>> the payment is geared to go up. sen. johnson: you're saying is the greater of 2% of income or two other $20 stop -- or $228. >> the consensus is, we think it goes to 2%, we would be happy to make that clear. the statutory framework provides that the payment goes up if you don't have coverage to a reasonable higher amount than the first year it will be increasingly encouraging people to buy health insurance. sen. johnson: this year, the percentage of income is what really drove it, so the average penalty was 1.8 times the minimum. if you extrapolate that, if it is 1%, it will be 588. if you are talking percentage of income, that will be a pretty good extrapolation. next year will be over $1100. if we extrapolate from this year, the euro after that it will be closer to $2500 for the average penalty paid if the americans exercise their freedom and choose not to buy an individual policy i just kind of wanted to me that on the table there. that is what the government is going to tax, i think is a penalty, but that is what we will tax the american people for not buying health care i was a little surprised, i shouldn't have been surprised but you say have an account to a too high and have to low. do you expect that trend to continue? mr. koskinen: right now, 70% of people give or take get refunds of their taxes generally and they do that because we all over withhold. nobody knows exactly. most taxpayers estimating their income understand that you can't estimate accurately and they tend to over withhold taxpayers do that learning the situation. we expect that what will happen is people will be careful in estimating their income and they will make sure that they overestimate their income to be sure that the adjustment is in their favor when they get to file their taxes. we expect that as the consumers adjust to the law that what will increasingly happen is that there will be positive increases in refunds or declines in amounts owed because people will have adjusted to the fact that you want to be careful and you want to build and the possibility that you will get a pay raise or your spouse will get a job. if there is a big change, you should call the marketplace. what we have seen with withholding generally is that people are careful and they make sure they have a refund coming rather than a tax owing. sen. johnson: have you evaluate the correctness to the subsidies ? do we have 100% income verification now? mr. koskinen: to the extent that we ever have 100% income verification. most taxpayers are trying to the compliant and they provided their income and we audited over time. ultimately, it is as correct as the taxpayers tell us in the information returns do. we assume that the income is correct. sen. carper: i often say, almost every day, find out what works, do more of that. we are trying to make sure we didn't up with an insurance pool which was largely old people sick people. we turn to massachusetts, the one state that actually tried to address this issue. they set up exchanges and had governor romney in the state of massachusetts that established the individual mandate. they were seven years ahead of us. what massachusetts has been doing for several years. do you have any idea of whether it has smoothed out over time. have people become used to working with exchanges, working with the tax code? has gotten any easier? mr. koskinen: at this point -- sen. carper: and welcome -- and what could we learn from them? mr. koskinen: it all that i have seen i have not seen that there is an ongoing issue in massachusetts. that would lead you to conclude that to the extent the mandate still exist there that people have adjusted to it and it has been implemented without difficulty overtime. our policy is the issue of people outside of texan ministration. i've kept track of what is in the press and i have not seen any indications that massachusetts has run into difficulties. sen. carper: but the go back to examples cited by our chairman to see if i can understand this. let's say one year ago, my family and i thought we were going to earn $50,000 in 2014 and my wife got a job and we end up taking twice that. we felt at the beginning of the year we would be eligible for tax credits at a certain level through the purchase of health insurance at the exchange. but it turns out, due to the unanticipated income, we were not eligible for either as much in tax credits or maybe any tax credit. we will say this example, it turns out i got the tax credit for $5,000 and i was ultimately not eligible. i have to pay that back i presume through the tax code. but that is not a penalty, that is basically an overpayment. i want to make sure we're talking apples and apples. what i just laid out, is that essentially what is happening in the situation senator johnston shared? mr. koskinen: a taxpayer generally come to the marketplace, buys a policy, it is determined what their premium is going to be and what portion will be paid on their behalf as a credit. what is happened is you bought insurance and the premiums have been paid to the insurance company and the question is, how much of that premium do you low and how much is eligible -- do you go and how much is eligible for the credit? the question is in this particular case, the taxpayer owes the premium but was not entitled to a credit for that premium paid. it is not a penalty. it is one of the reasons we spent a lot of time last year reminding people in your circumstance, for instance, where your situation changes. your wife gets a job, you get a pay raise, you should contact the marketplace and advise them of the change and the premium advance payment will be adjusted accordingly. therefore, over time we think that as more and more people get adjusted, it is not just a matter of stopping payment by making sure the marketplace is updated. as i said to the chairman earlier, we expect over time that people will make those adjustments earlier and they will also be careful in their adjustments for what they are to make sure they don't underestimate. we think this will work its way out to even smoother filing system. thus far, we have not seen a significant number of calls with problems. we know there have been adjustments made by cms, which runs the marketplace with a number of tax players -- taxpayers. the number of people of the people -- the number of the people affected is a relatively small number. sen. carper: yesterday we had him speak without notes and he did a terrific job. i asked him what we can do to help the irs serve the people of this country to make sure taxpayers are meeting our spots abilities but to also make sure we are providing the kind of service that we would expect. when claire mccaskill was auto -- was auditor for the state of missouri and iowa state a treasurer, we had really good service. we are very proud of that. to know that people call the irs and they have to wait forever to get something on the line or they go to the irs office in the have to wait to see somebody. we are complicit in that. we are not providing a reasonable amount of funding for the irs. yesterday, jean dinero said that there are things that the irs has done. he said there are some things that the irs hasn't done and that we should provide more in terms of resources. what i would hope we would do is act on his advice. we have a bunch of people who are preparing tax returns on earned income tax credits. we know there is a high improper payment related to earned income tax credits. a lot of those tax returns are prepared by people who are not credentialed. i know you have been pushing for us to do something to better and sure people are helping millions of taxpayers to their return. this is an important point. mr. koskinen: i would stress that we have a wonderful working relationship with the taxpayer community. and the vast majority know what they are doing, do a good job and work their way through the complexities of this tax code. is the more complex than anybody wants it to be. many of those taxpayers have no credentials. there are a group of them who don't have a lot of background much training, and do their best to make a lot of mistakes. there are a small percentage that are crooks. you can find that easy because you can drive to any city and there will be a sign saying, come to us and we will help you get a better refund. across the board, we think we ought to be able, and people have noticed numerous times, it takes more credentials to cut your hair then to prepare your taxes. there should be minimum qualifications before you can go to a taxpayer and do their taxes. a cool -- a court ruled that we did not have the authority for minimum requirements so we have asked for legislation that would require a minimum amount of education the way cpas and lawyers and others. >> this is an issue that requires to be addressed. sen. johnson: it does speak to the overregulation of the haircutting industry. first year, $95 or 1% of your income. this year is hundred $98 which is one point seven times the minimum. next year will be $1176. the third-year is $695 times 1.8, $1258 times 1.5%. that is the extrapolated penalty over the next several years. mr. koskinen: i think part of the calculation is, you either pay the minimum or the one or 2%. sen. johnson: the average penalty goes probably to these ballpark figures. sen. corbin: i want to focus in on the 1095-a issue. --sen. portman: they send out any incorrect tax statements which is very important to my constituents and folks around the country because they rely on the statements. i think they were initially told , don't worry about filing your taxes until we get a corrected statement and they were recently told go ahead and file your taxes and you will be penalized based on the information you rely on which is inaccurate. it has caused a lot of confusion in ensure you heard a lot about it. i have as i'm sure many of my colleagues have. i've a constituent named linda from ohio. she is not just insuring her last name today. she had incorrect to 95-a -- 1095-a and she has been contacting folks at the irs. she was informed that her correction was denied. then she received a phone call that said it was not denied. she is still not able to get a straight answer out of the system. mr. koskinen: i would note that she is calling cms, not the irs. they do have a very vigorous customer service effort working through those kinds of questions. sen. portman: i stand corrected will stop -- corrected. anyway, lots of questions about how we can help solve this problem and really the scope of the problem. if you could, today, give us with the irs's best estimate is about the folks who have to repay a portion of that subsidy. mr. koskinen: we won't know because it takes a while to post , but thus far, it appears that it is slightly less than half of the people that are getting an increase refund because they got smaller advanced payment of the premium tax credit than they were entitled to based on their final income. about 50-55% getting a smaller refund but they are still getting a refund. the adjustments, we don't know what the dollars are, i have seen tax preparers estimating that their experiment -- their experience has been $300 one-way or three -- or $500 another way. we don't have an indication about who, as a result of getting too much of an advance payment, actually ended up owing tax. the situation of the chairman's constituent is in. i would stress that we have better information in two or three weeks when we evaluated all. our estimate is that most people , the vast majority of people, get a refund in any event. the swings as far as whether you got too much of an advanced payment or too little of an advance payment a relatively modest enough. we will have better data for you in relatively three weeks. sen. portman: an estimate of what that percent would be in terms of folks receiving if subsidy after repay a portion of it. the income verification process was more accurate. the other issue that i think is going to continue to be something we hear about from our constituents is the state and federal data sharing. in the wall street journal yesterday, they had a piece about martin chapman from new mexico who expected to receive a refund but instead she had to pay taxes. the reason is, apparently the exchange and not account for her husband's social security benefits of my hundred dollars. -- of $900. beginning concern that the state databases may not be regaining properly with the federal databases. she reported that this was kind of a trick, that she wouldn't have gotten the insurance has she understood the full price and now she has dropped her planned for this year. my question for you there is, in terms of the information flow between the state and federal government, do you believe that is adequate and how can that be improved? mr. koskinen: about income verification i should explain about how the process works. the taxpayer goes to the marketplace and makes an estimate about what they earn. we then get paying -- get pinged by the marketplace and asked for an income verification surrounded by protections and not revealing to anybody outside. it basically says what your earnings were in the previous tax year. if the previous tax data was on the income year before, that data would have gone back to the marketplace. we would be at -- we would ask what they filed the year before. that information would go back to the marketplace and they would have a discussion. we found that we were 99.5% accurate in terms of the information we gave both to the state and federal marketplaces. it ultimately is up to the consumer, as we all do what we are filing are withholding an estimated tax estimates, what are we going to art in the next year. most people, with a variety in their employment circumstances never know exactly what that is going to be. our expectation is that as the process moves, more and more people will understand that they have to be careful about estimating their income. if you underestimated, it will all work out you have to reconcile and pay it back. our expectation is that those percentages of the number of taxpayers who get larger refunds will go up because, just the same way that when people file their taxes, 60 or 70% get refunds because they in effect overestimate. we think that is where it will work. the accuracy of the information we are providing to verify the estimate by the taxpayer as far as not a difficulty or problem. the states get the same information from us automatically. sen. portman: i have lots of other questions for you and i will submit those for the record. one of the things that the inspector general said was it would be tough until you have implemented a predictive and analytical model. -- analytical fraud model. i appreciate your service and the fact that this is going to be a complicated taxes and for you. sen sasse: thank you mr. chairman and thank you mr. commissioner for being here. are you familiar with a piece in the washington post yesterday about the 100% to 400% fpl level for the aca. he is summarizing a yale journal of regulation piece about who qualifies for the tax credit will stop it is my understanding that is 100% to 400% of the federal of -- federal poverty line. it looks to me that you have put forth a rule that disregards the 100% income level. mr. koskinen: i am not aware of that. i would be delighted to get your information. i am not aware that we have done anything that ignored the statutory framework. sen sasse: we will follow up with a letter. the particular concerns i have a related to the broad application of irs discretion. obviously in the regulatory rulemaking process but also in particular cases. many of our constituents, when i travel in nebraska, have genuine fear of the irs because there is an inadequate understanding of how discretion is applied. it is not clear that an employer would not be subject to an employer mandate penalty if employees that they have and upon exchange through no fault of the employer. i would love to get more information about that. can you help us understand more broadly how policy decisions in the rulemaking process are made between hhs, the irs, and the white house. you 36 components of your jurisdiction? mr. koskinen: we have all the tax components come under our jurisdiction. our role is tax administration. policy issues about what legislation ought to look like what changes in this act ought to be, are decisions made by the treasury, the white house, and the congress ultimately. issuance of regulations is a joint effort between the treasury department and the irs. we are a bureau of the treasury department. we don't issue regulations by ourselves. they technically have the authority but obviously designed regulations on the impact on administration. if there is a policy decision for instance the policy decision about the penalty application that is a decision by the treasury department. we get involved only to the extent that is a question for the implications on tax administration. all of the policy issues are decided, again, by the administration and ultimately by the congress in terms of legislative recommendations or fixes. sen sasse: would that be true with regard to the credits for illegal immigrants as well. the decisions that were made about the refund ability for folks that appeared to be getting credits in certain cases. the irs plays no role in that rulemaking process? mr. koskinen: we participate in the discussions about if you are going to make that change -- we might china made -- we might china and about tax decisions. we meet every two weeks going over regulations to make sure that as these regulations are tavon -- are designed, they are designed not only with tax and ministration in who -- in mind but they don't make it more difficult for the administration of the tax laws. sen. sasse: in the kingsley burwell -- king v. burwell case those decisions were made in the treasury department's tax policy division? mr. koskinen: those interpretations of the policy issues are up to the treasury. we participate, getting our view of how it would be for tax administration. but the policy calls are ultimately the responsibility of treasury, the white house, hhs and ultimately, the congress. sen. sasse: going back to the chairman's opening issue with his constituent. if a decision was made, how will the decision be made about the timeline of repayment of that. i understand you want to do -- do not call a penalty. mr. koskinen: they will have the $11,000 back that they all or if they have difficulty with that they will contact us. we keep encouraging them to do that. they can work on an installment agreement. you can develop an installment agreement online, which is one of the new things we built over the last year. i think they have substantial difficulties and they can work with us on a compromise. sen. sasse: one last question. these 34 provisions of the aca who is the point person inside the irs for the tax administration of all the new aca authorities? mr. koskinen: ultimately the commissioner's which is why i am here i met every two weeks for the last two months working toward the implementation of the development of the systems making sure filing season that started stop so i am ultimately responsible. thus far, i think filing season has shown that we have done a remarkable job in the face of both the challenges, getting them into a model t with not a great sound system but applications running for 60 years. i think we are up to it. i do think we do statutory mandates, so we will always have a highest priority of whatever statute you past. but if our resources are cut, we can't do other things we have discretion over. improvement of our i.t. systems, tax enforcement have to be put on hold. with the implementation of the affordable care act i couldn't be more pleased with the irs has been able to do. sen. johnson: let me just admit because back of the envelope calculations are dangerous. the second year would be about $340. i want to correct the record, i was wrong. it really looks like the minimum penalty will be the maximum penalty. i just want to correct that. it just seemed man, i started going through that logic of, this is unbelievable. sen. mccaskill: commissioner, everybody is offended at the notion, regardless of party or ideology at the notion that the irs whatever target groups based on their belief. i understand the outrage, i understand the need to hold people accountable. i would like you to explain when we vent that frustration by cutting your agency, who exactly are we punishing? mr. koskinen: as other people have noted, when you punish the irs by cutting its budget, ultimately you are punishing taxpayers because you limit the ability to provide the employer -- provide the service to them that our employees provide. satisfaction comes from helping people and they feel they don't have the resources. sen. mccaskill: your budget has been cut by 18% since this scandal came up and, what is the call weight, the average amount of time have to wait on the phone as you don't have enough personnel to answer? mr. koskinen: at this point, it would be on average about 28-30 minutes. sen. mccaskill: what percentage of the phone call can even answer at this point after these draconian budget cuts that were supposedly punishing you but are actually punishing my constituents that can't talk to anybody? mr. koskinen: about 60% of the calls this year are not going through. that exacerbates the problem because if you can't get through, we have had over 6 million disconnects where the system gets overloaded and we know you will be there too long and you simply get disconnected. a lot of people are calling 2-3-four times just to get through that you to wait for the half-hour. sen. mccaskill: and we have seen the scam in this country of people calling and claiming to be the irs and basically stealing money through coercive efforts and misrepresentations on the phone. when you are able to go after the criminals, what is the return on investment for every dollar that you are given to go after the criminals? and i saw this criminals firsthand as a prosecutor, that are using the irs and the tax code, and cheating all of us in america who pay their taxes. what is the return on investment for every dollar you get. what do you return to the treasury in terms of your ability to go after the criminals? mr. koskinen: enforcement alone the return is over 10 times the amount. as a general matter, when you give us one dollar you get 4-6 dollars back. we're the only agency where to give us money we promise to give you more back. sen. mccaskill: let me make the point, because this sometimes -- and i don't want, maybe i will get to it aggressively partisan place here. when you estimate your taxes you are deciding what you're going to make it what you are going to all of the government and then you decide what will be withheld. if you are right, if you are perfect, then it is even. you don't know anything and you don't get anything back. but if you underestimate your income, you might oh more. this is something that every taxpayer has to do every year, correct? so really what we are doing with the aca is exactly the same thing. the individual has to estimate whether or not they are entitled to get this amount of money for their insurance premium or if in fact they are entitled to that amount, and if they estimate wrong, they are either going to get money back or own money. mr. koskinen: that is correct in one of our goals is to try and educate the public to understand that. sen. mccaskill: and they will get better at this. mr. koskinen: our experience is that after the first year everyone pays attention and understands it is not a free good. when you get an advance payment and ultimately has to be reconciled with the reality of your income sen. mccaskill:. finally, calling it a personal responsibility tax. a 32-year-old man in america has enough money to either buy a new harley or health insurance. under the umbrella of freedom he decides i want a new harley. he goes out and put that harley on the pavement and he is sent to the nearest hospital where in america, we don't say to him you decided to buy the harley, we are going to let you die. instead we take him in the hospital and sometimes give him millions of dollars of health care. he goes bankrupt, the hospital has uninsured care, another is no magic fairy that i am aware of that comes into the hospital and pays the bill. what happens when back i decided to buy the harley instead of the health insurance, the hospital called the insurance company and says, we are going to have to charge more for labor and delivery. we will have to charge more for a knee replacement. we will have to charge you more for angioplasty. and then the insurance company called small business down the road and says, i'm going to have to raise your premiums. those premiums have been going up by double digits every year for years prior to this reform. the question we have here is one of personal responsibility. i have lectured about personal responsibility is so my friends on the other side of the aisle constantly. the question is, do we know all of us who pay insurance, should we pay a higher premium cacique got to get a harley or should he have personal responsibility to be able to cover his medical bills? and that is really the essence of this question. we say you have to have insurance when you're driving a car because you might harm someone else. when you go into the hospital with uninsured care, you are passing those costs onto's -- on two people that have taken personal responsibility. i get so tired of this notion that somehow this is the big arm of government instead of the notion that it is time that we acknowledge that personal responsibility in the health care sector is just as important as personal responsibility in any other sector. sen. carper: i'm tom carper and i approve that message. sen. ernst: i want to stay for the record that i do ride a harley, i have insurance and i have full protective gear. so i am personally responsible. fortunately, i don't make that choice will stop i know what i can afford in do so accordingly. senator sasse had brought up some good discussion about king v. burwell, and where your role will be with that decision is made. if it goes the way i think it should go, then we will have subsidies that have gone to states and to individuals that shouldn't have gone to those individuals. but what do we do, and maybe you have thought about this, in a hybrid situation. there are a handful of states in which iowa is one. it is a hybrid exchange, neither state or federal but a combination of both. have you thought through that and what role the irs might be playing? mr. koskinen: basically, there is no way for us trying to predict what the court will hold and what it will decide in terms of how to parse through all of this and what the responsibilities are of states federal government, the congress. much like potential tax extenders, we basically play the hand we are dealt. the court will make a decision and then we will respond. the policy issues, back to the earlier question, about what the implications are beyond tax administration will be decisions made by the treasury department and the administration. at this point, we have enough challenges running the filing season and so that is what we are focused on. sen. ernst: i do appreciate that. i hope that was the decision is made we can all jump on that together and figure out how we will handle that situation. since september of 2014 hhs has dropped over 300,000 individuals from obamacare because those individuals have failed to document their legal residency. we don't know what their statuses -- status is. many of those were enrolled for over a year. during that time, many of them did receive premium assistance tax credits and cost-sharing subsidies for which they are not entitled. they can't prove their residency, they are not entitled to those. under the administration's current policy if an individual or family is unable to prove his or her citizenship or lawfully present status, hhs provides coverage and taxpayer-funded subsidies under the affordable care act before the individual legal status can be verified by any government agency. if citizenship cannot be verified, those individuals are dropped. because many of those bats, if they are illegal immigrants they are not necessarily filing tax returns. i understand that it would be difficult for the irs to try and recoup payments or credits are subsidies because they won't be subject to the reconciliation process when they file tax returns because they don't file tax returns. so how as the irs, are you able to handle that situation and what is the plan moving forward for those folks that were receiving credit or subsidies? mr. koskinen: the qualifications and determinations were made by hhs. this is an area where they will be responsible for doing that. sen. ernst: that won't even be run through the irs? mr. koskinen: if the premiums have been paid on their behalf, at this point, the idea is that cms will pursue those to the extent that they pursue any other payments that they make that turn out to be improper. sen. ernst: this is going to be a very difficult situation with so many different entities involved with subsidies, tax credits. one agency not knowing how another agency is going to handle it. mr. koskinen: we worked together on that, there is not a gap. this has been an effort that is not totally unique, but for us we spent a lot of time with cms and have a very good working relationship with them. we have a lot of conversations with the treasury department. we chime in the terms of how it will affect tax illustration but i don't think there is any gap. as new issues come up, they all have to be resolved. sen. ernst: i know it is a very difficult situation and thank you for coming today to testify. sen. ayotte: thank you chairman, thank you commissioner for being here all stop -- being here. i wanted to ask about a situation we have in dealing with the new hampshire but it up in new hampshire is unique on this. i received a number of complaints from my local libraries that they didn't receive the necessary tax forms and instruction booklet. in new hampshire, we happen to have a high percentage of people that actually will file my paper and historically they have been able to go to their local library and get the tax forms so that they can do their taxes. i wrote to you, originally in february, about this issue. the first response i got back one of the primary reasons you said that these forms weren't being provided to people at their libraries in new hampshire was that the irs budget was cut. but the reality is, on taxpayer services, congress allocated the same amount of money. so why is it that irs is not able to provide the same level of customer service this year? it is not just this library issue. for us in new hampshire to have to go through the runaround that we did to get our libraries basic tax forms, it just was kind of unbelievable to me when my staff told me all the runaround we were going through. can you help me understand why this is happening. and what troubles me even more is that the national taxpayer advocate recently testified before the senate appropriations committee that this year, taxpayers are receiving the worst levels of taxpayers service since at least 2001 and the statistics are staggering in terms of 40% of the calls that the irs is receiving from taxpayers are not being answered or responded to in any way. mr. koskinen: the answer to that is, we get an appropriation in buckets for enforcement, for operations, which is for customer service and information technology. we also have user fees they go through to part of our operating budget. historically, we have never been fully funded for taxpayer services. the amount of money provided has been been supplemented by about $150 million out of the various user fees that we charge. because in both 2014 and 2015, we were zeroed out and funding for the affordable care act. we asked for $300 million each year just for i.t. and congress provided zero. while the base appropriation for taxpayer services was the same, we have to take $100 million out of our user fee allocation to put it into information technology. we have a smaller amount of money available for taxpayer services than before and the appropriators understand that because we go through it with them regularly. we are as concerned as you are about the low level. i have now visited 37 cities. i have talked with 13,000 irs employees. one of the common themes is that they want to help taxpayers. they get satisfaction out of answering questions. one of the concerns they had was when we told them we can only answer simple questions because questions make the cube get longer. we told congress last her that if our budget was flat, let alone cut by $350 million, we expected the level of service would drop to 30 -- 253%. we have to run the filing season. we collect over $3 trillion for the government in the ordinary run of the filing season. if you cut our budget, the only places they can cut is enforcement, taxpayers service and improve -- and improvements in the information technology. our experience has been that 85% of the forms we have been sending out to get used. we have been providing a lot of forms for landfills. for the libraries, we have provided them the basic forms what we provided them a format that would allow them to make copies of any form they wanted. they could download and make copies of those. anyone could call us and asked for documents. there was a problem because with the extenders we could get them up online and you can download them online. if you called us, it would take a few weeks longer before they actually got through the formal process. we tried to give taxpayers alternatives. the library concerned, which i understand, is that making copies is not a free good. with limited budgets, libraries are strained by that. that is why we encourage them to say that their constituents could go online and download them themselves. those people, we tried to give visibility so that they could call a special line. sen. ayotte: we had to send my staff are people he over to get these forms for people in new hampshire and we were only able to get 10 at a time. from your testimony, the one thing that people need to understand is that you had to money from the tax payer services lying to fund the implementation of the affordable care act. we flat funded you and you took the money to implement obamacare. mr. koskinen: it is the $100 million that we had to put into the statutory mandate and we have to do statutory mandate. sen. ayotte: the gao found the irs used $12.1 million for taxpayer services to implement the informal care act. mr. koskinen: the congress passed an act three days after our budget was dropped, they passed the act without any additional funding. we will do that because you have told us to do it, but the only way to do that is to find the money somewhere. sen. ayotte: i wanted to follow-up on an issue that someone may have already asked you about. that is the incorrect 1095-a form taken -- sent to many individuals incorrectly. do you know how he taxpayers in new hampshire received the wrong form? mr. koskinen: those forms are provided designed and filled out by cms. sen. ayotte: do you think that the people who waited a little longer -- as i understand they are being treated differently and are still on the hook for paying, if they own a larger premium, there may be a distinction between those depending on when they are filed. however the people in this country who were misled in terms of what they thought they would be receiving, how would you treat those individuals? mr. koskinen: of the 800,000, the estimate of the cms was about 50,000 involved. in terms of being misled, we had a long, informative discussion on that and i think after the transition of the first year people will understand better. when you register and apply for insurance coverage, you make an estimate of what your income will be for the year going forward. the way we all make estimates when we file our estimated payments and withholding. we then provide income verification about what your last tax return filings were. on that basis, a determination is made. first, you know by working it through what the premium for your insurances and then a calculation is made about how much of that premium will be paid on your behalf to the insurance company. one of the things we have tried to make clear from our standpoint, because we wanted to make sure that if people had a change from their circumstances that they would have an estimate and could go back to the marketplace. a lot of people actually went through and assumed that once they get the premium paid to the insurance company, that somehow it was never going to get reconciled. most people understood that it was going to have to be reconciled but a lot of people have not understood that. we think that going into next year that most people will understand that when you estimate your income, if your income goes up, then there is less support for your insurance payment going forward. it is a question of how much you pay and how much the government pays. if your income goes up you will be eligible for less and if you let the market know immediately they will update the advance payment immediately and you will have no reconciliation at the end of the year. we have spent a lot of time and cms has spent a lot of time getting people to understand that if your estimate was wrong or changed, you need to get back to the marketplace. a number of people dead. that would be to get a 1095-a for the one part of the year and then another one when you're premium changed so that then at the end of the year you know exactly what your premiums were. we think that will be a lot better the next year because people will have been through it once. if your income changes of the course of the year, due to get back to the marketplace. sen. lankford: thank you for the work that you are doing for the american people. you've walked into the middle of a lot of chaos, with laws that we all have some frustration with. i want to talk about just a couple of things. we talked about the eit see and identity theft issues -- eitc and identity theft issues. we had a 22% estimated fraud rate with the earned income -- with the eitc. the challenge has always been, this has been a high priority issue, how to get on top of this. what is the plan now to try to get on top of this 13 to $16 million loss. mr. koskinen: it is a major challenge for us and i have been concerned since we started. we have made progress, good progress, in some areas. except for the itc. the percentage of payments and the dollar volume of those have been pretty much with a range and not changing. the plan is, we did put together a working group of everybody who anything about this. we can't keep doing this expecting it to magically get better. we went back to the drawing board and it turns out that we have asked for support from the congress. we need to get w-2's earlier. we need to have correctable error authority. we see in the returns when there are errors. two people claim independent in our database says different, we can't make that correction without entering into an auditor exam. we did last year about 450,000 of those exams. but we have 27 million applicants, and to the extent that 20% of them are getting the improper payment, we will never be able to audit our way out of the problem. we said if we had error authority, we can make that correction, advised the taxpayer. the taxpayer would still have the right to come in and say they really have three kids as opposed to one. you always have the ability to make that clear, but we would be able to make those corrections directly. over 50% of the eit see -- eitc returns are filed by taxpayers. it is a complicated tax statute that if anybody wanted to simplify we would certainly support that. they are making honest mistakes. and then as we said, there are crooks. they are advertising that we don't get you a good refund. we have tried to more taxpayers. if your preparer says just sign a blank form you may never see that refund or they have nothing to do with what your reality is. if we had correctable error authority and minimum requirements and qualifications training for tax preparers, we think that we could make a dent in this problem. we will never get it to zero, but to me, you just can't keep running the system this way. it looks either like we don't know it is a problem or we don't care about it, or we can't do anything about it. sen. lankford: that is an aspect of this committee to determine where we are stuck and what we can do to be unstuck. you just articulated three issues that you need congress to help with. w-2 issue, correctable error authority, and the standards for tax mr. koskinen: we need w-2's earlier, correctable error authority, qualifications for preparers, and if we could simplify the statue, it would be helpful. senator lankford: this is something you are trying to manage in the transition of obamacare. september 2014 hhs dropped people saying they did not have documentation for residency status. some of those people weren't in the process with tax credits. what is the plan to recoup? we have 300,000 people that received a subsidy that hhs came back to answer they are not eligible. how is that working out? mr. koskinen: it is a complicated situation. they actually never got the tax credit portion. the government had made an advance payment to the insurance companies on their behalf. so, as a general matter, the policy has been that hhs and cs -- cms that deal with medicare payment sometimes improperly made, basic policy is that cms and hhs. a responsible when the payments are made on the basis of improper identification. collecting it again is up to them. senator lankford: up to hhs? because there are 300,000 people that do not have citizenship this point. that is over there? mr. koskinen: yes. senator lankford the law prohibits employers from reimbursing or providing financial employers -- sorry, to employees -- to help them pay for and individually purchased plan. so someone says they are going to go on the general market. the employer will provide them some sort of amount. in the past, small businesses would say, i cannot afford a policy. but i will find a way to help you do that. my understanding is that not -- is not legal anymore. are you aware what the tax policy is? mr. koskinen: it is my understanding that is a tax policy. that is a policy set by the treasury department in response to statutory language. senator lankford: does the irs carry out the penalty part of the? mr. koskinen: once someone has decided what the policy is, the tax administration is our responsibility. to the extent rules are set, we are responsible for administering them. so the penalties would be our responsibility. senator lankford: so at this point, there is a consequence that could come down for someone helping to pay for premiums out of the general market? mr. koskinen: the treasury department has provided guidance in that regard. that point has been made. senator lankford: kaiser family foundation has done a tremendous amount of research. they listed in their research only 4% of households received the correct obamacare subsidy. that is not your responsibility but it becomes a big issue on managing and affects a lot of people as they go through their tax planning and preparation. it is one of the aspects that has to be corrected. if we have 4% of folks receiving the correct subsidy upfront, we have a major problem to be dealt with. otherwise, they have to deal with the consequences of it. mr. koskinen: you have a much higher percentage of people estimating their income. what you are doing at the front and is making an estimate of what you're making at the future. that determines your premium. so, unless you know your job and know that your income is not going to change, you are always going to be making an estimate that by definition will never be 100%. senator lankford: it sets up americans to fail. mr. koskinen: what will happen is what people do with their withholding. 70% of people get refunds because they overestimate. that is what we expect people will do here. they will be careful about estimating. they will say, i am going to overestimate to make sure the premium is going to the insurance title i'm entitled to. i will get a refund in april. so it will be that normal taxpayer behavior. senator lankford: thank you. i yield back. senator: in june of this year, the supreme court will decide a irs ruling. has the irs done any planning in case the ruling comes down and it is an adverse ruling in terms of your rulemaking? mr. koskinen: as i said earlier, there are a wide range of possibilities on how the court will rule in terms of what it decides or wants to have its ruling implemented. our challenge is moving forward and preparing for the next filing season. there is no way we can adjust filing season planning trying to anticipate various options. much like we do with tax extenders, we run on the assumption life will look like it is. we have to adjust afterward. senator johnson: if the supreme court rules that subsidies can only be paid through subsidies established by the state, that is going to create problems for the irs, correct? mr. koskinen: depends on how the court rules. senator johnson: let's say they follow the law the way it is written and say that subsidies can be paid through exchanges established by the state. how would you possibly handle that? my question is, have you given any thought to that? any planning whatsoever, in terms of that possible eventuality? mr. koskinen: there will be a set of issues. a there are policy questions about how to implement them. some statutes are past and people are given more time to transition. depending on the decision, there will be policy decisions made about how to transition. they could make life more complicated for everybody. senator johnson: you are not commissioner when the ruling was handed down. did you ever look into or research how the ruling was developed? mr. koskinen: no. i spent 45 years parachuting into agencies under challenge. my rule of life is play the hand you are dealt. that decision was made before i got here. my job is to administer the agency as best we can where we are. senator johnson: you never looked into whether the irs was working with the white house in terms of how they should rule on that? mr. koskinen: except as a general matter, we do not work hand in glove with the white house and anything. the policy discussions we have are with the treasury department. regulatory processes work with treasured your -- treasury department. senator johnson: the irs is responsible for evaluating exemptions for the individual mandate. how many americans in general was the estimate in terms of americans that will qualify for exemptions provided for? mr. koskinen: at this point, we have not told that data out of returns. i cannot give you an answer on that. the assumption was that more people would probably file for exemptions. or had coverage for part of the year than people who will pay the shared responsibility payment. it will be a number we will see in three or four weeks. you will be able to accumulate that data. senator johnson: it will be pretty much on an honor system? anyway of trying to verify that through auditing? mr. koskinen: what we will do in these matters is when the computer selects returns with issues, when we look at those, we look at everything. of the 75% of americans who say they have coverage, if we have an issue with your return, we will ask you if you had coverage because you said you did. we will track through. when someone says they had a hardship and they made a lot of money and we are auditing you it will be noted that you apply for an exemption you do not seem to qualify for. then you are subject to penalties and interest. and penalties for purposefully understating income. it can amount up. senator johnson: coming back to the couple that wrote me the letter what if they are unable to repay? they were talking about not having the cash on hand. they do not have the ability to pay other than pulling money out of a retirement fund, which is a high penalty. if you pull money out of your retirement fund, there is a 10% penalty. mr. koskinen: only if you have already retired. if you are 59.5 years old, you can pull it out. senator johnson: they might have been retired. mr. koskinen: if they are 59.5, they only pay tax on it. under, and there is a penalty. senator johnson: what about the timing of paying the subsidy? mr. koskinen: as i have said, you can go online. if you qualify, you can do an online installment agreement that would allow you to spread payments over time. you can do that online or call us after the filing season. hopefully you get through quicker. you can arrange that so you do not have to take ciccone and steps -- draconian steps. in this case, it sounds like an installment agreement would be an appropriate response. senator johnson: over what time? mr. koskinen: generally three to five years. if you have not paid on time, there is an interest charge but no penalty. senator johnson: what is the interest? mr. koskinen: it goes after the government interest rate, which these days, is low. senator carper: not that i do not want to encourage people not to pay on time. my dad always used to say to me, use common sense. my mother used to say, treat other people the way you want to be treated. your response to senator johnson's question, saying people could go online and pay no penalty, aside from interest, that seems to be using common sense. and seems to be treating people the way i would want to be treated. i said to senator johnson, in public works, we focused on nuclear revelatory commission. i walked in and you are explaining to senator james what can we do to be of assistance? i am a believer in repetition. i'm going to ask you. this is important. in terms of what we can be doing to enable you to do a better job , i just want to hear it again. mr. koskinen: this is in the context of what we can do in the earned income tax area. senator carper: you may have answered the question. mr. koskinen: i am happy to repeat it. we need to get w-2's earlier to match up front. we need what is called correctable error authority. when we can see there is an error on a return, that we now have to audit. if we can make the correction, send a correction notice to the taxpayer they can say i really do have three kids instead of one. another person who claim the child is not my fault. i get credit for it. the third point is that we need help. have to returns for etic are prepared by paid repairs. making sure their people doing returns on behalf of someone else. those are three things in the green book. i said the fourth thing would tv -- be the statute is complicated in terms of figuring out is in charge and what relationships are. i think a lot of tax preparers and a low income people are stymied by that complication. if somebody wanted to step back and say it is a great program with bipartisan support if there were a way to make it easier for people to figure out exactly who gets credit and when, that would be a help. the first three are things that could be done now to immediately give us a significant opportunity to make a dent in the issue. if we were given the tools, we should be accountable for making that improvement. it will not go to zero, but it is a situation where i think we cannot keep running it without beginning to make progress in limiting improper payments. senator carper: when you look ahead, sort of looking ahead, i do not know how long you will be commissioner -- mr. koskinen: i think i have another 2.5 fun filled years. senator carper: what gives you joy in your work? mr. koskinen: it is an important agency critical to the function of government. you do not have to get up monday morning worrying about whether what you're doing is important. second, it is a wonderful workforce. when you get to talk to 13,000 employees across the country and they are dedicated to the mission, spending a lot of their time helping taxpayers -- it may take me a while to convince people we are from the irs but spend a lot of time trying to help people. if you are trying to be compliant and figure out how to pay your taxes, we want to help you do that. it has been a remarkable experience dealing with employees. we have been under a lot of rusher -- pressure. and i have 37 cities, in addition to the town halls. they are a remarkable group. it gives me great satisfaction to work with them. and it is a great honor for me to be commissioner. senator carper: on npr a couple of years ago, i was listening in delaware, the reported on an international survey. they asked, what do people like most about their jobs? some people liked getting paid. some people like having benefits , pension, health care. you know. vacation time. some people said they liked the folks they work with, the environment in which they worked. most people said what they liked was the fact that what they were doing was important. and they felt they were making progress. that was it. what most people said is what they were doing is important. and i find -- god knows the work you are doing at the irs is important, i think it was holmes who said we need tax for life in society. but we are not allowing you to make the kind of progress that you ought to be able to make. i think with your leadership and good advice from others, you are making progress. but not the kind you want to make. the wait times we here on the phone. people showing up at offices and not having forms available. we have a job to do here in concert with you so that the people we serve can feel better about the job you're doing and you can as well. thank you so much. senator johnson: we always give the witnesses a last chance at making a closing comment. if there was anything on your mind that you wanted to get off your chest. mr. koskinen: it has been an important discussion about a very important subject. i think hopefully, it has been helpful to the members of the committee. i think we are on television as well. my hope is that people watching have a better idea about the affordable care act, the efforts we are making to make sure it goes as smoothly as possible. i hope it is helpful for the public to understand that those participating in the marketplace , what they should pay attention to. again, when circumstances change, they should get back to the marketplace to make sure their reconciliation is as painless as a ghost. -- it goes. i think senator carper's point that the irs is important. people ask me why i have been at this now, why i continue to be enthusiastic about it. if you spend 45 years of your life doing turnarounds and dealing with agencies under stress, you have to be optimistic and assume it will get better. so i am optimistic. i think there are people anxious to be supportive. we have a responsibility to spend taxpayer dollars carefully. we are given this money from people who worked hard to provide them to us. we have to make sure we use the funds well. we have to make sure people understand when there are problems. my goal in life is to have no problems. but even with a shrunken workforce, it is the world's most collocated tax code. we deal with virtually every american family. our goal needs to be that, when we have our problems things do not go as expected, that we fix it quickly and are transparent about it. taxpayers need to become triple and -- comfortable and confident that we will treat them fairly even with limited resources. i do not want individuals thinking i'm getting audited because of something i said. i want them to understand there is an issue in their return that caused us to look at it. if someone else had the issue we would be looking at them as well. it is a system that depends upon voluntary compliance. we collect $3.1 trillion per year because americans are trying to pay the right amount and do the right thing. for that system to work, they have to have confidence and be comparable with the fact that tax administration is not a political enterprise and is designed to treat everyone fairly and make sure that people pay a fair amount. they can work with us to deal with it. if we can move in that direction, then we will be making progress in the most important way, which is to protect the voluntary tax compliant system of this country. senator johnson: i appreciate that. the agency has lost credibility and needs to be restored. i hope you do everything you can to restore the credibility. i appreciate your service, your thoughtful testimony. your forthright answers to our questions. the record will remain open until 15 days until april 30 at 5:00 p.m. hearing was adjourned. [captions copyright national cable satellite corp. 2015] [captioning performed by the national captioning institute, which is responsible for its caption content and accuracy. visit ncicap.org] >> up next on c-span, senators marco rubio and mike lee of utah discuss their tax plan. then a conversation about law enforcement and its relationship with the african-american community. on the next "washington journal," congressman david cicilline will talk about protections for the lgbt community. then a discussion with condiment chris smith about foreign-policy challenges, including the proposed nuclear deal with iran. "washington journal" there's live each morning on 7:00 eastern on c-span. >> at age 25, she was one of the wealthiest widows in the colony. during the revolution, in her mid-40's, she was considered an enemy by the british. later, she became our nation's first first lady at age 57 -- martha washington. this sunday night at 8:00 p.m. eastern on "first ladies: influence and image," examining the private lives of the women who filled the position of first lady, from martha washington to michelle obama. as a complement to the series, c-span's new book, "first ladies," providing lively stories and creating an inspiring read. it is available as a hardcover or e-book through your favorite bookstore or online bookseller. >> next, republican senators marco rubio and mike lee talk about their tax plan which would reduce the number of individual income tax rate down to two. the heritage foundation hosted the event. senator rubio declared his presidential candidacy on monday in miami. host: welcome. thank you for joining us at the heritage foundation. i have the opportunity to introduce two of my favorite people in the senate. the reason for that is that they took on their campaigns to run for the united date senate. almost no one in washington wanted them here. which means they are our kind of folks. [applause] host: they are great friends of freedom and heritage. mike and marco, thank you for being here. mike lee is a byu law school graduate. he clerked for a number of people, including justice alito. he is a leader in the senate. and serves on the judiciary committee. perhaps the most important role is chairman of the senate committee. you get blamed for almost everything that goes on that folks do not like when you are chairman of the committee. you need to stand up against everything that goes through that needs to be stopped. mike recently came out with a new book. it is about our lost constitution. an excellent read for those who want to really understand what it is we are losing and need to restore in america. mike, thank you for being here. senator marco rubio really has lived the american dream. he has been quiet recently. [laughter] host: that is why he is here with us. he has been a public servant for many years in florida, set an example as a state representative quickly and became majority leader. he was speaker of the house in florida. and again when he was set to run for the senate, it was a david and goliath quest. no one thought it was possible. but what we saw was the american people in florida and utah and everywhere recognizing people who were willing to stand up for principle. marco recently authored a book "american dreams: restoring american opportunity for everyone," which we like at heritage. they are here to talk about a tax plan today. when i was in the house and senate, a lot of candidates talked about the need for tax reform, tax simplification. very few actually introduce their own plan or even signed on to someone else's plan. once you put the specifics out there, people can misuse them, twist them, use them against you in the next election. it takes a particular vision and courage for folks in elected office, particularly the senate, to get the conversation started with a tax plan with a lot of good components to it that can help america and to see what this could do to our economy and job creation if we fix our tax system to make us competitive with the rest of the world. two great friends, thank you for being here. i will let senator lee star us off today. [applause] senator lee: thank you for that kind introduction. we miss you in the senate, but it is good to have you across the street. we developed a tax reform plan that is progrowth and profamily. it is designed, at once, to facilitate economic growth that will help american families middle class in particular. and also help get rid of distortions within our tax code. some of the complexity that you can find in and around washington. as albert brooks recently said, complexity is itself a subsidy. it is a subsidy for the wrong kinds of things. our tax code actively punishes people for getting married and having children and doing all kinds of things that we generally regard is good that we generally should not be punishing through our tax code or otherwise. on the individual side, we have come up with a two-rate system. going from seven to two is not simple. under this new framework the overwhelming majority of all americans, about 80% would pay under -- one flat rate of 15%. subject to deductions, one for morgan -- mortgage interest and the other for charitable contributions and all others who would pay at a rate of 35%. these rates begin, the higher rate begins at $75,000 for a single file or or $150,000 for married couple filing jointly. on the individual side, we have added a child tax credit, a new child tax credit of 2500 dollars per child per year. this is there to get rid of the parent tax penalty. we are familiar with the marriage tax penalty. that is a very -- an obvious feature and a well-known one. a subtle but less well-known feature is the parent tax penalty. the dynamic through which the federal tax system operating in tandem with our senior entitlement programs, social security and medicare, effectively taxes american parents twice. once people pay their taxes on the individual side and the payroll side and again, as they incur a substantial cost of raising children. according to one i believe lowball u.s. department of agriculture study, it takes $300,000 to raise a child to maturity. this does not take into account certain things that it should but let's assume $300,000 is an average cost we can live with. if you look at two hypothetical couples, you can see how this parent tax county hits america's moms and dads. imagine couple a and couple b may have the same contributions and mortgage patterns. imagine everything about them economically is the same with one exception. couple a has four children and couple b chooses to stay childless. couple b will not incur that expense. couple a in incurring that expense and raising their children is shoring up social security and medicare which are funded as a pay-as-you-go basis. today's beneficiaries of social security and medicare. it is today's children that will fund today's workers when they become retirees down the road. we believe this tax credit is an important step toward eliminating the tax inequity and unfairness of the parent tax penalty. on the corporate side, we reduced the rate down to 25% when we create a single layer of taxation. we do this in a way that we believe will promote economic growth and end the double taxation of corporate earnings by getting rid of taxation on dividends and also on capital gains. these are the basic highlights and i will turn the time over to my friend and colleague thomas senator rubio to give some additional explanation and that will answer some questions. [applause] senator rubio: thank you. we will be brief. i want to thank heritage for giving us this forum. i was asking jim as we drove in, with we drove by a spot where five years ago i held the speech about my nascent senate campaign. the reason we had it there is no one would let us use the facility because i was not supposed to be running or winning but jim demint found us a small sidewalk space where we held this press conference and the rest is history. it is good to see you and thank you to heritage for inviting us here, giving us the opportunity and all the scholarships [inaudible] two points i would make, the 21st century is a dramatically different time than the air i grew up in an mike and everyone else in this room. we do not operate in a national economy. we are in a global competition with economies that are competing with us for talent, investment, ideas and we want to make america the single best pace -- place to invest. a a lot of it has to do with the regulatory systems in this country which serve as a significant impediment but our tax code does, too and we have talked about that repeatedly. we have a tax code that has the highest combined corporate tax rate on the planet. we can no longer afford to do that at a time when other nations are going out of their way to become a friendlier environment for investors who it should not surprise us to open the taper and see another iconic american company making decisions they need to make to be in a friendlier environment. we have taken steps in this proposal to be pro-growth. we want our economy to be dynamic and vibrant. we want to be the single best lace in the world to create jobs and we want to tax code that says the more you innovate and invest into the american economy, the lower your tax per and will be. that was the purpose of our program approach to this matter. the reason why that is significant as we honestly believe that if we can create an environment where america can compete globally with anyone from the standpoint of how government treats business activity, we honestly believe the american people will do what they have always done. they will create millions of better paying jobs. which is critical because of the second point we wanted to emphasize and that is the cost of living. the bottom line is there are millions of people who have the same job they had 10 years ago. 10 years ago, 15 years ago after they paid all their bills, they still had some one left over to save for retirement, to save for their children's college expense. the same people with the same job are often living paycheck to paycheck. one unforeseen expense away from disaster. if the refrigerator breaks, if the engine on the carb lows out, they have no idea where they will get the money to pay for it and that is a real problem for our country. because everything cost more. we have expenses we did not used to have and paychecks have not kept pace. part of something that is having a vibrant and robust economy that creates better paying jobs so that people are not making $16 an hour, they are making $30 an hour or $32 an hour. we need those better changing -- better paying jobs. we learned a lot about the disruption [inaudible] it is a extort nearly disruptive time. it is creating extraordinary opportunities. we have a chance to replace the job lost and -- with better paying jobs with the higher quality of life, more professional for film and, more opportunity for management, and better pay. the second aspect is allowing people to keep more with a earned and this is problematic for working families that are trying to raise children. senator lee has done a good job of explaining to you the costs associated of raising a family and the contribution that makes for america's future. these are america's future taxpayers. it is important for families in the 21st century to keep more of their money so they can apply that not just to the cost of today but to the opportunities they want to give their children tomorrow. here is another dynamic that is often lost in the mix. there are hundreds of thousands if not millions of companies in america that hey there taxes on the personal rate. if you are starting a business out of the spare bedroom of your home not only are you doing so is -- violation of the zoning code you are probably paying a tax rate significantly higher than your larger competitors because you are a pass-through. you pay your business taxes on your personal rate. one of the things we do in this plan is re-create what he between a corporation and a pass-through which are not always small businesses but invariably they are. we create parity between them and the tax code and that means a lot for people who are operating a business out of their home for out of a one desk office or have two or three employees. i would venture to guess that today, most of not all of you and us room today had some experience at some point with a pass-through entity as we do business and the way you employ people. and the way you employ yourself and creating that parity is important. we can get more into the details of the plan but here is the bottom line. it is goat -- good to go back in history. at the beginning of the 19th century, the 1800s, america was still largely an undeveloped economy. written was the single largest economy in the world, the most powerful. the u.s. was so large -- still largely an agrarian society. some decided we want to capitalize on the opportunities of this industrial age. america was the most powerful economic force less than 100 years later. that generation not only confronted the challenges but capitalized on its opportunities. i would argue to you that we are now living through a time of transition is rapid, and dynamic, and impactful and perhaps more disruptive than the industrial revolution was. you see that every single day. every time you go to the checkout counter of a grocery store and you are swiping euro and barcode on an automated machine instead of the cashew that once did it it reminds you a job that has been replaced by machine. someone had to install that machine. someone had to design it. someone had to build it. someone has to retain it and someone has to be working to replace that machine. we need to be the economy that does those things. we need to create cup -- opportunities to become engineers and allows the receptionist that a law office to become the paralegal making 50, 60, 70, 80 thousand dollars year. a lot of that is reforming higher education but a lot of that is creating an economy where those jobs are created. we want to be the place where they build these machines, where they design the software, where we employ the technicians that repair and we want to be the place where the innovator's lives that are working on the new 21st century machine that will replace the one that is in place and to do that, we have to have a tax code. along the regulatory code and other things we're working on. we have to have a tax code that makes us globally competitive and that is what we endeavor to do in this plan. this is a white paper working product, it is the starting point of what will be an important engagement to do something as big and important as tax reform cannot be a take it or leave it proposition. we are look -- listening to some good ideas and our hope is from it we can arrive at a census -- a consensus about what a 21st-century tax code looks like. thank you. [applause] david: we now have time for some questions and answers but first i would like to say that the heritage foundation is a 501(c)(3) public policy research foundation. we do not endorse candidates or get involved in political campaigns. i would ask that you limit your questions to public policy, preferably the subject matter of this event tax policy. with that, who would like to ask their question? this gentleman. if you would, please wait for the mike and state your name and institutional affiliation. >> i am an attorney here in washington. in the introduction to your proposal you listed only two things that you were going to allow to be deducted from personal income taxes. charitable contributions and mortgages. was leaving out deductions for state and local property taxes just misspeaking or do you intend to abolish that production which would hurt families in or mislead, especially in places like new york, new jersey california, where state and local property taxes and income taxes are catastrophically high now. senator rubio: i come from a state that has property reform and state taxes. over nine out of 10 americans the overwhelming majority in its total will save more money under this plan than they are saving today on the tax code. any sort of effort to simple fire tax code and limit it will require us to look at different exemptions and remove them in exchange for lowering the rates on people and that is what this plan does not on that -- just on the tax code side. it would -- what you are concerned about is people are able to write off the expenses of their property and sales tax on their tax code, off the tax liability they have. under this plan, they would save as much if not more than they are saving under that existing system and that is not taking into account the economic aspect of the plan which would also create increases and take home page -- pay for hundreds of millions of americans. >> there is a problem with excessive taxation at the state and local level. we think this is a way of putting the attention where it out to be which is with the state decision maker. >> hi, i was just curious if you had any reaction to the score that you received. the plan would lose 14 -- $414 billion a year and over the first 10 years it would lose $1.7 trillion. do you have any concerns about what that 10 year phasing would do to the economy? senator rubio: i think when you look at the economic growth, this is leveling the laying field, this is removing disincentives that we have for business formation. this will help the economy and i do not think the american people are likely to complain overwhelmingly about having their tax burden reduced. we did design it with the understanding that it would amount to a cut, that it would be somewhat revenue-negative, yet we think this is good for the economy, this will stimulate economic growth and over time this will more than pay for itself. anything that enhances freedom and is profamily and progrowth is going to be good for our country and good for our economy. senator rubio: that is a great question. you cannot -- it is not fair to score a progrowth tax plan on a static model. because you are taking away from it is most important element which is it will grow the economy. we have a serious debt problem in america. when that we can tax away out of it -- our way out of it, you cannot tax our way out of it. if you confiscated money you could not make a dent in the long term debt. it is the only way to bring the debt under control. you have to do two things and do them simultaneously. you have to grow your economy so your economy is lower than the share of debt and second you have to hold the line on spending. that is why this plan is the growth side of the equation. this plan is designed to create the dynamic growth that we need not just to fuel the american economy but to create the revenue for american government to bring stability to spending. we still have to deal with the debt problem. irrespective -- if this was a tax increase plan you would still have a problem with the debt because you cannot realistically raise rates to any level to deal with the debt. we still have to look deal with the long-term drivers of our debt and that is medicare and social security and medicare that is -- as currently structured our unsustainable. that is a separate conversation and an important one to have. people in my generation and mike lee's generation will have to accept that social security will look different than our parents'. if we stayed doing what we are doing now, the math is simple. these programs bankrupt them selves. we are going to have to have in this country an effort to reform those programs so they exist without changes for our errands and grandparents and so when i retire and mike lim retires and many people in this room retires we will still have the best care and social security system in the world but it will look different from our parents' and it will be sustainable. you have to do both. [applause] >> thank you. i thank senator rubio and senator lee. i have up -- a trouble with the flat tax rate that senator rubio talked about. and the couple up to 150. and after that it would be 35%, you said, so that is exactly where my trouble is because i believe 90% of our middle-class income falls right there in 150 or 200. would you be taxing 99% from middle income class, 35% when the 1% will still pay 10% tax? how does make -- how does that make the difference? i also have trouble with senator rubio talk about the health care system. the four double health care act is the answered to the health care spending right now and i believe plus with many other programs especially r&d, research and development will bring us better jobs and competition with the global market, especially with china and many other rising powers. so why would we cut the r&d and why would we attack the affordable care act? if we promote that current growth trend, we would cut the deficit more than 50% in 10 years. thank you. senator rubio: thank you for your question. this was one of the things we took into account when we started developing this plan. we did not want a tax plan that would produce a tax increase for the middle class. we wanted something that would help the middle class and help grow and expand it. we have data that can show you this and charts. almost no one in the middle class would see their tax bill increase. those that -- very few that did would see only a slight adjustment there but very slight. this is not a middle-class tax hike. this is a middle-class tax cut. and would be very progrowth and we are attempting to level the playing field here. we have charts to back that up. senator rubio: we believe and have seen the evidence that it would cut taxes for over 90% of americans, some of them quite significantly. it is impossible to do that and raise taxes on the middle class because 90% of americans are not in the top bracket or wealthy. the rates alone are not the basis of the tax liability. it includes the personal deduction and the deductions we allow that are quite generous. we are removing the marriage penalty. we are increasing the per child tax credit. there are all sorts of other things that the people at the 15% bracket are paying less than the 10% bracket because all those things that are built-in and you talked about the health care law. it is not the topic of this conversation per se but we have to understand its impact on the tax code and on individual americans. it is true that there are people who are signed up and receiving obamacare through some form or system. depending on where they live and how they applied for it. it is also meant -- true that many are settled with high deductibles and copayments. they cannot see specialists near where they live. they cannot see the doctor they want had access to. there are -- the only way to make this cost effective is to reduce spending on innovation and health care because reimbursement rates will be crunched in order to he able to -- be able to parcel out health care in a way they find sustainable. that will lead to cuts in innovation and medical and in provider and networks that are available to patients and to top it all off, we are on the verge of bailing out a bunch of companies that went into these exchanges and are losing money. other than that is is working quite well but these are major impediments to the future of health care for millions of americans. >> how about over here, this gentleman. >> thank you. senator rubio, you have a lot of fans in taiwan, even for your tax work. senator rubio: i do not have very many in beijing but that is ok. [laughter] >> could you tell the people in taiwan why tax reform in america is so important and if you could touch on the taiwan policy, so much the better. thank you. senator rubio: i do not know how i can link the two other than to tell you economic growth -- we want to be a dynamic economy again. we are engaged in a competition. there are millions that can afford to buy the products that we make and services we offer. the things that we innovate. we want there to be a growing and vibrant growing middle class but we want to be competitive in the global marketplace in terms of the [inaudible] there will be higher-paying jobs that provide more upward mobility created in the 21st century. how many will be created here versus somewhere else? there are dozens of economies that are creating a friendlier environment for investment and innovation. they have better taxes on investment, on companies they have a better tax system on innovation. even on the personal side, it is simpler to comply and you add to that regulation, the fear of by long-term debt crisis, etc. it is imperative to be globally competitive and that is true for countries all over the world and particularly for the asia-pacific region where is much of the economic activity will grow rapidly in the next century. >> the stillman. -- this gentleman. >> mike warren from "the weekly standard." a lot of conservatives consider tax credits to be tax spending. they preferred tax deductions. your plan takes the view that tax credits are the better way to go. what is the defense to conservatives who might disagree with that? senator lee: it is just wrong. look. those who look at it as a bad thing, try to describe the child tax credit as a subsidy, as a special interest giveaway or something like that. it is not. this is an offset to an existing penalty. to an inequity that exist under the current system. our tax code coupled with our senior entitlement programs produces a parent tax penalty that we are trying to offset. i am not certain that the child tax cut of that we provide completely offsets the penalty. it is a step in that direction and i wholeheartedly defend it for that reason. senator rubio: i am not saying this about our conservative critics that believe in a flat tax and that is an attractive argument to make and there are elements of this embedded in this plan but it is important to understand what the tax system is. there are two ways to view it. it is important to point this out. one view is the government is entitled to 100% of your money but we will let you know how much of it you can keep. the other view is we are entitled to 100% of our money and we will let you know how much we will send you. that is the view i adopt. families should not be penalized for having those additional costs and for them, they will send less money to washington than they otherwise would because they are making an extraordinary contribution to america's future by raising the people who will grow up one day in ma, invest, and fund the entitlement program's that are so critical to our seniors and retirees. >> next. yes, ma'am? >> ni think the two senators proposed tax reform today because you want to get the american house and order and many of your alliance in asia actually are pretty worried that [inaudible] rising china and that.. do you have a confidence about the u.s. presence in asia and especially friends in taiwan are worried that you are able to maintain stability in cross straits with rising military muscle. do you have any comment? senator rubio: america is not in decline. we have a time when we have a bad president but we will overcome that. the second time -- point i would make is our alliances in the asia-pacific region are critical. i am a full that china's rise will not just bps pulled -- peaceful but fair. they will have to decide how to meet their peoples expectations. will they meet it with a crackdown or an economic opening? they are leaning in the direction of a political crackdown and that is apparent given all the other challenges they face internally as a nation. they have a very serious demographic problem. they have a serious environmental degradation. they have serious political problems. and part of the danger in all of that is they have turned toward nationalism as you see in the construction of, they are basically building islands to stake out their illegitimate claims in the region. it is clearly about our defense alliances but our economic links as well. we have a strong interest in increasing trade, commerce, and interaction with our allies in japan and south korea, in the philippines, in taiwan. part of that is america has to have a strong and robust economy. my message to our allies in asia is, the american people are ready to enter a new american century. they need leadership to give them the chance to do that and if they do, american will be -- america will be stronger than it has ever be and our allies will be firmer and more stable than they have been. >> this gentleman. >> from fox news channel. you have heard that could -- criticism that conservatives are saying about tax cuts not going deep enough for the top bracket. i wanted to get your specific reaction and also the editorial from "the wall street journal" -- i want to get this quote right. " a proponent that the reagan tax cutting agenda is a political dead-end and the party must redistribute revenue directly to middle-class families." your reaction to that. senator rubio: i will put them down as undecided on the tax plan. i do not think conservatives -- it comes down to the child tax credit and i would say two things about that. if we eliminated this tax credit the most he would get was maybe 2% reduction in the rate if you want to reduce [inaudible] this is not a redistribution. this money does not belong to the government in the first place. there is a penalty for those who are raising children. senator lee described it in the outset. he described two identical families, one raising four children and the other making a decision not to. the one with children has additional costs but they are contributing to america's future and the tax code does not recognize that. you cannot redistribute what already belongs to.

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