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Kleinbard addresses U.S. Senate Committee on Finance

Wednesday, Sep 14, 2011

Prof. Kleinbard Addresses U.S. Senate Committee on Finance

By Maria Iacobo
Photos by Jay Mallin

USC Law Professor Edward Kleinbard provided testimony before a subcommittee of the United States Senate Committee on Finance yesterday outlining his proposals for tax reform.  

Kleinbard joined other tax experts including Alan Greenspan, former chairman of the Federal Reserve.  The topic of the hearing was Examining Whether There is a Role for Tax Reform in Comprehensive Deficit Reduction and U.S. Fiscal Policy.

Kleinbard identified the two areas in which the United States spends more than any other developed economy in the world – healthcare and defense spending – before outlining how a sea change of each will provide long-term fiscal reform.  Recognizing that our current policies govern our healthcare delivery institutions, Kleinbard cautioned, “change must follow a predictable path that starts in the near future, phases in slowly, and comes to rest with new institutions that will serve the needs of Americans for decades to come.”

Similarly, Kleinbard pointed out that defense discretionary spending is a “great outlier” in government spending.  Kleinbard notes that, by one estimate, the United States spends as much on its military as do the next 14 countries combined – 42 percent of the entire world’s military expenditures.

“The United States is an extraordinarily low-taxed country by world norms – the fourth lowest in the [Organization for Economic Cooperation and Development],” Kleinbard said.  “Whatever the long-term world we transition to, we will need to finance the costs of getting there, and that in turn means higher tax revenues than those we currently collect.”

Kleinbard proposed what he termed his tax reform “Base Case” while maintaining the same level of revenues or slightly more:
•    In general, allow the 2001-03 individual tax discounts to lapse at the end of 2012.
•    Restore the estate and gift taxes to their 2009 levels, preferably as of January 1, 2012. (This actually has a roughly $260 billion cost relative to the Congressional Budget Office baseline.)
•    Maintain current policy’s prescription that corporate dividends should be
taxed at the same rates as long-term capital gain. (This proposal loses
revenue relative to the CBO baseline but has strong policy justification.)
•    Add a new top marginal tax rate of, say, 42 to 44 percent for incomes above
$2 million. (The idea would be to find the income level that would raise
revenues sufficient to fund the dividend tax reduction.).

To improve upon his Base Case, Kleinbard suggested eliminating many of the subsidies for personal itemized deductions, including the home mortgage interest deduction and eliminating business tax reductions, reducing the corporate tax rate and taxing multinationals on their worldwide income rather than allowing them to operate in the U.S. without a base from which they avoid paying taxes.

Kleinbard joined USC Law in 2009.  Prior to that he served two years as chief of staff for the U.S. Congress’ Joint Committee on Taxation, a non-partisan office that assists Congress on every aspect of the tax legislative process.

Watch a video of the hearing, or read Kleinbard's testimony.

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