Transcripts For CSPAN3 Tax Code Reform 20150331

So thank you for your leadership. Hearing is adjourned. Later today the Brookings Institution hears from tony blinken to talk about current priorities and future prospects for u. S. Engagement in central asia. That will be live on cspan starting at 3 30 p. M. Eastern. And Runoff Election scheduled for april 7th in chicagos mayoral race. Rahm emanuel faces his challenger chewy garcia. It is hosted by ttwtv in chicago. Neither won a majority this februarys election. You can see the Candidates Forum starting tonight at 8 00 on cspan. Today is the ted line for an agreement in the Nuclear Talks with iran. A reporter joined us this morning on washington journal to give us an update on the negotiations taking place in swizer land. Thomas erdbrink joins us on the phone. Thanks so much. Thanks for having me. What is the latest on the talks . There has been some reports of a possible extension by hour here. What are you hearing in tehran . Well, of course being in tehran means take im from the sidelines because im like other people here we dont know exactly what is going on. All that were understanding is the feedback were getting through the iranian media from the iranian negotiating team and it has been unclear what were hearing from the western negotiators, there might be a can deal later today. Of course they have this self declared deadline tonight when the day ends. And at the same time there is talk of extension. It has happened many times in the past. So definitely a possibility. So im very sorry that im not able to enlighten you more that i would like to. How would you describe how these negotiations are being described by the iranian media there . Are they optimistic, is it a pessimistic tone . I think most of the iranian newspapers and websites are following the trends of the negotiations. If the negotiating team says the negotiations arent going well then youll read that the negotiations arent going well. There is one main exception because one of the a state newspaper. They have been the only vocal voice against the talks. As of yesterday, one person came out and said that the deal was in shaping up. It will be a bad deal for iran. I dont think we will get everything we want. That shows how some people are thinking here. Overall, when you look at the media, everybody reflects the feeling that most iranians have. People want to see a deal and move on from these 10 years of Nuclear Debate and sanct feeling mostio iranians have. This i they want to move on from this ten years of Nuclear Debate and sanctions and this is something l reac you see reflected in the media. Ore and if there is a deal reached in the next several hours here before this deadline or if there is an extension and the deal is reached, who would ement you youon expect in iran to make the announcement on that side . Would it be president rohani the Supreme Leader coming out to talk about it somewhattit is this . What are you a fin hear something. I think it will not be so dramatic. This will be a temporary step towards the it deadline. Which is june 30. But it would disseminated through state Division News programs which is the main form of Mass Communication in this country. A this is how people would know there is or is not a deal. Appreciative the perspective from the ground there in iran. Thank you. Tonight on American History tv programs on the 150th anniversary of president abraham lincolns second inaugural. Less than six week before his assassination. At 8 00, an event commemorating the president s second inaugural inaugural. After that, a discussion on the making the making of his address. And then later the last speeches given by president lin con and Martin Luther king jr. Before their assassinations. Thats whats coming up tonight on American History tv on cspan3. In february, the Senate Finance Committee Held a hearing on the u. S. Tax code. Hearing from former senators both of whom were part of the 1986 tax deal under president reagan. Senator orrin hatch chairs the committee. Gas hearing is about the needs for tax reform and what we can learn from the Tax Reform Act of 1986 the last successful overhaul of the United States tax code. We have before us today two former senators who are key to that effort. I dont know why you call them former senators. I think you will always be senators to me. I look forward to hearing their thoughts and advice and i think we all did. We need a clear vision of what we want the system to look for and set a vision so how we want to change the opportunities for American Families and rye wards that americans receive from their labor, entrepreneurship and investment. Successfully reformed tax system will help make america the best place in the world to work conduct business invest and prosper. The successfully reformed tax system will be one that provides Economic Growth and is simple and fair. Land mark Tax Reform Act of 1986 was developed threw a careful and methodical bipartisan process that relied heavily on member input. Senator bradley was a key part of that process. And whole raft of others in the white house at that time. Over the last few would he bes, weve begun a similar process that we hope will yield a similar result. 1986 act signed into law by president reagan reformed a complicated tax system into a simpler one with lower tax rates for american households and businesses affording them greater personal prosperity. Over time our tax system has once again become costly, complex, impeding growth standing in the way of shared prosperity and place American Work he is and businesses at a distinct disadvantage. Put simply, it is past time for congress to stand up once again to fix our broken tax smg. Ive been making the case for tax reform. In december the republican staff produced a comprehensive report outlining the need for tax reform and providing some direction to our overall efforts. Im sure everyone here has read that report cover to cover. Ive laid out seven principles that i believe should guide our efforts. I wont go into much detail today and just talk about them briefly. First is Economic Growth. It should significantly reduce economic distortions. Second principle is fairness. Income tax base which has back riddled with exclusions, deductions and credits should be as broad as possible. It should broaden the tax base by eliminating other reducing the nim of tax except gi churs and removing distortions. The third principle is simplicity. Taxpayers and businesses spend over 6 billion hours a year complying with tax filing requirements. With annual Compliance Costs in excess of 171 billion. Which is more than the Gross Domestic Product of new zealand, for instance. Simplifying the tax code will result in greater clarity and compliance, and will free up resources for families, job creation, and other productive uses. The fourth principle is revenue neutrality. Tax reform should be revenue neutral and not an occasion to raise taxes on american households or businesses. General revenues already exceed their historic average as a share of our economy and greater revenue should not be an objective of reform. The fifth principle is permanence. The joint committee on taxation lists almost 100 provisions of the tax code that will expire over the next decade. This is unacceptable. Families and businesses should be able to plan for the future without wondering if the tax code is going to change from year to year. The sixth principal is competitiveness. The combination of a high Corporate Tax rate, worldwide taxation and the temporary nature of some tax incentives makes American Companies less competitive when compared to their foreign counterparts. Tax reform should reduce burdens on businesses, large and small, to allow them to more effective compete on the world stage. The seventh principle is the promotion of savings and investment. Many aspects of our current tax system discourage savings and investment, thereby hindering longterm growth. Savings and investment help build the capital stock, providing fuel for Economic Growth, and it generates prosperity for American Workers and businesses. These seven principles are the guideposts that we use when looking at tax reform proposals. I think were going to have an interesting hearing today. We have two really great former leaders, chairman packwood and senator bradley, to see what advice they can give us if we undertake our tax Reform Efforts in this congress. I did read showdown in guchi gulf and some indication of how difficult this was. If anything it may be even more difficult today, because of the mess that has occurred since, none of which you deserve to be blamed for. Senator widen . Thank you very much, chairman hatch. As chairman hatch noted, the finance committee is joined this morning by two legislators who are at the heart of the last Major Overhaul of the u. S. Tax code in 1986. Chairman packwood spent more time than anyone figuring out how to make the numbers in tax reform work. That is the tough work of legislating. Senator bill bradley was the intellectual godfather of the reform plan that broadened the base, closed loopholes, and kept progressivity in the code. Senator bradley lit the fire that got the Reagan Administration invested in reform. And i dont think anyone would question my judgment that senator bradley had by a wide margin the best jump shot in the senate tall guy caucus. Now if theres one obvious similarity between 1986 and today its that people are quick to say that tax reform is absolutely impossible. Americans say congress cant organize a twocar parade. Theres no way they could come to the on Major Economic legislation. So what happened three decades ago needs to happen again. Turning the impossible into the possible. The congress and president reagan came to the to pass the 1986 Tax Reform Act based on what i call principled bipartisanship. One side wanted to flatten the tax code. The other side wanted to close loopholes and guarantee that the tax code treated everyone fairly. Both sides said were going to set aside the partisan attack. Look for Common Ground, and each side came away with the feeling that it had upheld its principles. When president reagan signed the bill into law, he called it an historic overhaul of our tax code, and a sweeping victory for fairness. He continued, and i quote here, its also the best antipoverty program, the best profamily measure, and the best Job Creation Program ever to come out of the congress of the United States. Those same objectives guide the finance committee in the congress that works again to modernize our tax system. Reforming the tax code is always a herculean task. But the same strategy of principled bipartisan can work once again. The congress can turn the impossible into the possible. However, policymakers need to recognize that the process is going to look different. Not every part of a 30yearold game plan for tax reform can work today. China and india are now superpowers in the global economy. Which is a much bigger factor in the tax reform debate. The gulf between wage earners in the top of the income ladder has widened. And america is at its best when a rising tide lifts all the boats, and it should be obvious that making that reality that a reality once again is going to take some hard work. The status of the middle class across america is at the top of the list of compelling issues for tax reform to address. Its fundamentally unfair that a middle class wage earner could pay a higher tax rate than an affluent person whose earnings come entirely from investments. The tax code should not be used to punish the wage earner in america. Many tax incentives for College Education and Retirement Savings are simply out of whack. The support those incentives provide dont always get get to those who need them the most. And that ought to change. Another challenge is making america more competitive in the global economy. Today, look and come away saying our country is trying to win a road race in a 30yearold car. Our competition, meanwhile, trades up to more efficient models. America hasnt done enough to drive innovation at home, and worse, the tax provisions for research and development expire year after year. In 1986 there wasnt a lot of talk about the tax code. For example, and a Clean Energy Future for our country. Thats Something Else that has to change this time. And finally, modernizing our tax code has to be done in a fiscally responsible fashion. Tax reform cannot become an exercise in slashing rates at any cost. The biggest lesson from 1986 is that tax reform is possible, when democrats and republicans set partisanship aside, come together, and focus on shared principles. Over the years, ive talked frequently to senator bradley about how tax reform is always totally completely and thoroughly impossible until that moment when it happens. The finance committee today has two experienced, knowledgeable witnesses who are going to help us get closer to that point today. Chairman hatch, thank you. And i look forward to our witnesses. Mr. Chairman, mr. Chairman if i may have a point of privilege just for a moment . And i thank the chair very much. I am in an intelligence briefing on iran. But i wanted to come to join the committee and its leadership in welcoming the most outstanding United States senator new jersey has ever had to represent it. Not only does he have a great ability to shoot a threepoint shot effortlessly, but the intellect that bill bradley possesses, and his willingness to pass the ball to fellow teammates made him a consummate successful United States senator here in new jersey. So ive read his testimony. I look forward to the q a so we can engage in some of it, and i appreciate him and senator packwood joining us. Thank you, mr. Chairman. Thank you, senator. I think that was pretty of our senator. Our first witness is bob packwood. Senator packwood was first elected to the u. S. Senate in 1968, and served the people of oregon and this body for 26 years. He was chairman of the finance committee from 1985 to 1987 and presided over this committees efforts to draft and pass the Tax Reform Act of 1986. He made a typical difference in this, as did our other witness. He also served as chairman of the Commerce Committee for four years. And prior to his time in the senate, senator packwood practiced law in portland, oregon, for ten years. Was elected to serve for three terms in the oregon state legislature. He received a bachelors degree in Political Science from william f. University willamette. I got to pronounce that better dont i . And a law degree from university of new york law school. We feel honored to have you here today. We know you can help us in many ways to understand some of the difficulties were going to have to get through. And hopefully give us some advice on how to get through it. Our second witness is another great human being who i greatly admire and admired before he came to the senate, and thats senator bill bradley. Senator bradley represented the people of new jersey here in the senate for three terms. Beginning of 1979, and as a member of the Senate Finance committee he played a pivotal role in the drafting and passage of the Tax Reform Act of 1986. Of course prior to his time in the senate, senator bradley was a great professional basketball player. Hes a twotime nba champion and a member of the Basketball Hall of fame. Senator bradley holds a bachelors degree in American History from Princeton University and a masters degree from Oxford University where he was a rhodes scholar. He is the author of seven books on american politics, culture, and economy. And currently hosts american voices a radio show highlighting the remarkable accomplishments, both famous of both famous and unknown americans. We welcome you, senator bradley, as well. We thank both of you for being here today, and we look forward to your testimony. Senator packwood you go first. And senator bradley also holds a record for the most points ever scored in the play of basketball playoff in portland, oregon, when he scored what, 64 points . 58. Mr. Chairman, when i was contacted everyone asks how did you do it in 86, and are there any other parallels till today . There are some but the circumstances were different. In our era, fairness was the issue, not income and equality. And the next to the last page of my statement, you will see a list of newspaper stories about people that paid no taxes at all. Industries, Defense Industries at the time of the reagan buildup that not only paid no taxes, they got money back. And the public, and the members of congress, could not understand how wealthy corporations, and wealthy individuals could pay nothing. It wasnt fair. So that was the premise we were operating under at the time. You will find you will find in my statement on occasion the word diary. That means it was taken specifically from my diary at the time. Now, what happened. First tax reform is not a new idea. Stanley surrey who was president kennedys assistant treasury secretary for tax came up with the idea of tax expenditures. You can lower taxes and get rid of them. Bill bradley and Dick Gephardt in their fair tax said the same thing. Studies treasury one and treasury two, we all knew how it worked. We all knew that you could lower the rates if you could get rid of deductions. Its pure mathematics. The house had public hearings for a year in 1985, and they had a lot of individual votes on things as they went along. And they picked up enemies. They picked up barnacles because some of those interests lost their votes and theres lots of single issue groups. And i dont mean the nra or right to life but you touch mortgage interest, and youve got the realtors. You touch charitable contributions and youve got every organization in the country opposed. And the problem with the house bill is that they had enough of these barnacles attached to the bill when they finally came out of committee, that there were not votes on the floor to pass it. It would have failed but for the fact that Ronald Reagan literally came up on the hill. Met with the republicans and said, please vote for this bill, i will veto it if it passes in this form, but send it to the senate and see what they can do. With that, enough republicans changed their vote and the bill passed. Although youd never know if they changed their vote because it passed on a voice vote in the house. Comes to the senate. And in those days the senate didnt get going as quickly as youve gotten going now, and going till midfebruary or march. I finally started having some hearings on this bill but we didnt need many hearings because in the summer of 1985 we had about 30 hearings on the subject of tax reform. Just in case the house would pass something. Because if they passed it, i mean we have to act relatively quickly and i didnt want to have a lot of hearings at the same time. So we pretty much cleared the deck of hearings. But theres one thing that caught my mind at the time of the hearings. And i would ask witnesses how low would the tax rate have to be before you didnt care whether there was any deductions . How low . 30 . 20 . 25 . Its always in that range. I didnt think much about at the time but i was intrigued that almost every witness i would ask, thats what i would get. Well, all right. We come to the spring of 1966. Because im frankly making no progress in committee. Were not making the bill any better. Were not making it any worse. We just arent getting any place. So on friday, april 18th, i simply adjourned the committee, said were done with the bill. Somebody said you mean were done for the day . I said no were done with the bill. This is the end of this bill. And at that stage i called them and this is where things moved so rapidly. I called david brockway, who was then the chief of the joint Tax Committee said give me three bills, 25, 26, 27 percent. He says 25 youll have to get rid of mortgage interest. And bill i remember you saying how much trouble mortgage interest on your bill. So i asked him what about 26 . Thats friday. The following tuesday he comes and he gives me three not bills. They werent bill form but three plans as to how you could get 25 , 26 , 27 . And i looked at them and then i was delayed for 2 1 2 days, because at this stage, up came fast track for the Canadian Free trade agreement. Its one of those things where the president cant move unless you give him fast track authority, and there was a deadline. If congress had not acted by, this is tuesday, the next wednesday at midnight, he got it. The house had not acted. Fell on our side to take care of it. I thought it was a slam dunk. I was sure we were there. Turns out i didnt have the votes. I was missing one. And it was sparky who was mad from hawaii that the president had not answered his letter on macadamia nuts. And i had to get over that hurdle, and bring him around. We finally succeeded in doing it but it was thursday before i was done. Then on thursday i presented to the committees at the same time our Committee Just the outlines. We have no bill. Just the outlines of what might be possible, and they seemed to like that. So i thought to myself, meetings over, and getting toward the weekend and im thinking at this stage how are we going to do this . And i thought the only way it can be done is bipartisan, quickly, and behind closed doors. The bipartisan because i could see any bill that was utterly partisan on the republican side would have no success with the house conference. Any bill that was not done quickly, but hung out like the house bill did, would pick up enemies all along the way. And it would have to be done behind closed doors. It was helpful to have the president on board. It wasnt critical, but it was helpful to have him basically tilting the same way we were going to go in the senate. On that weekend on saturday and sunday, i called six senators. Bill bradley, george mitchell, pat moynihan, jack danforth, john chafee, Malcolm Wallop and i said would you be willing to meet in my Office Starting next tuesday at 8 30 to see if we can work out a bill that would be satisfactory to us and the president . Every one of them said yes. And now passed starting that tuesday the most extraordinary experience in my life in politics. We met from tuesday to tuesday, the bill was at every morning at 8 30 id meet with staff at 7 30, this core group, a cabal as i called it at 8 30 wed work out what we thought should be in the bill. We had one or two open Committee Meetings but basically the committee was just marking time waiting for us to finish. And you could tell although the meetings were behind closed doors theres no secrets in this town. And the word was getting out. We were having the meetings but no one exactly knew what it is we were doing. But on the thursday between these two tuesdays, came a phone call that became very important in this whole process, and i will read it to you, because its from the diary. Back again to tax reform in closed session was interrupted by a phone call from daniel rostenkowski. Bless his soul he said, pal, ive been thinking of coming over there and without fanfare, without press, just to say ive been through it. I know every day you go through troughs and on hills and ive been bleeding for you. But i think what youve got in terms of tax reform is the best thing congress has seen in ten years. You get this through the senate. And between the two of us were going to put out a bill that for a generation of americans will look like a pinnacle. God i appreciated it. What he was saying, with the ways and Means Committee chairman is saying write this bill in the senate, ways and means doesnt say very often. We continued our meetings through friday, and then we had a Public Meeting friday afternoon and i said to everybody, were done. And were not going to meet this weekend. By this time, the hallway is packed with lobbyists, we have speakers out there. Committee were done. Were not meeting at all this weekend. Cheers in his office. And then i said, to the core group, but we will meet tomorrow. Bill had already planned went to kentucky that night for a speech, canceled the Kentucky Derby and came back to be with us the next day. On that saturday the seven of us met all day, from about 8 30 to around 4 30 or 5 00 in the afternoon, and that tied up all the last of the things we needed. Joint tax needed a couple days to get it together. But they would have it for us monday or tuesday. And we were ready to gone tuesday night until i finally had to make an odious deal with the oilies to get their support, not the committee, we could have beaten them in committee, but to get their support for something we needed desperately on the floor and if we lost this particular issue on the floor the bill was dead. And that was it. We vote that night and most of the committee had not ever seen the whole outline of the bill or the whole bill until that night. So from tuesday to tuesday the seven of us worked that night the bill is adopted 200. Now, can you do the same thing now in this committee . Here are the things that would be critical. Its helpful to have the president on board, to have him with you from the start. But at a minimum, youve got to make sure that hes not against you, or gives the impression that hes not sure if hes going to vote for it, or he has some questions, because youre not going to get your members to take tough votes on things that the president might veto if you put them in a bill. So at a minimum he must say im open to sending you a good bill. Two, i think youre going to have to do it in much the same way we did, which is behind closed doors. But thats not uncommon in the house and the senate, even today. Behind closed doors, and try to do it quickly, and present it in one grand bill. We did it combining both corporate and individual into one bill, and then used the money we raised from them to lower tax bills for everybody else. If you look on the last page of your statement youll see who the major groups were we hit. It was almost all corporations and rich individuals. And do it in one bill so that people dont have to pick out a particular thing that they dont like and are forced to go on it. Give them this. You give them the whole bill and i think theyll go for it. And so thats what we succeeded in doing and believe it or not, hitting business as hard as we did, raising their taxes, about 140 billion, we managed to lower the corporate rates from 48 to 34 . Lower the individual rates from 50 to 27 . And keep the bill revenue neutral. You can do it. But orrin and ron, the two of you are going to have to make an agreement as to what were trying to get, and the thing i like about the fact that the two of you doing it, ron, you may recall about ten years ago we ran into each other in the dry cleaners. And you were working on tax reform then. And i know, orrin, you crossed Party Lines Many times i remember you working with ted kennedy on things. We both showed a willingness to Work Across Party Lines and on some occasions when it didnt please your parties too much. So it can be done but it can only be done if the majority and the minority at the start are on the same page. Thank you, mr. Chairman. Well, thank you. That was fascinating. Were very appreciative to have that overview. Senator bradley, wed love to hear from you. Thank you very much, mr. Chairman. Its always a pleasure to be on a panel with senator packwood. Hes an extraordinary leader, and he ran the committee with great effectiveness, not only on tax reform, but on a whole series of other issues. This is also a first for me. The first time ive been in this room since december 1996. I notice it hasnt changed. But what id like to do is id like to keep a few thoughts about structure, and make amplification on two things that senator packwood said. First, what is the ideal income tax system . I believe the ideal income tax system is a system that provides the greatest number of people the lowest rate. In terms of principles, and these were the principles that i think we used in 1986 to determine what was in, what was out, one was efficiency. The basic threshold question for members of the finance committee, and the efficiency point is, i believe, the mark of a more efficient allocator of resources than is a member of the ways and Means Committee or the finance committee. So that was one principle. The second principle is an equity question. Horizontal equity. Equal incomes should pay equal taxes. Not somebody has the same income and next door somebody is using loopholes to reduce their tax rate. Third is fairness. Which is essentially vertical equity. And that is those who have more should pay more. In other words the progressive nature of the system. And fourth, do whatever you can to make the system less complex. We live in a time where few people fill out their returns, and where tax fraud is estimated to be nearly 80 billion to 100 billion. So those are the principles. Efficiency, equity, fairness, simplicity. And you measure everything against those principles. Now what do you need to pass tax reform . Drawing on our experience i think you need at least six things. The first thing you need is the exact thing president packwood said. You need a president who is going to put this prestige and clout on the line to drive things through when the inevitable obstacles appear. Second, you need a treasury secretary who is the president s designee to deal with it every day, and you need a treasury secretary who has an incredible person who constantly monitors that. Of course, in 1986 the president was Ronald Reagan. And his secretary of treasury was jim baker. And his assistant was dick darmin. All of whom played critical roles in this. I cant tell you how important it is to have a treasury secretary who can speak for the president , who doesnt have to run back to the white house all the time to check this or check that. And, in fact, as bob remembers, we got down to the critical strokes at the end of this process. There were some difference of opinion, and jim baker was in the room doing the negotiating. Because he knew enough of the substance and had paid attention to it. I remember him convening a meeting during the period when there was treasury one and treasury two, which were things that Ronald Reagan tasked as the Treasury Department to do. And he convened a meeting with jack kemp at his house, and me, and i think bob or a few other people, i think its important to know the longterm journey of tax reform. When i came one of the reasons i ran for the senate was i wanted to reform the income tax system. I remember reading an article by Milton Friedman many years before when i was a basketball player about how you could have a tax system with 16 , and i thought thats pretty interesting. And i read all of Stanley Surrey from harvard, joe peckman at brookings, and i remember in 1986, i went to walter mondale, who was the candidate for president of the democrats, and tried to convince him to do tax reform. I said it could take the issue from the republicans, they were out there talking about tax cuts, here you could talk tax cuts and equity. He had been a member of the finance committee. And charlie wrangle was his adviser on this issue and i think the combination of those things made him unwilling to take what he thought was the big risk for a hopeless cause and so, it passed, however, as everything in politics, nothings secret. It leaked that maybe he would be doing tax reform. And so, thats when reagan called for a study by the treasury, treasury one and so happened that the people at the Treasury Department in the tax area were really great people and so they took the charge seriously. And they produced a document that was an outstanding document laying out the boundaries and the parameters and the specifics of what tax reform is. Naturally when you threw it out there, 82, something out specific and everybody chews on it, so everybody chewed on treasury one and how terrible this is and how terrible that is and you ended up having treasury two. And it accommodated some of those, stiff armed others, but wasnt an improvement over treasury one. And so thats how the Treasury Department got involved and you absolutely need a commitment from the treasury secretary. So you need a president , you need a treasury secretary that likes it, knows it, can cut the deal for the president. The third thing is you need a chairman of ways and means and finance who want to get this done. We see that their own political interests have served by getting this done. And bob mentioned dan. In 1981, passed a bill the first year cutting rates 30 and then he ended up being labeled as the king of special interests. And so i think that what he saw in this was an opportunity to seize the Good Government mantel and push forward with a challenge. That would make him a historic chairman of ways and means. I think the senate was very fortunate to have bob packwood as the chairman. Because i dont know specifically what your political interests were, but i sense that it was if you were going to do something that no other chairman of the finance committee had done before and you wanted to do something that would affect the 100 million americans in a positive way and potentially change the way we think about taxes. Without bob packwood and dan and jim becamer, and president reagan, which would never have happened. You have to have those, those parts in place and then you have a chance. The fifth thing you need is maybe a zealot. Thats the role i played in 1986. I did nothing but talk about tax reform for four years. It got so bad, i was op a sunday morning interview show recorded on a thursday night and rebroadcast on sunday. At that time, by daughter was about 8 or 9 years old and she had a girlfriend of hers staying with us, i said, dads going to be on tv and the guy said, bradley, stick around, dads going to be on tv, so, she elbowed her friend and said, lets go. All hes going to talk about are loopholes and indeed, that was all i talked about for four years. I also tried, recognized, i did not have the power, the power was with bob packwood and dan, so i had to be supportive every way i could and i tried to play that role. The sixth thing that you need if youre going to get it passed is a committed, knowledgeable staff. I remember bob, absolutely first rate. Key thing is they can cut the deal on a lot of issues, Everybody Knows they speak to the chairman. And they say the same thing to everybody. They dont say one thing to one person and one thing to another, but they keep their word. So i think those are the six that i think you need and the president who is committed, you need a treasurer, secretary thats committed. Chairman of the ways and Means Committee. Chairman of the finance committee. Maybe or maybe not need a zealot and then you need a staff that is competent and honorable and has absolute integrity. The last thing i think you need and this is probably the most important thing was epitomized by a visit we made to the white house to meet president reagan. I was a democrat, kind of a duty member, i wasnt invited a lot to the white house to meet president reagan, but there i was, seated around the table in the west wing and if you recall, each of us could go around the table and tell the president what we thought about tax reform. He was listening mainly, not talking, so when it came to me, made his commitment and even though hes made his position clear, i said, mr. President , i know youre interested in tax reform, which means lower rates because when you were an actor, the rates were 90 . He kind of nodded. And i said, mr. President , im interested in tax reform because when i was a basketball player, i was a depreciable asset, which in fact, i was. In other words, what that story says is theres got to be something for each party in the deal. It cant be all one. Its got to be something for each party. Each party has to know what they want and then if they do, theres a chance to get something done. Ill make only two other quick comments. Bob talked about writing to the line with seven people. Again, the only reason that happened with bob packwood wanted it to happen. He was the chairman. Finally called seven people. Okay, meet you in the cafeteria tomorrow, or next day or two years from now. When the chairman calls, you show up. And so it was because of him that that committee, that Small Committee of committees worked, but he also mentioned that when you were headed down path for a long period of time, we had 30 hearings about tax reform. Bob presided over every one. I was at every one. And we asked questions of every witness. One, which was how low would the rate have to go before you give up this, that or the other thing. I asked how low would the rate have to go before you give up Capital Gains exclusion and in the latter, answers came back if you were from silicon valley, witness would say, i dont care if the rate is 10 , you still need a differential for Capital Gains because that will affect Capital Appreciation and formation and but a lot of other people came in. I dont want to say just silicon valley, but there was a certain kind of person that said no matter what, youve got to have a differential. Others said if you got the rate down to about 20 , 28 , 29 , we give up that differential for Capital Gains and that is indeed what we did. We got the rate to 28 and that was the rate of capital and earned income. So with those thoughts, i thank the committee for the opportunity to come back to the room once every 25 years. Were honored to have both of you are here and i think anybody listening to this has to realize you went through a very trying time. Very difficult for the congress was split. Republican president i want you to both know how much i appreciate and respect both of you. Let me just ask this question. Revenues the percentage of gdp averaged 17. 4 over the past 50 years. Revenues in 2014 were 17. 5 of gdp. Trending up to 18. 3 . Of gdp by 2025. In other words, taxes are higher than the historic average and headed even higher. So taxes are already higher and have been raising revenue and tax reform makes enacting it less likely. Shouldnt we do tax reform on revenue neutral basis. Start with you, senator packwood. I would much prefer it although i would combine both corporate and individual into one bill. And then you have a little more wiggle room using either side of that equation to be able to reach your revenue neutrality. We of course did revenue neutral. I think the times today might require some additional tax. But i believe thats something that the committee has to work out itself. If you really do thorough tax reform, what you find is, at least we found, that upper income americans will pay a higher percent. Example, we cut the rate from 50 to 28 and yet the top 5 paid a higher percent of the total tax revenue after that reduction and before. The u. S. Is one of five Major Economies operating on the worldwide tax system. Meaning it currently taxes income of its companies wherever that income is earned. Even if its not in our country. Currently, companies have the option of bringing the profits back, but face a tax of 35 minus foreign tax credits. Both would rather not pay and keep the earnings abroad preferring the additional tax and currently is our law, u. S. Law, allows companies to defer the tax indefinitely. The budget was substantially limit deferal since it imposed a minimum tax of 19 . Do you think we should go to a territorial tax system like most other major countries, in fact most other Major Companies or not . Well, mr. Chairman, i thought so the last 30 years. Were often we have to compete overseas and heres the advantages they have and one of the advantages they have is territorial. I think we ought to go to the system that the rest of the principal Industrial Companies used, which is if you invest overseas and make profits overseas and you pay your taxes overseas, you can bring back whatever profits you have to this country and theyre not taxed and i think thats a good system. When you have profits overseas and are taxed in a particular country at the rate that country charges, all of those taxes are deducted against liability in the United States. The tax credit. The president s proposed two things. I think one is a 19 tax on the deferred income going forward. And a 14 tax on a whole of the packets abroad. I think that the committee will have to work its will on that. I think the tax makes sense in terms of the overall picture. In reality, were going to have to figure out, is there some other way, i dont think thats going happen. Is there some other way that you could bring the money back and i think embodied in the president s proposal, the 14 . Is a possibility that maybe not 14. Maybe its 10. Maybe its not 19. Maybe its less. But somewhere in there, Capital Gains, wants to bring the capital back. Thank you, mr. Chairman and the two of you have told an inspiring story about bipartisan ship on a Major Economic issue and colleagues, we just looked up the vote that attests to what happened. 973, original vote in the senate and then on the conference report, 74. 3. This kind of work paid off. What id like to start with is asking about the process. Because as far as i can tell, in this effort to promote bipartisan ship every step of the way, you said were going to use the normal process because normal process in the senate really promotes bipartisanship and you have to have 60 votes and certainly, neither side today has 60 votes, so you use the normal process and it really forces bipartisanship. The alternative is to use whats called reconciliation, which in effect has 51 votes, one side could have their way on tax reform. My question to both of you, either one who wants to start, is it your view that using the normal process, which you all used in 1986, was helpful and is it your assumption that it helps promote bipartisanship . Absolutely for a variety of reasons. One, every member of this committee ought to be misgivings about reconciliation and using it to jam as many things into a bill as the majority wants because theyre not sure they can get it passed any other way. What it lends to is more and more of the decisions leading up to the leadership. In my era, even in Lyndon Johnsons era, no majority leader would have ever thought of taking a bill away from committee. Reconciliation just holds out that plum, they use it this way. No, id much prefer the regular order for a couple of reasons. One, it is still the arguments against it, we had no chance. We didnt get to offer the amendments. There was a time limit and if you win it in the normal process, youve got a lot better credibility than if youve jammed it through in reconciliation. Senator bradley, can you top that . No. The question was what, mr. Chairman . Normal process. Abiding bipartisanship, reconciliation. I think the way we did it, i agree with senator packwood 100 . That the normal process is better. Also has to do with with the committee in the larger senate. We had agreement and members of the committee that when a vote would come up, Neither Committee members would break and would stay with the committee bill. And that was a point of personal anguish for me because in the committee. What senator packwood referred, oils. Senator packwood was the chair and senator russell long of louisiana was the Ranking Member russell long, louisiana, was the Ranking Member. And he had a few interests in the oil patch. And i, of course, was going to go after it. We had to go after that. We cant leave that out. We were meeting in secret back there and we had a vote in the back room and it was 119 against me. And i viewed that this was in the back room that there was one senator who was taking it public he wouldnt vote that way. And so i then raised the issue in the committee, full committee, and i saw senator longs head go like that. And i called for the vote. And the person who thought would switch didnt switch. And right up there against that wall afterwards russell long got a hold of me said if you ever do that again but life went on and, you know, the screw turned. We got to the senate floor, and then republican senator lowell wyker offered the exact amendment that i had offered in the finance committee. But because we had a deal that we were all going to stay together, i voted against my own amendment. So the cloud of the finance committee in the senate as a whole is instrumental in getting a bill passed. Because most of the other senators dont know a whole lot about taxes. You have a few opinions about this, that and the other thing. To the extent that you can speak clearly, authoritatively and hang together, you have you wont need to have any kind of reconciliation. Senator hatch, if i could ask one other question. Because this was a remarkable feature of the 86 bill. I think it would be helpful for the committee to know how you two got to Common Ground in 86. In 1986, you were able to say that income from wages, and income from capital was treated equally. Senator bradley talked a little bit about his views on it. But i think it would be very helpful to know how you two reached that judgment that by todays standards would be remarkable. In fact, today people say if you could just reduce the difference between the way income from capital and the income from wages was treated, that would be a huge reform. How did you two in 1986 get to Common Ground on treating wage income and capital income the same. Well, realize we wanted to keep the same progressivity that we had in the existing law, but we were going to lower the rates tremendously. So in order to make sure that the very wealthy still were roughly in the same progressivity incline, we had to get rid of Capital Gains and the differential. It was as simple as that. In fact, it didnt even really bother the committee that much. It was a small issue. Malcolm wallop had some misgivings about it. I do say to his credit, we agreed. Remember, bill, we made the rate the same but we didnt put it as a separate section of the bill because Malcolm Wallop says you put that in the bill and get rid of Capital Gains, the word, pretty Soon Congress will start to raise the rates with capital gain and it will go right up with them. He was right. But it was to make sure our progressivity was the same. Just in a little addition to that, i exactly agree with what senator packwood said. There was a provision in the bill since we got to the magic number of 28 for both capital and earned income. We had a provision of the bill that said if the general rate ever went higher than 28 , the Capital Gains rate would be 28 . In other words, you would never tax capital higher than 28 . And i remember, oh, might have been four months after the passage of that bill, people were then saying you need differential Capital Gains. My point was if you take a differential in Capital Gains, youre going to end up with a much higher general rate. And indeed, thats precisely what happened. President clinton came in, Capital Gains went back in, and the rates went to 39 . And seems to me that there is a lot more coherence in a bill with a lower rate that treats capital and labor the same. Thank you. Senator grassley. Thank you both for coming. I want to start with something you both touched on in your opening statement. But to get more specific, so ill start with senator packwood but ill ask senator bradley the similar question. It deals with the process and president ial involvement. Do you think tax reform, senator packwood, do you think tax reform would have happened if president reagan had not made tax reform a priority in his administration. And a followon, then isnt it going to take at least that much commitment and involvement with president obama and his own party and congress to get a tax reform bill enacted . And then for senator bradley, could you share your thoughts on the importance of president ial leadership in accomplishing tax reform . Senator packwood. Well, president reagan was immensely helpful. If youre asking me is it absolutely essential that the president be there from day one and pushing, i dont know. Its like saying this committee couldnt reach its own conclusion without the president. But it was very helpful. And one morning there was a small breakfast at the white house. It was just danny and me the president , Vice President , jim baker. And at the end it was before bill had passed here but before conference. President took danny and me aside right at the very end and said if you can keep this revenue neutral and keep the rates youve got you can count on my support no matter how you get to those rates. Thats how critical it was. We knew we had his backing. Absolutely. But bill touched on something. That was about the treasury. Jim baker was up to his neck in the negotiations with us and was especially as assistant treasury secretary dick darmin because in the last seven days where i talked about where this was all done, baker wasnt here. He was in tokyo with the president in one of those economic multination meetings. And all of the final negotiations for the administration were done by darmin. On the last paragraph of my testimony youll see an Interesting Exchange on the phone between darmin calling baker in tokyo and telling him what to tell the president. So is it critical. I dont know if its critical. Is it immensely helpful and was it immensely helpful. Yes. Senator bradley. I think president ial leadership is essential. I believe that there are so many times when things happen that you need to have be able to get the white houses clout. And that can be manifested through the treasury secretary. Its not you talking to the president all the time. But i also would say, going back to my anecdote, i think the president was viscerally in favor of lowering tax rates because when he was an actor he had a 90 rate. 90 . And i was viscerally in favor of this because of the depreciable asset as a basketball player. In other words, closing loopholes had traditionally been what democrats were for. Lowering rates were traditionally what republicans were for. The question is can you bridge that divide and bring something together. The answer is yes. But if Ronald Reagan had not said i put my imprimatur on this it would not have happened. Bill said something right there, senator grassley. Democrats wanted to get rid of unjustifiable deductions. Republicans were not adverse to going along with that if they could use the money to lower the rates. And as president reagan had said, im not signing unless it is revenue neutral. If you got rid of a lot of deductions and produced a pot full of money and you couldnt raise revenues with this bill, you had to use it to lower rates. But you had a willingness on both sides for Different Reasons to want to reach the same conclusion. My last question deals with something we have to tackle here in a basic way. So both of you in your view, how important was it that the 86 bill was comprehensive tax reform package rather than focusing only on business or on the other hand, individual reform in getting support for its passage. Well, for us it was critical because we needed a lot of the money we raised from business. Dont confuse rates with revenue. We raised an immense amount of revenue more than we were raising from businesses before. But we lowered the rates. And we used a lot of their money to lower rates for individuals. We mixed the two of them up. I would have misgivings about trying to do just business. And then later on well try to do just individual. I think youre better off to try to do both of them at once in one big bill. I want to use the word grandeur again. You come out with a big bill that youve agreed upon, and if you do and it touches a point bill and i have talked about. Before the bill ever gets to the floor of the senate, youre going to have immense newspaper support, academic support across the board, liberal to conservative, and you will be glad in retrospect that you combined it all in one. I agree, we should you should you should combine both corporate and individual. Because if you just do corporate, its not like youre going to have an easy path if you do anything thats serious. For example, when we did the individual and corporate, essentially the Business Community split. Large percent of the Business Community were for the reform. Another segment of the Business Community was against reform. Guess what was the dividing line . What tax rate they paid. If they paid less taxes because the rate went from 50 to 28 , they were for it. If they paid up more, they were against it. But the key was constructing a coalition that included a significant part of business. This is where bob was brilliant. And so i would argue that thats very important. You also might get to a point where you might have more flexibility if you do individual and corporate. Because theyre both they both are essentially two sides of the same coin. For example, you might decide that you want to cut the corporate rate to 10 . Or 15 . And you might want to offset that by increasing the taxes on the individual side on dividends and Capital Gains. Thats what they do in denmark, for example. You wouldnt have that flexibility if you didnt have both individual and corporate put together in the same bill. Senator isaacson. Thank you, mr. Chairman. Thanks both of you for being here. I was a real estate guy in 1986. And had a Development Company and a brokerage company. So i have a question for both of you. First of all, thanks for being on the nine who voted against selective treatment in terms of passing laws. I think thats right, both of you voted against that, if im not mistaken. But looking in a rearview mirror, had some transition been applied to those investments made prior to 86 so that the tax treatment could have continued, and the tax treatment on passive laws been prospective rather than a clawback, did you ever think about doing that, or if we go into something again could we do it that way . We did not think about it at the time. Hes absolutely right, if there is an industry that we hit, it was real estate. We drove the s and ls out of business who were one of the principal financers of real estate. We did not do it retro we did it retroactively. We found passive losses in such a grievous way for rich people to shell their money and pay very little taxes that we got rid of it. But senator, youre absolutely right. The Real Estate Industry was hit hard and the Oil Industry Got a particular favor because of a deal that i made because i was going to need their votes later on the floor on a particular issue. Senator bradley. I agree that Real Estate Industry paid more. If you phased it in, of course you have not as much revenue and you also skew the distributional tables. But in regard to real estate, keep in mind that was at a time where there were, i would say, Real Estate Tax shelters that were not investment was not based on the need for apartments or office space but was based upon the individual taxpayer getting a Tax Deduction offset against all his other income, or her other income. I had a call some time in this period from paul volcker who was then the Federal Reserve chairman. And he said, you know, i really like what you guys are doing up there. I said why is that . He said because i cant get at these banks who are simply throwing money at uneconomic real estate investments. And it has to be through the tax code. So i think thats one of the reasons. At least for me that i felt that we were on strong ground. I think you did the right thing with because it was abused. My point was, if you could have transitioned prospectively in terms of the treatment of passing laws rather than clawback, you might have prevented the collapse of the savings and loans and creation of the reits which is essentially what the ramifications were. I think youre right. One other question i have. I wouldnt say savings and loans collapsed because of the Tax Reform Act. No. It was the last straw, i guess. Yeah, maybe. Thats a better way to say it. My other question is, did you consider in 1986 or have you thought since about going to a retail sales tax or consumption tax instead of a progressive income tax . I have often thought to myself what kind of a deal could be made between the republicans and the democrats that would result in some increased revenue . I thought what happens if the democrats were to offer this to the republicans well go to an electronic funds transaction tax which i prefer to a retail sales tax, and we will cut in half the corporate and individual income tax and you will allow the tax, however, to produce an additional 500 billion in revenue. And now the republicans are thinking, wow, it could cut the income tax in half and corporate in half and were not really weve always kind of supported a consumption tax anyway. Is that kind of a deal possible . We will go to it one day. There is no question in my mind. The danger of any kind of a consumption tax this is probably why republicans are more afraid of it it is so easy to raise. Need a little more money . You raise it half a percent. Take a look at your sales taxes in different states that started at 1 or 2 30 years ago. Theyre now at 8 or 9 . Look at the european valueadded taxes. I dont know of any major country in europe thats not less than 20 on the valueadded tax. But to answer your question, yes. If you could combine it, i think theres a possibility that you could possibly, i can maybe see the republicans shaking their heads you could possibly make an argument for some increased revenue in exchange for dramatic reductions in corporate and individual taxes. Out of time but real quickly senator bradley, id love to hear your comment. I think that what senator packwood said about Electronics Transfer tax is extremely interesting. If i were the chairman, i would task the joint Tax Committee to do an analysis of that in terms of revenue that could be generated. Because you got to know what revenue youre going to generate before you decide how you want to spend it. On the consumption tax issue, in my testimony i make suggestion, basically the point is that we should tax less those things we like such as wages, and tax more those things which are bad for us or dangerous. Which are pollution, for example. And i think here there could be a very interesting tradeoff between employment taxes Social Security, medicare and unemployment and a gasoline tax. Or a tax on things like volatile organics or sulfur dioxide. Or lead or nitrous oxide or whatever. Right . It is just a numbers game. And if you did that, it would be have profound impact. For example, if you were able to dramatically cut both individual and corporate Social Security employment taxes, you would, in essence, be giving individuals a tax cut and corporations a tax cut. At a time where jobs are needed. The fact that there is this 15 hurdle is it affects Different Industries in different ways. For example, if youre mckinzie or microsoft and or google or you want to hire real talent, you pay them more because you really need that talent. So that you pay them more to offset the employment tax. If youre working in a lumber yard in oregon or somewhere, where theres a surplus of labor, you dont pay them more to offset it. So the irony is that it ends up hitting the lowerpaid guy and the struggling industry more than it hits the person whos in the consulting or technology industry. So reducing those employment taxes are have many benefits. For example, 24 Million People or 25 Million People who are working parttime now could very well be brought into the workforce. You can find people that werent working that could be brought into the workforce. So thats the good news. The question is what are you going to use to provide the money to do that . And, you know, i know the committees looked at it, it is probably not possible, but who knows . They said tax reform wasnt possible in 86. You could take a 1 gasoline tax, or you could take a carbon tax and use all that money to reduce those employment taxes. And i think the net benefit would be greater job creation and Economic Growth. It would hit certain sectors more than others, obviously. But lets just take the 1 gasoline tax. Never could it be offered would it be a better time to do it than now when prices are where they are. But lets say you phase it in as you suggested you do on the other things. If you phased in a gasoline tax over five years and the Automobile Industry was going to require improvement in miles efficiency, at the end of that five years, since the individual would be getting more miles with less gasoline, they would be paying no more for gasoline with a 1 tax that could be used to reduce Social Security taxes and employment taxes than theyre paying now without that. Senator nelson. And could, also, senator bradley, improve the roads and bridges that are crumbling. This has been a fascinating discussion for me and thank you very much. I take your ideas and try to put them into todays politics. Offsetting, lowering employment taxes and going after Something Like nitrous oxide. And thats much more difficult today because of the climate debate that is going on, getting the votes. I think about what you said, senator packwood, that president reagan was so critical in tamping down the opposition among republicans in the house. Well, how are you going to get president obama to tamp down that opposition . Today, just over the kneejerk reaction of some republicans to the word tax. So its hard for me to make the transition from your success in 86 to today. And it really puts a real burden on the shoulders of our chairman and Ranking Member. Well, thats why this committee, at least in bills and my era, there was much more nonpartisanship in the senate than there apparently is today. I cant tell you whether or not you can put it together. But 1986, it appeared to us just as difficult to put it together as it appears to you now. There are different issues than we had then. And nobody can make the right circumstances. You cant buy them, you cant wish them, you cant coerce them. All you can do is be around when the circumstance comes and hope you can take advantage of it. Maybe there is a possibility. But if were going to say the republicans say no bill if theres any revenue increases total. And if the democrats say no increases unless they include work issues, you might as well work on the transpacific agreement. A lot of your success has been were in this kind of herky jerky patch at the 11th hour. Tax extenders, for example. You want to give us your thought about how we take this illogical approach to taxes . Do you have to do it in the overall global kind of big deal in order to get it done . Tax extenders are lobbyist for employment act. Yes. You have to bite the bullet and make some decisions, what should be permanent, what shouldnt be permanent. And there are always questions of revenue, so you always you want it to go out a year or two, but not three or four because that would affect the revenue. And i just think that the practical reality is that people would probably say extenders are necessary. But theyre necessary only because fundamental choices are not made about the tax code. What kind of tax code do you want . What do you want in, what do you want out . Not what do you want in this year, because then we all know that means you lobbied every year about the same thing and quite frankly, it becomes boring, i would think, for you. You know the arguments before they come on. So i on your earlier point about nitrous oxide, you know, you would be cutting some taxes, Social Security. Recall a couple years ago you cut the Social Security tax, then there was a quiet deal, you let it go back up and nobody said anything about it. Right . Not one party attacked the other party. Well, thats the kind of thing you could get here with the employment tax reduction and the increased taxes on essentially either pollutants or gas or carbon. I have mixed feelings about extenders. You make some of these permanent, youre going to play hell ever getting rid of them when the time comes you think you ought to get rid of them. At least with extenders, you are forced to look at them at least and think, should this be kept. And then, of course, everything falls apart and you extend them all. But lets say you made them all permanent. Now you dont have to look at them until somebody says i think we should look at this. So you kind of pay your money and make your choice on it. Senator coates. Well, mr. Chairman, this has been fascinating for me. Im a rookie senator sitting i cant use the basketball analogy but i can use a baseball analogy. In the left field bleachers here with my friend from nevada. And to extend the roster, im here to being a date the three of us. Thats the right field. Well, thats home plate. Thats home plate. I figure im in the left field. Although i would prefer to be in the right field. Nevertheless, having had the opportunity to serve with these two distinguished former senators, just sitting here listening to them talk through the process has been fascinating. And so often we take an issue and we start with the substance of the issue and nobody pays attention to the process until everything comes to a grinding halt because the process wasnt set at the beginning in terms of how are we going to what is it going to take to get from here to there. So it was fascinating to me that both of you outlined the principles of the process that you had to work through in order to accomplish the goal. It occurs to me, mr. Chairman, that a buyin of the committee with the principles up front to prevent us from having to be seduced away, either through ideology or through special Interest Group pressure on particulars well, okay, i can get behind you if you exclude this, or include that, traps us from getting from the batters box all the way around to home plate. So i think it is a fascinating lesson in history here and i had the great pleasure of serving with both of you. Being in the house in 1986, but watching what was happening there as a somewhat neophyte member of the house. And now all of a sudden having the opportunity sitting here thinking, could this really be be done . And what youve left with us is, yes, if you avoid if we as a committee can avoid the pitfalls of making prejudgments as to what ought to be in, what ought to be out, and look at how we could accomplish something of enormous impact for the future of america for a whole generation, i think thats what were looking at here. What a legacy that would be to you, mr. Chairman, to Ranking Member, to all of us on this committee. It appeared to me that there are some stars lining up here between the house and the senate given the personalities, the experience and background of the leadership of the ways and means, as well as the finance committee here. Question mark in terms of where the occupant of the 1600 pennsylvania starting from relative to their situation relative to their income level and the things that cause them to eureka moment to say, yeah, i want to get on board there. Im just going on here, but it seems like the real challenge here is to address the question of how a lower rate and cleaner product can result in the kind of growth and dynamic Economic Impact of something that we would do, and how where that money should go. Should it go back into government for expenditures as perhaps appealing as it might be . How many roads could we pave and how many bridges could we fix . Or do we let the market determine how that capital is better invested. It is really not asking the question but if the panelists want to comment on that. I was actually making a statement. Im over my time here. Ill comment only in one side. Senator, you may remember my predecessor for whom you worked at one time. He used to use the expression, give me the control of the procedures of democrat and i will control the substance of democracy. This process in 1986 was not really a planned procedure. The house pretty much acceded to us to write the bill. But i wasnt following any process of normal procedures. Only when the thing was not moving at all that i came up with this idea of how about a halfadozen of us getting together as quick as possible. In that group we had four republicans, three democrats. We had an agreement if any four of us could agree on something, it would be put in the chairmans mark. I recall no vote that was four republicans, three democrats. I recall a number of votes where i was on the threeside. But it was that bipartisan in that sense. But it wasnt planned. It was nothing else has worked. And yet the circumstance was there to make something work. And thats how it happened. I dont know if the circumstance is here. You feel it. You dont plan for it. It arrives. Im not sure i know how to make it arrive. Im trying to get that feeling. Senator carper, youre next. Thank you, mr. Chairman. Senator wyden, to chairman packwood, to my friend bill bradley, it is great to see you. Just great to see you. I was talking to brian sealander who you signed up to my senate race. One of the reasons why im here today is because of that kind gift along with sean barney and couple of brothers who came as well. So thank you for all of them. Now i serve on this committee where you once both provided great leadership. We were having a hearing on deficit reduction a couple years ago. We had a bunch of people here to talk to us that day, too. Allen blinder, previously vice chairman of the Federal Reserve, as you may recall. Hes back now teaching economics at some school in new jersey. Starts with p. Princeton. Thats it. In his testimony he said to us, he said in terms of deficit reduction, 800pound gorilla in the room is deficit reduction. Came my time to ask a question. I said dr. Binder, you say Health Care Costs are the 800pound gorilla in the room. If we dont get our arms around that, then were doomed. Whats your advice to us . He sat there for a while. And thought. Then he finally said, im not an economist. Im not an expert on that stuff but he said this would be my advice to you. Find out what works. Do more of that. Thats all he said. Find out what works, do more of that. I said you mean find out what doesnt work and do less of that . He said yeah. Were happy youre here. And looking to find out what worked all those many years ago. One of the keys thats clear to me, leadership. Most important in leading any organization, whether it is a basketball team, or whether it is a military unit in the navy, army, air force, marine corps, whether it is a college, university or business. Most important here, most important ingredient is leadership. We cant pass laws to create leadership but every once in a while come along and provide great leadership. Talk about what leaders in this committee need to be doing. Please. As i said earlier, leadership starts with the president , the treasury secretary, chairman of ways and means and chairman of finance committee. Thats the leadership structure. If anyone of those isnt on board, its not going to happen. I would also make the point when senator packwood talked about the seven people in the room voting 43, whoever voted he lost sometime, i lost sometime. But four republicans, three democrats. That was fun. Legislating was fun with the right people. You can do something very important and you can enjoy what youre doing because you never know whats coming around tomorrow. If youre in that kind of negotiation. And it requires you to know what youre talking about, and, you flow, i just hope you guys are having that much fun. Ive got fun would be good around here. Ive got to tell a humorous story about bill. Because i remember i only have a little bit of time. Oh, go ahead. No, go ahead. If you could just answer id love to hear the story about bill but question about leadership. I think what senator bradley told us is very important. Right on. Well, all of us in politics have seen natural leaders. Some of them are inside leaders like lyndon johnson. Some are outside leaders like Ronald Reagan. Everyone in the senate there is a small fraternity we all know who are the standout leaders. We knew in my era scoop jackson, sam nunn on defense were good for seven or eight votes in a tight vote any time. We knew that dick lugar on Foreign Policy was good for six or seven votes. They were leaders in their area. All of you on this committee know who the halfadozen leaders of this committee are. I dont know who they are, but you know. And certainly the Ranking Member and chairman know who they are. And a coalition of those can be put together. But the key is not do you have the leadership. Does the little Leadership Group agree on the goal that they want to reach. If they dont agree on the goal, no quantity of leadership is going to make any difference. All right. Thank you. Second question deals with, you did all this work in 86. No sooner was the ink dry on all that legislation and we started changing it. We started changing it a whole lot, over time. Did you ever think at a time that wed see this kind of change that quickly and in such to such an extent, and did you ever think at the time about what can we do to sort of preserve for what we have at least for a while . I dont know how many changes weve seen but im told like 15,000 or something. Maybe more since 86. Should we be thinking about should we be looking for some way to preserve for a while at least what work were going to do . Is that just a fools errand . Well, tom, that was a real lesson for me. Obviously one congress cant bind another congress. You can pass something, which i thought and i think bob did, and people generally, as significant as tax reform, and it can be like a sandcastle on the edge of the sea. It could be washed away the next year. Which means you have to be humble when you do these things, and you have to i dont think there is an institutional fix to make things permanent. Maybe the reason this wasnt permanent is that, you know, this wasnt something that bubbled up from the country saying you must do that do this. This was something that happened because people who had responsibility on this committee assessed what was the right thing for the country. Senator packwood, just very briefly and my time will expire, i am afraid. Thank you. Senator heller. Mr. Chairman, thank you. I want to begin by thanking our distinguished guests for being here today. As a relatively new member of the senate and a new member of this committee it is great to get this historical perspective. So thank you very much for taking time. Mr. Chairman, i want to also thank you and the Ranking Member for being committed to this effort. I know it is not going to be easy, but its good to see that there is real work, real work moving forward. I appreciate your seven priorities and i share those with you and look forward to getting that done. To our witnesses, the further you get out here in left field, the more general the questions. But the good news is, it is good to know both of these started where i am today. So there is hope for the future. I want to move to five years ago in the bowlessimpson proposal. Did either of you testify or have an opportunity to put any input on that particular proposal . I did not. I was not called as a witness. I followed it very carefully in the press. But i was not a witness before the committee the commission. Can you give me any perspective what you thought of that report . Well, i thought the report was excellent in the sense of heres where this country is going if we dont do something. Ive often put it when i speak, i put it in a different version. I am less concerned about the deficit than i am about the increased spending. If youre rich enough, you can afford a deficit. As long as you stay rich. You can afford to pay the interest on a debt. But i look at spending and the figures are not that necessarily good from a century ago. But as best we can tell, a century ago, all of the governments in this country federal, state, local, water districts, fire districts spent about 10 of the Gross Domestic Product. Today the same governments spend around 40 of the Gross Domestic Product. And that same pattern has been true in all the Major Industrial countries. They just started at a higher point a century ago than where we were. But if you look at the simpsonbowles report and you see whats coming in medicare, medicaid, Social Security, that 40 figure is going to go up. And the debate we ought to be having in this country is not you can debate can we afford to carry it. I think we can. But do you want this country to eventually spend 45 , 50 , 55 of all the available assets in this country on government . And that debate doesnt get discussed very often because it gets mixed up with the deficit. Thank you. Senator bradley, i propose the same question to you. No, i did not testify. I always talk to my buddy, al simpson. But we didnt spend a lot of time talking about taxes. Hes one of my favorites. Alan simpson. I was on the when i was in the house, i was on the ways and Means Committee and dave camp was my chairman. As you know, bowlessimpson was dead on arrival. Camp came up with a proposal last year. As you are well aware of, got no hearings and was frankly dead on arrival. What did we learn . What lesson do we learn from these efforts . Youre discouraged. I read the proposal. I thought it was a good proposal. I thought it covered a lot of the bases that needed to be covered. You are right, it was dead on arrival. This is one again, im not going to badmouth the president but it irritated me that he appoints this commission and as soon as it comes out he just gives it the back of his hand. Well, that practically kills it right there. I thought the commission did a first rate job. I think camp had some interesting ideas. What happened . He kind of started too late. People knew he was going out the door and he did his own thing. And put something specific forward, which is a necessary prerequisite. Member treasury one, treasury two. The two bills i put in. You have to put something specific, because then the interests clue it up and you figure out what can be swallowed and what cant. I just think that you into ed to see the total picture. I think he did a very good job of thinking through tax policy and coming out with a coherent package. Senator bennett, youre next. Thank you. Thank you, mr. Chairman. What a great privilege to have both of you here. I was thinking back actually as senator packwood was talking to, believe it or not, john mcafees book, a sense of where you are, a book about senator bradley when he was playing basketball at princeton. Sort of asked the question, how could this maybe not the best athlete that we had, maybe not the best of this or that succeed so well at what he was doing. I think in terms of tax reform, senator packwood, interestingly said, the opportunity appears to do it. And so with that in mind, i wanted to read i took a look at showdown in gucci gulch in advancement of your arrival. The authors wrote i had a he just ask you to respond to it for us. The groups with an interest in the existing tax system were well organized and ready to defend their tax breaks at a moments notice. The populous who stood to benefit from lower rates were unorganized and diffuse. Furthermore, congress was a slow and cumbersome institution. Thats not true anymore. Of course. That only usually made piecemeal incremental changes. Tax reform proposed something very different, a radical revamping of the tax structure. A tremendous inertia in Congress Resists any such sweeping clang. As a result the conventional wisdom in washington held tax reform was destined to lose and conventional wisdom had plenty of history to back it up. Tax breaks, after all, had always been part of the currency of congress. This passage i would say is even truer today than it was 30 years ago as a description of where we are. Just in 2014, federal lobbying totaled over 3. 2 billion. I wonder if you could take us inside that room that you talked about and tell us a little bit, as senators, how you were able to overcome these interests and the pressures that you faced, and how we as senators should think about that in the arc of our careers on this committee. Well, if youre talking about the little cabal of seven of us, the pressures were not really that great on us. We knew what had to be done. We wondered can we swing it, will it work. But i dont recall any one of us saying im not going along with this if x is in or is not in this bill. So those pressures were not on us. I know what you mean about the Interest Groups. Thats what happened to the house bill. They had a lot of individual votes on each of those little parts. And if it hit your part and you hate that, youre against the bill. You dont care whats in the rest of it. You hate the bill. There is enough of that. That was not in the senate the senate bill just didnt happen that way. That senate bill was written in those seven days. And we didnt have any hearings. And it was suddenly, it was like minerva born fully formed. It was on that night the Committee Sees the bill for the first time and voted 200. But if they had to vote on little individual sections in fact, the reason i made the deal with the oilies and gave them what they wanted when nobody else got it and we had taken it away from everybody else. I gave it back to them. Bill was furious. George mitchell was furious because i hadnt bounced this off my little group because it was the night we were voting anyway. The reason i did it was because the Biggest Issue i was going to face on the floor whether this came out of committee 200, it is going to pass, but there was one issue and it was the i. R. A. S. There was not two sides. There wasnt a great clamor about tighten you were the i. R. A. S. The clamor was on the other side about oh, oh, more, more. As you see listed in my testimony, the i. R. A. S, i recall, was about a 24 billion pickup. Well, on the senate floor is i. R. A. Amendment came up and i won it 5148. And 19 out of 20 of the oily senators made it with me. Had i not made that deal, i would have lost a couple of them and had i lost a couple of them i lose ira, and there goes the bill. The irony is, that tax reform was failing until the counter offensive. And it wasnt like this just sprung forth from the head of zeus, right . We had had 30 hearings, the substance had been thoroughly chewed up by the committee. So it was familiar territory, it was just put together in a different way. Thank you, mr. Chairman. Thank you. Thank you. Senator menendez first. All right, mr. Chairman, thank you. Thank you both for your testimony, which i read at length. I think we all agree we need to simplify the tax code, and make it more economically efficient. But i always think that before we go about the task of comprehensive task reform, we need to agree what is the end goals that were trying to achieve so we can direct our focus. And i mean, i know that some of my friends here argue that we should focus solely on Corporate Tax reform and profits and stock market gains. I think ive heard you both say you need to do it all at the end of the day, in order to make it effective. Senator bradley, do you believe its enough for tax reform to be focused on increasing gdp, on stock market, on corporate profits or should we also have the goal of ensuring Economic Growth as part of it particularly as its felt by as Many Americans as possible. Is that the type of goal we should be looking toward . Yeah, you want the economy to grow, and you want everyone to benefit from that. These are the things you should consider. The markets are more efficient than we are. The weighs and Means Committee, figuring out we ought to do this activity or that activity. Second equal incomes should pay equal tax its not fair to have your neighbor pay less because they have a particular tax benefit. And third, those who have more should pay more. Progressive principle. And fourth, if you can simplify it, please simplify it. To me, those are the four principles. The economic issues, Economic Growth, obviously progress would say you want people to move up, and youd want to say to people at the top, you have to pay a little more. I think those are the principles that i would use goingforward. You know, i think that its, you know, my question suggests at least i view it, its not an either or proposition. Fairness in the code actually help reduce the burden of low and middle class working families, its not only morally desirable. But economically good policy, because about two thirds of our economy is fueled by consumer spending, and certainly, low to middle income class families have a higher percentage of their income that they need and spend on goods and services. So in that respect, i think that it makes sense to be looking at how we deal how the consequences of reform deal with them. Not just on reform. I think it will fuel private sector profits. Senator packwood at the end of your testimony, you included a statistic that in 1983 at least 1900 people who earned a Million Dollars or more paid no federal tax. And that fact was due to a myriad of special interest loopholes that were clogging the arteries of the tax code before 86. As you noted in your testimony the product that passed the finance committee 200 and would later become law raised the taxes significantly on corporations and rich individuals. They would pay more middle income and the poor would pay less. So weve had now a situation in which the average new jersey family that makes 65,000 per year, pays a higher rate than the wealthiest 400 americans that make an average of about 270 million per year. So from your experience, what impact does inequity have on the tax code. And would you agree that a focus of reform should be to eliminate the loopholes and preferential rates that have allowed the wealthiest to reduce their tax rate over the past 30 years . Theres no question that the public is aware of the inequalities. 1986 they werent, and the issue was fairness, how do these people avoid paying any tax at all that just irritated everybody, and that was a driving goal for us, inequality is obviously a much higher goal preference issue than it was 30 years ago. What im hesitant about is, how do you want to fix that . The longer ive been in life and the longer im in the senate, the less confident i was that what we were going to do would necessarily get us to what we wanted. thats why i agree with bill. The market is a better allocation. If you wanted to somehow undue the inequality, i think thats legislatively doable. If you can get both sites to agree on that, that is perfect. But it wasnt what drove us in 1986. Thank you. I might say that in terms of the middle class i mean, we need good paying jobs, more good paying jobs. And so thats tough to get at through the tax code. But not impossible so ill share with you one of my hobby voices. Infrastructure investment, desperately needed. Tough budget, you cant do it. The size that wed like to do it. But there are people that have money. Chinese, singapore, koreans, in the persian gulf, large sovereign funds. I mean, hundreds and hundreds and hundreds of billions of dollars. And they have to decide what do they do with that money. And i ask any number of them, why dont you invest in infrastructure in the United States . In other words, they play the role, the british played in the 19th century. They say, well, theres this one provision in the tax code. And the provision of the tax code is section 892. And that says that if youre a foreign government, and you invest in stocks or bonds, you dont pay tax on that. Very simple, extend that to infrastructure, and you could very well find a significant amount of emergency for infrastructure coming from sovereign funds. Thank you. Great. Senator thune . Thank you mr. Chairman, and thank you all for being here. I was a staffer in 85 and 86 when this was done last time and a great admirer of the hard work that went into it, and the ultimate result, i there are some things that are very different, its a different time, i think this is a different place probably than it was back then, the one thing you noted to that i think made a difference was the involvement, active engagement of the president , in the process, remember treasury one and two, remember the books they set up here, and how how hard they worked to get it across the finish line. That to me seems like to do anything big and consequential in this town you need president ial leadership. I hope that well get that. I have a couple of quick questions with regard to the issues you batted around back at that time. One had to do with whether lower rates or more favorable Cost Recovery provisions ought to be the focus of tax reform, and which is better for Economic Growth. And i think that was a part of the bait. The question is, i guess, do you believe lower rates paired with longer depreciation schedules was the right policy choice . Scandals was the right policy choice and how do you propose we approach that question today . Dont foe how you ought to approach it today. We clearly felt that lower rates were the most desirable thing we were doing. Depreciation was a major difference in interest between the house and the senate on that, when we had to go to conference. But im not going to advise you as to what you ought to do in this. Ill just say lower rates, in my mind, and keep it revenue neutral. But there might be something you can work on to increase revenues. But lower rates would be driving me. How about the issue of cap gains at the time going the same as normal income. In your view when you look back on it, was that a good thing . Yes, it was. And i remember bill talking a few moments ago about the hearings we had, and that fellow, you had to have a differential. If it was 30 , had to be 15 . And it was 20 , had to be 10 . So i asked him, i said, if there was no income tax, would you have to have a subsidy to invest . Because theres no differential. And he had never been asked that question. Didnt know how to answer it. But i think you can do very well if you have a low rate with Capital Gains being the same rate. Okay. And this has been alluded to a little bit all right today. But theres been some discussion of the goals of tax reform. One of the things that separates us here which makes it kind of hard is there are folks who look at this as an exercise to raise revenue. Thats something the president obviously wants to do. A lost us believe that the best way to get revenue is through greater growth. And that tax reform the goal of tax reform ought to be how do we generate Economic Growth in the economy which lifts everybodys boats and addressed a lot of those income disparity issues that were mentioned earlier as well. Speak a little bit about growth as an objective, a goal of tax reform and how you think that plays into the deliberations that should occur here. Growth obviously, everybody wants growth. But i remember russell long whos chairman of this committee for 16, 17 years in one meeting going, in 94, i have been here for 30 years. He says, three times we have put the investment tax credit in in tax reform. Three times weve taken it out in tax reform. You tell me when its reform and when does it work to help the economy . I think a lot of us dont know exactly what works. I do know there are all kinds of industries who want things who say this will work. But i dont think were necessarily smart enough to know. Sir bradley, youve talked a lot about growth. Tell me your views on that. Well, i think you can have growth and equity. I think growth you get in part through the lower rates but also in part from clearing out the code of all of this underbrush that prevents the economy from growing because it subsidized one segment as opposed to another. I think if youre going to deal with the equity question, i think the way to do that is with the earned income tax credit. I think the president s proposal on second earner credit is pretty interesting. I mean, you can do things in the code that are structural, that are not special interests, that will allow to you deal with equity at the same time youre lowering the overall rate. And to me thats the key. Thank you, mr. Chairman. Senator bradley, youre a credit to basketball players everywhere. Its a big compliment coming from you, senator. Senator scott, youre up. Thank you, mr. Chairman. Thank you both for being here with us and providing us insight from 1986 and how you brought together at times what seemed to be impossible. And ill tell you that sitting here as a relatively new senator it seems relatively impossible for the two sides to culminate together as well. So your insight has been valuable to all of us. Just for point of reference this is treasury two and this is treasury 1. During the years that you guys found the will to make things happen. These are about six years of the president s proposals. My first question really for both of you all is how do we find Common Ground when finding a serious partner towards real tax reform appears to be missing in the seriousness of the presentations and the proposals, number one, and the second part of that and the second part of that is when weve heard from our chairman and senator hatch and senator thune just talked about revenueneutral position. Revenue neutral position. When you start the conversation as well talking about achieving several hundred billion dollars more of revenue versus a position of neutrality, how do we bridge that chasm . I dont think bill and i can tell you how to bridge that gap. If the positions are irrevocable. Revenue, no revenue, that gap cannot be bridged. I kind of agree. Senator. Senator, if you can bridge that, then spend some time doing Something Else. I think, however, that the question is can you put together a small group of people on this committee that have sufficient clout within the committee as bob said earlier that you could actually you chose spend the time to come up with something that was pretty good. I mean, you know. More taxes, you have to figure out which taxes the tradeoffs i offered with the consumption tax versus cutting the Social Security and employment taxes. That is not something were going to decide. That is something you have to decide. And as i said earlier, all i know is we ended up in that room with seven people and youre doing things and taking votes and affecting this part of the economy. And thats a lot of fun. If you are just coming in and having your two sides make your statements, that cant be too much fun. Cant be too much fun is correct. Looking for other things to do with our time, sir, i thought about playing basketball but im too short and built for football. So good news is senator hatch on the other hand has taken a fairly inventive and creative approach to make sure we find some Common Ground looking across the aisle and looking for sweet spots. Hes put together some working group thats could be very beneficial going forward. One of the areas i have great passion and interest as an entrepreneur over the last 15 years is why simplification of the tax code benefits all. I think, senator bradley, you said tax loopholes are ways for politicians to spend money without going through the promotions process. And the more opportunities politicians have to spend money without the appropriations process, the more complicated and difficult the tax codes comes. When i started my business, i didnt think about loopholes to start a business. I thought about creating jobs and making a profit and changing the lives of family members and employees. I would love to hear you chat a little bit about the notion of simplification or either of you esteemed gentlemen talk about notion of simplification and the natural outcome of allowing money to find its best place through the private sector. You know, when i was speaking about this every day for four years, i went on the David Letterman show. Thats when he was late late. And i took out a card and said you ought to be able to do your income tax on this card. Now, thats not quite true. But we do know the vast number of americans have income from wages, interest, or dividends. And guess who has that information. Other than the individuals. The irs could do the return based on that, send it to the people and the people could either sign it or say no, i want to have another accountant do it. That would be a dramatic simplification. In 1986 i had a younger person on the joint Tax Committee who is gone, i cant remember who it was now, give me just a ballpark estimate not spend time running what you can do i would love to hear you chat a little bit about the notion of simplification or either of you esteemed gentlemen talk about the simplification and the outcome of allowing money to find its best place through the private sector . Um, you know, when i was speaking about this every day for four years, i went on the David Letterman show. And i took out a card and said you ought to be able to do income tax on this card. That is not quite true. But we do know that a vast number of americans have income and i said what if you exempt all families under 11,000. He said it slightly tilts toward the rich. And i was curious about slightly. But if 19 is the norm, you sally who works out the mill who fills out a 1040ez singledigit doesnt have any deductions is not adversely effected. But if 19 is the norm, you could keep the same progress and do it around 17 on the low end and 20 middle and 23 on the top. Now this is a top of the head thought of his. But it is worth running if you want to see what you could do and then, senator, you have got a simple tax. How much did you earn . You are in the 20 tax bracket, you dont get any deductions and that is simple. That is interesting. Thank you. And senator white, weve had over 30 hearings on this over the last four years. I do want to tell this one quick story about bill because it was cute. Sure. The president signed the bill. The signing ceremony is going to be on a wednesday. Bill is in portland at a noontime luncheon fundraiser for a democrat candidate for governor and catch the plane back for the signing ceremony. My Campaign Manager is a tough woman and she said you are not up for reelection, but bill is going. Well portland is socked in. He cant get a plane out in the afternoon. And he called seattle, can i drive to seattle and get a plane out. Can i get a charter plane in San Francisco and nothing is flying out. And so he and i was having a press conference the next day at 7 30 and the president was going to call me after he finished signing and i said bill we have a press Conference Tomorrow morning if would you like to come and he said no, im going to get out. Early the next morning he calls the next morning and said where is that press conference and he comes and the president talks to me and the local Network Affiliates are there and the president talks to me and i chat a bit and say by the way, bill bradley is here and you know how valuable he was for us. And he comes on, and he makes National Television for appearing on the local affiliate in portland and i dont get covered nationwide. Well the more relevant point is it was because of my respect for bob packwood that i decided in the middle of his campaign to join him in a press conference about tax reform. I think that is probably not happened a lot recently. That was welldone. Well i have a lot of respect for both of you. Youve been both great senators and you have both done an awful lot for this country. And we are very proud of you. Senator wyden has one more. Im going to be very brief and thank you both for that simplicity discussion. Because ive thought for a long time that this insanely complicated tax code plays right into the hands of the special interests and the lobbyists and it will be even more challenging today than it was in 86. And we talked about gucci gulch and wonderful descriptions in it about the lobbyists who would wait in line outside of the ways and means room for a phone booth. Well today a lobbyist is going to sit in the back of the room and set in motion a tweet that is in effect probably going to go to millions or tweet directly to millions from the back of the room. So simplicity is going to be hugely important and i think there are some contenders for how to do it and senator bradley mentioned one in his testimony with respect to the information that the irs, in effect, has in giving the citizen an option of in effect having the irs mail something, it wouldnt be required, just an option. The postcard concept, in effect, you can put a tax return on the back of a w2 and that is something worth exploring. And im also interested in