go up. They all say no. It is because they are not paying taxes. They found a way to do it and theres a study on the underground economy from the university of wisconsin and madison where they talk about being 2000, i think it is the 10 or 11, they felt like it was as much as 600 billion being evaded. You look at it and say i am going to bring the rate down. I am going to bring it down to 15 , 20 from where it is. That is going to make it more attractive for these people accept there is one calculation left out. That is if you have an eveasion of the income tax, you have a 15 state tax so you could be paying 40 . I dont think that is going to significantly reduce the evasion unless you get very draconian in your enforcement and i dont think it is really possible. One of the side effects of obamacare, i know a lot of people who have left corporate employment and are now contracting because they cant get much better tax benefits which may be that translates into exaggerating deductions, maybe it doesnt because they can now get their insurance separately. That is why i believe a retail sales tax makes more sense. That is why it has a lot of things primarily the last thing i have said this to curtis in debate and dan and others, if they were king and could guarantee that the flat tax alternative was going to stay in place for 20 years i am resigning as president and chairman and moving over to you but i asked the question trying not to embarrass anybody, how many people feel that the flat tax is going to be flat in five years . I almost never get a hand that is going to go up and this is out, i hear very little compared to 0 my time across the country. The people just dont believe that it is going to stay flat and i dont believe it is going to stay flat. With retail sales tax it is more transparent and harder to adjust. Thank you very much. [applause] thank you all for coming. It has been a really good discussion. I think steve and jason and steve and dan have hit but we can hit on. We could talk about tax reform for the rest of the day but i want to hit on a few topics, a few things currently going on in the debate. Going back to something and said at the beginning, he said there is broad acceptance the tax rates matter and he meant that is largely true but there are people out there, against that simple proposition. Go back a couple years ago the Congressional Research service which provides congress with data and denounced the legislation got a report in the middle of the week until election that tax rates dont matter. Pretty bluntly said that. If you pushback to say wait a minute, pretty common sense and pretty well understood the tax rates do matter we were accused of being anti science and not really being true to the research. I got attacked as well. It was kind of a bizarre world where we are stating the facts and told that wasnt necessarily true. Fast forward couple years, last summer in the 21st century basically says the accumulation of capital will lead to the ruination of capitalism. Spiraling in the quality. Anyway he proposed to deal with that was to levy tax rates at astronomical rates, 8 incometax above taxing capital over 100 . Economy will collapse because taxes dont matter so there are people out there who will disagree with the simple propositions. Is important to keep making the case the tax rates do matter, they have an impact and best keep them low. One thing that has come up through many presentations is this is no one way to get to the consumption tax. We can get there lots of ways. This happens during president ial campaigns and a lot of fighting among conservatives about the best tax reform plan. Part of the effort we have been doing at heritage is to educate conservatives and the public and lawmakers that we dont have to be fighting over what the actual plan looks like on the surface. I like to compare it to a Software Program they all ask the same function that have a different user interface whether it is the traditional flat tax, new flat tax a chance for tax, sales tax or some hybrid that combines elements of all those taxes. They are all getting us to the same place a rather than fighting over what we want the user interface, we want the taxpayers to hallett to actually pay the tax we should be saying that we are on the same page we want the consumption tax and the low rate and understand a benefits that will result if we get Something Like that. Leave the attacks reform debate has shifted somewhat. For a long time the tax reform traditional tax reform was both revenue and distribution neutral. Back in 2012, mitt romneys tax plan was a revenuesharing for the same revenue as the Current System it didnt shift the tax burden up or down. Last year chairman of the ways and Means Committee david camp at a bill that was revenue and industry neutral. This year however, that hole constrained has changed. There is a plant that is both a big tax cut, is a big tax cut we are not sure what the distribution is, we will learn about that as we go forward and center paul put a tax reform plan, i call these the new generation of tax reforms and they have a great benefit. They can be more progrowth than traditional revenue and distribution tax reform. If you look at what the Tax Foundation found, senator lee, the tax plan would grow the economy by 15 , 1 or 2 growth. They can also, one thing that happens with tax reform is you set one of the movers, the nature of tax reform. When you have revenue neutral tax reform, you end up with more winners and losers but an awful lot of losers will screen really loudly. When you have a tax cutting tax reform you get a lot less losers a lot more people lot better off and easier to pass. All that said it does come with challenges. We obviously are in a tight budget environment in washington and our friends on the left will point out as they always do the tax policies and joy that tax reform plan is a big tax cut that will add to the debts and all the monumental style negative Economic Impact because of that. Depending on how the tax burden is shifted able point out that perhaps the rich are getting a tax cut, the middle class is paying more. That shouldnt work out that way of tax reform plan is done correctly. Theyre not shy about meeting and that to fit their narrative. All that said, the challenges 3s year to deal with if we have a dynamic score. We gone a long way to getting dynamic scoring in congress this year. The house is going to use that, the senate is questionable. If you have a dynamic score of the tax reform plan is easy to deal with these issues and the plan is a 1. 7 trillion dynamic basis of ten years. The historical average over ten years, we can cut taxes that much. Scoring will go along way to determine a successful tax reform plan like new generations put together. Last time we did tax reform was 1986. Tax reform led the charge. No one can keep tax return on their own. And leading the charge, with international more and, so and competitive, and reading, desire and debate in washington. One reason this exists with the complexity, it is easier to comply with and congress creates mischief but i dont know anybody do tax returns this year by hand and fills the mouth by hand . You are quite a trooper. I did this every day, my wife and i move from one state to another, an end six tax returns by hand got all six from the irs and each of those states. Turbo tax is cheap, and with my kids screaming in the background. And was done before it. On the individual side. And political dynamic. I will reform tax cut because of damage done to you any of the great benefits you are going to have. That is a good message to bring back, not an easy message to go back and say you are getting killed out there and we are going to make sure they treat you better. O we are going to make short gm or microsoft word google or whoever it is that is a tough sell and i think it is part of the reason we have a hard time getting going and also because it is hard to do tax reform for corporations and we pass through enemies alone and many reforms, once you are going on to the past side of the Business Community, individual code and the whole ball of wax no one wants to get into given the current political debate. With that i will end and we can take some questions. [applause] all right. We have a reasonable amount of time for questions to the panel. Please wait for the mic and give your name and institutional affiliation. Wait for the mic so people can hear on the television and the web cast. My name is peter with a Heartland Institute National Tax Limitation foundation. My question is justin the rand paul tax reform plan interest lot of these Interest Rates . Rand paul. The individual side as well as the corporate side, the pass through and all of that taken care of in one fell swoop by the rand paul tax reform plan. That is important to point out. When i talk about the difficulty on the corporate side i am talking how tax reform is usually looked at by people in washington which is we have to fit within the boxes, revenue neutrality and all the things that go into the tax reform debate in washington and it is more of an e shu the next couple years because of the dynamic with the white house and congress in terms of the president said hes interested in Corporate Tax reform but never said business tax reform. If corporations believe the pass through a loan is difficult to do, you have to do them together and so it is we will be at loggerheads the next couple years. If youd do a fundamental tax reform like senator paul propose or any of the things we talked about you see those issues because you dont have them but that is really about pulling it up by the roots, that is what youre doing with reform plans, pull up by the roots. The washington establishment, boxes are all designed to boost in the beginning and revenue neutrality is on a neutral tax reform principal. Something about revenue neutrality. I am glad a lot of candidates are talking about tax reform plans that are also tax cuts and glad we are talking about dynamic scoring to get a more accurate assessment of what the revenue of locations would be but lets not forget there is probably zero chance we will leverage the anything on tax reform unless we figure out some way to cap and restrain the growth of the burden of Government Spending and that is why it is encouraging to see there has been movement not through the white house but from congress in terms of structural genuine entitlement reform. If we dont get a hold of Government Spending with the demographic changes we will wind up like europe and then the only tax reform we will get is adding a vat on top of the current monstrosity of an income tax. I dont worry about whether or not we have revenue neutral tax reform in the short run but we do need to marry or push for tax reform, push for a genuine budgetary and entitlement reforms as well. Next question. Let me ask a question of the panel. We have not addressed in any detail International Tax questions. The United States is the only major industrialized country that does not have a territorial system. There are a few minor or smaller countries that do. We also of course are incometax is not bordered. Do you think International Tax consideration issued be a major part of fundamental tax reform and what do you see s the major components of changes in the International Area at go down the panel. First thing for those the dont have the misfortune of following this too close the little definition. Worldwide taxation basically means that the irs taxes American Companies not only on the income they earned in the u. S. But also tax our companies that are earning money overseas but of course all those other countries where they are earning money they are imposing taxes as well so a bizarre form of double taxation pherae, our Companies Get a credit for the taxes they played to foreign governments that never works out well and combine that with high Corporate Tax rate, definitely puts u. S. Multinationals at a disadvantage which is why most tax reform plans move to territorial taxation, the commonsense notion huge tax borders. But it is for only narrows the son of people tend to focus on this but it is critically important terms of the competitiveness of your country and companies there in. We ought to have a global tax system, that the capital export neutrality, a company moving, put together a factory should not be influenced by taxes here or in canada or europe. The flaw in that argument lets tax some equally whether they are here or in canada and canada has a lowering we will put an addon tax on it. The flaw in all of that is that it assumes a certain amount of capital be informed, that factory is going to be created. If you over tax it might not be created at all. Or if it is worthwhile to put a factory in canada and put an extra tax on it wont put factory in canada. A french firm will put a factory in canada instead of us. All free is based on a misconception that there is fixed amount of capital and all we are deciding is where is going to go and mine is will be here instead of there. None of that makes any sense at all. Each country will build out its capital, you use all the potential profitable opportunities in that country. That country has a lower tax rate there will be more opportunities there and Additional Capital and it will be there. It doesnt mean ireland is stealing capital from germany. If the germans put the irish tax rate on the irish subsidiaries of German Companies there wouldnt be any irish subsidiaries of German Companies. All things based on misconception to start with but the weird is thing to me is if an American Firm is thinking of buying another American Firm with economies of scale french firm can come in an outbid them for the american confirm because the french firm wont be paying additional french taxes on the earnings in america. It is simply bizarre. We are treating foreigners better than we are treated ourselves. I dont see the point it doesnt get us any money, it costs us opportunities to invest and export to foreign subsidiaries and makes us weaker in the world, a smaller share of the World Economy than we were 30 years ago, countries have caught up after the devastation of world war ii, but we are making it worse than it has to be by shrinking our own crazy tax system. Hard to follow these two. I look at a point i forgot to make earlier, we start thinking about tax reform and of course we think about territoriality and lowering of the rate and always keep in mind the ideal Corporate Tax rate is zero. The ideal Capital Gains tax rate is zero. Anything above zero creates inefficiencies so we look at Corporate Tax reform, lower the rate we can get the better in general. If we look at a lower rate, the world wide taxes wouldnt matter if we were the rest of our competitors but dan is right looking at reform the odds are not to get zero. I would like to, to consider the rate at a territorial tax system at the same time. Jason is making a case for the fair tax. Corporate rate is zero. That is in fact what some of the economic studies show the you are going to have exponential attraction of capital coming in because as a recovering tax attorney i will confess that when it was legal i was a frequent visitor of the bahamas and the Cayman Islands and all and the reason was they did not have an income tax and we set up trusts and different things, when it was legal and we were able to have tax payments that were very low because of fat, capital is calculating its return based on what it can take home after taxes and if you have no tax on savings and investment for corporation itself you have a lot more people would king favorably at the United States to invest capital. The second thing is border adjustability and economists here should be explaining this, not me, but basically what we do not have under the income tax presently even though we tried and failed is any way to make the type of adjustments our trading partners joy because when they export goods from countries that have value added or other consumption taxes a rebate those taxes that be border, come over and are effectively not taxed, a very low rate of tax because we dont tax on imports but profits made from selling less imports. What we are talking about with the fair tax, with the other types of Corporate Taxes being proposed is there would not be that tax kerri, cost to government carried when we go overseas and conversely when they send product over here they would be sending to the same tax our products are and is very important to have border adjustability and very important to be in the forefront of attracting capital for not only here but some of that 15 to 20 trillion that is offshore now and really isnt in any country that is looking for places to go. That hit on a point. Any tax plan that establishes a consumption tax place should be territorial, should only tax income in the u. S. What i want to add about the misconception of a worldwide system part of the fallacy is we have to have worldwide system because businesses create operations that would have been created here. That is not true. Joy and operations abroad to chase new opportunities and markets in demand abroad and we want our businesses to be chasing new customers and be selling more and when a Company Standing of receives it is standing back here and the company gets more efficient, creates new synergies and create jobs here at home. One of the biggest economics books of the modern era is kennedys book. Those that invest in the market are better than wages in the economy creating income inequality. Some of the lessons, we are right and need to tax capital and they are not rich anymore. The rest say if youre trying to increase why not increase it through tax reform, government regulation reduced taxes some more folks get a return on labour. The second lesson is why arent we doing our best to make sure more people have access . Better savings incentives, it is interesting if you take the research at face value, and it is to change our policies and tax reform to get more people access. There are problems. You are going to invest all of it and get the wealth inequality but you dont when you retire of returns on capital. Is not being reinvested so the wealth inequality isnt rising. The poor guy didnt understand some people in retirement have to draw down their dividends and chantry invest all of them. That trashed the entire argument. The staff ran out of plan through our mall and crashed gdp by over 15 including a drop in labor income of 15 . That was on all levels of wages and labor lowincome people, middleincome people high income people, planned this. I want to emphasize one thing. All these consumption based ring, livens engine based plans are in effect helping with the Capital Formation here. They are all in a sense expertly or implicitly border adjustable to the same degree or it is in the longer the other one happens. If youre saving it you are not consuming and if you are not consuming it might as well be exported. They are all better than the current law on the International Trade and about the same way. That is something, the International Benefits of doing this are overstated. Going to a flat base the territoriality gives the additional king of not penalizing americans who are trying to invest abroad. It is a different question. Territorialism little different from the concept of neutral or flat tax but they are both important and the Business Community is not waiting for congress to get off the dime here. They are investing more and more broad and if necessary spinning off foreign subsidiaries and or arranging for their headquarters to move overseas doityourself tax reform. They cant wait for you. Burger king, funny point in point. For operations didnt have to manage so it spun off tom horton, tim horton. Got bought by another Canadian Firm and grew and this was not some vicious plot to get around our International Tax rules it just happened in terms of Economic Growth and they went ahead and did it. One of the funniest cases out there but it will happen more and more as time goes on if congress doesnt get off the dime. We need to wrap up this panel. Our next panel if they are here, please join me in welcoming our guests. [ applause] [inaudible conversations] thanks, david. Now for our last panel of the data like to introduce my colleague steve moore, distinguished visiting scholar in the project for Economic Growth at the Heritage Foundation and Economic Freedom and opportunity in addition to his role at the Heritage Foundation he has contributed to wall street journal and fox news. Two leading intellectual advocates of the flat tax here today, starting with Alvin Rabushka ending with Arthur Laffer. They have been two most influential people promoting this idea the last 25 or 30 years. Its a pleasure to have art laffer here. You know art laffer the intellectual architect of reagannomics. They turned Ronald Reagan and jack kemp on to supplyside econmics there. Is great book ive been reading about jack kemp by Mort Kondracke and fred barnes. It tells how art laffer and other intellectual leaders of that long long ago era really turned around the country in terms of promoting their ideas and getting Ronald Reagan to sign on to these ideas and a movement that not just openly changed the United States but really changed the World Economy so to that we owe Arthur Laffer a great debt of gratitude. He is the author of many, many books, including most recently an inquiry into the nature and cause of wealthy estates. I wrote with arthur and we have two other authors travis brown, why some states are growing so much faster than others. So without further adieu, i want to introduce my good friend, Arthur Laffer. [applause] i usually sit right up there, steve, so i can just sort of, thats impressive, dont you think . Steve sitting there i can look at the back of his head the whole time. How i do a facial thing how will you recognize myofacial movements . I go like this. Let me, i have a little fun with you today if that is all right and go through some of this. How are you . Good to see you. Howard . Golly, i thought all of you were dead by now . [laughter]. One of the real pleasures when you get to be my age of 75 is that all your enemies have died. But that you know, hillary is still around i guess. As long as that is happening what i want to do is start with simply incentives. There are two type of incentives in this world. There are positive incentives and there are negative incentives. By way of illustration the example i like to use if you beat a dog you know where the dog wont be but you have no idea where the dog will be. It will take off like mad but you dont have any idea in what direction. Positive incentive that was negative incentives. The stove doesnt care where your hand is, as long as it is not on it. But positive incentives tell you what to do. Negative incentives tell you what not to do. Positive incentives tell you what to do. If you feed a dog, you know exactly where the dog will be when it comes to food time, feeding time you know exactly. You have got to look at the world in terms of these incentives and when you look attacks which i will talk about here, taxes are a negative incentive. They tell people what not to do. Do not report taxable income. They dont care how you dont report taxable income. They care that you dont report taxable income. You can use evasion, avoidance, underground economy, moving to a different location, going out of business. All it is a negative system. You have to understand taxes are a negative system. And when you look at it you understand it intuitively. Why do we fine speeders on a freeway . Get them to stop speeding. Why do you fine why do you tax sick lets . To get people to stop smoking. Why do you tax income . You dont do it to get people to earn less income. So when you look at a tax system what you want to make sure you do you recognize the purpose and the purpose at hand is to raise revenues. So what you want to do to avoid damage you want to collect your taxes in the least damaging fashion and obviously spend your proceeds in the most positive fashion. But youve got to understand negative and positive. For example, you never want to mix a positive in with a negative. I mean you just dont. You dont want to have a negative system to put a positive a Child Tax Credit is a perfect example of mixing a positive with a negative system. You should never use a Child Tax Credit. If you want to reward people for having children which is perfectly fine, if you like to do that, i have six steve. So im, im all for rewarding people who have lots of kids but write them a check. Dont give them a tax credit. Write them a check. There are lots of people who dont file tax returns who do have children you get all sorts of distortion in the system. Let me if i can go through a couple of these with you because it is really important here. Why would you ever ever, ever, want to cut taxes on people with high income instead of cutting tax rates with people with low income . Why would you ever want to do that . I mean what on earth would generate someone to cut the highest tax rates and not use that to cut the lowest tax rates . Let me go through with you just a couple of things on why you would want to do that. The first thing, if youre looking at a cost benefit analysis, im going to use the example of john f. Kennedy, if i can. And john f. Kennedy in the 1960s, i think 63, 63 or 64 the tax bill, he cut highest marginal income tax rate from 91 to 70 . He cut the lowest tax rate from 20 to 14 . All of you with me this if you look at it in percentage terms by cutting highest from 91 to 70. That is 21 percentage points, divided by 91. That is a 23 cut in the highest tax rate. And by cutting the lowest rate from 20 to 14, that is a 6 percentage point cut, out after base of 20 that is a 30 cut in the lowest tax rate. All together with me . If you look at it, kennedy cut the highest tax rate from 91 to 70, 23 cut and the lowest rate from 20 to 14, that is a 30 cut. If taxes were all that matter you would perfectly correct he would cut the lowest tax rates by more than the highest but remember taxes are not issue. People dont work to pay taxes. People work to get what they can after taxes. That very personal and private incentive that motivates them which is not exactly taxes. In fact it is earnings rate. It is incentive rate that really matters. Let me take you through the incentive rate. A person in the highest tax bracket before kennedy cut that tax rate from 91 to 70, if that person earned a dollar they had to pay 91 cents in taxes. Their after tax incentive for earning that dollar was nine cents. All together . In the lowest brac connects the guy earned a buck, paid 20 cents in taxes and his or her incentive was0 cents for earning that dollar. All together . After the tax cut, by cutting the highest rate from 91 to 70, the incentive the after tax incentive rate for the person in the highest bracket went from nine cents on the dollar to 30 cents on the dollar. Now after the kennedy tax cuts they earned a dollar. They pay 70 cents in taxes. They were allowed to keep 30 cents. If you look at from the standpoint of incentives, that that is a 233 increase in incentives, for a 23 cut in tax rates. Thats a one to 10 cost benefit ratio looking at static revenue loss to an incentive effect, you get a one to 10 cost benefit ratio. You follow me on that. If you go to the low of the rate before the tax cut the guy earned a buck paid 20 cents in taxes, his incentive or her incentive was 80 cents on the dollar. After the tax cut going down to 86 cents on the dollar. That is incentive. That is 7 1 2 increase for incentives for that person for a 30 cut in rates, that is four to one cost benefit ratio. Whenever you cut tax rates, higher tax rates are, the greater is the percentage increase in attacks incentives for doing the work after tax incentives for doing the work for static dollar discuss. That is the key reason you want to cut highest tax rates the most because you get the greatest tradeoff between cost and benefits from that. Are all of you following me on this. Please do. I hope you do. Second thing i i want to go through in taxes marginal tax rates are the key or if i should say it, to correct myself marginal incentive rates are the key for tax cuts. You always want to look at incentive rates and on the margin. When you look at a tax return in the u. S. Every single taxpayer pays the lowest tax rate, every single one of the taxpayers pays the lowest rates. As you go up in the brackets, fewer and fewer people pay the higher tax rates until you fet get to the heightest tax bracket. When youre in the highest tack bracket, everyone is paying that tax rate on the margin. When you look at the actual tax brackets and filing of tax returns, and i dont remember what year it is less than 2 of all taxpayers actually pay the lowest tax rate as a marginal tax rate. All the rest of the tax cuts are infra marginal. If you cut the lowest tax rate you will have incentive effect to change substitution between labor and leisure. Only substitution effects are operates on very small percentage of people in that lowest tax bracket. Again, so higher you go up more effect you have of cutting the marginal rates and changing the marginal rate of substitution between labor and leisure. Another reason for cutting the highest tax rate. The last one i i want to go through here with you which i think is very important as well, rich people are different than poor people. They have got money. They have got the means to do things that poor people dont have. And in fact rich people have also the ways to do things that poor people dont have. They have both the ways and the means to change their taxes. They can hire lawyers, accountants, deferred income specialists, favor grabbers congressman, senators. I mean when you see a group of people hanging with the president , dont for a moment think this is a group of street people trying to explain to the president what it is like being poor. Theyre switching positions between Goldman Sachs and the white house. Rich people have the ways of changing. I moved from california, rancho santa fe, nashville, tennessee purely and simply for the income tax. I bought my house in tennessee with my first years tax savings. I had hang up pictures. I dont know if i told you this, i had to do watercolors all over the house and beach scenes and bikini girls all over the house for first couple salt sprays in every room and big sun laps and beach boy music in the background. I got over it. After three years the statute of limitation was gone and i could go back and visit. Rich people can change timing income. Iras 401 k s. They can change the location of their income. Unrealized Capital Gains they can change the volume of their income. People who are high income have a far more elastic and forgive me for, i dont know how many of you are economists, a far more elastic supply of taxable income to the system than lower income people. The reason you cut tax rates on the highest group is not because you love rich people although there is nothing wrong with rich people as long as they help me along as i need. If the Heritage Foundation isnt the place for that, steve, i dont know what is. But if you look it is because you get more bang for the buck. Number one the cost benefit ratio is lower for the highest brackets because incentive effects are much greater. Higher tax rates per dollar static revenue loss. In the highest brackets you higher brackets find a lot more people on the margin than you do in the lowest brackets. Thirdly you find in the highest brackets people have a lot more ways to change their income and elasticity of supply. That is why you want to cut. What you want to do, broader the base, leads you to a flat tax going through this logic. I want to talk to you about one other, redistribution. It is really important theorum on taxes and government. Redistribution, this is all pickety stuff, if you forgive me but redistribution is when you take from someone who has a little more to give to someone who has a little less. Are you with me . That is the quintessential definition of redistribution. If you take from someone who has a little bit more you have reduced their incentive to earn income and they will produce a little bit less. If you give to someone who has a little bit less, they all of a sudden have alternative source of income, other than working. And they too will work a little bit less. The theorum here is really explicit and unambiguous. Whenever you redistribute income you reduce total income. Whenever you do. Redistribution always comes at a cost of lowering total income, period. That is math. It is not economics. It is math. When you take from someone who has more, they have an incentive to produce less. You give to someone who produces less they also have incentive to produce less and both parties will produce less. The theorum is really simple. Whenever you redistribute income you will always get less income. The more you redistribute the more lower income will fall and in the extreme if you redistribute income completely and totally you will end up with zero income totally. You can see that. If you did redistribute income totally, where everyone who earned above the average income, that person was taxed 100 of the excess. And anyone who earned below the average income they were subsidized up to the average income. If you actually did that everyone would end up with the same amount of income. It would be exactly equal. Now if i actually did tax everyone who made above the average income, 100 of the excess and i did subsidize everyone below the average income up to the average income we can all stipulate today, counselor, that everyones income will be equal at zero. Just remember these are the theorums when you go into policy. Why you want to look at a flat tax and why you want a flat tax to be comprehensive. It is because, all, except for the speedy speeding and cigarettes, i. E. Those taxes youre imposing on a system to change peoples behavior. The joke i like to use we americans i guess dont like drunk people smoking while we shoot each other . [laughter]. You know except for sin taxes which are there to change behavior, what you want to do is do the least damage to the system in collecting the requisite revenues to run the government. Thats what you want to do. You want to collect your taxes in the leastdamaging fashion and spend the money in the mostpositive fashion, and when the last dollar of taxes is collected is a little bit less painful than the last dollars of money spent is beneficial, you stop already. Thats where government stops spending. That is the correct and optimal conditions. So what you want to do on these taxes, if you really want to get to where you have the least damage done by collecting unless you know the net supply elasticity of every factory in the world which obviously none of us does if you dont the best analysis is to have assume, all factors have the same elasticity. What you want to do is have the lowest possible tax rate on the broadest possible tax base to provide people with the least incentives to evade avoid or otherwise not report taxable income. And give them the least places to which they place their income and be exempt from taxation. You want lowest possible rate on the broadest possible base for a tax system. You all there . I mean obviously the rest of the program should be you want spending restraint. Government spending is taxation. Government doesnt create resources. Government redistributes resources. When ever the government bails someone out of trouble theyre putting someone else into trouble. Believe me when i tell you. Sound money you need sound money, i will not go through all of it. You need sound money. You need free trade. For you guys here, because heritage needs this lecture, free trade is wonderful. There are some things america produces better than foreigners. There are some things foreigners produce better than americans. We and they would be foolish in the extreme if we didnt sell them those goods we make better than they do, in exchange for those goods they make better than we do. It is winwin. Comparative vantage. Gains from trade. David ricardo, hello that is what it is. China is not our enemy. China is our best friend. Without china there is no walmart. Without walmart there is no middle class or lower class prosperity. Issue is not china is our enemy. China is our best friend. You know, sanctions on countries dont work. Sanctions on north korea. You see how they have caused them to see the light. Oh my god, america weve opinion only sanctioning them 65 years. We see market free progrowth democratic capitalism. They are hostile to america forever, ever end on end. When did we start sanctions on cuba . Sanctions are the an at this time that sills of influencing friends. I want to stay with taxes. Low rate, broad base flat tax. I will stay with you broad base on this one. Most people think it doesnt make sense politically. I did a proposal long, long time ago called the complete flat tax which got rid of all federal taxes. All of them. Got rid of personal income tax, gone. Corporate tax, gone. All payroll taxes both employer and employee gone. Excise taxes . Gone. Medicare and medicaid taxes . Gone gone. Capitalgains taxes, unearned income taxes, everyone ever those gone gone. Tariffs, all of them gone. Got rid of all federal taxes with a single exception of sin taxes. Left them. Theyre not very large portion of total tax revenues. If you replace static revenue no laugher curve effect on this thing, static revenue, full employment, all federal taxes with two flat rate taxes. One on Business Net Sales and one on person nan unadjusted gross income no adjustments exemptions or exclusions you could match all federal taxes with 12 on each. Can any of you imagine no federal taxes in this country except for two rates. Net flat sales, and personal income, 12 . Can you imagine what this country would look like . We would sell cars to central china, the boom of all centuries. Tax gdp once when it is spent and gdp once when it is earned. Reason that doesnt come out to 20 because there are certain items and immuted rental value of Owner Occupied homes and corporate profits from government corporations and stuff. But that is the where you want to go to grow your taxes. Now that tax, i was able to con governor of california back in 1992 to do this, jerry brown. Jerry brown did that. Jerry brown in a democratic primary ran on this propositively he raised it by 1 because he wanted a little bit more revenue i guess. You can tell just looking at him he likes to spend but he raised, so we went on flat rate tax of 13 on Business Net Sales and personal unadjusted gross income. Went from 8th in the race in the democratic primary to second. Lost in wisconsin by one voter really close in wisconsin. Going into new york jerry brown had bill clinton in crosshairs. Democratic primary. Lefties and wired dough freaks. Going into new york. We were catching up in the polls. Almost had him. And three weeks out of the New York Primary jerry announces his running mate is jesse jackson. Needless to say we didnt win. But jerry brown literally came in second in the democratic primary 1992, the first major president ial candidate to run on getting rid of progressive income tax in history. Take you one more shows popularity. 1986 tax act. Any of you know the 86 tact act . None of you are old enough to remember. You may be. Barely. I love picking out those, there we go. The 86 tax act we cut highest tax rate from 50 and dropped it to 28 on the fat cat rich chis. All the little tummys, incase we miss ad couple fat cat rich chis we cut corporate rate. Which at that time put us lowest Corporate Tax rate in oecd. 35 . Now were highist. Steve moore the revolution werent across the world on tax cuts. Cut highest rate on income, from 50 to 28. Cut lowest corporate rate 56 to 34. Make sure we didnt miss anyone and show dispain for the poor minorities disenfranchised, we raised lowest rate. That will teach you to be poor. We raised lowest rate from 12 1 2 to 15 . Now as you all know we werent trying to redistribute income the reverse way. What we were trying to do is move towards a flat tax. We got rid of 14 tax brackets. We made it two tax brackets. 15 and 28. Got liz of dozen exemptions and exclusions it came out exactly static revenue neutral. Exactly. Reagan says if it raises 100 bucks i will veto it. If it costs 100 bucks i will veto it. This is about constellation of tax rates not about a tax cut or tax increase, period. Can any of you imagine that bill today in congress . I dont think there is republican would vote for that today let alone any democrat. The vote in 1986 . The vote in the senate in 1986 was 973. Three senators voted against that bill. Simon, little bow tie from your state, illinois, steve. Melchior was from maryland levin, just retired from the senate in michigan. Alan cranston, mr. Lefty voted for himself. My next door neighbor see a lot of al gore voted for it. Told me six months ago best bill he ever voted for. Led to 20 years of prosperity. Tall and pink, mr. Bill bradley voted for it. Mr. Death tax himself Howard Metzenbaum he voted for it. What is his name from delaware, joe biden, he voted for it. Chris dodd voted for it. Teddy kennedy voted for it for gods sakes. In the house, back then, Barbara Boxer voted for it. Harry reid voted for it. Little Dickey Durbin he voted for it. Charlie wrangle voted for it. Chuck schumer voted for it. Why did they vote for it . Why . Because its the right thing to do. And it was the right thing to do when they voted for it. And believe me, when you name the north star, when you describe the tax codes correctly and you believe in what youre doing, you can win that really easily. We are at a stage in our history where we need to redefine the north star go through the tax codes correctly. We need a low rate, broad base, flat tax, conceptually clean. There is plenty time to compromise in the middle of the legislative process. You doesnt have to compromise before you even started. Describe the north star and let the race be run on the north star and then when you get to the lidgetive process you can legislative process you can compromise. There are couple others quickly. Every other year we should only be allowed to repeal legislation i dont know if you like that one. I also think that congressman and senators ought to be put on commission. I have no problem with them making lots of money as long as i do too. I would put them in, i would do with every congressman or senator the day he or she took office, shadow portfolio, five million dollars. Keep all the Capital Gains taxfree and hold them personally liable for all the capital losses. Believe me they would never vote the way they vote today. With that, steve i will stop. Have i done enough damage . Thank you. [applause] im just going to make a couple comments what you said, arthur. Then well get into the discussion. I was asked to talk a little bit about the politics of the flat tax. Arthur and the speakers you heard earlier this morning talked about the economic case for this but the question of course arises, why is it that weve been talking about this issue for at least 25, 30 years. 20 years ago steve forbes ran for president on the flat tax and he did well with it but were not that much closer to a flat tax today than we were when steve forbes introduced this idea. Now you heard today all the economic arguments in terms of why this would dramatically improve the economy and create jobs but i want to make a few points how we sell this issue and arthur and i will engage in a little bit of conversation on this as most of you probably know arthur and i spent many months with rand paul helping him develop a flat tax proposal and he has come up with something very similar to what arthur just described, the complete flat tax. Not entirely the same, arthur but it has a lot of the same characteristicses. 14 1 2 to 15 flat rate income tax. It has 15 on personal income tax. On the business side very similar to what arthur just described. Essentially a Business Net Sales tax. It has gotten an enormous amount of attention already. It has only been out there three or four weeks but he had four million hits on his website. It is just deluge. They shut down the website. It got some hits the first week the plan came out. We found even irs agents were interested in this plan because they saw benefits of it. Yet, even at polling weve been doing at heritage on this concept of the flat tax the flat tax is a concept is not especially popular. A lot of people like it but a lot of people dont like it. The question is what do we do what are some of the arguments we should make in favor of this . I wanted to just mention two or three. One is the obvious one, the International Competitiveness aspect of this. The idea of the United States having a 15 tax rate when the rest of the world is at 35 or 40 would give america an obvious huge, huge, competitive advantage in terms of companies located here rather than locating abroad. And one of the ways that i like to try to emphasize the importance of this look, a lot of people on the other side of the aisle dont believe tax rates matter. Arthur, they dont believe a word that you say. They dont think tax rates have much impact where people go and where capital goes and where businesses flow. Many of you know just about a week 1 2 ago i was in las vegas debating paul krugman who is probably the most influential leftwing economist in the country and he writes for the New York Times twice a week and when it comes to politics it is hard to point to anyone who has more impact on the way that democrats think that paul krugman. What was interesting we got into the big debate about states. As i mentioned arthur and i both have this book about the wealth of states. About the fact that people are moving from hightaxed states to lowtaxed states. Evidence is overwhelming this is happening. I will not go through all the arguments. I showed paul krugman this chart, that showed texas and florida created over last 20 years, texas and florida have no income tax versus california and new york where they have 13 income tax as arthur just described. What we found is that for every job that has been created over last 20 years in new york and california, three to four jobs have been created in texas and florida. And i confronted paul krugman with this data how do you explain this, paul krugman, that some of these jobs are flowing from states that did exactly what you told them to do and going to states that did exactly what Arthur Laffer told them to do. What his response was, they were moving because of airconditioning. That is crazy thing to say. By the way with everything krugman says there are kernels of truth. All things equal people do move to warmer states but the point im making here it is irrefutable that tax rates matter on the state level. There is no question about it. There is massive flow. We estimate about 1000 people a day are moving from high tax to lowtax states. My point is people would move from one state to another say 13 percentage point differential in the tax rate theyre going to move substantially across capital will move across borders if you have a 20 or 30 point advantage on tax rates that we would have if we had the flat tax. That is number one. Number two, the maybe the most important argument in my opinion right now in terms of con striping the American People why we need a radical change in the tax system. That is either the flat tax or what steve hayes talked about National Sales tax the major selling point isnt even the economics point. Its a point about anticorruption in washington. If you look atpolling what is happening with donald trump. Im not by any means a supporter of donald trump. I thought what he said this weekend about john mccain was despicable, there is no question about it what donald trump has tapped into is this idea that washington is corrupt that it is incompetent and there is too much cronyism. We need to take power away from washington. That is what donald trump is talking about. If you want to do that, what is the kind of epicenter of power structure in washington . It is the tax code. It is members of congress buy and sell tax favors every single day. The point we need to make over and over and over again, if you wipe out all of these special preferences, all these carveouts, all these special interest provisions that keep k street in business you will take power away from washington right . You will replace it to the people. And this is kind of a power to the People Initiative that i think we dont talk enough about. That no longer would people have these politicians and lobby i haves have the power to influence where money flows just based on the tax code. Final point i will make about this i think we underestimate but as really important one in terms of selling this concept to the American People is that you mentioned, arthur, the Corporate Tax which is abomination. I dont think you can come up with a worse tax. Correct me if im wrong i cant think of a worse tax than our Corporate Income tax. Were taxing producers and were not taxing producers that produce things and bring them into the United States. Interesting element to the flat tax, the complete flat tax at thursday and i put together i like you to think about, 15 complete flat tax, what this plan is gap legal, 15 tariff on anything that is brought into the United States. So in other words, instead of taxing what we produce were now going to tax people on what they consume here in the United States. That is enormous. I believe we go to bluecollar workers across america look, this is what you have always wanted. You wanted a tax system that gives america fair advantage. That is what this plan does in spades. I think that is a very very powerful message to bluecollar workers across america who make things who basically look at things coming in from china or coming in from japan and other countries, wait a minute, we want to at least compete on equal basis. And this plan were talking about would do that. I do think that when you look back at what happened in 1986 it was kind of a miracle. All the stars were aligned. And if you look at america in 2015 it just, it just feels to me that the American People feel that the tax system is so corrupt and so filled with special interest provisions that dont benefit them but benefit a corporation down the street, that the time could not possibly be more right with this. So let me start with a question for you arthur, about this. First of all, do you agree with my assessment . Second of all, the depressing part about whats happening on the democratic side of the aisle we have a senator from the state of vermont, Bernie Sanders who is basically been giving speeches around the country we should go back to 50, 60, 70, or 80, 90 tax rates. He says the economy performed very well back then when we had tax rates at 70 80, 90 . We can have a Strong Economy with tax rates that high again. How would you advise people to respond to that argument . By the way he is climbing in the polls with this very populist argument . First i do agree with steve that Bernie Sanders is, they had high tax rate and economy prospered. My suggestion to Bernie Sanders prove his point raise tax rates to 100 . Then drop them down to 70 and watch how the economy improves. If you look at the history of the u. S. In the postworld war ii era amazing. Highest marginal income tax rates at end of world war ii. 92 1 2 . I mean, think about it for a split second. Here you have the u. S. Where the house has to pass the bill senate has to pass it and president has to sign it. The highest marginal income tax rate at that place was 92 1 2 . Think about the debate in congress back then with the lefties and righties. Okay okay, im willing to to 92 1 2 , i am, but 95 that is gouging. Lefties says 90 is give away to the fat cat rich. If you look at it, went from 92, 892 1 2. Harry truman cut it to 91. Jack kennedy cut it to 90. Then cut to 28 . Look at trend in the u. S. And world moving away from this. We have a different world today. Look at Union Representation back then today. We are becoming so much more of a free market Free Enterprise world. To think that there will be any major change in that trend i think is a real mistake. What i think is going to happen in 2016 well win the election landslide. May well be a democrat. You know this is not, this is not republican or democrat. It is not liberal or conservative. It is not leftwing or rightwing, it is basic, basic economics. Jack kennedy did it. Bill clinton was great. Ronald reagan was terrific. It is bipartisan, ignorance and blessing. Some of your critics say the economy performed obviously very well in the clinton years. Very well. Clinton raised tax rates. Yeah. This is counter to your theory. Clinton didnt raise tax rates, come on. If you look at first thing he did he pushed nafta through congress against his own party. Against the unions. Seriously, you have totake your half off to say congratulates mr. President , that was wonderful thing. Got rid of retirement caps on Social Security. Used to be when you hit 6572 every dollar of income you learned you lost 50 cents in Social Security benefits. Got rid of retirement test of Social Security. Massive tax cuts on elderly workers. Welfare reform. You have to look for a job to get welfare, how unfair. Biggest Capital Gains cut in our history. He dropped highest rate from 28 to 20. But the thing that he really did was he exempted all evener occupied homes from Owner Occupied homes from capitalgains taxization. That is enormous size of that tax cut on that. To save best for last, bill clinton as president of the United States cut Government Spending as share of gdp every single year for eight years running. Cut it more than the next four peacetime president s combined, best peacetime president s. Look at clinton to say he raised taxes raised two highest tax brackets which he did do, that he did do, that defines his presidency, that is nonsense. That is just not correct. He was a great, great president on economics and his biggest mistake was allowing the personal income tax rate to go up. But that by no mean offset all the wonderful things he did in economics. How would you respond to what paul krugman was saying about the fact that tax rates dont matter, that they dont matter in the states. They dont matter across the world . He says sweden is a huge Success Story and they have high tax rates and social it system. What would your response be . Have any of you sweden. I dont know what company youre talking about. No death tax. No Corporate Tax. Progrowth. Qe1, qe2. Croner is doing well. Not part of the euro withdrawinggy and ben bernanke key. You talk about sweden i used that as example for me, if you would. But if you look at worldwide the whole stuff youve done, steve, all your work on those countries that have fastest growth, best performance of always been those that have low and have cut tax rates. Two things matter. The level of taxes matters. And also the change in taxes matters as well. You mentioned jerry brown. Obviously that was seminal event where you had a leading liberal democrat talking about the flat tax. But today, you know the, democrats a lot of them would support what Bernie Sanders talked about, rates of 50 60, 70 . Do you see any democrats that those of us who support tax reform can work with to get this done . If i can take you back in time, to me, today is exactly 1980 1979 1980. Ive been to this barbecue before. At that time neither the republicans nor the democrats really believed in anything were talking about. We had a couple of wildoff one situations. 78 tax act. That was Capital Gains. I think there were 90 cosponsors in the senate i remember. Howard, you would remember that 90 cosponsors in the senate. Once that went through i mean the president didnt want that. But even reagan was very tepid on tax cuts, just to be honest with all of you here. And democrats at that time were not. Carter was not. But once you start let me tell you guys who are young once you start with a little itty bitty tax cut it worked. Try another one. It becomes an avalanche. It becomes a cascade. It becomes a waterfall. By 86 the reason it was 973, everyone was trying to find another thing think could cut a tax on. If it swam they cut a tax. If it jumped they cut taxes. If it slept they conflagration of tax cuts across the world leading to enormous prosperity of the planet. Once this thing starts rolling people, you cant stop it. It is our day. The time has come. These guys have backed themselves into the corner. They cant go any further. Now it is our day and once it starts, believe me it is more fun than anything youve done ever. So weve weve been working two of us, larry cud loy steve forbes, to get president ial candidates towards more growth. We talked about the plan that rand paul put into effect. Do you anticipate other of these republican candidates coming out with flat taxes . I anticipate every single one of them will. I anticipate ted cruz will, sean. I anticipate that, i mine, even huckabee is talking about it. Not his primary target area but he is talking about it. Oh yeah. He is talking about a fair tax. Theyre all sorts of different ways. Do you think jeb bush will . I think jeb bush definitely will. You talked with him. I had a little fun with him. He said youre best of the family. You watch it. I come from a stand your ground state. Jeb bush is one of the finest guys going. Really very impressive. Weve seen scott walker. This is a field of candidates. If i can honestly say, each and everyone of these candidates, two i dont know, i dont know donald trump. I dont know santorum but the others i can assure you each of these candidates has where with all to be a great president. What youre looking at in president ial race, forgive me i know all you think people are born with principles all that, politicians are a group of people who are united by one characteristic, they all had bad mommies. [laughter]. You know whether you have done the job well or not. Your mom taught you to someone you did a great job. No, i didnt. These people do not have internal compass. They dont have a value system. They always look to external approbation, to confirm their own selfworth. That is why they sit in front of mirrors for days on end. I would guess Ronald Reagan spent three hours a day you ever see a pick you are of it Ronald Reagan or jack kemp not perfect . These guys always looked how the rest of the world looks at them. Want to find a fun one, go to youtube look up, jonathan edwards, i feel pretty. If you havent seen that thing. These guys if a politician gives a speech and everyone boos they change their speech. And what you have here is the perfect defining ground, Training Ground of politicians. These guys are out there trying their ideas with money makers with the pollsters and they will change their views. I believe the final candidate to pop out the one best trained in this process and will be a huge, huge winner. One candidate who hasnt really been singing this tune on republican side of the aisle is marco rubio because he does have this big Child Tax Credit which is not it is not something that we would necessarily support but, if you have been able to talk to marco . You and i i have made mistakes in my life. Milton friedman always used to yell at me, arthur make a mistake, make it only once. Dont keep hanging on to the stupid answers you used to give, change it and stop making that mistake. I suspect a lot of these candidates will learn they arent phds in economics. These candidates are probably you know, each of them thinks that he or she is the single best brain that ever walked planet earth and they have the correct proposal for every field but let me tell you i would not go oneonone with ben carson on brain surgery. I just wouldnt. That guy really knows how to do it. If he suggests brain surgery i would defer. When it comes to tax plans he may not be the right one. These guys are sitting there trying to figure out how to get one. The hubris of some of these candidates, they are young very successful. Hubris candidates think they can define a tax plan better than someone who knows what theyre doing. That will change as time goes on a and they will become more and more mature. They will learn from the field around them. They will become better and better candidates. That is why we have a primary, people. That is why young people finally grow up. God, did i hate those lines when i was young. Its true. These guys will learn through the process, you will get a great set of policies out of these candidates, each and everyone of them. I tell you, i know of them. Each and everyone has the where with all to be great president. Some are enormously accomplished. If you have seen ben carson, what he has done, i mean, separated conjoined twins at the brain. Both Siamese Twins lived. Thats amazing. Ted cruz was, he argued nine cases before the supreme court. Hello, he is 12 years old marco rubio. Marco rubio is young too. He was speaker of the florida house. This guy did amazing stuff. Theyre allowed to make mistakes as they go along. They will change and get right into the group and lets, we have about seven minutes. We have time for maybe two or three questions. If anyone has any questions, why dont we you give folks. Why dont we start with this gentleman here. Hi. This is tim. This is question for dr. Laffer. Governor walker mentioned the laugher curve in his speech laugher curve in his he talked with mentioning the tax base. I would pay him a lot until i found out he replaced it with the cold curve. You know scott walker, i knew him as county executive. This guy is amazing. Wisconsin is righttowork state. Hello. This guy withstood how many recalls and how many elections he had. Scott walker is made out of pure great a pham noll person. He is in the process and each one of these guys has his own thing. Im a huge fan of scott walkers. We met with scott walker and i think he will come up with on this tax issue i think he will come up with something very big and bold. I think it will will include laffer curve effects. There is no question that scott walker is the real deal. And i think he hasnt come out with a tax plan yet but i think you will be very happily surprised to see what he comes up with. Peter. All right. I think the 1950s proved that the kind of tax rates that tommies pickering and Bernie Sanders want a bombing of International Campaign of all international competitors. Speaks for itself. I want, please, pull back a little bit. Remember taxes matter. And they matter a lot but theyre not only things that matter and they really arent. Government spending matters. Tariffs, quotas restrictions on trade matters. Monetary policy really matters. When we came into office on january this 1981, the prime Interest Rate in wonderful country of yours was 21 1 2 . Can you imagine what the country would look like today with that . Regulations matter. In the 50s we had blue laws. There were no Discount Stores were allowed. Remember it is not just taxes. It is all sorts of things together. But dont ever forget taxes matter and they matter a lot. There is a leftwing ideology that intellectual class of the left. The fact that thomas picketys lunatic book became a bestseller, tells you a lot where the left is at in their thinking. I dont think any of us, dan mitchell or myself or art laffer will persuade those people. They are hardcore, income redistributionists. They drink that koolaid but, the reason im optimistic. I wonder if you agree with, if you talk about the base voters in democratic party, working class americans they do get this, donts you think . They understand the importance of tax rate. They understand if you tax the employer there is less money for hiring more workers. Seems like we need to do better job communicating that message. But i just dont see the American People in favor of 70, 80 tax rates do you. No. I think youre completely right on this thing, steve. Also remember the Republican Party does not have a leader. So they dont speak with one voice. As soon as reagan was nominated in 1980, he was the leader and all of everyone lined up behind him. You cant believe the power of once the republicans have a nominee, and that nominee is the leader of the convention is set you will find all these disparate, trying to herd cats, they will come behind the line. The Republican Party will be speaking with one voice. Right now it is very hard to even discern what is going on in the Republican Party with what how many candidates . 18. 18, when the exgovernor of virginia is not included in that 18, you have got a lot of candidates. Hillary i think has a problem here too because she, when she gave her speech which was actually a week ago today, her whole theme how do we help middle class. Didnt call them working class america. Everyday americans. How do we help these people. She had a big problem. Her problem is that Everyday Americans she is trying to reach out to have gotten creamed in the last six years. These are people who are victims of obamas policies. If you look at Census Bureau data. The average family middle class who she speaks for, has lost 1000 of income during the recovery. That has never happened before where you had middle class people declining and a recovery. One of the themes that she talked about over and over again in her speech how do we get businesses reinvesting in america . Is truce, american businesses are healthy. They have trillion dollars in capital. We need companies to reinvest and same speech talks about raising capitalgains tax and raising taxes on very people she wants to invest. If you want less of something you tax it. Seems like she has a big inconsistency there, wouldnt you agree . Yeah. One last question. Well wrap this up. Thank you. I appreciate you continuing to mentor steve even though he is into his 50s. So much younger. So much younger. I happen to be here in the 1990s when many so of this was going on the hill and it was interesting with armey right . Yes. It reminds me of how, with the exception of nafta we kind of dragged, republicans dragged bill clinton into all of these taxandspending policies which you mentioned with the exception of nafta. I remember these fights. Not with the exception of nafta. We did nafta with reagan. We couldnt get it through. It took bill clinton to get it through. So if you, in the future want to give this rosy, rear view picture of the bill clinton economy, it would be helpful to at least contrast that with the modern democratic leadership and party and say these folks today arent for any of these policies that bill clinton, where he signed the bills on spending cuts and tax cuts and all this stuff. Forgive me, if i can, youre right, youre completely correct but in 1979 1980 there wasnt a damn democrat alive in favor of it either. You may not remember tip oneill and jim wright, Dan Rostenkowski theyre jokes now but they were not funny then. They were exactly the same as reid pelosi obama. If you look at today, dont think those democrats can not become us. They can. They will. They need our big tent. They dont need a closed tent. We need to accept them into our fold. Once they get in they will do what al gore said to me, six months ago, best bill i ever voted for economics led to 20year prosperity. He loves his vote for the 86 tax act. Go read what those guys wrote in that time that situation what they said it would do. Makes me and steve look like leftwingers. Schumer wrote that. It is an important point that the reason hillarys speech was important last week is she basically said, if you elect me you will not get a third bill clinton term, you will get a third barack obama term. I dont think the American People want a third barack obama term. The party is clearly being shifted to the left. Which i think is extremely discouraging right . I think it is so discouraging that those ideas, those new democrat ideas have been cast aside which actually makes it all the more important we get these guys on the republican side of the aisle at least to embrace this idea. I think just in closing, i see youre hyperventilating there, in closing the fact that you have got 18 republican candidates out there for president and fifth teen of them or so are talking about these ideas, thats a real breakthrough because we have problems getting republicans in favor of these ideas in years past, right . Very much true. But what im asking you steve is not stay open to democrats. Work with them. Bring them on board. It is all of our country, not just one partys country. Please please please educate them, work with them. Every now and then they may have something to teach us. So please, it is one country, one people one vision, one future. And we work these things out in the primaries but please be that way. Thank you very much. Thank you steve, very much. [applause] thanks again to steve and art. Thanks to everybody for coming. Before we close were going to have another tax event later this fall, probably in october. So stay tuned to that announcement. And i think there might be some sandwiches and drinks and cookies and stuff out there. So help yourself. And thanks very much. The senates about to gavel in. They will spend the morning on general speeches with legislative work set to begin this afternoon at two 15 eastern. That is when senators vote on advancing a bill to set highway bridge and Mass Transportation projects for next three years. It is call the highway bill. The pass passed a temporary extension until december. The Highway Trust Fund runs out of money at end of this month. Senate live on cspan2. The president pro tempore the senate will come to order. The chaplain, dr. Barry black, will lead the senate in prayer. The chaplain let us pray. Lord of the harvest, we continue to seek you, for we desire to do your will. You, o god, are our light and salvation, so we refuse to be afraid. As our lawmakers strive to walk