specifically blamed mcconnell for his push not being successful. the truth is if the majority leader hadn't opposed us we could have insisted that iran recognizes israel's right to exist and released its hostages before any sanctions are lifted. he told reporters. more now on what's in store for the senate from a capitol hill reporter. >> good morning to you. >> good morning. >> explain this criticism and where it came from? has this been long simmering between senator ted cruz and the majority leader mitch mcconnell? >> yes, to answer you briefly. cruz is running a campaign that is essentially running against republicans in washington and trying to showcase himself as the conservative leading the charge against what he considers the washington cartel. they have been fighting over strategy ranging over the budget conference in 2013. the government shutdown in 2014. there was a fight over immigration at the end of last year. we have numerous tactical battles. this is the latest example of that. they really ratcheted it up to a new level on friday when he accused mcconnell of lying during the speech over mcconnell's strategy to move the export/import back. so just to take a step back, this all started at the end of may when the senate was trying to pass a major trade bill. there were three senators who were holding out their vote on that trade bill. mcconnell needed to get his vote to have that fast track bill. what he promised those people. those senators were demanding a vote on the export/import bank. he said he would give them a vote. the debate is over exactly what he promised. cruz says as part of that promise, mcconnell looked him in the eye and assured him he would notexport-import bank on his own, only that he would allow those senators to offer it as an amendment. but as we know any senator can block any amendment from being considered, so what mcconnell did is that he filed cloture on friday to move to a vote to override a filibuster on the export-import bank amendment to the highway bill. mcconnell's office and other senators say, look all along there's been no secret. the export-import bank would be added to the highway bill. so that is the nature of the dispute. cruz yesterday was very angry coming off the floor lashed out at the senate majority leader for telling lies and for not being truthful and essentially colud colluding with democrats to pass that agenda. cruz wanted a roll call vote on a separate amendment to the highway bill, but given the that he has handled himself republicans essentially did not allow him to have a vote because there were not enough senators who seconded his motion to have a roll call vote so essentially that was dispensed with by voice vote. it was a pretty remarkable scene on the floor and outside the halls as well. >> and the headline from politico on the story that you contributinged to, senate smackdown, ted cruz mike lee efforts squelched by leaders. the rift between mitch mcconnell and ted cruz widens. you talked about ted cruz's version of these events being disputed by mcconnell's office, but has the majority leader directly responded to ted cruz on the floor of the senate? have we seen him respond in kind? >> you know he's had subtle -- yesterday when mcconnell spoke yesterday, there was a subtle reference to mcconnell -- from mcconnell to cruz. he didn't call out cruz by name but he said there was no special deal, this had been discussed all along. we tried to ask him a question in the halls on friday after cruz accused him of lying and mcconnell just smiled at us and walked away. so mcconnell does not address the press until tuesday. he will certainly be asked then. i think what you'll hear him say is probably something similar to what he said yesterday something that we said all along there's not anything that i back tracked on he'll say, but it's a complicated procedural dispute. and it's a dispute that happened behind closed doors so there is no transcript of the remarks of what mcconnell promised cruz and the rest of the republican conference. so it may end up just being a game of he said/she said. >> and we've been talking about majority leader mitch mcconnell, but in the leadership of the republican ranks in the senate iincludes senator john cornyn, senator cruz's colleague from texas. who's seen as the voice of conservatives in the group of senators who make up that key republican leadership staff? >> you know, from the leadership perspective, i mean it's hard to say exactly. cornyn is certainly one of the more conservative members of the senate republican leadership chain team. the team is sort of broken down into several senior members john thune, roy blount all senators who have been serving for some time. unlike the house where there are specific members of leadership who are sort of liaison to specific blocks of members of the house like conservative caucus and such, there's really nothing like that in the senate. part of the frustration from cruz and others is that they believe that the voice of the conservative movement is not being represented in the party's leadership, and so that's part of the reason why you're seeing some of the disputes play out. and really one of the reasons why that cruz is kind of in the minority of the minority in the republican conference. a lot of people -- mcconnell has deep support within -- among republican senators, but there are a couple of very notable stand-outs and ted cruz is one of them. >> manu raju is a congressional reporter for politico. you can see all of his work at politico.com. the story we've been talking about, senate smackdown the rift between mitch mcconnell and ted cruz widens. we appreciate your time this morning. >> any time. thank you. and the u.s. senate convenes this afternoon at 2:00 p.m. eastern time. you can watch live coverage on c-span 2. cabinet officials will return to capitol hill this week to testify on the iran nuclear agreement. tomorrow secretary of state john kerry goes before the house foreign affairs committee. here's a portion of secretary kerry's exchange with new jersey senator robert menendez from last week's senate foreign affairs committee hearing. >> is president obama willing to make a clear and unequivocal statement, not that all options are on the table because i think if you talk to our intelligence people they will tell you iran does not believe there is a credible military threat, that iran under no circumstances will be permitted to acquire a nuclear weapon. >> absolutely. he has said that and many times. >> well, he's said all options are on the table. >> the president has said very clearly under no circumstances will they be allowed to get a nuclear weapon, and in fact i think ash carter reiterated publicly very specifically. but can i just -- senator -- >> please, i'm sorry. i have limited time. you've been with the iranians two years i have seven minutes. >> i know but it's worthy -- >> mr. secretary let me ask you this. i'm seriously concerned about the lifting of the arms embargo that creeped its way into this deal. as i read on page 119, the ban i iranian ballistic missiles has in fact been lifted. the new security council resolution is quite clear. iran is not prohibited from carrying out ballistic missile work. the resolution merely says, quote, iran is called upon not to undertake such activity. now previously in security council resolution 1929 the council used mandatory language where it said quote, the size that iran not shall undertake any activity related to ballistic missiles capable of delivering nuclear weapons. why would accept inferior language that changes the mandatory shall to a per missive call upon? we often call upon a lot of countries to do or stop certain actions in the u.n. it doesn't have the force of "shall not" which has consequences if you do. can you answer simply is iran banned banned from ballistic missile work for the next eight years? >> they are -- >> >> do you want to answer senator? >> yes i will. >> that is not accurate. the exact same language that is in the embargo is in the agreement with respect to launches, and that is under article 25 of the u.n. and that is exactly where it is today in the language. but in addition to that, iran did not want it and we insisted on it, they are restrained from any sharing of missile technology, purchase of missile technology, exchange of missile technology, work on missiles. they cannot do that under article 41 which is chapter 7 and mandatory. and it does have the language "shall". >> well, i'm reading to you -- i'm reading to you from the security council resolution that was adopted, codifying the agreement. >> yes, the security council resolution -- >> and that security council resolution says -- mr. secretary, i'm reading you explicit language, i'm not making this up. iran is called upon. >> correct. >> not to undertake -- that's far different than shall not. >> senator, that's exactly what it is today. that's the same language as is in the embargo now, and we transferred it to this and that's what it is. >> not the same language as security council resolution 1929. i mean i don't know why you wouldn't just keep the same language which made it clear that you shall not and there are consequences if you do. >> energy secretary moniz and treasury secretary jack lew will be joining secretary of state john kerry tomorrow before the house foreign affairs committee as they testify about the iran nuclear agreement. live coverage starts at 10:00 a.m. eastern time here on c-span 3. next, analysts offer their recommendations on tax policy including a flat tax corporate tax rates capital gains taxes and proposals being offered by presidential candidates. economists art laffer known for his theory called the laffer curve which depicts the tax rates collected by governments is among the speakers. do i just sit here like this the whole time? >> see? oh, all right. that will work. good morning welcome to the heritage foundation in our douglas and sara allison auditorium. we welcome those who join us on our heritage.org website and those who are joining us on c-span on a future occasion. we would remind everybody in house to check cell phones are muted and online we remind you that questions or comments may be sent to us simply e-mailing speaker@heritage.org. hosting our opening discussion this morning and the rest of our program for parts of it today is paul winfree director of our thomas rowe institute for economic policy studies. paul returned to heritage this year after serving as director of income security policy at the u.s. senate committee on the budget. prior to joining that committee, he had served here as a senior policy analyst and simulations in our center for data analysis. he has additionally served on the world economic forum commission to study alternative measures of economic performance. he also specializes in health economics and applied econmetrics. please join me in welcoming by colleague, paul winfree. paul. >> thanks, john. we're pleased and honored to have with us today dr. alvin rabushka. he's senior fellow at the institute at stanford university. he's a world renowned expert, especially in taxation having served on president reagan's tax policy force. he has a bachelor's degree from washington university st. louis and a ph.d. from washington university. please join me in welcoming dr. alan rabushka. so thanks. we've got a -- alan and i are going to engage in a little bit of a discussion and then we'll open it up for questions. but, you know first of all, i'd like to welcome david to our tax reform talk show. i'm sorry, we don't have a live band to play, but if you want to play some games at the end of this like smashing eggs on our foreheads, then i'm open. so let's get this thing kicked off. in your book with ball hall and the flat tax you wrote that economists and politicians of all persuasions agree on three main points. one, the federal income tax is not simple. two, the federal income tax is not costly. three, the federal income tax is not fair. can you elaborate on these points for us? >> sure. for those of you who may be interested or haven't seen any of the versions of the books bob and i have done, we managed to condense a flat tax law into four pages, largely self-explanatory, which means a minimum of regulations. but we're somewhere, what, 60 70, 80,000 pages, but it grows so anybody who thinks that's simple is missing the point. but so many stories over the years. some entrepreneur not too complicated, takes his tax return to seven different tax offices and gets seven different tax results so that should be a problem for tax professionals. and then all the difficulties in interpreting things makes for enormous complexity. and then all the various gray lines. every time there's another tax measure to simplify it and clean it up, it gets worse. among my favorite phrases was archer, bill archer, who kept talking about tearing the income tax out by its roots. by the time he got done, the roots were deeper, larger and sucking in even more water. so part of the problem is is that it just gets worse and worse and worse. now, what does it cost us? i was invited in 1984 to serve on the american bar association's commission on taxpayer compliance. and we had three former commissioners, some professors some tax experts, and we produced this lovely report over two years. it was about 100 pages long, single spaced. we had a staff of experts to help us out. we went through every single thing we could figure out why there's $300 or $400 billion of taxes that are owed but not paid. and it's very hard to prove in any way scientifically, what the main cause is but we could all agree on one cause. the higher the rate, the greater the noncompliance, the lower the rate the less the noncompliance. only the only unqualified recommendation was have lower rates. when you think about cost, what do we have? we have i don't know how many hundred billion dollars in unreported income because people are trying to avoid taxes by underreporting income or exaggerating deductions. we have tax planning, tax lawyers, tax accountants. my favorite statistic when we wrote the first book in 1983 is the number of people who practice law in new york city versus washington, d.c., and we found in the early '80s that the number in washington had grown so rapidly that they caught up with the number in new york city. exempt the number of lawyers in washington didn't really practice law, they practiced various forms of advising people on tax policy expenditure policy, and so forth. so we've created this massive industry. in silicon valley before the bust, i remember talking to 400 financial planners. and all but about two or three said that with a tax rate below 19% they'd have to look for other rate. but because we had high rates of 40% and 50% basically remember a dollar saved in taxes is $2 of producing income. way better to concentrate on saving taxes than producing income where you're some margin where you can choose one for the other. so simplicity complexity, cost rates, the whole package. and it's not fair either. if you think about it we have a wonderful legal system in this country that's gradually evolving. you're not supposed to or you're legally not supposed to discriminate on the basis of age, sex, gender, race, religion ethnicity, handicap. but tax policy discriminates against every single person by affording each individual different kinds and different amounts of deductions and exemptions and rates. and so we have a tax code which is the very essence of discrimination which seems to me to fly in the face of the 14th amendment. so anyway, that's a good way to begin a discussion of the topic. >> it seems like there's a tremendous opportunity cost to the human capital that goes into both evading and avoiding taxation. because it's not like the tax accountants and the lawyers and everybody else who works in d.c. how many folks in here work -- probably most people in here work in the tax world, but how many folks in here are tax lawyers or tax accountants or have j.d.s and work in the policy world? so not as many as i thought. just david over here it looks like. that's a big enough of an opportunity cost in and of itself. >> i should also mention the problem with high taxes is that we can't quantify foregone opportunity. for example, under a simple flat tax, i'll give it a shot. under a complex high tax system, say on -- it may not be worth the effort to go into business on my own because if i succeed, they'll grab a large chunk of it. so we ending up deferring opportunities. those we can't count because they're invisible. we can just estimate what they might be. so there's a whole range of invisible costs associated with the current code. >> that's right. so let's talk about this issue of fairness for a minute. so many on the left and right think that the graduated marginal income tax rate system that we have today implies progressive progress progressivity. which in actuality it doesn't. can you go into a little bit about how the flat tax is more equitable than our current system? >> actually i did have one set of numbers that i can't remember so i wanted to bring with me. i did an assessment of something like 202 political jurisdictions around the world to see every single one of their income tax systems. so here's what i found. 16 have no personal income tax, the oil she cans, the offshore havens. 45 have a flat rate, of which about 36 or 37 we can trace from our books. i've got a desk in my office where i have flags from all the flat tax countries. it's a nice picture. 23 have two rates 118 have three rates. so clear -- and not only that, but these rates aren't the same. they're different everywhere and change over time. so if someone wants to tell me what's a fair tax, i want to know how you pick out which of these 218 is the fairest and it won't sit still not to change anyway, and this is just rates not base, not deductions not exemptions. so the notion that a particular system is fair and all the others aren't is just a matter of your personal choice at the end of the day or what you can politically get away with and enforce. so fairness. the way i like to think about fairness is that you can have a progressive tax on a single uniform rate. so i did the numbers at one point to illustrate this. so let's just take, for example, and say an individual has a $20,000 exemption. so up to $20,000 of income you have zero. then if you go to $40,000 you're paying 10%. and you go all the way up until you're making about a million dollars, say and you're paying 19.9999. so you run your way up from zero all the way up to about 20 depending on your level of income. so you can vary the personal allowance, make it higher, and that way you would have a greater degree of progressivity or lower it and make a smaller degree. but at the end of the day as long as there's a personal allowance or exemption or deduction in there it is progressive. so the question is what degree of progressivity do you want? well, if you decide to have tax rates going all the way up to 50%, you can be sure in response that the congress will because it always has give high income people special treatment because people don't pay 50% tax rates. very few do. and so what happens as those rates go up is you end up with a tax code that gives special deductions to startups special deductions to various kinds of sectors and industries. when you talk about fairness through marginal rates you have to deal with the fact that you're taxing different entities at different rates too from personal people to professional corporations to business enterprises and the like. so my view of this is it's impossible to consider a flat rate with no deduction where everybody starts at the first dollar of income. but once you hit that threshold a flat rate allows you to have a simple, fully integrated progressive consumption tax. i'm going to repeat that again. a fully integrated progressive consumption tax. there's a lot packed in there and i'm sure we'll talk a little bit about it. that achieves the goals of having a consumption tax base plus an element of progressivity, plus full integration of business and individual tax rates without double taxation. and i think that's the beauty of having just two post cards to do it. the reason for two, but fairness then under that situation will treat people pretty much the same because everybody is taxed the same on their last marginal dollar of income and everybody, depending on family circumstances, receives the same personal allowance. now, you may think you want to give preference to one group over another. fine. vote for it openly on the budget in the form of financial transfers. you're on the record of voting for spending money. but if you hide it in the tax code, you're not on the record voting for spending money. it's way more complicated to say you're the equivalent of spending money by providing tax deductions that narrow the tax base. so i mean one can make the argument the flat tax or any flat rate system really is about as fair as you get in terms of treating people equally. some people don't want to treat people equally. that's their political view. >> in your book you have this great -- speaking of this, in your book you have this great quote from john raulz and the theory of justice about how an expenditure tax applied across the broad base is probably the most equitable tax imaginable. john rawls i think it's safe to say, is not necessarily a conservative. anyway, so i thought that was very fascinating. >> if you don't know what your life is going to be why not everybody have exactly the same tax system that they're going to face rather than determine in advance what tax system you're going to face. >> so you spoke a little bit about a consumption base, how it's important to have a consumption base. and so for folks in the room who don't -- who maybe aren't as familiar with that, basically a consumption tax is a tax on income spent on consumption not income that's saved or invested. can you explain or go into a little bit of detail about having a consumption base is so important. >> basically the way i like to think about it is if you just use the very simple formula the gross domestic product equals consumption plus investment plus government services, which is small, forget that and net exports, if you net out investment, you're left with consumption. so what's investment? it's whatever you do that you invest to make your business activity more productive. and having first-year write-off of investment spending gives you the maximum incentive to make that investment in the first place and then also changes the tax base of gdp to purely consumption. so economists generally across the board agree that you get better performance in the economy by taxing consumption and not taxing new investment. so that's the basic core argument on that. now, there's always going to be differences among people as to how much better the economy will perform. will it be one-tenth of 1% half a percent, 1% 2% but i'm not sure i know of anybody that says it's negative. everybody says it's positive. we don't know what the slope is whether it will be small middle or large or the coefficient, but we pretty much agree it will be positive. what that means is in the long run as we accumulate capital we get worker productivity worker wages rise and so forth. so you do get a benefit over the larger run. imagine if you could compound growth at 4% instead of 3%, how much more rapidly you would double real income. so it becomes very useful to think inspect terms of long-run rates of growth and you will get great greatergreat greater growth rates. >> can you talk about why marginal tax rates are so important for real income growth. >> people work for themselves not for the government. i know of very few people, especially rich people who silt down each day and say what can i do to reduce the national debt. you know what i'm going to do i'm going to write a check. there's a special office in the treasury where you can send that check to. i don't have the zip code for it. >> nobody works there. >> it's called paying down the national debt. i think every now and then they get a check which they highlight. but most people work for themselves, which is quite fascinating. think about this. you have billionaires billionaires who go out of their way to make sure they're not paying ordinary income but carried interest on certain transactions that i think should be taxed as ordinary income, but that's schumer's district and he gets a lot of money from those people so that continues to survive for the time being. basically as the tax rate rise, ronald reagan figured out very early, and i guess it's old hat to use him, that by the time they come he was paying 91% so he quit working the last six months of the year. there's a lot of situations where when your tax rate goes up, you begin to think is it really worth it. it may be worth it at 50 cents on the dollar. is it worth it at 20 cents on the dollar? the other thing is the higher the rate the more likely you are to avoid and even evade and so one is legal one isn't and the line between the two is often a very thin judicial decision. so one of the things we discovered in marketing the flat tax around europe and we discovered this in romania and bulgaria and elsewhere, they used to enjoy these high marginal rates of 20, 30 and fort and they dropped them to 10 and 16 and made some estimates. they figured out so much is underground and so will will become legal and they can buy insurance and get bank loans. they estimated in the first year they would recover that much revenue. they got that much revenue in the first nine months because you got so many people coming on board. so high marginal rates really create all kinds of problems for all kinds of people. and so the lower the rate, the higher the after tax return and most people work for themselves, not for the government. >> so there are a lot of congressional staff in the room. one of the issues that's being debated right now in congress is the highway trust fund. one of the ways that both the house and the senate have proposed to pay for the highway trust fund shortfall is through additional tax compliance measures, which would almost by definition increase the complexity of the tax code. what would you tell a member of the congress who is looking at additional compliance measures relative to say overhauling the code altogether? >> generally speaking, i would tell them low rates on a broad base reduces the incidence to avoid or evade taxes and adds simplicity to that and you have less need of compliance. the united states is a pretty good country for people paying taxes. we get a really good response with lower rates. we get not as good a response with higher rates. so any measure that's going to increase complexity is just going to make people more unhappy with every aspect about taxes. there's a story i'd like to tell which is if you're in a residential neighborhood and there's a lot of small kids and some car goes speeding through at 60 miles an hour and you catch the license plate, you're going to call the police and try to get that person apprehended. but if everybody in the neighborhood is more or less honestly paying the tax code and they found a neighbor has found a way to cut their taxes by half or more nobody calls the irs they go over and ask him how he does it. i think this gives you some indication of how people respond to the irs. and generally speaking you know, when you sit around a bunch of people at a tax conference, an irs conference, you know after hours in the bar, so what are you doing what have you found? have you found a lawyer that's got some special thing for you? they don't talk about let's go out and march for more compliance. >> so on the white house website, president obama has laid out a series of principles for tax reform. those principles include, one, lower marginal rates. two, eliminate inefficient and unfair tax breaks. three, be part of a deficit reduction effort. four increase job creation. and five, remain progressive. >> well, as i've said, the flat tax is a fully integrated, broad base, low rate consumption tax that over time to the extent it aids economic growth and reduces noncompliance will generate additional revenue. if we can somehow or other stop the congress and president from spending every dollar it gets and ten cents more, it would over time reduce the deficit. that is a faster performing economy and a less rapidly growing government will give you additional revenues. so i say they're all terrific. but governments don't create jobs, they get in the way of job creation. so i would certainly drop that category. let the business community and individuals form their own businesses and create jobs. i wouldn't focus on the deficit reduction part of it. i would just try to freeze spending, because if you try to focus on cutting things you end up with all kinds of people telling you why you shouldn't. but otherwise i think it's right on the mark it's just too bad they don't do what they say. >> so basically you're -- so the president's comments don't poison the well on tax reform? >> no they don't. but i've noticed that mrs. senator, secretary clinton today is proposing things to do. and so i'll leave that to later questions and answers. but i would just put it this way. she couldn't be more wrong if she tried in raising capital gain rates, and in particular holding long-term investments. i go to silicon valley, nine out of ten startups that failed were not interested in long-term preferences. they were interested in financing more of these things so the whole notion that somebody will sit around and hole things for five years to get a higher rate is just plain silly. >> one of the significant and inside the beltway accomplishments that congress has had in the last six months is the adoption of the dynamic squaring rule by the congressional budget. you've written in the past that to dispute that higher rates discourage economic activity is to repudiate the one general law of economics, the law of demand, which stipulates that prices and quantities are inversely related. how do you think or do you think that the new dynamic scoring rule that has been adopted by congress does it help the eventual passage of the flat tax or acceptance of the flat tax? >> well there's probably 50 different factors that would go into getting it passed but it certainly would help it. there's going to obviously be a huge debate as there already has been on what the degree of response will be. will it be small, medium or large. so we're pretty sure there's going to be some response. i think in this case the notion of -- people get rich quick or they stop working. but i don't think there's any doubt that there's going to be a whole lot more people working and doing things to get richer in the first place. so i think what one needs to be careful of is not overexaggerating the benefit of it just as a political measure but take some small, if you can get a sense of benefit because it's just going to have a long-term cumulative impact. so as i said even if you can only get a one-half percentage point increase in the annual growth rate, over time it makes a huge difference. >> we have a few minutes for questions. we have a few minutes for questions. if anybody -- if anybody has any, there is a couple of microphones. just please state your name and affiliation and then state your comment in the form of a question. >> hi. i'm nick farmer. can you comment on the idea of having a pure consumption tax, a sales tax whatever you want to call it, flat replacing all other taxes. business corporate personal payroll tax, and keeping the progressivity of our current system with a rebate to individuals to replace all of the various income transfers that are embedded in the federal budget. do you think that concept would work well and be much more efficient? >> what you've done of course, is just describe the fair tax. we had governor huckabee out at the hoover institution three weeks ago and bob hall and i tried to budge him off of it a little bit in favor of the flat tax and didn't get anywhere. but i wrote a piece once called "a friendly case against the fair tax why it's not as good for america but great for me." i just want to give you a couple of features of that. in the 1960s there were 12 european countries with a national retail sales tax. by 1980 there were zero. all had transformed themselves into a value-added tax. and the reason is a value-added tax is more of self enforcing up the chain and you can collect it whereas a retail sales tax is prone to cheating. i will tell you my early personal story in 1981. i was having dinner at a restaurant in rome. on the way out the cashier said now, listen we're not charging you value-added tax but sometimes police are outside the restaurant checking receipts. so if we see someone coming up to you, go ahead and show them the receipt because one of us is going to run out the door, right there as fast as we could, i'm sorry, sir, we gave you the wrong receipt. and after a while, it turns out the proprietors get very good at doing this kind of thing. so you're going to lose a whole lot of revenue in that process. retail sales taxes are very hard to enforce across a whole country. now, a second matter is we also have a retail sales tax in some of the states as well so tack that on and you're going to have a fancy rate. but there's a number of other aspects of this that are kind of small but they start to add up. i'll start with a joke. if i may. i hope all of you have seen the various star trek series. my favorite characters are those who live for profit and i have this little book called 216 rules of acquisition and rule 183, if i remember, is only fools pay retail. so that was one. the second thing is is i don't know how many of you come from large, extended, jewish or other imgranting families. but there was always an uncle in the family who said no, no no, i'll get it for you wholesale and so there was no tax there. and then you have a rush to set up small businesses and you become a c corp and get your sales tax from the state and so in the worst economic situation in belgium in early '81 there was a proliferation of restaurants because people were eating on the restaurants, that is they weren't paying tax on the food they consumed. my house is paid off, my car is paid off, i live on my cash flow and my successful kids are in exactly the same situation. we consume such a tiny proportion of our budget that it would be way better than the income tax or even a flat rate income tax in affecting us. there's another little aspect of this. when you add a sales tax increase to any state or entity it goes into the cpi, raises the consumer price index. do it hall-rabushka style and you get a value-added tax you get the equivalent conceptually but it looks like an income tax and doesn't have any effect on the consumer price index and so on. so this is just a bunch of these things that get in the way and complicate it. so prebase is also going to be a problem because you've got to know who's eligible for it. how are you going to know that. anyway, so what i think is my biggest fear is that if you were to do that the probability that the congress would overnight swap one for the other i believe is low and the answer would be let's start at 3% and see how it works. then let's raise it to 5, 10 15, and when we hit 30, we'll get rid of the personal income tax and corporation income tax. no european country has done that. not japan, not korea not taiwan. they all start low 3, 5, and 10 and haven't reduced the income tax. so it's no accident in europe they spend 50% of gdp and we spend 30, 35. it's because they have gone that route and you don't end up with a replacement it's just an addition. it's very hard. there's so many programs you need to finance that congress would never agree to an overnight swap, whereas there's not going to be -- and by the way, a transition, in our very first book in 1983 it became a big problem so we have transition sections subsequent and our sort of rule can be varied as five years. so you can have five years to cling to the old system if you've got a lot of unused depreciation, but if you want to go to expensing, do it right away and we figured out about 80% plus of all enterprises would go right away to the expensing. and at the end of the five years there's not going to be much depreciation worth anything anymore. and certainly for startups it's fantastic. you can write off as you go and carry your tax losses forward and then you can draw them down when you're profitable. so in many respects i'm not persuaded. i'm not influenced. the bush commission had about an 80-page review of pair tax, national retail tax and there's a lot of problems in it that they add to it. so it might be better than the current system but only if we had a constitutional amendment which guaranteed a 100% simultaneous replacement, otherwise i would be very nervous. >> did you want to follow up? >> i was just going to say i just learned out of that that i can move to rome and start a business printing fake restaurant receipts and apparently make some money. >> that's why 25% of the economy is estimated to be underground. >> yeah. >> and 50% -- oh 50% of the entire population between 15 and 24 is unemployed. >> hi. i was wondering if you wouldn't mind going into a little bit of detail contrasting the flat tax with hillary clinton's proposed tax plan and why the flat tax would be better. >> i don't know what her tax plan is because she hasn't spelled it out. she's hinted at what it will be. it will be higher taxes on the wealthy and i think maybe 50% marginal rate over those over a million. let me digress here to throw a little cold water on that. the best-selling economics book in what 50 years thomas pickety. he organized a letter signed by 250 french economists in 2012 saying they supported francois hollande because he wanted to put 75% personal income tax on those earning over a million. and lo and behold, january, 2013 he did. then it's 2014 and the thing is scheduled to expire and he lets it expire. what? a socialist? so pickety turns down the french medal of honor. then he resigns from the french school of economics in paris, which he himself founded. he moves to london where they're more open to this stuff. so it works in theory, but not in practice. then the british labor party was running against cameron and the polls showed them even, even, even until the last day. labor said we'll go back to that 50% tax ban and they got slaughtered, of course. just a week or two ago the new leader who you've never heard of of the labor party the tax issue is settled. no more talk about a 50% marginal rate, we're happy with 45 and we'll let the corporate rate go to 18 and we may see some personal rate reductions. so out there in the real world, people who have either tried it or who are advocating it gave it up and don't want to talk about it anymore. so there's not much stomach for actually doing this stuff. and i think it's really important to remember why it went down so high from the early years and when you like to talk about 91% under eisenhower, nobody paid it. 92% of the people were paying 20%. so we're talking about a tiny tiny tiny fraction. we're not talking about a third of the middle class paying these very high rates that will hit them today. she's talking about high rates of tax on capital gains. capital gains are just a double tax. if it's in the form of dividends, it's a tax on after-tax profits that are distributed. if it's on capital gains, it's an after-tax gain, profit on the higher stock price due to retained earnings. in any case we use gdp. for those of you who know how that's constructed, you don't kind capital gains in gdp. if you're going to have a gdp consumption base tax there's no base for capital gains and you end up with the hybrid system with income and double taxes. so we went out for the lowest rate. now, if you had, say a 9% rate and then another 9% on capital gains, then the double tax rate would only be about 16% and it would be prohibitive. but if you're going to start talking about a 39.6 or a 50% tax in california or new york or 60% and then talk about a 50% tax on capital gains and 25% tax on dividends and you earn a million dollars you're paying 75%, 80% marginal tax rates. that's when companies start buying cars for everybody because that's a tax deductible expense. then we go back to three martini lunches and three and a half hour work breaks. so what you will ending up with is distortions, inefficiency complexity lobbyists and it's just the wrong way to go. >> yes. >> wait for the mic, please. >> i have maybe a technical question. i think it is a technical question. you mentioned that you figured that 80% of businesses would choose expensing given the option. where did you get that figure? >> this went back to the early 1980s, just looking at the nature of investment. for example, we had drawn out appreciation schedules for construction, for buildings. but imagine you can put up a shopping mall and write the whole thing off in the first year. so what you're going to have is all new investment. spending is serbly lycertainly going to come under the new tax code. then look at the value of unused depreciation. so for some companies there might be some calculation where you have to think about if you're going to make new investment, the benefit of writing that off versus maybe losing some of the depreciation of your old investment. the people who would benefit for those who are just absolutely stagnant not planning much in the way of investment and they're just going to slowly depreciate their old investment. that looked to us based on our assessment as a small minority. certainly in the tech world there's no case where you defer depreciation to a first-year writeoff and in the case of small business there's probably no case. since most new jobs are created with small wisbusiness, you're certainly going to get a better stimulus to small business and jobs growth by having full investment spending. you know section 179 that we managed to get up to $250,000 is basically what we're proposing for the entire tax code. it's an across-the-board section 179 for all new investment. but interestingly enough, if you look at investment in physical plant and equipment, we're actually producing more with less. the share of our economy that's manufacturing is smaller but the output is still more than it was when it was bigger. so we're getting into a situation where it's almost going to be obvious to anyone that you want to take the expensing route. after five years it's going to be pretty hard to find very many businesses, if any, that are going to go six, seven, eight, nine in terms of writing off the rest of their depreciation. so i think that's the principle benefit. not only that and i should tell you a little bit about how senator deaconcini was one of the first supporters of the hall-rabushka bill. his family controlled property. they had 48 separate properties set up as 48 separate companies and they were all under 48 separate depreciation schedules. he looked at me and said, you mean i can tie all of these together and put all of these on one tax form and i said yeah and he said tie me up. that's how we got democrats. in 1982 there were more democrats supporting our plan than republicans. as a joke "the new york times" came out on april 15th, 1982, and wrote a strong positive endorsement of our flat tax. the secret was it was bob hall's economic student. but anyway so i have the actual quotations from "the washington post," "wall street journal," "the new york times" in 1982 and then the story changed later. but i want to make one other point which the questions haven't brought up. economists think more about efficiency. they think about equity too but they think about efficiency and they talk about neutrality and not favoring one industry over another. as i look back over 34 years of doing this stuff and marketing it all over the world what i would say is that in the united states we may have understated or underplayed the important of simplicity. whereas when you look at the post-soviet country looking with latvia central and eastern europe, they regard simplicity and compliance and understanding and online reporting in the same way they regard low rates is conducive to their economy's high growth, strong revenue growth. and i think here, particularly among economists we can't stop talking about efficiency and we don't talk about simplicity. ease of understanding, ease of compliance, ease of collection ease of promotion of the idea you should pay and at a low rate and simple. our very first book was called "low tax, simple tax flat tax." we changed the title to "flat tax." we found people couldn't keep three concepts in their mind. that's the old can't walk and chew gum. so then we went on to say it was a low rate, simple tax and it was flat. but simplicity is really important. i would think any of you would want to get on the bandwagon, i think it is important to stress that we've got to keep it simple, because otherwise all we're going to have is increasing complexity. >> so if folks want to know a little bit more, how can they do that? >> okay. the good news is, you can get the flat tax book free online. so let me tell you how to do it. the easiest way is to google my name. my hoover home page comes up first. you will see in the brief description about me in the first paragraph the words "the flat tax" are underlined. if you click that, you will go to the hoover press page where you'll see the flat tax book. each chapter can be downloaded and printed free of charge as many as you like. print a thousand and give them to your same home page there is a link to my flat tax blog called flat tax blog.com and what you will find in there is i've tried to chronicle the history of the flat tax movement all over the world. as i said, there's 45 jurisdictions that now have it and i've written about every one and what their rates are and the latest updated list which i just put up of the 45. and it goes back to 2008. there's 120 posts. so if you really want to follow it, go back and you can read all 120 and you will know the entire history of the flat tax movement all over the world. every time there's a change anywhere, i put it up. i usually put up an end-of-year update on that. on that same flat tax blog spot page, you'll also see a picture of the flat tax book so if you couldn't find it underlined click on the picture and you'll get to the book free of charge. it won't look like that because it's the newer, hard cover version with an introduction explaining how it spread to 25 new countries. and by the way, just a short note on that. why is it that these baltic countries and others went to a simple flat tax? under command and control of communism, the state gave out the money and collected all the revenue. so when the wall came down and they needed to go quickly the easiest thing was a short, simple form you could do online. they needed to collect revenue on a market economy literally in year one. and then some of the other countries wanted to follow western europe, originally russia, czech republic and all these others. after seven or eight years, they threw in the towel. when russia went to 13%, they literally tripled taxes in seven years on real inflation-adjusted terms, so that's when the bandwagon started all over the world. so i'm still trying to market this. there's a big movement going on in italy, which we don't have time to get into but it's my great hope that we'll see something happen in western europe. anyway, that's how to get it. and the best way to reach me if you're media or if you want to talk, is e-mail me with questions and i'll take the time to answer them. but the back of our book, the last chapter has 66 questions and answers and they were the 66 most common questions that we heard over about 15 20 years of interviews. they're one to three paragraphs and they're designed for quick, easy understanding things. if you don't want to read the plan, read the questions and answers and you'll get it. if you come up with a new question, you get bonus points. >> i'll sat q & a section of that book is fantastic. i encourage everybody to go out and download a copy or a thousand. >> and give them away on the corner. >> and give them away on the corner. everyone please join me in thanking dr. rabushka. [ applause ] >> okay, thank you. that was great. >> and at this time we'll have the next panel come on up. i'd like to introduce my colleague, david burton. david is a senior fellow in economic policy at the thomas a. rowe institute at the heritage foundation where he focuses on tax matters securities law entitlements and the regulatory administrative law issues. his career in financial and tax matters includes posts of partner in the argus group manager of the u.s. chamber of commerce's tax policy center and general counsel at the national small business association. burton received a j.d., being our apparently only lawyer here from the university of maryland's law school. he also holds a bachelor's of arts degree from the university of chicago. please join me in welcoming david to the podium. [ applause ] >> good morning. the purpose of this panel is to discuss the essentials of good tax policy. we have a very strong panel today with five of the country's leading experts and proponents of fundamental tax reform. each panelist will make a presentation of about ten minutes and then we'll have questions and answers from the audience. the entire session will last about an hour and 15 minutes. now, the broad principles of tax reform are something that most informed conservatives and libertarians generally agree about. the economic principles of sound tax policy are driven by the findings of the public finance literature, the optimal tax literature and price theory and microeconomics. and those principles could be summarized as the tax system should raise the amount of money necessary to fund limited government in the least economically destructive way. and in more formal economics terms, in the way that minimizes the dead weight loss or the excess burden associated with raising a given amount of money. what this effectively means is a flat rate consumption tax. now, as you'll hear about in some detail by the panel, there are four types of flat rate consumption tax that have been proposed by conservative politicians over the years. the hall-rabushka flat tax is 1 version of that that we just heard about. there's also what is sometimes called the new flat tax or consumed income tax expenditure tax, cash flow tax, and that also has been introduced in congress. although not in the current congress, i believe. there is two other methods. one is called a business transfer tax. and the other is of course a national retail sales tax. the best known of which is the fair tax. now, the magnitude of the economic gains to be had from moving towards any of these approaches is very, very large. steve in particular is going to address this subject, but fundamental tax reform has the ability to positively transform the american economic landscape. it's probably the economic policy program that has the most -- represents the greatest opportunity to improve the standard of living of the american people and to create -- recreate prosperity in the united states. the second principle is that the tax system should have the least negative impact on the core institutions of civil society. that would include the family, but also voluntary associations such as our religious charitable educational and civic institutions. they have written eloquently and persuasively about the importance of these type of institutions to the success of a free society. now, the third is to help preserve our rights to life, liberty and property and to further the cause of fairness and justice the tax system should impose no unreasonable burdens on individuals and apply consistently to all americans with special privileges for none. it should also respect taxpayer rights to due process. now, three papers have been made available to you today, and those of you who are watching either on c-span or on the webcast, the papers are four conservative tax plans with equivalent economic results and it examines the economic equivalents of the various consumption tax proposals. the second is called "a tax reform primer for the 2016 presidential candidates." and it walks through the various design choices that anyone developing a tax reform plan must confront. and the third is "how congress should reform business taxes" and it looks in detail at the issue of how we should tax businesses and proposes both intermediate and long-term recommendations. all three of these papers are available on our website. now, let me quickly introduce our speakers. first we have dr. dan mitchell. he's a senior fellow at the cato institute. he was a senior fellow here at the a senior fellow at the heritage foundation before he lost his way and went to work for that other think tank. he previously worked for senator bob packwood i believe before he was chairman of the senate finance committee and he's one of the nation's leading propopents of a flat tax and a tireless advocate for economic freedom. stephen enton is senior fellow at the tax foundation. he and his colleagues at the tax foundation have created the best and most transparent tax model in the country. prior to joining the tax foundation he was, for many years, with the research institute of the economics on taxation working with dr. norman toure and he was deputy assistant secretary of the treasury department during the reagan administration and worked for both the jec and the kim commission. dr. jason figner is senior research fellow at the percado center and professor of economics at georgetown and the johns hopkins of advanced international studies and the virginia tech center for public administration and policy. jason was explaining to me just before we came here that his students actually like his courses, so i'm hoping that we'll have a similar presentation today. [ inaudible ] jason served as deputy commissioner of social security and is chief economist and associate commissioner for retirement policy of the social security administration and he also served as senior economist with the jec. steve hayes is chairman and president of americans for fair taxation and an attorney in private practice. he sometimes calls himself a recovering tax attorney, but that means he brings to tax policy discussions a practical awareness of the real-world problems with the current tax system. i think it is fair to say that no one has done more to improve the public's understanding of the fair tax and the need for fundamental tax reform generally than steve. curtis dubay is senior fellow of tax policy here at the heritage foundation. previously, he was senior associate of pricewaterhouse cooper where he structured international transactions as part of the transfer group. he also served as senior economist at the tax foundation where he authored three widely recognized reports, tax freedom day, state local tax burdens and the state tax index. both kurt and jason are among the very best among their generation of free market tax policy experts and we're going to go in the order that people are seated at the deus and join me in recognizing john mitchell. >> let's just do this sitting down. i think that might make more sense than people getting up and down. thank you, david for introducing the panel. it's good to be back here at heritage. i used to represent the conservative wing of the heritage foundation, and i'm glad that you're upholding that important role. i want to make one basic comment they think underscores the importance of everything that we're going to be talking about and you got this, of course, from alvin and you'll hear it later on today as well, but tax rates matter, and what really frustrates me is that politicians understand this when they want to. a lot of times we see politicians, federal state local level, bang their fifties saying we need higher taxes on tobacco because we want people to smoke less. i'm at a libertarian think tarng and i don't think it's government's job to control our choice e but you know what? i give those politicians a-plus for economics because they're right. the higher the tax you put on something the less you're going to get of it, and you will get cigarette smuggling and other negative side effects, but the fundamental economic point they're making is right. high tax rates discourage what's being taxed. my frustration is many of those same politicians forget that lesson when it comes to taxes on work saving investment, risk taking entrepreneurship, the things that help our economy grow and the things that make us more prosperous and make us more jobs and make us competitive. that's really what tax reform in my mind. i try to make it as simple as possible. that's what it's about. we want more growth and prosperity, and you heard alvin just saying over and over again consumption-based tax. my job on this panel is to try to explain why that's important. it's important because our important tax system treats income that you save and invest much, much worse than the income that you can consume. think about it in this very simple fashion. you make some money. you pay tax on that money. what's left? disposable income or after-tax income. you have two choices of what to do with your after-tax income. you can consume it right away or you can consume it in the future. what's consuming in the future? it's saving and investing. now let's think about how the federal tax system treats those two choices. if you consume your after-tax income right away, the federal government by and large leaves you alone. yeah we have a federal excise tax on gasoline and we have a federal excise tax on bows and arrows and other than a few obscure things like that, there's really no federal tax on consuming your income but what happens if you save and invest your income instead. in other words, you consume your income in the future. well, between the capital gains tax and the corporate income tax and the dividends and the death tax it's possible for that single dollar of income to be taxed over and over and over again, and you don't have to be a wild-eyed supply sider to think that if you have even low tax rate, but those low tax rates imposed multiple times that you're going to be doing something that's going to dramatically or at least significantly affect people's decisions on whether to consume their income today or can consume their income in the future. now, why does it matter economically? so what? okay. so people want to consume their income faster rather than slower because saving and investing is treated harshly by the tax code. what difference does that make? well, it makes a big difference because every single economic theory. it doesn't matter you can have a socialist up here and a marxist up here and every single economic theory is based on the notion that you have to defer some of today's consumption to finance tomorrow's growth. you have to have what economists call capital formation. and yet our tax system, as i just explained mistreats and abuses the people who save and invest. why? because rich people tend to have a lot of saving and investing. that's really it. there's no sensible theory behind it, it's why he robs banks that's where the money is. that's why politicians double tax and triple tax and sometimes quadruple tax, saving and investing. let me try to sum this up with an analogy that i think perhaps makes it very, very clear. imagine if you owned an apple orchard. you're getting into the fall. your apples are ripe. it's time to harvest them. what's the best way to harvest those apples? do you pick them from the tree or do you chop down the tree? apples are income. the trees are capital. the reason we want a so-called consumption-based tax is because we don't want to mistreat capital, but to understand why it's so foolish, you don't need to think about marxism socialism and free market theory, just think about it this way and if you chopped down the tree or to be technical more accurate as to what the tax system is and if you harvest by the branches of the tree, what does that do for your long-run prosperity and your long-run income and you will have fewer apples next year so it doesn't make sense to double, triple and quadruple tax capital. in other words o this one issue the marxists and socialists are right because they happen to agree with sensible economists and you need the capital formation for long-run growth and that's why we should have a tax system that treats all income equally and that means no longer double taxing income that is saved and invested. you want neutrality. not only neutrality in the sense of getting rid of all of the loopholes and also neutrality in how you earn and how you spend your income. thank you very much. [ applause ] david, thank you for bringing the panel together and inviting us here and it's ri freshing to see the topic coming back to life after neglect in this country. i think it's critical that we worry a little bit about the tax base and the structure of the tax system and not just how much we're trying to get at any one point in time. this is not strictly about the government deficit and what's convenient when doing the budget resolutions in the congress and it's about what's good for the economy and the country. i have a handout with charts on it which we'll put up the tax foundation website later this afternoon and dan has done a very thorough job of what i was going to talk about where he list four layers of tax with investment and one layer of tax and income used for immediate consumption, but i want to make the point that these extra layers of tax have an adverse effect on the capital formation and the capital formation has an adverse effect on employment and wages. >> how economists focus efficiency and we have been talking here now about efficiency and why it's inefficient to distort things in this way and the reason it's so bad is that it leads to horrible inequities in the fact that you are depressing wages and take the wrungs out of the economic ladder for people that don't have enough saving and need to rely on the saving of others to get started and have a place to work. when you cut the capital stock you reduce the demand for labor and you reduce wages and jobs. so, when people were thinking in

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