Sen. Max Baucus Holds a Hearing On Tax Reform

Political Transcript Wire › December 06, 2010

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Sen. Max Baucus Holds a Hearing On Tax Reform

SENATE COMMITTEE ON FINANCE HOLDS A HEARING ON TAX REFORM

DECEMBER 2, 2010

SPEAKERS: SEN. MAX BAUCUS, D-MONT. CHAIRMAN SEN. JOHN D. ROCKEFELLER IV, D-W.VA. SEN. KENT CONRAD, D-N.D. SEN. JEFF BINGAMAN, D-N.M. SEN. JOHN KERRY, D-MASS. SEN. BLANCHE LINCOLN, D-ARK. SEN. RON WYDEN, D-ORE. SEN. CHARLES E. SCHUMER, D-N.Y. SEN. DEBBIE STABENOW, D-MICH. SEN. MARIA CANTWELL, D-WASH. SEN. BILL NELSON, D-FLA. SEN. ROBERT MENENDEZ, D-N.J. SEN. THOMAS R. CARPER, D-DEL.

SEN. CHARLES E. GRASSLEY, R-IOWA RANKING MEMBER SEN. ORRIN G. HATCH, R-UTAH SEN. OLYMPIA J. SNOWE, R-MAINE SEN. JON KYL, R-ARIZ. SEN. JIM BUNNING, R-KY. SEN. MICHAEL D. CRAPO, R-IDAHO SEN. PAT ROBERTS, R-KAN. SEN. JOHN ENSIGN, R-NEV. SEN. MICHAEL B. ENZI, R-WYO. SEN. JOHN CORNYN, R-TEXAS

WITNESSES: CONGRESSIONAL BUDGET OFFICE DIRECTOR DOUGLAS W. ELMENDORF

THOMAS BARTHOLD, CHIEF OF STAFF, JOINT COMMITTEE ON TAXATION

DEPUTY ASSISTANT TREASURY SECRETARY FOR TAX ANALYSIS MARK MAZUR

[*] BAUCUS: Meeting will come to order.

A tax system expresses a society's values. America's always changing. That's one of our strengths. That change also means that periodically, we need to consider whether our tax system continues to express the values that we want to put first.

To consider where we want our tax system to go, we need to understand where we are and understand where we've been.

In September, the committee kicked off a series of hearings on tax reform. We examined the environment that produced the 1986 tax reform.

Today, we look at historical trends in income and in taxes. This will give us a useful background as we roll up our sleeves for tax reform.

First, we need to examine where federal revenue comes from. The composition of federal revenue has changed significantly since World War II. As a percentage of total revenue, Social Security taxes have increased and corporate excise taxes have decreased.

For example, 1950 corporate income taxes provided 30 percent of federal revenue. By 2009, they made up only 7 percent. In the '50s, excise taxes produced 19 percent of federal revenue and by 2007, they comprised only 3 percent.

Over the same period, social insurance taxes like Social Security and Medicare taxes more than quadrupled. In 1950, they provided about 10 percent of federal receipts. By 2009, they generated 42 percent.

Why has the composition of federal revenues changed so dramatically?

Should there be concern that the share of revenue raised by the corporate income tax has declined by more than 75 percent? Is that a result of an increasingly global economy?

Is it because the corporate tax base is too narrow? Or is it linked to the fact that the share of business income subject to the corporate income tax as opposed to the shared tax on a pass-through basis has fallen from about 70 percent to about 43 percent over the past quarter century?

Is it a cause for concern that fewer businesses are structuring themselves as corporations?

Did more businesses structure themselves as corporations -- I'm referring to C-Corps -- in the past because corporations were used as tax shelters. Or, was it because we now tax corporations too heavily?

Answers to questions like these will help us know where we are going in corporate tax reform.

Second, we need to understand the distribution of income in federal taxes. In 1980, the richest 1 percent of Americans received about 9 percent of total income. By 2006, the share more than doubled to about 19 percent.

Meanwhile, the share of total income received by the 20 percent of households with the lowest incomes fell from about 6 percent to about 4 percent.

Over this period, average tax rates fell for all households, including the richest 1 percent. The share of federal taxes paid by the top 1 percent grew. But this group's share of income grew even faster. And as a result, over the past quarter century, the share of after-tax income received by the richest 1 percent has doubled from about 8 percent to 16 percent.

Meanwhile, the share of after-tax income declined for almost all other households. For example, the share of the middle fifth of taxpayers fell from a...

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