Speaker 1:	It's a lot of fun to come back and see Amanda after a few years. We were both a little, a few years younger back then. I had a great time teaching at Williams and I've had a great time since in Washington analyzing public policy questions, first income distribution questions and more recently taxes.
	For the last six years at the Tax Policy Center, it's been fun to have my mouth unleashed. At CBO I was never allowed to talk to the press except on background, now when I finish talking to a reporter I wonder if I've said something that's gonna embarrass me if it shows up in print. Fortunately, if you're nice to reporters, they're nice to you and so far they haven't made me sound stupid. 
	Tonight I want to talk to you about fiscal cliff deficits and 47%. On the menu tonight I'm gonna talk about five things, start off with budget history and the outlook. Where we are right now and where we're headed in terms of the budget. What taxes do we pay today? What taxes are there at the federal level? How do taxes work? We've got the little introduction to public finance at the tax level. We'll talk about fiscal cliffs. This is pleural hear. There's not one fiscal cliff, but rather a whole bunch of them. And finally if we have time, we'll get to the 47%, which is something I really enjoy talking about. I like the fact that it had a major impact on the most recent campaign and I think it's a very interesting issue, but it confused a lot of people, and I enjoy explaining why people are so confused about it.
	Let's start off with budget history and outlook. Setting the stage, a little about the history. Here is the last 50 years of federal budgets, and the projections of 10 years going forward. These are CBO numbers as of last month. The blue represents the taxes we collect. The red represents the excess of the spending over taxes. So this very top is typically, spending. We actually had a couple of times when we had surplus right here for a very brief period in the early 60s and then the Bill Clinton years at the tail end of 2000, 1990, but for the most part we've been is running nice, big deficits. 
	Over the entire period, if you look at too sort of average the revenue and spending over a 40 year period, average revenue has been about 17.9% of GDP or 18%. Spending's been about 21%. So on average, we've been running about a 3% deficit, year after year after year, building up that debt that everybody's worried about these days. That has gotten sometimes bigger. It was big back here in the 80s. It got very big with the recession. It's going to trend down according to CBO and if things trend out, will be down as a debt of ratio about 3%, 4% of GDP as the deficit going forward. 
	I want to focus though instead, not on this whole thing, but let's get rid of the first 40 years. Focus on the last 10 years. Bring it down to manageable size here so you can actually see it. This is 10 years back and 10 years forward and we'll talk a little bit about where we are. The big deficits of course, occurred during the great recession. 2008-2009 the running deficits were more than 10% of GDP. Our spending was about 25% of GDP, the highest we've had any time since World War II. Our revenues were about 15% of GDP the last time I saw revenues that low was about 1950. We're running huge deficits in part because the economy is doing poorly and in part because we were spending a lot of money. The government was spending a lot of money. In part because people were paying low taxes because the low tax rates we had, the tax stimulus. As that expires, things get better looking forward and if you look out here ... I'm sorry. Back up. Things do get a lot better. 
	What didn't we do? We didn't do what we could've done, which is not pass the tax bill that was passed last month. This is the tax bill that was passed on January 1st, wee hours of the morning. Ruined my New Year's Day. Reporters started calling at 10:00 New Year's Day and I was on the phone almost nonstop for the next eight or nine hours. The next day 36 reporters called me to talk about what after we're gonna do. But what you see here is had it actually not passed, we'd have smaller deficit here. This is the amount of revenue we'd have gotten if we had not allowed taxes to stay low for most of the population. We would've been down in the next couple of years to a deficit of barely 1% or 2% of GDP. Even trending out here at the end, we'd be down no more than 3% of GDP. That's all very manageable in the growing economy. 3% of GDP and 3% of gross of the economy means the deficit will not grow, the debt will not grow as a share of GDP. 
	You can manage deficit and debt over time but when we're running a bigger deficit, which we are in fact and will going forward, you're gonna have much growing debt over time and projected with this, we'll hit debt as a share of GDP approaching 100% by the end of the decade. This is actually the good news part of the story because there are a couple of things that are almost certain to happen to make this a little bit worse. If we continue spending growth that we've been having, there'll be additional spending and if extend the temporary cuts congress passes year after year after year to last for one year because we don't want them permanent. We'll pass them again next year because we don't want them to go away, but we don't want them to be permanent. So only one year, but we'll do it a year after year after year. 
	These extenders have been going on forever. There are probably three or four dozen of them. They free up obviously, quite a bit of revenue and as a result our deficit out here by 2023, ten years out, will be well over 5%, 6% of GDP and that will push us well past 100% ratio very shortly. Again, this is the good news. Because here's the bad news, let's go out another 20 years. Spending's gonna go up. Taxes will not keep track with it, when I keep pace with it. In fact, my graph has to be extended a little bit in order to pick this all up. I've got to extend the scale up from 25% top to 40%. The deficit by 2042, by CBO's long run estimate will be ... What is it? 40% minus 18%, about 20% of GDP. That's twice as big as the biggest deficit we ran during the great recession. This is gonna run debt up well-passed the 200% of GDP. Obviously, not sustainable. 
	A couple of things about this. This assumes that spending growth will continue as it does. Almost all of this is entitlements. The growth of health programs funded by the federal government. The growth of social security. Both of those kinds of programs, unchecked will chew up an ever larger share of GDP. There's also assumes that tax revenues do not rise. You see this? This is a nice flat line here for taxes at 18.5%. The CBO makes that assumption because we don't constrain taxes, we just let them go free for all. They'll actually outpace spending and by the time we get out to the end of this period, it'll be up to close to 50% of GDP. 
	How many people think that's likely that congress would ever let that happen or the population would ever let that happen? Taxes would get to 50% of GDP. People are very unhappy right now, seeing 18% or 19% or 20%, imagine what it would be like if it got up there. CBO makes this assumption that over time we haven't exceeded 18.5% of GDP with revenues very often. Highly unlikely to do that in the future, that's a good long run assumption. But even if you let it trend upward, it will still be very, very large. Historically, large deficits driving that ever upward.
	So, we've got a problem. The question is, what are we gonna do about it? Well, let me start off telling you about the tax we pay the government. The biggest federal tax is the individual income tax. Nearly half of all taxes, about $1.1 trillion last year, were collected from the federal income tax. Another 35%, a third of the revenue, $850 billion, comes from payroll taxes. Those are the taxes that support social security and support Medicare. They come out of every paycheck that you have. Social security you pay on the first $110,000.00. $115,000.00 this year, almost $114,000.00 this year. Medicare tax is open-ended but last year about 35% of taxes came out of payroll. Another 9% comes from the corporate income tax. Those are taxes levied on large corporations. Not all businesses are taxed as corporations. Corporations in many cases have a choice whether to be taxed as a corporation or to be taxed through the individual tax returns of the owners of the corporations. Smaller firms can do that. 
	But the part that hits the big corporations delivers that $224 billion in tax last year. We get about the same amount, another 9% from the remaining tax, estate and gift taxes [inaudible 00:09:22], excise taxes, the tax we pay in alcohol, tobacco, firearms. The guns. When you're flying an airplane. All the excise tax revenue and tariff. 
	The taxes paid on imported goods. All together that totaled about $2.4 trillion dollars last year. I find trillion dollars very hard numbers to get my head around. A trillion is a very big number. But if you put this back in individual, a trillion dollars is about $3.33 for everybody in the United States. So $2.4 trillion dollars isn't that much. I'm sorry, a billion dollars is that. This is about 3300 times 2.4, about $8,000.00 per person. It's about 15.8% of GDP. Again, that's very low by historical standards. The average we saw over the last 40 years was about 18% of GDP. We haven't gone below 15% ever in the last 50 years. And we saw, it's gonna trend upward. 
	The United States is very low tax jurisdiction. Very low tax country compared to others. This ranks all the members, the OECD, the Organized Nation for Economic and Community Development. OECD countries. The average for all OECD countries is about 34%. Ranging from a low of Chile, which is barely 20% to a high for the Scandinavian countries, Denmark is approaching 50%. United States at 25%. This is combining both the 15%, 16% federal taxes and about 9% or 10% from state and local taxes is very much low-end of the distribution. But it's important to tell what you're spending those dollars on. The European countries down here at the bottom are providing a lot of things that we rely on private markets in the United States to provide. All healthcare, a lot of retirement, a lot of support for families with children is paid by the government. We rely ... We leave that to individuals. Don't need as much taxes to do it but again, we're a very low tax jurisdiction. So when people complain about how high our taxes are, I'd like to show them this graph.
	What do taxes do? A little public finance, here. Obviously, the biggest thing is to raise revenue, but that's not all they do. They deliver social policy in a lot of different ways. We try to induce ... Sorry. We transfer income, individuals. Social security does that. The supplemental security income transfers income to low income people. We use ... I'm sorry, that's the spending program. We use the child credits, we use the earned income tax credit always to transfer income to low income individuals. We encourage people to undertake certain activities. One of the things we do is we have tax breaks if you save for retirement. Put money in your savings account, your favorite retirement account, we give you a break on your taxes. We encourage you to buy a house by giving you a tax deduction for the mortgage interest you pay. We encourage you to give to charities by giving you deductions for monies contributed to charitable activities. 
	So we use the tax system to encourage people to do particular things and on the other side of it, we use the tax system to discourage kinds of activities. Our taxes on cigarettes have been raised again and again in recent years. And that does in fact, discourage smoking. We like to do that. We'd like to discourage people polluting by imposing carbon taxes. We discourage people from drinking too much with alcohol taxes, doesn't do too good a job, I hear. In any case, we're not just trying to raise revenue, we're trying to deliver a lot of social policies through taxism. 
	What are the criteria for a good tax policy? There's three things that economists talk about when they talk about what is a good tax. The biggest one you hear about and the easiest one to measure is efficiency. Efficiency to an economist means are we allowing markets to work freely without interference? We want our taxes to interfere as little as possible with what people do. Taxes are going to influence people's behavior almost certainly. Because people will say, "If I've got a choice between doing two different things, one of which is taxed and one of which isn't taxed, I'm more likely to choose the untaxed one." We want taxes to be levied in a way that doesn't try to drive people's choices between types of activities. Doesn't make people make this investment rather than that investment. Unless of course, we're trying to change people's behavior. Efficiency is an important thing and we like to look at ... We like to maximize the efficiency of tax system.
	The best way to do that is to tax as much as possible at the lowest possible rate. You tax as much as possible and people can't avoid taxes by moving from one activity to another because you're taxing them all. So you're not changing people's behavior in terms of the types of activities they choose. And if you keep rates low, there's not much of an incentive to try to avoid the tax by either hiding income or doing things that will make your taxable, whatever's being taxed, smaller. This is where we talk about broadening the tax base. Taxing more stuff. Lowering rates, taxing a lower rate. And a lot of what you hearing out of Washington these days is, are there ways that we can approve the efficiency of the tax system by lowering rates and taxing more stuff. 
	Equally important but harder to measure, harder to determine what's the right thing, is the question of equity, fairness. What's the fair amount of tax people should pay. There are people that say, "Everybody should pay the same amount in tax." Not very many. Other people say, "We should all pay the same share of our income tax." There are other people who say that, "It's most important to measure the ability to pay." How much you have after basic expenses, how much do you have that we could tax and we should tax some portion of that. We have a very progressive tax system in the United States. Some pieces of it are more progressive than others. A progressive tax system is one in which, the more you make, the larger share that we take. The less you make, the smaller share. And we'll see in a few minutes when I show some of the graphs I've got about the equity the system has got, the income tax system.
	The final thing we care about, but you wouldn't know it by looking at our tax system, is simplicity. We'd like to have a simple tax system so it's A: inexpensive for people to comply with, and B: easy to comply with. It's not hard to figure out what your taxes are. You see, congressmen are all the time, coming with these big stacks of books. Here's 2,000 pages of tax regulations. Most of those regulations are trying to figure out how big your income is in terms of the taxes. It has nothing to do with taxes we levy on that income. It actually figuring out what your income is and most of that's for businesses by the way, not individuals. 
	We certainly don't have a simple tax system. That's shown by the fact that 90% of us don't do our own taxes, pen and paper, and fill out the returns ourself. 60-65% of us hire somebody to do the job for us. We go to H & R Block or our favorite accountant and get them to work it out. Another 25-30% of us buy computer software, do our taxes on line, let the software take care of it for us. The problem with that is that if you don't do your own taxes, you have somebody else do it for you it's so complicated, you don't understand how taxes are working, you can't understand the tax system. And you think, as most people do, it is so complicated people must be getting away with murder in the system. They know things to do in this complicated tax system. Ways to save on taxes, that I'm not figuring out. 
	Something's wrong with this system and it creates a lot of distrust and actually, can lead to people cheating on their income tax. Despite the fact that a poll the other day showed 90% of people thought you should never lie on your income tax, cheat on your income tax. In fact there's a lot more cheating than that. We estimate that about $300 billion a year in taxes that should be collected, is not collected because of different forms of not complying. Part of that's because people can get away with it, we have a complicated system. Part of it is just because we have an efficient system where if you change people's behavior it gives them incentives to change the amount of taxes they pay. 
	Either way, interrupt me with questions along the way. I will talk all night long. I think I am. Am I talking slow enough here? My wife told me I should talk more slow than I usually do, so I'm trying to attempt ... Keep my tempo down. 
	Okay, so those are the things we want to do. It's hard to measure. Let me talk a little bit more about equity. A key thing with equity is measuring who actually pays taxes. As you see, it's obvious. Corporations pay taxes, they're the ones that pay the corporate income tax. Workers pay payroll taxes. Individuals pay their income taxes. Who pays the estate tax? Well, that's a good question. We'll talk about that in a moment. Who actually pays, is a lot harder question to answer. 
	The payroll tax, for example. For social security each worker pays 6.2% of the first $113,700.00 of income this year and their employers pay the same amount. It sounds like there's a tax on workers and a tax on businesses. Virtually every economist will tell you, "No. That's not true." In fact, the workers' being paid 6.2%, roughly, because of that tax and in fact, the tax is coming out of the pay he otherwise would get. So in fact, the full 12.4% for social security is coming out of the worker side and nothing is being paid by the corporation. So we'll assign the incidents that actually pays that payroll tax to the worker. The same is true of Medicare tax. 
	How about the corporate income tax? There's three possibilities for the corporate income tax. It could be paid by corporations, the owners of corporations in the form of a lower return after tax. They've invested in the companies. They're getting money back either in dividends or capital gains. They could be getting a lower return because that corporation has to pay taxes. Alternatively the corporation could be paying workers less than they would otherwise pay them if the tax weren't in place. The corporation could invest in more capital, could make workers more productive, workers would have higher productivity and work for higher pay, so the tax is coming out of their hides. Or it's possible, that they're passing some of the tax onto consumers in the form of higher prices on their goods. There's a lot of disagreement among economists on that incident, the question who pays the corporate income tax?
	Some people argue that more than all the tax is paid by workers, believe it or not. There's a study by CBO that says that 70% of the taxes paid by workers and almost all the value goes to foreign workers because instead of investment in the United States, the investment goes abroad. It makes foreign workers more productive because they're the ones with more capital to work with. American workers have less, so the American workers are earning less. Our conclusion at this point is about 20% of the taxes paid by workers in the form of lower wages and the other 80% by corporations and it's split up in a way that's kind of hard to describe. 
	Talk about two different kinds of equity. Vertical equity and momentarily horizontal equity. Vertical equity says how do we compare up and down the income scale? Do higher income people pay more? How much more do they pay? Is there fairness going up and down the income scale when you compare people with different incomes?
	In contrast, we have horizontal equity that we're trying to compare people of equal incomes and say, "Are they paying the same taxes?" An example I use for that is LeBron James and Warren Buffett. LeBron James as you know makes his income by bouncing a basketball and selling shoes. He gets a lot of money. It's all wages so he's being taxed at the ordinary tax rates. They go as high as 36.9% and then a little bit more on top of that. Warren Buffett on the other hand makes his money from investment. He buys corporations. He makes them into better corporations. He gets income from those corporations. His income is mostly dividends and capital gains, all of which are taxed now at a maximum tax rate of 20% plus a little bit more. They have incomes that are not terribly different. Yet, Warren Buffett pays a lot lower tax than LeBron James. 
	That's the question of horizontal equity. Is that fair or not? You could argue it is fair if the money that Warren Buffett is getting has been taxed elsewhere. The money he's getting with corporations may have been taxed through corporate taxes and therefore is getting less than would otherwise getting. He is in fact paying more tax than it appears just by looking at the income tax. Or you could say, "No. That's not. The tax is really shared differently." Horizontal equity measuring across. Vertical equity measuring up and down. 
	We'll take a look at a vertical equity. Horizontal equity is really hard to work with because it's hard to say who is equipped. Is a family with ... A married couple with two kids and $50,000.00 of income, equivalent to a singe person with $50,000.00 of income? They both have $50,000.00 of income and on one sense they are horizontally equal. But in terms of their needs, the four people sharing the $50,000.00 in income is quite different than the one person with $50,000.00 in income. Measuring horizontal equity, are they the same, is hard. What is equal? What is horizontally equal in measuring what the taxes would be and then even not measuring what the incidents of the tax would be. 
	Vertical equity tends to be a little easier, but still you've got to question how do you rank people, in terms of who's better off, who's worse off, who's higher on the income scale. We're talking about power point at dinner and saying not too many words on power point. Is that clear enough for you?
	Incomes and tax is distributed unequally. In 2013, this year, we estimate that about half of all income will be earned by people in the top income quintile. Quintiles are fifths of the distribution. 20% chunks of distribution. So the lowest quintile is the first 20% of those with the lowest incomes. The highest quintile is those in the top 20%. The 20% of people with the highest incomes earned, slightly more than half of all income this year. In contrast, those in the bottom end, the lowest, only about 4% of income. As unequal as that is, taxes are more so because those rich guys are paying about 2/3 of all federal taxes. And the poor guys are paying so little that you can't even see their slice here. It's about 4/10 of 1% of all taxes. They're earning about 4% of all income and paying 4/10 of 1% of tax. Rich guys are earning half the income and paying 2/3 of tax. That's the progressive tax system. The more you make, the more you're paying as a share of your income. 
	Here's another way to look at it. Again, with the five quintiles now across the bottom of the bar for each one. Vertically the entire bar measures your total income before taxes. So at the bottom end, the lowest income quintile has before tax income of about $10,000.00. People on the top quintile have incomes on average of about $250,000.00 before taxes. The red is the amount of federal tax being paid by people in each income segment. At the very bottom, only 1.8% of income is going to federal taxes, leaving them with not very much different income than the $10,000.00 they started off with. Contrast at the very top, 27.5% of income is going to federal taxes, leaving them with substantially less. But know that there's still, even after taxes, very, very unequal distribution of post-tax income. The blue bars.
	If we go further up the distribution, let's take this top income quintile and break it up into smaller pieces and you'll notice I had to change the vertical scale, here. The top now is back here ... Oh, sorry. I didn't need that one. Back here is only $250,000.00. Well now, we have to go to $8 million to get the average income for the top 1/10 of 1%. I've got the 80th to 90th percentile. The 90th to 95th. 95th to 99th. These guys all sort of disappear on this big scale because being up to the 80th percentile, you have to make a little more than $100,000.00. The 90th percentile, about $180,000.00. To make it to the top 1/10 of top 1% you need to make about $600,000.00. More than $600,000.00 your pre-tax income is approaching $1.7 million. And it gets to the top and you have to have about $2.2 million in income to make it into the category. On average those people have almost $8 million of income this year. Even at the very top, taxes are very progressive. These in the 80th to 90th percentile are only paying 20% of their income in taxes. People in the top 1% on average are paying 36% and people at the very top are paying 38%.
	Still though, after taxes, very, very, very unequal distribution of income at the very top. This has changed a lot in recent years. If you go back over the last 30 years, the income at the top of the income distribution has grown remarkably fast. Income through the rest of the income distribution has grown much more slowly. Up until a couple of years ago, almost all of the income gain was going to the top ten. If you looked at the change in income after adjusting for inflation and changes in family size and so forth, from 1979 - 2005, people in the bottom quintile saw their real incomes go up by 1%. People in the middle quintile saw their incomes go up by 15%. People in the top quintile, the top 20%, saw their incomes go up by 90%. And people in the top 1% saw their incomes go up by a factor of three. They tripled. So bottom end, 1% increase. Middle, 15%. Top 1%, 300% increase in income. At the same time, tax rates went down for everybody but went down more at the top end. 
	That's exactly why President Obama argued since he started running for President in 2007 that we need to tax the high income more because they're the ones that have done well in recent years. They're the ones that have the ability to pay more tax. The rest of the income distribution doesn't have that ability to pay. Things have been somewhat different over the last few years, the great recession hit people very hard. One thing that the IRS comes out with every year is a look at the top 400 taxpayers. Those guys took a real hit with the recession. Their incomes dropped by about $90 million each on average. Almost all of that was taking smaller capital gains. We could almost ... make it about a substantial for a share of their income. About 2/3 of their income comes from capital gains, which has received favorable tax treatment. For those people with very volatile incomes, this picture wouldn't show if I were doing it for the middle quintile.
	There's another way to look at it. Here what I want to do is break out the different kinds of taxes. I've got four different kinds of taxes listed across the bottom. The dark blue is the individual income tax. The tax before filing on April 15th. The red are the payroll taxes for those that fund social security and Medicare. The light blue is the corporate income tax. And the red is the estate tax. Or the pink, it is. 
	At the very bottom of the income distribution you'll see income tax, the blue, is negative. People on the very bottom quintile are paying about -7% of their income in taxes. In other words, they're getting payments from the government augmenting their income by about 7% of what they're getting from market income. They're paying payroll taxes that are bigger than that and they're share of the corporate tax is enough to bring them to the 1.8% we saw on the last graph.
	By the time you get to the middle quintile, income tax are now positive and they grow very rapidly as a share of income. These percentages up here by income taxes are what? 26% of income. Income tax is very progressive. In contrast, payroll taxes, the red bars, gets smaller as you get to the top. That's because we don't tax all income. We don't tax for Medicare purposes, all earnings. And we don't impose any of these taxes on unearned income, on investment income. So at the top end where people are getting a lot of investment income and much of the earnings are not subject to social security tax, because only that first $113,700.00 is subject to that. Their share of income going to payroll tax is very small. This is what? 2%. Less than 2%. By blue, the corporate income tax you'll see grows and this is a function of the fact that much of the tax is paid by investors and perform lower returns. So much of that tax is being paid by people on the top end of the distribution. 
	And the estate tax is only paid by people at the top end. There is nothing paid below the 95th percentile. The pink here is because of these rich guys. It's meaningful over in here at the top. One question to toss at you. I want to watch the time. One question they ask us to do is who pays the estate tax? There are two possibilities. The estate tax could be paid by the person who dies because he has less to leave after taxes. Or, it could be bourne by the people inheriting the tax. Inheriting the estate from the individual. Most people argue that it depends on the purpose for leaving an estate. If you left it accidentally, I just died too soon, before I could use up all that I had, then the tax burden is on the person dying, because you didn't use all that money. If you view it as I'm getting money to these kids because they need it. I'm transferring it to them, making them better off, then you can argue that they're the ones suffering the costs. Most economists will argue that the cost imposed on the decedent and that's what we do here.
	Okay. Let's talk about how we do our income taxes. I don't know how many of you recognize any of these forms. You don't have to fill them out. If you miss any of them, I've got on my tie tonight. My favorite tie for giving talks about taxes. It's pieces of tax return. I want to simplify a way ... I want to start by saying, "How do we impose a tax on income?"
	Let's start off with all income. We'll break it into three pieces. First is earnings. Earnings get hit by two kinds of taxes. You pay the income tax. You pay payroll taxes. Another big chunk of income is capital gains and dividends. We tax that only through the income tax but we tax it in lower rates, preferential rates no higher than 20%. The income tax on earnings can be as high as 39.6%. Then the rest of your income gets hit only by the income tax. 
	How does the individual income tax work? Well, we start out with our income but there's a big chunk of that we're not getting taxed at all. We first allow you not to count, not to report, not to tell us income you got from a number of different sources. We're saying if you earned income interest from municipal bonds, the bonds that cities float in order to fund capital investments, you don't have to pay tax on the interest paid on those bonds. If you get social security, at least 15% of your social security benefits are exempt from tax. And if you're low income, 100% of your social security is exempt from tax. If you take a job overseas, you're about to graduate a job overseas is a good thing, because the first $90,000.00 you earn is not subject to federal income tax. Earn that money, bring it home tax free. 
	Overall the excluded total of 18% of our income because of these various rules that say you don't have to count the income. We also allow exemptions. Every person reported on your tax return, you, your spouse, your dependents, it's an exemption of $,4900.00. So if you're a married couple with three kids, that knocks $19,500.00 off your taxable income. You don't have to pay taxes on it. That in total is about 11% of all income not subject to tax. 
	Then we allow deductions. You can either take the standard deduction, a fixed amount for a tax return, $6,000.00 for individual. $12,000.00 if you're a married couple filing a joint return. Or if you choose, you could itemize your deductions and say, "There's certain things I'm allowed to count as deductions, reduce my income." The biggest ones ... Well, we'll talk about the biggest ones in a few minutes. But the ones that show up most obviously, taxes you pay to state and local governments, interest you pay on your mortgage, money you give to charities. You give money to [inaudible 00:35:27] and seniors on the way out the door, give the money. A lot of money so you can deduct it and it makes sense to itemize. If you have enough of these itemized deductions to make it more than the standard deduction, you want to itemize, reducing your income subject to tax. And again, that adds up to about 15%. So overall, we're left with only 57% of income subject to tax and 43% doesn't see the federal income tax at all. 
	We then apply an appropriate tax rate. And appropriate depends on the kind of income it is through your taxable income, and that gives you a measure of your tax before we give you any tax credits. Then we allow you to subtract off credits to get the income tax you pay. Tax credits differ from the reductions in income in that they reduce your tax bill directly. A $1.00 credit reduces your tax bill by $1.00. A tax deduction reduces the income subject to tax by $1.00, but that saves you taxes only based on the tax share of that paid in taxes. If you're paying a 15% tax rate, that $1.00 deduction is worth 15 cents. Contrast $1.00 credit is worth a $1.00 reduction in your taxes.
	Big credits here, the child tax credit. $1,000.00 per child under age 17. Another one's the earned income tax credit. If you're a low income worker, you get a subsidy from the government equal to as much as 45% of the first $8,000.00 or $9,000.00 of income that you earn. A boost of income for low income workers, encouraging to go to work, encouraging to work more. There's a credit for having child care. Dependent care so you can go to work. You can deduct up to $6,000.00 for two children, $3,000.00 for one child and you get a tax credit equal to as much as 35% of that. I think that's the right number to use there. 
	Put all these together, we've got five ways in which taxes are reduced. What we call tax expenditures. Spendings with the tax system by allowing you to reduce your taxes from various activities. Exclusions, exemptions, deductions, credits and preferential tax rates. These are the biggest tax expenditures as measured by the joint committee on taxation that congress's taxing committee. I'll talk about a few of these very quickly. I'm gonna run out of time if I don't talk faster. 
	The biggest one is exclusion of employer health insurance contributions. This is the one that 60% of us get our health insurance through our employers or through somebody in our family employer. The cost of that insurance is not subject to income tax. You get that tax free and that's a lot of money. For a family, the plan will cost them somewhere around $15,000.00. For an individual it can be anywhere from $5,000.00 and $8,000.00. Income not subject to tax, that reduces revenue by an average of about $200 billion a year over the next five years.
	Other big ones, not taxing benefits on employer sponsored retirement plans. If I contribute to a retirement plan I don't pay taxes on, that income until I draw it out. There's that deduction for home mortgage interest. I pay interest on my mortgage, I don't have to pay taxes on it. That's one of my bugaboos, I hate that one. 
	Let me describe a quick spending program I proposed to help encourage people to buy a home. I'm gonna offer the following deal. If you're a person who's relatively low or moderate income, I'm gonna pay 10% maybe 15% of your mortgage interest. If you're a rich guy, you have that big house to buy, it's expensive. I'm gonna pay 35% of your mortgage interest. You're a rich guy. Do you think that's a good idea? 35% subsidy for the rich guy. Make it 39.6% now. 10% or 15% subsidy for the poor guy. That's exactly how our mortgage interest works because rich people, a $1.00 deducted saves him 39.6 cents in taxes. The poor guy, in 10% or 15% tax bracket saves only .10 or .15 cents. So we're subsidizing rich people to buy big houses a lot more than we're subsidizing lower and middle income families to buy more moderate houses. 
	Crazy way to spend our money. Are we likely to get out from under that? Good luck with that. The real estate industry fights tooth and nail for this one. It's $120 billion a year that we're not collecting in revenue. And by the way, it doesn't increase the rate of home ownership. There's no evidence that allowing people to deduct their mortgage interest makes them more likely to buy a home. What it does, is it makes them more likely to pay more money for the home and buy a bigger home. But to buy a home in the first place, there's no evidence that this encourages home ownership.
	A number of other things, I don't have time to talk through all of these but lots of these. In total tax expenditures reduce revenues by about $1.3 trillion a year. And remember the total revenue we collected was about $2.4 trillion. This is $1.3 trillion we don't collect because of all these tax breaks. We'd have half again as much revenue. More than closing our budget deficit. 
	For benefits on all these tax expenditures very quickly, what I've done here is divided the board into four populations. The red is people in the top 1/10 of 1%. Those are the richest 1 in 1,000. The light color here is the rest of the ... 20%. The top quintile. The light blue is the middle 60% and the dark is the bottom 20%.
	Capital gains and dividends are tied to the lower rate. Half the benefit goes to the people on that top 1/10 of 1% and fully 95% goes to people in the top quintile.
	Itemized deductions. Most of that goes to people in the top quintile. Some of it's going to the people at the bottom here. But a lot of it's the richest 20%. 75% goes to the richest 20%. 
	Exclusions from AGI. These are the exclusions that we had. Again, well over half, 60%, going to the top 20%. These are things that are not included in income above line. Again, more than half go to the people at the top. 
	When we get out to credits, we start moving down the distribution. Here 80% of the non-refundable credits and 95% of refundable credits, go to people in the bottom 80%. And of refundable credits, about 30% goes to people in the bottom quintile.  Difference between refundable credits and non-refundable credits, a non-refundable credit can only offset positive taxes. It can bring your tax down to zero, but it can't pay you any money. A refundable credit says once we've zeroed out your taxes, if there's anything left, we'll send you a check for the difference. The refundable credits, not only does it zero people's taxes out but they give them cash payments. That's why we had that negative income tax rate that we saw earlier.
	But notice, depending, which kind of distribution you've got here or, which kind of tax expenditure, it affects different people throughout the income distribution. If we look at all tax expenditures though, 15%-20% go to people in that top 1/10 of 1% and over 60% go to people in the top quintile. Those are very unequally distributed in terms of who benefits from tax expenditures. Going after these tax expenditures, reducing them, increasing our revenues would target people at the top end of the distribution, those most able to take it. 
	Okay, I want to talk about the fiscal cliff or actually fiscal cliffs, because there are more than one of them. Let's talk about the first fiscal cliff, the one we passed over. January 1st we were supposed to actually fiscal cliff that included tax increases. I was supposed to include the sequester that you're all hearing about these days, cutting domestic and defense spending and we're also about to hit our debt ceiling. 
	Congress actually allowed one of these things to happen. Some of the tax increases occurred. But they pushed off the sequesters until tomorrow, maybe they'll happen tomorrow. I shouldn't say maybe, they will happen tomorrow. We'll start cutting domestic spending, start cutting defense spending tomorrow but things won't hit very quickly, they'll build up over time. The federal government will start laying off workers, they're furlowing workers in April. Just in time when the IRS pays to not be there to collect your tax return. They're still due by the way, on April 15th. You don't get a break or that. Federal debt ceiling, they pushed off til May 18th and they can probably push it further than that if necessary. And then there's one more fiscal cliff in the middle there, the government funding has expired. Congress only funded the government this year up through March 27th and they have to fund it again if we're gonna keep the government in business after that. 
	A little more discussion of this. What happened to the tax increases? There were a few things that happened. One was the expiration of the temporary payroll tax cut for the last two years. We had a 2% reduction in the payroll tax, financing, social security. They took the tax rate from 6.2% on workers earnings down to 4.2%, so that disappeared. That tax cut had saved households an average of about $900.00 a year. With expiration of that, that's $900.00 a year pulled out of people's pockets. [inaudible 00:44:53] we've got about $120 billion pulled out the economy this year, relative to what was there last year.
	Expiration of the 2001, 2010 tax cuts, but only for high income people, extended those tax cuts for everybody except the top ... It was gonna be 2% if President Obama had his way but when they finally settled on it, it became the top 7/10 of 1%. We raised taxes on 7/10 of 1% of the population by not allowing the Bush tax cuts and the Obama tax cuts to continue for them. 
	And we have some new taxes that took place, that started up this year to finance the healthcare reform that was passed in 2010. Those taxes hit only high income people. In order to get hit by that you have to be a couple with more than $250,000.00 income, a single person is more than $200,000.00. That's the top 2% of the income that you need. 
	What would've happened, we don't know the cliff but there's the big bottom line. $536 billion of tax increases. $500 billion pulled out of the economy. That's about 3% of GDP, that by CBO's calculations would've reduced economic growth by about 3%, 3.5% over the course of the year if it had lasted through the whole year. Our economy has been recovering very weekly from the depression, the recession that we've been in. This would've reversed that. We would've gone into a new recession but we didn't quite get there. Instead, our expiring tax cuts, payroll tax, pulled $115 billion out. This is what would've happened if we allowed the other tax cuts to increase and we got about $24 billion from new tax care law. 
	See what the distribution actually was, this is what would've happened if we'd gone over the cliff.  The five quintiles down there at the bottom, their taxes would've gonna up anywhere from $400.00 to $14,000.00 on average for those five quintiles. On this vertical axis though on measuring income is a share ... taxes as share of income so what's the effective tax rate. This would've raised the tax rate on the bottom four quintiles by about four percentage points. That's 4% of their income would've gone to pay additional tax. For this top quintile it would've been close to 6% and here, I've got the top 1%. They would've been hit by an annual $120,000.00 tax increase, about a 7% increase in their amount of income.
	What actually happened, about 1/3 as much for these bottom quintiles. For them it's all a payroll tax. For the top, about 2/3 of a tax increase occurred. Part of that's because we allowed tax rates on the highest incomes to increase. Part of that is because the new health care taxes took effect for higher income people. Be we get a lot smaller tax increases, even these rich guys that did get a tax increase, got a lot smaller increase than they would've gotten had they been allowed to play out and the schedule to play out.
	This is another cut on the same thing but I've got the tax rates that they're paying. The dark blue is the tax rates they were paying before increase. The light blue is what would've happened to those tax rates. The red is what actually happened. So well over their tax rates, the biggest increases are down here. Their tax rate went from 1 ... .6% up to about 1.7% total. That's 1.1% increase. Here at the top it went from about 31% to about 35%.
	The second fiscal cliff is the one that's gonna hit tomorrow. Sequesters cutting domestic and defense spending. That will cut spending about $85 billion this year, about a trillion dollars over 10 years. In addition to that trillion dollars, you've got $200 billion in debt service interest on the national debt that would not be paid because we're not spending that money. It's only in discretionary spending that it protects all the mandatory spending. All the programs that are built on law and go on year after year without any congressional intervention. Discretionary programs, congress has to renew every year saying you're allowed to spend this money. Virtually all defense spending is discretionary. The things that are mandatory spending are primarily social security, Medicare/Medicaid, the big transfer programs. It's split between the defense and non-defense. Big cuts in both.
	The DC area is very, very worried about this because their so heavily dependent on defense. Fairfax County, where we live, there are a lot of defense contractors who are laying off workers or giving workers warning that may be laid off very shortly because of the sequesters. 
	So a lot of things are happening, whether or not the sequester occurs or whether or not the sequester lasts. In April, there will be a lot of federal workers being furlowed, being told to take a day a week off or a day every couple of weeks off. They suspect that will reduce their incomes by about 5% over the course of the year and that will have a hit on the economy. CBO estimates that if the sequester, if it lasts through the year, will reduce economic growth by about 1.5%.
	Third fiscal cliff, the government funding expires. Congress has not passed a budget for fiscal 2013. That's the fiscal year that started last October. We're almost halfway through the year. Congress, instead of passing a new budget saying, "Here's what you can spend." Says instead, "Well, you can continue spending like you used to spend but only through March 27th. March 27th we'll think about it again." And if they don't do anything, the government will shut down. 
	The government did shut down a few years ago. It had a very personal affect on us. We had tickets to go see an exhibit at the National Art Gallery and because the government was shut, our tickets were worthless and we didn't get to see ... Was it Van Gogh we were going to see? Van Gogh exhibit, yeah. It gets personal every once in a while. 
	The final one is one coming up in May. It's estimated about May 18th. It's guessed about when the federal ceiling will be hit. Congress sets a limit on how much government can borrow, how big debt can be. When we get close to that limit, either congress has to raise it or the government has to say, "We can't borrow anymore money and if we can't borrow more money, we can't pay our bills." There was a January agreement to allow the debt ceiling to rise with the amount of additional spending but only through May 18th. After that, they have to decide what's gonna happen. Well, the ceiling will be there but it estimate it won't bind, actually constrain the government's activities until sometime in August. If we actually get to that point, the government will stop paying some of the bills it's supposed to pay.
	So we've got a bunch of fiscal cliffs in front of us not just the one we had in January and you can bet each of these fiscal cliffs will get kicked down the road a little bit, although, we're gonna go over one tomorrow. There will be a sequester starting tomorrow. The question is, how long will they allow it to continue and how bad it will be for the economy.
	Okay. Last and foremost ... Well, not foremost. Last and most fun. 47%. 47% got a lot of publicity during the campaign when Mitt Romney said he didn't care about the 47% because they don't have any stake in the economy. Where does 47% come from?
	Here's a brief history of it. Back in 2009, June 2009, I published this one page paper. That's the whole paper right there. Saying how many people don't pay federal income taxes and this wonderful tables on here has lots and lots of numbers on it but the key number down here is 46.9, 47% of people, overall, all tax units, all incomes didn't pay federal income tax in 2009, best guest at the time. Nobody cared about this. Nothing happened with this piece of paper. It sat in Tax Notes, a very obscure journal in daily, probably comes out about five times a week in DC. It's read by tax lawyers and a few tax aficionados, people who are willing to where a tax tie sometimes. Nobody else reads it. 
	But the following tax season, an AP reporter located this thing and put something out over the wire saying, "47% of Americans don't pay federal income tax." So what happened next? Well, it became a little viral on the Cable News Networks and in fact, I was invited to be on ... I think it was FOX. The statement by one of the announcers was, "47% of all U.S. [inaudible 00:53:43] pay not one dime in taxes." Well it's not true, not one dime in taxes. I'll tell you the whole story momentarily. What do you do? What is the real story? Well, who does it take to get it right? Jon Stewart. I didn't get on the Jon Stewart show, on the Daily Show, but my paper did. Three seconds of fame. There it is. Prove it. 
	So what is this story? I'm gonna tell you the story in three different pieces. Actually, one of the real good things that happened with this, anytime I want to go to the Daily Show, I just call them up and they give me a ticket. I haven't gotten to New York yet but my daughter got to New York. She shows up and they invite her inside to the Green Room. And she's back there sitting in the Green Room as the various actors come back and forth, "Wow. Good deal." All's it takes is one paper in an obscure journal and someone picking it up. One crazy idea. 
	So, what's the real story? Recession and the stimulus measure really made a difference in how many people didn't pay any income taxes. Here's the percentage of people who didn't pay any income taxes starting in 2004 and running up to 2013. You'll see before the recession, it was 40 drifting down, 39%. Here comes the recession 2008 and suddenly it jumps to 50%. Why is it 50%? Well, a couple of reasons. People lost their jobs. They had less income. If your income's low enough, you don't pay federal income taxes. So a lot of people didn't pay federal income taxes because of that. But in addition, George W. Bush gave a big tax stimulus payments to people. $600.00 per adult. $300.00 per kid. That zeroed out taxes for a lot of people who were previously paying taxes. So suddenly we jump from 40%, 39% to 50%. The next year, 2009, we got the same thing again. The economy's a little bit worse and President Obama's tax stimulus is putting money in people's pockets. 
	What happens after that? Well the economy starts getting better, just downward. Then in 2011, things go down a lot because the stimulus stopped putting money into your income tax, giving you an income tax break and instead become a payroll tax cut. These aren't payroll taxes, these are income taxes. So suddenly those people who were not paying income tax because the stimulus bill cut income tax, are now getting a payroll tax cut, but they are now paying income tax and we're down to 42%. As the economy's gotten better, we're down to 40%. And if you look at that over time, we're gonna continue to drop and by the end of the decade, we'll be down to 31% of people not paying federal income tax. That's a lot different from half the people, or 47%. 
	So whoever runs for President in 2020 is gonna say, "I don't care about that 32% of people." That doesn't have nearly the ... that 47% even with these video cameras or cellphone cameras.
	Okay, secondly, almost everybody pays some federal taxes. We're only looking at income taxes here. Overall in 2013, our estimate is 60% of people will pay income tax, about 40% won't pay income tax, but of that 40%, 2/3 of them are gonna pay payroll taxes because they're working. Some money's gonna be taken out of their paychecks for payroll taxes. If we look at the same graph we had before of people not paying income taxes, these are the people who are not paying payroll taxes but they are all ... All this blue here is people not paying income taxes but they're paying payroll taxes. If you're blue, you're paying payroll taxes. If you're red, you don't pay payroll taxes. 2/3 of the people not paying income taxes are paying payroll taxes. Only 1/3 of them aren't paying either one. 
	How about those that are not paying either the payroll taxes or the income tax? Well, about 2/3 of them are elderly. People who are relying on social security and pensions. They're not working, so they're not paying payroll taxes. Their incomes are low because they don't make very much money. They're not paying taxes. Another 3.5% are non-elderly people who don't have jobs and their incomes are below $20,000.00. They just don't make very much money. They're not paying taxes because they're poor. We're left with 7/10 of 1% of people who are not working and therefore not paying payroll tax, not elderly and making more than $20,000.00. That's a lot smaller number than 47%.
	The interesting thing is though is there are people in that income category who have very high incomes. In 2009 there were 1,400 people with incomes of a million dollars or more who didn't pay any federal income tax for one reason or another. So it's not that there aren't rich people not paying income taxes, and I could spend all night telling you about the Alternative Minimum Tax, which was congresses way of going after high income people who didn't pay income taxes. Congress imposed the AMT back in the 60s because the Treasury Secretary reported to congress that there were 155 people with incomes over $200,000.00 who didn't pay any federal income taxes in 1957. And congress said, "Oh my god. We better change this." And they imposed a new tax, the Alternative Minimum Tax. 
	Yeah.
audience:	[inaudible 00:59:00]
Speaker 1:	I honestly don't know. A lot of it was because they had income from overseas. And that was not-
audience:	[inaudible 00:59:06]
Speaker 1:	Well some of it's taxable here, some of it isn't. A lot of it had to do with the fact they were getting foreign tax credits, credits for taxes paid overseas but not paid to the United States, so they don't have to pay those taxes. 
	Part of it is they gave away a lot of money because they could deduct the federal contribution. A lot of things fit into it. But I can't tell you very much about those individual people. Thank you for the question. I'm glad somebody asked a question finally. I get a chance to wait for a moment while you ask. 
	Okay. Finally, almost everybody pays other taxes. Federal excise taxes, those are the taxes you pay on tobacco, alcohol, airline tickets, bows and arrows. Anyone buy a bow and arrow recently? State and local taxes. The taxes we pay to our state and government on local sales taxes. Every time you go down the store, you buy something and you pay ... What is it here in Pennsylvania? 6%? 7%? 12%? 6%. We just raised ours so we could get rid of our gas taxes in Virginia. We're not gonna have a gas tax in Virginia anymore, we're gonna have a higher, more aggressive sales tax. Our state income taxes. People pay state income taxes. People pay property taxes either directly or indirectly. All these kinds of taxes. Almost everybody pays some tax. Even if you're not paying other federal taxes, you're still paying something.
	And finally, income tax does two different things. As I said before, it raises revenue and delivers social policy. I'm gonna take the same ... Now I've got my pie chart but I'm gonna stretch it out into a bar and eventually I'm gonna fill in this whole thing. I've got incomes down the side. But here, this is everybody. And about 60% of the population taxable, 40% paying no tax. Of that 40% pays no tax, half of them pay no tax because they have low income and half of them because of tax breaks. Those tax expenditures. The tax with low income, the standard deduction in personal exemptions alone is zero off their taxable income. They have no taxable income after you've taken off the most basic things we say you shouldn't pay tax. That's half of the people not paying taxes. They're just too darn poor. The others are getting these tax expenditures. The exclusions, the itemized deductions, the tax credits, all these different bells and whistles, the tax loopholes, the tax breaks, the tax preferences, the tax expenditures that zero out their taxes.
	This stretches out to the whole thing. The blue is people worked who are paying tax. The red is people who are not paying tax because they're poor. The green is people who are not paying tax because of tax breaks. We're starting at the bottom here with people only making less than $10,000.00. Almost all of them are paying no tax because their incomes are so low. $10,000.00 - $20,000.00 there you're getting quite a few people paying tax now but more of them not paying tax because of the tax breaks. As we work our way up, the low income disappears. The tax breaks get smaller and smaller and by the time you get up to the top, over $100,000.00, you've got 97%, 98% people paying income taxes.
	It differs a lot across the income distribution. Again, poor people don't pay taxes because they're poor. But a lot of people don't pay taxes because there's green in all of these tax breaks they have. This just breaks out the kinds of tax breaks that there are. About 44% of all these tax preferences, that's the stuff in greens. All these green pieces. I'm breaking the green up into types. Of that green, about 44% of it is breaks for the elderly. We give them ... We don't tax the social security they get. They don't tax all the social security you get. The elderly people get an extra deduction, a bigger deduction. There are things that the elderly get that the rest of us don't. 
	About 30% is credits for children and working poor. And the remaining core is all these bits and pieces. Exclusions and transfers, itemized deductions, education credits that these guys, the parents will get and so forth. 
	So most of it, 75% of it is for families with kids, poor families and the old. 
	Yeah?
audience:	[inaudible 01:03:13]
Speaker 1:	This is the percentage of the value of tax expenditures that's created by the different kind of provision. So 44% of all the tax reductions, because of these tax expenditures, are because of the ones for the elderly. In other words, almost 1/3 thinks the benefits for the poor and the families with kids. 
	And just to make it even more complicated, there's the whole thing by types of ... I'm not gonna try to explain that. If you want it, it's in a paper we wrote.
	Yeah?
audience:	Earlier in your presentation you started [inaudible 01:03:53]. What would you recognize [inaudible 01:04:05].
Speaker 1:	There are two things we can do on that. One is ... Well, I'm gonna do it two sides. I'm gonna do one on the funding side and I'm gonna do one on the spending side.
	On the funding side, charge people like me more. I'm pretty well off. I should pay a larger share. I'm gonna get a real bargain when I retire. Actually I shouldn't say that. I'm on Medicare already. If I collect all the Medicare benefits that i could potentially get, I will have about $800,000.00 or $900,000.00 worth of benefits and it will cost me a couple of hundred thousand dollars to have it. That's crazy. Why should we be paying that much for healthcare for people who are able to cover their own costs, able to buy insurance on the market. We need a market that let's people buy insurance. We should allow that. But we don't need to subsidize very rich people. We need to subsidize poor people. They can't afford to buy health insurance. That's part of what Obamacare is gonna do. That's part of what Medicare does. Medicaid backs it up. So it makes people who can pay more, pay more, on the funding side.
	On the spending side, we've got to figure better ways to spend money more efficiently. One is, make us more accountable for the medical decisions that we decide, that we make. If I decide to go to a doctor, it ought to cost me something. If I go to a doctor tomorrow, I pay zero. Because I've got Medicare, I've got two health insurance plans and when you add them together, I walk into the doctor's office. I walk out and they say, "Goodbye." I look down at the bill and say, "Goodbye." Nothing. What's the incentive for me to not go see the doctor other than the fact I don't like to go see doctors? There's virtually no incentive because I'm not sharing the cost. So we need to have an economic stake in the game for the people making the decisions. 
	And you've got to put the same economic stake in the game on providers by saying, "You've got to provide the kind of care that is effective and does something rather than just doing a procedure because you're gonna get paid for it." We've got to get away to pay providers that will give them an incentive to provide the best kind of care available to keep you healthy, to keep everybody healthy and not spend as much money doing so. We know it's better to keep people healthy than to wait and treat them after they're sick. We just don't have a good way to do that and we need to figure out a way to do that. 
	Part of what Obamacare is all about is trying to move things in that direction, changing incentives. We're not there yet because we don't have all the things we need to do that. But that's something ... I could spend another-
audience:	[inaudible 01:06:47]
Speaker 1:	Good summary of ... And there's a lot more to it than that. There are all sorts of problems. If this was an easy problem we would've solved it 10 years ago, 20 years ago. It's really hard not much closer to solving it now. I could come back next year and give the next lecture again but we'll do it all on Medicare. 
	Okay, so where does this all leave us? This is my last fly. Tax policy was a major factor in the Presidential election. I believe it by the amount my phone was ringing and in the deficit and fiscal negotiations. It will continue to be. Revenues have to rise to cover our costs. Even with spending cuts. There's no way the American people will be happy with the degree of spending cuts we need to balance the budget with the revenues we're scheduled to get today. We need more money to pay for the things we want. 
	One of the things we haven't decided as a country, one of the things congress hasn't decided, one of the things the President hasn't decided and we as a population hasn't decided is how big we want government to be. And a lot of the argument right now is over bigger/smaller. We don't know what it's gonna be. Once we decide how big we want government to be, how much we want government to do for us, then we know how much money we need to pay for that and we know how much we have to go after in revenue. We don't know that.
	But we almost certainly have to increase revenues to cover our costs because the amount we have to cut just isn't gonna make up the balance.
	Yes?
audience:	[inaudible 01:08:17] sale of bonds to [inaudible 01:08:50]. 
Speaker 1:	The problem with bonds is that's just borrowing again. We're doing that. We're already borrowing to pay for those wars and selling bonds, again, is a form of borrowing. What we really need to do is start taxing people. You want to fight a war? Is it worth fighting? Do we want to fight it? Are we willing to pay for it? Raise our taxes. Pay for it with taxes. Bonds are exactly what we did. We put it on the credit card and that's the same as selling bonds in some sense. But that's really not the way to go about it, the way to go about it is say, "Are you willing to put your money where your mouth is? Or put it where your guns are."
	Okay, tax expenditures are gonna be part of the equation. They're on the chopping block.
	Yeah?
audience:	[inaudible 01:09:30]
Speaker 1:	Right. Yes. I've got a set of slides-
audience:	[inaudible 01:09:46]
Speaker 1:	I've got a set of slides and I chopped that. What you see if you look at the history of the income tax in particular, it follows a scalloped pattern. Taxes rise, and they hit a point and congress says, "Oh, that's too high. We'll cut taxes." And then they cut them and it comes down. Tax rates and the taxes coming out of the ... when taxes stay the same, as incomes grow, revenues rise. When these tax revenues, tax rates in place, as our income grows in real terms we move into higher and higher tax brackets, we pay more of our income, a higher share in taxes, remedies rise relative to the economy. Every once in a while ... Yeah?
audience:	[inaudible 01:10:30]
Speaker 1:	I didn't see that woman. 
audience:	[inaudible 01:10:38] I did this in college too. 
Speaker 1:	Yeah. I didn't see her then. 
	We get this spiraling effect. Congress steps in and brings things down. That's why we've kept this roughly steady over time. But we see a rise and fall, year to year or decade to decade. Virtually every decade you see this scallop effect. 
	Let me finish. Make Amanda happy. 
	Taxes that are gonna be on the chopping block but finally I have no idea what the outcome is gonna be. Nobody has any idea what the outcome is gonna be. I do know that we're gonna be very busy in Washington doing whatever it is we do when we hit the fiscal cliffs and taxes are gonna be a big part of that and I'm not gonna have any problem being employed for the foreseeable future. Thank you.