St. Barnabas Health System CEO Leadership Conference, Remarks

Remarks by David C. Chavern
Chief Operating Officer, U.S. Chamber of Commerce

Gibsonia, Pennsylvania
September 22, 2008

As Prepared for Delivery

Introduction

Thank you very much. It's great to be back home and to take part in this discussion.

One of the benefits of a presidential campaign is that it can generate national attention on important economic issues—taxes being one of them—as well as fundamental challenges … and our nation has several of those.

We have an aging infrastructure badly in need of investment—highways, bridges, ports, power grids, transmission lines, and refineries.

We're faced with the challenge of ensuring that our children get the education and skills they need to compete in a highly competitive global workforce.

We need policies that will open foreign trade and investment opportunities—not policies that shield us from the global economy behind a curtain of protectionism and isolationism.

We have to expand free market tools to make health care more accessible—not create an even bigger role for government in the health care system.

We need to develop more energy domestically—fossil fuels and renewable sources—or else forever be dependent on unfriendly nations for our supplies.

And finally, we need to seriously examine the U.S. tax system and the burden it puts on workers, entrepreneurs, small business owners, and corporations.

Let's be honest—it's difficult to talk about taxes. The tax code affects everybody differently, so there are conflicting opinions on how to improve it.

Everybody professes to hate the IRS and says they are for tax reform - until it's their deduction, exemption, or credit that is taken away.

We tend to get bogged down fighting and scratching to protect this deduction or that deduction, and in the process, the more fundamental questions about our tax system are ignored or given short shrift.

Let's not forget that the level of taxation in any society fundamentally determines its economic freedom and global competitiveness.

The tax debate in this country needs to focus less on choosing winners and losers and more on the core question of what is the right tax policy to help the economy avoid a recession and get moving again.

And over the long term, what level of taxation balances society's need for government programs versus its need to compete and be economically free, where American families, businesses, and entrepreneurs are rewarded—not punished—for taking risks, innovating, creating jobs, and working hard?

This is where the U.S. Chamber is working to drive the debate … and where we have a very strong point of view.

Setting the Record Straight on Taxes

A fair debate on taxes has to be based on the facts, and so we have to clear up some common misunderstandings about how much we are taxed and who pays taxes.

For 2005, the most recent year for which information is available, taxpayers with adjusted gross incomes in the top 1% of the population bore 39% of the total national income tax burden. Those in the top 5% bore 60% of the burden, and the top 10% bore 70% of the income tax burden.

The bottom 50% of income earners paid just 3% of the income tax burden.

Approximately one-third, or 44 million, of individual income tax returns filed showed no income tax liability whatsoever. And this does not even account for all those individuals who had insufficient income to even have to file income tax returns. That's what I would call a steeply progressive income tax system.

Let's take a look at the impact of the 2001 and 2003 tax cuts. We've heard all too often during this campaign that those tax breaks, in particular, favor the wealthy.
But a look at the facts suggests that this really is just rhetoric designed to generate sympathy for more tax increases.

As Senator Russell Long famously said, "Tax reform means 'don't tax you, don't tax me, tax that fellow behind the tree.'"

The real numbers show that wealthier Americans have shouldered even more of the tax burden since the tax cuts earlier this decade went into effect.

From 2000 to 2004, the year that all of the 2001 and 2003 tax cuts were in effect, the federal tax liability of the lowest one-fifth of income earners dropped 18% compared to a 1% increase for income earners in the top fifth.

It is that the income gap between the wealthiest and least wealthy Americans has widened a bit in recent years. But that gap has nothing to do with the tax relief enacted earlier this decade, and it certainly won't be fixed by hiking taxes on those in the upper income brackets.

Income disparities exist because those with technological skills and high education levels are rewarded in the labor market, while those with little or no skills and education are not.
Better training and education—not redistributing income—is the solution to the income gap.

We have to raise the bar in K-12 education and hold schools accountable for student performance, which is what the successful No Child Left Behind law sets out to do.

We also have to improve worker training programs, so that workers whose jobs disappear or become obsolete learn new skills in high-value added, high-tech industries.

But trying to create greater income equality by redistributing income through the tax code will only discourage innovation, growth, and hard work.

There are also misconceptions about the taxes that companies pay. You may have recently seen a story in the press drawing on a GAO report saying that some two-thirds of businesses in a recent eight-year period did not pay the income taxes that they legally owed.

Now if that were really the case, we would be reading about a Department of Justice or IRS investigation into the matter and not some synopsis of a dry GAO report.

The media got it wrong, plain and simple. They didn't understand that companies can make millions in revenues and not turn a profit and therefore not owe taxes.

They didn't understand that companies are allowed to average the good years with the bad years through the use of loss carryforwards and carrybacks to smooth out tax payments in the same way that individuals do.

They didn't understand that many small business owners legally reduce their profits to zero to avoid paying a corporate income tax, but they fulfill their tax obligations by paying personal income and wage taxes.

And, in perhaps the biggest oversight, the media failed to make the distinction between not paying taxes owed and not having a tax liability. Companies avoid a tax liability through the legal use of deductions and credits or because they don't have any profits. You don't pay income taxes on profits you don't have!

These kinds of misunderstandings are tainting the fundamental debate on tax fairness.

The U.S. Chamber is working to set the record straight and is vigorously pursuing an agenda that we believe will enable the nation to compete globally, retain its economic freedom, and spur innovation and new technologies.

The Chamber's Tax Agenda

First, we need to keep individual taxes low, and that means extending the Bush tax cuts and stopping the alternative minimum tax, or AMT, dead in its tracks.

The Bush tax cuts were tremendously successful in spurring consumption and significantly cutting the service price of capital for corporations and small businesses.

As a result, businesses invested, jobs were created, the economy soared, real wages grew, and tax receipts increased substantially.

If the tax cuts expire—and they will if Congress does nothing—it will represent the largest tax increase in American history—as much as $2 trillion over 10 years by some estimates. By comparison, the Clinton tax increase was $240 billion over five years.

Businesses would disinvest, the capital stock would shrink, wages would fall, jobs would be lost, family-owned businesses and farms would be hurt badly by the death tax, and an economy now flirting with recession would be hardpressed to avoid another one two years from now.

The AMT is another ticking time bomb even more insidious than the looming expiration of the Bush tax cuts because it is less transparent and triggers sooner.

The AMT was created nearly 40 years ago as an add-on tax to catch about 150 high-income individuals who were legally able to avoid any tax liability.

Million of Americans have been forced into the AMT because their tax liability has been reduced by the Bush tax cuts and because the basic AMT exclusion is not indexed for inflation, meaning that as incomes rise, the tax snags a growing number of taxpayers.

Many taxpayers subject to the AMT are not high-income tax avoiders but, rather, everyday upper-middle class working Americans. The AMT could trap almost 30 million more taxpayers at a cost to them of $1 trillion over the next decade.

Second, we need to retool our corporate tax structure to compete in a global economy.

The United States has the second-highest combined federal-state corporate tax rate among industrialized nations—higher than even France's! In recent years, nations around the world have implemented our Reagan-era tax reforms, slashing their corporate tax rates to become more attractive to industry and investment.

Ireland has cut corporate tax rates to a level one-third that of the United States. Germany has reduced its total rate from 38% to 30%. Sweden just announced that it will cut its corporate tax rate.

As a result of this flurry of activity, the overall U.S. corporate tax rate is now 50% higher than the average of the 30 nations that belong to the Organization for Economic Cooperation and Development.

In a global economy where capital and human talent are as mobile as ever, how can we compete with our current corporate tax code?

Finally, we have to carefully consider the overall tax burden on society. In 2007, taxes collected by the federal government equaled nearly 19% of gross domestic product—and that doesn't include local and state taxes.

To put that number in perspective, from 1944 through 2005, tax receipts as a percentage of GDP ranged from 14.5% to about 21%.

So while current tax receipts as a percentage of the economy are not at a record high over the past 60 years, we are certainly at the upper end of the range. And if the tax cuts are allowed to expire and new tax hikes are enacted, we could see that figure inch further upward.

A federal tax burden that is almost one-fifth the size of the economy goes directly to the heart of the fundamental question of whether our tax burden is compatible with a free society that gives everyone the right to succeed, and when they do, the right to keep the fruits of their labors.

A Call to Action

Ladies and gentlemen, the U.S. business community must come together as one in the tax debate.

Too often, industries are pitted against one another to protect sections of the tax code that are favorable to them but perhaps not to other industries. This kind of infighting is exactly how the tax-and-spend crowd wants it.

They seek to fracture the business community with a divide-and-conquer strategy that will clear the way for a heavier tax burden overall.

There is too much at stake to allow this to happen. The business community has to unite against an uneven tax system that picks winners and losers. We need to stand up for a system that preserves America's well-earned status as the best place in the world to take a chance and pursue your dreams.

Thank you very much.