[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]

FUNDAMENTAL TAX REFORM

=======================================================================

HEARING

before the

COMMITTEE ON WAYS AND MEANS
U.S. HOUSE OF REPRESENTATIVES

ONE HUNDRED TWELFTH CONGRESS

FIRST SESSION

__________

JANUARY 20, 2011

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Serial No. 112-01

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Printed for the use of the Committee on Ways and Means

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COMMITTEE ON WAYS AND MEANS

DAVE CAMP, Michigan, Chairman

WALLY HERGER, California SANDER M. LEVIN, Michigan
SAM JOHNSON, Texas CHARLES B. RANGEL, New York
KEVIN BRADY, Texas FORTNEY PETE STARK, California
PAUL RYAN, Wisconsin JIM MCDERMOTT, Washington
DEVIN NUNES, California JOHN LEWIS, Georgia
PATRICK J. TIBERI, Ohio RICHARD E. NEAL, Massachusetts
GEOFF DAVIS, Kentucky XAVIER BECERRA, California
DAVID G. REICHERT, Washington LLOYD DOGGETT, Texas
CHARLES W. BOUSTANY, JR., Louisiana MIKE THOMPSON, California
DEAN HELLER, Nevada JOHN B. LARSON, Connecticut
PETER J. ROSKAM, Illinois EARL BLUMENAUER, Oregon
JIM GERLACH, Pennsylvania RON KIND, Wisconsin
TOM PRICE, Georgia BILL PASCRELL, JR., New Jersey
VERN BUCHANAN, Florida SHELLEY BERKLEY, Nevada
ADRIAN SMITH, Nebraska JOSEPH CROWLEY, New York
AARON SCHOCK, Illinois
CHRIS LEE, New York
LYNN JENKINS, Kansas
ERIK PAULSEN, Minnesota
RICK BERG, North Dakota
DIANE BLACK, Tennessee

Jon Traub, Staff Director

Janice Mays, Minority Staff Director

C O N T E N T S

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Page

Advisory of January 19, 2011, announcing the hearing............. 2

WITNESSES

The Honorable Nina E. Olson, National Taxpayer Advocate.......... 6
Robert A. McDonald, Chairman of the Board, President and Chief
Executive Officer, The Procter & Gamble Company................ 39
Warren S. Hudak, President, Hudak & Company, LLC................. 51
Kevin A. Hassett, Ph.D., Senior Fellow & Director of Economic
Policy Studies, American Enterprise Institute.................. 57
Martin A. Sullivan, Ph.D., Contributing Editor, Tax Analysts..... 70

SUBMISSIONS FOR THE RECORD

Questions for the Record......................................... 108
John Pettengill.................................................. 114
John W. McClelland............................................... 115
Geoffrey Burr.................................................... 115
Georgia Crowell.................................................. 118
Michael D. Warlick............................................... 118
Katherine G. Lugar............................................... 118
Novogradac & Company LLP......................................... 121
Phillip J. Bond.................................................. 121
John Pettengill.................................................. 123
Bobby L. Austin.................................................. 123
Neil G. Rogers................................................... 127
Alvin S. Brown................................................... 127
Matt Lykken...................................................... 136
American Citizens Abroad (ACA)................................... 142

FUNDAMENTAL TAX REFORM

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THURSDAY, JANUARY 20, 2011

U.S. House of Representatives,
Committee on Ways and Means,
Washington, DC.
The committee met, pursuant to call, at 9:03 a.m., in Room
1100, Longworth House Office Building, the Honorable Dave Camp
[chairman of the committee] presiding.
[The advisory of the hearing follows:]

HEARING ADVISORY FROM THE COMMITTEE ON WAYS AND MEANS

Chairman Camp Announces First in a Series of Hearings on Fundamental
Tax Reform

First Ways and Means Hearing of the 112th Congress

to Examine the Burdens Imposed by the Current

Federal Income Tax System and the Need for Reform

January 19, 2011

House Ways and Means Committee Chairman Dave Camp (R-MI) today
announced that--pursuant to House Rule XI, clause 2(g)(3), and with the
concurrence of the Ranking Minority Member--the Committee on Ways and
Means will hold a hearing on the costs imposed on families, employers,
and the economy at large by the current structure of the Federal income
tax. The hearing will take place on Thursday, January 20, 2011, in 1100
Longworth House Office Building, beginning at 9:00 A.M.

In view of the limited time available to hear witnesses, oral
testimony at this hearing will be from invited witnesses only. However,
any individual or organization not scheduled for an oral appearance may
submit a written statement for consideration by the Committee and for
inclusion in the printed record of the hearing. A list of invited
witnesses will follow.

BACKGROUND:

This year marks the 25th anniversary of the enactment of the
bipartisan Tax Reform Act of 1986 (Pub. L. No. 99-514)--landmark
legislation that broadened the tax base by closing loopholes and
curtailing tax expenditures, while dramatically reducing marginal tax
rates on both individuals and businesses. Since then, marginal rates
have gradually risen again, while the tax base has been narrowed
significantly by the enactment of myriad new tax preferences. These tax
preferences, which frequently favor certain groups and activities over
others, add substantial complexity to the Tax Code and increase the
compliance and administrative burdens on taxpayers and the Internal
Revenue Service alike.

The costs, both in terms of money and time, of complying with
Federal tax laws--in addition to the vast resources poured into
sophisticated tax planning and tax-motivated transactions--deprive both
households and businesses of capital needed for more productive uses.
Ensuring long-term prosperity in the face of increasing global
competition and acute fiscal pressures requires the Congress to re-
examine the Tax Code to determine the specific ways in which the
current structure of the Federal income tax discourages job creation
and economic growth.

In announcing this hearing, Chairman Camp said, ``This hearing
marks the beginning of a dialogue that the President and the Congress--
both Republicans and Democrats--must have with the American people
about broad-based tax reform that will allow families to thrive and
employers to create jobs. With nine out of ten families either hiring
tax preparers or purchasing tax software in order to file their taxes,
it is clear that the Tax Code is too complex, too time-consuming and
too costly for our families and businesses. We have one of the highest
corporate tax rates in the world, and our small businesses are
struggling with continued uncertainty about individual tax rates and
new regulations. It is this Committee's responsibility to examine ways
to reform the code so that it won't be a continued barrier to economic
growth and job creation.''

FOCUS OF THE HEARING:

The hearing will examine the economic and administrative burdens
imposed by the current structure of the Federal income tax. It will
explore the cost of complexity borne by American families, the cost of
a corporate tax system that is increasingly out-of-step with the rest
of the world, and the broader cost to the U.S. economy of a tax system
that fails to maximize job creation and impedes economic growth.

DETAILS FOR SUBMISSION OF WRITTEN COMMENTS:

Please Note: Any person(s) and/or organization(s) wishing to submit
for the hearing record must follow the appropriate link on the hearing
page of the Committee website and complete the informational forms.
From the Committee homepage, http://waysandmeans.house.gov, select
``Hearings.'' Select the hearing for which you would like to submit,
and click on the link entitled, ``Click here to provide a submission
for the record.'' Once you have followed the online instructions,
submit all requested information. ATTACH your submission as a Word or
WordPerfect document, in compliance with the formatting requirements
listed below, by the close of business on Thursday, February 3, 2011.
Finally, please note that due to the change in House mail policy, the
U.S. Capitol Police will refuse sealed-package deliveries to all House
Office Buildings. For questions, or if you encounter technical
problems, please call (202) 225-1721 or (202) 225-3625.

FORMATTING REQUIREMENTS:

The Committee relies on electronic submissions for printing the
official hearing record. As always, submissions will be included in the
record according to the discretion of the Committee. The Committee will
not alter the content of your submission, but we reserve the right to
format it according to our guidelines. Any submission provided to the
Committee by a witness, any supplementary materials submitted for the
printed record, and any written comments in response to a request for
written comments must conform to the guidelines listed below. Any
submission or supplementary item not in compliance with these
guidelines will not be printed, but will be maintained in the Committee
files for review and use by the Committee.

1. All submissions and supplementary materials must be provided in
Word or WordPerfect format and MUST NOT exceed a total of 10 pages,
including attachments. Witnesses and submitters are advised that the
Committee relies on electronic submissions for printing the official
hearing record.

2. Copies of whole documents submitted as exhibit material will not
be accepted for printing. Instead, exhibit material should be
referenced and quoted or paraphrased. All exhibit material not meeting
these specifications will be maintained in the Committee files for
review and use by the Committee.

3. All submissions must include a list of all clients, persons and/
or organizations on whose behalf the witness appears. A supplemental
sheet must accompany each submission listing the name, company,
address, telephone, and fax numbers of each witness.

The Committee seeks to make its facilities accessible to persons
with disabilities. If you are in need of special accommodations, please
call 202-225-1721 or 202-226-3411 TTD/TTY in advance of the event (four
business days notice is requested). Questions with regard to special
accommodation needs in general (including availability of Committee
materials in alternative formats) may be directed to the Committee as
noted above.

Note: All Committee advisories and news releases are available on
the World Wide Web at http://www.waysandmeans.house.gov/.

Chairman CAMP. The committee will come to order.
We meet today in our first hearing of the 112th Congress to
begin what I expect will be a long discussion, and one I hope
will be bipartisan, on the need to reform our Federal income
tax system. As I did on Tuesday, I again want to extend my
appreciation to Ranking Member Levin for agreeing to allow this
hearing to move forward today even though the committee did not
officially organize it until two days ago.
Twenty-five years ago, a Democrat House and a Republican
Senate sent to the White House, and the President signed,
landmark legislation known today as the 1986 Act. This is where
we started in 1913. This is the entire Tax Code of the United
States of America and all the regulations, this pamphlet. This
is where we are today. This is the Tax Code and all of the
regulations that Americans have to deal with today.
The law in 1986, which marked the successful culmination of
years of work, broadened the tax base and lowered tax rates;
and it remains the basis of our system of taxation. But, in
some sense, it is a shell of its former self. In the
intervening years, Members of Congress from both sides of the
aisle have loaded the Tax Code with a dizzying array of
credits, deductions, exclusions, and exemptions.
The late economist, David Bradford, once provided a tongue-
in-cheek example to illustrate the concept of tax expenditures
and why they are little more than disguised spending.
Bradford proposed to cut the defense budget for weapons
procurement to zero, while creating a new weapons supply tax
credit that could be claimed by defense contractors for
appropriate weapons ``donated'' to the Pentagon. And under this
regime it would appear to the untrained eye that both spending
and taxes would be reduced, thus allowing elected officials to
claim the government was smaller. But, in reality, nothing
would have changed. A spending program would still exist. It
would just be cleverly disguised as a tax credit.
Bradford's cautionary tale seems all too real to those who
have parsed the Tax Code and its mysterious tax expenditures
for congressionally blessed industries and activities, both big
and small. And, regardless of the merits of any individual tax
expenditure, the broader picture is not a pretty one. The
President's deficit commission which I served on, along with
the gentleman from Wisconsin, Mr. Ryan, and the gentleman from
California, Mr. Becerra, measured the impact of these
expenditures in terms of higher tax rates.
The Bowles-Simpson report makes clear that taxpayers foot
the bill for those expenditures in the form of higher tax
rates. The Bowles-Simpson report called for eliminating all tax
expenditures and would have moved individual rates to 8, 14,
and 23 and dropped the corporate rate to just 26 percent. And
if their plan used all of the higher revenue from eliminating
tax expenditures to push down rates, those numbers would have
been even lower.
As we will hear from Nina Olson, the Taxpayer Advocate, the
impact of the changes to the Tax Code to create, expand, and
extend these expenditures can be measured by the thousands of
additional pages added to the Code or the thousands of changes
enacted in the last decade alone. Clearly, the Tax Code is too
complex, it is too costly, and it takes too much time to comply
with. All of this adds more burdens on our families, and on our
employers, making it more difficult to create jobs in this
country.
I am under no illusion that the task before us will be
easy. To really reform the Tax Code in a way that lowers the
tax rate, broadens the base, and promotes the competitiveness
of American employers, we will need to make some tough choices.
I don't think this can be or should be a partisan exercise, and
it can't just happen because one Chamber passes a bill. It will
require the active participation of all members of this
committee, and it will require us to work with the
administration, and, yes, we will even have to talk to the
Senate now and again. But, more importantly, we will talk to
the American people--individuals, families, employers large and
small--who are actually impacted by the laws we pass here in
Washington.
So this is just the first hearing of many. I have asked our
witnesses to confine their remarks at this first hearing to
defining the problems of the current tax system. I look forward
to hearing from many other witnesses and working with all of
you as we undertake this enormous challenge. As we do so, we
will have many further opportunities to consider various
solutions, but today our focus should be on making sure we
begin to understand the scope of the challenge.
And with that, I yield to my friend and Ranking Member, Mr.
Levin.
Mr. LEVIN. Thank you, Mr. Chairman. We welcome this
opportunity.
Clearly, there is a need for tax reform. Clearly, any tax
reform, which was true in 1986, will have to be bipartisan, it
will have to be bicameral, and also it will require leadership
from the executive, which I am sure will be forthcoming.
In a way, this hearing is a pickup of an effort some years
ago. Next to me, Mr. Rangel was chairing the committee,
introduced legislation to try to move ahead this issue of tax
reform.
I am not going to be here for a bit because I think Kevin
Brady and I will be going to meet with President Hu of China. I
hope this hearing will indeed move the ball forward, though
let's not expect any touchdowns. It is a long way from the goal
line.
I do think we need to keep in mind some basic principles,
including the need for our tax system to help create jobs, to
help promote economic growth.
I also think--and this may be somewhat controversial and
difficult--that also we need to make sure that reform is
fiscally responsible.
Another principle that we need to keep in mind is that any
tax reform has to benefit the working families of America.
Also, let's keep in mind that the Code is complex.
Answering it through tax reform will not be easy.
Mr. Chairman, you have referred to the testimony of the
National Taxpayer Advocate, who is here with us; and I join in
welcoming all of you. As we looked at the materials last night
of all of your testimony, which I am glad we received in time
to review, on Page 10, Ms. Olson, you list the tax expenditures
under the caption, on page 9, ``The Dirty Little Secret: Tax
Breaks Generally Benefit the Masses. That is your language''.
I just urge that everybody go through the list of tax
expenditures on page 10 to understand why some have advocated
their being there, the breadth of their coverage, and the need
for us on a responsible, bipartisan basis to have, as you have
said, Mr. Chairman, an intelligent, forthright discussion as to
each and every one of them.
So this is the kickoff. The field will not be easy. There
may be snow, rain. We are used to that in Michigan on fields.
But I think we need to pursue this, and we Democrats look
forward to our working together to tackle this issue.
Thank you, Mr. Chair.
Chairman CAMP. Thank you very much.
Today, we are joined by five witnesses. Our first witness
will be the Honorable Nina Olson, the National Taxpayer
Advocate; and we welcome you back to the committee.
After her, we will hear from Bob McDonald. Mr. McDonald is
the Chief Executive Officer of Procter & Gamble and is
testifying today in his capacity as the Chairman of the
Business Roundtable's Fiscal Policy Initiative. I should note
that Mr. McDonald will need to leave promptly at 11 a.m. But
given the schedule of votes that we are going to have today, I
don't think that will be an issue.
Our third witness will be Warren Hudak, who is the
President of Hudak and Company, a small business that provides
tax services to other small businesses.
And, fourth, we will hear from Dr. Kevin Hassett, a Senior
Fellow and Director of Economic Policy Studies at the American
Enterprise Institute.
And, last, we will hear from Dr. Martin Sullivan, a
contributing editor for Tax Analysts.
We welcome all of you, and we look forward to hearing your
testimony.
Before recognizing our first witness, let me just note that
our time this morning is limited, so I will not be asking
questions today. And with the concurrence of the Committee,
questions by Members will be limited to 3 minutes in the hopes
of giving more Members the opportunity to be recognized. But
each of the witnesses will have five minutes.
So, Ms. Olson, your written statement, like those of all of
the witnesses, will be made part of the record; and you are
recognized for five minutes. Welcome and good morning.

STATEMENT OF THE HONORABLE NINA E. OLSON,
NATIONAL TAXPAYER ADVOCATE, WASHINGTON, D.C.

Ms. OLSON. Thank you, Chairman Camp, Ranking Member Levin,
and distinguished Members of the Committee. Thank you for
inviting me to testify today about the subject of tax reform.
Let me begin by saying bluntly that, in my view, the Tax
Code today is a mess. Since the last major reform 25 years ago,
the Code has become an ever-expanding patchwork of provisions
with little logical connection and it has become unreasonably
difficult for taxpayers to understand and comply with.
In my 2010 annual report to Congress, I identified the
complexity of the Tax Code and the confusion and distrust it
engenders as the number one most serious problem facing
taxpayers and the IRS. I titled that section The Time for Tax
Reform is Now, because, while there has been a lot of talk of
tax reform in recent years, experience has shown that it will
require a sustained bipartisan effort with the support of an
engaged public to make tax reform a reality.
I start by noting that the Tax Code as it stands today
imposes excessive compliance burdens on individual taxpayers
and businesses.
It is rife with complexity and special tax breaks, helping
taxpayers who can forward expensive tax advice and
discriminating against those who cannot.
The complexity obscures understanding and creates a sense
of distance between taxpayers and the government, undermining
taxpayer morale and leading to lower levels of voluntary
compliance.
The complexity of the Tax Code is also burdensome for the
IRS, making it more difficult for the agency to meet taxpayer
needs and probably resulting in more audits and enforcement
actions than a simpler code would require.
Now, despite the existence of many narrow special interest
attacks break, it is important to recognize that the
overwhelming majority of tax breaks by dollar value accrue to
large segments of the taxpaying public. In short, we are the
special interests. If tax rates are to be lowered substantially
and overall tax liabilities on average are to remain unchanged,
virtually every taxpayer will have to give up cherished tax
breaks. There is simply no free lunch. Yet I am convinced that
what I call the ``busy majority'' of taxpayers wants
fundamental tax simplification and will support it. Lower tax
rates will offset the loss of tax breaks; and, at the same
time, taxpayers will understand how their taxes are computed
and will save time and money on return preparation.
To assist Congress in deciding which tax breaks and IRS-
administered social programs to retain and which to eliminate,
I suggest utilizing a zero-based budgeting approach. Under that
methodology, the starting point for discussion would be a Tax
Code without exclusions or reductions in income or tax. A tax
break or IRS-administered social program would be added only if
lawmakers, you, decide on balance that the public policy
benefits of running the provision or program through the Tax
Code outweigh the tax complexity challenges that doing so
creates for taxpayers and the IRS.
In my view, tax reform will have a better chance to succeed
if it proceeds on a revenue-neutral basis. Although there is
widespread recognition that we ultimately must take steps to
reduce our current deficit level, I am concerned that if we
attempt to solve those issues through tax reform we may never
achieve structural tax reform. Rather, we are likely to get
stuck in partisan debate precisely when we need a calm and
civil analysis of the structure of the Tax Code.
For all of these reasons, I believe that fundamental reform
must be made a priority. A simpler, more transparent Tax Code
will substantially reduce the estimated 6.1 billion hours and
$163 billion that taxpayers spend on return preparation. It
will increase the likelihood that taxpayers will claim all
benefits to which they are entitled. It will reduce the
likelihood that sophisticated taxpayers can exploit arcane
provisions to avoid paying their fair share of tax. It will
enable taxpayers to understand how their tax liabilities are
computed and prepare their own tax returns, improve taxpayer
morale and tax compliance and perhaps even the level of
connection that taxpayers feel with the government. And it will
enable the IRS to administer the tax system more effectively
and better meet taxpayer needs. I am confident that, in the
end, public support for a simpler code will be strong and deep.
Thank you.
[The prepared statement of Nina E. Olson follows:]

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Chairman CAMP. Thank you very much.
Mr. McDonald, your written statement is also part of the
record; and you have five minutes. Thank you very much.

STATEMENT OF ROBERT A. MCDONALD, CHAIRMAN OF THE BOARD,
PRESIDENT AND CHIEF EXECUTIVE OFFICER, THE PROCTER & GAMBLE
COMPANY, CINCINNATI, OHIO, TESTIFYING IN HIS CAPACITY AS
CHAIRMAN, FISCAL POLICY INITIATIVE OF THE BUSINESS ROUNDTABLE,
WASHINGTON, D.C.

Mr. MCDONALD. Chairman Camp, Ranking Member Levin, and
distinguished Members of the Committee, my name is Bob
McDonald; and I am the Chairman, President and Chief Executive
Officer of the Procter & Gamble Company. I am here today in my
capacity as Chairman of the Business Roundtable's fiscal policy
initiative.
I appreciate the opportunity to discuss the importance of
corporate tax reform to competitiveness, U.S. investment, and
U.S. job growth. The world has changed dramatically since the
basic operating rules of our international tax system were
adopted. The spread of free markets around the world has opened
up new opportunities for America's businesses and workers to
sell their products to the 95 percent of the world's population
that live outside the United States. At the same time, American
companies and workers face heightened competition from foreign
competitors as they seek out these new markets.
The time in which multinational corporation was synonymous
with American corporation has long passed. As just one example,
in 1960, the largest worldwide companies were nearly all
American companies. U.S.-headquartered companies comprised 17
of the world's largest 20 companies. By 1985, there were only
13; and, by 2010, just 6 U.S.-headquartered companies rank
among the top 20.
In this hypercompetitive environment, many factors can
disadvantage American companies and cause them to lose out in
this competition to the detriment of the U.S. economy and
American workers. Taxes are a very important factor. American
companies seeking to expand in markets at home and abroad are
working with one of the least competitive tax systems in the
world. Let me explain why.
As this slide shows, the United States has the second-
highest corporate tax rate among advanced economies. After
Japan adopts its proposed 5 percentage point corporate rate
reduction this spring, the U.S. will have the highest corporate
tax rate in the OECD, 14 percentage points above the average.
This next slide shows that it was not always the case that
the U.S. tax system was so uncompetitive. In 1986, when the
last major tax reform was undertaken, the U.S. went from among
the highest corporate tax rates to among the lowest. But, since
that time, the tax systems of the rest of the world have caught
up and surpassed us.
As this next slide shows, the United States is also one of
the few remaining advanced economies that taxes its companies
on foreign earnings from active business operations when
remitted home. Most other OECD countries have adopted
territorial tax systems that largely exempt these active
earnings from home country taxation.
Recently, both Japan and the United Kingdom have switched
to territorial tax systems. They have chosen these territorial
systems to improve the competitiveness of their businesses and
their economies.
This tilted playing field created by the U.S. tax system
hurts the competitiveness of American companies and American
workers. First, diminished sales around the world directly
reduce U.S. exports of goods and services along with
investments and jobs in the United States. Second, high taxes
imposed on American companies that bring foreign earnings back
to the United States discourage use of these funds to expand
U.S. operations. Third, a high U.S. corporate tax rate on
domestic profits discourages investment here in America by both
U.S.-based and foreign-based companies. And, fourth, the
highest price paid is paid by the American worker in the form
of lower wages and a more slowly growing economy.
On behalf of the Business Roundtable, I look forward to
working closely with this committee, the Congress, and the
administration on this incredibly important issue.
Thank you, Chairman Camp.
[The prepared statement of Robert A. McDonald follows:]

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Chairman CAMP. Thank you very much, Mr. McDonald.
Mr. Hudak, you also have five minutes; and your written
statement will be part of the record.

STATEMENT OF WARREN S. HUDAK, PRESIDENT, HUDAK AND COMPANY,
LLC, NEW CUMBERLAND, PENNSYLVANIA

Mr. HUDAK. Good morning, Chairman Camp, Ranking Member
Levin, and Members of the Committee. I am pleased to be here as
a small business owner and as a tax professional assisting
small businesses.
My business, Hudak and Company, provides a full range of
tax services for small businesses, so I know firsthand the
challenges that my clients and our company face in complying
with the Tax Code. The complexities of the Tax Code are
especially onerous on small businesses. They can't afford
staffs, HR staffs, tax professionals on hand. They have to
outsource all of that at a tremendous price. They spend about
1.9 billion hours $19 million in costs in complying with the
Tax Code. It is a staggering amount of money.
I am also a member of NFIB, which has 350,000 members; and
we recently surveyed our members. Two of the top, top
priorities for small businesses is the Federal Tax Code and its
complexity.
One thing to be very sure of from a small business
perspective, the business can't be separated from the owner.
Most small businesses are structured as a pass-through company.
The earnings are taxed at the individual company rate. They
select this for simplification. It is a simplified way of being
able to understand their taxes.
The best example I can give in understanding the small
business is two examples from this year. We had two companies
that were getting ready to retire, they wanted to use--they
counted on their business to be their retirement plan. They
were regular corporations and in order to avoid the double
taxation of C Corp they switched to an S Corporation. Because
of the onerous 10-year built-in capital gain provision, they
actually lost 50 percent of all of their earnings that they
worked their whole life for, 18 hours a day. Some of these
businesses are second generations and losing that kind of money
is staggering, preventing them from investing in other
business, starting a new venture, pursuing a new idea; and for
one owner it meant he had to continue working into retirement.
So we are all struggling with the Tax Code.
To speak to the complexity of the Tax Code, the IRS
recently sent out a postcard to all small business owners
saying they were no longer going to accept payroll taxes to be
remitted using a paper voucher. They were no longer allowing
them to submit that. And some of my most sophisticated clients,
who have been clients for a long period of time, e-mailed me
and said, what have we been doing wrong? Why did I get this
notice? They didn't even understand the very nature of the
notice.
What was even more mind-blowing for me was the fact that we
have always submitted their taxes electronically. For 8, 9
years we have been submitting their taxes electronically. To
get a simple postcard in the mail saying we will no longer
accept paper vouchers and they are panicked, what are we doing
wrong, what is going on. They didn't understand the very fact
that we were already doing it electronically.
That is a very simple example of the misunderstanding about
what is actually going on. My clients, as hard as we try, try
to get them to understand the Tax Code, this leads to terrible
compliance problems. The Tax Code definitely has to be
simplified.
Thank you.
[The prepared statement of Warren S. Hudak follows:]

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Chairman CAMP. Well, thank you very much.
Dr. Hassett, you also have 5 minutes; and your written
statement will be part of the record. Welcome.

STATEMENT OF KEVIN A. HASSETT, PH.D., SENIOR FELLOW AND
DIRECTOR OF ECONOMIC POLICY STUDIES, AMERICAN ENTERPRISE
INSTITUTE, WASHINGTON, D.C.

Mr. HASSETT. Thank you very much, Chairman Camp. Ranking
Member Levin is not here, so perhaps Mr. Rangel is the highest
ranking. But thank you so much for having me here. It is a real
pleasure and honor to be here and to talk to you about this
important topic.
The first part of my testimony discusses recent research by
Carmen and Vincent Reinhart that looks at the long-run economic
impact of a financial crisis. They find that one can expect to
have slower growth for a good long period after a financial
crisis, perhaps as long as a decade. And if we have the typical
experience of an economy after a severe financial crisis, then
we will grow about a percent a year slower over the next 8
years, and the unemployment rate 8 years from now will be about
8 percent. This is an unacceptable outcome to everyone.
But I note at the outset of my testimony that this is a
medium-term problem, and a short-term stimulus is of little
use. More fundamental changes must be considered, which is why
I celebrate this hearing.
The first part of my testimony talks about the complexity
of the Tax Code. It provides a chart of the marginal tax rates
under the current system that account for all of the phase
outs, for all of the different targeted tax policies that we
have. It shows that the marginal tax rate as we go up with
income goes up and down sort of like a city skyline.
Now, progressives generally favor tax rates that increase
with incomes and others favor rates that are flat across
incomes. And I don't think anybody thinks that the marginal tax
rate schedule should look like a city skyline, but that is what
we have. This is really logically indefensible and the reason
why fundamental tax reform could have a very large impact.
Now, sound reform should not only fix the rates but also
should reform the definition of the tax base as well. If we do
this, we can accomplish a lot.
A well-designed reform could easily produce significant
growth effects. Just to sketch the terrain, a survey of 69
public finance economists conducted by Victor Fuchs, Alan
Krueger, and James Poterba in 1998 found that the median of
respondents believed that the 1986 tax reform produced about 1
percentage point of higher growth over a long period. My review
of the literature with Alan Auerbach suggested that this is a
consensus that is a fair reading of the broader tax reform
literature.
Now, there are many possible reforms that would broaden or
modify the base, but the key point is that they can conceivably
have effects that are just about big enough to offset the
growth shortfall that we have inherited because of the
financial crisis.
In the first part of my system, I make these points, but
then I move on to look specifically at the case of the
corporate tax. While there is a broad consensus that the high
statutory corporate tax in the U.S. makes investments in the
U.S. uncompetitive relative to other OECD economies, some
question the extent to which effective taxes paid by
corporations are equally high.
As there will be much discussion of these factors in coming
months, the remainder of my testimony looks specifically at the
question of effective rates. I begin with the statutory rate
analysis that is very similar to what you have just seen. The
statutory rate, though, is an imperfect measure of tax
competitiveness, because it does not take into account the
breadth of the tax base. This causes countries with high rates
and a narrow base, such as the United States, perhaps to appear
more uncompetitive than they really are. Effective tax rates
resolve this issue by taking into account offsets, the present
value, depreciations, and other deductions that narrow the
base.
There are two measures of effective rates that are really
the industry standard, the effective average tax rate, which
you can think of as being the rate that affects something like
a plant location decision, and the effective marginal rate,
which affects decisions like should I buy a new machine for the
plant that is already there.
Now, in the forthcoming study that I have done with my
colleague, Aparna Mathur, we looked at national rankings of
statutory rates and of these effective rates. Our analysis
finds that the United States' performance in the global economy
does not look much better when scored with effective rates than
when scored with top statutory rates.
In 2010, for example, the U.S. effective average rate,
which is again the rate that is marginal when you are trying to
locate a plant somewhere, was 29 percent, while the average for
all OECD economies was 20.5 percent. This is the second-highest
effective average rate in the OECD. The United States compares
slightly more favorably to other OECD countries when we look at
the effective marginal rate, which is the rate which influences
the decision to buy a machine.
Even with the effective marginal rate, however, we are not
doing so well. In 2010, the U.S. effective marginal tax rate
was 23.6 percent relative to the non-U.S. OECD average of 17.2
percent. This was the fifth-highest in the OECD.
Any discussion of tax rates is incomplete without analysis
of trends in corporate tax revenues. With one of the highest
corporate tax rates in the world, one might expect the share of
revenues from corporate capital to be higher in the U.S. than
other OECD economies, but this is not the case. In fact, in the
U.S., our revenue is lower than the OECD average.
This pattern is consistent with the literature that
explores the responses of tax revenue to changes in the
corporate rate. Alex Brill and I found significant evidence
that a reduction of the corporate tax rate in the U.S. would
increase the corporate tax revenue by looking at the changes in
revenue in response to other nations' reductions in corporate
rates. There is a large literature that generally finds a
Laffer curve in the corporate tax base.
Given the significant headwinds that the economy faces, the
indefensible state of the current Code, and the horrifyingly
high U.S. corporate tax rate, I am glad we are considering
reform at this moment.
Thank you.
[The prepared statement of Kevin A. Hassett follows:]

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Chairman CAMP. Thank you very much. Thank you, Dr. Hassett.
Dr. Sullivan, you also have 5 minutes; and your testimony
will also be part of the record, your written testimony. Thank
you. Welcome.

STATEMENT OF MARTIN A. SULLIVAN, PH.D., CONTRIBUTING EDITOR,
TAX ANALYSTS, ALEXANDRIA, VIRGINIA

Mr. SULLIVAN. Mr. Chairman, Members of the Committee, thank
you for this opportunity to testify.
A quarter of a century ago, President Reagan defied all the
sceptics and provided the leadership for a bipartisan overhaul
of the tax system. He lowered the tax rates. He cut the tax
breaks. It was a victory for the public over the special
interests.
Twenty-five years later, the need for tax reform is greater
than ever. Tax complexity costs businesses billions. Families
endure endless hours of anxiety and paperwork. The perception
of unfairness, whether it is due to outright cheating by
investors hiding funds in Caribbean havens or to special
interests who lobby their way to lower taxes, is an insult to
Americans paying their fair share.
On top of all this, our Tax Code is deadweight on the
shoulders of the American economy. The Tax Code's long list of
subsidies defies any notion of a free market.
My focus today will be on the corporation tax, which is in
particular need of reform. As we have just heard, Japan has
announced its intention to cut its corporate rate by 5
percentage points. This leaves the United States with the
dubious distinction of having the highest corporate tax rate in
the world. Cutting the corporate tax rate is no longer just a
good idea. It is an absolutely necessity.
At the same time, we must recognize our dire budget
problems. We are on the road to fiscal catastrophe; and, so
far, Congress has done nothing to remedy the problem. To put
the Nation's finances on a sustainable path, that is, just to
get our debt to GDP level to stabilize, far, far away from
balancing the budget, that will require annual deficit
reduction of $500 billion a year.
In this environment, with these unprecedented budget
pressures, it seems reasonable to assume necessary corporate
tax cuts must be accompanied by corporate base broadening. Mr.
Chairman, a fundamental feature of U.S. international tax law
is that it favors foreign job creation over domestic job
creation. If an American corporation opens a factory in
Indiana, it pays a 35 percent tax rate. If the same corporation
opens a factory in Ireland, it pays a 12.5 percent tax rate.
Let us say the factory generates $100 of profit. The choice is
between after-tax profit of $65 in the United States or $87.50
in Ireland. Obviously, the U.S. tax law provides a strong
incentive for building factories in low tax countries.
Now, it is essential at this point to discuss transfer
pricing. It should be front and center of any discussion of a
corporate tax reform. Transfer pricing is not a detail. Data
from a variety of sources indicate any inappropriate profit
shifting occurring on a large scale.
What I would particularly like to bring to the committee's
attention is that, over the last decade, the transfer pricing
problem has gone from bad to worse. When you work out the math,
what you discover is that transfer pricing is not just a
revenue problem, which could be 30, 40, $50 billion a year, but
it is also a job creation problem. The effective tax rate for a
typical investment in Ireland is not just 12.5 percent. It is
actually negative. This means that the U.S. Treasury Department
is subsidizing investment in Ireland. It is no different than,
say, the Commerce Department directly sending checks to
companies. This is corporate welfare only available to
businesses investing abroad.
So, irrespective of one's views about whether the United
States should move to a territorial system, we should all be
able to agree that the inefficiency of subsidies provided
through aggressive transfer pricing is a drag on the economic
growth and job creation and that any tax reform should include
strong measures through use of inappropriate profit shifting.
Multinationals record on domestic job creation is not good,
as indicated on the screen. Between 1999 and 2008, they reduced
domestic employment by 1.9 million jobs and at the same time
increased foreign employment by 2.4 million.
In conclusion, let me just say this. The essence of an
efficient and competitive tax system is a level playing field.
Government should not attempt to outguess the market and pick
winners and losers. As you can see from this slide, our
corporate Tax Code has created winners and losers. The winners
are those companies that are able to locate profits and
offshore tax havens. The losers are companies that did not have
that opportunity.
Of course, multinational corporations are important to the
U.S. economy. They are research intensive, they are export
intensive, and America wants strong multinationals. But
multinationals competitiveness and overall competitiveness are
not the same things. Yes, U.S. multinationals create jobs but
so do purely domestic companies, so do small businesses, and so
do foreign headquartered companies in the United States.
Thank you, Mr. Chairman.
[The prepared statement of Martin A. Sullivan follows:]

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Chairman CAMP. Thank you. Thank you very much, Dr.
Sullivan. Thank you to our entire panel.
Now we will go to questions, and the chair recognizes Mr.
Rangel for the opportunity to question.
Mr. RANGEL. Thank you, Mr. Chairman. Richard Neal and I
will attempt to fill the absence of our Ranking Member.
But I think it is generally agreed with this panel as
relates to corporate taxes that if we were to exclude the
credits, the deductions, the exemptions, as Dr. Sullivan
referred to, we could have a dramatic decrease in the corporate
tax rate. But everybody wants to cut the loophole for the other
guy but not the incentive that he or she or the corporation
enjoys.
Dr. Sullivan, in your dealing with the corporate world, do
you find any tremendous objection to starting with ground zero
in terms of the loopholes that we have in the corporate system
so that we can more easily, dramatically reduce the statutory
rate for corporations?
Mr. SULLIVAN. Just as Chairman Camp was saying, we should
think of tax expenditures just like direct expenditures. We
need to go through our tax expenditures with a fine-tooth comb
and look for abuse and inefficiency; and I think, as we say on
the direct spending side, everything should be on the table. I
think when you start picking through the details you will see
that most of the tax breaks in our Code could be trimmed and
made much more efficient.
Mr. RANGEL. So what you are saying is there is no big
target out there. If we were talking about individual tax rates
and start talking about mortgage deductions and charitable
contributions and local and State deductions, that is the big
mountain that we would have to climb. In the corporate area,
however, what would be our biggest obstacle, in your opinion,
if we started off with no exemptions at all? What would we have
to overcome politically in order to do that?
Mr. SULLIVAN. We would have to eliminate the tax incentives
for offshore job creation that is intrinsic in our
international tax rules.
Mr. RANGEL. So you don't think that our corporate leaders
would not think that it would be competitive if we reduced the
rate and then they can decide where to make the investment and
remove the subsidy for encouraging investment abroad?
Mr. SULLIVAN. I think it depends on which corporate leader
you are speaking to. Because some corporations under current
law do not have opportunity--frankly, they don't have a lot of
tax breaks available to them, while others do. So the companies
that do not have those tax breaks available to them are going
to be in much more in favor of lowering the rates across the
board.
Mr. RANGEL. Thank you. I yield back.
Chairman CAMP. Thank you very much, and now the chair
recognizes Mr. Herger for three minutes.
Mr. HERGER. Thank you, and I would like to thank the
chairman for this very important hearing.
There are a number of reasons for Congress to seriously
consider tax reform, but I would like to focus on the impact on
jobs. Mr. Hudak, you expressed concern about the expiring tax
provisions and the uncertainty that creates. This is something
that has long been a concern of mine as well. As someone from a
small business background, I recognize that business owners
have to plan for the future when they make investment
decisions. Tax relief that lasts only one or two years isn't
all that helpful when you are planning an investment that will
pay off five or ten years down the road. Could you elaborate
further on how the uncertainty of temporary tax provisions
affects some of the businesses to which you provide services?
Mr. HUDAK. Absolutely. The Tax Code causes businesses to
think tactically instead of strategically. When provisions are
temporary or when provisions are put in place to incentivize,
oftentimes we miss the mark because of their complexities. The
Section 179 deduction, the AMT fix that we wait until the very
last moment at the end of the year might be the difference
between a 5 or $10,000 tax bill going into the next year. And
that could mean the difference between a new truck, maybe an
on-line marketing initiative, or maybe even a new employee. It
has a direct impact, the temporary provisions and the last-
minute uncertainty that we have been seeing increasingly over
the last decade. It is very important that businesses think
strategically and not tactically.
I had a situation where, for instance, we had a complicated
provision that allowed people who bought a certain kind of
truck, a certain size truck, were able to get a deduction. So
he went out and talked to his accountant and bought a truck. It
was the wrong truck. It was a massive truck. He was hoping to
grow into it. He was in a paper products company, and that
truck became his warehouse. He used it to pick up his paper
products, put it in the truck, and why bother unloading it. He
just drove around with his warehouse in his back. He was
thinking tactically and not strategically, and the Tax Code
does that continuously.
Mr. HERGER. Thank you.
Thank you, Mr. Chairman.
Chairman CAMP. Thank you very much.
Mr. Johnson is recognized.
Mr. JOHNSON. Thank you, Mr. Chairman.
Mr. McDonald, I would like to have your comments. I think
we have got IRS people in darn near every corporation now. And
what they do is sit there and keep you out of trouble,
theoretically, and then turn around and come back at you when
you make a mistake which they are there to prevent,
theoretically. I think that is a waste of effort, frankly.
I think you probably know that the IRS Commissioner,
Douglas Shulman, does not file his own taxes in part because he
believes the Tax Code is too complex. He says--and I will quote
him--``I have used a tax preparer for years. I find it
convenient. I find the Tax Code complex so I use a preparer,''
he said. That means to me that the average American can't
fathom this Tax Code and we need to do something to fix it.
But, basically, I want to thank you for being here and ask
you to what extent has our corporate tax system adversely
affected investment and job creation in America?
Mr. MCDONALD. Well, Congressman Johnson, the issue we have
talked is that the corporate tax rate of the United States,
both the rate itself being the--soon to be the highest in the
world as well as the worldwide system disadvantages American
corporations.
In the case of the Procter & Gamble company, the company I
am the CEO of, most of our competition is international
competition; and, on average, we pay about 2 percentage points
higher corporate tax than those international competitors.
Plus, we face the higher tax rate if we repatriate money that
we earn overseas. That is a disincentive for any company to
invest in the United States.
In our case, because we are a global company and because we
can't export our product, we can't make a disposable diaper in
Mehoopany, Pennsylvania, and ship it to China and make any
money on it. We do have an organization around the world, and
we do have 150 plants around the world. So for us there is
never really a decision as a company that we invest either here
or there. We have to invest everywhere in order to sell to the
4 billion people we reach every single day with our products.
Mr. JOHNSON. Does that make you think that some of the
corporate structure might move overseas just to get out from
under our Tax Code?
Mr. MCDONALD. Certainly it could be possible. What we are
attempting to do is provide a competitive system for this
country so that businesses stay here and flourish here the way
they have for years.
Mr. JOHNSON. Thank you.
All right, Mr. Chairman.
Chairman CAMP. Thank you. Thank you very much.
Mr. Stark is recognized.
Mr. STARK. Mr. Chairman, I yield to Mr. Neal.
Chairman CAMP. All right. Mr. Neal.
Mr. NEAL. Thank you, Mr. Chairman. Thanks for holding this
hearing. Thanks to Mr. Stark.
A couple of questions that I would like to direct to the
panelists, because this is complicated work and oftentimes in
this town it is reduced to jargon, as you know. I think there
are reasonable arguments.
I have been to that Gillette plant, Mr. McDonald, in
Boston. It is a remarkable story about domestic manufacturing.
And perhaps you can let us in on how many blades are going to
be added during the Super Bowl to that razor. I know that is a
closely held secret.
But is it possible, Mr. McDonald, to focus on growth and
keep the initiative revenue neutral?
Mr. MCDONALD. Congressman Neal, it is a great question. We
believe it is best to take a look at getting a competitive
system first.
Many of our CFOs had meetings with Secretary Geithner last
week, and, revenue neutrality, we ask to take that off the
table for now and let's just agree that what we want to do is
to do something that is fiscally responsible the way the
chairman and I think the Ranking Member talked about. I think
if we work together we can develop a competitive tax system for
this country and do it in a fiscally responsible way, and that
is what we are setting out to do.
Mr. NEAL. When Mr. Rangel kicked out his proposal, if you
recall, the critics jumped on it. It was a starting point in
the conversation. That is all it was. It was an opportunity to
shed some light on the needless complexity of the current Code.
Now, let me use an example of how I think we got burned
here.
A few years back, the former chairman of the committee
argued for repatriation; and, right now, American companies are
estimated to be sitting on more than $300 billion in revenue
offshore. But recall that when money was repatriated at 5.25
percent, and there were no jobs created. In fact, in one
instance, one company laid off I believe 6,000 people in the
next few weeks after the money had been repatriated. So I share
the argument that getting that money back for job creation is a
good idea, but what assurance do we have that as the money is
returned that in fact domestic job creation would occur?
Mr. MCDONALD. I think if we start with the premise that we
have a noncompetitive system, we set up that competitive
system, that will lead to economic growth, that will lead to
business growth, and that will lead to job creation. So, as a
Business Roundtable, we have encouraged our members to not look
for a one-time repatriation but rather to work on--with us--
getting a competitive rate, going to a territorial system so
that we can grow the economy and create jobs in this country.
Obviously, if we are in a territorial system, the repatriation
takes care of itself and we create jobs here.
Mr. NEAL. How many people wake up every morning and use a
Gillette razor?
Mr. MCDONALD. Not enough.
Chairman CAMP. With that answer, the gentleman's time has
expired.
Mr. NEAL. Mr. Camp, I believe Mr. Stark yielded the time to
me. Would you allow me to pursue the next three minutes that I
have along the same line?
Chairman CAMP. Well, it is now time to go to the other side
of the dais, but then we will come back to you.
So Mr. Nunes is recognized for 3 minutes.
Mr. NUNES. Thank you, Mr. Chairman. I will be very brief. I
want to thank the panelists for coming. But I want to just take
this time, Mr. Chairman, to encourage you to move forward with
fundamental tax reform. I think that last year President
Obama's Commission, the Debt Commission that you served on and
some of the Members of the committee served on, really
undermined the power of this Committee and undermined our
Constitutional duties that we have in this Committee. So I hope
that you will work with Ranking Member Levin in a bipartisan
manner and that we can move real tax reform legislation through
this House this year. I think it would be great if we could do
it in a bipartisan way, and I yield back.
Chairman CAMP. All right. Mr. Tiberi is recognized.
Mr. TIBERI. Thank you, Mr. Chairman. Thank you all for
coming.
Mr. McDonald, following along what Mr. Neal was talking
about, I am from Columbus, Ohio. And during the last campaign
season in Columbus and I am sure in Cincinnati we saw a lot of
ads regarding trade and regarding taxes and regarding
incentives. In fact, in the Governor's race, which was all
about jobs, we saw the current Governor attacked for a vote or
votes in Congress, that he voted for tax breaks to ``send
American jobs overseas,'' and most of that was targeted to
American worldwide companies that were expanding into different
markets.
Obviously, Procter & Gamble has a huge presence overseas.
Can you tell me what those tax breaks are that ``send jobs
overseas,'' in your mind?
Mr. MCDONALD. Congressman Tiberi, as I said, we invest
everywhere. Our investment decisions are not we invest here or
there. In fact, our international business is about 60 percent
of our total sales. Our U.S. business is about 40 percent of
our total sales. Yet we pay 60 percent of our taxes in the
United States. We are one of the largest taxpayers here in the
United States.
What is important is, as we grow overseas, that creates
jobs in the United States. Twenty percent of our jobs in the
United States depend upon our international business. Forty
percent of our jobs in Ohio depend upon our international
business. So even though we may be the largest consumer goods
company in China with 7,000 Chinese employees, we have got a
lot of people in Columbus, Ohio, and in Cincinnati, Ohio, who
depend upon the strength of that business for their jobs; and
we take that very, very seriously.
Mr. TIBERI. Is it fair to say then--and others have said
this to me, CFOs and tax accountants--that if we aren't
proactive here in the United States with respect to tax policy
and competitiveness, even though Procter & Gamble, for
instance, has been in Ohio for over 100 years, you don't have
to be headquartered in Ohio or the United States; and other
countries would love to have you. Is that a fair statement?
Mr. MCDONALD. I think the chart that I showed earlier that
showed how statutory tax rates have gone down over time is
suggestive of the fact that countries around the world are
competing for investment and they are competing for companies
like ours to move outside of their home country. We have got to
get into that game, and we have got to be competitive, and we
have got to get people to invest here in the United States.
Mr. TIBERI. And, ultimately, the more diapers you sell in
China or the more toothpaste you sell in Europe is going to
mean more jobs in Ohio?
Mr. MCDONALD. Yes, sir. More jobs in Ohio.
Mr. TIBERI. Thank you.
Chairman CAMP. Thank you.
Mr. Neal is recognized.
Mr. NEAL. Thank you, Mr. Chairman.
I want to come back to the point that I was raising
earlier.
Dr. Sullivan, I was caught by the statement that Dr.
Hassett made that cutting corporate tax rates increased tax
revenues. It sounds a lot to me like tax cuts pay for
themselves. I think tax reform is a worthy pursuit and very
sensitive to the international arguments that are being made
here today, but in some measure didn't America get into trouble
based upon that notion, that tax cuts pay for themselves?
Mr. SULLIVAN. Certainly the idea that tax cuts pay for
themselves is very attractive politically and appears to make
the issue very easy--for example, in the 1980s, that notion was
very popular, the Laffer curve. And there are some dynamic
aspects to the revenue estimates. But to think that tax cuts
pay for themselves, except in very extraordinary circumstances,
is mostly wishful thinking.
If you look back at the 1986 Tax Reform Act, we lowered the
rates and broadened the base; and immediately after the 1986
Act there was a whole set of hearings in the Senate finance
about where did the corporate revenue go. There was actually
less corporate revenue collected than expected.
And, also, if you follow the efforts of the joint committee
and the Treasury Department, the official revenue estimator, I
don't think they would ever score it that way.
Mr. NEAL. Part of the problem then in some measure is the
fact that we are fighting two wars and we have cut taxes by
$2.3 trillion and that has been a drain on the Federal
Treasury. In the course of this conversation, based upon what
you have said, would you argue that tax cuts pay for
themselves?
Mr. SULLIVAN. No, certainly not--no, I would not argue that
corporate tax cuts pay for themselves.
Mr. NEAL. So that invites the next question. As we go
forward, how do we devise a system, as Mr. McDonald said, that
perhaps can be revenue neutral and at the same time keep our
companies competitive in a global economy?
Mr. McDonald, do you want to weigh in on that as well?
Mr. MCDONALD. Congressmen, I think that is the challenge;
and what we have said is let us prioritize getting to the
competitive system and make sure we do it in a fiscally
responsive way. I am not sure we will be exactly revenue
neutral, but let us do it in a fiscally responsible way.
Mr. NEAL. And the last question--Ms. Olson, I appreciate
your good work. My time is running out quickly, but I do want
to thank for your parallel pursuit of my career, doing
something about alternative minimum tax.
Ms. OLSON. Thank you, sir.
Mr. NEAL. Thank you, Mr. Chairman.
Chairman CAMP. Thank you very much.
Mr. Davis is recognized.
Mr. DAVIS. Thank you, Mr. Chairman.
When we talk about international business and its reach and
impact domestically, I harken back to being deployed in the
Middle East in the 82nd Airborne Division and taking a walk
through the desert one night. Under the moonlight, a wrapper
blew up to my feet, and it was an Arabic-labeled Pampers
package, and I began to understand the reach of our economy.
Mr. McDonald, P&G has about 1,300 employees, 1,200 of whom
live across the river in our district. That created $138
million in wages. And your company also purchased $160 million
in goods from over 260 suppliers that are in our region in
Kentucky. Those are real numbers. Those are real jobs that
impact a lot of lives and a much broader supply chain that is
multiplied in the economy.
At a time when the economy is struggling to regain its
footing, we have looked at job creators, small businesses but
also, very much so, large businesses like P&G, as a means to
put Americans back to work. Companies want to manufacture in
the United States, but they are currently faced with a tax and
regulatory structure that encourages them to do otherwise. As
you try to grow P&G and invest in Kentucky, Ohio, Indiana
versus foreign markets, do you factor tax liability into your
decisions? And if you do, do you look more at the corporate
marginal tax rate, your overall effective tax rate, and why?
Mr. MCDONALD. We certainly do look at tax rate, Congressman
Davis. Whenever we site an operation anywhere in the world, we
look at tax rate.
As I said earlier, because we do sell to 4 billion people a
day around the world, we really do have to invest everywhere.
And normally what happens is when we invest in the United
States it becomes a decision of where to put the operation in
the United States. Right now, we are building a factory in
Utah, in Box Elder, Utah. It is a $300 million investment. It
will employ about 300 people. We did that because it is a paper
factory and we need to get our paper products more efficiently
on the west coast.
One of the things you see today going on which is very
different than it was in the 1980s, in the 1980s when I joined
Procter & Gamble, the manufacturing expense of a product was
more important than the logistics cost. But because of the cost
of fuel today and for other reasons, the logistics costs are
much higher than the manufacturing expense. So it becomes much
more difficult to produce a product in the United States, for
example, particularly something as low cost as a diaper, and
ship it somewhere overseas.
But what we have in Cincinnati, what we have in Kentucky
are high-paying technical jobs. Our research and development
operations are there, our corporate headquarters is there, and
those really have a lot of very highly skilled people who are
running our businesses around the world.
Mr. DAVIS. Do you have a sense, just in closing, when you
create or open a new market or expand in an overseas market,
what is the multiplier effect back home on jobs generally?
Mr. MCDONALD. It can generally be anywhere from 6 to 10,
depending upon the supply chain. We work very hard to develop
suppliers who can be global suppliers for us. In fact, today we
are recognized as one of the top companies in the United States
for developing minority owned suppliers. We will take a
minority owned supplier, and we will work to develop them into
a global supplier, and today we do about $2 billion a year of
business with minority owned suppliers in the United States,
many of them located in Kentucky or in Ohio.
Chairman CAMP. Thank you.
Chairman CAMP. Mr. Reichert is recognized.
Mr. REICHERT. Thank you, Mr. Chairman. I want to thank Mr.
Camp for holding this hearing. And I think all of us in this
room have recognized for many years that the Tax Code is
complicated. That's an understatement. But I think that the
testimony and the questions that we have heard today and the
testimony from Ms. Olson saying, it is a patchwork, it has no
logical connections, it is confusing, and it creates mistrust;
And Mr. Hudak, saying it is onerous. I mean, these are words
that all of you on the panel have used over and over again.
So I hope that we can come together in a bipartisan way to
begin to address some of these issues. Yesterday we had the
opportunity to meet--some of us did--with Mr. Ballmer from
Microsoft and, Mr. McDonald, he was saying some of the same
things that you were saying about corporate structure. But I
think that one of the things that really struck me as he spoke
to us yesterday was, he urged us to think not just about a
corporate tax rate, but the competitive tax system, as is the
point that all of you have been making today.
And, of course, one of our big concerns is--at least one of
mine--is the small businesses. So my question is for Mr. Hudak.
What challenges does the amount of business income taxed at the
individual level present for reforming the Tax Code in a way
that helps American businesses grow and create jobs and
compete?
Mr. HUDAK. Well, 70 percent of small businesses are pass-
through companies. They are taxed at the individual rate. So
taxing anything beyond what a business owner is due as wages
for his work is really taxing capital formation. It is really
hitting on his ability to invest, create jobs. Certainly
everybody should be subject to the full force of employment
taxes for the value of their work. But beyond that, because of
the corporate structure of the small business, when you tax
beyond that, you are really hitting on the small business
owner's ability to form capital, dream dreams, invest,
innovate. And that is a very important point.
Mr. REICHERT. I appreciate the answer. And I yield back.
Thank you, Mr. Chairman.
Chairman CAMP. Thank you. Mr. Doggett is recognized.
Mr. DOGGETT. Thank you, Mr. Chairman. Let it be remembered
that Congress began this debate on whether or not to reduce
corporate tax revenues to pay for our national security on the
same day that our committee leadership, like our President, is
meeting with the Chinese. Because the first question that needs
to be answered in this debate is how much more America will
borrow from the Chinese so that some corporations can pay less.
To say, as the representative of the Business Roundtable has
done here, that ``revenue neutrality should be off the table''
may be consistent with the misguided holiday tax deal that
added another almost $1 trillion to the national debt. But it
is just another way of saying, Go borrow from the Chinese.
Of course, there may well be some merit to lowering the
statutory corporate tax rate. All of our witnesses are
suggesting that there is. One should realize, of course, that
to the extent that we lower the statutory rate, if all
corporations were paying that, that would represent a
substantial tax increase for many of our multinationals. You
have noted General Electric, for one, that would be paying many
times the effective rate if it paid the lowered statutory rate
that is being proposed.
To call for a pure territorial system is really just
another way of saying, We want a permanent repatriation of
profits holiday like the one that didn't produce more jobs for
Americans last time, and it is a surefire way to encourage the
continued export of more American jobs.
I would ask you, Dr. Sullivan, when we talk about
competitiveness, which all of us are for, shouldn't we be
concerned about promoting a level playing field so that our
smaller American corporations, the ones that are the real
engine for economic growth who don't have subsidiaries and tax
havens, whose lobbyists haven't come up here to this committee
to add hundreds, if not thousands, of pages to the Tax Code and
regulations that Chairman Camp showed at the beginning of this
meeting and to make it so complex, have a level playing field
and aren't at a disadvantage against their larger multinational
competitors?
Mr. SULLIVAN. Thank you, Mr. Doggett. Yes, the most
important thing that we can do to improve the competitiveness
of our tax system is to make the tax system neutral across all
types of companies. We need to look for pockets of over
subsidization. And that is what we find in certain areas of the
international tax law. So we want a level playing field so that
job creation can be uniform across the economy, particularly
when our deficit problem is at these incredible levels.
Chairman CAMP. Thank you. The gentleman's time has expired.
Mr. Roskam is recognized.
Mr. ROSKAM. Thank you, Mr. Chairman. Mr. McDonald, an
observation and a question. The observation--I am from suburban
Chicago. And I am sometimes kind of amazed at conversations
that I will have with folks in the Chicagoland area who are
working for worldwide American companies who have not had a
sense of clarity about the fact that their very employment is
dependent upon the success of that company in overseas markets.
So my statement to you, as the leadership of the Business
Roundtable, I think that there is a lot of advocacy that is
left on the table because businesses are somehow reluctant to
engage in substantive philosophical conversations because they
feel like they are going to be perceived as donkeys and
elephants and get into partisan issues when you are really
talking about a world view that says capital markets are good,
competition is good. And I am telling you, I am amazed at the
level of conversation. So that is my observation.
Mr. MCDONALD. I agree with you, Congressman. All of our
members would agree. We have to do a better job.
Mr. ROSKAM. Terrific. To amplify Mr. Tiberi's point, there
has been, you know, the slogan, Shipping jobs overseas is a
bright and shiny bumper sticker, which is very, very catchy.
And it seems like the more subtle but more robust argument is a
five-paragraph economics essay which makes lots of sense, but
you have got to get through all five paragraphs. And if you do
get through all five paragraphs, you say, ``Oh, makes sense''.
I get it. But we and many on both sides of the aisle--have done
a very bad job of communicating about overseas markets and
their relationship to American prosperity.
And I would just encourage you, and we want to be part of
this conversation with you--about how to communicate more
effectively to American citizens that prosperity overseas for
U.S. companies means prosperity at home.
Mr. MCDONALD. Absolutely, Congressman. In fact, I wanted to
clear up a potential misrepresentation of a territorial tax
system. A territorial tax system, which I discussed earlier,
says that we pay the same tax, as a U.S. company in a foreign
market, that our competitors pay, that our foreign-based
competitors pay. It is not a tax break. We are not talking
about a tax break. What we are talking about is paying the same
as our foreign-based competition. Our foreign-based competition
doesn't have to pay tax--incremental tax on the repatriation of
funds to their home market. That is the difference. It is very
simple.
Mr. ROSKAM. I yield back.
Chairman CAMP. Mr. Gerlach is recognized.
Mr. GERLACH. Thank you. Following up on that point, Mr.
McDonald, and also on what Mr. Neal raised a few moments ago,
from your perspective, given your domestic business activities
as well as your foreign business activities, from a perspective
of what it would take from a Tax Code change to have you
consider investing more in domestic job creation rather than
foreign job creation, would that then be just a general
reduction in the corporate tax rate itself? Or should there be
more specific targeted language for the repatriated dollars
that we would want to have you bring back to the United States
and hopefully invest, and not as you raised, Mr. Neal, brought
back but not have any jobs created?
So from your perspective, is a general tax rate reduction
more favorable to you in that job creation here domestically or
language that would say, if you brought those dollars back
domestically, you would get a lower rate if you specifically
invested that in R&D activities or manufacturing activities,
something very specific and targeted that you would get that
tax benefit by doing that? What, in your mind, would be the
better way from a Tax Code standpoint to encourage you, Procter
& Gamble, to invest more in the United States?
Mr. MCDONALD. Congressman, our principle would be, Let's
come up with a competitive system, and that would be both the
rate and moving from a worldwide to a territorial system. And
what I would suggest is, let's benchmark the other countries
that we are competing with. Because we are also not just
talking about American companies investing here. We are talking
about Chinese companies. I have met with Chinese CEOs who say,
Help me figure out how to invest in the United States. And they
are struggling with our Tax Code as well. And that is part of
President Hu's visit and the reason I will need to leave too is
because we are trying to get Chinese companies to invest here.
And if we can get to a competitive system like those other OECD
countries that have improved their systems, then I am sure we
will succeed.
Mr. GERLACH. Thank you.
Mr. MCDONALD. Yes, sir.
Mr. GERLACH. Thank you, Chairman.
Chairman CAMP. Thank you. Mr. Thompson is recognized.
Mr. THOMPSON. Thank you, Mr. Chairman. Thank you for
holding this hearing. I think it is an important discussion
that we have to have. I think we need to simplify our Tax
Codes, all the Tax Codes. And I would like to just ask the
chairman for his help and cooperation this year on expanding
that. I am going to reintroduce my bill on estate tax reform. I
think it is a sad day when family farms have to be sold in
order to pay estate tax on those family farms. And hopefully,
we will be able to create a situation where if you inherit the
family farm and you keep farming it, you will be able to get a
postponement in any estate tax. So I hope we would expand it to
that.
I don't think the idea of a tax policy that encourages jobs
in this country, rather than overseas, is a bumper sticker. We
received this sheet that shows the number of foreign jobs that
were created between 1999 and 2008 versus domestic jobs that
were lost. I think we need to have a Tax Code that, in fact,
does encourage job growth here in the United States of America.
And I understand that businesses consider all of their
investments, foreign and domestic, when they figure out their
bottom line. But I think we have to pay particular attention to
creating jobs here.
And then lastly--and kind of a statement but also a
question--there has been a lot of talk about deficit neutrality
when we work on reforming the Tax Code. I just don't think you
can take that off the table or take care of it later on. I
think this is a real, really important issue not only because
of the growing debt, but the impact it is going to have on
companies like Procter & Gamble.
There was discussion just this last year of lowering the
U.S. credit rate because of our big deficit and our big debt.
And I think that would impact U.S. competitiveness and U.S.
corporate profits, if that were to happen.
So I don't think this is something that we can ignore. I
would like to hear from both Dr. Sullivan and Mr. McDonald on
that specific thing. How would that hurt U.S. companies both
here and abroad if our credit rating was lowered because we
don't pay attention to the deficit of our tax reform.
Chairman CAMP. We need short answers.
Mr. MCDONALD. Well, I think, Congressman Thompson, we have
already seen somewhat the impact of that if we look at what is
going on in Europe right now in places like Greece and places
like Spain and places like Ireland. So we know what will
happen. It will be a higher interest rate. It will be harder to
get capital. The chart that you referenced, while a good chart,
we have to get into the detail of that because the businesses
and the economies are growing much faster in places like Asia
and Africa than they are in places like Europe and the United
States. So, of course, any time you have global business, you
are going to be hiring more people in those geographies. So I
just think we need to get into the details and understand why
those jobs were being created abroad.
Chairman CAMP. The gentleman's time has expired. But, Dr.
Sullivan, if you would just answer briefly. Thank you.
Mr. SULLIVAN. Thank you, Mr. Chairman. The deficit problems
we face are unprecedented. They slowly weaken the foundations
of our economy by sapping capital formation, and we risk
financial collapse. So these are very serious problems for our
competitiveness. Thank you.
Chairman CAMP. Mr. Heller is recognized.
Mr. HELLER. Thank you, Mr. Chairman. I appreciate you
having this hearing. I apologize that I missed some of what was
said here this morning because I was on the radio. And the
timing of it and the discussion had specifically to do with our
tax structure and what is going on here in Washington, D.C. and
what we are trying to do. I told them that it is great that we
are able to get the Republicans and Democrats together and
actually start talking about some tax reform--long overdue,
long overdue tax reform. And there isn't a small businessman or
a manufacturer in my district that isn't talking about how
complicated this tax system and the taxes are.
We have 14.4 percent unemployment in Nevada, and I have to
believe that our current tax structure has something to do with
that. And I am pleased to hear about the administration,
talking about their desire and eagerness to look at some tax
reform. There are Commissions out there. There are committees
out there, Leadership on both sides of the aisle, as we are
seeing here in this Committee meeting. But I think what we are
missing and what is important to concentrate on is that it is
the constituency out there, these small businesses and
manufacturers, that are talking about the need for fundamental
change in our Tax Code so that they can be competitive not only
here in this country but abroad.
And we are hearing stories after stories--and I don't know
if this was brought up--Microsoft talking about having to
borrow in this country because they cannot bring money back
from overseas. They have billions of dollars overseas. They
can't bring it back to America to create jobs. Their only
choice is to borrow because that is what is best for their
shareholders. Those kinds of stories, those kinds of issues
that we have right now are fundamentally flawed with the
process that we have.
So, Mr. Chairman, I certainly do appreciate this hearing. I
saw a couple of charts yesterday that were talking about
deflation now here in this country. I know gasoline prices are
going up. I know food prices are going up. But you get past
those two obstacles, and then we start looking at the deflation
of other goods and services. We are looking at falling wage
growth here in this country, and I believe that that has a lot
to do with the Tax Code we have here in this country. And I
guess quickly--and I don't know how much time I have left--but
you talked about a simpler code, Ms. Olson. Have we gotten to
the point that our Code has run its course; our current Tax
Codes has run its course? And are there alternatives out there
to the current code as opposed to just making it simpler?
Ms. OLSON. Well, as I said in my testimony, I really think
you need to, on the individual side, really just put everything
on the table and then go through it--not first from a cost
benefit but say, Is this a policy that we should run through
the Internal Revenue Code? First, is it a policy that we want?
Second, is it a policy that we should run through the Internal
Revenue Code? If it is a policy you want, then when you answer
that second question, you have to think, what is the burden
that you are putting on individual taxpayers to have to
document this thing, to tie their businesses up into knots in
order to meet the requirements for it.
And then what are you making the IRS do? How are they going
to treat taxpayers, whether they are businesses or individuals?
Right now, you have just heard a morning of testimony about the
difficulties that taxpayers are facing.
Mr. HELLER. Thank you, Chairman.
Chairman CAMP. Thank you. Dr. Price is recognized.
Mr. PRICE. Thank you, Mr. Chairman. And I want to
congratulate you on obtaining the gavel for this Committee. I
want to congratulate you and commend you for your passion for
fundamental tax reform which is so necessary. I, frankly, am
struck by the unanimity of the panel, especially as it relates
to the corporate tax rate and the need to decrease the
corporate tax rate.
I think it is imperative that we not punish the job
creators. And I think, as the charts have shown, a high
corporate tax rate does, in fact, punish job creators because
we live in a global economy.
I was struck, however, Dr. Hassett, by comments about any
decrease in corporate taxes, not increasing revenue necessarily
to the Federal Government. I wonder if you would comment about
what many of us believe: a decrease in corporate tax rates
actually increases revenue to the Federal Government.
Mr. HASSETT. Thank you very much, Mr. Price, for the
question. And Mr. Neal, I welcomed the opportunity also to
respond to the earlier exchange.
The thing is that there is a well-developed literature,
including, you know, a fairly recent Brookings paper a paper by
a German economist who is definitely not Republican or
Democrat. That shows that really a lot of the lessons in Mr.
Sullivan's testimony are apparent in the data that if you are
high tax place, and it is relatively easy for companies to move
their profits to a low tax place. That is why you saw the lower
average rates in Mr. Sullivan's testimony for some companies.
It is that they have been very adept at locating activity in
lower tax places.
If we reduce the tax here in the U.S., then they have less
of an incentive to locate their profits and their activity
abroad, and then it is just an empirical question. Is the
change in incentive enough so that you could actually reduce
the rate and get more revenue? It is almost never the case with
taxes--at least in the near term--that when you reduce the
rate, you get more revenue. But in the corporate tax space,
there are actually academic papers that find that result. I
would say a rough reading of the literature is that the revenue
maximizing tax rate in the corporate tax space is maybe around
30 percent. So if we are above that, then it means we are
actually losing revenue. And in part, it is because it is so
easy to transfer to lower tax jurisdictions. And I put a
reference in my testimony, inside that reference that----
Mr. PRICE. Thank you. A quick comment as well on something
that has also been an area of disagreement and that is the
repatriation of dollars. It seems that our friends on the other
side think that would be a nasty thing to do, to allow that
money to come back because they don't have any proof that there
are jobs created. But the converse of that is that if you just
leave the money over there, then it actually is better for the
United States. Isn't it better for American workers and our
American economy to, in some way, allow for that repatriation
of resources?
Mr. HASSETT. Right. We need to allow firms to put their
money where it can be best put to use, regardless of taxes; and
repatriation shouldn't be relevant. I would counsel against a
temporary measure. It should be a permanent measure.
Mr. PRICE. All right. Thank you. I yield back
Chairman CAMP. Thank you. Mr. Larson is recognized.
Mr. LARSON. I want to thank the chairman and thank him for
this opportunity. I have three quick questions for the
panelists. One for Ms. Olson. In your testimony, it said, If
tax compliance were an industry, it would be one of the largest
in the United States. It consumes 6.1 billion hours. The tax
industry requires the equivalent of more than 3 million full-
time workers. These are a pretty amazing statistics. I would
like you to expand upon that, noting that it seems to me that
our current tax system is broken. It was antiquated in the last
century. We are already a decade into this century, and we
still haven't made much gains in terms of straightening it out.
Second question, to any of the panelists, with regard to
transaction taxes, noted on 60 Minutes that more than $60
trillion takes place in transactions over the counter that are
unregulated. And in terms of looking at revenue that takes
place in the EpisPhere or done algorithmically or whatever the
case may be, it just seems to me like this is an opportunity
that is worth looking at as opposed to taxing one's labor. So I
would be interested in answers to those questions. Ms. Olson, I
will start with you.
Ms. OLSON. I think what those numbers point out--and I must
note that those numbers include business taxes as well as
individual--but I urge this committee to not forget the
individual taxpayers, the 132 million individual taxpayers who
are your constituents, who are suffering under the current, you
know, burden of this Code. And as we talk about businesses
making decisions about where to place their profits or their
activities, that very ability to make those decisions leads to
a great distrust of your constituents of the Internal Revenue
Code and of government. And it leads to the sense that they are
being discriminated against by the Code and by their government
because they cannot afford or do not have those kinds of
breaks. So that was some of the things that we were trying to
get across in our testimony.
Mr. LARSON. Over the counter transaction taxes, anyone? Dr.
Sullivan, Dr. Hassett?
Mr. SULLIVAN. I do think it is important we re-evaluate our
Tax Code in light of the financial crisis to remove the
elements of the Code that contributed to it. For example, the
deductibility of debt. However, a transactions tax has been
tried in many countries around the world, and it is very hard
to administer. So I think its initial appeal wears off the more
you look at it.
Mr. HASSETT. I concur with Dr. Sullivan.
Mr. LARSON. So there is no way to regulate an over-the-
counter trade in a way that it produces significant revenue?
Mr. SULLIVAN. Unless we went to a multilateral--where all
countries agreed to do this, the trading activity, because it
is so mobile, would shift to other countries. Sweden tried this
several years ago, and other countries have tried it, and they
had to repeal it because they just couldn't administer it
effectively.
Chairman CAMP. Thank you. The gentleman's time has expired.
Mr. Buchanan is recognized.
Mr. BUCHANAN. Thank you, Mr. Chairman. Someone mentioned
earlier--it is interesting, we are having a tax debate, and the
President of China is in town at the same time. As someone who
has been in business for himself for 35 years, I can tell you
that it is not Florida--I represent Sarasota, Florida against
Alabama and Mississippi competing for business. The fact of the
matter is that we are competing around the world. And one of
our biggest competitors today by far, the 800-pound gorilla, in
my mind, is China. I have done business overseas as well.
So when I think about this and the fact that we haven't
touched the Tax Code in a material way since 1986, I think it
is appropriate we have these discussions today because I always
personally believe what makes America special and great is free
enterprise.
So let me jump over, Mr. McDonald, quickly to you. When you
talk in terms of Business Roundtable, the fact of the matter
is--and I was a C corporation and moved to an S, and now I have
a bunch of LLCs that my family runs--but the bottom line is,
half the tax revenue, I understand, is through pass-through
entities. So when you look at earners lowering the tax rate or
the discussion of the tax rate for corporations, what are you
going to do about all those employers that have 500, 100
employees, 50 employees that are LLCs?
I hope that will be taken into consideration. You can't do
one without the other because otherwise you end up with a
competitive advantage over someone else that happens to be a
large family-run business. Could you comment on that quickly?
Mr. MCDONALD. I agree with you, Congressman Buchanan. And
you are right. It is about half.
Mr. BUCHANAN. Yes. So what would you suggest? When you are
having discussions around the Business Roundtable, hopefully--
are you guys talking about C corps? Or are you looking at all
the other entities, the LLCs and sub-S's and partnerships and
everything else?
Mr. MCDONALD. Well, as I suggested earlier, my comments
were about creating a competitive Code for everyone, not just
our members, which tend to be the larger corporations. But we
realize that 50 percent or so are the smaller companies, and we
think that the Code has got to be competitive for all of them.
Mr. BUCHANAN. Thank you.
Mr. Hudak, let me just ask you quickly. When you look at it
in terms of jobs, the fact of the matter is that 70 percent of
the jobs created in America are created by small- and medium-
sized businesses. In the State of Florida, Tallahassee, 99
percent of all companies registered in Tallahassee, whether
they are LLCs or partnerships, are small- and medium-sized
businesses. What is the biggest one or two things--because you
primarily work with small businesses--we can do or should
consider to help small businesses in terms of cost and
complexity? What do you think are the two biggest things we
could do in terms of having an impact?
Mr. HUDAK. Simplification on all levels of the Tax Code.
For instance, a sole proprietor, just to take the home office
deduction, it is a one-page form that refers to the
instructions 13 times. Something you shouldn't do is like the
1099 provision. Right now, as a tax practitioner, I feel more
like a paper pusher. I don't know who is going to collect all
the W-9s to collect that information, but we don't have the
staff to do it.
Mr. BUCHANAN. Thank you. I yield back.
Chairman CAMP. Thank you. Mr. Schock is recognized.
Mr. SCHOCK. Thank you, Mr. Chairman. And thank you, once
again, for hosting this very important first hearing.
Mr. McDonald, has your group studied approximately how much
money among your member companies and companies at large could
be repatriated if Congress does act to allow for either
permanent or temporary repatriation at either zero or some
small amount?
Mr. MCDONALD. I don't have that number right now,
Congressman, but we can get back to you with that number. We
have chosen, as a group, to prioritize the whole discussion of
getting to a competitive system and a system which is
territorial rather than worldwide, which would allow for the
repatriation. But we can get you that number.
Mr. SCHOCK. Okay. And since that is your focus, what is the
rate that you have decided would be necessary here in the
United States that would not incentivize the sourcing of a
multinational from a foreign source?
Mr. MCDONALD. Right. We haven't chosen a single rate.
Again, I think the exercise we all need to do together to be
fiscally responsible is to look at those OECD countries that we
are competing with and see what effective rate we would need in
order to compete effectively with them. But we haven't chosen
the number yet. We look forward to working with you to do that.
Mr. SCHOCK. Yeah. I think this is a very important action
that we can take sooner rather than later and doesn't have to
be a part of the larger discussion of Tax Code simplification.
I find it hard to believe that some of my colleagues think that
if we repatriate this money, no jobs will be created. We met
with a CEO of a large publicly traded company yesterday who
estimated $30 to $40 billion just in that company alone that
would be repatriated. I would have to think it would be in the
trillions of dollars with all companies and that no jobs would
be created here if that money came to our economy seems a bit
crazy.
Dr. Sullivan, in your estimation, your opinion, which seems
to vary a little bit from the rest of our panel, do you have a
number in mind in terms of what you think the corporate rate in
America needs to be to disincentive foreign sourcing when the
customer is of equal distance?
Mr. SULLIVAN. Thank you for the question. Obviously, we
want the rate as low as possible. Let's talk about what
realistically can happen. Based on Treasury estimates, if we
just do revenue-neutral corporate tax reform and get rid of
most of the major incentives--we are talking about research
credit, production credit, accelerated depreciation, we go full
throttle, we would be lucky to get down to 30 percent, if we
want to be revenue-neutral. If we want to go below that, but we
need to----
Mr. SCHOCK. Let me ask you this: Are you making the
assumption that the level of investment would remain static
regardless of what the rate would be?
Mr. SULLIVAN. No. No, I am not. I think investment would
increase as a result of the lower rate.
Mr. SCHOCK. And you stated earlier that obviously there is
some risk reward based on that. So do you have a number in
mind?
Mr. SULLIVAN. A number for----
Mr. SCHOCK. What the rate should be.
Mr. SULLIVAN. As low as possible.
Mr. SCHOCK. Like 0 percent?
Chairman CAMP. Thank you. The gentleman's time has expired.
Mr. Blumenauer is recognized.
Mr. BLUMENAUER. Mr. Chairman, let me begin by expressing,
as a number of our colleagues have, an appreciation for your
starting our deliberations dealing with the Tax Code. I think
you have taken the right direction and, I will say, the right
tone. I have appreciated that and look forward to working with
you on it, because this is, clearly, a unique opportunity. Part
of the opportunity is just simply the value that is wasted,
that you have documented, Ms. Olson. Part of our difficulty in
having a productive conversation about the Tax Code is that it
is so hopelessly complex that everybody is right. Every
generalization, every complaint, right, left, center, they are
right. They can find an example.
I am a tax junkie, as a revenue committee chair and a State
legislator eons ago. I went to law school and took tax classes
because I wanted to learn more about the job. I could not do my
taxes today under torture with weeks worth of time, and I am
not Warren Buffett. It is a scandal, and it is approaching a
crisis point. The cost of compliance, the disconnection from
tax provisions with what they were intended to do, the
alternative minimum tax, the tax on millionaires who evaded
taxes has morphed into a tax on the near rich who pay their
taxes. And no billionaire hedge fund is ever touched by it.
I hope, Mr. Chairman, that we will be able to move forward
with this with dispatch because I think it is a symbol of
whether or not government itself can respond to something which
is universally agreed that is in need of fixing, but whether we
can follow that path. And in that connection, I guess I just
have one question that I would offer to Ms. Olson and Mr.
McDonald: Can we do this successfully if we disconnect the
individual tax provisions from business? Or do they need to be
done concurrently?
Ms. OLSON. Well, I think that although the business and the
individual issue--they present different issues and different
questions, but I do not think you can do them separately, in
part because so many businesses are pass-through entities, and
you still have to deal with the individual side.
Mr. BLUMENAUER. Mr. McDonald.
Mr. MCDONALD. Yes, sir. I would agree with that as well.
Many of those pass-through entities are suppliers of ours, and
they are very critical to our business all over the world, so
it has to be done together.
Mr. BLUMENAUER. Thank you.
Chairman CAMP. In an effort to continue everyone's
opportunities, Mr. Rangel and I have had a discussion, and we
are now going to move to 2 minutes per member. So with that,
Mr. Lee is recognized.
Mr. LEE. Thank you, Mr. Chairman. With shortness of time, I
will just make a brief statement. But really, what I heard here
today, and as a former businessman, what we hear with regard to
the Tax Code--does not bring a lot of confidence for businesses
to want to invest in this country with all things being equal.
With regards to labor, the cost of building a facility, when
you have this differential in the Tax Code, it is mind-
boggling. And Ms. Olson talked about 6.1 billion hours with
regards to compliance costs. The only area of this economy
where I know we spend more time is debating health care. So
that is a frightening number because that is a cost that is an
impediment to job growth in this country.
Some of the recent statistics, The Wall Street Journal
reported just a few weeks ago that literally $2 trillion in
liquid assets are sitting on the sideline primarily because we
do not have enough certainty. Our Tax Code over the last
decade--literally, 10 years ago there were very few pieces of
tax legislation that would be considered temporary, less than
12 to 18 months. Today that number has grown exponentially;
thereby, again, making decisions on long-term investments in
capital. We want to attract the other multinationals to the
United States.
So we said, the Fortune 500--we look now on the position of
U.S. corporations. There are many other countries around the
world. We want those jobs here. Unless we do something about
our Tax Code and make it a priority, we won't see the
significant job growth that all Americans, frankly, deserve to
have. I appreciate you being here today and look forward to
moving forward on the subject.
Chairman CAMP. Thank you. Ms. Jenkins is recognized.
Ms. JENKINS. Thank you, Mr. Chairman, and thank you for
holding the hearing.
I join my colleagues in having a passion for this
particular topic. In particular, I have a keen interest in it.
I spent, in my real life, many years practicing public
accounting on the tax side of things. And I recall the last
time Congress discussed tax simplification was a wonderful time
in my career because there was job security.
So every time Congress begins a discussion about job
security, I think every CPA firm in the tax department holds a
party that day. And so with that in mind--I know we don't have
enough time. I could spend hours with you folks. But does
anybody want to just try to prioritize for us, if you could
change three things, what they might be? Keeping in mind, I
guess, the priority would be job creation and economic growth,
if anybody wants to tee that up. And then I would just love to
know your two second thoughts on the flat tax, and the Fair
Tax.
Mr. MCDONALD. I would certainly prioritize, Congresswoman
Jenkins, getting to a competitive tax system because, as you
saw, we are uncompetitive with our foreign competition today.
Mr. HASSETT. I think that the main thing is the corporate
rate just has to come down to make us more competitive. So that
is all three of my things.
Mr. SULLIVAN. Ms. Jenkins, what I would just add to that
is, this tax reform has to take into account our two credible
deficit problems, which I don't think this Congress has fully
come to grips with yet. Thank you.
Chairman CAMP. All right. Thank you. Thank you very much.
Mr. Kind is recognized.
Mr. KIND. Thank you, Mr. Chairman. I want to thank you for
holding this hearing, which I hope will be the beginning of
many hearings that we have in this session. And one
recommendation, Mr. Chairman, is perhaps getting the co-chairs
of the Fiscal Commission, upon which you and others serve, to
testify with some of their recommendations. Is it effective for
the Tax Code and deficit reduction. But, Ms. Olson, let me
first start with you and thank you for the work that the
National Taxpayer Advocate office does and your recommendations
that you submit to us from time to time.
And I hope all of us do heed your admonition that we don't
lose sight of the individual tax implications because--and I
think you are right. I think there is a sense of fundamental
unfairness for average working families, individuals, small
business owners who feel that unless they have got their team
of accountants, team of tax lawyers, that they are not able to
take advantage of the great complexity and the loopholes that
do exist. I think this does affect the compliance issue of tax
filing and the underreporting and the cheating and the tax gap
that has grown, just given the complexity of this Code.
So as we move forward, I hope that we can marry the issues
of corporate reduction along with the individual rate, which I
think is going to be imperative. My guess is that most of the
folks in the audience today are more focused on the corporate
rate and what is going to happen there and not the individual
rate.
But back to Mr. Hudak raised with us today in his testimony
and written testimony, most of the business in this country are
pass-through entities. They are not C corps. They are S corps.
They are sole proprietors. They are partnerships. And that is
why getting to the individual rate is going to be so important
for most of the job growth that does occur in all of our
individual districts, which are small business-oriented, rather
than the larger multinational businesses and the implication.
But I also agree with the rest of your testimony that, as
we get into the corporate tax rate, this should be done through
the prism of international competitiveness issues in light of
the changes that have happened with the Tax Code in other
countries, and to make us as competitive as we need to be. But
it is one of the reasons--back to you, Mr. Hudak, why I have
had legislation, the S corp modernization bill, to try to
simplify and make easier the compliance and also to get at the
built-in gains issue that we have to work on. So working with
you and others, hopefully we will have a chance to get into
that. Thank you again, Mr. Chairman.
Chairman CAMP. Thank you. Mr. Paulsen is recognized.
Mr. PAULSEN. Thank you, Mr. Chairman. And a lot of the
conversation--I know whenever tax reform is brought up--it
surrounds simplicity, fairness, the complex arguments that we
heard about today. But I am pleased that a lot of the
conversation today, obviously, is about economic growth and
competitiveness, without a doubt. And I am wondering--maybe Mr.
McDonald first--if you can just expand a little bit and talk a
little bit about debt versus equity and the concept of how we
encourage businesses and individuals to borrow and to finance
their operations through debt rather than through asset
creation or capital formation. And why that is important? Why
we should be focused on that?
Mr. MCDONALD. Well, I understand that Steve Ballmer was
here yesterday talking about the amount of money that Microsoft
has overseas. And obviously with that money overseas and the
inability to repatriate it without paying more tax--again, I
want to, again, underscore the fact that we all pay tax in
overseas markets. The difference with the United States and a
very few countries that I showed on the chart was, you have to
pay an additional tax when you repatriate the money to your
home country. There are very few countries in the world that do
that. The United States is one. This causes them to have to
borrow money here.
At the Procter & Gamble Company, we pay almost half of our
profits in dividends, and most of our shareholders are our
employees, our retirees, are people in this room. They are not
institutions. Less than half of our shareholders are
institutions. We have to have that cash in order to pay those
dividends, and it becomes a burden to create that cash when you
have to pay a higher tax rate on that money coming back. You
are, in a sense, taxing the shareholder, taxing the common
person.
Mr. PAULSEN. Thank you, Mr. Chairman.
Chairman CAMP. Mr. Berg is recognized.
Mr. BERG. Thank you, Mr. Chairman. This is my first
hearing, and I can't think of a better topic. I am just tickled
pink hearing all of the people that have presented. And you
know, an issue like this is just so critical. I am a small
businessman. It is good to hear that my colleagues, both
Republicans and Democrats, have the same frustration with their
taxes as I do. So again, I don't want to take any more time
here. But just thank you for being here, and I thank the
chairman for holding this meeting.
Chairman CAMP. Thank you. Mr. Pascrell is recognized.
Mr. PASCRELL. Thank you, Mr. Chairman. And thanking you for
bringing us together on this critical issue. Ms. Olson, it is
always an honor and a pleasure to listen to you because you
make sense. You are a true advocate, and I am glad you brought
up the subject of the average taxpayer because frequently, as
has happened frequently, that person is forgotten. So while we
are maybe trying to prioritize the cutting of corporate taxes,
which I think is important and we need to address and it will
be addressed, you cannot--and I want to know if you disagree
with me--you cannot address, for instance, that issue in a
vacuum without talking about what the trials and tribulations
are of folks who are making $25,000, $30,000, $35,000. Do you
agree or disagree with me?
Ms. OLSON. I absolutely agree with that.
Mr. PASCRELL. Now do you think then that systemic change is
doable?
Ms. OLSON. Yes. I think it is entirely possible. And it
will take great courage and dedication. And I think you have to
educate the public. We were talking about educating the public
about businesses, but we need to educate the public about what
they get as benefits through the Code and what will happen if
we get rid of some of those benefits but lower rates.
Mr. PASCRELL. And educating the public is critical?
Ms. OLSON. Absolutely.
Mr. PASCRELL. And ourselves. Because take, for instance,
and I don't make this a centerpiece. Take, for instance, do you
think most Americans know that most of the folks, the great
folks that are on the panel with you, that Federal, State, and
local income taxes consumed 9.2 percent of all personal income
in 2009 which is the lowest rate since 1951?
Ms. OLSON. Probably.
Mr. PASCRELL. Yes or no?
Ms. OLSON. No.
Mr. PASCRELL. Do you think that is important in looking at
this thing in context?
Ms. OLSON. Yes, absolutely.
Mr. PASCRELL. Do we know what we are talking about on this
side of the aisle, on this side of the barrier here about
taxes?
Ms. OLSON. Do you know what you are talking about?
Mr. PASCRELL. Yes.
Ms. OLSON. Absolutely.
Mr. PASCRELL. Thank you.
Ms. OLSON. You are welcome.
Chairman CAMP. The gentleman's time is expired. Ms. Black
is recognized.
Mrs. BLACK. Thank you, Mr. Chairman. And likewise, as has
already been said, this is certainly a very important topic. I
know in consideration of the time, it may be that we won't be
able to answer these two questions that I have, and perhaps
more in writing. And I am not sure that you will have an
immediate answer to them.
But Ms. Olson, for you, I am looking at individuals. I am
curious, if we were to simplify the system--because you have
testified that people don't trust and they try to evade has
there been any study done to show that if there were a more
simplified system that we would, perhaps, collect more revenue
because of so much evasion? And that would be one question that
I would have.
Ms. OLSON. I think it depends on how you structure the
system. We know when people have withholding and the income is
reported to the IRS that 99 percent of the taxes, their incomes
is reported. And so the taxes are paid on that income. When you
don't have that kind of reporting and you have lots of
opportunity to take deductions and claim special benefits, then
that increases the opportunity to, you know, avoid an
underreport.
So if you structure the system right, you can minimize
noncompliance. The more complexity you have in the system, the
more opportunity you have to have noncompliance.
Mrs. BLACK. Thank you. Mr. Chairman, my understanding is
that we are able to submit questions that then can be answered
separately. Am I correct on that?
Chairman CAMP. Yes. Members are able to submit questions
for the record. And if they do, I hope our panel will respond
promptly.
Mrs. BLACK. Thank you.
Chairman CAMP. Thank you. And now Ms. Berkley is
recognized.
Ms. BERKLEY. Thank you. I want to thank you, Mr. Chairman.
I think this was a wonderful hearing and I am glad it is just
the beginning of a process. I would like to submit for the
record my opening statement, which I wasn't able to make.
[The information received:]

Shelley Berkley
Opening Statement

Thank you, Mr. Chairman, and thank you to the witnesses joining us
today. A serious discussion about reforming our nation's Tax Code is
long overdue. The Tax Code is an area of law our constituents interact
with everyday, yet we have created a system of taxation that is so
dense and so complicated that few ordinary Americans--including, I'm
sure, many Members of Congress--are able to calculate their taxes
competently and confidently. This complexity harms individuals,
families, businesses big and small and the economy at large by
cementing into law inefficiencies in the way people do business.
Creating a Tax Code that removes these issues, and creates a system
that is more accessible and comprehensible to the American public, has
the potential to fix many of these problems.
Merely saying that we need tax reform for the sake of simplifying
the code is not enough. As we look at the code, it is important to do
so with an eye toward maintaining a fundamental level of fairness with
regard to the burdens of taxation. I'd like to ensure that all
taxpayers pay their fair share, and that those at the top of the income
scale aren't able to manipulate the system at the expense of us all.
Warren Buffett has noted in the past how appalled he is that he
pays a lower effective tax rate than most of his employees, despite
being one of the wealthiest men in America. Efforts at reform must
address this phenomenon so all Americans feel they are being given a
fair shake by the system. We must thoroughly review the many
deductions, credits and incentives we have created in the past and
ensure they are still relevant to the economy today. We must not be
caught up in maintaining an inefficient status quo merely because some
of these breaks have ``always been there.'' Reform, done right, could
help spur our economy and bring greater fairness and predictability to
the system.
I look forward to working with my colleagues on the Committee in
the months ahead to craft a tax reform package that is fair, efficient,
and far less complex than our current system. Doing so will help the
American economy by removing inefficiencies that harm our citizens and
businesses.

Ms. BERKLEY. I am very glad, Ms. Olson, that you talked
about that we need to do the individual reforms with the
corporate reforms. In my family, when I was growing up, my
father was a waiter in one of the Las Vegas hotels. The way we
did our taxes is we waited for my Uncle Nattie to come from New
York once a year to do the taxes for us. And I don't think that
is a good process for any American family, and I am sure, least
of all, my own.
We just passed a massive tax package last month and in it,
it had all the tax extenders, every one of them I supported.
And I felt that I had friends in the race car track world. And
the taxi companies that use propane gas, they kind of camped
out in my office and explained how important all of these tax
credits and tax breaks were to their business and how much they
created jobs.
Now let me ask you something. If we actually lower the tax
rates for corporations and companies throughout the United
States, is that going to be enough? Are they going to be
willing to give up all of these individual tax credits and
breaks that are in our Tax Code? Or are they still going to be
coming to me, explaining how they still can't make ends meet,
they are going to go under, and they need have additional tax
breaks? Because that is going to kill us when it comes to our
deficit. There has to be revenue coming in somehow to support
this country.
Ms. OLSON. Can I make a point about that? I think that that
goes to the need for education so that people understand that
at least on average, maybe their bill won't increase. But on
the other hand, I think it is very important that we will never
get rid of everything. And so when you decide to put something
in the Internal Revenue Code, you have to make sure that you
all have the information to be able to evaluate.
Chairman CAMP. And the witnesses can submit their answers
in writing.
Ms. BERKLEY. And let me ask one other question that I was
going to submit about repatriation.
Chairman CAMP. But Mr. McDermott and Mr. Levin would like
to question. So Mr. McDermott is recognized.
Mr. MCDERMOTT. Thank you, Mr. Chairman. I ask unanimous
consent to enter into the record an article by David Cay
Johnston called Johnston's Take, Reasons, Rules, and Riots: Our
Societal Panic.
Chairman CAMP. Without objection.
[The information follows:]

Mr. McDermott
Statement for the Record

Reasons, Rules, and Riots: Our Societal Panic

By David Cay Johnston

On the surface, what's going on with tax policy in Washington right
now seems crazy. A Democratic president whose enemies call him a
socialist makes a deal with Republicans that sells out both his party
and the very tax promises that won him the election, while Republicans
leaders who say that debt is our overwhelming domestic problem insist
on borrowing tens of billions of dollars to give tax savings to the
richest among us. The polls, at the same time, show the public
overwhelmingly favors ending tax cuts for high earners.
What we are witnessing, however, is much more profound than
political, economic, or fiscal insanity. And it goes much deeper than
disputes over whether extending temporary tax cuts for two years and
long-term jobless benefits for 13 months is politically or economically
smart. Those are mere manifestations of a much more pervasive problem.
America is in the grip of a full-blown societal panic. Crazy,
irrational, contradictory ideas about tax policy are just the most
obvious symptom. Societal panics occur when the expectations and rules
everyone has been accustomed to living under no longer work. They occur
when some new force changes the rules of the game--a force that may be
easy to identify or invisible, but whose effects are far-reaching and
unstoppable.
Sometimes that force comes from nature, sometimes from a discovery,
sometimes from inventions of the human mind. But in every case
throughout history, that force, like the waters pouring over Niagara
Falls, cannot be stopped, although sometimes it can harnessed.
Because no one knows quite what to do when the old ways stop
working, panic sets in, replacing reason. Crazy responses spread until
an idea or a leader emerges, a new way to make sense of the change. The
new leader is often the one who persuades people that it is better to
live by new rules.
Humans have experienced societal panics time and time again.
Sometimes they end in tragedy, sometimes in triumph. And those
unexpected accidents of history often play a huge role in the outcome.
Consider what happened to the Greeks 2,700 years ago. The Lydians,
Greek settlers in what is now the Mediterranean coast of Turkey, found
a mine rich with electrum, a naturally occurring alloy of gold and
silver. This find resulted in the invention of coinage, an invention so
revolutionary that it launched the ancient Greeks into a societal panic
that lasted two centuries, but at its end gave us two of the most
powerful, intertwined, and enduring principles ofWestern Civilization--
the moral basis for progressive taxation and democracy.
America was in the grip of a societal panic from the end of the
CivilWar until 1893, an era historians call the Gilded Age, but that
could just as easily be called the Agrarian Death or the Industrial
Triumph as America the land of yeoman farmers became America the land
of industrial might. It was an era of turmoil and conflict--gilded
mansion ceilings and a famous speech about oppressive debt and a gold
cross; the invention of the electric light and violent night-time
attacks on workers seeking more pay; and our first encounter with a
politician who lost the popular vote but became president anyway.
Our current societal panic began almost four decades ago, when the
economic glow created by emerging from World War II with half the
world's industrial capacity wore off and President Nixon went to
Beijing, opening the door to the transfer of that manufacturing
capacity to China. The long-term effects of this, and the faux ``free
trade'' policies adopted at the behest of our financier class, took
time to affect society, just as the invention of coinage did not
instantly disrupt ancient Greek social and commercial relations. Our
panic turned into wildly unthinking behavior at the end of the last
century, with taxes as the first sign that reason was giving way to
belief, that dogma was trumping empirical evidence.
But while the symptoms we see are crazy tax policies, crazy
borrowing, and neglect of the commonwealth property and policies that
are the foundation for private wealth creation, our panic is about
something much deeper.
David Cay Johnston is a former tax reporter for The New York Times
and teaches at Syracuse University. He has also written two books about
taxes, Free Lunch and Perfectly Legal.
Johnston shows how lessons from history can inform our chaotic tax
debate.
Our societal panic is about what we as a nation fear almost as much
as death itself--the end of American abundance, the death of the idea
that each generation would do better than the last, the end of the
notion that everyone who works hard and plays by the rules will at
least prosper in the sense of having a roof over their heads and enough
to eat. Our societal panic is about a new world of mind-numbing
complexity where speculation with algorithms and borrowed money pays
more in a day than thoughtful investment may return in a lifetime,
where jobs pay less tomorrow than yesterday, and where loyalty is
something we associate with frequent flier programs rather than
careers.
Societal panics are like riots, something I found myself in the
middle of a number of times in the turbulence of the '60s and '70s.
When crowds turn violent, with steel pipes intended to support saplings
pulled from the ground as weapons, when lines of police swing batons at
anyone in their way, when rocks and bottles rain down from rooftops
through a fog of tear gas, the natural instinct is to join the
wildness, to become mindless because nothing makes sense but escaping
the fear, the terror, that envelops you.
Keeping your head, becoming coldly rational, makes it possible to
sidestep the cudgels and spot the street furniture that can provide a
canopy from the hail of deadly missiles launched from the rooftops. But
even if you keep your head, in riots there is no place for rational
discussion. Fear is all consuming. As the novelist Frank Herbert taught
us in Dune, his tale of an entire universe in panic and a new leader
who ended the panic, fear is the mind killer.
The fear of what the new American economy means is killing reasoned
debate about taxes, tax policy, and how to distribute the burdens of
making our great nation function.
Fear keeps us from talking about how to create an economy in which
prosperity is widespread and how using taxes can make us richer by
insuring the efficient and bountiful supply of the common goods and
services that modern economies require: education, research,
infrastructure, and universal healthcare as a service, not a profit-
making insurance product.
While societal panics are difficult to appreciate when you are in
them, once they have passed they are easy to identify, along with their
causes and how the problem that brought on the panic was resolved.
Often the disruptive force is unknown to a society, like the
microbes that brought the Black Death to Europe, bequeathing us the
murals of the Danse Macabre, featuring skeletons holding hands with
kings and popes. Sometimes the force is obvious, as when locking up all
the land in perpetual trusts (which many states now allow) brought
worsening poverty to 18th century France until Dr. Guillotine's cutting
edge severed the problem at the head.
Sometimes the disruptive force is obvious, as when the Lydians
discovered electrum. The gold and silver alloy could be pressed into
tokens that, in time, evolved into coins of different value.
The jingling of coins is so common today we think nothing of them.
At their invention, however, the ease of engaging in transactions and
building up a store of cash challenged ancient societies, which were
built more on cooperative relationships than any medium of exchange.
It took the Greeks two centuries to work through the issues that
began in Lydia, what we now call the Age of Tyrants. Their panic
eventually produced the plays of Aristophanes and in time gave birth to
two of the greatest ideas of Western Civilization, ideas intertwined to
this day--the moral basis of progressive taxation and the various forms
of selfrule we call democracy.
But before the classical age in Greece there was draconian law,
named for the dictator Draco, who decreed death for all crimes because,
he reportedly said, it was the appropriate sentence for petty theft and
he could not think of a harsher punishment for worse offenses.
The Greeks endured these harsh laws for four decades, a reminder of
how long people will endure harsh and unjust policies. Then came Solon,
who repealed Draco's harsh laws, except for death as punishment for
murder. Solon also forgave all debts, which enriched those who had
borrowed heavily at the expense of the lenders and, for a time, made
credit hard to get for poor farmers.
Eventually the crisis created by coinage helped the Greeks work
through the idea of what freedom meant, how laws could define conduct,
and how economic power was separate from political power.
This last insight resulted in the Greeks' reasoning that it was
only because of Athens--its laws, its courts, its military--that one
could legitimately acquire riches and have them protected, for in his
natural state man was in a jungle, a war of one against all in which
riches came by luck or plunder and could be taken away by brute force.
That insight resulted in the first progressive taxation. The moral
basis for this was the principle that the greater the wealth Athens
made possible, the greater the burden the wealthy must bear to sustain
Athens, which in turn protected that wealth through laws and its
military. Intertwined with that was the birth of the ancient world's
first recorded example of self-rule through one-man, one-vote for
Athenian citizens.
Societal panics, the ancient Athenians showed us, can have
remarkably positive outcomes, although getting there can take a long
time when much damage is done to society.
Our own nation was in a panic from the end of the Civil War until
the economic collapse of 1893, the Gilded Age. After its collapse the
underlying conditions changed little until one of those unexpected
twists of history changed everything. In September 1901 a disgruntled
office-seeker shot President William McKinley near Buffalo, N.Y. The
new president was Theodore Roosevelt, who gave substance to the
Progressive Era, an unexpected development because the Wall Street
interests who detested Roosevelt as governor of New York had made him
vice president to make sure he had no power to threaten their
interests.
Imagine an America today without the many changes wrought by
Roosevelt, or that he encouraged, in his assault on what he called
``malefactors of wealth.''
In our panic today we are bedeviled by tax policy and an economy
built on rules that no longer work. The 20th century, what some
historians will look back on as the American Century, prospered under a
national, industrial-wage economy, flush with high-paying jobs and tax
rules that discouraged withdrawals from operating businesses. Taxing
wages was a smart way to finance government because wages were rising.
But since 1973, with some brief exceptions, this has not been true for
the vast majority, whose average income in 2008 was less than 1 percent
greater than in 1980, while incomes at the top soared, spurred in part
by rules that encourage withdrawals of capital from business for
unproductive consumption because of extremely low tax rates.
The 21st century is an era of a global, digital, and asset economy
with rules that favor the free flow of capital over labor, which is
brutally suppressed in China and legally suppressed in America through
anti-union laws, lack of enforcement of wage laws, and the dampening
effects of a growing reserve army of the unemployed.
America's current societal panic is not going away soon. Tens of
millions of people are out of work and tens of millions more fear their
next paycheck could be their last. The temporary Bushera tax cuts will
not end next month, even though the huge deficits run up since 1980
hover over us like dark clouds of debt that could drop enough worthless
government bonds to drown us all.
Yet we must deal with the circumstances we have created for
ourselves. The price of self-governance and its freedoms is making wise
choices and electing wise leaders or suffering the consequences.
The adoption of misguided economic policies, the election of
politicians unwilling to be disciplined in opening the public purse,
and the artificial deadlines imposed on us by the legislative
gamesmanship used in enacting the 2001 and 2003 tax cut laws, together
with our faux free trade policies, have put us in a deep hole.
In clawing our way back we must keep in mind that those Bush tax
cuts were not tax cuts at all but simply loans against a future which
has now arrived in giant waves of red ink.
There is talk, by very thoughtful people, that we can never recover
from this hole, that our fate is sealed, and that we will descend into
a future worse than the past within living memory. I believe we can go
on to a richer future, but it will take a leader who synthesizes an
understanding of how the old rules must be discarded and new ones
adopted that flow from the changes in the world economy.
Before we get there things may get worse, much worse, as the Greek
experience with Draco and his draconian laws should remind us. But we
will never get on a path to sound tax policy, policy that flows from
the new economic order instead of against it, until enough of us stand
back from the riotous conditions and find a place where rational debate
about taxes can grow into popular understanding.

Mr. MCDERMOTT. Talks about the history of taxation and that
we establish progressive taxation along the Greek lines because
we realize the people at the top got most of the benefits, so
they ought to pay most of the taxes. And the Republicans, when
they took over the Congress, last week, passed a rule which got
no ripple in the press. Nobody even mentions it. They said that
if we cut taxes, we don't have to replace the money. It is not
a loss to the budget.
Now, I find it very hard, when we have been operating under
PAYGO rules, to think that we are going to do any kind of
reduction in corporate taxation and not replace the money,
unless this is simply a hearing on, how do we cut spending? How
do we cut investment in education? In higher education? In
infrastructure? I would like to hear from you, Mr. Sullivan. Do
I understand correctly what that rule means?
Mr. SULLIVAN. If I understand what it means, it is that tax
cuts do not have to be paid for, which I think is--again, in
this fiscal environment, is absolutely outrageous and it is
dangerous to the long-term health of this economy.
Mr. MCDERMOTT. So it is saying we are really going to make
these tax cuts and the only place we will get the money is by
borrowing it internationally to continue the level of services
that we have in this country. Otherwise, we are going to reduce
the level of services?
Mr. SULLIVAN. Obviously, the choice between whether it
should be tax increases or spending cuts is a political
decision, but I think the rule should be neutral, and these
rules are not neutral.
Mr. MCDERMOTT. Thank you. I yield back the balance of my
time.
Chairman CAMP. Thank you. Mr. Levin is recognized.
Mr. LEVIN. We have to vote. But I just wanted to take the
opportunity, Dr. Hassett. If it isn't directly related--it was
in your materials. Or at least I saw them. You talked about the
President, ``his obsession with manufacturing and his policy of
nationalizing GM and Chrysler.'' I don't think he has an
obsession. I think manufacturing matters. And we have not
nationalized GM and Chrysler.
Mr. HASSETT. Would you like me to respond?
Mr. LEVIN. Well, let's talk about it another time. But I
want us to proceed in a rational bipartisan basis. And when I
saw your article, I just wanted to say to you, I think that is
not accurate. There is no obsession. There is a concern. And
there is no nationalization, sir. We have met with the CEOs,
and the last thing they would say is that they have been
nationalized. So go out and buy one of their cars.
Chairman CAMP. Dr. Hassett, if you wanted to comment? You
don't need to.
Mr. HASSETT. I look forward to having the exchange with Mr.
Levin.
Chairman CAMP. This hearing was really about the burdens of
the Federal tax system: the compliance burdens the
administrative problems, the difficulties for families and
small businesses, the problems of creating economic growth
under the current system, as well as the high corporate tax
rate and the international tax system being increasingly out of
step with the rest of the world. But I want to thank our
witnesses for their testimony. This schedule has really been a
difficult one this morning for us. Thank you for bearing with
us through that. Again, members can submit questions to you,
and I hope you will respond. And obviously you have made it
very clear that our Code is a complex mess. It is frustrating
to families and to businesses big and small. It encourages
inefficient behavior. These points were actually made in an
opinion piece published by Minority Whip Steny Hoyer. And while
I don't necessarily subscribe to everything in that article,
his comments about the need to act on a bipartisan basis to
reform the Tax Code were right on point. I look forward to
continuing this dialogue at future hearings. But for now, the
committee is adjourned.
[Whereupon, at 10:55 a.m., the committee was adjourned.]
[Questions for the Record follow:]

Nina E. Olson
Response
The Honorable Dave Camp
Chairman
Committee on Ways and Means
United States House of Representatives
Washington, D.C. 20515

Dear Chairman Camp:

I am writing in response to your letter dated February 8, 2011,
which requested that I answer two questions for the record submitted by
Rep. Diane Black in connection with the Committee's January 20, 2011,
hearing on Fundamental Tax Reform. The questions, and my responses,
follow.
Question 1
Evasion at the individual taxpayer level: What are the statistics
regarding tax evasion by individuals?
Response 1
The term ``tax evasion'' is generally used to describe solely
willful and intentional noncompliance with the tax law. In practice,
the reasons for noncompliance with the tax law form a continuum from
confusion about the law's requirements, to errors attributable to the
complexity of the law, to noncompliance that is facilitated by
preparers, to willful and intentional noncompliance. I believe that the
IRS needs to gain a better understanding of the reasons for various
types of noncompliance, because the solutions vary based on the cause.
For example, traditional enforcement measures may work best when
dealing with taxpayers who are willfully and intentionally violating
the law, while improved outreach (and, ultimately, tax simplification)
may be most effective in addressing noncompliance that results from
confusion about the law's requirements. In the National Taxpayer
Advocate's 2010 Annual Report to Congress, we published an overview of
studies that my office plans to conduct in the next few years to try to
get a better handle on the causes of noncompliance.\1\
---------------------------------------------------------------------------
\1\ See National Taxpayer Advocate 2010 Annual Report to Congress,
vol. 2, at 89-99 (Researching the Causes of Noncompliance: An Overview
of Upcoming Studies).
---------------------------------------------------------------------------
At present, the IRS does not know the extent to which tax
noncompliance is intentional. However, the IRS has conducted periodic
research studies to estimate the size of the so-called ``tax gap.'' The
tax gap is the amount of tax that is not voluntarily and timely
reported and paid. According to the IRS's most recent estimates, which
are based on audits of tax returns filed for 2001, the tax gap stands
at about $345 billion per year.\2\
---------------------------------------------------------------------------
\2\ IRS, Tax Gap Map for Year 2001 (Feb. 2007), available at http:/
/www.irs.gov/pub/irs-utl/tax_gap_update_070212.pdf. These figures do
not include unpaid tax on income from illegal activities. Because the
IRS projects it will ultimately recover about $55 billion through late
payments and enforcement action, it estimates the annual ``net tax
gap'' to be about $290 billion. Id.
---------------------------------------------------------------------------
As shown on the ``tax gap map'' (attached as Appendix A), the
components of the tax gap include:

Nonfiling--$27 billion (7.8 percent);
Underreporting--$285 billion (82.6 percent); and
Underpayment--$33 billion (9.6 percent).

A closer look at the data shows that withholding and third-party
information reporting are the key drivers of tax compliance. Reporting
compliance rates are about 99 percent on wages subject to withholding
and third-party information reporting, about 96 percent on income
subject to full third-party information reporting (e.g., interest and
dividends)--yet less than 50 percent on income not subject to third-
party information reporting.\3\ Unreported income earned by individuals
in the ``cash economy''--taxable income from legal activities that is
not subject to information reporting or withholding--is the single
largest component of the tax gap. As shown on the tax gap map, self-
employed taxpayers who file returns but underreport their income (and
related self-employment taxes) account for about $148 billion in lost
revenue per year, or 42.9 percent of the tax gap.\4\
---------------------------------------------------------------------------
\3\ IRS, Tax Gap Map for Year 2001 (Feb. 2007), available at http:/
/www.irs.gov/pub/irs-utl/tax_gap_update_070212.pdf.
\4\ Id. The $148 billion figure includes $109 billion attributable
to unreported business income on individual tax returns and $39 billion
attributable to unpaid self-employment taxes. Id.
---------------------------------------------------------------------------
I have proposed both administrative and legislative recommendations
to improve tax compliance in the cash economy.\5\ For example, I have
proposed legislative recommendations to:
---------------------------------------------------------------------------
\5\ See National Taxpayer Advocate 2007 Annual Report to Congress
490 (Key Legislative Recommendation: Measures to Address Noncompliance
in the Cash Economy); National Taxpayer Advocate 2007 Annual Report to
Congress 35 (Most Serious Problem: The Cash Economy); National Taxpayer
Advocate 2007 Annual Report to Congress, vol. 2, at 1 (A Comprehensive
Strategy for Addressing the Cash Economy). See also National Taxpayer
Advocate 2003 Annual Report to Congress 257 (Key Legislative
Recommendation: Tax Withholding on Nonwage Workers); National Taxpayer
Advocate 2004 Annual Report to Congress 478 (Key Legislative
Recommendation: Tax Gap Provisions); National Taxpayer Advocate 2005
Annual Report to Congress 381 (Key Legislative Recommendation: Measures
to Reduce Noncompliance in The Cash Economy); Statement of Nina E.
Olson, National Taxpayer Advocate, Before the Senate Committee on
Finance, The Tax Gap and Tax Shelters (July 21, 2004), available at
http://www.irs.gov/pub/irs-utl/nta_sfc_testimony_tax_gap062104.pdf;
Statement of Nina E. Olson, National Taxpayer Advocate, Before the
Committee on the Budget, United States Senate, The Causes of and
Solutions to the Federal Tax Gap (Feb. 15, 2006), available at http://
www.irs.gov/pub/irs-utl/nta_senbudget_taxgap_021506.pdf; Statement of
Nina E. Olson, National Taxpayer Advocate, Before the Subcommittee on
Federal Financial Management, Government Information, and International
Security of the Committee on Homeland Security and Governmental
Affairs, United States Senate, The Tax Gap (Sept. 26, 2006), available
at http://www.irs.gov/pub/irs-utl/
nta_testimony_senate_hsgac_092606.pdf.

Increase the use of the IRS's electronic payment
system for estimated tax payments;
Authorize voluntary withholding agreements; \6\
---------------------------------------------------------------------------
\6\ For similar proposals, see the TAX GAP Act of 2010, S. 3795,
111th Cong. (2010) and Treasury Department, General Explanations of the
Administration's Fiscal Year 2012 Revenue Proposals 99 (Feb. 2011).
---------------------------------------------------------------------------
Eliminate the corporate exception from information
reporting for small corporations; \7\
---------------------------------------------------------------------------
\7\ Businesses making payments totaling $600 or more in a calendar
year to any non-employee service provider (i.e., a contractor) that is
not a corporation are generally required to send an information return
to the IRS setting forth the amount as well as the name, address, and
Taxpayer Identification Number (or TIN) of the contractor. IRC
Sec. Sec. 6041(a) & 6109(a)(3). Effective for payments made after
December 31, 2011, the Patient Protection and Affordable Care Act, Pub.
L. No. 111-148 (2010), expanded this information reporting requirement
to include payments to a corporation (except a tax-exempt corporation)
and payments for property. The National Taxpayer Advocate recommended
that Congress repeal this requirement with respect to payments for
property while retaining the requirement with respect to payments to
corporations for services. National Taxpayer Advocate 2010 Annual
Report to Congress 373-376. The Treasury Department recently made a
similar proposal. See Treasury Department, General Explanations of the
Administration's Fiscal Year 2012 Revenue Proposals 97 (Feb. 2011).
---------------------------------------------------------------------------
Accelerate the taxpayer identification number
validation process;
Provide for withholding on payments to noncompliant
contractors; \8\ and
---------------------------------------------------------------------------
\8\ The Treasury Department recently made a recommendation to
require businesses to withhold tax on payments to contractors who did
not provide them with a valid TIN-name combination. Treasury
Department, General Explanations of the Administration's Fiscal Year
2012 Revenue Proposals 99 (Feb. 2011).
---------------------------------------------------------------------------
Require financial institutions to report all accounts
to the IRS by eliminating the $10 minimum on interest
reporting.

Question 2
Corporate tax: We know the high U.S. corporate tax rate is not the
only factor that U.S. companies consider when deciding where to locate
future investments and that companies also consider such things as the
workforce, ease of access to raw materials, quality of the
infrastructure, stability of the legal and political environment, the
location of customers and the cost of shipping finished goods to them,
etc. Can you help explain how companies weigh these factors and how
large--or small--a factor the U.S. statutory tax rate is?
Response 2
I agree with the thrust of the question that corporations consider
more than merely tax rates when deciding where to invest and locate
their operations. Depending on the circumstances, costs such as those
for labor or raw materials could outweigh tax effects. By statute, my
office focuses on tax administration, and we do not have the expertise
to identify or quantify factors that are considered in corporate
decision-making.
For your convenience, I note that the Congress has at its disposal
a staff of non-partisan economic experts who may address these issues
in publications for Members. In particular, the Congressional Research
Service (CRS) has observed that business relocation may be ``the result
of a variety of factors, ranging from technological progress, to
exogenous shocks, to changes in institutional policies.'' \9\
---------------------------------------------------------------------------
\9\ David L. Brumbaugh, Taxes and International Competitiveness,
RS22445 (May 19, 2006) 6; see Staff of the Joint Committee on Taxation,
The Impact of International Tax Reform: Background and Selected Issues
Relating to U.S. International Tax Rules and the Competitiveness of
U.S. Businesses, JCX-22-06 (June 21, 2006) 57 (stating there ``is no
consensus on what method of taxing international investment income
minimizes distortions in the allocation of capital when nations tax
income at different effective rates, but the alternatives of capital
export neutrality and capital import neutrality are the most cited
guiding principles''), available at http://www.jct.gov/
publications.html?func=startdown&id=1498; Simple, Fair, and Pro-Growth:
Proposals to Fix America's Tax System, Report of the President's
Advisory Panel on Federal Tax Reform (Nov. 2005) 104 (stating that the
tax consequences of investment abroad depend ``on the circumstances of
the taxpayer''); Simplification, Compliance, and Corporate Taxation,
Report on Tax Reform Options of the President's Economic Recovery
Advisory Board (Aug. 2010) 85-86 (discussing effects on the location of
the economic activities of U.S. multinationals).
---------------------------------------------------------------------------
* * * * *
I hope you find these responses useful. If you have further
questions, please feel free to contact my office at (202) 622-6100.

Sincerely,

Nina E. Olson
National Taxpayer Advocate

Appendix A--Tax Gap Map Tax Year 2001 ($ Billions)
Internal Revenue Service, Feb. 2007
[GRAPHIC] [TIFF OMITTED] T0869A.068

Responses to Questions for the Record submitted to Robert McDonald
for the Committee on Ways and Means hearing on Fundamental Tax Reform,
held January 20, 2011
Questions from Rep. Diane Black

1. Evasion at the Individual Tax Payer Level: What are the
statistics regarding tax evasion at the individual level?

A: We do not have data independent of that compiled by the IRS on
this matter. I believe the Taxpayer Advocate, Nina Olson, who testified
on this panel is best able to provide you the appropriate information
or refer you to the office within IRS who has studied the data.

2. Corporate Tax: We know the high U.S. corporate tax rate is not
the only factor that U.S. companies consider when deciding where to
locate future investments and that companies also consider such things
as the workforce, ease of access to raw materials, quality of the
infrastructure, stability of the legal and political environment, the
location of customers and the cost of shipping finished goods to them,
etc. Can you help explain how companies weigh these factors and how
large--or small--a factor the U.S. statutory tax rate is?

A: All of these factors are important and the relative importance
of each factor will differ from product to product based on the
attributes of the product. For many products, transportation costs can
be a significant component of the total cost of manufacturing, so
production needs to be located near the customer and consumer. More
generally, each of these factors has to be included in an investment
model in order to determine whether a company can deliver the final
product to the consumer at a competitive price. For some investments,
U.S. taxes--at about 39 percent of net income--can represent a sizable
share of the return on investment and will weigh heavily in the
investment decision.
One clear example of how taxes can affect the investment
decision is when a foreign company is considering investing in
North America. The company will soon be able to invest in
Canada with a tax rate of about 25 percent or it can invest in
the United States with a 39 percent tax rate. In many cases,
this tax difference will outweigh other factors and drive the
investment decision to Canada.
The high U.S. rate affects other decisions that can also be
counterproductive to the United States. The high U.S. rate in
conjunction with our worldwide system of taxation also
discourages repatriating foreign earnings to the United States
because of the U.S. tax imposed on these remittances.

Warren Hudak
Responses to Questions for the Record
Ways & Means Committee
February 22, 2011

Evasion at the Individual Tax Payer Level

What are the statistics regarding tax evasion by individuals?
The starting point for any statistics relative to tax evasion
begins by looking at the available data regarding the tax gap. The tax
gap is defined as the amount of income owed to the Federal Government
compared to the amount actually received. The estimated tax gap is
about $345 billion, but after enforcement efforts the total is closer
to $290 billion.
About 70 percent of the gross tax gap is attributable to the
individual income tax. The individual income tax is the largest source
of federal receipts.
Determining the reason for the tax gap is more difficult.
Intentional evasion is difficult to measure, since it requires an
intentional act and we can only measure those taxpayers who have been
caught. In addition, a certain amount of the tax gap is the product of
errors.
From the perspective of small business owners, simplifying the Tax
Code would be a good way to help address these problems. A simplified
Tax Code will reduce errors and also provide fewer opportunities for
those looking to evade their tax obligations.
Corporate Tax
We know the high U.S. corporate tax rate is not the only factor
that U.S. companies consider when deciding where to locate future
investments and that companies also consider such things as the
workforce, ease of access to raw materials, quality of the
infrastructure, stability of the legal and political environment, the
location of customers and the cost of shopping finished goods to them,
etc. Can you help explain how companies weigh these factors and how
large or small a factor the U.S. statutory tax rate is?
Your question outlines the main issues a business raises in
determining where to locate future investments. The tax rate is
certainly part of that consideration. For most small businesses, the
statutory corporate rate is less of a factor than for a larger
business. First, most small businesses are organized as pass through
entities--about 75 percent--so they do not pay the corporate tax rate,
but the individual tax rate. Second, fewer small business operate
abroad so the corporate tax rate relative to the rest of the world is
less of an issue.
That being said, tax rates are an important decision for any
business owner. For smaller businesses, the federal tax rate is only
part of the consideration. They must also consider the state and local
tax rates, which when stacked with the federal rates in some states are
creeping towards 50 percent. This is why keeping the individual tax
rate low is so important for small businesses. The money that a
business earns is often put back into the business or used to start
another business. A successful small business will look for the next
opportunity--either opening another branch or diversifying into another
business. This is one factor that makes the small businesses a driver
of job creation. Raising the individual tax rate deters capital
formation and reduces the ability of small business owners to make the
investment in new firms.

Kevin A. Hassett, Ph.D.
Response
March 21, 2011

Committee on Ways and Means
U.S. House of Representatives
1102 Longworth House Office Building
Washington, DC 20515-6348

Dear Representative Black:

Thank you for your questions. Please feel free to contact me if you
would like additional information.
1. Evasion at the Individual Tax Payer Level
According to the latest IRS report on the tax gap, dated July 8,
2009, the estimated overall non-compliance rate for tax payments is
approximately 16%. The gross tax gap is estimated at $345 billion.
After enforcement efforts, the net tax gap is approximately $290
billion. Underreporting of income by individuals is responsible for
approximately 50% of the tax gap. Due to its complexity, the tax gap is
not well understood. Contrary to popular commentary, the tax gap is not
a readily available revenue source. The gap is very difficult to close,
because it would be practically impossible to monitor all the ways
people potentially earn income.

Source: http://www.irs.gov/pub/newsroom/tax_gap_report_-
final_version.pdf.
2. Corporate Tax
There are, as you mention, many factors that determine location
decisions, and taxes can, in principle, be a small part of the puzzle.
As mentioned by my co-panelist, Proctor and Gamble, for example, often
locates its activity close to its customers, which means that it must
have operations all around the world. One way to check whether taxes at
the margin are important is to watch the revenue impact of lower tax
rates. When a nation cuts its rate, it makes itself more attractive,
but the rest of its characteristics, presumably, remain the same. The
evidence (as reviewed and extended in a recent paper I coauthored with
Alex Brill) clearly indicates that there is a wide range over which
revenues increase when corporate tax rates decline, suggesting that the
tax variable is very important. I would add that for the U.S., at this
time, with what is about to be the highest rate in the OECD, cutting
the corporate rate would have a bigger impact on the U.S. than
virtually any other policy that I can conceive of.

Link for Hassett-Brill reference: http://www.aei.org/paper/26577.

Warm Regards,

Kevin A. Hassett

Dr. Martin A. Sullivan
Response

1. What are the statistics regarding tax compliance by individuals?
Details are important, and on the issue of tax compliance I must
refer you to the detailed and excellent study by Eric Toder of the Tax
Policy Center (``What is the Tax Gap?'' available on the Urban
Institute web site).
Let me summarize the situation as I see it. Individual compliance
depends on what sort of income we are talking about. Different sources
of income have hugely different compliance rates due to the differences
in withholding and information reporting.
According to the IRS, underreporting by individuals can be divided
into four categories:

1. When there is withholding and information reporting, the
rate of underreporting of income is only 1.2 percent.
2. When there is substantial information reporting, the
underreporting rate is 4.5 percent;
3. When there is some information reporting, the
underreporting rate is 8.6 percent; or
4. When there is no information reporting, income is
underreported by 53.9 percent.

Compliance is generally high in the individual sector because the
bulk of income is wages (withholding and information reporting) and
dividends and interest (extensive information reporting). Most
individual noncompliance is due to small business. There is neither
withholding nor information reporting on most small business income.
Although they are now extremely unpopular on Capitol Hill, expansions
of 1099 reporting are critical for reducing noncompliance and catching
tax cheats.
2. Corporate tax: how important is the statutory rate?
At first glance, it would be reasonable to assume that the
statutory corporate tax rate plays a minor role in location decisions.
For a typical U.S. manufacturing firm, wage costs are about ten times
larger than corporate tax payments. Obviously, the opportunity to cut
wage costs in half in far more important than cutting taxes in half.
And of course the other factors you mention--access to raw materials,
infrastructure, political environment, etc.--are critical.
But, as you well know, business in the 21st century is more about
patents and trademarks than bricks and mortar. It is easy to move
intangible assets across international borders, and because our
transfer pricing rules work so poorly it is easy to shift the profits
attributable to these intangible assets to tax havens. So, by locating
business operations in low-tax countries, U.S. corporations get a
foothold on to which profits from high-tax countries--including the
United States--can be directed. In short, the conventionally limited
effect of the level of the statutory corporate tax rate on location
decisions is turbo-charged by tax rules that allow significant profit
shifting.
The significant presence of U.S. multinational corporations in
Ireland illustrates these points. U.S. multinationals employ about
90,000 workers in Ireland. Ireland has a 12.5 percent statutory
corporate tax rate. And it is this rate was largely responsible for
Ireland's economic boom from 1990 through 2008. U.S. corporations
report profit rates about three times greater in than elsewhere. This
is not ``the luck of the Irish.'' This is tax law failing to do its
job. If Ireland had a rate to 35 percent, it is fair to say the Irish
economic miracle never would have happened. Alternatively, if the
United States had lowered its corporate tax rate to 12.5 percent, the
Irish economic miracle never would have happened.

John Pettengill
January 19, 2011

Dear Committee,

Please consider my understanding of the FAIRTAX as expressed below.
It seems clear to me that the FAIRTAX is a win..win for both the
government and the taxpayers. Thanks so much for your time.

John Pettengill, Richmond, VA

__________
Under the FAIRTAX you will pay over 4 percent less for everything
and still pay the Federal Government the same amount in taxes as you
pay today . . . plus no April 15th tax preparation.
Today the one dollar shelf price of a loaf of bread includes 23%
business taxes that are passed on to you. Consequently, under the
FAIRTAX, the bread's shelf price will be reduced to just 77 cents. At
the register, a 24% FAIRTAX will be added making the total cost to you
95.48 cents or 4.52% cheaper than a dollar. Of course, state and local
taxes will still apply as they do today.
Under the FAIRTAX, we will have a whole group of New Taxpayers:

Criminals (pimps, prostitutes, gang members, mobsters etc.)
Tourists . . . since the prices will be the same/less, why not
let them help.
Tax Dodgers . . . those who purposefully avoid the current
income tax.
Those who now work for cash.
Rich persons with high priced tax lawyers.
Illegal immigrants (only those who do not pay income taxes
now.)

Under the FAIRTAX, investment in business, savings and stocks would
be free of government taxes and could provide more and better profits .
. . and more jobs.

John W. McClelland
January 25, 2011

Dear Mr. Chairman:

I am writing on behalf of the 4,000 members of the American Rental
Association (ARA). ARA members rent construction and industrial
equipment, tools, and party and event equipment to other businesses and
the public from more than 7,500 locations throughout the United States.
ARA wants to commend you for beginning a dialogue in the Ways and Means
Committee that is aimed at developing serious proposals for
fundamentally reforming our Nation's income Tax Code.
The equipment rental industry grew up in America in the days
following World War II when young veterans came home looking for new
opportunities. The scarcity of tools that could be used to provide
housing for the growing families of the baby boom was one of the main
drivers of the early equipment rental industry. ARA was formed by some
of the early pioneers of the industry in 1955 and for the past 55 years
ARA has represented and served the equipment rental industry.
In the early years of ARA, virtually all ARA members fit under the
title of small business. However in the early 1990's some large
investors, as well as equipment manufacturers, began to drive a
significant consolidation in the equipment rental industry that has
resulted in the existence of several large equipment rental companies
with rental revenues in excess of $1 billion annually and locations in
virtually every state and several other super-regional players with
annual revenues in excess of $250 million.
These developments mean that the equipment rental industry and ARA
are made up of a diverse group of companies. Most still are small
businesses, about half of which organize as pass-through entities.
Others are large corporations that have equity and/or debt financing.
However, most of these large corporations are quite young and have very
few exemptions of exclusions under the current Tax Code.
While the economic downturn has hit the equipment rental industry
severely, we like the rest of the economy, are recovering slowly. In
2008 the combined revenues of the equipment rental industry were $36.5
billion. Our research partner, IHS Global Insight, estimates our 2010
revenues will come in at $27.9 billion. However, IHS Global insight has
forecast rental revenues for 2015 to be $45.1 billion. While this is a
significant recovery, we believe reforming the current Tax Code to one
that has a broader base with fewer exclusions and exemptions and
creates a competitive tax system for business will help the equipment
rental industry meet or even exceed those revenue projections.
The benefits to the equipment rental industry from a more
competitive tax system with fewer tax expenditures are clearly stated
by you in your opening statement at the Committee's January 20, 2011
Hearing on Fundamental Tax Reform. Taxpayers ``foot the bill'' for Tax
Code expenditures by paying higher rates. ARA members are hopeful that
the effort you have begun with this hearing will result in a
competitive tax system that reduces compliance costs and strengthens
the tax base.
ARA looks forward to working with you and other Members of the Ways
and Means Committee as you develop proposals for reforming the Tax
Code. We begin by offering our full support to this effort.

Sincerely,

John W. McClelland Ph.D.
Vice President Government Affairs
American Rental Association

Geoffrey Burr

Dear Chairman Camp and Ranking Member Levin:

On behalf of Associated Builders and Contractors (ABC), a national
organization with 75 chapters representing 23,000 merit shop
construction and construction-related firms with nearly 2 million
employees, we appreciate the opportunity to provide our thoughts in
response to the House Ways and Means Committee hearing regarding
``Fundamental Tax Reform,'' to examine the burdens imposed by the
current federal income tax system and the need for reform.
Under the nation's current tax system, rates are too high and laws
are too complex, thus inhibiting the growth of small businesses.
Currently, unemployment exceeds 20 percent in the construction
industry, and adding increased taxes to an already burdened industry is
not conducive to an expedient economic recovery. Therefore, tax relief
is critical for businesses to spur reinvestment, create jobs, and grow.
During the 112th Congress, ABC urges Congress to provide immediate
tax relief for small businesses, which includes the following:

Increasing and indexing the threshold for small
construction contractors for them to utilize the Completed
Contract Method (CCM);
Fully repealing the 3 percent withholding
requirement, which is effective in 2012;
Fully repealing the expanded Form 1099 reporting
requirements under the Patient Protection and Affordable Care
Act (PPACA, P.L. 111-148); and
Fully repealing the new Medicare Hospital Insurance
(HI) tax on investment income, which is effective in 2013.

Research from a 2008 study released by the Small Business
Administration's (SBA) Office of Advocacy illustrates that the small
business community is disproportionately affected by burdensome federal
regulations. The study found that small businesses spend more than
approximately $10,600 per employee annually to comply with federal
regulations. In fact, the study concluded that small businesses spend
three times as much per employee to comply with the federal Tax Code
than larger firms. For the construction industry, excessive regulations
translate into higher costs that are eventually passed on to the
consumer.
Completed Contract Method (CCM)
The 1986 Tax Act failed to increase and index the threshold for
small construction contractors, and as a result, they are unable to
utilize the Completed Contract Method (CCM). Under current law, the
threshold is approximately $10 million, and because of this, small
construction contractors cannot use the CCM of accounting and are
required to use the percentage of completion method (PCM), which does
not accurately reflect results because of the required use of
estimates.
However, to provide relief for small construction contractors and
small businesses, in the 111th American Job Builders Tax Reform Act of
2010 (H.R. 6097), a bipartisan tax bill that proposed to amend the 1986
Tax Act by increasing and indexing the threshold for small construction
contractors and permitting them to utilize the CCM. The legislation
also provided relief for small construction contractors from the
Alternative Minimum Tax (AMT) and ``look-back'' accounting
requirements. By increasing the threshold and eliminating the AMT
adjustment, small construction contractors would no longer be subject
to the burdensome ``look-back'' calculations for both regular and AMT
purposes. ABC looks forward to working with Representatives Herger and
Berkley in the 112th Congress for immediate reintroduction of this
critical bill that will affect the construction industry and
construction-related industries as a whole. Congress, Representatives
Wally Herger (R-CA) and Shelley Berkley (D-NV) introduced the
Three Percent Withholding (Section 511)
Additionally, ABC supports fully repealing the 3 percent
withholding requirement (also known as Section 511) on all government
payments for products and services made by federal, state and local
governments with total expenditures of $100 million or more, in
accordance with Section 511 of the Tax Increase Prevention and
Reconciliation Act of 2005. Section 511 is effective in 2012, and to
date, the Internal Revenue Service has yet to finalize regulations
implementing this burdensome law and ultimately define how construction
contractors will be repaid after the withholding. Construction
contractors typically average a profit margin of 2.2 percent. Section
511 will undoubtedly deplete not only the construction contractor's
profit, but will also reduce sorely needed operating capital.
Eventually, construction contractors will be forced to raise their
proposal price to account for this shifting burden of financing and the
taxpayer's cost of construction will increase, or worse, drive small
businesses out of the government contracting market.
Expanded Form 1099
A new mandate under the Patient Protection and Affordable Care Act
(PPACA, P.L. 111-148) expanded the Form 1099 reporting requirements to
include two forms to be submitted for every business-to-business
transaction of $600 or more for both property and services. In this
current economy, small businesses do not need an increased paperwork
burden. ABC strongly supports full repeal of this tax filing mandate to
alleviate the increased reporting and paperwork requirements on small
businesses.
Recently, an ABC member, who is the vice-president of a family-
owned small business, indicated that the Form 1099 reporting
requirements may force him to hire an additional full-time employee to
work in his company's accounting department--such department already
employs two full-time employees. Because the ABC member works with
1,200 vendors, of which only 4 or 5 presently issue a Form 1099, the
accounting department will be required to spend countless hours on the
increased paperwork and filing.
Two years ago, the same ABC member employed 136 employees; however
due to the current construction market, he was forced to lay off
employees, reducing his staff to 66. Instead of investing in equipment
or hiring employees to actually perform work in the field, he may be
faced with a huge overhead expense of hiring a full-time employee to
solely work on this new burdensome mandate.
ABC members have also expressed the following concerns regarding
the expanded Form 1099 reporting requirements:

Businesses would easily have a multitude to request/
collect/follow on receipt of W-9's (approximately double what
they currently maintain);
Businesses would have to incorporate a review process
to ensure that a W-9 is on file prior to the release of
payments (again at least double what is currently maintained);
Businesses would have to ``hold'' payments from
suppliers until they receive the W-9 which could delay payment,
place holds on accounts, delay shipments, etc.;
What is commonly known today as a ``check request''
would have to include a process of collecting a W-9 and vendor
setup to track for 1099 purposes--which would cause a delay in
the turnaround time;
What are commonly known as ``onetime vendors'' would
probably need to go away due to the inability to issue 1099's
or even be able to review for year-end purposes--multiple
payments to the same company/person made under this vendor;
Field personnel would become part of the process.
Before calling someone out to perform a service, or making an
over the counter purchases, businesses would need them to be
proactive and either notify the office prior to placing the
order or collect the W-9 themselves; and
Additional forms and postage would be an increased
cost as well.

New Medicare Hospital Insurance (HI) Tax
A new Medicare tax on non-wage income was also included in the
PPACA. Starting in 2013, households with incomes above $200,000 for
individuals and $250,000 for married couples will have a new 3.8
percent tax applied to their income from interest, dividends, capital
gains, and some profits from investments in partnerships and S
corporations. ABC opposes this new tax. Many of our members operate as
S Corporations, partnerships, Limited Liability Companies, or LLC's
treated as partnerships, who file their income tax return as an
individual. According to the National Federation of Independent
Business, 75 percent of small businesses are organized as pass-through
entities (sole proprietors, partnerships, S Corps, etc.) and pay taxes
on their business income based on the individual tax rates.
We appreciate you taking the time to address tax reform in a
meaningful way. Lessening the tax burden on small businesses will
encourage small business owners and construction companies to reinvest
in their businesses, thus expanding the economy and creating jobs. ABC
strongly supports minimizing the tax burden and providing relief for
small businesses, including home-based businesses and the self-
employed. We look forward to working with you in the future on tax
reform initiatives.

Sincerely,

Geoffrey Burr
Vice President, Federal Affairs

Georgia Crowell, Statement

1. Eliminate all income tax and replace with a consumption tax
similar to the Fairtax, but not including the elimination of social
security taxes.
2. Instead of the Obamacare proposals, place a tax on all
processed and artificial foods which are destroying our health, such as
sugar, artificial sweetening, colors, preservatives and many other
manufactured processes. Use this income to provide free clinics to
whoever wants to use them. Also, use the proceeds from these types of
taxes to provide free testing available 24/7 for everyone including the
wealthy. As these taxes are levied, the junk food becomes more
expensive than fresh fruit, vegetables, meat and dairy and people will
be inclined to make the healthier choices (instead of being forced to
do so).

Michael D. Warlick, Sr., Statement

The current income tax system (and we use the term ``system''
loosely) imposes economic and administrative burdens on American
families that have become intolerable. Even the 1040EZ is too complex
for many taxpayers, and the traditional Form 1040 that must be
completed by those who itemize to take advantage of deductions is
almost incomprehensible. Even with the help of software like TurboTax
(which cost us $80 this year), completing a tax return is still at
least a two-day project.
Karen Walby, PhD, compared the total compliance costs and the
budget of the Internal Revenue Service. In 2006, American families and
businesses paid $304 Billion to prepare and file their tax returns--
including everything from the cost of corporate accountants and tax
attorneys to the fees an individual taxpayer paid to H&R Block. The
necessary record-keeping costs businesses must incur to document
deductions, credits, offsets are staggering.
The United States now has the highest corporate tax rate of any
developed country, and company and company relocates their headquarters
from the U.S. to other countries to avoid the burdensome tax structure.
Cisco is just one recent example. When Congress decides to increase
corporate taxes, does no one understand that these taxes are ultimately
passed on to individuals in the costs of goods and services? Cutting
the income tax rates for middle-income taxpayers while increasing
corporate rates is nothing more than a shell game, and more and more
American taxpayers understand that this is not even real tax relief,
much less true tax reform. A few more dollars in our paychecks are
quickly absorbed by higher prices at the cash register.
We urge you to consider the real and measurable tax reform offered
by HR-25, the Fair Tax bill introduced in the 112th Congressman by Rob
Woodall (GA-7) and now co-sponsored by 52 Congressman. The national
retail consumption tax on new goods and services, coupled with a
monthly prebate passed on the number and household residents and keyed
to the poverty level as determined by the Department of Health and
Human Services, is the one true tax REFORM measure in Congress. Based
on $22 million in research by leading economists at seven universities,
FairTax is the solution our country needs.

Katherine G. Lugar, Statement

On behalf of the Retail Industry Leaders Association (RILA), I
write to offer retailers' perspectives on tax reform as your committee
begins efforts to review our current tax system and undertake
fundamental tax reform. RILA supports tax policies that will improve
the business climate for retailers, both domestically and
internationally, by helping them continue creating jobs and bring
price-competitive value to American consumers.
By way of background, RILA is the trade association of the world's
largest and most innovative retail companies. RILA promotes consumer
choice and economic freedom through public policy and industry
operational excellence. Its members include more than 200 retailers,
product manufacturers, and service suppliers, which together account
for more than $1.5 trillion in annual sales, millions of American jobs
and more than 100,000 stores, manufacturing facilities and distribution
centers domestically and abroad.
Principles for Tax Reform
As part of any major tax reform proposal, it is important to
recognize that the current rules governing individual taxation and
domestic and international taxation of businesses are inexorably
intertwined. Accordingly, fundamental tax reform must address all
aspects of the tax system. We recommend that Congress focus on the
following principles as it considers proposals to reform the nation's
tax system:

Keep tax rates low--Enabling individuals to keep more
of what they earn encourages savings and enables them to make
purchases of needed consumer products, which also has the
benefit of providing a major stimulus to the economy including
sustained, improved retail sales. Similarly, low tax rates help
American businesses by increasing capital for investment and
job creation.
Enact simple, predictable and easy to understand tax
rules--A tax system that individual and business taxpayers can
easily understand will improve compliance and reduce the cost
of tax administration.
Establish tax rules that are consistent with economic
reality--For business taxpayers in particular, tax rules need
to result in appropriate timing and accurate reflection of
income without arbitrary rules that, for example, delay
deductions beyond the period in which the income is earned or
set depreciation periods inconsistently with the real economic
life of the property.
Ensure the tax system fosters business
competitiveness and promotes economic growth--In an
increasingly global economy, the tax system should not hinder
the ability of U.S. businesses to compete internationally as
well as domestically against foreign firms. A Tax Code that
treats business fairly and equitably will minimize burdens on
compliance and decision-making, thereby enhancing the
productive capacity of U.S. businesses and the U.S. economy.
Implement reforms that ensure industry-specific
neutrality--Business decisions should be based on economic
benefits of the particular transaction, not driven by special
tax benefits targeted to one industry versus another. The
economy does not benefit when the Tax Code chooses winners and
losers. Accordingly, tax reform should allow the marketplace,
not the tax system, to allocate capital and resources
appropriately.
Avoid a whole-scale change in the tax base--Dramatic
shifts in tax policy, such as implementing a national retail
sales or value-added tax, would be immensely disruptive to the
economy and particularly detrimental to lower-income workers
and families.
Make changes permanent and ensure certainty--A new
tax system must be permanent and stable, not littered with
expiring provisions that cause uncertainty for families saving
for college and retirement and business striving to expand,
create jobs, and remain competitive in the United States and
abroad.
Provide realistic transitions rules--Significant
changes to the current tax system will create substantial
burdens on taxpayers, especially in the business sector, to
ensure compliance. Establishing transition rules that provide
adequate time for implementation and that take into account
existing agreements, practices, and other requirements is
essential for the success of any new tax system.
Recognize that tax revenues are one part of fiscal
discipline--As with any business, long-term fiscal viability
requires careful management of both revenues and expenses. The
tax-revenue lever can only be pulled so much and so often
before it harms the business sector (with resulting effects on
tax revenues from businesses, employees, and investments).
Equal attention must be given to government spending to strike
a reasonable balance with a Tax Code that fosters economic
growth, job creation, and investment.

These principles represent a foundation on which a tax system can
be built that will achieve the government's revenue needs but without
the burdens and complexities of our current tax system, which stifle
innovation, hinder job creation, and deter overall economic growth.
Growth-Orient Tax Reform: Lower Business Tax Rate
The retail industry is vital to our nation's economy, representing
one of the largest industry sectors in the United States with nearly 15
million jobs and $3.9 trillion in annual sales in 2010. The industry
pays billions of dollars in federal, state, and local income taxes, and
collects and remits billions more in state and local sales taxes. As
you consider tax-reform options, one of the most far-reaching options
that the Committee could endorse would be a reduction in the federal
tax rates on corporations and other forms of business.
The last major overhaul of the system occurred with the enactment
of the Internal Revenue Code of 1986, which substantially reduced the
corporate tax rate along with major restructurings to the corporate tax
system. Over the ensuing 24 years, Congress has made thousands of
changes to the Tax Code increasing its complexity and the tax rate,
resulting in greater burdens for American businesses. Today, the United
States has nearly the highest statutory tax rate on corporate income,
which has a number of significant ramifications for U.S. retailers.
Overall, high corporate taxes reduce the availability of critically
needed capital for business to investment in labor. A number of studies
confirm that a significant share of corporate taxes is borne by labor.
Thus, a reduction in the tax burden will free companies to create new
jobs, increase real wages and income, and improve standards of living
for U.S. workers. With the unemployment rate holding above 9 percent,
this is a critical opportunity for Congress and the Administration to
reverse the job losses that have occurred over the past several years.
Moreover, our current high corporate tax rate hinders retailers'
ability to maintain their existing operation and invest for the future.
Especially in the current economic environment where the flow of
private-sector capital has been constrained, a lower tax rate would
free up essential corporate earnings for investments in new equipment,
facilities and products. Similarly, it would enable retailers to retain
more of their earnings to reinvest for the long-term growth of their
companies, which will contribute to nation's economic recovery and
ultimately to sustained economic expansion.
Looking beyond the domestic benefits, a lower corporate tax rate
also holds significant potential for improving the competitiveness of
U.S. businesses. In recent years, a growing number of U.S. retailers
have expanded into the global marketplace through the establishment of
both retail operations in other countries as well as subsidiaries that
strengthen the supply-chain of goods and services they provide to their
customers. Unfortunately, the United States is set to have the highest
corporate tax rate in the world once Japan enacts its proposed rate
reduction, and this country remains one of the only countries with a
system for taxing worldwide income. As a result, the United States has
created a difficult environment for its multinational businesses to
compete in the global economy. And, further exacerbating this
situation, other members of the Organization of Economic Cooperation
and Development (OECD) have been pursuing measures to reduce their tax
rates. Lowering the U.S. corporate tax rate would help level the
playing field for U.S. multinationals and encourage companies to keep
jobs and investments in this country.
At the same time, it is important to recognize the tremendous
growth in the number of businesses operating as pass-through entities
(e.g., partnerships, limited liability companies, S corporations, and
sole proprietorships), including some RILA members. These business
taxpayers are critically important to the U.S. economy and must be
taken into consideration in the tax-reform debate if overall tax reform
is to be successful.
For the foregoing reasons, RILA encourages the Committee to endorse
a significant reduction in the rate applicable to U.S. corporations and
other forms of business as a step toward improving the business climate
for retailers, both domestically and internationally, which will help
the retail industry continue creating jobs, investing in new equipment
and technologies, and contributing to the nation's long-term economic
growth.
Anti-Growth Tax Reform: National Sales Tax
While tax reform is important and can contribute to economic growth
and job creation, we strongly believe that adoption of a national sales
or value-added tax (VAT) would be antithetical to those goals.
Regardless of whether this tax is imposed through the manufacturing
process or at the point of retail sale, the victim of this tax will
ultimately be the American consumer who will face higher prices at the
register.
Sales taxes are highly regressive and pose particular harm for low-
and middle-income consumers who spend a higher percentage of their
earnings on basic necessities such as food, clothing, and household
products. In addition, state and local governments already apply sales
taxes to many goods and services--which a number of states have
increased in recent months to address revenue shortfalls resulting from
the current economic situation. A similar tax at the national level
would simply add to the tax burden consumers are increasingly asked to
shoulder.
Moreover, the retail industry represents the third largest employer
in the United States--behind only government and healthcare. A national
sales or value-added tax would significantly depress retail sales and
have a devastating impact on this important sector of our national
economy and the critical jobs it provides. Such a tax would also create
significant administrative burdens for retailers already responsible
for complying with the complex federal income tax system and the
remittance of disparate state and local sales taxes.
Finally, from the perspective of leveling the international playing
field, a VAT would only worsen the competiveness of American
businesses. As noted above, the United States will soon have the
highest corporate tax rate while our major trading partners are
actively lowering their tax rates. As a result, adding a VAT in this
country would increase the tax burden on American businesses and
intensify the competitive disadvantage they already face in trying to
compete in a global economy.
With the nation's economy continuing its slow recovery, the last
thing this country--our businesses and our consumers--needs is a new
supplementary tax system that will increase retail prices and threaten
American jobs. Accordingly, we do not believe there is any room at the
table for a national sales or value-added tax.
Conclusion
Thank you for this opportunity to present our views on tax reform.
RILA and its members look forward to working with the Committee to
implement meaningful tax reform that includes provisions that support
the retail industry and help it create jobs and grow.

Novogradac & Company LLP, Statement

We are writing to you on behalf of the LIHTC Working Group. Our
group is made up of low income housing tax credit (LIHTC) industry
participants including nonprofit and for profit developers,
syndicators, investors, accountants and lawyers. The Committee has
begun a series of hearings on the costs imposed on families, employers,
and the economy at large by the current structure of the Federal income
tax, and we would like to submit this statement for consideration by
the Committee.
Both the use and types of tax expenditures promise to be a large
part of what the committee considers during these hearings. We believe
that any discussion about tax expenditures should include a distinction
between those tax expenditures that benefit the recipient of the
subsidy and those tax expenditures that benefit a third party and
promote a social good. For example, LIHTCs are claimed by investors to
help developers build housing that benefits people who could not
normally afford it. Tax expenditures that benefit a third party and
promote a social good should be considered separately as they benefit
someone other than the taxpayer and benefit someone in need (low income
individual). Changes to these programs could hurt the dynamics of what
makes the program successful and in turn primarily hurt the third party
beneficiaries (low income individuals).
The Committee has an enormous task in front of it, and we are
pleased you are approaching it as a dialogue with the American people.
We look forward to being a part of the process. Thank you for your
time, and we are available if there is any way we can be of assistance.

Phillip J. Bond, Statement

I write today on behalf of TechAmerica on the importance of
fundamental tax reform and the need to create a globally competitive
system that spurs capital investment and job growth and to caution
against piecemeal modifications to the corporate tax rules. Unless
Congress acts now, and in a comprehensive manner, the United States
will surpass Japan to have the highest statutory corporate tax rate in
the developed world.
TechAmerica is the leading voice for the U.S. technology industry,
which is the driving force behind productivity growth and jobs creation
in the United States and the foundation of the global innovation
economy. Representing approximately 1,200 member companies of all sizes
from the public and commercial sectors of the economy, it is the
industry's largest advocacy organization. It is also the technology
industry's only grassroots-to-global advocacy network, with presence in
state capitals around the United States, Washington, D.C., Europe
(Brussels) and Asia (Beijing).
As consideration of fundamental tax reform begins, we urge Congress
and the Administration to stay focused on the goal of developing a
globally competitive taxation system that fosters innovation and job
creation. We urge you to avoid any interim proposals that would make
our taxation system even less competitive, create further uncertainty,
or hinder future investment. Chipping away at the Tax Code while the
tax reform debate gets underway would also be counter to the
President's goal of creating a system that supports economic growth and
investment in the United States.
According to TechAmerica Foundation's ``Cyberstates 2010'' report,
the U.S. high tech industry directly employs 5.8 million people at
375,600 establishments with a payroll of $516 billion, accounting for
10 percent of total U.S. private sector payroll. Indirectly, the U.S.
tech industry supports over 20 million jobs. U.S. high-tech workers are
paid an average wage of $84,400, which is 86 percent higher than the
average private sector wage. The vitality of this industry is
inextricably tied to its competitiveness worldwide, and the United
States would benefit from a modernized Tax Code that accounts for
innovation and is designed to compete globally with other countries
that are effectively recruiting more business and investment through
favorable business and tax policies.
As the United States continues to focus on entrepreneurship, global
competitiveness and job creation, tax reform should embrace the
principles of an ``innovation economy.'' Those principles include
recognizing the valuable contribution of incentives such as those for
research and development, tax law stability, and the recognition that
in a global economy, expanding operations overseas enhances U.S.
productivity and is essential for future growth in the nation's GDP.
U.S. high-tech companies of all sizes operate overseas to be near
their customers. Some small and mid-sized companies generate as much as
97 percent of their revenues overseas, with many large companies
earning more than three-quarters of their income outside the United
States. As global competition has grown, other countries have adopted
taxation systems that bolster the ability of their companies to compete
in foreign markets and increase investments at home. As the United
States undertakes an effort to fundamentally reform the Tax Code, we
must recognize the reality of a global economy--and the positive
connection between strong overseas operations and U.S. investment.
TechAmerica urges Congress and the Administration to resist any
piecemeal reforms to the international tax rules that would make U.S.
companies less competitive. In order to grow and create jobs in the
United States, U.S. companies must invest, operate and compete for
business all around the world. Overseas investment leads to greater
success selling goods and services globally, which under the right tax
structure, should significantly fuel domestic capital investment,
domestic job creation and increased domestic investment in research and
development activities.
In recent years, other countries have recognized the inverse
relationship between corporate tax rates and capital flows, and have
successfully increased capital investment by lowering corporate tax
rates and enacting incentives that attract high-paying jobs. This
spring, after Japan lowers its statutory corporate tax rate, the United
States will have the highest rate among the OECD countries. In 1986,
the United States lowered its top corporate tax rate to one of the
lowest in the world, and other countries followed suit. Not only does a
lower rate help U.S. companies compete, but it also encourages foreign
companies to invest in the United States, resulting in increased
employment and higher wages for American workers.
Even as other countries have lowered their corporate tax rate, they
also have recognized the importance of investment and job creation by
adopting incentives for research and development (R&D) activities.
Again, the United States once had the most generous R&D credit among
the OECD nations; however, the U.S. credit currently does not even rank
in the top ten among those countries. With more than 70 percent of
credit dollars being attributable to the wages and salaries of workers
in the United States, the R&D tax credit is a domestic jobs credit. In
an increasingly competitive global environment, reforming the Tax Code
to include a stronger and permanent credit would help make the United
States a more attractive location to perform R&D.
The Tax Code should help facilitate business decisions that benefit
the U.S. economy, but in order to make long-term planning decisions,
companies need clarity and certainty in the regulatory system. There
has been significant bipartisan support for incentives such as the R&D
credit over the years; however, there have also been proposals that
would actually encourage companies to perform R&D elsewhere, creating
uncertainty for companies. In addition, the credit has been allowed to
expire more than a dozen times, also depriving companies of the ability
to make long-term decisions relating to how much R&D they can perform
in the United States.
Undertaking a tax reform effort provides a rare opportunity to
examine our current system and consider how it can be made more
competitive by fostering innovation and job creation rather than
deterring it. The greatest challenge is to understand and anticipate
the effects that any change has on the overall tax burden. Reform is
inherently an exercise in interwoven and interdependent features such
that any change needs to be viewed in light of overall compliance and
total tax burden concerns. TechAmerica urges this Committee to keep
these issues in mind when considering tax reform proposals--or any
interim proposals that could make our current system less competitive.
In conclusion, TechAmerica would like to emphasize two points.
First, to summarize, we believe the ultimate goal should be to avoid a
piecemeal effort that would hinder innovation and investment. Instead,
Congress should focus on developing a globally competitive taxation
system that fosters innovation and job creation. Second, because our
member companies have substantial operations in countries all over the
world, they know the ingredients for success in the technology sector,
and they know how to compete. Please feel free to consider the
experience and expertise of our members as an ongoing resource
available to your committee in your work on tax reform.

John Pettengill
January 19, 2011

Dear Committee,

Please consider my understanding of the FAIRTAX as expressed below.
It seems clear to me that the FAIRTAX is a win..win for both the
government and the taxpayers. Thanks so much for your time.

John Pettengill, Richmond, VA

Under the FAIRTAX, investment in business, savings and stocks would
be free of government taxes and could provide more and better profits .
. . and more jobs.

Bobby L. Austin, Statement
I contend that for a nation to try to tax itself into prosperity is
like a man standing in a bucket and trying to lift himself up by the
handle.

--Winston Churchill

Recent news articles clearly show that America is losing jobs to
overseas countries and is losing billions of dollars in tax revenue as
a result of our convoluted, anti-business tax structure.
Huntsville Times (AL), 15 December 2010. ``Sleeping bag maker may
close.'' Exxel Outdoors, a Haleyville, Alabama sleeping bag
manufacturer may close because it cannot compete with sleeping bags
produced more cheaply in Bangladesh. Because the sleeping bags do not
qualify as textile or related products the Bangladesh manufacturer is
able to ship the bags tariff-free to America. The unemployment rate in
Winston County is 18%. Exxel is the last manufacturer of this type of
sleeping bag in America.
Huntsville Times (AL), 29 December 2010, ``U.S. firms hiring
overseas.'' Sales are up in other countries more than in America. The
Economic Policy Institute says American companies have created 1.4
million jobs overseas this year compared with less than 1 million in
the United States.
Huntsville Times (AL), 25 October 2010, ``Tax loopholes let Google
save $3.1 billion.'' Google uses a strategy known as Double Irish or
Dutch Sandwich to drastically reduce taxes. This technique involves
``Transfer Pricing,'' transferring profits, through paper transactions,
from countries with high tax rates (such as America with a 35% tax,
highest of industrialized nations), through Ireland, to countries with
zero tax rate, such as Bermuda. Facebook is preparing a similar
strategy to transfer funds to the Cayman Islands. Hundreds of
multinational companies use some version of the method according to
Richard Murphy, director of Britain-based Tax Research, avoiding most
taxes in all countries.
America needs to be one of those countries with a zero corporate
tax rate. The Fair Tax Act, H.R. 25, will make that reality. The Fair
Tax does all of the good things that other proposed tax plans do, and
more. Neither the flat tax nor the VAT provide a zero corporate tax
rate and at the same time lowers the tax rate paid by individuals,
protects low income families from a regressive tax system, and fully
funds Social Security and Medicare.
The Fair Tax is a nonpartisan tax plan based on $22 million of
privately funded research under the auspices of Americans for Fair
Taxation. It was developed, independently of any other proposal, over
the course of several years by noted economist after extensive market
research was conducted into what the public desired in the way of a
national tax system. An extensive account of the development of the
plan can be found in the book, FairTax: the Truth, by Neil Bortz and
Congressman John Linder.
The Fair Tax eliminates all income based taxes for both
corporations and individuals. It replaces those taxes with a 23% sales
tax, which is included in the price of items and is shown on the sales
receipt. Income, Social Security, Medicare, capital gains, interest,
AMT, gift, and estate taxes are all eliminated. Thus, individuals take
home more pay and are encouraged to save and invest. Only new goods and
services are taxed at the ball final consumption only . . . used goods
are not taxed. Business-to-business sales that are used in the
production of a product or service for final consumption are not taxed.
All taxes ultimately are paid by the consumer. Nobody else pays the
taxes. Corporations don't pay taxes. They collect them, but they don't
play them.
Dr. Milton Friedman. Comments to the President's advisory panel on
Federal tax Reform, March 31, 2005.
Corporations do not pay taxes . . . consumers pay taxes; therefore,
it is reasonable and logical to tax at the consumer level.
International Competition--A non-government and a government study
show that business taxes and tax preparation add 22% and 24%,
respectively, to the cost of American products and services. Thus, the
cost of American products and services will decrease by about 22%.
Consumers actually pay the ``corporate'' taxes, record keeping, and
filing costs embedded in the cost of products and services. Moving
collection of these costs to the point of consumption makes American
companies 22% more competitive on the international market. Further,
$12 to $13 trillion held by American companies in offshore accounts
will flood to America with the elimination of the current 35% tax
(second highest of the industrialized nations).
One study concluded that American exports would increase by 18%.
Another study concluded that exports would increase by $100 billion per
year.
While former Fed Chairman, Alan Greenspan, out of respect for the
new chairman, will not formally endorse the Fair Tax, however, he
concurs with the plan.

http://www.youtube.com/watch?v=tp2ycmMR-fs

Referring to the off shore funds. Allen Greenspan said that these
funds would come to the U.S. in months if the corporate tax rate were
zero. And he was right!
Congress approved a one-year tax rate reduction to 5.25% for 2005.
A government agency estimated that $200 billion would be repatriated
and would yield $2.8 billion in revenue. However, the IRS concluded
that eight hundred companies brought $362 billion back to America, 1.8
times the estimate, with revenue of $18 billion, 6.4 times the
estimate. U.S. business investment rose 9.6% in 2005--the highest rate
in more than a decade.

Wall Street Journal, 1 July 2008, p. A16

Just imagine the tremendous long-term growth to the American
economy and job creation if companies knew the corporate tax rate would
be zero . . . permanently! ! !
Superior to Alternatives.--The FairTax plan is indeed the ultimate
tax reform and economic stimulus without investing a single tax dollar.
A 1997 government taxation committee reports that in a study by many
economists, of differing persuasions, ALL agreed that the FairTax Plan
is superior for long term growth. The FairTax addresses issues that no
other plan touches. Neither the Flat Tax nor the Value Added Tax (VAT)
addresses: fairness, simplicity, withholding taxation, cost of
administration, cost of compliance, and cost of enforcement. Further,
both Flat Tax and VAT stifle growth of the economy and place American
companies at a tremendous disadvantage on the international market.
In an informal survey of 500 CEOs of international companies, 400
said that they would build their next facility in the United States and
100 said they would move corporate headquarters to the United States,
if the tax rate were reduced to zero.
Professional Endorsement--Upon submission of the FairTax
legislation 76 professional and university economists wrote an open
letter of endorsement to the President, Congress, and Fellow Americans.

www.okfairtax.org/Open_Letter.pdf

Former Treasury Secretary John Snow said to the framers of the
FairTax Plan, ``You have just proposed the biggest magnet for capital
and jobs in history.''
Economist Milton Friedman, told the 2005 President's Advisory Panel
on Federal Tax Reform, that he helped the Treasury design the
withholding tax to fund WWII, but said, `` . . . it has been a mistake
in the post war era and we would be better off if we did not have a
withholding.''
Ideological Issue--``In America, cutting tax rates is an
ideological issue. In the former Soviet satellites of Europe, it is
increasingly not an issue at all--so obvious is it that it gives people
better lives.''
Ireland--With its 50% corporate tax rate; near 20% unemployment;
and the GDP of 1.9%, Ireland's economy was known as ``the poor man of
Europe'' Since reducing its corporate tax rate, in increments, from 50%
to 12.5% in 2003, and passed other laws conducive to attracting
industries, the economy has exploded and quickly became known as ``the
Celtic Tiger.'' Four American international companies contribute 90% of
Ireland's exports. In addition, two other companies have major
facilities. Microsoft, alone, holds $4.1 billion in cash to avoid the
35% tax if brought to the U.S.
(NOTE: Cap and Trade is a major disincentive, rather than
incentive, to attract companies to come from abroad to America.)

www.washingtontimes.com/news/2008/mar/21/the-emerald-isle/

Ireland's low corporate tax rate of 12.5% on trading profits has
been a magnet for multinational companies who are responsible for 90%
of Irish exports and a significant contributor to the success of the
modern Irish economy, commonly known as the Celtic Tiger.

www.finfacts.ie/irelandbusinessnews/publish/article_10003995.shtm

Low corporate tax rates and business friendly legislation moves
jobs and stimulates economic growth. In a 2009 survey of 220 CEOs, two
thirds from international corporations, 88% said the tax regime is the
most important factor influencing the decision to continue to operate
in Ireland.

www.internationaltaxreview.com/Article/719831/Latest-News/Article.html

Switzerland--One state reduced its tax rate to 6.66%. Two U.S.
multinationals, Procter & Gamble and Colgate, relocated their European
headquarters to Switzerland and Biogen Idec, transferred from Paris to
Switzerland when the corporate tax rate was reduced.

www.finfacts.com/irelandbusinessnews/publish/
printer_1000article_10004879.shtml

Other Benefits:
FairTax is indeed fair. All industries and services are treated the
same, no exclusions or exceptions. All consumers pay the same rate
while low income families are protected from a regressive tax. The 23%
(included in the price of goods and services) tax rate replaces 11
corporate and individual federal taxes.
Low income families are protected with a progressive tax. No
registered (legal resident) family pays tax on income up to the poverty
level, regardless of total income. Each registered family receives a
``first of the month ``pre-bate'' of the tax on the poverty level of
income for the family. The pre-bate will be less than the $345 billion
dollars of uncollected income tax. Untaxed used goods provides another
tax break for low income families. Further, analysis shows that
charitable giving increases directly with the growth of the economy.
Charitable Contributions--Charitable contributions are directly
related to the state of the economy. Thus, as the economy grows,
charitable contributions will grow. Churches will no longer have to
worry about maintaining tax exempt status.
Social Security and Medicare are fully funded with a fixed
percentage of the tax collected. Each worker's gross income is reported
to the Treasury for the purpose of calculating SS benefits.
The FairTax stabilizes the Tax Code, since the influence of
lobbyist will be essentially eliminated. No more special interest, back
room deals. Highly visible congressional legislation will be required
to change the tax rate.
Low income families are protected as no legal resident pays tax on
expenditures up to the poverty level ($10,830 of one adult, $21,660 for
two adults, and $3,740 for each child).
Individuals will pay less tax than under the current IRS system
because of four primary factors:

(1) Individuals will take home more pay;
(2) Individuals are taxed on what they spend rather than
income . . . save or invest 10% and reduce tax paid by 2.3%
(23% of 10%)
(3) Due to the ``pre-bate'' no legal resident pays tax on
expenditures up to the poverty level . . . tax rate is negative
up to the poverty level, 11.5% at twice the poverty level, and
15.3% and never more than 23% regardless of expenditures)
(4) The tax base is doubled. Every consumer pays tax,
including those in the underground ``cash only'' economy and 40
million annual visitors to America.

In addition, tuition for education and training is considered an
investment, rather than final consumption; therefore, is not taxed.
Further, used goods are not taxed.
Implementation and collection cost will be minimal as states will
collect the tax and submit to the treasury. Forty-five states already
collect sales tax. Businesses and states will receive one quarter of
one percent as a service fee.
Enforcement cost will be lower than under the current power system
is the IRS will be abolished; no individual tax returns to audit; and
the number of states and businesses to be audited will be greatly
reduced.
Neutral Revenue--The 23% tax rate is calculated to initially
provide the same income as the current tax system. However, as the
economy grows tax revenue will increase.
If reform is necessary, what are the criteria for tax reform--
In December 2004 the House leadership wrote a letter to the
President with these recommendations on tax reform:

-- It is urgent . . . we must reform the Tax Code now
-- It must be progressive . . . No increase on mid-income
families
-- Avoid the unintended consequences of the AMT
-- Must be simple . . . Far less complex then the IRS code
-- Must be revenue neutral . . . bring in the same revenue as
currently collected

A Congressional tax committee report states that--

Tax reform is necessary, and . . . to be successful
legislators must . . .
-- Minimize administrative costs
-- Apply low marginal tax rates to . . .
-- A broad economic base.
-- Meeting these objectives should reduce disincentives to
work, save, and invest.

Of the currently proposed tax systems, the Fair Tax is the only one
that meets all eight objectives.
Opportunity Squandered--The FairTax Plan, has been pending
congressional approval since 1999. The evidence is overwhelmingly clear
that tax cuts are a better economic stimulus than ``bailouts,'' which
put an unbearable tax burden on future generations. The FairTax is the
ultimate tax reform and economic stimulus and job creator which
requires no expenditure of tax dollars, while reducing the tax burden
on individuals. The FairTax Plan has strong endorsements from highly
qualified individuals. The FairTax legislation should have been passed
10 years ago.
Time for Non-partisan Action--Particularly, given the more recent
undeniable history of economies flourishing following tax cuts, it is
inconceivable that the opportunity for historic American economic
growth has been ignored by presidents and congress. Given the current
need to do everything possible to stimulate the economy; it is now time
for all legislators to do ``what is best for America'' and immediately
pass the FairTax legislation, H.R. 25.

Neil G. Rogers, Statement

More than ever we need the FairTax
As we deal with the worst financial situation in generations, we
are going to need bold, new thinking to address how Washington and our
economy function. For that reason, I hope you'll give proper
consideration to the FairTax, which is the answer that America needs
now more than ever.
Here are some key reasons why the FairTax is critical to the
American economy:
1. Rescue the homeowner and you rescue the economy
The FairTax will end the harmful practice of withholding taxes from
paychecks, and millions of Americans will see a huge boost in their
take home pay--enough to save their homes and pay mortgage bills.
2. A $10 trillion dollar stimulus program funded with private
investments
Economists say the FairTax will attract literally trillions of
dollars into our economy from offshore. That means new jobs right here
in America (a point I know you readily appreciate), higher wages and a
stock market that goes up instead of down.
3. Bring Back the ``Made in America'' Label
The FairTax ends the retail price disadvantage American producers
suffer under the income tax system. The income tax system adds up to
20% to the price of American products and that chases our manufacturing
and service industries offshore. The FairTax gives American companies--
and jobs--a fair chance.
4. Our economy works when wage earners prosper
The FairTax makes our economy works again and restores consumer
confidence by putting more money in wage earners' pockets. It attacks
the problem at the base of the pyramid where average people live--not
at the pinnacle. It ends the tax disincentives to upward mobility,
savings, investment and capital formation.
For these reasons and more, I urge you to consider the FairTax.
This comprehensive reform plan is embodied in H.R. 25 and S. 296. The
taxpaying public--individuals, farmers, schoolteachers, seniors, small
business owners, and others--will thank you for it.

Alvin S. Brown, Statement

Chairman Camp, Ranking Member Levin, and distinguished Members of
the Committee on Ways and Means, thank you for the opportunity to
provide comment on ``fundamental tax reform,'' as a consequence of the
complex burdens imposed by the Internal Revenue Code on U.S. taxpayers
and also the IRS.
The burdens of the current tax system require an evaluation of the
many problems of the IRS in collecting revenue, and conducting
examinations. Tax reform can be justified or supported to the extent it
can be demonstrated that the IRS does not administer the tax law with
integrity or fairness, consistent with the IRS Mission Statement.\1\
Tax reform is also necessary to correct actions of the IRS that are
counterproductive to the collection of revenue, contribute to business
failures and reduce American jobs. The identification of IRS
administrative, managerial and technical problems is the best
foundation from which to validate tax reform.
---------------------------------------------------------------------------
\1\ The IRS Mission: Provide America's taxpayers top quality
service by helping them understand and meet their tax responsibilities
and by applying the tax law with integrity and fairness.
---------------------------------------------------------------------------
I have an informed opinion of the ``complex burdens imposed by the
Internal Revenue Code'' based on my thirteen years of experience as an
interpretative tax attorney, specializing in IRS controversies, and
representing taxpayers throughout the United States and abroad. I had a
full career in the office of the IRS Chief Counsel as an interpretative
tax attorney/manager, and I have been representing taxpayers before the
IRS since 1998. My experiences within the IRS and my current
specialized IRS tax practice provide unique insight into the IRS and
the problems of the IRS in its administration of the Internal Revenue
Code that are intended to be helpful to this Committee in its
consideration of fundamental tax reform.
The issues dealing with tax reform have largely been divisive
political issues. The classic argument against tax reform is that it
benefits the ``rich.'' That argument dissipates against a database of
documented case histories of taxpayers with problematical experiences
with the IRS, mismanagement and actions taken that are contrary to law.
Although there have been small incremental changes in the direction of
simplification, the Code has nevertheless grown in complexity along
with the corresponding administrative problems and burdens of the IRS.
A focus on various forms of IRS administrative deficiencies and
failures creates ``talking points'' that support tax reform. The goal
of having an IRS that administers the tax law effectively is a
nonpartisan issue. IRS deficiencies and failures create a nonpartisan
platform that supports fundamental tax reform. The public and every
Member of this 112th Congress, without exception, want improved
administration of the law by the IRS in strict compliance with its
Mission Statement to apply the tax law with ``integrity and fairness.''
The legislative proposals recommended by this Committee will get far
larger acceptance with information made to the public identifying the
nonpartisan administrative deficiencies of the IRS. The platform of
documented IRS tribulations makes it far easier to reduce the political
rancor from any tax reform proposal recommended by the Committee on
Ways and Means. After the data platform of IRS problems are identified
and documented, the issue then becomes how to best facilitate
fundamental tax reform to resolve the IRS deficiencies. I will identify
some IRS policies and activities that are counterproductive to the
current economic policies to stimulate job growth and business growth.
I will also identify some IRS activities that contrary to the intent of
Congress under current law. Support for tax reform will increase to the
extent the public and the media understand that something needs to be
done to correct the distortions to the economy caused by inept
administration of the tax law by the IRS. In this way the nonpartisan
goal to have a better IRS can be blended into the need for tax reform.
IRS tax lien filing counterproductive practices
The IRS has the plenary power to file a ``Notice of Federal Tax
Lien'' (NFTL) tax lien in the public records on a taxpayer if there is
``any tax'' liability.\2\ The IRS Internal Revenue Manual requires the
filing of a tax lien for tax assessment balances of $5,000 or more and
states that the tax lien should filed even if the tax balance is less
than $5,000 if the filing of the tax lien will promote payment
compliance.\3\ The tax lien will not be released until the tax debt is
paid or otherwise discharged. The NFTL has severe negative economic
consequences on individual and business taxpayers often initially and
long after any tax obligation is resolved.
---------------------------------------------------------------------------
\2\ Section 6321.
\3\ IRM 5.12.2.4.1 (10-30-2009).
---------------------------------------------------------------------------
Tax liens destroy individual and business credit ratings. Most
businesses cannot function profitably or grow their business with a tax
lien on their credit report. It is very difficult for any business to
remain viable after their credit reports reflect IRS tax liens. When
the businesses close, jobs are lost, and taxable revenue is lost.
All of the U.S. credit agencies record tax liens in their credit
reports and that tax lien remain in place until the tax debt is
discharged. Even if the IRS tax lien has a short life, the credit
agencies will still keep that tax lien in their credit reports for
seven years after the IRS releases its tax lien. For this reason IRS
tax liens are a long term economic disaster for individual and business
taxpayers. At the present time, credit reports are instantly available
and they are commonly referenced for most commercial and employment
practices.
The IRS will file a credit-destructive and business-destructive tax
lien even if the taxpayer agrees to fully pay the outstanding tax
liability with interest and penalties in an Installment Agreement,
documenting the financial ability to fully pay that tax liability. When
a business sustains a federal tax lien, they suffer loss of credit,
eventual business failure and loss of jobs, which further affects the
IRS through loss of taxable revenue. The federal loss is exacerbated
because those who lose jobs must survive on federal and local
assistance provisions for the unemployed. In this chain reaction of
events, creditors of the business reduce profit with even a greater
loss of tax revenue collected by Treasury. Consequently, the capricious
and mechanical filing of tax liens under current IRS administrative
practices cause irreparable economic harm, especially in situations
where the business taxpayers have the ability to make payments on their
tax debt.
In the case of individual taxpayers who have received IRS tax
liens, the loss of credit impacts negatively on their ability to get
employment and housing. Employers and landlords commonly take into
account IRS tax liens identified in credit reports. This credit
impairment means that the individual taxpayer is less likely to buy a
car, a home and other items that stimulate economic activity and grow
taxable business income. The counterproductive policy of the IRS for
filing tax liens is one haplessly ignored by the IRS and Treasury.
On the other hand, there are reasons that justify a tax lien filed
in the public records in some cases. A tax lien gives the IRS a secured
priority interest against other unsecured creditors. If a taxpayer has
a large equity interest in real estate and has a large tax debt, an IRS
tax lien is justified to give the IRS priority status ahead other
creditors. In other cases where there are no serious assets (e.g., no
real estate with more than nominal equity) a tax lien makes no economic
sense when balanced against the economic harm it causes to an
individual or business. There may be businesses that are just service
businesses, yet the IRS will still file a tax lien even in these cases
where there are no assets to give the IRS a secured creditor
preference. In these circumstances, the tax lien only serves the
purpose of destroying the credit of the business and the individual
taxpayers. Tax liens filed in these circumstances are frivolous,
punitive and imprudent. In some cases, the filing of a tax lien, when
it will obviously cause irreparable harm, is malicious.
Any IRS revenue officer has the unencumbered statutory authority to
file a tax lien on any individual or business even if the taxpayer has
agreed to pay the tax debt quickly. The strong tax policy of Congress
is to encourage taxpayer to repay their tax debt at the earliest
possible time. When the full amount of the tax debt cannot be paid,
taxpayers are authorized to pay their tax debt in an Installment
Agreement. The IRS will normally not agree to allow a taxpayer to enter
into an Installment Agreement without the filing of a NFTL. When the
IRS agrees to the taxpayer's offer to pay the outstanding tax debt, the
IRS will then punish that taxpayer with a tax lien that destroys the
taxpayer's credit. The tax lien is perverse in this situation because
bad credit reduces the ability of the taxpayer to make installment
payments and fully pay the outstanding tax debt. These tax liens are
required even in cases with the taxpayer does not have property that
could be seized in any kind of an enforced collection action; in these
cases a security interest in property owned by the taxpayer is
meaningless and counterproductive. The National Taxpayer Advocate (NTA)
has the power and authority to use Taxpayer Assistance Orders (TAOs) to
stop the filing of capricious and counterproductive tax liens.\4\
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\4\ Sec. 7811(a)(1)(A) authorizes the NTA to issue Taxpayer
Assistance Orders to prevent a significant hardship as the result of
the manner in which the internal revenue laws are being administered by
the Secretary.
---------------------------------------------------------------------------
The $5,000 threshold for a mandatory filing of a tax lien is contrary
to the law
The $5,000 standard for mandatory tax liens is contrary to law. The
authority of the IRS to file tax liens in the public records is
discretionary, as decreed by Congress. Congress made that authority
discretionary. Section 6321 which provides:
If any person liable to pay any tax neglects or refuses to pay the
same after demand, the amount (including any interest, additional
amount, addition to tax, or assessable penalty, together with any costs
that may accrue in addition thereto) shall be a lien in favor of the
United States upon all property and rights to property, whether real or
personal, belonging to such person.
The language drafted by Congress under Sec. 6321 creates an
unperfected lien, and not one that requires that the tax lien be
perfected. When the IRS created a mandatory filing of tax liens in the
public records in its Manual, it converted a discretionary power to a
mandatory rule that is in conflict with the intent of Congress. If
Congress wanted to write a mandatory lien statute, requiring that
unperfected tax liens be filed in the public records, that would be an
easy addition to Sec. 6321. The IRS mandatory tax lien policy is direct
conflict with the intent of Congress under Sec. 6321 to make the
public-record filing of tax liens discretionary.
IRS abuse of Sec. 6323(j)(1) authorizing the withdrawal of tax liens
Section Sec. 6323(j)(1) of the Code provides discretionary
authority to the IRS to withdraw a tax lien for the withdrawal of a tax
lien in certain: if the filing was premature and not in accordance with
IRS administrative procedures; if the taxpayer has entered into an
installment agreement under section 6159; if the withdrawal of the
notice of lien will facilitate the collection of the tax liability; or,
with the consent of the taxpayer or the National Taxpayer Advocate,
with withdrawal of such notice would be in the best interests of the
taxpayer (as determined by the National Advocate) and the United
States.
If tax liens are withdrawn from the public records, the result
would be the same as if the tax liens were never issued and the tax
liens will be expunged from the credit reports. Withdrawn tax liens
restore credit but will not restore a business that has closed as the
consequence of a tax lien.
It is anomalous that Sec. 6323(j) provides statutory standards to
withdraw a tax lien, but IRS revenue officers file economically
destructive tax liens on businesses and individuals that eliminate or
substantially reduce IRS collection potential. The standard that
permits the withdrawal of a tax lien under Sec. 6323(j) should apply as
a statutory threshold before the IRS has the authority to file a tax
lien. I view this as a legislative drafting error. It makes no sense
for Congress to draft a statutory standard to have a tax lien
withdrawn, but no statutory standard of filing a notice of tax lien in
the public records. This is an additional argument that supports my
observation that the IRS has misused its plenary authority to file tax
liens in the public records.
The standards in Sec. 6323(j) are quite clear, yet the IRS rarely
uses its authority to withdraw a tax lien when the facts are within the
standards of Sec. 6323(j). The withdrawal of a tax lien by the IRS is
rare and unusual even in cases with strong documentation of economic
hardship (e.g., documentation that the tax lien will result in the loss
of a profitable business). Neither the IRS nor the NTA support tax lien
withdrawal applications even where severe economic hardship is
documented. Generally, applications for tax lien withdrawal are granted
only in cases where the tax liability was assessed by the IRS in error.
It is my experience that the IRS will not withdraw a tax lien even if:
the tax lien will result in employment discharge; employment is
available only with lien withdrawal; or only if it is the only way a
person can get work as a contractor. In short, the IRS and the NTA do
not follow the statutory standards of Sec. 6323(j) where there is a
mutual benefit to the IRS and the taxpayer and it will allow the
taxpayer to generate taxable income sufficient to repay the person's
tax debt. Here again is one more example of an IRS and the NTA,
ignoring the intent of Congress under the clear language of a tax
statute.
Counterproductive tax levies
The tax policy of Sec. 6343(a)(2)(D) \5\ to prevent or stop a levy
in the case of an ``economic hardship'' is explicit and unqualified.
The regulations under this statute provide objective standards to
determine economic hardship.\6\ Under Reg. Sec. 301.6343-1(b)(4), there
is ``economic hardship'' for individuals if the levy denies a family,
food, housing transportation, medicine, health insurance, child care,
court ordered payments, and other reasonable and necessary living
expenses. Since ``economic hardship'' has a clear definition, it should
be easy to stop.
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\5\ Sec. 6342(a)(2)(D) states that the IRS shall release the levy
if the IRS has determined that such levy is creating an economic
hardship du to the financial condition of the taxpayer.
\6\ Sec. 301.6343-1(b)(4).
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The IRS does not make an ``economic hardship'' determination before
they file the levy. To the contrary, in most cases, the levy is
invariably excessive. This hardship is exacerbated because levies on
wages and gross income are continuous. If the levy is excessive, the
employee will leave the job rather than work for any residual amount
that is insufficient for necessary living expenses. Excessive levies
force employees to go jobless or work in the underground economy and
not disclose income that would be subject to levy. The obvious intent
of Sec. 6343(a)(2)(D) is to prevent excessive levies and permit a levy
to the extent it does not deny a taxpayer basic necessary living
expenses.
Levies on businesses include continuous levies on one or more
accounts receivable (i.e., gross income). Most small businesses
struggle to survive. Therefore, a levy on even a small portion of
business gross income will likely result in closing the business along
with the resulting job losses of employees. In these circumstances, an
excessive tax levy on gross income will create job losses, business
failure, and a loss of tax revenue. It is important for the IRS to make
sure that any levy does not create the kind ``economic hardship''
described in Sec. 6343(a)(2)(D) because the net effect of the excessive
levy will create an accelerated business failure with all of its
pyramiding negative ramifications on the economy.
In the case of IRS wage levies, the IRS does not inform employers
about the ``economic hardship'' prohibition under Sec. 6343(a)(2)(D).
For that reason, employers think their entire employee wages must be
handed over to the IRS, with one exception that is misleading to
employers. Each request for levy of wages is accompanied by Publication
1494,\7\ which identifies the amounts excluded from levy under
Sec. 6334.\8\ When employers receive the chart within Publication 1494,
the erroneous impression they have (and the impression left by the IRS)
is that the employer can give over to the IRS all of the wages of the
employee in excess of the amount in the chart. The statutory exclusions
from income under Sec. 6334 are quite limited and are essentially
summarized in the chart within Publication 1494. For example, in the
case of a family of four, the exemption is $2,200 per month, well below
the median family income of families that size. That family of four
would have to pay for housing, food, transportation, medical and
similar necessary living expenses. That $2,200 is insufficient to pay
the fixed support a family of four in most cases. Nevertheless, the
real issue is that the use of the Publication 1494 chart ignores the
mandatory language of Sec. 6343(a)(2)(D) that the IRS shall not levy if
it creates an ``economic hardship.'' Publication 1494 does not test for
economic hardship (e.g., whether or not there is a serious health issue
in the family) and it ignores the statutory exclusions from levy under
Sec. 6634 (e.g., workman's compensation). The IRS use of Publication
1494 is not accompanied with instructions to the employer that will
allow the employee to receive the full amount of income necessary to
for reasonable and necessary living expenses. This IRS misapplication
of its statutory responsibilities of Sec. 6343(a)(2)(D) generates job
losses and economic hardship, contrary to the intent of Congress. A
large part of the requests for assistance to the NTA deal with abusive
tax levies. If the IRS is compelled refrain from any levy prohibited by
Sec. 6343(a)(2)(D), that would relieve the NTA of a major part of their
workload.
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\7\ Publication 1494 (2011).
\8\ These are statutory exclusions that include wearing apparel,
school books, workmen's compensation and other items specified in this
statute.
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The NTA and the IRS have taken the position that a business cannot
have an economic hardship \9\ within the meaning of section
6343(a)(2)(D).\10\ The IRS and NTA positions are each wrong because
Sec. 6343(a)(2)(D) and Reg.Sec. 301.6343-1(a) do not distinguish
between individual and business economic hardship. Here again, the IRS
and the NTA take positions inconsistent with clear and unqualified
statutory language. The IRS and the NTA cannot deny the reality in our
present economy, or at any other time, that businesses can suffer an
economic hardship.
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\9\ Section 13,1,18 of the Internal Revenue Manual deals with
administrative positions of the National Taxpayer Advocate in dealing
with ``hardship.'' The provisions apply to individuals and not to
businesses.
\10\ TD 9007 that published the final OIC regulations on July 23,
2002. TD 9997 states that the economic hardship standard of Section
301.6343-1 if the regulations ``specifically applies only to
individuals.''
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Individual and business taxpayers severely suffer due to the
inability of the IRS and the NTA to properly administer the law on
``economic hardship'' levies. The administration of the law on tax
levies by the IRS is not only technically incorrect, as noted, but also
counterproductive to the objectives of the Congress and the
Administration to grow businesses and grow jobs.
Refusal of the National Taxpayer Advocate to comply with the language
of Sec. 7811
The heading of Sec. 7811 is ``Taxpayer Assistance Orders''.
Congress identifies TAOs as the primary task and function of the NTA.
Under Sec. 7811(a)(1)(a), the NTA is authorized to issue a Taxpayer
Assistance Order if the NTA determines the taxpayer is suffering or
about to suffer a significant hardship as the result of the manner in
which the IRS is administering the tax law. A TAO \11\ would require
that the IRS not levy or file a tax lien if those actions would create
a significant hardship. The definition of a ``significant hardship'' is
a serious privation.\12\
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\11\ The application for a Taxpayer Assistance order is made on
Form 911.
\12\ Reg. Sec. 301.7811-1(a)(4).
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The primary function and purpose of the NTA under Sec. 7811 is to
have the NTA issue a TAO to prevent the IRS from taking any collection
action against a taxpayer if that action will create a ``significant
hardship.'' Congress intended the NTA use TAOs to prevent the IRS from
causing taxpayers any economic hardship. As noted from the prior
discussion on tax liens and tax levies, the IRS does indeed cause
widespread economic hardship contrary to law, and the NTA does not
issue TAOs to stop the IRS from the creating ``economic hardship'' in
most cases. If I get a call from a taxpayer stating: ``The IRS is
levying my income, how to I feed the kids?,'' that call will not
generate a TAO from the NTA, but it should under a basic analysis of
the law that I have previously identified. I can document the fact that
the NTA is not using the authority it was empowered to do under
Sec. 7811. Instead, the NTA case worker offers liaison services with
the IRS Revenue Officer or is helpful providing information about the
case. The NTA case workers do everything but stop levies or tax liens
that create economic hardship, which results in closed businesses and
jobs lost.
In my tax practice, I see onerous and economically destructive tax
liens and tax levies regularly if not every day. I see businesses
close, job losses, and significant hardship. I regularly file Form
911s, an appeal for a TAO, in these cases. I have worked with these
issues since 1998 and in all of the years to the present time; I have
never received a TAO from the office of the NTA. As a tax expert,
interpretative tax attorney, with a 27 year career in the office of the
IRS Chief Counsel, I have no difficulty interpreting Sec. 7811 to
require the NTA to issue a TAO in every case where there is a
documented significant hardship determination.\13\ In effect, the NTA
has refused to use the authority Congress intended her to use under the
plain language of that statute to issue TAOs to prevent the IRS from
causing taxpayers significant economic hardship.
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\13\ Form 433A for individuals and Form 433B for businesses provide
financial statements that can be completed by taxpayer to show
significant hardship. Those forms require attachments documenting the
relevant financial data. These forms are used for Offers in Compromise,
Installment Agreements, and they can also be used to document
significant hardship.
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In the recent NTA Report to Congress (over 600 pages in two volumes
with supplements), she did not even discuss TAOs. In one appendix, it
states that the NTA issued 95 TAOs in 2010. My small boutique law firm
sent the NTA more than 100 requests for TAOs in 2010, a negligible
portion of the requests received by the NTA. The Form 911 is a one page
form that permits one to identify the economic hardship. All that the
NTA case worker needs to do is sign that Form 911 and forward it to the
IRS to stop the verified hardship. TAOs are not issued even when the
hardship is fully documented.
The underutilized TAOs have the effect of reducing taxable revenue
caused by closed businesses and lost jobs. In these instances the NTA
does not stop clear IRS ``misconduct'' for abusive tax liens and
abusive tax levies that, in each instance, cause job losses and
business failure.
Recommendation to reduce the size of the office of the National
Taxpayer Advocate
The NTA's substantive non-use of the statutory authority to issue
TAO's is at the same time a statement by NTA that TAOs are not needed
to prevent a significant hardship. That premise leads to the conclusion
that there is no need for the 65 local taxpayer advocate offices and
the 10 area offices. The elimination of that function would permit the
reduction of 2,000 IRS employees. Other residual services of those
offices pertain to incidental services and are not necessary.
There are legislative and administrative solutions available to
replace the need to use the office of the NTA. It is possible to draft
objective standards to prevent IRS abuses of its authority to file tax
liens in the public records as well as objective standards creating a
statutory threshold before the IRS can file a levy on individual and
business taxpayers. The excesses of IRS Revenue Officer and Revenue
Examiners can be fixed either by legislation or by Treasury Department
regulations. It would be easy to construct some new guidelines to
prevent tax lien, tax levy and other IRS abusive conduct, that
undercuts the intent of Congress, on issues of integrity and fairness
or are counterproductive to the intent of Congress to promote economic
growth for both business and individual taxpayers who are willing to
resolve their tax issues under current law. These are issues that
should be considered by the Department of Treasury. It is my
recommendation that this Committee hold hearings to determine the
extent to which the office of the NTA is not essential to the effective
operations of the IRS.
The Need for IRS ``Transparency'' to Facilitate IRS Oversight
Many of the distortions I have identified occur because there is
presently no effective IRS oversight and there is no IRS transparency.
The Senate Finance Committee held IRS abuse hearings in 1997, and the
result of those hearings was the IRS Reform and Restructuring Act of
1998, a very pro-taxpayer body of legislation. IRS oversight hearings
are needed and will be constructive in promoting tax reform. Although I
have only addressed a few topics, my statement highlights the apparent
need for IRS oversight by this Committee. IRS hearings are needed to
properly evaluate the extent the IRS meets or fails to meet its
responsibility to apply the law with integrity and fairness and the
extent to which the IRS misapplies the law. The other reason for
hearings, as I previously noted, is to publicize the inefficiencies and
ineffectiveness of the IRS in its administration of a very complex body
of tax law and thereby support tax reform. Congress needs to know
``what is broken'' in the IRS before making legislative decisions to
provide fundamental tax reform.\14\ Hearings are also needed to
evaluate the effectiveness of the Office of the Treasury Inspector
General for Tax Administration to consider the need to improve
sanctions for IRS employee misconduct.
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\14\ The Senate Finance Committee held IRS abuse hearings in 1997,
and the result of those hearings was the IRS Reform and Restructuring
Act of 1998, a very pro-taxpayer body of legislation.
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``Transparency''_National Database_Voluntary Taxpayer Submissions
Congress is largely aware of the IRS abuses I have identified in
this statement. Due to privacy law, very few know what the IRS does
because of the statutory prohibition on disclosing taxpayer
information. In the cases I work, the only people who know what happens
are the IRS employee, my client and myself. Congress and the public do
not get the kind of insight that I have provided to this Committee on
just a few topics. I am a witness to many other IRS misapplications of
law in other areas, for example, in IRS civil and criminal
examinations.
Every Member of Congress gets complaints about the IRS regularly.
Constituents complain about IRS abuses of power, IRS misconduct,
erroneous applications of law, and hardship. This data is not saved.
Those constituent complaints are not archived into any kind of a
database to provide IRS transparency to provide helpful information
about the IRS to this Committee. The complaint traffic to the NTA is
also not saved into a national data base of IRS issues and problems.
There is a need for a national database for IRS complaints. The IRS
will be hesitant to be overly aggressive on a tax matter, or to engage
in the counterproductive practices I have described, if IRS actions
were more ``transparent'' to the public, to the media, and to Congress.
The Subcommittee on Oversight will be able to execute its oversight
function over the IRS more effectively if it has access to a national
database reflecting IRS interactions with taxpayers. Taxpayers
throughout the U.S. voluntarily voice their IRS experiences constantly
to all Members of Congress as well as to the members of this
Subcommittee. That empirical data is available but it is neither
organized nor saved. There is also no platform to upload that data to a
combined database. A national database of taxpayer and constituent
experiences, if collected, organized by issue and analyzed would give
this Committee and its Oversight Subcommittee the IRS transparency that
is presently lacking.
The IRS Forum as a Vehicle to Provide IRS Transparency and Oversight
The IRS Forum, www.irsforum.org, has been approved by the IRS as a
501(c)(3) educational organization. The IRS Forum presence on the
internet encourages the uploading of taxpayers' experiences with the
IRS. The sole purpose of this is to provide a national data base of
taxpayer experiences with the IRS. This ``transparency'' facilitates
oversight of the IRS because the data is openly available for all to
see and evaluate.
Using tax liens as an example, if a Member gets a complaint from a
constituent that a profitable business was closed and jobs lost
attributable to the tax lien, that data is wasted. On the other hand if
constituents uploaded 1,000, 10,000 or some other number, in each
instance, blaming the business and job losses on abusive conduct of the
IRS, that data would eventually hit critical mass and get the attention
of the media, the public, educators and Members of this Committee. The
data can be analyzed to identify and resolve administrative and legal
issues that would provide this Committee with current data about how
the IRS is administering the tax law.
Taxpayers can upload data without using their identity at the IRS
Forum. The data can be collected by issue (e.g., tax liens, levies,
examinations, etc). One constituent complaint to any Member of Congress
becomes wasted data but becomes valuable when made a part of a larger
database with similar content on similar issues. The only goal and
purpose of the IRS Forum is to provide IRS transparency that is
presently lacking. With that transparency, the public and this
Committee would be a witness to IRS abuses as they occur.
The accumulation of a national database of taxpayer experiences
with the IRS is a very simple idea. The IRS Forum is located on the
internet to receive and organize taxpayer data as well as maintain a
perpetual database about taxpayer experiences with the IRS. The
nonpartisan IRS Forum is not a commercial venture. There are no
membership fees, and the IRS Forum does not accept advertising. The IRS
Forum functions only as a nonprofit educational organization on IRS
positions and administrative practices. The immediate goal of the IRS
Forum is to provide assistance to the Congress in conducting oversight
of the IRS by accumulating and making publicly available data regarding
IRS practices. Funding of the IRS Forum is expected to come from
voluntary contributions. It is a low maintenance organization. At the
present time it exists without any office with just its presence on the
internet.
The IRS Forum would be able to create a formidable national
database of taxpayer interactions with the IRS, if Members of Congress
made constituents aware of that institution. Once constituents and the
public are aware of the purpose and function of the IRS Forum to
archive a perpetual database of taxpayer experiences with the IRS, it
would then be able to reach its potential to provide ongoing IRS
transparency. The problems I have identified in this statement could
not occur, in my opinion, if the actions of the IRS are transparent to
this Committee, the public and the media.
The IRS Forum is available as needed by the Committee to help
initiate a national database of taxpayer experiences with the IRS and
provide IRS transparency that would otherwise not exist. Ongoing
uploads by taxpayers of their IRS experiences will correspondingly
assist this Committee in ongoing oversight of the IRS and its
administration of the tax law. The IRS Forum is also available to
Committee staff to collect taxpayer experiences that will be helpful to
staff when looking for data to help draft legislation to correct IRS
abuses reported to the IRS Forum in addition to its function to educate
the public about the IRS.
As the world's largest retail trade association, the National
Retail Federation's global membership includes retailers of all sizes,
formats and channels of distribution as well as chain restaurants and
industry partners from the U.S. and more than 45 countries abroad. In
the U.S., NRF represents the breadth and diversity of an industry with
more than 1.6 million American companies that employ nearly 25 million
workers and generated 2010 sales of $2.4 trillion.
Summary of Comments
Members of NRF believe that the most important aspect of any tax
reform measure is its impact on the economy and jobs. The U.S. economy
is coming out of the worst recession since the Great Depression, but
economists predict that economic growth may continue to be slow because
of high unemployment, which will also continue to depress consumer
spending. It is vitally important that any tax reform measure do no
harm to our economy, which is likely to remain fragile for several
years to come.
Consumer spending represents two-thirds of GDP. During the past few
years, consumer confidence has hit its lowest levels since records have
been kept, and consumer spending has dropped precipitously. One of the
most harmful things that could be done to our economy at this time
would be to place a direct federal tax on consumption.
NRF believes that a reform of the income tax, by providing a broad
base and low rates, will bring the greatest economic efficiency and
will not cause the economic dislocations inherent in the transition to
a consumption based tax system. Reforms of the income tax could be
designed to eliminate some of the major complications in the current
Internal Revenue Code and stimulate economic growth, without causing
major economic dislocation.
NRF also opposes using tax reform as a guise to fund increases in
government spending, as would be true if the United States adopted a
value added tax (VAT) in addition to the current income tax system. NRF
believes policymakers need to be forced to make choices with respect to
how taxpayer dollars are spent, rather than being provided with a money
machine to finance entitlements and other government programs.
Reform of the Income Tax
NRF supports income tax reform that would broaden the income tax
base and lower the income tax rates. The elimination of many special
deductions and credits in exchange for lower rates will bring about a
more economically efficient tax system that is simpler for taxpayers
and will ease enforcement.
Reform of the corporate tax system is particularly important. The
United States has the second highest corporate tax rate in the OECD. In
a global economy, higher U.S. corporate tax rates serve as a
disincentive for investment in the United States. The U.S. corporate
tax rate needs to be lowered to make us more competitive, and the lower
rates should be paid for by eliminating various tax preferences in the
Internal Revenue Code. Lower tax rates reduce the incentives for
entering into tax motivated business strategies. Lower rates combined
with the elimination of various tax preferences will cause businesses
to structure transactions to their most productive use, rather than
spending inordinate amounts of resources on tax planning
Consumption Taxes
Whenever fundamental tax reform is considered, policy debates
generally turn to whether the United States should move from its
current income-based tax system to a consumption-based tax system or to
a hybrid tax system, which would impose a value added tax (VAT) in
addition to the income tax, similar to the European model. NRF opposes
the adoption of a consumption tax because it would have a chilling
effect on our already weak economy.
Consumption taxes can be imposed in various ways including a
National Retail Sales Tax (NRST), Value Added Tax (VAT), Flat Tax, and
consumed income tax. Economists generally agree that the economic
impact of various forms of consumption taxes is similar, although the
application of the taxes may differ.
In 2010, Ernst & Young and Tax Policy Advisors conducted a study
for NRF on the Macroeconomic Effects of an Add-on VAT enacted for
deficit reduction. The study found that following the enactment of a
VAT, the economy would lose 850,000 jobs, GDP would decline and retail
spending would decline. By contrast, the study found that following the
enactment of comparable deficit reduction through a reduction in
government spending, the economy would add 250,000 jobs, GDP would
increase and there would be a much smaller drop in retail spending. A
copy of the NRF study can be found at www.nrf.com/VAT.
An earlier study,\15\ prepared for the NRF Foundation by
PricewaterhouseCoopers, examined the impacts of replacing the income
tax with a consumption tax (either an NRST or a Flat Tax). The study
concluded that although replacing the income tax with a consumption tax
might bring long-term economic growth, there could be very harmful
short-term and mid-term economic results.\16\ The study also found that
the economic growth that occurred during the ten-year modeling period
was relatively modest compared to the disruptions to the economy during
the transition years. Specifically, the study found that following the
enactment of an NRST, the economy would decline for three years,
employment would decline for four years, and consumer spending would
decline for eight years. The study found that following the enactment
of a Flat Tax, the economy would decline for five years, employment
would decline for five years and consumer spending would decline for
six years. Given the fragile state of the current economy, the United
States cannot afford to see further declines in consumer spending for
several more years.
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\15\ PricewaterhouseCoopers LLP, Fundamental Tax Reform:
Implications for Retailers, Consumers, and the Economy, April 2000. A
copy of the study can be found at: http://nrf.com/
modules.php?name=Documents&op=viewlive&sp_id=3965.
\16\ The PwC model was developed specifically to analyze tax reform
plans. It combined microsimulation models for individual and corporate
income taxes with a macro-economic forecasting model, which allowed it
to provide short-term transition results on an annual basis. Id at p.
119.
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In addition to the overall impact of consumption taxes on the
economy, retailers are particularly concerned with the impact of
consumption taxes on our customers. Consumption taxes are highly
regressive and will raise the tax burden on lower and middle-income
Americans. This occurs because lower-income households tend to spend a
higher portion of their incomes, so they will pay a higher tax relative
to income level under a consumption tax than will upper income
households.
Consumption taxes also impose an unfair tax increase on senior
citizens. Senior citizens generally live off of previously-taxed
earnings that they have saved from their working years. They now are at
a stage where they consume far more than they earn. An increase in the
tax burden on consumption would be extremely difficult for seniors.
A consumption tax, whether as a replacement to the current income
tax system or as an addition to the income tax system, will not meet
President Obama's goal to not impose higher taxes on Americans with
less than $250,000 a year of income.
A federal consumption tax will also wreak havoc with state budgets.
Forty-five out of fifty states depend on sales taxes as a major source
of revenue. In fact, much of the current short fall in state budgets is
as a result of the sharp decline in consumer spending, and hence sales
tax collections, during this weak economic period. If a consumption tax
is added at the federal level, it will be far more difficult for the
states to increase sales taxes to address budget short falls.
Enforcement issues are likely to increase if the Federal Government
adopts a consumption tax either in addition to the current income tax
or as a replacement to the current income tax. Studies have shown that
when the rate of tax on consumption exceeds certain levels, tax evasion
grows. The level of tax on consumption that would be imposed if a
federal tax were added to state and local sales taxes would probably
exceed these levels. They certainly would be exceeded if a federal
consumption tax were to replace the income tax.
Adding a bureaucracy within the Internal Revenue Service to enforce
a federal consumption tax will necessitate large start up costs, as
well as additional ongoing costs to operate.
Adding a federal consumption tax to the income tax will also
greatly increase the overall level of complexity of our tax system.
Complications will result because of the differences between the
federal sales tax base and state and local tax bases. The dual tax
system may be particularly burdensome for small businesses, which have
enough trouble meeting the burdens of collecting and remitting payroll
and income tax withholdings.
Conclusion
We urge the Committee to move forward with corporate income tax
reform that will lower tax rates and broaden the tax base. The United
States currently has the highest corporate income tax rate in the
developed world, which hampers the ability of U.S. companies to compete
and deters business investment in the United States. This type of tax
reform will simplify administration of the tax system and encourage
economic growth without shifting the burden to those that can least
afford to pay.
Transitioning to a consumption tax system will lead to a decline in
the economy and a loss of jobs for many years. Given the impact that
weak consumer spending is having on the ability of the U.S. economy to
recover from the Great Recession, we urge the Committee to reject any
tax reform measures that would impose a direct tax on consumer
spending.

Matt Lykken, Statement

I am the Director of SharedEconomicGrowth.org. I thank the
Committee for the opportunity to submit this statement with regard to
the economic burdens imposed by the current tax system and the
possibilities for helpful reform.
I am an international tax attorney with 24 years of government and
corporate experience. I have worked for U.S. corporations in the U.S.
and abroad, and for a foreign corporation following the acquisition of
my U.S. employer. I have advised several foreign governments on how to
structure their tax systems in a manner that would provide strong and
secure revenue while at the same time encouraging investment. My
colleagues in SharedEconomicGrowth.org are likewise tax attorneys of
broad experience. As tax professionals and parents, we have become
alarmed by the clear negative effect that the U.S. corporate tax system
is having upon the U.S. economy. The current system discourages U.S.
employment, inhibits repatriation of hundreds of billions of dollars,
and strongly interferes with efficient investment. Further, compared
with taxation of the same earnings at the individual level, corporate
tax is regressive, imposing the same 35% levy on earnings allocable to
the IRA of a minimum wage worker as it does on earnings allocable to a
billionaire. The United States can no longer afford this efficiency
burden. We seek to offer an alternative that is revenue neutral in the
short term, revenue positive in the longer term, and helpful to the
working, saving middle-income families who have been suffering from
artificially low interest rates on their savings and have been standing
aghast as our government commits their hard-earned money to helping the
rich and the spendthrift.
A Right and a Wrong Way to Reform Deferral
The Administration is right to wish to reform deferral. Under the
current system, a corporation can increase its after tax manufacturing
profits by 54% simply by choosing to locate a plant in the Dominican
Republic (``D.R.'') rather than in the United States. Further, when the
corporation then determines how best to invest $1,000,000 of that D.R.
profit, it must consider that it can invest the full $1,000,000 if it
does so in any country except the United States, but can only invest
the after tax amount of $650,000 if it brings the cash here. Clearly,
we should seek to alter this incentive. However, attempting to do so by
simply taxing foreign earnings at 35% would have an extremely
destructive effect given the existence of global competition.
The Wrong Way
The United States does not have a monopoly on technology,
creativity, or capital. Virtually all U.S. multinationals have strong
foreign based competitors. Those competitors are free to set up their
plants in the D.R. and pay no tax, and under their home country
territorial tax regimes they will never pay tax on those earnings. (As
one Example, Bayer AG in 2007 had tax expense of = 72 million on income
of = 2,234 million). In the global economy, shareholders demand an
equivalent post-tax return from any corporation having an equivalent
growth and risk profile. If a fully-taxed U.S. corporation is forced to
compete with an untaxed foreign rival, then, two things can be expected
to happen. First, the foreign company may choose to compete on price,
relying on the fact that it would only need to earn $65 of pre-tax
profit to be equivalent to a 35% taxed U.S. rival earning $100. The
U.S. company may not be able to make a reasonable profit in the face of
that disadvantage, and may be crushed or seek to withdraw from the
competition. This raises the second effect. If the D.R. operations
would be worth $1,000 on a 0% tax basis, they would be worth only $650
on a 35% tax basis. Therefore, a 0% taxed rival could buy the D.R.
operations of a U.S. parent without tax friction. In other words, it
could pay $1,000 because the operation would be worth $1,000 to it, the
U.S. seller would receive $650 after tax, and so both sides would be
content. Faced with the choice between hopeless competition or a
frictionless sale, which would the U.S. corporation choose? Could a
35%-taxed U.S. corporation buy out its 0% taxed D.R. rival? No. Going
in that direction, the fact that tax basis can only be recovered over
time imposes a level of friction that would be impossible to overcome.
Using a typical 15 year recovery period and a typical 15% discount
rate, the U.S. company would be paying $1,000 for an operation worth
only $796 to it. In short, existing foreign operations of U.S. parents
would die or be sold, new operations would not be acquired, and U.S.-
based operations would labor under the burden of unfair price
competition. Many U.S. corporations would be acquired by foreign
rivals, with the consequent elimination of prime U.S. headquarters jobs
and elimination of U.S. export operations, further aggravating our
balance of payments. This is not a formula for American success.
The Right Way
This Committee may hear a number of proposals for corporate tax
reform. They will have various known flaws. The Committee will be asked
to lower corporate tax rates. That is an extremely prudent suggestion
given that the U.S. tax rate is now a global outlier, but substantial
rate reduction will increase the earnings lock-in effect and will bring
back all of the personal income sheltering issues that were suppressed
when corporate and individual rates were brought into harmony. The
Committee will hear calls for conversion to the type of territorial tax
regime used by essentially all of our trading partners, but that also
has recognized issues. The Committee may receive radical reform
proposals that raise the risk of a fresh ``arms race'' between tax
planners and the government, losing the protection of a long-tested
system of extracting revenue. But there is one proposal that would
eliminate the deferral problem in a manner that would encourage U.S.
investment and strengthen U.S. corporations. It would make corporate
tax-shelter and transfer-pricing issues a thing of the past. It would
eliminate corporate cash lock-in and free funds for investment in the
best opportunities available in the overall economy. It would drive
true corporate transparency and accountability, reduce corporate power
and ``too big to fail'' consolidations, and shift focus from mindless
growth to solid profitability. It would reduce the hidden harvest of
corporate profits by executives and give those funds back to the
shareholders. It would improve the progressivity of the U.S. tax system
and reward middle-income savers, increasing the value of their hard-hit
IRA and 401(k) accounts. It would do this is a manner that would be
revenue neutral on a static basis, and strongly revenue positive in the
future as increased after-tax earnings are withdrawn from retirement
accounts. And it would do all of this with a three page bill, included
here.
The Shared Economic Growth proposal is simply a corporate dividends
paid deduction with the revenue offset at the individual shareholder
level. The United States has always sought to achieve corporate
integration by reducing tax at the shareholder level, a highly
regressive technique that pleases large campaign contributors. Shared
Economic Growth instead allows corporations to reduce their tax only if
and when they pay out their earnings as dividends, and simultaneously
taxes those dividends in the hands of the shareholders at full ordinary
rates. Certain other changes to the system that are possible only with
the introduction of a dividends paid deduction (i.e. not with a
corporate rate reduction or shareholder level relief) make this work in
a revenue neutral manner. Shared Economic Growth could be implemented
in two alternative ways, offering a policy choice. Because a portion of
corporate dividends flow to tax-deferred savings vehicles such as IRAs
and 401(k)s, there would be a current revenue loss. The version of the
bill attached here assumes that this Committee would prefer to allow
that deferral and to make it up through a levy on individual income
over $500,000 a year equal to the individual employment tax levy that
ordinary wage earners pay. Under this version, as the IRAs and 401(k)s
pay out their enhanced earnings in the future, the government would
harvest substantial incremental revenues that could be used to reduce
the deficit. Alternatively, one could enact the proposal with a
withholding tax that would hold tax-deferred savings accounts neutral
while still obtaining all of the incentive-correction and efficiency
effects of the proposal and still somewhat increasing progressivity.
Further information on the proposal, and on the impact of the
current system
on our economy, can be found at http://www.sharedeconomicgrowth.org/
home/summaryslideshow.html.
Given This Option, Enacting Destructive Changes Would Be Inexcusable
Shared Economic Growth is a viable option. It is simple. The static
numbers are based on IRS Statistics of Income and Federal Reserve data
and are valid. It is safe. It would strengthen the American economy,
bring home hundreds of billions of dollars of corporate cash, and
enhance the market power of American employees, all while satisfying
the Administration's revenue requirements over time. With such an
option available, there is no good reason to further damage U.S. stock
values by even considering the destructive alternative of attacking
deferral under our current flawed system.
This is a critical moment in America's history, one where the
choices made by Congress will determine whether our children will have
a chance for a joyous and prosperous future or will be doomed to fight
for their share of a wounded and diminished economy. I thank you for
investing the time to ensure that you have thoroughly considered all of
the options so that you may make the right choices for America.
A Bill
To amend the Internal Revenue Code of 1986 to remove incentives to
shift employment abroad, and to remove hidden taxes on retirement
savings and provide equitable taxation of earnings.
SECTION 1: SHORT TITLE
This Act may be cited as the ``Shared Economic Growth Act of
2011''.
SECTION 2: PROVIDING INCENTIVES TO LOCATE HIGH-VALUE JOBS IN AMERICA
AND TO INJECT CASH INTO THE AMERICAN ECONOMY
(a) Part VIII of Subchapter B of Chapter 1 of Subtitle A of the
Internal Revenue Code of 1986 is amended by adding the following new
section:

``251. (a) General Rule. In the case of a corporation, there
shall be allowed as a deduction an amount equal to the amount
paid as dividends in a taxable year of the corporation
beginning on or after January 1, 2012.

(b) Limitation of benefit to tax otherwise payable.

1) The deduction under this section may not exceed
the corporation's taxable income (as computed before
the deduction allowed under this section) for the
taxable year in which the dividend is paid, decreased
by an amount equal to 2.85 times any tax credits
allowed to the corporation in the taxable year.
2) Where the deduction otherwise allowable under this
section in a taxable year exceeds the limitation
provided in paragraph 1 of this subsection, the excess
may be carried back and taken as a deduction in the two
prior taxable years or forward to each of the 20
taxable years following the year in which the dividends
were paid. However, the total deduction under this
section for dividends paid during the taxable year plus
carryovers from other taxable years may not exceed the
limit provided in paragraph 1 of this subsection. Rules
equivalent to those provided in paragraphs 2 and 3 of
subsection 172(b) of this subchapter shall govern the
application of such carryover deductions.
3) No amount carried back under paragraph 2 of this
subsection may be claimed as a deduction in any taxable
year beginning on or before December 31, 2011.

(c) Consolidated groups. In the case of a group electing to
file a consolidated return under Section 1501 of this Subtitle,
the deduction provided under this section may be claimed only
with respect to dividends paid by the parent corporation of
such consolidated group.''

(b) Subparagraph (b)(1)(A) of Section 243 of Part VIII of
Subchapter B of Chapter 1 of Subtitle A of the Internal Revenue Code of
1986 is amended to read as follows.

``(A) if the payor of such dividend is not entitled to
receive a dividends paid deduction for any amount of such
dividend under Section 251 of this Part, and if at the close of
the day on which such dividend is received, such corporation is
a member of the same affiliated group as the corporation
distributing such dividend, and''.

(c) Section 244 of Part VIII of Subchapter B of Chapter 1 of
Subtitle A of the Internal Revenue Code of 1986 is repealed for tax
years beginning after December 31, 2011.
(d) Subparagraph (a)(3)(A) of Section 245 of Part VIII of
Subchapter B of Chapter 1 of Subtitle A of the Internal Revenue Code of
1986 is amended to read as follows:

``(A) the post-1986 undistributed U.S. earnings, excluding
any amount for which the distributing corporation or any
corporation that paid dividends, directly or indirectly, to the
distributing corporation was entitled to receive a deduction
under Section 251 of this Part, bears to''.

(e) Subsection 1(h) of Part I of Subchapter A of Chapter 1 of
Subtitle A of the Internal Revenue Code of 1986 is repealed for tax
years ending after December 31, 2011.
(f) Subsection (a) of Section 901 of Part III of Subchapter N of
Chapter 1 of Subtitle A of the Internal Revenue Code of 1986 is amended
to read as follows:

``(a) Allowance of credit

If the taxpayer chooses to have the benefits
of this subpart, the tax imposed by this
chapter shall, subject to the limitation of
Section 904, be credited with the amounts
provided in the applicable paragraph of
subsection (b) plus, in the case of a
corporation, the taxes deemed to have been paid
under sections 902 and 960. However, in the
case of a corporation, no credit shall be
allowed under this section or under Section 902
for foreign taxes paid or accrued, or deemed to
have been paid or accrued, in tax years
beginning after December 31, 2011. Such choice
for any taxable year may be made or changed at
any time before the expiration of the period
prescribed for making a claim for credit or
refund of the tax imposed by this chapter for
such taxable year. The credit shall not be
allowed against any tax treated as a tax not
imposed by this chapter under section 26(b).''

This amendment shall override any contrary provision in any
existing income tax convention.
SECTION 3: PREVENTING WINDFALL BENEFITS FOR FOREIGN INVESTORS
(a) Section 1441 of Subchapter A of Chapter 3 of Subtitle A of the
Internal Revenue Code of 1986 is amended by adding at the end of
subsection (a) thereof:

``, and except that in the case of dividends, the tax shall
be equal to 35 percent of such item.''

The imposition of this 35 percent withholding tax on dividends
shall override any contrary restriction in any existing income tax
convention.
(b) Section 1442 of Subchapter A of Chapter 3 of Subtitle A of the
Internal Revenue Code of 1986 is amended by adding at the end of the
first sentence of subsection (a) thereof:

``, except that in the case of dividends, the tax shall be
equal to 35 percent of such item.''

The imposition of this 35 percent withholding tax on dividends
shall override any contrary restriction in any existing income tax
convention, except that any treaty limiting the imposition of U.S. tax
on dividends paid from a U.S. resident corporation to a foreign parent
corporation shall not be overridden where the foreign parent owns,
directly or indirectly, at least 80 percent of the voting stock of the
U.S. corporation and where the foreign parent is 100 percent owned,
directly or indirectly, by a corporation whose ordinary common shares
possessing at least 51 percent of the aggregate voting power in the
corporation are regularly traded on one or more recognized stock
exchanges.
SECTION 4: FAIR FUNDING FOR RETIREMENT SECURITY
(a) Section 1 of Part I of Subchapter A of Chapter 1 of Subtitle A
of the Internal Revenue Code of 1986 is amended by adding the following
new subsection:

``1(h)(1)(a) Tax imposed. There is hereby imposed a tax of
7.65 percent on so much of the adjusted gross income for the
taxable year of that exceeds--

(A) $500,000, in the case of

(i) every married individual (as defined in
section 7703) who makes a single return jointly
with his spouse under section 6013;
(ii) every surviving spouse (as defined in
section 2(a)); and
(iii) every head of a household (as defined
in section 2(b)), ;

(B) $250,000, in the case of

(i) every individual (other than a surviving
spouse as defined in section 2(a) or the head
of a household as defined in section 2(b)) who
is not a married individual (as defined in
section 7703); and
(ii) every married individual (as defined in
section 7703) who does not make a single return
jointly with his spouse under section 6013;

(b) Credit for hospitalization tax paid. There shall be allowed as
a credit against the tax imposed by this subsection so much of the
amount of hospitalization tax paid by the individual with respect to
his wages under subsection 3101(b) and to his self-employment income
under subsection 1401(b) of this Title as exceeds the following
amounts:

A) In the case of individuals described in subparagraph
(1)(A) of this subsection, $14,500; and
B) In the case of individuals described in subparagraph
(1)(B) of this subsection, $7,250.
Shared Economic Growth--Bill and Computations Summary
The Shared Economic Growth bill allows a corporate dividends paid
deduction, restricted to taxable income otherwise reported decreased by
2.85 times any credits claimed, so that the deduction may only reduce
tax to zero. Excess reductions could be carried back 2 years and
forward 20, so there would be incentive to pay out earnings with 2
years. Subsection 2(a) of the bill makes this change, with Subsections
2(b), (c) and (d) making certain conforming changes to the existing
corporate dividends received deduction provisions.
In 2006, a normal year, corporations paid tax of $353 billion, so
offsets of up to $353 billion would be required for static revenue
neutrality. The first and most natural offset is individual tax payable
on the dividends paid. In order for the proposal to work, special rates
for dividends and for capital gains on equity would need to be
eliminated, so that these dividends would be taxed at full 2013
individual rates. Subsection 2(e) repeals these special rates. Per the
Joint Committee on taxation 2006-10 tax expenditure report, this would
have provided an offset of $92.2 billion for 2006 without altering the
various special capital gains exemption and rollover provisions. As a
practical matter, this offset is only feasible in conjunction with the
allowance of a dividends paid deduction, since such a deduction
eliminates double taxation on the corporate side and thus eliminates
any legitimate argument in favor of the capital gains rate benefits. As
is noted below, the bill provides substantial excess offsets, so select
non-equity capital gain rate benefits could be retained if desired.
Subsection 2(f) provides an offset mechanism that is only possible
in conjunction with enactment of a dividends paid deduction. Because
the deduction would effectively eliminate taxation of corporate income,
including foreign income, it would no longer be necessary to allow a
corporate credit for foreign taxes paid. A deduction could be permitted
instead with the same bottom line effect. However, allowance of a
deduction would impel corporations to pay out more dividends in order
to eliminate the corporate level tax on the foreign income, which in
turn increases the offset at the individual level. With this provision,
the individual level offset from full 2013 rate taxation of the
dividends needed to reduce corporate tax to zero would be some $153.6
billion, after factoring out shareholders not subject to tax.
Section 3 provides another offset only feasible in conjunction with
a dividends paid deduction. Foreign investors are effectively paying
the 35% U.S. corporate level tax on their investment earnings. Congress
would not have to let them have the benefit of the dividends paid
deduction, since U.S. resident shareholders would have to pay full rate
tax on such dividends. So, Section 3 imposes a 35% incremental
withholding tax on dividends paid to foreign portfolio holders,
exemption certain qualified foreign parent companies. This offset
figure is somewhat inflated because I lack data to sort out the portion
attributable to qualifying foreign parents corporations versus
portfolio investors.
Section 4 provides the final offset, which the draft bill sets at a
much higher level than necessary, since there is a certain attraction
in subjecting individual income over $500,000 a year to an AGI tax
equivalent to the individual portion of the FICA taxes that ordinary
wage earners pay. The minimum level needed for this levy is some 2.65%.
At a 7.65% level, this levy would offset the revenue attributable to
dividends paid to non-taxable retirement plans, so in effect this levy
is requiring high income individuals to pay a supplemental tax similar
to FICA taxes that supports non-social security private and state
pension savings, thereby taking pressure off of the social security
system. Moreover, because these retirement savings will ultimately be
paid out and taxed (at an average rate of some 17.66% after exclusions
(as computed from the 2006 IRA/pension/annuity distribution income by
AGI class), this would increase revenue by some 22.2 billion per year
on a static basis as the pension income is paid out. Use of a 7.65%
rate provides an excess offset of $67.6 billion that can be used to
reduce the other offsets or to provide other compensating benefits or
deficit reduction.
The static computations, based on 2006 IRS, JCT and Federal Reserve
data, are reproduced in summary below and are available in full on
request. I should note a computation relating to a variant from the
static model. The static model ignores the fact that if corporations
pay out a higher share of their earnings as dividends, capital gains
taxes that would otherwise be payable under current law would be
reduced, since a portion of capital gains tax collections pertain to
gains flowing from the increment in share values attributable to
retained earnings. The sensitivity computation below shows that at
worst this effect would not be large enough to invalidate the model.
The static model already conservatively accounts for taxes payable
under current law on dividends that are normally distributed. The
maximum effect of the above-described capital gains interaction is thus
computable based upon the incremental taxable dividends as computed in
the model. This results in the following computation.

Maximum reduction in capital gains tax due to
elimination of capital gains attributable to
earnings that would otherwise be retained
Incremental dividends subject to tax $454,991,419
Times 65% to account for earnings reduction from corp $295,744,423
tax under current law
Times 20% maximum capital gains rate $59,148,885
This is less than the excess offset

This computes the necessary offsets, based on IRS
2006 SOI data and Federal Reserve ownership data
Total corporate tax collected $353,083,862
Foreign tax credits used $78,183,457
Incremental tax if FTCs replaced by deductions $50,819,247
Adjusted corporate tax for computation $403,903,109
Grossed up by dividing by 35% to obtain value of $1,154,008,883
dividends required to reduce corporate tax to zero
Qualifying taxable dividends reported by shareholders $137,195,800
Percentage of stock held by retirement funds 31.14%
Percentage of stock held by state & local gov't 0.52%
Percentage of stock held by foreigners 17.02%
Total dividends % not subject to income tax 48.68%
Implied non-taxable dividends paid $130,160,817
Incremental dividends to reduce corporate tax to zero $886,652,266
Incremental dividends subject to tax $454,991,419
Individual tax on those incremental dividends 156,287,339
Remaining offset needed $196,796,523
35% withholding on foreign shareholders $68,747,233
Remaining offset needed $128,049,290
Capital gains & dividends rate benefit $92,200,000
Remaining offset needed $35,849,290
2.65% AGI tax on income > $500,000 $35,849,290
Remaining offset needed $0
Note: At an AGI tax of 7.65% on income over $500K, $67,550,274
there would be an excess offset of allowing plenty
of room to tweak the other offsets
Based on 2006 IRA/pension/annuity distributions, the 17.66%
dividends going to pension funds will ultimately be
taxed at a weighted average rate after exclusions of
Producing tax of $63,474,391
Of which the incremental amount produced by SEG would $22,216,037
be

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