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Scott Hodge: Thank you for listening to the Tax Foundation’s Tax Policy Podcast. I’m Scott Hodge, President of the Tax Foundation. Joining me today is Mark Weinberger, who is the Americas Vice Chairman for Tax Services at Ernst & Young.

Mark has had a very distinguished career in government. He has served as Assistant Secretary for Tax Policy at the U.S. Treasury. He was a member of the Social Security Advisory Board from 2000 to 2001, and Chief of Staff for the President’s 1994 Bipartisan Commission on Entitlements and Tax Reform.

Mark, thanks for joining me.

Mark Weinberger: Scott, happy to be here. Thank you.

Scott Hodge: I was very interested in an article that you wrote for Tax Notes a few weeks ago titled “The Trees Are Taking over the Forest,” and you had a very interesting observation. You thought that Congress needed to address a big issue and that is the deficit in the trust fund, and I take it you weren’t talking about Social Security or Medicare, but the lack of trust on both sides of the aisle and on both sides of Pennsylvania Avenue. What do you see and how do they fix it?

Mark Weinberger: Well, Scott, you’re spot on. Obviously, we have some major issues facing us as a country to deal with on the financial side, on both the spending and the received side. And whenever you tackle these big issues, you have to do it in a bipartisan way, because there’s often short-term pain for long-term gain.

And in almost any tax bill, as we all know, there are winners and losers, and so even when they spout out about revenue neutrality, my favorite analogy is, “Remember, every poker game is revenue neutral.” (Laughter) And at the end of the day, you have the same amount of money, but it’s in different people’s pockets, and so that’s what tax bills are about.

And so, if you’re going to do major reform to deal with taxes that are being called for, or if you’re going to deal with some of the bigger financial issues that we face and have to be dealt with like Social Security reform and dealing with the healthcare imbalance between outlays and receipts, the only way you’ll be able to accomplish it politically is if you reach across the political aisle, as you suggest in your question, and Democrats and Republicans work together and you get the administration and the Congress working together.

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All you need to do is look, in my view, at the 2006 election and see the message that voters sent that they want a Congress and President to work together and solve problems that real Americans face. And so far we’ve seen some instances of that, and the policymakers are getting the message. They’re going to have big disagreements, but if they want to tackle those big issues, I think they’re going to have to work together.

The last observation I guess I’d make in response to your question, Scott, is the ’86 Tax Reform Act was a real example of a Republican President, that time President Reagan, and Democratic House leadership in that era, Chairman Rostenkowski, working together and trusting each other and pledging to work together for the common goals of tax reform, and not being so wedded to any particular recipe as to how that reform would ultimately look at the outset, but just to reach in the joint objective. And their working together to try and resurrect it several times after it failed on the House floor with both parties interested in trying to get a positive resolution, and without both those players – again, someone from the White House, someone for the Republicans, someone from the Congress, someone from the Democrats in that case – working together, we never would’ve gotten over the finish line.

Scott Hodge: Well, a lot’s happened in the last 21 years. In fact, I think, as you well know, the tax code has become even more complicated during that period of time. I hear reports that some 15,000 changes have been made in the tax system over that 21-year period, and we look out there and right now there – I’ve seen 86 different bills to establish tax credits or tax breaks of some form or another.

We see kind of an appetite to put more complexity in the code, but not a whole lot of appetite to simplify it. How do we get that process started?

Mark Weinberger: Well, that’s an excellent observation, Scott. It’s – to me, it’s like the deficit. It’s great in concept, tax simplification is, but it’s very difficult in practice. And the reason is is because there’s so many competing objectives that policymakers are trying to wrangle with at the time they would like to have the overarching goal of simplification or deficit reduction.

And then you look at the specific policies put in place to try and reach other objectives, whether it be spending for the war or for entitlements, or whether it be tax cuts to keep us competitive, those get in the way of the overarching objective. Simplification is

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always something that people espouse, but when you have a tax system that is being used to run social policies through and economic policies through, and fairness and progressivity policies through, it’s almost by definition very hard to have a simple tax form, which is why we have the IRS looking into very, very difficult issues and healthcare and research and development and the like to try and resolve, which makes the system complex and hard to deal with.

There’s an overriding issue, of course, that this Congress has imposed upon itself, which always adds to complexity, which is the PAYGO rules, whereby whenever you have a tax cut, you now need to pay for it with a tax increase and/or spending cut in entitlements. And that makes things very difficult, because you come up with offsetting policies to just offset another policy you’re trying to do, and in that regard, you usually create more complexity. But, there’s a greater good there they’re trying to achieve, which is overall budget neutrality and trying to address the deficit.

So, the bottom line is, I think, until we have a tax system that is not meant to do everything, like social policies and economic policies and the like, but really just collect the revenue necessary to fund the government, it’s not gonna be possible to have an overly simple system.

Scott Hodge: Well, the PAYGO rules are going to certainly affect a debate over the AMT, which as everyone knows as Alternative Minimum Tax, the parallel tax system that is trapping more and more Americans, and certainly that’s a big concern for especially many Democrats in Congress of so many other constituents, especially in high tax areas such as New York and New Jersey are affected.

Is there a solution for AMT? Where do you see the possible answers to that problem?

Mark Weinberger: Well, it’s another great question. The Alternative Minimum Tax, obviously, has gone beyond its stated objective, and is now, as you suggested, affecting upwards of 25 million people, perhaps this year, if they don’t have another patch, which is becoming costly to do on an annual basis. And talk about complexity, having to calculate your taxes under both systems really adds to that.

I know that the Democrats have made it a stated objective in the campaigns this year to repeal the AMT, but the shackles they placed on themselves with the PAYGO rules – assuming they

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don’t waive the budget rules with the appropriate amount of people, which would be in contradiction to their stated objective – are going to make it very difficult to come up with over $1 trillion to permanently repeal the AMT. So, it seems like either that will have to be rolled into massive tax reform and dealt with as a bigger issue, which is probably the most likely, or you won’t likely see the annual patch continue, certainly until major tax reform and/or a movement towards trying to just hold people harmless by increasing the exemption amount like they’ve done for the past several years, and perhaps putting indexing in to stop the problem from getting worse.

You could also start to change some of the preference items in the AMT to relieve some of the burden on various constituencies that are currently paying it. But, if you really want to tackle the underlying issue, which should be tackled, you have to, I think, wrap it up in the larger tax reform.

Scott Hodge: You’ve been on a number of panels that have also addressed, or tried to address, the entitlement reform issue, and we’re actually closer to insolvency for many of these problems than even the days in which you were studying it. What do we do about this $43 trillion elephant that’s in the room that everyone seems to want to ignore, but really can’t be ignored?

Mark Weinberger: Well, if I had that question, I could also tell you which direction the stock market would go in tomorrow (laughter), because it’s probably as difficult to predict how we get out of this mess as it is to determine which way the market will go. It is a – it is truly a situation that needs to be addressed. Everybody knows it.

Our country has proven time and time again, when we have to, we will deal with these things, whether it be, you know, like the ’83 commission, the Greenspan Commission around Social Security when there was risk of them not being able to send out checks or when we have any other major hurdle. But, where we’re not good is dealing with these issues ahead of time far enough in advance so that we minimize any disruption to the people who are benefiting from the programs who will have to pay the price for any changes.

So, the real challenge is, in my view, to create the public outcry and have them lead the call for reform, which has not been successful. The president tried on Social Security reform a couple years ago. While there was a lot of interest and debate, there was not enough public outcry to fix the program today that got it seriously considered by Congress.

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The same is true today, but as we get to the 2008, 2009 time period where we start to see the baby boomers begin to retire, and they start turning 62 in 2008 as the AMT will at that point be hitting 30 plus million people if not dealt with. And as we are facing the expiration of the President’s tax cuts from 2001 to 2003, all in the five-year budget window that Congress will be looking at, I think you’re going to see a need to focus on some of these larger issues beginning about that time.

And the way, the only way, in my view, to deal with it will be, as we started conversation, Scott, to have bipartisan cooperation and coming to the table to recognize that they’re all gonna have to give a little bit, which means that we may slow the growth in programs the Democrats may want – may like. And on the Republican side, they may have to look at additional revenues to meet some of the objectives, and until everyone comes to the table, recognizes they’re gonna have to give something, it’s going to be very difficult to trackle the problem.

Scott Hodge: I’d like to wrap up our conversation with – by talking about U.S. competitiveness. You have your ear to the ground with the business community. You work with a lot of U.S. companies and try to advise them, and certainly there’s concern about outsourcing.

There’s concern in Washington about companies inverting. That means reincorporating in low-tax countries to minimize their U.S. tax burden, and, you know, we’ve seen reports recently out of the OECD that the United States has the second highest overall corporate tax rate among OECD countries – second only to Japan.

And meanwhile, I think that the reports that I’ve seen are as – that many, many European countries are slashing their corporate tax rates to attract business investment. Are we simply falling behind by doing nothing? And how do we get Washington to tackle this issue?

Mark Weinberger: Well, Scott, it’s a very appropriate question. Actually, one could argue in 1986 we led the effort to reduce overall marginal corporate tax rates, and since that time, your question is absolutely correct in its assertion. In fact, since 2000 we’ve seen 80 percent of the OECD countries – 24 out of 30 – lower their top marginal tax rate beyond and following what we did in 1986, beyond what we have done, which leaves us, when you combine federal and state taxes, as the second highest after Japan corporate marginal tax rate. And, in fact, Germany is making noise about changing it,

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lowering their rate and others are going even further, so I think you’re gonna see this trend continue.

Now, as an overall percentage of GDP, our corporate tax take is not below some of the other countries, but as we all know, where companies decide to invest on the margin depends on that marginal tax rate, in large case. And so, we have to be mindful of what other countries are doing, and I believe that as we look at tax reform and based on the previous topics we talked about, Scott, while we’ll be looking to raise revenue, perhaps overall, we’ll certainly not be in a position to really reduce the revenue coming in based upon the financial needs this country has.

We might have an eye towards lower marginal rates, but we’re gonna have a mind towards trying to keep our revenue base up, which means that I think you will see, and hopefully will see, a debate around lower rates traded off or some other reductions, perhaps in some of the incentives that are in the code right now, which always creates an interesting debate amongst the business community. But, that’s what’s been happening around the world, and I think we’re gonna be facing that dilemma in the United States in the not too distant future.

The only other point I’d raise in regard to this question: while tax rates, obviously, are incredibly important, they are only one component of competitiveness. We’ve seen lots of discussion out of the Capital Markets Reform Commission report as well as the – Secretary Paulson talking about a spring meeting he’s gonna have about competitiveness and regulatory reform.

When you look at the overall regulatory burden on U.S. companies, add to it the high cost of deal making in this country, plus the litigation environment, enter on top of that a high corporate tax rate, we really are trying to ask our companies to compete with one arm tied behind their back. So, I think we need to look at all of those issues going forward.

Scott Hodge: And is Sarbanes-Oxley part of that?

Mark Weinberger: Well, Sarbanes-Oxley has originally, as we all know, caused the cost of doing business in the U.S. to rise. Some would argue, though, that the increased certainty we have in the numbers that are now coming out of corporate America would make a reduced overall cost, and I think what we’ve seen in the markets is a recalibration by the regulators most recently with their announcements around 404, and the announcements about how to

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enforce the rules, that we’re gonna be swinging balance – into balance at some point.

But, we always find ourselves on the pendulum of either too much or too little regulation and hopefully somehow we settle in the middle. I think that recalibration is going on right now as we think about, not only Sarbanes-Oxley, but other regulatory rules.

Scott Hodge: Well, Mark, thank you so much for taking time out of your busy schedule to join me. I always appreciate your observations, and certainly you’ve had a tremendous experience in Washington. And I hope that members of Congress take some of these things to heart and try to move things forward in a bipartisan manner.

Mark Weinberger: Well, Scott, thank you, and it’s always a pleasure talking to you, and the great work that you do over with your organization is just phenomenal. Tax Foundation adds to the dialogue and debate and provides the necessary data for policymakers to make the decisions, so thank you for that.

Scott Hodge: Thank you.

The Tax Policy Podcast is produced by the Tax Foundation, a non-partisan, nonprofit tax research group that has monitored fiscal policy at the federal, state and local levels since 1937. Please help support our programs by making a tax-deductible contribution at www.taxfoundation.org.

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