To prosperity. Who is this that i spent time actual time working on the National Security issues. Of all those people running there is not one that has fixed areas in all of those critical three areas. A midsummer person running for president . We do. Part of a video giving the reasons john kasich says he should be president. The live announcement is live on cspan 3 at 11 00 a. M. Eastern. Its almost as if they were a matter enacting it. Freedom breeds inequality. Ill inequality. Ill say it a third time. Almost always in the rate. Very unlikely today. Today i believe there is someone singing dwindling talk about hot topic hot salacious topic number two whereas then i dont think i was the norm in tv at the time and i dont think these guys needed that. As you mention the moderator a distinguished newsstand who is really embarrassed by this year he was moderating but he disappears for sometimes five or more minutes out of time. Today you would have a moderator not jumping in every 30 seconds. Really everybody at abc stood back and let the fire burn. The father of the woman who Authorities Say was killed by an undocumented immigrant in San Francisco will testify on capitol hill this morning. Next upcoming discussion on that in the tax code including the flat tax, Corporate Tax rates and proposals offered by president ial candidates. From the Heritage Foundation this is three hours. That will work it good morning. Welcome to the Heritage Foundation. We of course welcomed us to join us on our heritage. Org website and those joining us on cspan on the future occasion. We recommend everyone in house to check their cell phones have been muted and for those online but remind the questions or comments can be sent any time. Hosting our opening discussion for a price of the todays paul winfrey for Economic Policy studies. And income policy at the u. S. Senate committee. Prior to joining the committee he served here is a senior policy analyst in simulations and our center for data is. Hes additionally served on the Foreign Commission to study alternative Economic Performance and also specializes in Health Economics and applied econometrics. Join me in welcoming my colleague, paul winfrey. Paul. [applause] thanks, john. We are pleased to have with us dr. Eleanor bush cuts. A david and jones senior fellow at the Hoover Institute at stanford university. He is a worldrenowned expert in a number of areas but especially technician having served on tax for spirit he has a bachelors degree from Washington University in st. Louis and a phd from Washington University. Please join me in welcoming dr. Alan bush cut. [applause] alan and i will engage in a little bit of a discussion here and then open it up for questions. First of all i would like to welcome david to our tax reform talk show. We dont have a live band but if you want to play some games then im open. So lets get this thing kicked off. And your seminal book you wrote that economists and politicians of all persuasions agree on three main points. The federal income tax is not simple. To come the federal income tax is not costly in the federal income tax is not there. Can you elaborate this points for us . Share. For those of you who may be interested or havent seen any other weve done for this largely selfexplanatory which means a minimum of regulation and 60, 70, 80,000 pages. Anybody who thinks that simple is missing the point. So many stories over the years some entrepreneurs take a tax return to seven different tax offices and get seven different results. That could be a problem for tax professionals. And all the difficulties in interpreting things every time theres another caption it gets worse and among my favorite phrases was archer who kept talking about the income tax and by the time he got even more water. Part of the problem is it just gets worse and worse. What is the cost us . I was invited in 1984 to serve on the American Bar Association commission on taxpayer compliance and we had three pharma commissioners, some professors tax experts and we produced a lovely report over two years about 100 pages long single space. We had a staff of experts to help us out and went through everything we could figure out why theres three or 400 billion owed to not pay. It is hard to prove in any way with the main causes. The higher the rate the greater the noncompliance, the lower the rate the list of noncompliance. What do we have . They are avoiding taxes by exaggerating deductions. We have tax lawyers, Tax Accountants. Luther wrote the first book in 1983, the number of people who practice law in new york city versus washington d. C. We found in the early 80s the number in washington had grown so rapidly that they caught up with the number of new york city except the number of lawyers in washington practice law. They does advising people on tax policies and so forth. We created a massive industry and in Silicon Valley before the bust i remember talking to 400 Financial Planners and all but two or three said that the tax rate below 19 that because we had high rates of 40 and 50 basically remember it is 2 of producing income come away better to concentrate on saving them producing income where you can put one for the other. Simplicity, complexity, cost, rates, the whole package. Its not fair either. If you think about it, we have a wonderful legal system gradually evolving. Youre illegally not supposed to discriminate on the basis of age, sex gender, race religion ethnicity. Tax policy discriminates against every Single Person by affording each individual different kind in different amounts of deductions and exemptions on rates. We have a tax code which seems the 14th amendment. That is a good way to begin discussing. The it seems like a tremendous opportunity cost of the Human Capital that goes into abating and avoiding taxation. Its not like a Tax Accountants and lawyers and everybody else. How many folks in here working the tax world and how many are tax lawyers are Tax Accountants . Not as many as i thought. Thats an opportunity cost in and of itself. I should mention the problem with high taxes is we cant quantify forgone opportunities. Under a simple flat tax say i miss the core person and i will pay the going from tax rate. If they succeed they will grab such a large chunk of it. Theres the unknowable and invincible appeared we can estimate what they might be if you had a much lower rate. As a whole range of invisible costs associated. So lets talk about the issue of fairness for a minute. Many on the left and right thing for graduated marginal income tax rate we have today when in reality it doesnt. Progressivity is savagery, not marginal rate. Can you going to have the flat tax is more equitable than our Current System . I did have one set of numbers i cant remember so i wanted to bring with me. I did an assessment or Something Like 202 political jurisdictions around the world to see every single one of the income taxes. Heres what i found your 16 have no purse or income tax. 45 have a flat rate at which 36 or 37 and we can trace in my book. Ive got a desk in my office by 5000. 23 have to raise. 118 have three raids. Not only that but the rates arent the same. They are different everywhere over time. If someone wants to tell me i want to know how you pick up to 218 is the fairest and i was a still long enough not to change anyway. This is just rates, not days, not production. The notion that a particular system is fair and the other side is a matter of personal choice or where you can politically get away with it in in force. The way i like to think about fairness since you can have a progressive tax on a single uniform rate. So i did than her up one point to illustrate this. Lets take for example insane individual has 20000. Less than 20,000 of income you have zero. If you got a 40,000 you are paying 10 and you go all the way up until you make a Million Dollars a year paid 19. 9999. You ran your way up from zero to just about 20 depending on your level of income. You can vary the personal allowance, make it higher can have a greater degree of progressivity or you could not read and make a smaller degree. At the end of the day as long as theres a personal allowance or deduction or exemption and is progressive. What a great progressivity do you want . If you decide to have tax rates going up to 50 you can be sure the congress will because it always sounds as high income people get special treatment because people dont pay the tax rate. Very few do. What happens is the rates goes up is you end up with a tax code that gives special deductions to various kinds of sectors in industry and when you talk about fairness or marginal rate, you have to do with the fact that different entities from personal people to corporations to Business Enterprise in the leg. My view of this as it is impossible to consider a flat rate with no deduction where everybody starts the first dollar of income. A flat rate allows you to have it simple, fully integrated progressive consumption tax. I will repeat that again. Fully integrated progressive consumption tax. This attacks in there and im sure well talk about it. The goal of having a consumption taxbased custom element of progressivity plus integration of business and individual taxes without double taxation. That is the beauty of having the reason for sue. Fairness under the situation will treat people pretty much the same because everybody is taxed the same on their last marginal dollar of income and everybody has a room circumstances and do the same personal allowance. You may think you had to give preference to one group over another. Fine. Both openly on the budget financial transfers. Here in the record of for spending money. If you hide it in the tax code youre not on the record voting for spending money. Disclaimer complicated to say youre spending money by providing tax seductions and the tax base. The flat tax or in a flat rate system is when you get in terms of treating people equally. That is their political view. In your book you have this great quote about how an expenditure tax applied across a broad base of equitable tax. Imagine john rawls is not necessarily conservative. So i thought i was dairy if you dont know what the latest know what her life is good to be, why not everybody have the same tax system they will face rather than determine in advance. You spoke about how it is important to have a consumptionbased and so for folks in the room who arent as familiar with that the social taxes as a tax on consumption, but not income investing. Can you go into detail about why have any function basis so important . Basically, in a way like to think about it is it to use the simple formula, product equals consumption plus government services, which is small. If you net out investment it is whatever you do if you invest and make your Business Activity more productive and having your right off of investment spending is the maximum incentive to make the investment in the first place and also changes the tax base of gdp to purely consumption. Economists across the board agreed to get better performance in the economy by taxing consumption and not investment. That is the basic core argument on that. Theres always differences among people on how much better it will perform. 1 2 . Everybody says its positive. We dont know whether it will be small, middle or at large. But we pretty much agree it will be positive and what that means in the long run as we accumulate capital to get her productivity and so forth. You do get a benefit over the longer run. Imagine if you could compound growth of 4 instead of 3 how much are rapidly you a double real income. It becomes useful and youll get higher growth rates over time on a consumption days. Can you talk about by marginal tax rates are important . People work for themselves not just government. I know very few people who sit down these days and say what can i do to reduce the national debt. I will write a check because theres a special office in the treasury you can send that too. Every now and then they highlight that most people work for themselves which is quite fascinating. You have billionaires who go out of their way to make sure they are not paid ordinary income thats buried in on circumstance action that i think should be taxed as ordinary income. That continues to survive for the time being. Basically if the tax rates rise Ronald Reagan figured out very early that by this time he was paid 91 sacred work in the last six months of the year. A lot of situations when your tax rate goes up you begin to think a little bit about is it really worth it now. The other thing is the higher the rate the more likely you are to avoid the higher the aftertax insert and and those people work for themselves and not the government. Theres a lot of stuff in the room and one of the issues debated right now in congress is the highway trust fund. Two additional Tax Compliance which would increase the definition of the tax code. What would you tell a member of Congress Looking at compliance measures relative to overhauling the total . Generally speaking i would tell them low rates on a broad pace and fitted to avoid or evade taxes and add complexity to that and you have less need of compliance. The United States is a good country for people paying taxes and we get a pretty good response with lower rates. Any measure to increase complexity will make google more and happy with every aspect about taxes. Theres a story appeared a residential neighborhood and some cargo speeding through and you call the police to get the person apprehended. If everybody in the neighborhood is more or less pena tax code nobody calls the irs. They call and ask allie does it. This gives you some indication of how people respond to the irs and generally speaking when you sit around a bunch of people at a tax conference you have a word that does a special thing for your heart you avoid avoid the high inheritance tax. The lot more compliance. A white house website president obama has laid out a series of protection forms. This includes one lower marginal rate, eliminate unfair tax rates. Three depart the deficit reduction effort. For increased job creation and five income revenue. The panel at are fully in grated broadbased low rate consumption tax that over time to the extended aids Economic Growth and reduces noncompliance will generate additional revenue and if we can somehow stop the congress and president from spending every dollar it would over time reduce the deficit is a faster performing economy to give you additional revenue. I say they are all terrific. Governments dont create jobs. I was sort to drop the category list the Business Community and individual businesses to create jobs. I wouldnt focus on the deficit reduction part of it. I would try to freeze spending because if you focus on cutting things you end up with all kinds of people telling you why you shouldnt. Otherwise it is spread in the margin. Its too bad they dont do what they say. Disc with the president s comments dont poison the well. No they dont. I have noticed that mrs. Senator secretary today in proposing things to do. I believe that two later questions in the others. She couldnt be more wrong if she tried in raising capital gain rate and in particular longterm investment. In Silicon Valley nine out of 10 startups fail. We are interested in more peace of the whole notion someone will sit around to get a lower rate. One of the significant things inside the beltway accomplishments that congress has had in the last six months is the adoption of the rule by the congressional budget. You have written in the past at high rates discourage Economic Activities in the last demand which stipulates the prices and quantities inversely related. How do you think or do you think a new dynamic scoring rule adopted by congress can help the flat tax . Theres probably different fact her stomach go into it. But it certainly would help it. Is going to obviously be a huge debate on what the degree of response will be, small, medium large. I think in this notion that people get rich quick or the second i stop working. I dont think theres any doubt that therell be people working and doing things to get richer. I want to be careful to not over exaggerate the benefits of it as a political measure but take some small its just going to have a longterm cumulative impact. Even if it only you could get a 1 growth rate over time they will make [inaudible] wait a few minutes for questions if anybody has a name. Please state your name and affiliation with your comment in the form of a question. Hi, nick farmer. Can you comment on the idea of having a peer consumption tax, sales tax and whenever you want to call it replacing all your taxes. Business, corporate, personal, payroll tax and keeping the progressivity of our Current System with the rebates to individuals to replace the various income transfers embedded in the federal budget. The concept would work well and be much more efficient. What youve done of course is just described the fair tax only if governor hoover in favor of the flat tax and we didnt get anywhere. I read a piece once called a friendly case against the fair tax, why its great for me. A couple features of that. In the 1960s there were 12 European Countries and the National Retail sales tax. By 1980 there were zero. Ill had transformed themselves and the reason is the value added tax is off the chain and you can collect it wheres the retail sales tax is from to cheating. By early personal story in 1981 i was having dinner in a restaurant in rome and on the way out the cashier said listen. We are