Shared Sacrifice in Resolving the Budget Deficit (cont.)

Floor Speech

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Mr. GRASSLEY. Madam President, now you hear the other side of the story. It is a privilege for me to come to the floor of the Senate to speak on the issue of the bill before us, which is a sense-of-the-Senate bill, which means basically the Senate is debating something that is not shooting with real bullets. In other words, it just expresses the sense of the Senate, it does not change any law, so it doesn't amount to much.

As the President and congressional leaders continue to debate how best to reduce the deficit, it seems my friends on the other side of the aisle and my President continue to demand a tax increase as part of any deal. For sure, any discussion of reducing the deficit should include a discussion of tax reform, but tax reform is different from tax increases. You heard the previous speaker speak about Republican plans that deal with reducing expenditures, and that is right, because we believe the deficit problem in this country is not because the American people are undertaxed, it is because Congress and Washington overspend. However, what is being discussed with this bill currently is tax increases on targeted groups, supposedly because they can afford it. This is not tax reform.

Professor Vedder of Ohio University has studied tax increases and spending for more than two decades. In the late 1980s he coauthored with Lowell Galloway, also of Ohio University, a research paper for the Congressional Joint Economic Committee. That study found that every new dollar of new taxes led to more than $1 of new spending by the Congress. It did not reduce the deficit then--you raise a dollar, you increase the deficit. I will be a little more specific.

Working with Stephen Moore of the Wall Street Journal, Professor Vedder updated that research last year and came to the same result. Specifically, Moore and Vedder found:

Over the entire post-World War II era, through the year 2009, each dollar of new tax revenue was associated with $1.17 in new spending.

That is like a dog chasing its tail. Very few dogs catch them, so when you raise a dollar here, common sense might dictate it goes to the bottom line, but it doesn't work out that way. It actually increases the deficit because Congress believes we have a new dollar coming in, let's spend $1.17.

History proves tax increases result in spending increases. We know that increasing taxes is not going to reduce the deficit. History also shows that tax increases do not increase revenues. That is probably contrary to most people's common sense, but I have a chart here that I think demonstrates this very clearly. I will be somewhat repetitive because I want to leave my remarks and go to this chart, and I will refer to it again.

What this chart basically shows is that over a long period of time, going back to World War II to the present, all the taxes coming into the Federal Government have been roughly 18.2 percent of gross national product, but pretty much even-steven across the board. Sometimes it is up a little bit, sometimes down a little bit, but for 50 or more years it is averaging about 18.2 percent of gross national product.

What this chart also shows is--contrary to what you believe, that if you raise taxes you are going to bring in more revenue, and if you reduce taxes you are going to bring in less revenue--that is not true.

That gets to this issue of taxing the wealthy. It gets to the issue of raising taxes on anybody. From World War II until Jack Kennedy, President Jack Kennedy, we had 90 percent marginal tax rates. Then from President Kennedy to President Reagan, we had 70 percent marginal tax rates. Then in the last half of the Reagan administration and up until 1986 it was reduced to 50 percent, under Reagan's administration. Then Reagan had another tax bill and it was reduced to 30 percent. Then of course President Bush the dad made this promise in the campaign:

Read my lips, no new taxes.

But he didn't keep his promise so the taxes went back up to about 40 percent for a period of time until you get to a period when Bush the son comes into office and the marginal tax rate is reduced to where it is now, 35 percent.

But whether you have high marginal tax rates or low marginal tax rates, you get about the same amount of revenue. I am going to be repetitive on that point but it is very important that you understand that.

History shows that tax increases do not increase revenues. The chart here shows that revenue as a percentage of gross domestic product hovers around 20 percent as far back as post-World War II. I said in my off-the-cuff remarks it averaged out about 18.2 percent.

This chart also shows where you have high and low marginal tax rates over those same years. During the last years of World War II, we had a 94-percent tax rate. Then from 1950 through 1963, it was 90 percent, as this chart shows, and under President Kennedy--and I want to emphasize that he was a Democrat--he was smart enough to reduce marginal tax rates to incentivize entrepreneurship. He reduced the marginal tax rates to 70 percent. They stayed around 70 percent until President Reagan brought it down to 50 percent.

Let me say at this point, I gave President Reagan credit for it, but I was a brandnew Member of the Senate Finance Committee in 1981 and we had some very brave Democrats on that committee who believed that 70 percent was too high and it was going to promote entrepreneurship more if you reduced it to 50 percent. President Reagan gets credit for it. I don't think any Republican on the Senate Finance Committee could take credit for it because we would have been accused, as we have just been accused, of wanting to reduce taxes on wealthy people, so thank God there were a lot of smart, intellectually honest Democrats on the Senate Finance Committee in 1981, who said the tax ought to be reduced to 50 percent.

Well, then it went down to 30 percent when we reduced marginal tax rates further during the Reagan administration. Then, as I said before, the first President Bush reneged on his promise to not raise taxes, and the marginal tax rates went back up to 40 percent and stayed there until the tax relief enacted under the second President Bush. During all of these tax increases and decreases, the amount of revenue as a percentage of GDP stayed roughly flat, with a 50-year average of 18.2 percent.

So everybody thinks that if you raise the marginal tax rates, you are going to bring in more revenue--seemingly common sense but not true because the taxpayers, the workers in America, the investors in this country that create jobs are smarter than we are, but we don't think they are smarter than we are. And we have had 93 percent marginal tax rates, 70 percent, 50 percent, 30 percent, back to 40 percent, now 35 percent. Regardless of that rate, we get roughly the same amount of revenue. Higher tax rates just provide incentives for taxpayers to invest and earn money in ways that result in the least amount of taxes paid or you might say it this way: Some people just say to themselves that they are not going to work hard because why should I work so darn hard if I am going to send the money to Washington for people in Congress to spend and waste? In other words, taxpayers have decided they are going to give us politicians in Washington just so much money to spend, and it comes out about right here.

We ought to have some principles of taxation that we abide by, and I abide by this principle that 18 percent of the gross domestic product of our country is good enough for the government to collect and to spend. That leaves 82 percent in the pockets of taxpayers for them to decide how to spend. When you send money to Washington with 535 of us deciding how to spend it, it doesn't do as much economic good or turn over as much in the economy and create jobs as it would if it was left in the pockets of the 130-some million taxpayers individually to decide how to spend it.

This benchmark of 18 percent of gross domestic product is good, and it has been consistent throughout recent history. It is a principle we should keep in mind while we debate Tax Code changes.

This level of taxation--another reason I say it is justified is it has not been harmful to the economy, as higher tax rates such as we find in Europe are harmful to the economy--much higher tax rates than we have in this country--and it seems to be a level of taxation that there has not been a great deal of revolt by the taxpayers of America against.

There is another principle I would like to have you keep in mind; that is, What is the purpose of tax law? Those who support bills such as the one we have here currently debated, this meaningless bill, assume that the key objective for our Federal Government through the Federal income tax laws should be to ensure that income is distributed equally throughout the country as opposed to government taxing for the purposes of government but not for the purposes of the redistribution of wealth. In other words, the authors of this bill believe the Federal Government is the best judge of how your income should be spent.

Bills such as the one we are considering today assume--I say it for a second time--assume that 535 Members of Congress know how to best spend the resources of this country, and presently that is about 18 percent, but that is not enough. Well, actually, they are spending more than 18 percent because the expenditures of this country add up to about 25 percent of the gross national product from the Federal Government because we borrow 42 cents out of every dollar we are spending today.

It assumes that government creates wealth and should therefore spread it around the way they do in Europe. In fact, government doesn't create wealth; government consumes wealth. Only workers and investors, laborers, and people who provide capital and, in turn, people who use their brain to invent and create, is what creates wealth. Yet, as history shows, there is evidence that tax increases lead to more spending--and I quoted Professor Vedder--and that revenues as a percentage of gross domestic product pretty much stay the same regardless, even if the marginal tax rates are very, very high.

It would be one thing for me to vote for a tax increase if it went to the bottom line: reducing the deficit. It is quite another thing to vote for a tax increase that just allows more spending and raises the deficit instead of getting the deficit down.

The resolution before us now in the Senate requires us to concede "that any agreement to reduce the deficit should require that those earning more than $1,000,000 per year make a meaningful contribution to the deficit reduction effort.'' The bill does not state that such a "meaningful contribution'' would be accomplished through tax increases, but how else would the authors of this bill and the taxpayers intend to or make such a contribution?

Let me make clear that I do not support this bill and will vote no on its adoption. However, I think it is a good thing we are debating such an issue. It is clear that those who support this bill believe those earning more than $1 million per year are not paying their fair share. Note, however, that just last year, these very same people believed that a single person who earned $200,000 or a married couple who earned $250,000 weren't paying their fair share.

In evaluating whether people are paying their fair share, experts frequently look at whether the proposal retains or improves the progressivity of our tax system.

Critics of lower tax rates continue to attempt to use distribution tables to show that tax relief proposals disproportionately benefit upper income taxpayers. We keep hearing that the rich are getting richer while the poor are getting poorer, don't we? Almost every day. This is not an intellectually
honest statement, as it implies--what does it imply? It implies that those who are poor seem to stay poor and that those who are rich seem to stay rich. So I want to dispute that position.

In 2007, the Department of Treasury published a report entitled "Income Mobility in the United States From 1996 to 2005.'' The key findings of this study include the following:

There was considerable income mobility of individuals in the U.S. economy during the period 1996 through 2005 as over half of taxpayers moved to a different income quintile over this period.

Roughly half the taxpayers who began at the bottom income quintile in 1996 moved up to a higher income group by the year 2005.

Among those with the very highest incomes in 1996--the top 1/100 of 1 percent--only 25 percent remained in the group in 2005.

One in four 10 years later. So the poor aren't always poor and the rich aren't always rich.

Moreover, the median real income of these taxpayers actually declined over this period.

The degree of mobility among income groups is unchanged from the prior decade (1987 through 1996).

So I used the group 1996 through 2005, and I am comparing it with the group 1987 through 1996, so I want to repeat that the degree of mobility among income groups was unchanged over a 20-year period of time.

Continuing to quote:

Economic growth resulted in rising incomes for most taxpayers over the period of 1996 through 2005. Median income of all taxpayers increased by 24 percent after adjusting for inflation. The real incomes of two-thirds of all taxpayers increased over this period. In addition, the median incomes of those initially in the lower income groups increased more than the median income of those initially in the higher income group.

Therefore, whoever is saying that once rich, Americans stay rich, and once poor, they stay poor, is purely mistaken because America is a country and land of opportunity.

Now, I want to say that the Internal Revenue Service data supports the analysis I just gave. I was done quoting at that point.

A study of 400 tax returns with the highest income reported over 14 years--and I don't know whether these are the same 400 taxpayers my friend on the other side just referred to in his speech, but a study of 400 tax returns with the highest incomes reported over 14 years, from the year 1992 to the year 2006, shows that in any given year, on average, about 40 percent of the returns that were filed were not in the top 400 in any of the other 14 years. I got the impression that the top 400 taxpayers in the previous speech were maybe always the same people, but 40 percent were not in that group.

The so-called shared sacrifice bill before the Senate now does not acknowledge these trends; hence, I think it is intellectually dishonest. It presupposes that anyone making more than $1 million should be contributing more to reduce a deficit that they likely did not create in the first place. We created it.

The bill assumes that the folks in this income category have always made more than $1 million, that they haven't paid their dues on their way up the ladder of success and, as a result, should pay a penalty for their current success even if they are on the way down the ladder. The bill also assumes these folks will continue earning what they are earning now.

As I just noted, however, the Treasury report and the IRS tax data contradict this position.

I welcome this data on this important matter for one simple reason: It sheds light on what America really is all about, what this great country is all about--vast opportunities. Of course, as I just said in these statistics, but you can see it in a lot of different ways as well, we are a country of great economic mobility. This country is built by people from all over the world. Our country truly provides unique opportunities for everyone. These opportunities include better education, health care, financial security, and probably a lot of other things. But, most importantly, our country provides people with a freedom to obtain the necessary skills to climb the economic ladder and live better lives. We are a free nation. We are a mobile nation. We are a nation of hard-working, innovative, skilled, and resilient people who like to take risks when necessary in order to succeed. We have an obligation as lawmakers to incorporate these fundamental principles into our tax system.

On another matter in this debate, we have also heard much about "closing loopholes.'' Well, that sounds good. I don't want to tell you how I believe that ought to be done. There are things that are legal, and there are things that are not legal.

There are things that are legal and there are things that aren't legal. Let me say if there are, in fact, loopholes to be closed, I would support closing them.

During my tenure as chairman and then ranking member of the Finance Committee, I worked with colleagues from both sides of the aisle to cut off tax cheats at the pass. The American Jobs Creation Act signed into law in October of 2004 included a sweeping package to end tax avoidance abuses such as corporations claiming tax deductions for taxpayer-funded infrastructure such as subways, sewers, and bridge leases; corporate and individual expatriation to escape taxes; and Enron-generated tax evasion schemes. We closed them.

One of the tax avoidance provisions the jobs bill shut down was so-called corporate inversions. Average workers in America can't pull up stakes and move to Bermuda or set up a fancy tax shelter to avoid paying taxes. Companies that do this make a sucker out of workers and companies that stay here in this great country and pay their fair share of taxes. So that was closed. Corporate inversions, we called that.

We also closed loopholes used by individual taxpayers. The jobs bill contained a provision that restricted the deduction for donations of used vehicles to actual sales price. Prior to that fix, individuals were claiming inflated fair market values before they gave their car to a nonprofit organization.

Then in the Pension Protection Act, which was signed into law in August of 2006, I championed reforms to deductions for gifts of "fractional interests'' in art as well as donations to charities that were controlled by the donor. Because if you give money away, it ought to be given away. A person should not be able to control it after they give it away. The same way with art. In both cases, individuals were taking huge deductions for donations without providing equivalent benefits to the charities to which they donated.

In addition to ensuring income and deductions are properly reported, I also supported giving the Internal Revenue Service more tools to go after tax cheats. The jobs bill contained provisions that required taxpayers to disclose to the IRS their participation in tax shelters and increased penalties for participating in such tax shelters as well as not disclosing such participation to the IRS.

I also authored the updates to the tax whistleblower provisions included in the Tax Relief and Health Care Act which was signed into law in December of 2006. There was a whistleblower statute long before that, but because of the low dollar threshold, it encouraged neighbors to blow the whistle on their neighbors. So the 2006 changes I championed increased the awards for those blowing the whistle on the big fish--individuals and businesses engaged in large-dollar tax cheating through complex financial transactions.

I don't know why it took the IRS so long to get this law under way because they have had plenty of whistleblowers come forward, but we have only had one time so far--I think we will get a lot of others now--but we have only had one time so far under this provision, which was instituted in April of this year, and we recovered $20 million for taxpayers that otherwise would have been lost to fraud--from one company.

These are just a few examples of my support for provisions to stop abuses of the Tax Code to make sure everyone pays their fair share. If and when we get around to considering comprehensive tax reform, I look forward to shutting down any other abuses that exist. But first we need to be clear on what a loophole is.

Itemized deductions are just that: itemized deductions. They are not loopholes. Similarly, deductions and tax credits that enable a corporation to zero out its tax liability are not loopholes. For instance, if a person had a loss last year, they can carry it forward to this year. The question of whether deductions and credits should be limited is a question that should be answered not to raise revenue but in the context of comprehensive tax reform. Eliminating deductions and credits for certain taxpayers should be subject to extensive review and extensive debate. Taxpayers should not be targeted for tax increases for political sport, as this resolution before us does.

I wish to finish by summing up in three points, very quickly. First, according to this chart, tax increases don't--well, not according to this chart. That is the second point I will make. First, tax increases don't reduce deficits and they don't increase revenue as a percentage of GDP.

Secondly, we ought to have some principles of taxation. First of all, this chart shows that we get about the same amount of revenue coming in over a 50-year period of time--about 18.2 percent of gross national product. We have high marginal tax rates, really low marginal tax rates, but it still brings in about the same amount of revenue.

Second, we ought to have some principles of taxation that we abide by. Limiting revenues to the historical average of 18 percent of GDP should be one, while ensuring income equality should not be one. In other words, we raise revenue for the purpose of funding the functions of government, not to redistribute wealth.

Last but not least, it is right to consider tax reform when discussing deficit reduction. However, the proposals put forth so far, including the current bill, are political proposals--not reform proposals. Tax reform requires Presidential leadership, and we are just now seeing that. I mean, we are not seeing it on tax reform, but we are finally seeing it on deficit reduction. But I don't think it is going to last very long.

Madam President, I yield the floor, and I suggest the absence of a quorum.

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