Well, good afternoon, everybody. I want to welcome you all today. I am peter russo, i am the director of Congressional Affairs at the Cato Institute and i want to thank you all for coming. You were at a capitol Hill Briefing entitled major tax reform in 2017. Before we begin, if youre watching via cspan or the live stream and would like to join the conversation, wed love to hear from you, so please tweet comments and questions to us and our panel at catoevents. Catoevents. This spring the Mercatus Center released this, if youd like additional copies, please contact me after the program, ill be happy to hook you guys up. Mean while, fully searchable pdfs are available at cato. Org. There is a chapter in here on federal tax reform and the tax treatment of health care and as well as the importance of preserving global tax competition. With that i want to introduce catos Chris Edwards, director of tax policy studies and editor of www. Governmentdownsizing. Org, before joining cato, senior economist on the Congressional Economic Committee and author of downsizing the federal government and coauthor of tax revolution. Chris . Thanks a lot, peter. Thanks a lot for coming here. I think some of you might have had to avoid the president ial motorcade there out on independence avenue, so that was a bit of a nuisance, but youre all here, so thats good. Im going to provide a brief overview of tax reform and then introduce our three speakers today, j. D. Foster, Jason Fichtner, and ryan bourne. Well, President Trump and republicans are pursuing tax reform. The basic idea is to cut individual and business tax rates, to close some loop holes, and to improve the treatment of savings and investment. So why do we need tax reform . Well, tax reform can spur more Economic Growth, which will raise Living Standards for everybody. Tax reform can simplify the code, and tax reform can also increase fairness by creating more equal treatment between taxpayers. The other reason we need tax reform is that we have not had a major tax reform since way back in 1986. The world has dramatically changed over the last three decades. International investment has exploded, entrepreneurs and wealthy people and businesses can have far more choice about where to invest in the Global Economy these days. We want businesses to locate here in america, so we need a competitive tax code to make that happen. So if you look at Corporate Taxes, the last time we cut the Corporate Tax rate was back in 1986. Before that our combined federal and state Corporate Tax rate was about 50 , which was about the average of the oecd industrial countries of the time. So then we slashed our Corporate Tax rate in 86, but that launched sort of a global revolution in Corporate Tax cutting. Rates have plummeted. The average oecd Corporate Tax rate has been slashed in half since the mid 80s from 48 down to just 24 today. Weve got the highest rate in the world at 40 , when you include state taxes. Many of you have probably heard that ireland has a 12. 5 Corporate Tax rate that attracts a lot of investment, but hong kongs got a 16 Corporate Tax rate, taiwan and singapore are just 17 . So if youre building, you know, a semiconductor plant, for example, would you put it in the United States and pay 40 or put it in taiwan to pay 17 . Even some European Countries have remarkably low Corporate Tax rates. Portugal, what used to be kind of a real leftist country these days has a 21 Corporate Tax rate, and sweden, which is the supposedly socialist country that a lot of american liberals admire has a 22 Corporate Tax rate. Ryan will discuss that the uk has chopped its Corporate Tax rate to just 19 today. So, you know, what are we doing here . Our 40 tax rate makes absolutely no sense. Looking at the individual income tax, again, rates have fallen around the world over the last couple decades. Back in the mid 80s, the average top oecd individual rate was 64 . Back then our top individual rate was 55 . So we had we had an advantage on that for a while. So we cut our individual rate back in 86, but other countries started cutting, as well, but we kept our advantage in individual income tax rates for most of the last three decades up until 2013. The deal that ended part of the bush tax cuts pushed our top individual rate back up again, and our rate now with state taxes is about 46 , which is above the oecd average. Were a high income tax country. This is a problem. High rates at the top end really matter, because they punish the most productive people in the u. S. Economy. Entrepreneurs and Brain Surgeons and venture capitalists, people like that, are very responsive to tax rates. Also a large amount of business income flows through the top brackets in the tax system, so high tax rates means less investment and less work effort by the most skilled people in our economy. So thats the overview today, and im going to introduce our three speakers, then turn the podium over to j. D. First. J. D. Foster is chief economist at the u. S. Chamber of commerce. Before that, j. D. Was a senior fellow at heritage foundation, and before that a chief economist at the omb and adviser at the u. S. Treasury. In the 1990s, j. D. Was head of the tax foundation, where he was my boss. J. D. Was a very good boss and i learned a lot from him at the time. J. D. Also worked on capitol hill for a number of members. He received his ph. D in economics from georgetown. Next after j. D. Well hear from Jason Fichtner. Jason is a senior fellow at mercatus out at george mason university. He focuses on tax and budget policy. Jason was Deputy Commissioner and chief economist at the Social Security administration. He was also a senior economist at the joint economic committee, where i was a coworker with him. He has a ph. D in Public Policy from virginia tech, and hes the author of the hidden cost of federal tax policy, which looks like that, which is an excellent overview of our topic today and is actually free on the internet, so thats a pretty good bargain. Finally well hear from ryan bourne, who occupies the evan scharf chair for understanding of economics at cato. He researches all kinds of Economic Issues, including tax policy. Before joining cato, ryan was head of Public Policy at the institute of Economic Affairs in london and also the head of Economic Research at the center for policy studies, also in london. Ryans written extensively on Economic Issues in uk newspapers and he holds a masters degree in economics from university of cambridge. So with that, im going to hand over the podium to j. D. Thank you, chris. Hello, everybody. And in about two weeks we will be celebrating memorial day, and you may find yourself at some point over the weekend watching a ball game. Maybe a golf match, maybe nascar, whatever your preference. In the course of watching that program, theres a high likelihood youll see a beer commercial. Also a high likelihood youll see car commercials. Those car commercials will be along the lines of somebody driving on a winding road, we get to do that a lot in d. C. , out on the open road advertising this is the great memorial day sale, low Interest Rates on loans, big slashing of prices. Why do they do that . Why advertise that way . Because people respond to prices. Prices align what happens in our economy, aligns supply and demand. People and businesses respond to prices. What youre not going to see in all likelihood are any car commercials or any others saying my car is just as good as that guys car and it costs 5,000 more. Youre not going to see a lot of advertisement advertising people have higher prices than somebody else. May seem kind of obvious, but the u. S. Economy has now for a great many years been advertising to the world come to the United States, we have the highest tax burden. Not in total tax burden, but in terms of rates as chris was just describing. Weve been advertising for years that we have an extraordinarily punitive tax system. We also have been imposing a lot of regulations over the last eight years on our economy thats also been telling the world come to the United States because were making it a lousier place to do business as we can. Well, that, obviously, is changing at the moment. Were trying to get it to change in tax policy. Through 1986, the last great Tax Reform Act, we learned and then reminded the rest of the world how important low tax rates really are. And shortly after the 1986 Tax Reform Act, we forgot and stayed in place pretty much for that period till today. Meanwhile, the rest of the world learned the lesson and they kept applying it, reducing rates over and over, one country after another. In fact, recently in france, emanuele macron was elected the new president. He ran as a centrist. Previously he was in the socialist government distinguishing himself by calling himself a pro business socialist. I guess thats how you define a centrist in france, is a pro business socialist. Its france, what can i tell you . France understood, macron understood, they needed to lower their rates. Their top rate of Corporate Income is already below ours, 33. 33 . He ran as a french socialist, now centrist, to reduce the rate to 25 . Its amazing. Even the french get the fact that youve got to lower your tax rates to be competitive. In the recent president ial election, bill clinton gave a speech and noted, yes, when he was president he signed a bill raising the tax rate on Corporate Income, but he did so to make that rate competitive with the rest of the world. We pulled our rate down and the rest of the world had to compete in the process of reducing their rates. So he said it was okay to raise the rate. But now its not. Now we have uncompetitive tax rates on business income and bill clinton during the Campaign Said we need to reduce these rates. I think thats a pretty good observation on his point, and thats really from a business standpoint what tax reform is all about. Its not a complicated exercise. Its pretty straight forward. First thing you have to do is weve got to get significant rate reduction. Im not going to say how far down. Its sort of like youre going to go buy a car, how much of a discount do you want . How much can i get . How far can i bring the rates down . Thats the issue. Not just for corporations, but for all business entities, pass throughs, as well as corporations. If you want the u. S. Economy to start advertising to the rest of the world, this is where you want to do business, it starts with getting the rate down. We need a more competitive capital consumption system, depreciation system. We need to adopt expensing. We have for far too long had a system of taking account of when a business buys a piece of equipment how you charge it off over time. And the effect of that has been along with high tax rates to produce a highly elevated whats called cost of capital. Cost of capital is a term you should be hearing a lot of going forward, and really all it does is it puts in one summary statistic the sum total of all tax policies affecting an investment and says how much do these various policies raise the price that you have to pay, that is the earnings that you have to have on that piece of capital . So you have a basic level of earnings, you have to have to make an investment worthwhile as a business, and then you start figuring out, okay, this tax is going to raise it, this tax is going to raise it more, this tax is going to raise it some more. The sum total of those effects is the cost of capital. What we want to see happen in tax reform is the cost of capital to be brought down as far as we can, reducing the tax rates and expensing are the two key elements of bringing down the cost of capital. The third piece thats core to tax reform is fixing the way we Tax International income. 20 years ago or so, the industrialized world was pretty mixed. About half the countries in the world did what we do today, adopting a worldwide tax system, and the other half adopted a territorial. Back when i was with chris at the tax foundation, we used to run International Conferences and we would talk about the need for a territorial system and half of the countries we visited would nod yes and the other half would say thats crazy, and the prevailing thought in the United States was thats crazy. Well, turns out we were right. Almost everybody in the world now has some variation on a territorial system. What is a territorial system . Well, one way to think about it is its kind of like a las vegas commercial. What happens in vegas stays in vegas. The income thats earned where its earned is taxed where its earned and only there. Thats all territorial means, is Company Earns income in france or germany or japan or china, wherever they earn it, its going to be subject to whatever taxes are imposed in that jurisdiction. Were not going to tax it again in the United States. Its as simple as that. Much simpler system. You might think of it in terms of Corporate Income getting an exclusion for dividends paid, so foreign subsidiary pays it to u. S. Parent, youre going to exclude that income from tax. Why . Its taxed over there. If youre adding tax to it, youre making that u. S. Operation abroad less competitive and because operations are integrated internationally, thats the u. S. Operation works closely with the foreign operation, if you make the foreign less competitive, you make the u. S. Operation less competitive. Thats the reason why even socialist countries in europe adopted a territorial system, all of them, because they know they need to compete on a global scale on the global scene and the only way to do that is to have a competitive tax system. So those are the three key components. There are other things that can be done in part of tax reform, dealing with the estate tax and other elements. Those are all important. This core elements of tax reform, significant rate reduction, expensing, and a territorial system. And right now if youll notice when we talk about tax reform, whether its the blueprint or President Trumps proposals, they tend to revolve around those three pieces, and thats a big part of the reason why we have a chance of getting this done fairly quickly. Depending how you want to look at the calendar, i argue the 1986 Tax Reform Act was the culmination of an eightyear exercise that began with a democratic senator from texas, later treasury secretary, championed and got through and got people started thinking about how to redesign the tax system and thats what jack kempe and bill roth and others ran with that got us first the 81 tax cuts, then the tax reform, it was a long process. Part of the reason it was a long process was that tax reform bill was an incredibly complicated piece of legislation because they tried to solve every single tax problem that they could that they had identified, whether dealing with limited partnerships or pensions or what have you. This was a comprehensive in the broadest sense of the term tax reform. If we go down that road right now, we have a still great chance of getting tax reform done probably some time in 2019 or 2020. If you want to get it done soon, which is what we need to do, weve identified the key elements, we need to keep it a very focused package. Whether the two or three or four major things we need to do to help the economy to get it to be stronger and what are the two or three major pay fors we need to deal with and that brings up the next subject of tax reform. Tax reform is great to talk about rate reduction and expensing and what were going to do for the economy, but we have to put the big boy pants on to do this. There are going to be revenue raisers, big ones, they are going to involve tradeoffs. Were going to have to balance, really think about if we want this enough to be worth this tradeoff, because you cant get a 28 or 25 or 20 or 15 corporate rate and comparable pass through rate by closing loopholes. You get 2 or 3 points by closing loopholes. If you want to close the rest of the difference, you have to do something thats going to be painful and thats where the tradeoffs come in. If you do it correctly, the tradeoffs will leave the overall plan pro growth and thats going to be our focus at the chamber. Theres going to be a lot of fights over the details of the rate reduction, how expensing is structured, how transition rules are applied and designed. A lot of these details, but the fundamentals are going to be what is this going to do for the economy . Comprehensive tax reform is ultimately about taking us from an economy growing too slowly to one thats going to grow up to its potential and raise its potential in the short run and the long run. Thats what its all about. And as long as this tax reform package looks like it will do that, u. S. Chamber is going to be supporting it and pushing for it. Where it can be made better, working to make it better, but ultimately the bottom line is we will not get caught up in the fractious fighting over the details of the pay force. The chamber and Business Community is ultimately going to focus on does this work for the economy, is it going to make it stronger . In effect, when were done with comprehensive tax reform, are we going to be advertising to the world, writing our commercials on memorial day baseball games to the whole world come to the United States, invest here, move here, u. S. Companies arent going to be looking to move overseas, they are going to be looking to move back. Foreign companies are going to be looking to move back because this is the place we want to be. Well be advertising to the world, this is where you want to informs, this is where you want to be, come here. For those that dont heed that warning, look out, because they are going to be competing against a country, businesses and workers, that are armed with a tax code that allows them to compete very effectively and we will take on the world and have a very Strong Economy going forward. So, thank you very much. Good afternoon. Again, my name is Jason Fichtner with the Mercatus Center at george mason university. I want to thank Chris Edwards and peter russo and, of course, the Cato Institute for having me come speak with you today and thank you all for coming out. Basically, we divvied this up, jason corporate, me individual, and then the uk experience to give you a sense of what happened and the lessons we can learn, but i want to start my time with general points on tax reform, provide you some Guiding Principles when thinking about tax reform, and then discuss how the house blueprint and President Trumps proposals sort of measure up to those principles. Im also going to sort of echo a few things j. D. Said because they are very important to sort of hit home. First, it really is important to notice that the United States tax code currently severely distorts market decisions and the allocation of resources. It is currently impeding both potential Economic Growth and potential tax revenue. It is in need of reform. Dont think we can do this later. We have to do this now. Were having discussions right now if we can hit 3 growth per year. Years ago we were discussing if we could do 4 . Weve lost the ability, so were getting lower and lower because were impeding Economic Growth because of our bad tax system. Second, economists generally prefer a broad tax base with lower marginal rates because its the tax rates that drive the decision of what to do next, more work, more saving, more investment in plant labor, equipment, intellectual property. A broader base is more efficient because youre not treating some forms of income or expenses more than others and creating bias. Based broadeners and lowering the rates. Again, i say generally prefer a broader tax base, but base broadening shouldnt be traded off for other provisions in an attempt to evade revenue neutrality that would actually raise the cost of capital. J. D. Kind of mentioned this, as well. For example, you dont want to trade off lower marginal rates for increasing the length of depreciation schedules. That would undo the benefit of rate reduction, so you have to think about it wholistically. Also, this is my personal take, because j. D. Brought this up, we shouldnt basically focus on revenue neutrality, especially on the corporate side, but rather we should focus on the right tax policy division, the Corporate Income tax right now is reading about 300 billion a year. Its not chump change. The reason its getting smaller and smaller is because corporations are moving income overseas. We know to bring competitiveness and job seekers, to bring jobs to america, need a lower rate and better tax system. I dont want to get in an argument, but i know revenues are going down because of tax systems. And focusing on what the right policy provisions are, competitive job creation, brings me to my third point. Provisions that just tinker around the edges, like antibase erosion and profit provisions will only exacerbate the existing problems we already have in the current Corporate Tax code. Theres an old saying, the road to tax hell complexity is paved with good intentions, so be careful of base broadeners and tradeoffs we dont do more harm than good. We have exhausted Economic Research that shows the more you tax capital or labor, the less you get. You want more labor, you want more capital, lower the rates. For efficiency we should tax income once, we should avoid double taxation. One sort of possible tax reform option we should be discussing more is the idea of doing corporate integration with individual income tax. Only people pay taxes. Ive heard way too often corporations arent paying their fair share. Corporations arent people. Only people, living people, can pay taxes, consumers, owners of capital, or workers. So if youre saying a corporation is not paying its fair share, youre saying workers arent paying their share or consumers arent paying their share or people that own stocks, which include pension holders. Corporations arent people. They dont bear the burden of attacks, only real people do. So thinking about some of these Guiding Principles, policy makers indeed not fly blind. We Start Talking about defining goals and principles. What do we want . Simplicity. Make it is difficult and costly to come ply with and easy to game the system. Make the tax code as simple as possible to increase compliance and reduce compliance costs, so simplicity is one. Next is equity. Policies intend to benefit or penalize certain individuals or groups, these policies result in immeasurable unintended consequences. Fairness is subjective but favor one group, President Trumps plan and chairman kempes plan both do that. It should be efficient. Because a tax code alters market decisions in areas such as work, savings, investment, job creation, impede growth, lower the rate, we should also be predictable. The negative effects the current tax code result not just from what it does today, but also what it may do in the future. Such uncertainty deters Economic Growth and investment. Heard about tax extenders every year, why do businesses want to invest if they are not sure the tax break is going to expire, so they hold off investment until they get certainty, so to sum up, broad consensus about which policies are most likely to promote solid sustainable growth, which are most able to fail. Lower rates, group loopholes, no double taxation and reduced bad incentives. Fortunately, on the individual side, the tax plans offered by chairman grady and President Donald Trump follow many of these principles. Chairman bradys plan consolidates three tax brackets on the individual side. We have seven right now. The lower would go to 33 , would effectively be a 0 tax rate, simplify by creating a larger standarded reduction, larger child independent tax credit, reduce the need for itemized so it makes it more simple, eliminate the alternative minimum tax, keep but improve the earned income tax credit and repeal the estate tax. President trumps plan, which isnt as detailed as the house blueprint, may have some changes, would consolidate down to three brackets, as well, 12, 25, and 35. So the highest tax rate would go to 35, its 39. 6 now. We dont know what income brackets they would apply to. With chairman gradys plan we know the dollar brackets, we dont yet know that with President Trumps plan. Were leaving that open to negotiation. It would simplify tax volume, it would double deduction for 25,000. Thats a significant standard deduction that would make tax filing much more simple. It would phase out most itemized deductions but keep charitable contributions, Home Mortgage interest, and Retirement Savings plans. The rest would basically go. Also repeal the estate tax. The top capital gain rate would go down to 20 , get rid of the obamacare tax. There is one potential issue, though, the escrow rate would fall to 15 . There could be some gaming going on there if we lower the pass through for s. Corps to 15 . If we do that, im going to incorporate myself as an s. Corp. And become an independent contractor to get a nice 15 rate. So we dont have to equalize the pass through rate with the corporate rate. We should lower both of them, which j. D. Mentioned, allow for a little differential. If we go 15 for corporate, 20, 21 on the pass through, 20 corporate, maybe 25, 28, but basically you want to lower them both, they dont have to be equalized. We have a once in a generation chance to do tax reform. We really need to do this. J. D. Made a good point of pointing out that the chamber is not going to focus on the nitpicky details here and there on revenue knneutrality, as lon as the plan overall is good for growth. Thats important to keep in mind. We need to discuss whether or not we do want to have revenue neutrality, deficit neutrality. For example, if youre concerned ability growth, it comes from the corporate side, not the individual side. Individual is good to do, but generally more political than growth oriented. Im willing to take a revenue hit on the corporate side and base broadening and pay fors on the individual side. Of course, its hard up here because everything looks as a package, so we have to look at the details and what goes into it, but it might be wise in some ways to separate our discussion and say the growth comes from expensing and lower corporate rates, lets do that, lets not worry about paying for that, lets do that because it gets good growth and talk about the individual reforms and say what do we want to pay for, whats that mean, and have that discussion, because all the growth stuff comes from the corporate side and thats what really does need significant performances. On the individual side, President Trump and chairman grady are close. I think theyll come to an agreement, but the corporate side is where we need to do some work and get agreement on so we can actually get reform done this year. Thank you. Thank you, chris. Thank you for the organizers of today. The cato team deserve credit for getting you all here. Thank you all for being here. As my accent probably implies and chris has eluded to, im relatively fresh off the boat from the uk, so im not going to patronize you by pretending to know the intricacies of your tax code, but chris has requested me to talk briefly about two areas where the uk has tried to reform where you might want to think about some of the lessons, and that comes on the corporate Corporate Tax reform and the taxation of savings. So as j. D. Eluded to, its widely acknowledged that Corporate Income tax is one of the most damaging forms of taxation. High statutory Corporate Tax rates, not only encourage businesses to locate elsewhere, but they also deter new inward investment from overseas and on the margin deter those new investments from Companies Already operating here as the high statutory rate raises both the average tax on profits and the effective marginal rate, which is what jason just outlined. So what does the uk know . Since 2010 the uk has substantially reduced its headline Corporation Tax rate. Weve gone from 28 to 19 today, with a plan to reduce to 17 by 2020. That forms part of a longer term trend that chris outlined. The uk, as soon as 1980, as long ago as 1980 had a rate of 52 , so at its current 19 after seven years of rate cuts, the uk now has the fifth lowest tax rate in the oecd and the lowest in the g7, and, obviously, considerably lower than your headline rate here. That doesnt tell the whole story of the reforms in the uk, which broadly come in two parts. In the first couple of years of cutting the rate, in order to make those reforms revenue neutral, the government actually broadened the base in a damaging way by reducing the generosity of depreciation allowances, so offsetting the rate cut by raising the cost of capital in other ways and actually the effective marginal rate on a new investment that broke even actually rose a little bit from 20 to 22 . So economically, though the statutory rate was being cut, and this was incentivizing new investments, with all other things the same, allowing companies to relocate in the uk, as well, the reform is not helping to stimulate that new incremental investment of companies in the uk because the effective marginal tax rate had actually gone up. Since then thankfully the government has focused on rate cutting and hasnt tried to offset the rate cuts with base broadening elsewhere. Overall, the package between 2010 and 2017 has been a very large Corporate Tax cut with only around a quarter of the static costs of the current offset by the less generous depreciation allowances and other antitax avoidance measures. To give you an idea of the scale of that tax cut in revenue terms, as a static cost it was about a third of revenues from when the rate started being cut, so this is not an insignificant tax cut. Now, as i said, the result is the uk is among the lowest statutory rates and average Corporate Tax rates around. Weve still got relatively stingy depreciation allowances in comparison with other countries, so our marginal rate is closer, but falling. But the long and short is our marginal effective tax rate is now 17 , and thats still lower significantly lower than the u. S. s 23 here. What has this meant for revenues . When 2013, the uk government dynamically scored the whole package and they said that with improved economic activity, faster Economic Growth, over 18 years would recoup somewhere between 45 and 65 of the static cost of the cut. You might imagine that might be higher here given your high statutory rate, and perhaps we can discuss later the estimates of that here. But actually early science suggest the official statistics, official forecasts may have underestimated the effects of the cut on economic activity. Nominal receipts fell significantly in the uk after the financial crisis and through to about 2013, but since the time the government has purely been cutting the rate and aggressively cut the rate to 20 within three years from 2013, they projected initially that by this year revenues would be about 38. 2 billion pounds. Actually, the outterm has been 50 billion ponds. Thats despite revenues from some other areas of the economy, offshore oil and gas falling pretty dramatically. Yes, theres been some offsets if other areas, attempts to clamp down on tax avoidance, but continued cuts to the headline rate dont appear to be leading to the falls in revenue predicted. And looking at the longest week of history, that probably shouldnt surprise us, over the last 30 years the late, as i say, has fallen from 52 to 19 in the uk, and revenues, although pretty cyclical, have tended to range between about 1. 7 and 3. 5 of gdp, currently around 2. 6 , which is exactly the same rate as seen in 1985 when the main rate of tax was 40 and the thatcher boom was well under way. The government appears to have been somewhat successful, too, in its aim to attract businesses to locate to the uk. Mcdonalds, starbucks, fear snack, which i believe is the Apparent Company of snapchat, and a range of other companies, have moved headquarters or significant parts of their nonu. S. Operations to the uk over recent years, and its locally that the government will continue to articulate that rationale given the need to remain open for business postbrexit and with International Coordination putting low pressure on the super low tax jurisdictions, i think the uk sees opportunity to get even more businesses to locate. So what are the two key lessons for the u. S. Of this experience . The first one i suggest is cutting the headline rate doesnt appear to have reduced rates anywhere near as much as expected. The second one is the one jason eluded to, though, which is base broadening to the extent you do it to offset the revenues lost through the rate cut should be done for economic reasons, not just to achieve revenue neutrality. Corporate income tax is a damaging taxes, and the uks experience shows that reducing depreciation allowances, making depreciation allowances less generous to allow the rate cuts can lead to tradeoffs between attracting companies to locate in the uk and actually stimulating new investment, and for the first couple of years when we cut the rates, we cut them in such a way we didnt actually incentivize more investment. Now the uk could also offer suggestions on savings, too. Most focus has been on business taxation, and i agree with jason that should be the priority, theres been relatively little discussion on the taxation of saving, even though the house plan suggests creating whats described as universal savings accounts based on legislation introduced by senator jeff flake and remittive dave brown. The uk has very similar accounts called individual savings account, or isas, as we call them, and they are incredibly popular. The broad idea of this type of savings account is this, comprehensive income taxes tend to double tax saving. Therefore, most income tax codes try to exempt saving from taxation on returns so the tax system doesnt discriminate in favor of consumption over saving, but most income tax codes tend to do this by exempting returns from retirement saving. A loan from tax. Theres no economic reason in principle why the tax code should favor certain saving for certain purposes than others. And for that reason both the uk and canada have set up more all Purpose Savings account with a very simple tax treatment. So contributions are made to these accounts after tax. In the uk up to a limit of very generous limit of 25,000 per person. No income tax is then levied on income from the savings and investments, nor a Capital Gains tax. Savers can access their accounts any time for any purpose without penalty, and investors are able to transfer their money between isa managers, fund managers, pretty easily. There are no lifetime limits on how much you can put in or earn tax free, so these are pretty much like supercharged roth i iras, the main difference theres no withdrawal fees or penalties, and basic economics would imply to us that the margin would encourage people who are indifferent between consuming and saving, more likely to favor putting that money into a savings account. These accounts are incredibly popular, especially for those who want to save but like the security of that liquidity that comes from no withdrawal penalties. 43 of the Adult Population hold these accounts. Compared to with about 20 , i believe, of adults who have roth iras here and 58 of those who own the accounts contributed to them last year. With a very high average contribution. Now, these accounts appear to be very, very popular with people of modest to low incomes, as well, about 55 of all those isa holders have incomes of less than 25,000 per year, and relative to their incomes, lower earners hold more in their isas than higher earners. The government has added some unnecessary complexities and we could spend all day going into those. Government tends to try to make things more complicated than they need to be, but overall, this tax reform has led to a tax system which is, for the vast majority of people, vast majority of earnings, neutral between consumption and saving and neutral between the purpose of saving, as well, and neutrality is a key principle that we seek from tax reform. What about the effects on saving . Well, theres lots of other things going on and youd imagine there would be a lot of displacement, as well, from ordinary savings accounts to these isas. So, theres little evidence overall that they might have increased the aggregate savings rate, but where they have had a big impact is helping to alleviate the problem on the margin of poorer people and people on modest incomes not having modest amounts of savings to call upon for contingencies. As i say, these accounts are popular across age groups and income levels, precisely because of their flexibility, which is why chris and i have wrote why they should be introduced here, too. Now, the proposal by senator flake and representative bragg would see individuals able to put up to about 5,000 per year after tax income into the accounts, which would then grow taxfree. But, you know, you could have a more generous starting point from that. Weve suggested actually you could make this 10,000, but at the same time use this as an opportunity to scrap a range of existing favored savings vehicles and introduce these accounts as part of a broader tax simplification measure. Now, you always have to be careful about taking lessons from other countries, and it would be very easy to look at whats happened in the uk and purely focus on the rate and perhaps not look at things that we did wrong in the first couple of years or look at the impact of isas and not look at the broad framework for the taxation of savings, including pensions. But i think in these two areas, even considering that, and as somebody whos come from the uk to the u. S. , uk has shown things that can be accomplished and perhaps some ways not to do things, as well. Thank you very much. Thank you, ryan. Were going to open up to questions now. To reiterate what ryan said on his last point, the idea of universal savings accounts, theres a house and Senate Legislation on that. Ryan and i have a new report on that that you can find on the cato website under either ryans name or my name. We think that these accounts ought to be part of tax reform this year. Yes, norm . Norm singleton, former legislative director for ron paul. So, what im about to say wont surprise anybody, given my background. I agree, i like most of the presentation. Mr. Foster, i agreed with almost everything you said until the very end when you started talking about revenue raisers. Theres three things that i found lacking in the presentation, so i want to make a point of and ask for your response. One, any idea of the moral and philosophical philosophy behind the tax system and tax reform . It seems like even conservatives and libertarians when they discuss this talk about in very technocratic measure that buys into the premise that the government has a claim and in many cases a first claim on our income before we get before those of us who actually go out and have earned it have it to spend on our taking care of our families, investing in businesses, and buying cato policy reports. Second, my second and related point is that is that in rearranging deck chairs on the titanic, i think that sometimes we get that the tax reform debate gets so caught up in revenue neutrality and this kind of feeds off the first one, that it forgets what most people are concerned about with tax reform, which is simplify the system and, secondly, cut my darn taxes. And i dont hear a lot of talk, even from the right of Center Policy community, about actually making sure that the total tax burden on the American People is lowered, instead of lets cut this tax for efficiency, versus raising these taxes because they are inefficient, lets get rid of this deduction, keep this deduction, instead of saying lets lower taxes. And the third point, which feeds from the first two, is the reason for that is it kind of ignores the elephant in the room, which is the other half of the fiscal equation, which is spending. I would respectively suggest, mr. Foster, if you want a tax reform that is revenue neutral or even in my case revenue actually revenue depriving of the federal government, that we Start Talking about no tax reform until Congress Gets serious about cutting spending, which is difficult to do, and but it is a fact, as dr. Paul has often said, that a tax cut is good, always good, but a tax cut without spending cuts is merely a temporary tax cut, because eventually in terms of the debt thats imposed, were either going to pay it in terms of future revenue raises or in terms of the inflation taxes that the Federal Reserve monetizes the debt in order to help the government deal with crushing Interest Rate payments and other negative effects of the deficit. Go for it, j. D. Thanks. I think you make a great point. When you have a tax reform that is a significant tax cut, were running budget surpluses, that wouldnt be an issue, but were running a budget deficit today we most easily talk about in fractions of a trillion, over half a trillion that will double without any changes in spending. That makes it quite accurate what you say that if you have a major tax cut now without the spending cut, youre just promising future tax increases. In fact, were going to face a lot of pressure because of those budget deficits for future tax increases. So we have to address it if you dont want the tax increases, youre going to have to address it with spending cuts. Congress has been attempting with republicans in control, with democrats in control, with mixed governments, for some decades now to cut spending. Great to have that discussion. We have Social Security and Medicare Trust funds going broke and just over the budgetary horizon, just over ten years, technical expression is they are going to be exhausted and that programs cant function anymore in just a short period of time, yet Congress Seems reluctant to do anything about that at this point, so we could, in fact, hold tax reform hostage to getting the spending cuts necessary for tax reform to be a massive tax cut. We could do that, in which case our projected date for passing of tax reform probably would be somewhere around 2015 excuse me, 2025, 2035, 2045. Id rather not wait that long, so taking what you said about the need to get spending down, especially given our budget deficits and the how much easier it would be to do comprehensive tax form if we didnt have all these pay fors to pay for the rate reduction, i dont think thats where we are right now. If you can change the political calculus, then we can change that discussion, but thats not where we are right now. Otherwise, one exception ill leave the philosophy to the philosophers and one exception is the concept of transparency. What we have now is a system which in many respects is extraordinarily nontransparent to people who are paying tax. You all experience this every time you get a paycheck. Look at that paycheck and you see about the Social Security tax being collected and say, oh, my gosh, thats a lot of tax. Well, guess what, its twice, but they dont want to let you know that. And if you introduce legislation saying, no, were going to have both halves of the payroll tax show up on your pay stub, youll have a very clear indication who wants transparency and who likes hiding the ball. I raise that because thats exactly, as jason mentioned, whats at issue with business tax, not just Corporate Income tax, but all business tax. No business ever paid a tax, they collect tax. They collect tax on somebody else and you want to know who pays the tax . Well, we dont know. We have estimates in the aggregate as shares of the Corporate Income tax between capital and labor, but that doesnt mean you know you paid it. Everybody in this room paid business tax, but you have no idea how much. If youve ever saved a dollar and put it in a 401 k and put it in a stock, you paid Corporate Income tax. Can you tell me how much . You never will, because the essence of the Corporate Income tax, the reason its so perfect for the nature of the government we have, well all acknowledge Corporate Income tax collects a fair amount of money with relatively modest expense in doing so. A lot of expense in terms of economic effects. Why do we like taxing businesses so much . Because nobody knows who paid the tax. Thats my one philosophical note for the day. Okay. Other questions . I would build on that a little bit, transparency is very much a libertarian principle, norm, so i think youre absolutely right about spending, but i think there is a lot of pro libertarian stuff you can do with the tax code. Growth, more growth is more freedom, more transparency is better government. Yep . Richard National Foreign tra council. Im a veteran of 1986 with j. D. Within the parameters of existing deductions, the fact that the president s plan leaves intact the deduction for Home Mortgage payments, and the fact that none of these plans touch the deduction for Employer Provided Health care. Can you comment on this . Youre being set up. In terms of economic efficiency and transparency. Well, ultimately, this isnt an exercise done by a bunch of tracks economis tax economists. There will be an exercise hopefully guided by tax economists, hopefully to some extent. But ultimately it is a political exercise. If you want rate reductions, you have to have payfors. The exclues for Employer Sponsored Health insurance is an extremely politically popular provision of the tax code. Thats reason why it is not being touched. The Home Mortgage Interest Deduction in the president s plan and the blueprint is not being touched in part because it is politically powerful but it is also not being touched because unless you address the way Interest Income is taxed, it is actually the correct solution. As long as youre going to tax Interest Income to the recipient, symmetry that is neutrality demands that you allow a deduction for that interest expense, of any kind of interest, whether thats consumer interest, business interest or Home Mortgage interest. We do have in the blueprint a proposal to reduce the or eliminate deduction for net interest expense at the business level. You do not get a rate reduction without doing what i call some damage to tax theory in the base. That elimination of the deduction for net interest is not good tax theory. It probably or may be necessary to get the rate reduction. If somebody else comes up with a different Revenue Source thats better, then maybe we dont need that one, better being defined as less damaging to the economy, less damaging to the cost of capital and less damaging to future prospects. Right now net interest is on the chopping block but that doesnt mean it is good tax policy because we continue to tax Interest Income. If youre going to tax Interest Income you have to allow deduction. That establishes symmetry, that establishes neutrality. Were going to continue to tax Interest Income for a lot of kinds of savings. Maybe fewer if were successful with chris proposal for savings. But for a lot of Interest Income is still going to be subject to tax which means you still leave that deduction. To norm and or richard, want to bring the two questions together. Politics is the art of the possible. My fear is that we have not been doing a good enough job laying out the moral case for why our current tax system is wrong in the first place. Should we tax consumption, not income. We should be talking about the idea that income is based on your property and you own that and such should come first, and you own it, not the government. We are not make being the case about distortions in Home Mortgage interest. The jds point, if we allow deduction for that, i shouldnt have to pay tax or interest to the bank for loaning them money. We are giving up some of the moral high ground by not talking about the tax code or distortions in the current code. To the idea about revenue nye neutrality, deficit neutrality is what offsets some of the deductions in revenue coming in. When we Start Talking about revenue neutrality, not deficit neutrality, we are in a trap in which we allow one party to raise spending and we get caught, now weve got to keep that spending level up with revenue. Well always get second or third best tax reform. I understand were going to make compromises and i am okay making compromises. But lets talk about the morality first so thats known and we have a better discussion of what we are giving for those tradeoffs. My really quick take, richard, i think a reasonable compromise for tax reform this year would be capping the mortgage Interest Deduction, the dollar cap and capping the exclusion for Employer Provided Health care. I think thats a reasonable first step to take. Okay. I think weve exhausted the questions. Thanks a lot for coming be everybody. Thank you. [ applause ] taking a look at congress this week, the Senate Returns at 3 00 eastern where theyll consider Jeffrey Rosen to be deputy transportation secretary, and rachel brand to be associate attorney general. Procedural votes to advance their nominations are set for 5 30 p. M. Eastern. The house returns tomorrow for le legislative business to coincide with National Police week, theyll take up bills involving law enforcement, including legislation making the murder or attempted murder of police an aggravating factor in determining Death Penalty sentences. Also on the agenda, new sanctions on the Syrian Government and individuals who do business with them. Watch the house live on cspan and the senate on cspan2. And donald trump is getting ready to travel. The president leaves this friday, may 19th, and will head to saudi arabia, israel, and rome where hell visit the vatican before going to brussels for a nato meeting. Hell end his trip in sicily, italy, for the g7 summit. Tonight, on the communicators, a look at small town and Rural Broadbandley blo. Miss bloomfield talks about her organizations desire for Rural Broadband expansion to become a greater priority within the trump administration. Shes interviewed by Communications Daily Senior Editor david kaut. What would you say your biggest priorities are right now either in congress or at the fcc . How do we make sure that broadband is considering part of any infrastructure package that is considered. I look at it and i think, you know, super highways of the future . Its really about broadband. It is the ability to do the teleworking to bring jobs and commerce in. Public safety, education, telemedicine, all of the initiatives that really kind of keep our country robust can really be derived from broadband. How do we make sure policymakers see infrastructure beyond just a road and a bridge. Watch the communicators tonight at 8 00 eastern on cspan2. Cspan where history unfolds daily. In 1979, cspan was created as a Public Service by americas Cable Television companies. It is brought to you today by your cable or satellite provider. The environmental and Energy Study Institute hosted a Panel Discussion recently on infrastructure investment. Speakers outlined ways to make infrastructure more resilient and provided recommendations for financing infrastructure projects. Also, the American Society for Civil Engineers executive director, thomas smith, discussed the findings of his groups 2017 infrastructure report card. This is about an hour and 20 minutes. Good afternoon, everyone. My name is carol western rner. Im executive director of the environmental and energy stunnedstunned steweddy insuran study
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