[House Hearing, 111 Congress]
[From the U.S. Government Publishing Office]
INCREASING U.S. COMPETITIVENESS AND PREVENTING AMERICAN JOBS FROM
MOVING OVERSEAS
=======================================================================
HEARING
before the
COMMITTEE ON WAYS AND MEANS
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED ELEVENTH CONGRESS
FIRST SESSION
__________
MAY 23, 2017
__________
Serial No. 115-FC02
__________
Printed for the use of the Committee on Ways and Means
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
U.S. GOVERNMENT PUBLISHING OFFICE
33-426 WASHINGTON : 2019
COMMITTEE ON WAYS AND MEANS
KEVIN BRADY, Texas, Chairman
SAM JOHNSON, Texas RICHARD E. NEAL, Massachusetts
DEVIN NUNES, California SANDER M. LEVIN, Michigan
PATRICK J. TIBERI, Ohio JOHN LEWIS, Georgia
DAVID G. REICHERT, Washington LLOYD DOGGETT, Texas
PETER J. ROSKAM, Illinois MIKE THOMPSON, California
VERN BUCHANAN, Florida JOHN B. LARSON, Connecticut
ADRIAN SMITH, Nebraska EARL BLUMENAUER, Oregon
LYNN JENKINS, Kansas RON KIND, Wisconsin
ERIK PAULSEN, Minnesota BILL PASCRELL, JR., New Jersey
KENNY MARCHANT, Texas JOSEPH CROWLEY, New York
DIANE BLACK, Tennessee DANNY DAVIS, Illinois
TOM REED, New York LINDA SANCHEZ, California
MIKE KELLY, Pennsylvania BRIAN HIGGINS, New York
JIM RENACCI, Ohio TERRI SEWELL, Alabama
PAT MEEHAN, Pennsylvania SUZAN DELBENE, Washington
KRISTI NOEM, South Dakota JUDY CHU, California
GEORGE HOLDING, North Carolina
JASON SMITH, Missouri
TOM RICE, South Carolina
DAVID SCHWEIKERT, Arizona
JACKIE WALORSKI, Indiana
CARLOS CURBELO, Florida
MIKE BISHOP, Michigan
David Stewart, Staff Director
Brandon Casey, Minority Chief Counsel
C O N T E N T S
__________
Page
Advisory of May 23, 2017 announcing the hearing.................. 2
WITNESSES
Juan Luciano, President and Chief Executive Officer, Archer
Daniels Midland Company........................................ 8
(Truth in Testimony)......................................... 16
Brian Cornell, Board Chairman and Chief Executive Officer, Target
Corporation.................................................... 17
(Truth in Testimony)......................................... 21
William Simon, Former President and Chief Executive Officer,
Walmart U.S.................................................... 22
(Truth in Testimony)......................................... 31
Lawrence B. Lindsey, President and CEO, The Lindsey Group........ 32
(Truth in Testimony)......................................... 42
Kimberly Clausing, Thormund A. Miller and Walter Mintz, Professor
of Economics, Reed College..................................... 43
(Truth in Testimony)......................................... 57
MATERIALS FOR THE RECORD
Tax Cuts For Whom? Heterogeneous Effects of Income Tax Changes on
Growth and Employment, paper by Owen Zidar..................... 64
Lack of Workers, Not Work, Weighs on the Nation's Economy,
article by the New York Times.................................. 95
Report: Repatriation Tax Holiday a `Failed' Policy, article by
the Wall Street Journal........................................ 101
US Daily: What Would the Transition to Destination-Based Taxation
Look Like?, report by Goldman Sachs............................ 105
Columbia Sportswear Company, letter from Tim Boyle............... 116
Hardlines/Broadlines Retailing, research by J.P. Morgan.......... 127
Mnuchin Cites Problems in Border Tax as House Panel Seeks Tweaks,
article by Bloomberg........................................... 139
2017 First Quarter Published Expatriates--A Total of 1,313,
article by International Tax Blog.............................. 144
17-5 Effects of Consumption Taxes on Real Exchange Rates and
Trade Balances, study by Freund and Gagnon..................... 159
Assessing the House Republicans' ``A Better Way'' Tax Report,
research paper by Alan Auerbach and Larry Kotlikoff............ 189
QUESTIONS FOR THE RECORD
Questions from The Honorable Sam Johnson, to Mr. Cornell and Dr.
Lindsey........................................................ 205
Questions from The Honorable Carlos Curbelo, to Mr. Simon and Mr.
Luciano........................................................ 208
Question from The Honorable Carlos Curbelo, to Dr. Lindsey....... 208
PUBLIC SUBMISSIONS FOR THE RECORD
Accurate Signs and Engraving, Inc................................ 212
The African Ambassadors Group (AAG) in Washington, D.C., through
the Economic Development Committee (EDC)....................... 214
African Coalition for Trade, Inc................................. 220
African Cotton & Textile Industries Federation................... 222
Alan J. Auerbach, Robert D. Burch, Professor of Economics and Law
Director, Burch Center for Tax Policy and Public Finance....... 223
American Apparel & Footwear Association.......................... 229
American International Automobile Dealers Association............ 235
Center for Automotive Research................................... 241
ASR Group........................................................ 250
Americans for Tax Reform......................................... 252
Association of Bermuda Insurers and Reinsurers................... 253
Association of British Insurers.................................. 260
Association of Global Automakers, Inc............................ 266
Autocare Association............................................. 268
Bermuda International Long Term Insurers and Reinsurers.......... 270
Black Mingo Outfitters........................................... 277
Bradbury H. Anderson, Former Chief Executive Officer of Best Buy
Co, Inc........................................................ 279
Mayer Brown LLP.................................................. 281
Andrew F. Quinlan, President Center for Freedom and Prosperity... 298
Michael G. Bindner, Center for Fiscal Equity..................... 302
Coalition for Competitive Insurance Rates........................ 311
Columbia Sportswear Company...................................... 314
Committee for Economic Development of the Conference Board....... 317
Consumer Technology Association.................................. 327
Eric Blackledge, for the National Small Business Network......... 329
European Union Delegation to the United States of America........ 334
BDI and DIHK..................................................... 338
Filament Brands.................................................. 345
Food Marketing Institute......................................... 347
Footwear Distributors & Retailers of America (FDRA).............. 352
Fortune Fish & Gourmet........................................... 357
Freedom Partners................................................. 358
Games by James................................................... 359
The Greenbrier Companies......................................... 362
Honey-Can-Do International LLC................................... 365
International Wood Products Association.......................... 366
J. B. Prince Company, Inc........................................ 368
Americans for Prosperity......................................... 370
Richard Woldenberg, CEO of Learning Resources.................... 371
Levi Strauss & Co................................................ 381
The Like-Kind Exchange Stakeholder Coalition..................... 383
Mercatus Center.................................................. 387
Motor & Equipment Manufacturers Association...................... 395
National Association of Chain Drug Stores........................ 404
National Retail Federation....................................... 410
New England Fuel Institute....................................... 415
Bill Parks, President NRS Inc.................................... 417
Partnership for Responsible Growth............................... 420
Phillip Swagel, Professor, School of Public Policy............... 423
Prodotto......................................................... 427
Industriales Puerto Rico......................................... 428
PVH Corporation.................................................. 437
QuadGraphics..................................................... 439
Resolute Forest Products......................................... 442
Retail Industry Leaders Association.............................. 444
SanMar........................................................... 451
Slade Gorton & Co., Inc.......................................... 453
Southern California Local Bead Store Association................. 454
Kyle Pomerleau, Director of Federal Project Tax Foundation....... 457
Texas Auto 290................................................... 466
NPES The Association for Suppliers of Printing, Publishing and
Converting Technologies........................................ 468
United States Fashion Industry Association....................... 472
INCREASING U.S. COMPETITIVENESS AND PREVENTING AMERICAN JOBS FROM
MOVING OVERSEAS
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TUESDAY, MAY 23, 2017
U.S. House of Representatives,
Committee on Ways and Means,
Washington, DC.
The committee met, pursuant to call, at 10:03 a.m., in Room
1100, Longworth House Office Building, Hon. Kevin Brady
[chairman of the committee] presiding.
[The advisory announcing the hearing follows:]
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Chairman BRADY. The committee will come to order.
Welcome to the Ways and Means Committee hearing on
increasing U.S. competitiveness and preventing American jobs
from moving overseas.
Before we get started, I want to take a moment to speak
about the evil terror attack that occurred last night in the
United Kingdom. Our deepest condolences go out to the victims,
to their families, and their loved ones. Please know that you
are in our prayers.
Today, we are continuing our work on pro-growth tax reform
that will improve the lives of all Americans. This morning's
hearing is focused on strengthening America's competitiveness
and preventing American jobs from moving overseas.
For years, Americans have watched as our manufacturing
plants, middle class jobs, and longstanding U.S. companies have
moved overseas, devastating communities and the families that
depend upon them. Hundreds of thousands of good-paying American
jobs have left and continue to leave to China, Mexico, Ireland,
and other foreign countries. Some of our communities have never
recovered, because when these plants and companies move
overseas, the local businesses, housing values, and local tax
revenue disappear with them.
I have watched as 17 key Texas companies have relocated
their headquarters to England, Canada, Bermuda, Ireland, the
Cayman Islands, Switzerland, and the Netherlands. Americans are
being hurt because our Nation is saddled with one of the most
costly, unfair, and uncompetitive tax systems on the planet.
According to the nonpartisan Tax Foundation, when it comes to
competitive tax codes, America is ranked nearly last among our
global competitors, 31 of 35.
The good news is, we are edging out Greece. The bad news
is, nearly everyone else is eating our lunch, along with our
jobs, manufacturing plant, and research facilities. The urgency
for bold, permanent pro-growth tax reform has never been
greater.
We gather today because, with our current Tax Code, the
playing field for American workers is not level, not even
close. Over three decades have passed since the last time we
reformed America's Tax Code. While Washington has been on the
sidelines, our foreign competitors have been improving their
tax systems for their businesses and their workers.
Today, it is clear our Tax Code is failing American
workers, families and businesses in three crucial areas: First,
our corporate tax rate, now the highest in the industrial world
at 35 percent, is at least 10 to 15 points higher than our
competitors. This makes it much harder for our businesses to
compete globally and create jobs here at home.
Second, our tax system discourages U.S. businesses from
bringing home foreign profits to grow middle class jobs and
middle class paychecks. Instead, our Tax Code encourages global
U.S. businesses to keep profits abroad, to grow foreign jobs
and foreign paychecks. At last check, more than two and a half
trillion dollars of U.S. profits are stranded overseas, unable
to be affordably reinvested back here in America.
Addressing these two issues is important and would be good
enough to move America back to average, somewhere in the middle
of the pack. But tax reform only happens once in a generation.
Is our vision merely to be average? Given all that is at stake
for middle class families, our goal in tax reform should be to
vault America from dead last among our global competitors back
into the lead pack, back among the top three best places on the
planet for that next new job, manufacturing plant, or research
facility.
To do this, we must take action on a third crucial
competitive issue: Ending the Made in America tax. Today, the
vast majority of our international competitors apply taxes on
products that are sold in their country no matter where the
product's made. And they remove taxes from products that are
exported, including products that are sold into the United
States. This is called border adjustment. Taxes are adjusted
when products cross the border.
Over 160 of our competitors border-adjust their taxes.
These are all the blue countries on the map on the screens.
America is one of the very few who don't, along with countries
like Cuba, North Korea, and Somalia. In our country, we apply
taxes only on products that are made in America and Washington
imposes that Made in America tax on our products no matter
where they are sold, including overseas. As a result, Made in
America products are at a major tax disadvantage here at home
and around the world.
So why is Washington providing special tax breaks for
foreign products over American-made products? Why should
Chinese steel get a tax break over American steel? Mexican auto
parts and agriculture over American auto parts and agriculture?
Foreign oil over American made oil? This doesn't make sense,
especially since this is a big reason our current Tax Code
drives U.S. jobs and companies overseas.
In the tax reform blueprint, we propose to end the Made in
America tax and instead tax all products and services equally
when they are sold in America at a low rate of 20 percent. No
special tax breaks for foreign products, everyone treated the
same, true competition for the first time.
And we lift the tax on Made in America products and
services when they are sold abroad, and for the first time
leveling the playing field for American workers, businesses,
and farmers. Our goal is not simply to eliminate any tax reason
to move American jobs overseas, but to reestablish America as a
21st century magnet for new jobs and investment. And for the
first time, companies will no longer gain by moving their
headquarters to Bermuda, their manufacturing plants to China,
or their intellectual property to Ireland.
As a result, for the first time in decades, companies and
industries are coming forward to describe how, under the
Republican blueprint, they can bring a large part of their
supply chains back to America. These are the good-paying jobs,
manufacturing plants, research labs, and technology centers
that house cutting-edge intellectual property like patents. The
current Tax Code told them to move these activities oversees.
The House blueprint allows them to bring them back to the
United States.
We recognize this is a significant change from our current
Tax Code. We know there are legitimate concerns, including from
some of our witnesses here today and our colleagues on the
other side of the aisle, about how it will affect American
workers, businesses, and consumers; and we are committed to
working with all of you to address these concerns. We have to
get it right, and we will.
It is time for a Tax Code that rewards Americans' hard work
rather than pushing American jobs out of our communities. The
Tax Foundation estimates the House blueprint as a whole will
create 1.7 million jobs over the next decade and grow paychecks
for middle class American families by roughly $5,000. Imagine
how successful American consumers will be when they have a
secure good-paying job and a Tax Code that allows them to keep
more of their paycheck. It is time for Washington to get off
the sidelines and back into the game, fighting for our
businesses, workers, and consumers.
I want to thank all of our witnesses for being here today.
We have a stellar field, and we look forward to hearing your
ideas on how we can level the playing field for American
workers and unleash a new era of American prosperity.
Before I recognize the ranking member, I want to announce
that we are joined here today by Bill Thomas, who chaired this
committee from 2001 through 2006.
Mr. Chairman, welcome back.
I now yield to the distinguished ranking member, Mr. Neal,
for the purposes of an opening statement.
Mr. NEAL. Thank you, Mr. Chairman. And we fully share the
sentiments you expressed on the events that took place last
night in Manchester, Great Britain.
First, let me thank you, Mr. Chairman, for holding today's
hearing on increasing U.S. competitiveness and preventing
American jobs from moving overseas. It is an important topic
and I look forward to a productive conversation.
As we continue with this series of hearings on
comprehensive tax reform, I want to reiterate my support for
reforming the Tax Code. There is certainly strong bipartisan
support for simplifying the tax system and making it more fair.
We on the Democratic side are willing partners in those
efforts. However, we will support tax reform on a comprehensive
basis that will ease financial burdens on the middle class and
working families. We will not support tax cuts for those at the
top of the income scale at the expense of those of the middle
class. Our primary focus and top priority in tax reform needs
to be putting the middle class first.
I also believe that a key component of tax reform is
ensuring that American businesses remain competitive in the
global economy and that we prevent American jobs from moving
overseas. Achieving this includes providing incentives to
companies to conduct research and development here in the
United States. We also need to improve our Nation's
infrastructure so that it is in line with other developed
nations. That includes meaningful investments to repair and
enhance our Nation's roads, rails, bridges, harbors, sea and
water harbor opportunities as well. These reforms can be done
through the Tax Code and would also jump start economic growth
and create thousands of jobs.
Another key component of international competitiveness is
investment in well-trained and skilled workforce opportunities.
A 2015 report by the Manufacturing Institute estimated that
over the next decade 2 million manufacturing jobs in this
country could go unfilled due to a skills gap.
The New England Council recently estimated in a 2015 report
that thousands of high-paying advanced manufacturing jobs, some
with salaries well over $80,000 a year with full benefits, go
unfilled because employers are struggling to find candidates to
meet the needs of these open positions.
At a time when families across the country are trying to
reach and stay in the middle class, our Nation cannot afford to
have factories and workers sit idle. To remain competitive, we
need to invest in workforce development.
Let me shift to another focus of today's hearing, the
border adjustment tax. I think that the border adjustment tax
proposal is certainly interesting. As my past support of an
innovation box demonstrates, I am no stranger to innovative tax
ideas and am willing to look outside the box for smart tax
policy and certainly encourage others to do the same.
Some argue that a border adjustment tax would create such
an incentive for companies to make things in the U.S. that it
would drive up demand for American-made goods. We certainly are
supportive of American manufacturers. However, there are many
unknowns about the border adjustment tax. Given the many
significant economic uncertainties and risks associated with
the border adjustment tax, the committee must evaluate its
merits thoroughly and methodically.
There are many very important questions that must be
answered in order to evaluate the proposal. So I applaud the
chairman for holding today's hearings to do just that. For
example, what will the impact be on consumers? The retailers
tell us that the cost of products, like food, clothing and
medicine, will go up for consumers by more than $1,700 a year,
gas prices could increase by 35 cents a gallon. Also, I have
been told that a 20 percent BAT would increase the average home
heating oil cost for a New England family by up to $400 per
winter.
Middle class families can't and shouldn't have to sustain
these types of increases in consumer prices as a result of tax
reform. Is that a risk with an adjustment border tax? Will the
dollar strengthen to offset increases in consumer prices? If
so, how long will it take and will it, indeed, be complete? And
how much certainty is there with respect to currency
fluctuations and other implications of an increased dollar?
And the border adjustment tax, is it WTO compliant? Is
there the risk of retaliation? What would the BAT's impact be
on American jobs? Who will be the winners and losers as a
result of a border adjustment tax?
Another important question that I have is the impact on
small businesses. Unfortunately, we don't have a small business
witness with us today. But I think understanding the potential
impact on small business is key. The owner of Dave's Soda and
Pet Food City in my district, who is quite successful, tells me
that his imported products would certainly provide the margin
for him to operate the rest of his business as currently
constructed. He says that if his costs go up, he can't rent out
utilities, he can't rent out other places to cut the payroll;
in fact, he has to absorb the cost.
He also is very concerned that if consumers have to pay
more for gas and other essentials, he will sell less of the pet
accessories that keep his business afloat. I hope we can
continue to examine the impact of the BAT on small businesses.
Mr. Chairman, I hope you will consider holding a hearing in
the near future on how to best use revenue from a deemed
repatriation tax as we discuss tax reform. I support using
repatriation dollars to pay for infrastructure and/or other
productive purposes for the middle class.
Mr. Chairman, thanks for your leadership in calling today's
hearing, and I am hopeful that we can dive into this topic of
the BAT and get our questions answered. I hope that this will
continue to be a productive conversation, and thank the
witnesses for their participation.
Chairman BRADY. Thank you, Mr. Neal. Without objection,
other members' opening statements will be made part of the
record.
Today's witness panel includes five experts: Juan Luciano
is the president and chief executive officer of the Archer
Daniels Midland Company; Brian Cornell is the board chairman
and chief executive officer of the Target Corporation; William
Simon is the former president and chief executive officer of
Walmart U.S.; Lawrence B. Lindsey is the President and chief
executive officer of The Lindsey Group; and Kimberly Clausing
is the Thormund A. Miller and Walter Mintz professor of
economics at Reed College.
The committee has received your written statements. They
will all be made part of the formal hearing record. You each
have 5 minutes to deliver your oral remarks.
We will begin with Mr. Luciano. Welcome, and you may begin
when you are ready.
STATEMENT OF JUAN LUCIANO, PRESIDENT AND CHIEF EXECUTIVE
OFFICER, ARCHER DANIELS MIDLAND COMPANY
Mr. LUCIANO. Thank you. Chairman Brady, Ranking Member
Neal, members of the committee, thank you for the opportunity
to testify about comprehensive tax reform. ADM began as a
linseed-oil processor in Minneapolis 115 years ago. Today, we
employ nearly 20,000 employees in the United States, serving
customers in 160 countries. Our network allows us to source
crops, to transport them to our facilities, to transform them
into food, feed, renewable fuels and chemicals, and to deliver
them to customers on six continents.
We support U.S. farmers and businesses in significant ways.
In 2016, we purchased $25.9 billion in goods and services from
farmers or vendors in all 50 States. I am pleased to say we
have employees in 25 of the 26 States represented on this
committee. And, Congressman Neal, we hope to have the
opportunity to invest in Massachusetts too.
ADM's reach opened global markets for America's farmers who
have run a trade surplus for 50 years. But U.S. companies like
ADM now compete with well-capitalized non-U.S. companies, who
often enjoy a tax system with lower rates and border
adjustments that create a competitive advantage for them.
ADM only thrives when America's farmers thrive. For us to
serve America's farmer while creating jobs and contributing to
growth, we must have a globally competitive U.S. Tax Code. We
must encourage the return of capital to the U.S. and enable
companies like ADM to create and maintain jobs here in the
United States.
The proposal we are discussing today will help accomplish
those goals. First, reducing the corporate rate to 20 percent
will allow companies like ADM to operate more competitively.
Today, many competitors have a substantial tax advantage.
Our effective tax rate is approximately 30 percent, and we must
compete with firms with tax rates at 20 percent or in the
teens.
Second, the proposal will level the playing field by moving
from worldwide taxation to territorial taxation. A territorial
tax system will remove the burdens of high corporate tax rates
and address the capital restrictions that hinder U.S.
companies, but not global competitors. This will facilitate our
ability to enable American crops to reach the world.
Third, a destination-based cash flow tax will level the
playing field for our exports when we must go toe-to-toe with
competitors we enjoy significant BAT rebates or exemptions when
they export. Unlike a BAT, the U.S. income tax system has no
offset for exports. This systematically disadvantages our own
producers. A destination-based cash flow tax corrects this
imbalance.
The U.S. market share of global exports has fallen
precipitously in major commodities over the past five decades.
The U.S. is no longer number one in soybeans and wheat. From
1965 to today, U.S. world share of soybeans exports has fallen
from 90 percent to 39 percent, with Brazil taking the lead.
Over the same period, our world share of exports of wheat has
fallen from 40 percent to 20 percent, with Russia taking the
lead. The U.S. world share of corn has fallen from 65 percent
to 34 percent.
America's antiquated tax system may not be the only reason
for this decline, but it clearly contributed. We need to
modernize our Tax Code to allow us to keep up with the rest of
the world. This proposal creates the climate which will support
the reinvesting in America and will result in millions of
American jobs.
It will help stop the decline in our market share and
enhance our ability to serve the world. Other countries have
responded to our inaction. We have the opportunity, with tax
reform, to give American farmers and workers the chance to
fairly compete and provide American products to customers
around the globe.
[The prepared statement of Juan Luciano follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Chairman BRADY. Mr. Luciano, thank you very much for your
testimony.
Mr. Cornell, welcome, and please proceed.
STATEMENT OF BRIAN CORNELL, BOARD CHAIRMAN AND CHIEF EXECUTIVE
OFFICER, TARGET CORPORATION
Mr. CORNELL. Good morning, Chairman Brady, Ranking Member
Neal, and members of the committee. Thank you for the
opportunity to be here today.
Let me begin by saying that we strongly support tax reform.
At Target, we have a very high effective tax rate, an average
of 35 percent over the last decade. So we are as motivated as
anyone to bring that rate down. We recognize our current Tax
Code is broken. The status quo is unacceptable.
Mr. Chairman, we will put every tax benefit we currently
receive on the table, every single one, in order to pass tax
reform, to lower that rate, to spur investment, to create jobs,
and to grow the American economy. However, we have concluded
that the new border adjustment tax would undermine the
progrowth principles in the blueprint.
And it is not just us; more than 500 companies and
associations feel the same way. I am talking about Main Street
coffee shops, car dealers, grocery stores, gas stations, and
restaurants. From large companies like Target to small American
businesses, we have all come to the same conclusion: Under the
new border adjustment tax, American families, your
constituents, would pay more so many multinational corporations
can pay even less.
Eighty-five percent of America shops at Target every year.
We believe this new tax would hit families hard, raising prices
on everyday essentials by up to 20 percent. We are not talking
about luxury items here, but instead the basics American
families need. Moms in Cincinnati would pay more for back-to-
school clothes. Parents in Houston would pay more for their
groceries. Seniors in Philadelphia would pay more for medicine.
Every time your constituents fill up their gas tanks, they
would pay more. The people who shop at Target are middle class,
hardworking families whose budgets are already stretched. For
them, this new tax would be a budget-breaker.
Mr. Chairman, we are investing in America. We are hiring.
We recently announced we are investing $7 billion in
communities across this country, $7 billion to build new
stores, to renovate hundreds more, and to transform our
distribution network, all right here in the United States.
These investments will create thousands of new jobs at
Target and thousands more for engineers and electricians,
plumbers and painters across the country, and we are doing that
today. But under the new border adjustment tax, our rate would
more than double, from 35 percent to 75 percent. And we, like
many others, would be left with only bad options. It is pretty
simple math. If the government takes nearly $4 out of every $5
we make, 4 out of 5, there is no capital to invest and no
prospects for growth, and that matters a lot, both to us and to
the American economy. Instead of investing and creating jobs,
we would be pushed in the other direction.
Mr. Chairman, I have a responsibility to more than 320,000
employees, 99 percent of whom are based right here in the
United States. That is hundreds of thousands of American
families who depend on me every day. I know there is an
academic theory that says currency markets will adjust, that
families won't be harmed under this plan. Well, that might work
in a textbook, but I can't tell my employees that their
paychecks and Congress shouldn't tell American families that
their budgets are being wagered on an unproven and untested
theory.
So in closing, Mr. Chairman, members of the committee, we
have a historic opportunity to simplify the Tax Code, to spur
economic growth, and to create jobs. Many parts of the
blueprint will do just that, but I can't sign up for a plan
that would stick American families with that bill or a plan
that would double our tax rate, a plan that would stifle our
investment in America. Mr. Chairman, I want to thank you again
for your leadership.
I know this is challenging and I want to help. Let's move
past the new border adjustment plan and get tax reform done. It
is too important. That is why we are here today. So thank you.
[The prepared statement of Brian Cornell follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Chairman BRADY. Thank you.
Mr. Simon, welcome today, and please proceed with your
testimony.
STATEMENT OF WILLIAM SIMON, FORMER PRESIDENT AND CHIEF
EXECUTIVE OFFICER, WALMART U.S.
Mr. SIMON. Thank you, Chairman Brady, Ranking Member Neal,
and members of the committee. It is really my pleasure to be
here with you today and discuss the importance of U.S.
manufacturing on middle class jobs. I am here representing
myself as a private citizen. These are my views.
I would like to begin by noting that I have long been a
supporter of U.S. manufacturing. In fact, the National Retail
Federation hosted me at their annual meeting in 2013, where we
launched Walmart's U.S. manufacturing initiative, which I would
add has been quite successful.
Manufacturing jobs in this country and, really, around the
world have always represented a pathway to the middle class.
That is how it works. And we have seen it throughout our
history. And there is a reason that the middle class has
struggled in this country recently; and it is the same reason
we have seen middle classes emerge in global markets, and that
is, the manufacturing base has moved and, with it, the jobs
have followed.
There was a time in this country when a job in the local
factory was a ticket to the middle class. I grew up in
Congressman Larson's district around Hartford, Connecticut. And
we made Pratt and Whitney engines and Colt firearms, and
everybody in the community was proud of that fact and if you
got a job there you were set.
But in this country, it doesn't work that way anymore. You,
the government, you lay out the rules like puzzle pieces, and
then businesses like us take the tax, labor, and trade policies
that you have given us and put them together and try to deliver
the best results we can for shareholders. And over the past 30
years, when you assemble those puzzle pieces, virtually every
scenario run by every company has resulted in the same outcome:
Offshore manufacturing and a hollowed-out middle class with
limited job progression. Something needs to change on this,
everybody agrees. And I join my colleague in commending you for
taking on this difficult issue.
Many ideas have been discussed in recent months, and of the
most controversial, particularly for the retail industry, has
been the border adjustment. And I have weighed the considerable
challenges the proposal presents to retail--and they are
considerable--with the significant benefits that it will
deliver to the economy as a whole and have concluded that, if
properly implemented, it is in the best interests of the
country for this to be considered.
However, such a system would have to be implemented with
careful consideration to the transitional challenges retailers
will face. It has to allow for adjustments that are necessary
to address the concerns that you have heard from the industry.
For example, most of the manufacturing capacity that exists in
the world outside of food products no longer is based in the
U.S., as we have heard, so simply applying a 20-percent tax
across the board on day one would have serious impact to the
industry and consumer, and I know that is not being proposed.
I hope you see my point of view isn't completely at odds
with the industry. I just look at it from a different
perspective. That is, if we are to move forward, I believe it
is important that retailers work with the committee and provide
input on how to best transition. The industry, retail industry
is already in flux. They are dealing with generational
technology and trend changes, and I submit that it is all part
of the same issue. The challenges that face the middle class
today have put a damper on the power of the consumer and are
now impacting retail broadly.
Resurgence in American manufacturing would result in a
stronger U.S. consumer and a stronger retail industry over the
long run. But in manufacturing and in supply chains, the long
run is a long time. And a migration of manufacturing out of the
U.S. took 30 years, and so it is critical that any proposed
legislation understands and accounts for this. If you move
forward with the border adjustment, I would recommend
considering a long implementation period with a phase-in of the
tax impact. And to guard against the currency fluctuations that
some believe are just a textbook thing, economists forecasting
those impacts would offset the change. And I would suggest that
you peg or use the value of the dollar maybe to trigger or
signal the next phase-in of the tax, or some other method that
provides some security to the retail industry.
And there is also things that the retailers can do, the
industry can to accelerate the transition. First and foremost
is embrace U.S. manufacturers when they come online, and they
will come online rapidly, because with the change American
sourcing will become increasingly viable.
Also, being closer to the point of consumption shortens
lead times, lowers transportation costs, and increases
manufacturing flexibility.
Second, for some products, and apparel is a good example,
competitively priced U.S. product won't be available for some
time. In that case, they need to work with existing suppliers
and look upstream as a way to drive down costs. For example,
American cotton is readily available on the international
markets and could be acquired by a retailer and then reimported
to offset some of the impact of the adjustment.
With increased competition, obviously, prices will come
down. Our current system isn't serving anybody well at all. But
until we substantially change the puzzle pieces, the puzzle
will continue to be assembled in a way that inhibits the
development of our manufacturing base. It will continue to
restrict the development of the American middle class, and it
will not deliver the economic security that we need.
But, if we get the pieces right, we will see a rebirth of
American manufacturing without the severe negative impacts on
important sectors like retail. We will see more good middle
class jobs, a robust U.S. economy, and an era of growth that
will be led by a new industrial revolution.
Thank you.
[The prepared statement of William Simon follows:]
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Chairman BRADY. Thank you, Mr. Simon.
Mr. Lindsey, welcome to you as well and please proceed.
STATEMENT OF LAWRENCE B. LINDSEY, PRESIDENT AND CHIEF EXECUTIVE
OFFICER, THE LINDSEY GROUP
Mr. LINDSEY. Thank you, Mr. Chairman.
Chairman BRADY. Hit that microphone.
Mr. LINDSEY. I was told to do that. Can't teach old dogs
new tricks, I guess.
Mr. Chairman, Ranking Member Neal, and members of the
committee, thanks very much for having me here today.
I think we all have the same objective, and that objective
is to grow this economy faster, improve our competitiveness,
raise living standards, and, if possible, improve the
distribution of income by making it more fair. I am here today
because I believe that the basic blueprint that was outlined
will accomplish all of these goals.
Forty years ago, when I was a graduate student, the basic
structure of what was laid out in the blueprint was considered
across the political spectrum to be the best way we could
design a tax system. I quote in my testimony a paper written by
a colleague of mine, Larry Summers, that points this out. He
said: The welfare cost of capital income taxation is seriously
underestimated. For reasonable parameter values, the annual
welfare gained from a shift to consumption taxation is
conservatively estimated at 10 percent of GDP. It is unlikely
that that basic conclusion of this analysis would be altered.
Capital income taxes are likely to appear very undesirable in
any sort of realistic lifecycle formulation.
That is how broad the consensus was about how we should
structure our Tax Code. There was a survey of 69 public finance
economists by NBER that said that the 1986 bill, which was a
pale imitation of what we are doing here, increased the long-
run growth of the U.S. economy by a full point.
My work on the House blueprint suggests that we will have a
growth rate of about 3 and a half percent for the first 4 or 5
years, and that will ultimately moderate to about 2 and three-
quarters percent. If you work it out, this is almost identical
to Summers' calculation of a 10 percent increase. The reason is
that if you look at recent performance, our problem has been a
lack of capital formation, which in the current recovery has
fallen by almost 40 percent, and the collapse in productivity,
which has fallen by two-thirds.
And by this, I am not counting the recession; I am counting
the years after the recession. This has been the worst period
of recovery ever, and that is why. And this bill targets both
capital formation and entrepreneurship.
I think all of the extra growth that will show up will be
in the form of increased labor compensation. It is not only
because of the structure of the tax, which will give each
worker more capital to work with, but because we are right now
at roughly full employment. And so any expansion of the economy
I think is likely to lead to higher real wage growth.
The last time we did anything like this, i.e., a capital
formation-oriented supply side tax cut at a time of full
employment, were the Kennedy tax cuts in 1964. And the takeoff
in the economy and the rapid rise in capital--excuse me, rapid
rise in wage income and improvement in the distribution of
income occurred, just like I think will happen today.
Let me turn to the territorial system and the border
adjustment tax. I think we need to move to a territorial
destination-based system and away from our current global
production-based system. Right now, our goods are taxed here
when they are produced and are taxed there when they are
imported.
On the other hand, their goods have a big tax rebate given
to them when they leave there and are not taxed here. So,
essentially, a good portion of our goods are taxed twice, while
a good portion of our goods going there aren't taxed at all.
Let me turn to a few particular points. Border adjustment
isn't complicated. It doesn't follow each good each time it
crosses the border. It is a netting effect of exports minus
imports.
Second, border adjustment will lead to a currency
adjustment. We can argue about how much. But basically, when
you put something like this in, you increase the demand for
dollars and you decrease the supply of dollars. And higher
demand and lower supply means a higher value of the dollar, it
is as simple as that this.
One of my competitors, I guess, has estimated this. They
actually have the lowest percentage of exchange rate adjustment
that I know of, 65 percent, and they estimate that the effect
of border adjustment on consumer prices will be a one-time
probably over two years, a one-time increase of the total
consumer price level of just 1 percent. That is what we are
talking about here. Will there be transition costs to these
changes? Absolutely.
And I agree with the other witnesses that that, in fact, is
where the focus of our conversation should be. But the most
important thing you can do is pass this bill. Thank you.
[The prepared statement of Lawrence B. Lindsey follows:]
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Chairman BRADY. Thank you, Dr. Lindsey.
Ms. Clausing, welcome to today's hearing. Please proceed.
STATEMENT OF KIMBERLY CLAUSING, THORMUND A. MILLER AND WALTER
MINTZ PROFESSOR OF ECONOMICS, REED COLLEGE
Ms. CLAUSING. Chairman Brady, Ranking Member Neal, members
of the committee, thank you so much for inviting me today. In
my testimony, I will talk about competitiveness, the Ryan-Brady
plan, and alternatives to the plan that can keep the advantages
but without the downsides.
First, competitiveness: In talking about competitiveness,
many people emphasize tax. But competitiveness really has more
to do with fundamentals, like worker education, like an
economically secure middle class, like sound infrastructure.
The investments that make the middle class prosperous will make
our businesses successful.
But by most measures, our businesses are quite successful.
Corporate profits are a higher share of GDP than they have been
at any time in recent history. Profits in the last 15 years are
50 percent higher than they were in prior decades. Also, our
companies dominate the Forbes list of the most important
companies in the world. While our economy is about one-fifth
the size of the world, our companies are one-third of the
world's top companies.
While our corporate tax system has problems, most
multinational firms face comparable effective tax rates as
firms in other countries. In fact, our corporate tax revenues
are lower than the corporate tax revenues of peer nations by
about 1 percent of GDP.
Turning to the Ryan-Brady plan, there are good parts.
First, it tackles offshore profit-shifting, and this has
become a huge problem. My research suggests that profit-
shifting to tax havens is currently costing the U.S. Government
over $100 billion every year. In fact, our profits are often
shifted to tax havens such as those shown on the chart:
Bermuda, Switzerland, and the Caymans.
However, there are some serious flaws with the Ryan-Brady
plan. First, the plan is likely to generate large economic
shocks, harming American workers and major parts of our
economy. The plan taxes imported goods; and absent dollar
appreciation, this will harm American businesses and harm
American consumers.
In Oregon, a Nike executive called this plan the single
biggest threat to the company in its history. Many practical
considerations may get in the way of dollar appreciation, and
the evidence we have suggests that there are some serious risks
here. Do we really want to bet large sectors of the economy on
this idea? The retail sector alone accounts for one in ten
American jobs.
Second, legal experts argue that the plan is incompatible
with the world trading system. Because of this, our trading
partners will file suit; and when we inevitably lose, they will
be authorized to retaliate with tariffs, reducing U.S. exports
by hundreds of billions of dollars. Trade disputes of this
magnitude generate uncertainty, an unstable investment
environment, and a threat to a trading system that we spent 50
years negotiating after World War II.
Third, this plan loses revenue. The nonpartisan Tax Policy
Center estimates that it loses $3 trillion over 10 years.
Although the border adjustment feature raises revenue, that
revenue is simply borrowed from future taxpayers since trade
deficits eventually turn to surpluses. Also, there is no
intellectually coherent rationale for a lower rate on business
income under this plan. Instead, the lower rate will cause
revenue loss, as wealthy individuals mask labor compensation as
business income.
Fourth, the plan is regressive at the proposed rates. The
plan benefits the top 1 percent with a tax cut 1,000 times
larger than the tax cut for the bottom 80 percent. Yet this
plan follows several decades of increasing income inequality
and middle-class wage stagnation. It used to be that income
growth was higher for the middle class than for those at the
top, but in the past 35 years, there has been very little
income growth for the bottom 90 percent of the population.
Because of these trends, tax policy should be moving in the
opposite direction of the Ryan-Brady plan.
Fortunately, there are good alternatives to the Ryan-Brady
plan. Congress should focus on a revenue-neutral reform that
reduces the rate, but also eliminates loopholes. Most helpful
would be repealing deferral, taxing offshore earnings in full.
This will solve our huge profit-shifting problem and end the
repatriation problem, but without the negatives of the Ryan-
Brady plan.
Making our tax system compatible with the global economy is
an important goal. We need a simpler corporate tax system that
actually collects the tax that is due at a reasonable rate.
Even more important, we need a tax system that reflects the
real struggles of the middle class by giving tax cuts that are
larger for the middle class than for the rich.
We should also work to solidify the fundamentals that are
crucial to competitiveness. This requires responsible tax
legislation with enough revenue for the priorities and
education and infrastructure that we need.
Thank you for inviting me to testify today. I look forward
to your questions.
[The prepared statement of Kimberly Clausing follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Chairman BRADY. Thank you. And thank you all for your
excellent testimony. We will now proceed to the question-and-
answer session, and I will lead off.
So, Dr. Lindsey, based on your economic analysis, you see
in the blueprint significant acceleration of growth, greater
than even the Reagan reforms, which you know quite a bit about,
but you see all this growth reflected in higher wages, which is
exactly what we want to see with tax reform and why we need tax
reform now.
And you have heard Mr. Cornell eloquently express concern
the border adjustment element could result in higher prices for
consumers and increase costs for retailers like Target that
import a lot of the products that they sell. We don't want to
see that happen.
Can you explain why you don't think that will be a result
of the border adjustment provision and, more broadly, how
increased wages can help grow the economy, including for
importers, who are an important part of our economy?
Mr. LINDSEY. Absolutely, Mr. Chairman. I learned that time.
First of all, why will wages at this point increase? I
think there are two elements, some of which are neglected in
the long-run analysis, and that is the particular point of the
business cycle that we are at right now. We are labor-
constrained, but because of the free flow of goods into this
country, effectively, we are not capital-constrained.
Now, if you have growth at this point and you keep that in
place, what you are probably going to have is higher wages, but
the cause will be a less competitive situation. I think what
you will end up with is either an inflationary push, or you
will have a recession, or possibly both. This is a very, very
difficult time for the Federal Reserve, and I think they will
actually be making the decision.
The only way you can extend this expansion, which, although
anemic, has been going on for 8 years, the only way you can
extend it once you get to full employment is to also increase
the supply side of the economy. Because what you are basically
doing right now is you are driving up and you are about to hit
a brick wall. And I think what you have to do is you either hit
the brick wall or you move the wall. And I think what this bill
will do is move the wall. That will allow wages to rise as we
continue to expand jobs at full employment.
I think any measure of how much wages will go up absolutely
swamps any other distributional considerations. I think we will
actually see for the first time in 50 years, actually for the
first time since the Kennedy tax cut, a reduction in the
measures of inequality we have.
Chairman BRADY. Thank you, Doctor.
Mr. Simon, you are a strong advocate for the retail
industry, because of your work experience. You also have a
passion for bringing manufacturing back to the United States,
which will revitalize our local communities. And, as you say,
with supply chains that are local, that will shorten lead
times, lower transportation and transaction cost, but it will
grow a middle class that is sustainable.
So your experience with global supply chains, can you share
your thoughts on what kind of manufacturing capability and jobs
can return to the United States; and, as part of that, how can
manufacturing and retail work together, partner with us to make
sure this tax reform works well for them?
Mr. SIMON. Thank you for the question, Chairman.
Based on experience, and we have had early successes with
the Walmart program, and the early successes in repatriation
were new lines at existing factory and reopening of old
facilities that had closed. Investors in companies have been a
little bit hesitant to spend major capex needed for a
transformational change, and hopefully, this will bring that
forward.
In order for the transformational change, we need some of
the things that have been talked about today. Access to all the
capital that is stashed offshore invested in the U.S. would be
a huge boon for manufacturing. The expense versus depreciation
issue would help, although for some small businesses you should
potentially consider an either/or option. And, as the ranking
member said, workforce transformation is really, really
critical, because that is a limiting factor today.
Retailers need to do some things too. The way the P&Ls are
structured and incentives are structured aren't aligned to
think. We have been trained over 30 years to behave the way
that we behave. An example of that would be imported goods. A
retailer has to order a year ahead of time nearly and then take
possession FOB at the foreign port, and they are on the water
for up to 3 months. So a year lead time, 3 months you own the
product where your cash is not doing anything for you.
Domestic products, when you order and the lead times could
be as short as 14 or 16 weeks and you take possession when it
hits your distribution center. So the cash flow is different.
But most companies in their model don't incent buyers on cash
flow; that is a Treasury function. It isn't until you look at
the whole picture holistically that you start to realize that
this can and does make sense.
And we can expect products to come back in this order, and
we did this work: Large, heavy, big items, heavy cube items
first, like furniture, lawn furniture can come back now once
the plant's in place. With some of the changes you make, the
line will go down. There are some products today that the
economics don't suggest they could come back. Small items like
microchips in some cases or heavy labor items like cut-and-sew
apparel could be challenging.
But if we do the work, it is worth it. And I have toured
towel factories in Georgia and bicycle factories in South
Carolina where you can see the difference that it makes in
people's lives. And more so, you can see the excitement and the
energy and the transformation that occurs in the communities
when these plants open, and it is worth every bit of the
sacrifice that it might take to get there.
Chairman BRADY. Thank you, Mr. Chairman.
I now recognize the distinguished member Mr. Neal for any
questions he might have.
Mr. NEAL. Thank you, Mr. Chairman.
Professor Clausing, as I mentioned in my opening statement,
my priority as well as the minority's position here is in
support fully of middle class relief. Would you talk a little
bit about your ideas for what we might do with the Tax Code
that would help with the middle class growth and aspiration?
Ms. CLAUSING. Absolutely. One of the key things we can do
with the Tax Code to help the middle class is to expand tax
relief to the middle class at a greater rate than for the rich.
I also think expanding the earned income tax credit is a
crucial policy tool. It rewards work for some of the people in
our society who most need help with their wages. Those two
would be great contributors.
I also think it is important to avoid tax changes that
raise the deficit, because that hurts future generations of
taxpayers and the fundamentals of our economy.
Mr. NEAL. Mr. Cornell, you seem to be a bit skeptical about
the argument over dollar appreciation. Do you want to talk a
little bit about that?
Mr. CORNELL. You know, we have spent a lot of time looking
at this issue, and I am certainly not an economist. I am not a
currency expert, but we have been studying what some of the
experts have been saying. And, as you might know, there are
very different opinions.
I have talked to many of our economists, economists at
Goldman Sachs that support us. Their economists have been,
there should be grave doubts that exchange rates will smoothly
offset the effects of the border adjustment. We have been
listening to Fed Chairman Yellen. Her quote was: The problem
is, there is great uncertainty with how, in reality, markets
will respond to these changes.
We worked very closely with the lead economist and FX
trader at Bank of America, David Woo. He talks about this being
the most difficult thing to forecast, and to build an
intergenerational tax reform plan based on these assumptions of
what FX will do is somewhat of a laughable notion.
So when I read comments and read reports like this, and
think about the impact this can have on our business, on
American families, I worry about the impact on those families,
who for basic essential items, for clothing, for back-to-school
essentials, for those basic family essentials, as we looked at
it, would be paying prices that could be 20 percent higher.
So we have certainly looked at the currency adjustment. As
we run our models, we factored in some currency appreciation
and capture rates. But every time we run the models, we come to
the same conclusion: Americans will pay more for basic
essential items that they need today. And we don't think that
is the right thing for American families, and I have a sense
that many of you would agree with that.
Mr. NEAL. Professor Clausing, who might be the winners and
losers as a result of the border adjustment tax?
Ms. CLAUSING. I think the big losers would be import-
intensive industries and the workers in those industries and
the consumers of their products, mostly because of this
uncertainty about the exchange rate.
Many countries have fixed exchange rates. Much trade is
priced in dollars. And, you know, as just mentioned, the
exchange rate is very difficult to forecast. It is a $5-
trillion-a-day market, 88 percent of which is in U.S. dollars.
So we aren't sure the exchange rate is going to appreciate and,
absent that, the import-intensive industries would be really
hurt.
The export firms could win, but they also face some risks
here, in terms of possible retaliation from trading partners
and the like. So I would be happy to elaborate on those if you
like.
Mr. NEAL. If you want, you have another minute.
Ms. CLAUSING. So, for instance, if we lose in the WTO,
which most trade law lawyers think that we would, that will
cause retaliation by our trading partners, and they would be
authorized to have historically very large tariffs, enough to
reduce U.S. exports by hundreds of billions of dollars. This
has given a lot of exporting firms pause in thinking about the
benefits of this proposal.
Another major downside for them is that they may not show
tax liabilities under this proposal, but if the exchange rate
adjusts, they would be due a credit back from the government.
However, the plan doesn't include enough to fully offset these
losses.
So they will find that they aren't able to use the losses
that they are showing, which might lead to some silly outcomes,
like ADM merging with Target. And it is not entirely clear that
we want the Tax Code to induce those types of mergers, just
because ADM can't use their losses and Target can.
Mr. NEAL. Thank you, Mr. Chairman.
Chairman BRADY. So, for the record, I am assuming ADM is
not merging with Target. We can pretty much go with that today?
Mr. CORNELL. You can go with that today. Chairman BRADY.
Thank you, Mr. Cornell. Mr. Nunes, you are recognized.
Mr. NUNES. Thank you, Mr. Chairman.
Dr. Lindsey, thanks a lot for being here. I just want to
ask you, Chairman Brady talked about this in his opening
statement, but it is interesting that the one thing that the
United States, Mali, Libya, Syria, Iraq and Afghanistan and
North Korea have in common is what?
Mr. LINDSEY. That we don't have any border adjustment.
Mr. NUNES. We don't do border adjustment. All the other
major countries in the world do. I am going to come back to
you, Dr. Lindsey, but, Mr. Simon, I know that you formerly
worked with Walmart. You were a global company, so you operated
in many of these places that weren't North Korea, Iraq, Syria,
Mali. I think you have places--your big markets are where,
Canada, Mexico?
Mr. SIMON. Correct, U.K., China.
Mr. NUNES. U.K., China. In any of those countries, because
they border-adjust, did you pay anywhere close to a 70 or 80 or
90 percent tax rate?
Mr. SIMON. I don't have that information at my fingertips,
but my inclination is no.
Mr. NUNES. Dr. Lindsey, I will come back to you. In your
opening statement, at the very end of your opening statement,
you didn't get a lot of chance to expand on it, but the one
economist who is your rival who disagrees with the exchange
rate, could you go into that, how he only came up with a 1
percent change in price?
Mr. LINDSEY. Sure. Again, the consensus of the economics
profession is that simply supply and demand is going to cause
the dollar to appreciate. And their estimate, which is actually
very much in the low end, was that the appreciation would only
be 65 percent of what one would expect in terms of full
appreciation. And if you plug that number into the model, what
you are going to end up with is a total increase in consumer
prices of just 1 percent, not 1 percent a year, 1 percent
altogether.
Now, I know there are some concerns that have been
expressed about the pace of it. The first thing I would point
out is that markets move ahead of reality. That is how they
make profits is market makers move quickly. So I wouldn't worry
about things being delayed.
The second point I would make is, yes, some countries have
administered exchange rates, notably China, but, if anything,
an administered currency exchange rate is something that is
quicker to move. And, in fact, the Chinese, as soon as November
9th, when it appeared that something like this might actually
have a good chance of moving, the Chinese began the
depreciation process quickly. They speeded it up.
Now that the market thinks that it is less likely, they
have tended to slow it down. So I wouldn't worry about the
administered exchange rate argument, because I think, actually,
they will be the first to move their exchange rates.
Mr. NUNES. And you have worked on this, obviously, for a
long time. And can you talk about the WTO argument, which is
one of the main objections to this? Can you walk us through
that?
Mr. LINDSEY. Congressman, when you say a long time, you
mean it. I think you were seven when I first started working on
it, so that is a long time. I have worked on it in every
administration. I am going to be very candid. The WTO is
dominated by Europeans. There is no question about it, most of
the rulings are pro-European. And yes, it is an international
body and we should respect the international body, but we
should recognize that prejudice.
That is why European-style tax systems, one reason why
European-style tax systems all had border adjustability
declared legal. Now, there are technical arguments, and I would
acknowledge that there are both lawyers and economists on both
sides of this issue. I suspect that not even the WTO would be
so boldfaced as to say it is okay for Europeans to do this, but
not for Americans to do it.
It is such a transparent recognition of their bias that I
don't even think they would do that. Now, if they were then I
think maybe we should reconsider our situation with the WTO,
but I don't think that is going to happen. I just don't think
that is logical.
Mr. NUNES. So with the 30 seconds I have left, Mr. Lindsey,
can you walk us through kind of maybe a possible phase-in
approach of the border adjustment?
Mr. LINDSEY. Yes. I mean, I get that 20 percent is a big
leap, and I can understand the issue of uncertainty very well.
I think one way of addressing that is to just do a portion
of it. The first thing I would make sure I did was in the short
run, maybe a year or two, you might want to say all dollar-
based contracts are deemed to be domestic.
But secondly, I think--so phase it in, say, 30 percent.
Have only 30 percent of exports and imports involved. I don't
think anybody thinks that a 6 percent border adjustment is
going to, you know, ruin the world. It is not going to cause
the retail industry to go out of business. So sure, let's try
it. Let's try something minor.
Chairman BRADY. All time has expired. Mr. Levin, you are
recognized.
Mr. LEVIN. Thank you.
Welcome. I don't want to focus on this, Mr. Lindsey, but as
someone who worked here with the WTO on like cases, I think
there is a deep distinction between a VAT and a border
adjustment tax, and I think we lost cases before the WTO and we
would likely lose this one, with some very serious
implications.
And I have worked on this; we lost the cases twice that had
some similarities. We need tax reform, but I think we need to
step away from some of the mythologies. By the way, one is that
the vague benefit in terms of income growth will come from a
further income tax break for the high-income.
And I would like to have introduced into the record a paper
by Owen Zidar, who says: Stimulative effects of income tax cuts
are largely driven by cuts for the bottom 90 percent, and that
the empirical link between employment growth and tax changes
for the top 10 percent is weak to negligible over a business
cycle frequency. I would like that to be entered.
Chairman BRADY. Without objection.
[The information follows:]
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Mr. LEVIN. Okay. Now I want to talk about manufacturing.
The chairman used a few examples. And no one cares more, I
think, about resurgence of manufacturing than I do; but the
examples that you used of steel, that happened because China
rigged its currency, because of their State-owned enterprises.
It was not related in any real way to our tax system or theirs.
The same is true of your reference to the automotive
industry and the movement of auto parts and vehicle assembly to
Mexico. It wasn't because of our tax systems; it was because of
the huge differential in the cost of labor. And in both case,
the Republican majority, both as to steel and as to auto parts,
refused to address trade-related issues that impacted on the
loss of manufacturing jobs.
Now, let me just try to get to one of the nubs. I want to
ask Professor Clausing this: In Mr. Lindsey's testimony, he
reiterates an argument made by proponents of a BAT, namely,
that U.S. companies are now disadvantaged when other countries
operate under VATs with rebates for their exports.
Two conservative analysts from Cato and George Mason have
suggested this claim is false, saying the real issue is whether
the playing field is level in a given market. They point out
that if a U.S. company and a German company sell a product in
Germany, both firms pay a VAT and corporate tax. If they sell
in the U.S., both pay just a corporate tax. In other words,
companies selling in the same market are treated the same.
What is your view of this issue?
Ms. CLAUSING. I absolutely agree with that
characterization. And the designers of this tax, who are
economists, also agree with that characterization. The VAT
doesn't create on unlevel playing field across countries. And
so the Made in America tax concept is little bit misleading.
Put simply, imagine an American firm selling a good in France.
If the American firm sells it in France, they pay the French
value added tax, but so the does the French firm. They pay the
U.S. corporate tax, and the French firm pays the French
corporate tax. So they are treated the same. If the two firms
instead sell in America, neither of them pay a value added tax,
but they both pay their corporate taxes at home. So we already
have a level playing field with respect to those taxes. And
that is why the Cato person that you cite agrees with that, but
also Alan Auerbach and Mike Devereux, and others who designed
this tax, would similarly agree with that.
Mr. LEVIN. Okay. This is one of the gists of the argument.
And I think as we talk about substance, both on manufacturing
but also on the BAT, we need to really look at the realities.
There may be a difference in the corporate tax structure in
Europe and the United States, and, therefore, there may be some
differential. It may not be entirely level. But in terms of
each paying the same kind of taxes, it is the same. I yield
back.
Chairman BRADY. Thank you.
Mr. Reichert, you are recognized.
Mr. REICHERT. Thank you, Mr. Chairman. Welcome, and thank
you for your testimony today.
Like our witnesses last week, you have all made it very
clear that we are behind in global competition, that the Tax
Code is holding our businesses, farmers, and workers back. And
we all know that given half a chance, our American workers will
always exceed and win, from the apple grower in Eastern
Washington, to the manufacturer on the west side of the
mountains south of Seattle.
We all agree that we need tax reform. The devil is in the
details. And your testimony today has been very educational and
helpful to me, I know for sure. But this is our chance to build
a competitive Tax Code that leads to increased growth, higher
paychecks, and greater opportunity, and I know Mr. Neal said
ease the financial burden of the middle class. But we are more
interested in not just easing the financial burden, but
providing job opportunities and economic growth. I mean, we
want to think big and move forward, look to the future.
So I want, Mr. Luciano, please, if you could discuss
further how the international tax system impacts your company's
domestic/international operations, and with the modernized
code, would you invest more in the United States?
Mr. LUCIANO. Thank you for the question, Congressman.
So a healthy agricultural industry is important for us to
be able to feed the world. We will have to feed 9 billion
people in 2050, and that is a challenge in itself. But it is
also important because of the connection with the middle class
and middle America. We are a company that have 32,000 people,
but we have only in our headquarter--global headquarter in
Chicago, we are less than 70 people. The rest of the people are
in small communities, whether it is Decatur, Illinois; Cedar
Rapids, Iowa; Alpharetta, Georgia, those are where the people
are. And we see those communities. And in those communities
inside the country, in small, rural America, there are very
little competitive advantages left. And that is why it is so
difficult to get jobs, and to get industries. One of the
competitive advantages is agriculture.
But the way we are operating today, when we compete in a
global market, if I need to sell to Egypt, and I have the
choice to bring the product from Kansas City, wheat, Kansas
City, or from Ukraine, Ukraine has the opportunity to get the
refund of the BAT. So the Ukraine does not have--they get the
credit for that 20 percent, where the U.S. does not.
So, to me, if you think about one thing to have a
competitive playing field for the farmers in the U.S.--and you
heard my oral testimony, we have lost market share. We used to
be the breadbasket of the world. We have lost it in wheat to
Russia. We have lost it in soybeans to Brazil. We are hanging
to corn, but not for long. So what happened in this period is
that acreage in the United States has been reduced 12 percent
over the last 20 years. While in Russia, production of corn has
improved 61 percent. The planted area of soybeans has increased
by three times.
So all these countries where they have the same competitive
advantage that we have, whether it is, you know, a very good
weather, good soil, and land available, have countered with
policies that actually have been helping those farmers to take
market share from the U.S. So we are not leading any more into
that, and we are slowly declining. As you decline, those
communities that are boosted by agriculture, continue to
decline as well. Because when we go there, we just don't have
an elevator or storage. We buy from the farmers, and the
farmers--and we also have an ecosystem of other companies that
basically supply security to us. They supply, you know, safety
equipment, that they supply----
Mr. REICHERT. Would you invest more money into the United
States?
Mr. LUCIANO. I am sorry?
Mr. REICHERT. Would your company invest more money back
into the United States?
Mr. LUCIANO. Of course. If the farmer would be growing in
the United States. At this point in time, again, we have lost
50 million acres. So we are going to invest if there is going
to be more production. So I think that with the plan like the
blueprint we are considering today, we can see us leveling the
playing field for the U.S. farmer to be competitive in the
world. And that could become, as you guys said before, a magnet
for investment in the U.S. and jobs. And I think that this
blueprint achieves that.
Mr. REICHERT. Thank you.
Chairman BRADY. Thank you. Time has expired. Mr. Lewis, you
are recognized.
Mr. LEWIS. Thank you, very much, Mr. Chairman. Let me thank
all of the witnesses for being here today.
Dr. Clausing, you are the Democratic witness, right?
Ms. CLAUSING. That is correct.
Mr. LEWIS. And you are the only woman on this panel?
Ms. CLAUSING. That is also correct.
Mr. LEWIS. You see a lot of men here dressed in blue suits.
[VOICE]. Not everybody.
Mr. LEWIS. Well, one in gray.
Don't you think it is sort of strange when we are talking
about tax reform, and when women make up more than 50 percent
of the population of America, and you see all of these men
here?
Ms. CLAUSING. Well, there is a lot of strange things about
tax reform.
Chairman BRADY. Thank you.
Mr. LEWIS. Don't you think we should move into the 21st
century as a Nation and as a people?
Ms. CLAUSING. Absolutely.
Mr. LEWIS. Comprehensive tax reform should help the middle
class and working families. Do you think this proposal will
help the middle class and working families.
Ms. CLAUSING. I have several doubts about that. And mostly,
if you rely on the nonpartisan Tax Policy Center estimates, my
biggest concern is that the top one percent get a tax cut that
is about $200,000, and the bottom four-fifths of the population
get a tax cut that is about $200. Now, this $200 tax cut is
nice, but it is not going to go very far if your imported goods
are more expensive, or if you have lost your job because you
are in the retail industry and the exchange rate didn't adjust
as quickly as we thought. Waiting around for an exchange rate
to adjust can take some time, and as Keynes once said, ``In the
long run, we are all dead.'' So I worry a lot about the middle
class given the way that this tax cut is structured.
Mr. LEWIS. You stated in your testimony that business tax
reform should be revenue neutral. Can you explain why this is
so important?
Ms. CLAUSING. Yes. The deficit is an important issue for
several reasons. We have a lot of obligations to our senior
citizens, many of whom are retiring now and will be older in
the coming years. And this means that even on a normal
trajectory, our deficits are going to be increasing due to our
Social Security and Medicare obligations.
So tax cuts, at this point, will make those deficits even
larger, and those deficits can crowd out investment or increase
the size of our trade deficit, both things that this committee
might worry about.
So I think it is important to raise adequate revenue,
because we are going to need that revenue for priorities that
also affect our competitiveness, like infrastructure,
education, healthcare, and the like.
Mr. LEWIS. Thank you.
Mr. Chairman, I would like to yield the balance of my time
to Mr. Doggett.
Mr. DOGGETT. Thank you very much.
So many of our colleagues believe that there is a giant tax
cut rainbow, and at the end of that rainbow is a huge pot of
tax cut gold, that if we can just find the right good tax cut
fairy, everything will be blissful in our country. And because
they believe that, there is no obstruction of justice, there is
no breach of our national security, there is no tweet that is
too outrageous to be ignored, because Donald Trump is viewed as
the key way to find that good tax cut fairy.
We find ourselves here today with more of the mythology and
fantasy that has characterized this debate from the outset.
Now, I agree 100 percent with the chairman that we should
be supporting a pro-growth tax policy to grow jobs in this
country.
The problem is the so-called better way, as self-styled,
does not do that, and it does not even come close. It is a
better way to get more national debt. It is a better way to
widen the income gap and disparities that are already out
there. And without the border adjustment tax, which is already
on life support, the remainder of the territorial system here
will only grow jobs overseas as it advantages multinationals
over small territories.
And how amazing to hear that the policy we need to follow
from the Tax Foundation is to achieve the type of system
Estonia and Latvia have. Who knew that that was the approach to
success here? Well, Estonia and Latvia, in the time that they
have had that, over in the last 3 years, have never grown more
than three percent. And we are told that under this magical tax
fairy approach, we will achieve over 5 percent growth. It is
mythology in action.
Chairman BRADY. All time has expired. Mr. Roskam, you are
recognized.
Mr. ROSKAM. Thank you, Mr. Chairman.
Three observations, and a question for you, Mr. Simon.
Observation number one: Mr. Neal observed that there is no
small business here, and yet on Thursday, it is no myth, there
was a small business here; Mr. Mottl, from the Chicago area,
who testified two or three times in a competitiveness hearing
how in favor he was of border adjustment. It was very powerful
testimony. You can look at the record. Point number two: It is
interesting, we are an hour and 20 minutes into this hearing
and no witness, no member of this body, has mentioned the myth
of $1700 negative impact on average, middle Americans that has
been running on television ads, criticizing the border
adjustment tax. Really interesting. And I commend the critics
of border adjustment today not using what factcheck.org called
baloney.
Third point: Professor Clausing was pretty dismissive--I
mean, listen, we are all in the advocacy business--but was
pretty dismissive of this WTO question. And I just think we
have got to be sort of measured and sobered, because she made a
claim that this will inevitably lose before the WTO, and then
quickly, in the testimony, was, like, tripping us down into the
valley of retaliation. And I thought it is important to
recognize that the Director General, Alberto Acevedo, of the
WTO, has noted that there is lots of gray areas in the WTO
rules. And he has declined to speculate. And we are working
through these details. And we are mindful of the criticism.
But, surely, we don't need to be just coming to the conclusion
that this is not compliant.
Mr. Simon, I think you are the most interesting person here
today. You are the most interesting person here today because
you have got the value of actual perspective. And you have made
some very strong claims. You said this in the best interest of
our country, if properly implemented. That is an incredibly
strong claim.
You said: If we do the work, it is worth it. The change in
American sourcing becomes increasingly viable. I mean, there is
an aspiration there.
Look, one point--and then I am really interested in your
viewpoint as somebody who has run, arguably, one of the biggest
retail operations on the globe, why doesn't this create fear
and loathing in you in the way that it does Mr. Cornell and
others? Why do you say, no, no, no, this is a good thing. I
know this system. This is a good thing.
Here is one point: We haven't discussed the nature of the
companies that are leaving today. So in Chicago, for example,
when Aon left, where did they go? They went to the U.K. They
are going to our best friends. When Burger King left, they went
to Canada. They are not going to some tax haven.
Walgreens tried to make a jail break not long ago. They
weren't successful based on the politics.
But it seems to me, like our Tax Code is an island that is
dissolving underneath us. Dissolving underneath us. And we have
got an opportunity for a transformational moment. What is the
transformational moment, Mr. Simon, that we should seize? Why
is your insight so helpful? And what assurance do you have for
people who have no interest in having an adverse impact on
middle class families? Why is this a boon?
Mr. SIMON. My view is not too dramatically different from
what Mr. Cornell just described, or the retail industry. The
concerns that they have are real. And if we can address those
with an implementation mechanism or a safety net of sorts or
a----
Mr. ROSKAM. A transition.
Mr. SIMON [continuing]. A transitional plan for them, on
the other side of this, it will be very, very good for the
country. That is the point I came here to say today. I don't
want to ignore, nor bulldoze their concerns. Because improperly
implemented, it will be very, very hurtful for the industry and
the consumer.
But if we take the time and do the work, and sit down in a
group and iron out, lay out, what it will look like, I think it
will be very, very successful for U.S. manufacturing. Once the
middle class jobs start to return to the country, and the wage
increases that would come with that, retail will start to see a
new sort of resurgence and a period of growth.
Right now, the wind is coming out of retail sales because
the wind is coming out of the middle class. And the points
about the bifurcation of income have been well-documented.
There just aren't enough people on the high-end to keep all the
retail locations that we have going, and that is why they are
struggling.
But if we can rebuild a middle class through a
manufacturing base, retail, in the long run--and I know
everybody is dead--but in the long run will be better.
The question is, how do we get to the long run? And that is
what I would like to get to discuss.
Mr. ROSKAM. And I think a smooth transition is key. Thank
you, Mr. Simon.
Mr. CHAIRMAN. Thank you. Time has expired. Mr. Doggett, you
are recognized.
Mr. DOGGETT. Well, thank you, very much.
I guess we do just have a basic disagreement. In referring
to America as a prison break, America is not a prison for
American business. We have some of the most competitive
businesses in the entire world.
And to refer to it as a prison break, is also wrong in that
the reason these companies have suddenly renounced their
American citizenship and gone abroad, in many cases is because
of the consistent refusal of our Republican colleagues to
support measures to put a stop to it. They won't close the door
to those who want to do their business here in America and head
off to Ireland, or the Bahamas, or the Cayman Islands. And Dr.
Clausing has some impressive data about that that I would like
to explore.
Additionally, we have already seen the path, the rainbow,
to the pot of gold followed once in this committee already,
with the results that will be achieved if we do it a second
time. And that is on the so-called ObamaCare repeal, which was
really nothing but a $1 trillion tax cut that rewarded certain
special interests like pharmaceutical manufacturers, and
dramatically, again, widened the income gap by giving the
benefits to those at the top rather than to the middle class.
Of course, we don't know exactly how much it did that,
because it was rushed through this committee almost overnight.
And we still don't have a score from the Congressional Budget
Office for that ill-advised proposal. Even though they rushed
it through, it is still sitting on the Speaker's desk. They
weren't in such a rush they sent it over to the Senate for
action.
Let's focus on the propaganda and mythology associated with
today's proposal, the so-called Better Way.
And one of the big aspects of the pot of gold that is out
there waiting for us is $2.6 trillion that is just dying to
come back to America if we will treat it right.
Dr. Clausing, I would like to ask you about this $2.6
trillion in so-called stranded offshore earnings that could
allegedly do so much good in creating jobs here in America. Is
it true that much of that money can already be invested in the
U.S. economy without those multinationals paying a dime of tax
on it unless they earn money from their investments here?
Indeed, aren't a substantial portion of that $2.6 trillion,
isn't it already being held in Wall Street institutions right
here, onshore, within the United States?
Ms. CLAUSING. Agreed. Yes. Much of that money is booked
offshore for tax purposes, but it is still invested in U.S.
assets through U.S. financial institutions.
There are limits on what firms can do with that money. They
can't give it back to their shareholders as dividends or as
share repurchases. And this is why they are very anxious to get
that money back. But they can still borrow against those funds,
and the firms that have those funds abroad are some of the most
creditworthy firms, you know, on the planet, and they have no
trouble financing new investments.
Mr. DOGGETT. And your paper shows that they, in fact, earn
millions, if not billions, of dollars in interest and dividends
right here in the United States on their offshore earnings
today.
Ms. CLAUSING. That is correct.
Mr. DOGGETT. Now, you mentioned the fact that they would
like to have this money back not to create jobs but to give
higher earning executives even more high earnings and to give
their shareholders dividends and stock buybacks. We have had a
little experience with that before. And it is just really
appropriate that former Chairman Thomas was here. Because he
was the author pushing through this committee what was called
the American Jobs Creation Act of 2004.
How many jobs did that bill that this committee heard much
of the same rhetoric that we are hearing in support of this
measure, how many jobs did that bill create?
Ms. CLAUSING. My understanding is that all economists who
have looked at that bill found that it didn't create a single
job or cause a single investment, and this includes some people
who advised George W. Bush, who also looked into this. That
money was used for dividends and share repurchases and some of
the firms that repatriated the most money actually laid off
workers. It is possible it did have a small job creation affect
for lawyers and accountants because there was a lot of
complexity in the bill as well.
Mr. DOGGETT. We were told by the chairman, follow the
example of the Tax Foundation, follow Estonia and Latvia and
their tax policies. Do you think our companies will be more
competitive if we adopt the Estonian and Latvian approach to
international taxation? Are they competitive today in the
international market?
Ms. CLAUSING. As the slides I showed earlier indicate, they
are quite competitive. We have profits these days that are 50
percent higher than they were in prior decades.
Mr. DOGGETT. Thank you.
Mr. CHAIRMAN. Thank you. Time has expired. Mr. Buchanan,
you are recognized.
Mr. BUCHANAN. Thank you, Mr. Chairman. I also want to thank
all of our witnesses for being here today.
Dr. Lindsey, let me ask you: I think you have had as much
to do with the blueprint as anybody. The economy is growing an
anemic 1 percent, on average 1\1/2\ percent the last 10 years.
I guess you have got to go back in the 1950s where it is only
grown at that percentage. But what is your thoughts, when you
talk about growing the economy and this plan from 3, 3\1/2\, 4
percent, I don't want your number, but I heard 3\1/2\. On what
basis, and what are the drivers that is going to drive it up
from 1, 1\1/2\ percent, to 3\1/2\?
Mr. LINDSEY. Sure.
There are two steps here. The first is what I would call
long-run capacity. Auerbach and Kotlikoff, for example, have
the same long-run number that I do, which is 2.7, 2\3/4\
percent.
However, to get to that capacity, we are likely to have a
short-term increase in business-fixed investment. That is
actually the demand side of the proposal. That is going to
stimulate the economy in the short run. I think this is a very
high multiplier tax cut in that regard. And that is how I got
to the numbers that I got to. There is both a long run and a
short run component.
Mr. BUCHANAN. Let me ask you another question. One of my
concerns--and I have heard other people express it--is the idea
of budget deficits. When we came here almost 10 years ago, it
was $8 trillion and change; today it is $20 trillion. At some
point, it ends badly. That is why I am a believer, like 49 out
of 50 Governors, have a constitutional balanced budget
amendment. But what does this do to our deficit long-term? I
mean, ideally, with the growth, it should be somewhat revenue
neutrality, ideally. What are your thoughts on that?
Mr. LINDSEY. Yeah. Though I scored out the long-term debt
situation, I think on an annual basis, the blueprint breaks
even about in year 6, and I think that by year 12, the total
cost of the deficit--excuse me, deficit cost of the bill will
be covered.
So long run, very long run, I think it is a positive. And I
think that it is essentially a revenue-neutral bill over 12
years.
Mr. BUCHANAN. And my last question is on inversions. We do
have a lot of great companies leaving America. I would like to
think that as a part of our tax planning, this could be the
best place on the planet to do business in terms of a pro-
growth tax policy where they are not moving their tax havens;
they are moving to our friends in Canada and Great Britain
where they have cut their rates. In fact, I read--someone said
The New York Times--that the inversions in Great Britain have
come down dramatically, or pretty much quit. What is your
thoughts in terms of that?
Mr. LINDSEY. I think it is important that we differentiate
between the inversion piece and the offshore money piece.
I listened to Mr. Doggett's comments carefully, and there
is actually one component in which I think he is correct, and
that is, that the money so-called kept overseas is in
international markets. And I know a lot of people have said,
Oh, let's use that for infrastructure, things like that. I
think it is in international markets already.
However, the tax revenue associated with that has not come
to the U.S. Treasury.
My colleague here estimates that the annual cost of that is
$100 billion that is being lost to the U.S. Treasury. This bill
fixes that. In addition, if you have a one-time deemed
repatriation, depending on the rates you select, you are liable
to get perhaps as much as $200 billion. I don't know what the
actual number is, depends on your rate. So, yes, the money is
in international markets. But the taxes on that money is not in
the U.S. Treasury. It should be, and the bill under
consideration will do that.
Mr. BUCHANAN. The other thing I have watched--I have been
in business for 30 years before I got here--is that people will
move to different States; Florida, no State income tax; Texas;
Nevada. You can name the States. They will move and move their
businesses to other States, and it is the same thing in terms
of moving--in terms of inversions and other things. Not
everybody, but some. It is a major consideration and major
driver. Don't you agree?
Mr. LINDSEY. Absolutely. The best thing we can do, long
run, for workers, for everyone, is to make America the best
place in the world in which to invest, and start a business,
and hire people. And I think this bill does that.
Mr. BUCHANAN. Thank you.
Mr. CHAIRMAN. Thank you.
Mr. Thompson, you are recognized.
Mr. THOMPSON. Thank you, Mr. Chairman. And thanks to all
the witnesses for being here.
Mr. Chairman, I have two articles that I would like
unanimous consent to place into the record. One is out of The
New York Times that points out that after eight years of steady
growth, the main economic concern in Utah, and a growing number
of other States, is no longer the lack of jobs, but a lack of
workers. And it goes on to explain this shortage. I would like
to have that----
Mr. CHAIRMAN. Without objection.
[The information follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Mr. THOMPSON. And then the second one is a Wall Street
Journal article that explains, I think beautifully, the point
that Mr. Doggett was making as to what companies who
repatriated moneys from overseas spent that money on. And I
think it hits those points exactly. And I think Mr. Doggett was
correct. I would like to have that put into the record.
Mr. CHAIRMAN. Without objection.
[The information follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Mr. THOMPSON. Thank you.
Ms. Clausing, you mentioned in your written testimony that
the border adjustment tax would raise revenue, but that that
revenue was ultimately borrowed from future taxpayers. I want
to make sure that people at home fully understand what this
means, and how it is going to impact their pocketbook. Can you
elaborate on that a little bit, please?
Ms. CLAUSING. Sure. At present, we run a trade deficit. And
because of the size of that deficit, that means that when you
tax imports and exempt exports from taxation, on net, the
border tax will raise revenue, and the Tax Policy Center
estimates it is about $1 trillion over 10 years. But no country
can run a trade deficit forever. Trade deficits entail a flip
side, which is borrowing from foreigners. It is equal and
opposite to the size of the trade deficit.
So, eventually, when we repay that money, we will also be
running a trade surplus. In those years, the import tax will
raise less revenue than the export exemption costs the
Treasury. So in the future, our taxpayers will actually lose
money from the border adjustment. So that means that,
basically, what we are getting from that is revenue that we are
borrowing from future generations.
Mr. THOMPSON. I had someone come in and talk to me the
other day about the effect that the border adjustment tax would
have on their business. They are a company located in
Washington.
They make $30 million a year, employ 4,000 employees. What
they sell, they buy from 31 other countries. They are items
that wouldn't be made in this country no matter what we do.
There is a very low markup on this stuff.
And they told me if the BAT comes about, that they will go
from making $30 million a year to losing $130 million a year.
In other words, this Washington State company would close the
doors, five-generations-long company, would close the doors.
And I think that is something that we need to be concerned
about. But the other side of that--and it has really become--
made clear today is our constituents, those consumers that buy
those products--and there is a couple of companies represented
on the dais today that represent companies that those consumers
that buy those products, they are going to be hurt. And that is
exactly, I think, what it is that Ms. Clausing is talking
about. So your consumers, our constituents, are going to see
their prices go up.
There was also--Ms. Clausing made the point about the WTO
impact.
How would this play out? When would we see this happen? I
represent a district that imports a lot of products overseas. I
represent wine country in California. And whenever there is a
discussion about anybody retaliating, it doesn't take long
before that conversation comes back to U.S.-exported wine.
So can you tell me what our constituent companies are going
to experience if retaliation becomes a reality?
Ms. CLAUSING. Yeah. So our trading partners are already
preparing suits to be filed with the disputes settlement
mechanism of the WTO. This dispute settlement mechanism, by the
way, is something the U.S. helped negotiate, and it is
something that serves our interests very well because often the
WTO will rule in our favor about disputes that we have too. The
WTO has over 160 member countries, and it supervises a well-
functioning trading system. But once they authorize that our
tax is a direct tax, which it is, and thus it violates the WTO
obligations, that then gives the green light to trading
partners to retaliate in an equal and opposite fashion. And
because of the size of this, that will entail large tariff
burdens.
Mr. THOMPSON. Thank you very much.
Chairman BRADY. Thank you.
And without objection, I would seek to place in the record
the Goldman Sachs report that estimates that with no
appreciation of the dollar, 85 percent of industries have
actually cut their prices, still maintain their current profit
margins, and with the dollar even partially adjusted, likely no
industry would need to raise prices. Without objection.
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Chairman BRADY. Mr. Smith, you are recognized.
Mr. SMITH OF NEBRASKA. Thank you, Mr. Chairman. And thank
you to our witnesses here today for sharing your perspective
and insights. I think this is an overdue conversation that we
need to have, and I think a constructive moment here as we do
sift through the facts. And I just think that the status quo
with our Tax Code shows that we have great opportunity to
change it, to be bold, and to truly pursue growth-oriented
policies.
Representing agriculture, the number one agriculture
district in the Nation, certainly we are pretty good at
exporting things already. I don't want to jeopardize that. But
I also am concerned that there actually are still significant
barriers.
And, Mr. Luciano, you stated that there are some barriers
that are still out there that you feel that the tax proposals
that are being made would be helpful in overcoming some of
those obstacles.
I am also concerned when I hear Professor Clausing say that
U.S. multinationals are not paying very much tax, and that the
tax rates proposed in the tax reform plan are too low, and that
a better reform would be to expand the U.S. worldwide tax
system by eliminating deferral. And now imposing immediate
taxes on U.S. companies' worldwide income, I believe, would
move our country in the exact opposite direction as our trading
partners, and I think a lot of the facts would point to that.
But, Mr. Luciano, can you talk about your perspective?
Obviously, it is a pretty broad perspective. I know you
depend on ag producers, one at a time, being successful,
hopefully, on their productivity, their efficiency. Can you,
perhaps, expound on how you think that this plan might help and
that also perhaps some of the notions that imposing immediate
taxes on U.S. companies' worldwide income moving our country in
a negative direction?
Mr. LUCIANO. Yeah. Thank you for the question.
This is all about balancing the playing field. When we
compete with the other companies, other global grain companies
that are as well capitalized, or they have the same technology
as we have, and experience that we have, as I said before, we
pay about 30 percent. I have two of them that pay in the low
20s, the rest in the mid teens. So that is the kind of
difference. And in agriculture and the business we are in,
business models are very similar. So it is very similar to
compare these. So there are no major differences in our margins
because the trade of commodities are very thin. So these
differences in income tax are astronomical in putting ADM, at
this point, at a disadvantage to other competitors around the
world. And then they have the flexibility to move their
earnings and invest wherever they want, which, you know, we are
partially restricted to.
And the third point is that a lot of their exports are
coming from countries that they refund the BAT. If you look at
Ukraine provides 20 percent refund of BAT. Argentina, 10
percent. Germany, 19 percent. And then you have places that
compete with us, whether it is Australia, Canada, or Brazil,
that basically have internal consumption taxes that they are
not assessed for exports. So there is no wonder that our market
share of global commodities from the U.S., exported to the
world, is declining, and it is going to continue to do so
because we are at a disadvantage.
So, to me, this proposal addresses those three issues,
where they are going to get jobs back to middle America, and to
the middle class of America, through agriculture, which is, I
think, one of the true competitive advantages of the U.S.,
inside the U.S., the middle of the U.S., still have.
Mr. SMITH OF NEBRASKA. Thank you. I know that there are
many challenges facing agriculture, and I would hope that we
would not complicate matters and that hopefully a growing
economy will also help agriculture.
Ms. Clausing, I think you suggested--but correct me if I am
wrong--that perhaps the corporate Tax Code that we currently
have is really not that bad.
Now, I thought that perhaps some lower hanging fruit in
terms of agreement on changing our Tax Code would fall in that
corporate category. But am I wrong in----
Ms. CLAUSING. You are wrong. I mean, I think that most
economists across the political spectrum think that there is
ample room for a fair improvement to the corporate tax system,
and I suggested some alternates in my testimony.
Mr. SMITH OF NEBRASKA. What would that look like?
Ms. CLAUSING. But I believe it would include, potentially,
a lower rate, but combine that with closing the loopholes that
we have presently. Right now, some of the domestic firms pay,
you know, much higher rates than these mobile multinationals.
Mr. SMITH OF NEBRASKA. Thank you.
Chairman BRADY. Thank you.
Mr. Larson, you are recognized.
Mr. LARSON. Thank you, Mr. Chairman. And I want to thank
all the panelists. We always like to think that Congress is
about the vitality of ideas openly exchanged. And today, Mr.
Chairman, you are to be commended, because I think we are
witnessing that here. I also want to thank my colleague, Mr.
Roskam, for pointing out, and I share his sentiments about Mr.
Simon, and I must confess a prejudice because of representing
the city of Hartford, and also would note the strong feeling we
share, I know on this side of the aisle, and I daresay my
colleagues on the other side, as well, with the key to
manufacturing.
You mentioned, too, in Hartford, both Colt Manufacturing,
and, of course, Pratt & Whitney, which is a part of United
Technologies. United Technologies does exemplary in terms of
what they do for their employees. And I would hope all
manufacturers would take heed in terms of offering free
education to further their training in any field, paying for
that, and giving them time off. That is a little plug for
United Technologies and for the city of Hartford. And thank you
for being here. Thank all the panelists.
To get back to your point about manufacturing. If we are
going to revive the middle class, and I think the disparities,
as everyone on this committee has pointed out, are pretty well-
known to everybody. The concern, on this side, is that what we
see is this shift that is going to take place again.
Mr. Doggett pointed out that we saw that in healthcare, and
now it seems in the tax proposal that we are going to see this
again.
Ms. Clausing, you pointed out that that shift is very
dramatic, and what would result in this would be almost 1,000
percent difference in terms of what would be the share for the
middle class versus the Nation's top one percent.
Could you explain that?
Ms. CLAUSING. Those come from the Tax Policy Center
estimates of the bill. And that is a nonpartisan center. And
those are their estimates, that the top 1 percent would get a
$200,000 tax cut, and the bottom 80 percent would get a $200
tax cut. So that is a thousand fold difference.
What Mr. Lindsey's testimony suggests is that if you had
enough growth, that could maybe counter some of those effects.
If you had enough investment, that could raise wages. But I
have some concerns about that as well. In particular, it seems
odd to suggest that what we need is more after-tax corporate
profits to generate investment and wages when we are at a
period of historically very high corporate profits.
And sometimes, these growth forecasts can be a little too
optimistic. When they surveyed economists very recently about
whether the Trump growth forecast that went with his tax plan
were, you know, accurate, 35 of 37 economists concluded that
those growth forecasts were way too optimistic. And when they
asked the other two, well, why do you think it is going to grow
so quickly, it turns out they misread the question. So all 37
really disagreed with those optimistic growth estimates.
So I think it is important that our budgets and our tax
plans raise the revenue that is needed now without making
valiant assumptions about growth and----
Mr. LARSON. I think a number of our manufacturers and
exporters--and Mr. Simon pointed out how this could work. And I
appreciate a lot of the optimism and concern that have been
stressed. He mentioned caution as we go forward to make sure
that we get this right.
Being from a strong manufacturing State, what would be some
of the risks for major manufacturers? And is it clear that this
is a clear winner or do we have to exhibit that caution? And
what would be your concerns, Ms. Clausing?
Ms. CLAUSING. I think the exchange rate risk is a serious
one. I went back and looked at all of the countries that have
adopted VATs, which should see a similar exchange rate
adjustment under a floating exchange rate. And there are only a
handful of rich countries that have adopted VATs under floating
exchange rates to look at. But if you look at that set of
countries, in three quarters of the cases, the exchange rate
actually moved in the wrong direction. So I guess my point is
exchange rates are very volatile. It is a very large market. We
can't be sure it is going to move in the right direction or by
the right amount, and that gives us a big risk for the import-
intensive industries. If you look at the data, it appears that
countries with VATs also trade somewhat less than other
countries. And I think trade is an important part of a healthy
manufacturing sector, and many of our products are made with
global supply chains throughout the world.
Mr. LARSON. Thank you. And, again, I thank the panelists.
And in many cases, many people who have commented on this
bill oftentimes feel like they are trapped between this
proposal, and the White House, and the Senate. But I want to
assure people and thank them for being here today. And the
exchange of these ideas has been beneficial to the committee.
Chairman BRADY. Thank you. Ms. Jenkins, you are recognized.
Ms. JENKINS. Thank you, Mr. Chairman, for holding the
hearing. And we thank the panel for your time this morning.
Mr. Luciano, I have a question for you, coming from Kansas,
just to follow up on the ag inquiry of my seatmate, Mr. Smith.
In your testimony, you talk about growing global demand for
food. If we can get this international tax reform right, how
does that pair with increased global demand to put more money
in the pockets of Kansas farmers? And how does the border
adjustment help U.S. farmers see a bigger and better market for
their goods?
Mr. LUCIANO. Thank you for the question.
So the world is growing the population, and the population,
as I said before, will reach 9 billion people in 2050. But the
production is in only three parts of the world. The production
is concentrated in North America, South America, and Eastern
Europe. So you have--China has 22 percent of the world
population, only 6 percent of the water, 8 percent of the land.
So they are always going to be importing.
So you have this global middle class that needs the product
that we produce. The issue is this race between Eastern Europe,
South America, and the U.S. And both places, Brazil, or
Argentina, or Ukraine, or Romania, or Russia, they have BATs
that basically they discount what we export. So the U.S. farmer
in Kansas is actually at a disadvantage. Because when you form
the price, everybody else discount that tax, and we add it to
the tax.
So we are all just waiting for a level playing field. There
is no technological difference between the farmer in Kansas and
the farmer in Russia. There is actually a competitive advantage
we have in logistics. Even if our infrastructure is
deteriorating, we still have a competitive advantage. We still
can ship something 1,500 miles cheaper than what Argentina can
ship it 300 kilometers.
But the issue is of all the things that the farmer and
companies like us can control, we are more competitive than the
other countries. Only tax that makes the difference.
So I don't think it is the only factor. But I think that
the proposal, the blueprint, addresses a lot of that----
Ms. JENKINS. Thank you. Mr. Chairman, I yield back.
Chairman BRADY. Thank you.
Mr. Blumenauer, you are recognized.
Mr. BLUMENAUER. Thank you, Mr. Chairman. I would like to
welcome Dr. Clausing, a constituent from Reed College, really
appreciate your joining us.
But first, Mr. Chairman, I would like to enter into the
record a letter to you and Mr. Roskam from Tim Boyle, the
chairman and CEO of Columbia Manufacturing in Portland, where
he outlines the deep concerns his company has with the approach
to a Border Adjustment Tax. He also points out that they
transact with their foreign partners and contractors
exclusively in U.S. dollars, and so the adjustment in terms of
the currency----
Chairman BRADY. Without objection.
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Mr. BLUMENAUER [continuing]. Have problems for them, and
that most of the products that they are involved with are no
longer manufactured in the United States and haven't been for
some time, leaving them without choice. So I appreciate your
courtesy on that.
I do appreciate the notion, Mr. Simon, about doing it
right, trying to get the balance, your concern about having
hollowed out the middle class, and not being available to
purchase, and collapsing retail. Would it not be possible to
stimulate demand here at home by putting people to work on
infrastructure projects that can't be outsourced? If we were to
do something radical like raise the gas tax, like dozens of
Republican States have done to improve infrastructure? Wouldn't
we be able to strengthen the middle class in purchasing power
by taking a step like that?
Mr. SIMON. Well, you are clearly out of my area of
expertise when you start talking about infrastructure. But
anything that would provide----
Mr. BLUMENAUER. Haven't your enterprises relied heavily on
well-functioning American infrastructure----
Mr. SIMON. Absolutely.
Mr. BLUMENAUER [continuing]. Problems with congestion or
lack of reliability----
Mr. SIMON. Anything that builds good, solid, strong, long-
term middle class jobs would be good for the industry.
Mr. BLUMENAUER. But, Mr. Cornell, doesn't your business
rely upon a well-functioning American infrastructure?
Mr. CORNELL. We certainly do. And we would certainly love
to see infrastructure improvements.
Mr. BLUMENAUER. I would like to turn back to Dr. Clausing,
a point that you made that I think is important, in your
testimony I really appreciate that you are making a distinction
that is not often made before this committee. Yes, there are
some companies that are wildly disadvantaged and pay close to
the statutory rate because they don't have as many
opportunities to engineer the Tax Code. But you make a point
that American international corporations have been very
successful. They have higher profit rates than their
competitors. That they have an effective tax rate that is very
similar to what their competitors are because they take
advantage of this stupid jerry-rigged Tax Code, and they spend
time and energy engineering it. But, at the end, aren't they
basically at status quo ante? You say it better than I in your
testimony.
Ms. CLAUSING. Yes. There is a big difference between label
and reality in our tax system. So our label is a statutory tax
rate of 35 percent. But our reality treats different firms very
differently from each other. Some domestics pay an amount that
is close to the statutory rate. But many multinational firms,
including some of the more aggressive profit shifters, can get
their rate down into the single digits. And so you have a big
discrepancy there.
There is another label mismatch with the worldwide and
territorial. Our worldwide system, some describe as just a
stupid territorial system. And I think that is pretty accurate.
Many multinational firms, most of them, don't pay a single cent
on their foreign profits. They leave them offshore, and they
wait for the hopes that one of you guys will give them a
holiday. You know?
So where some of our trading partners who have purportedly
territorial systems, they tax immediately some of the foreign
income that is earned because of their base erosion protections
through things that look a lot like a minimum tax. So we have
to be careful about how we characterize the system.
Mr. BLUMENAUER. I think it is important to look at the big
picture the way that you do. There are opportunities for us to
move forward. Investing in infrastructure is one of them. But
to have a broad brush, so-called reform that puts us at risk
for companies like Columbia Sportswear, and sets us up in the
future because we are not going to run huge trade deficits in
perpetuity, for significant revenue loss. And your point about
tax changes like this could incent people to have unnatural
mergers simply because of the Tax Code, like the aforementioned
Archer Daniels Midland and Wal-Mart. We can do better than
that, and I think the committee can do better with that if we
listen carefully to the information like you presented.
Thank you.
Chairman BRADY. All time has expired. Mr. Paulsen, you are
recognized.
Mr. PAULSEN. Thank you, Mr. Chairman. And, first of all,
thank you all for providing very constructive testimony here
today. I especially appreciate the opportunity to have a great
Minnesota company be a part of this tax reform conversation,
which I think provides a good component to this discussion.
You know, the primary justification for the advocates of
border adjustability is end the special tax breaks for foreign
products over American products, and to keep American
businesses and jobs from moving overseas. Certainly, given that
the pace of American companies moving their headquarters to
other countries, inversions, which we talked about earlier in
recent years, it has happened both in Minnesota and across the
country. You don't need to convince Minnesotans that something
needs to be done.
We need to make sure that America is a destination to not
only invest, but to build or be able to create a business. But
this has to be done in a very thoughtful way, a way that
addresses the very real and valid concerns that, Mr. Cornell,
you raised today, and I heard from others, certainly, that have
been raised. I cannot support the border adjustability
provisions as introduced last year in the blueprint. I really
want to urge this committee to listen, to be educated, and then
to address these concerns that we heard as we move forward with
reform.
Now, last week we had a really good hearing, a hearing that
talked about the need for the comprehensive reform efforts, for
fundamental reform. It is very important. We heard a lot about
the positive effects it would have in the form of more jobs,
higher wages, and greater economic growth. We also heard about
the effects it would have on companies, both large and small,
up and down the supply chain at every level. So we know the tax
policy impacts different businesses in different ways. And we
know the reform proposals will affect different businesses in
different ways. But we got to focus on making sure that we are
lifting everyone up. And economic growth is a key component.
Because I think of the four key principles as focusing on
growth, on simplicity, dealing with base erosion, and then
dealing with permanency so you can count--as you are budgeting,
count on, with predictability and certainty, as you are
budgeting, allocating capital for 5 years, investing in your
people and your companies, we are giving you that certainty,
that confidence.
So, Mr. Cornell, you shared your views about border
adjustability. And you also mention we can't keep the status
quo. You said we should have every tax provision out there, tax
benefits, should be on the table. I agree.
So keeping that in mind, what might be some--knowing that
we are working on fiscally responsible tax reform in revenue
neutrality, et cetera, what might be some policy
recommendations that you would offer that should be key
components of this reform effort as part of a comprehensive
effort? Because that is really--it is not just about cutting
rates. It is about the comprehensive effort that----
Mr. CORNELL. Well, again, I am certainly not a tax expert.
I run a retail business and deal with real consumers, and real
families, and real employees every day.
To your point, we certainly would like to see tax reform.
As a company that pays one of the highest effective rates
anywhere in America, at 35 percent, we would certainly like to
see that rate lowered so that we can continue to invest in our
business and see our business grow. We would certainly like to
see simplification.
But as I listen this morning to the discussion, there is
one word I continue to hear repeated again and again. And that
is ``if.'' If currency depreciates, and if the GDP grows, and
if manufacturing comes back, and if we can avoid trade wars. We
certainly need to be sitting here working on something that is
going to provide greater certainty to certainly the families we
serve at Target, my 320,000 employees, those small businesses
in the back of the room. It is really hard for me to sit here
today and craft a business plan, one that is focused on
investing in America, and strengthening my company, and
creating more jobs, when I keep hearing these provisions that
say if this happens and if these triggers are in place.
I think we have to be focused on a plan that creates growth
in America but simplifies the Tax Code, gives us greater
certainty, so that we have greater certainty as I talk to
families across America or interface with my team each and
every day. I can't ask American families to sit back and say,
if these things happen, you will be okay. I can't sit with
320,000 employees, Mr. Paulsen, and let them know if all these
things come to pass, our company will still be here. And I know
for small business in America, they can't sit here today
saying, If all of these different factors come together, they
will be okay.
So I would be happy to work with you. I think we have shown
and demonstrated that to the chairman. We are willing to roll
up our sleeves. But I think we need greater simplicity, much
greater clarity, and much more certainty going forward.
Mr. PAULSEN. And I would just urge you to keep your seat at
the table for that discussion. Because that is what, really, we
are counting on as a part of that education effort.
So I yield back, Mr. Chairman.
Chairman BRADY. Thank you. Mr. Pascrell, you are
recognized.
Mr. PASCRELL. Thank you, Mr. Chairman. Great, great
committee before us today, the panel, and thank you for all of
your testimony.
Mr. Simon, there is a reason, you say, in your testimony
that the middle class in the United States has struggled
recently. It is the same reason the middle class in the other
global markets has emerged. The manufacturing base has moved
and jobs followed, unquote.
Look, the manufacturing base, that is an inanimate object.
You, your companies, and before even this panel, in the past 25
years, you moved manufacturing. You moved it. You moved it
offshore, because it was cheaper labor and very few
regulations. You are entitled to your opinions. As some would
say, you are not entitled to your own set of facts.
Now, I look at this hearing today as part of act two, scene
two. Act one was what happened in 2001 and 2003, with promises
attached as to what it would do to not only increase and help
the economy to grow its domestic product, but also have it
sustained, question number one. And question number two is, it
was obviously not sustained.
Act two began last week in our hearing. We had a search for
anything in tax reform that even referred to the people in the
other cars and the caboose, everything about the top 1 percent.
Everyone else was left offstage.
Now, we have heard a lot today that businesses in this
country cannot compete globally because our taxes are too high.
I would like to see real bipartisan revenue-neutral tax reform
that would benefit all Americans, while bringing down the top
corporate rate to be more in line with our competitors around
the world. I have no problem doing that. The number we can
debate.
I introduced legislation a few years back, the Bring Jobs
Home Act. I tried to get bipartisan support, like I do all my
legislation.
My Republican colleagues are clinging to a debunked idea, a
debunked theory that a bill would end the tax break companies
get for shipping jobs offshore. No, they believe in the idea
that if they cut taxes at the top, all that will trickle down
and serve everyone. But firms in the United States already have
checked this out. The highest, higher after-tax profits than at
any time since the 1960s, that is a fact of life. But they are
not investing those profits towards increased productivity;
they are just paying it out to wealthy shareholders.
Corporations that are sitting on record profits today do
not need to be showered with deficit-financed tax cuts at a
time when middle class wages are stagnant, as some of you
brought up in your own presentations, and broad gross domestic
product is sluggish. It is, quite simply, a misallocation of
our resources.
Further, U.S. firms are extremely competitive, Mr.
Chairman, by any metric. The Forbes Global 2000 list of the
largest public companies in the United States is
disproportionately represented. The World Economic Forum ranks
the United States third in global competitiveness out of 138
countries. And lastly, with all the deductions and loopholes
corporations employ, effective tax rates paid by profitable
organizations and companies are closer to 25 percent, similar
to or lower than the averages around the world.
Manufacturing jobs aren't moving abroad because, really,
primarily the Tax Code, but because they seek low labor costs.
So as long as factory workers in Vietnam make 20 cents an hour,
textile factories will continue to move there, regardless of
what tax we employ on what is coming across the border. We know
what boosts productivity. We can invest in infrastructure and
developing our workforce and raising wages for middle class
families and the working poor.
And, Mr. Chairman, is my time up?
Chairman BRADY. Yes, sir, all time has expired.
Mr. PASCRELL. I have a lot more to say about it.
Chairman BRADY. I know, Mr. Pascrell. So we will begin two-
to-one questioning so we can balance out the questions here.
Mr. Marchant, you are recognized.
Mr. MARCHANT. Thank you, Mr. Chairman.
We all have the same goals here today. We want a simpler,
fairer Tax Code that significantly lowers personal pass-through
corporate rates and makes our companies competitive on the
world stage. I think we can all agree on that.
Mr. Cornell, what percentage of product that you sell in
your store is brought in from overseas?
Mr. CORNELL. Half of all the products we sell today are
made right here in the United States. The other half,
obviously, would be brought in from other countries. So you
take a look at the composition of our business today, eight of
our top ten vendors are companies right here in the United
States. They are companies like Procter & Gamble in Ohio or
Frito-Lay in Plano, Texas, companies like KitchenAid in Ohio,
Johnson & Johnson in New York. So it is a balance. So many of
the products----
Mr. MARCHANT. But the answer is about 50 percent?
Mr. CORNELL. About 50/50.
Mr. MARCHANT. Mr. Simon, when you were affiliated with
another major retailer, what figure did you use? What was the
common----
Mr. SIMON. Because of the heavy concentration of food at
Walmart, about two-thirds of what they sell in the U.S. is
either grown or made in the U.S.
Mr. MARCHANT. So about a third?
Mr. SIMON. Two-thirds.
Mr. MARCHANT. Two-thirds, okay.
One of the big objections that I have heard today about the
border adjustability tax is the uncertainty of how the currency
would adjust and whether the currency would adjust, and how
would you deal with a currency that adjusted?
Chairman BRADY. So, Mr. Marchant, while we are adjusting
the microphones, you might want to speak a little closer to the
microphone.
Mr. MARCHANT. I would like to ask Mr. Lindsey, how has
retail across the world adjusted in the last 3 months? While we
have seen the dollar-euro, the dollar has lost about 8 percent
against the euro in the last 3 or 4 weeks, 3 months, while we
have been talking about this discussion, and the pound has
gained about 8 cents, from 122 to 130. And then when we had the
Brexit, we had a drop in one day from 160 down to 120.
So after all that has happened, what have the companies
that are adjusting the currency--Mr. Simon and Mr. Cornell, how
has your company dealt with those currency swings?
Mr. CORNELL. We have currency experts that look at this all
the time. There are a number of other factors that you have to
consider as we think about changes in costs. Currency is one of
them. Commodity prices tend to change; and those are impacted
by a number of different variables, starting with weather,
extreme freezes, extreme heat, floods and droughts.
Transportation costs can be impacted by----
Mr. MARCHANT. But in this case, we are talking about
currency. So, Mr. Lindsey, how are companies dealing with these
kind of currency swings?
Mr. LINDSEY. Well, first of all, let's just take an example
of border adjustability. All the countries, the 160 countries
that have border adjustability, amazingly still have retail
sectors that haven't been wiped out by the imposition of border
adjustability.
So I think the claims of the damage that will be done to
those companies is exaggerated. What companies do, first of
all, is there are currency hedgers. They take up positions in
various currencies.
The other thing that happens is one of the reasons the
currencies adjust is these folks have market power. To imagine
that Walmart or Target doesn't have market power with regards
to Chinese sweatshops I find kind of silly. And, in fact, what
will happen, the Chinese politburo understands that perfectly
well and they will adjust their currency. There is no doubt in
my mind that they will do it, and then that is why there is not
really an issue here.
Mr. CORNELL. If I could, I think one of the other important
factors we all need to recognize is, for a company like
Target--and I can speak for many others in the retail industry
today--our contracts are dollar-denominated. They are today;
they will be tomorrow. And the vendors that we work with, their
raw materials are largely dollar-denominated. So I think we
have to recognize as we go forward, the U.S. dollar is the
global currency.
Mr. MARCHANT. Thank you.
Chairman BRADY. Thank you. Mr. Kelly, you are recognized.
Mr. KELLY. Thank you, Chairman.
Thank you all for being here. Please don't take this as
disrespect. Mr. Lindsey, Ms. Clausing, I appreciate your being
here, but I wanted to talk to the people that are actually in
the retail business. I am an automobile dealer. I am not
somebody that grew up on a laptop; I grew up on blacktop.
Who I talk to are moms and dads who are trying to make sure
that their budgets are workable. And whenever I sit down with
people to see if we can get to some type of solution for their
transportation problem, it is always the wife who makes the
final determination of whether they can afford or not afford to
buy a new car or new truck. And sometimes, the difference is $5
a month. Now, in Washington, DC, people say, oh, that can't be
possible. Please come home with me and see what blue-collar
people go through every single day of their life.
So that is why I wanted to ask you, because you are in the
retail business. My concern is the final price on the shelf for
those folks that pick up the tab on every single thing this
wonderful government does in their name.
So if you could just tell me, now, Mr. Luciano, you talked
about things that were happening in ag. Mr. Cornell, you talked
about what was happening at Target, which my wife is addicted
to being in every Sunday right after mass. And Walmart I go to
quite a bit, because they are all in my town.
The effect, the actual effect on everyday Americans,
because the global supply chain has changed. I also have in my
pocket, by the way, Monroney labels, which I would love to
share with people, that show parts content, because that is
truly the complication of how do you tax different pieces.
So if you can tell us--and there is not enough time to do
it, 5 minutes is not nearly enough time to talk about this huge
proposal--how does this affect the price on the shelf and how
will it affect consumers as we go down this road, both plus and
minus? I know we have to pay for these tax cuts, but I don't
want it to be on the back of everyday hardworking American
taxpayers.
Mr. CORNELL. I would be happy to start.
Mr. Chairman, for the record, I think I will stay with Mr.
Cornell for today.
But we talk to consumers all the time. I have 30 million
shoppers in our stores every single week. I spend time with
them in our stores and in their omes. And, to your point, these
are families, middle class families on a budget. And for those
families, as we look at the implications, I think the
unintended implications of the new border adjustability tax, we
know that their prices will go up on essential items.
They will pay 20 percent more for apparel--I am going to
spend a few minutes explaining why--on back-to-school items.
They are also going to spend more on essential items, like
produce, that in the winter we don't grow in the United States.
They come from Mexico and Chile. We are not going to be growing
bananas anytime soon in Ohio or coffee beans in Michigan. So
that basic American family, they are going to pay higher
prices.
We have talked about manufacturing coming back to the U.S.,
and I would certainly love to see that happen, but I also
know--and Mr. Simon has talked about this--for many of the
supply chains, they don't exist here in the U.S. right now.
Ninety-seven percent, 97 percent of all the apparel we buy
in the U.S. is made outside the U.S. Those supply chains don't
exist here.
So I know under the new border adjustability tax, the
prices we pay, that those moms pay to buy apparel and clothing
for their kids, they go up. And right now, I can tell you when
I sit with them, they are on a budget. At the start of the
month, when they get a paycheck in their family, they are
loading up their pantry, they are buying a few unique things
for their family.
By the end of the month, they are counting their final
dollars. So we have got to make sure we understand the impact
on American consumers. All of the electronic devices we all
love, all of our phones and tablets, those supply chains are
not here in the U.S.
Mr. KELLY. I am just going to stop you for one second,
because I am running out of time.
How many employees do you have?
Mr. CORNELL. I have 320,000 employees, 99 percent of which
are right here in the U.S.
Mr. KELLY. Mr. Simon.
Mr. SIMON. Well, I am retired now. I have one.
Mr. KELLY. But when you weren't retired?
Mr. SIMON. One point three million.
Mr. KELLY. One point three million. Mr. Luciano?
Mr. LUCIANO. Thirty-two thousand globally, 20,000 in the
U.S.
Mr. KELLY. Okay. But I want to get really clear as I hear
this thing, we go into political talking points rather than
good policy here. How can we attack the other side? I would
just like to remind everybody that is sitting in this panel, in
addition to paying taxes on your profits, there is a huge item
there called wage taxes, there are business privilege taxes,
there are real estate taxes that actually propel all the
wonderful programs this Nation supplies for its people. And I
think sometimes we miss the bigger part of this.
It is you that is responsible or makes up all the revenue
for social security, for Medicare. All these wonderful programs
that we have come out of wage taxes. And I think that we better
take a look at are we going to eliminate people who are
working. They are the ones that pick up the tab on all these
wonderful things.
I thank you so much for being here, we share your concerns,
and we are on board. We are going to do this the right way.
Thank you, and I yield back.
Chairman BRADY. Thank you.
And, without objection, I will submit for the record
research by J.P. Morgan that shows that if the dollar didn't
adjust at all, which no one believes, retailers would need to
raise prices by only 5 percent, on average, to offset it, and
it would be just 2 percent final parts retailers. Without
objection.
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Chairman BRADY. Dr. Davis, you are recognized.
Mr. DAVIS. Thank you very much, Mr. Chairman.
And I too want to thank our witnesses. It is a very
interesting hearing, and I think in order to understand how
these tax proposals will affect our constituents, we must
examine them in light of the cruel Republican budget priorities
released to date: This budget, which cuts hundreds of billions
of dollars from the most vulnerable Americans; this budget,
which makes draconian cuts in food stamps, Meals on Wheels,
heating assistance, and support for the extremely poor, elderly
and disabled people, particularly targeting families with
disabled children; it eliminates the Social Services Block
Grant that funds critical child welfare and youth services, and
eviscerates our health education and job training supports.
The Trump Republican tax plan amplifies the harm from these
mean-spirited policies by taking even more from these families
to give an average tax cut of at least $15 million a year to
the wealthiest 400 families and the most profitable
corporations, in sharp contrast to the minimal $250 relief for
middle class families.
In addition, these untested tax policies promises to shock
our vulnerable economic system. In a time of stagnant wages,
heightened economic insecurity, appalling wealth gaps, and
shocks to the workforce from trade agreements and technological
advances, the Republican plan could send prices at stores
skyrocketing by 20 percent and force huge job losses in the
retail sector, which would certainly undermine my city, my
State, and our Nation.
Professor Clausing, given the Republican policies to
dramatically cut Federal support to middle and working class
families on the spending side, I am deeply concerned about the
possible harm to these same families from these tax policies.
Could you expand on your concerns about the potential shock
to our economic system and how it could affect jobs, income,
and cost to families?
Ms. CLAUSING. Sure. This tax system, while border
adjustment is similar in some respects to a VAT, really has no
precedent. There isn't another country that does a border-
adjusted corporate tax. And so that makes it fundamentally
different. I think the biggest risk to households really do
come from the possible absence of adequate exchange rate
appreciation, but this is an untested plan, and there are other
types of risk too.
Let's say the dollar does appreciate by the amount they
said it would, to 25 percent immediately. That could create an
emerging market crisis. There are $9 trillion worth of dollar-
denominated debt in the world economy. And Mr. Cornell is
exactly right, the dollar is a unique currency in the world
system. And so when the dollar appreciates, that can harm the
entire world economy, which, again, can hurt the middle class,
because the middle class is dependent on international trade,
whether they have export jobs or whether they have jobs that
are import industries.
So between the fears of higher costs and the fears of job
loss in trade-intensive sectors, those would be my big
concerns.
Chairman BRADY. Thank you. All time is expired. Mr.
Renacci, you are recognized.
Mr. RENACCI. Thank you, Mr. Chairman.
I want to thank the witnesses for being here.
Look, I believe getting tax legislation signed into law is
absolutely critical to getting our economy growing. I must
admit, though, I have been skeptical of the border adjustment
as a central element of the blueprint, but I am trying not to
be. It is not because I oppose border adjustment in all
contexts. As many of you know, I am a strong supporter of a
more conventional border adjustment consumption tax.
My concern is really rooted in three questions: Does border
adjustment, adjustability in the blueprint pick winners and
losers; who will the tax burden ultimately shift to; and is it
compliant with our international treaty obligations? There are
just three simple questions.
From what I have heard today, the answer to the first two
questions hinges on economic theory, that currency will adjust
to offset the tax. Market analysts and currency experts have
been skeptical. Wall Street firms believe there is a large
potential for disruption and could cause volatility in the
market.
With respect to question three, it really seems, at best,
border adjustment is in a case of first impression, or at
worst, it is a flagrant violation of our international
obligations.
I am also hearing very real concerns from Main Street Ohio,
where I represent. One major employer in my district sells
coffee. But coffee beans generally come from high-altitude
mountains in Africa and Latin America. You just can't buy much
U.S.-grown coffee here in America. Border adjustment would
increase the price of coffee.
I am very concerned for the low-margin companies in my
district that rely on imported goods not primarily produced in
the United States, whether that be coffee or any other good
that can only be imported.
So, look, I am a business guy like Mr. Kelly, a CPA, a tax
practitioner. I understand taxes and I understand business. I
have been in the business world for 30 years. I have made all
of my decisions on factual background, normally not on economic
theory. In fact, economic theory in many cases in the business
world can be troubling if you do it the wrong way, as you all
know.
So, to each witnesses, can any of you assure me that the
currency will adjust so that there will be no effect to the
cost to our consumers, yes or no, to each one of you?
Mr. CORNELL. No, I can't.
Chairman BRADY. Anybody?
Mr. LINDSEY. No.
Mr. RENACCI. There is going to be an effect to our
consumer. Currency will adjust----
Mr. LINDSEY. Nothing has no effect. I think it will be
extremely minimal.
Mr. RENACCI. Okay, but there is an effect.
Mr. Lindsey, you gave an answer on my third concern, which
is WTO. To each of the other witnesses, do you have any
experience to know whether this will pass WTO, yes or no?
Mr. LINDSEY. No one will know whether it can pass WTO until
it is brought there. No one could possibly know the answer to
that question.
Mr. RENACCI. Anybody else? Do you think, yes or no, will it
pass WTO?
Ms. CLAUSING. I don't think it will, based on discussions
with lots of trade lawyers.
Mr. RENACCI. Any other individuals, yes or no, will it pass
WTO?
Mr. LUCIANO. Difficult to know. It is pretty similar to VAT
that is being enforced today.
Mr. RENACCI. Mr. Lindsey, I am going to come back to you,
because I was listening to you. You said WTO is a European-
based organization. Okay for Europeans to do it, but not
Americans. Isn't it true that European-based border adjustments
do not allow for deduction of labor; and if it did, the same
thing with our BAT, if we eliminated labor in our BAT concept,
it would become a VAT and, therefore, it would be WTO-
compliant, yes or no?
Mr. LINDSEY. No. Let me describe exactly what the Europeans
did. What they did was they put on a VAT, and then they cut
other taxes with the revenue they got.
Mr. RENACCI. I understand.
Mr. LINDSEY. So essentially, essentially what they did was
exactly what the BAT do, exactly.
Mr. RENACCI. I know. But if labor was eliminated, we would
have the same thing.
Mr. LINDSEY. If they eliminated. What they did was to
reduce other taxes on labor with it.
Mr. RENACCI. I understand.
Mr. LINDSEY. So that is why I think it will pass WTO
muster, because essentially the Europeans did exactly what this
tax----
Mr. RENACCI. I have got a couple other questions. I
appreciate.
Mr. Simon, you indicate in your testimony, a long
implementation period for this to work. In the 1950s, 90
American companies made TVs. Today, there is not a single
American company making TVs, and there hasn't been in over 20
years an American company has made a TV. How long, on average,
do you think it would take to get American companies back in
the business of making TVs? Because you said a long
implementation period; I would like to know what that means?
Mr. SIMON. TVs are being assembled in the U.S. for the
first time since the seventies today, with a progression
towards making them in the U.S. I can tell you the same thing
about bicycles. They started in South Carolina in assembly, and
they are moving into paint and powder and rolled steel. It
takes time, and the process for bicycle has taken 4 years.
Mr. RENACCI. Mr. Lindsey, I am going to come back to you.
You said this bill is the best way to make America the most
competitive place in the business world. Is this the only way
to get this accomplished, this bill? Is it the only way?
Mr. LINDSEY. This is the best way that I have seen to get
it done.
Mr. RENACCI. So far?
Mr. LINDSEY. That is correct. And I am, by the way, very
supportive of what was called for here, which is careful
implementation, phasing in and things like that. I am a big
supporter of it. And what I hear from the chairman and others
is that they are too. So I think that will happen.
Mr. RENACCI. I thank you all. My time has expired.
Chairman BRADY. Thank you, Ms. Noem, you are recognized.
Mrs. NOEM. Thank you, Mr. Chairman.
My name is Kristi Noem. I represent the entire State of
South Dakota. And I go to Walmart to get a lot of things that I
need, but I go to Target for fun. So I don't know. Our family
appreciates both of you being in towns in South Dakota, because
a lot of times we don't have a lot of options.
I am very concerned about small retailers. I am very
concerned about small businesses. That is the lifeblood of
South Dakota. But our number one industry is agriculture, which
supports all of the small businesses in our State and our
families.
Mr. Luciano, I wanted to talk to you about that, because we
read over and over again about large companies being bought out
by companies not from the United States, especially in the
agriculture industry. We are seeing concentration happening, in
Chinese companies specifically, coming in and purchasing large
chemical companies and other within the agriculture industry.
Do you believe that our Tax Code and policies have
perpetuated this problem that we see, this consolidation
happening in the industry? But also we see it, the ownership
changing to other countries, and how that is impacting the
United States. And what in this proposal could be beneficial in
stopping that type of change that we don't believe is
necessarily--I don't believe necessarily is in the Nation's
best interests? And I have a follow up question when you are
done with that one too.
Mr. LUCIANO. First of all, Congresswoman Noem, let me thank
you on behalf of ADM and the biodiesel industry for your
personal leadership for both biofuels overall and for biodiesel
in particular. That was very helpful to the industry.
I think this proposal, as we are analyzing it today and it
is presented to us, helps improve the competitiveness of the
industry. The fight for grabbing sources of food, as you
describe, is very important, very strategic, whether you are in
the Middle East, whether you are in China, whether you are in
all those places where you have multiple nations in production,
actually. And we have that and South America has that, as I
said before, and the Black Sea has that.
So whether we can stop that, I mean, I am not sure any
proposal can stop if China determines that strategically they
need to own resources, but I think it can make us more
competitive. I think it can allow us, for the U.S. farmer to
continue to invest and for us to have the ability to help the
farmer to become more competitive, by investing in
infrastructure, by investing in support for the farmer.
And I think that that is what it limits. I worry very much
about losing competitiveness and losing share, what I said in
my oral testimony. Because once you lose a customer, once you
present to that customer that you are not a reliable supplier,
because you are retrenching, things change.
And when somebody in Egypt that has been using our wheat
for years to make bread starts to use some wheat from Romania,
things change, and they adapt recipes and all that and then you
become a secondary supplier, a supplier of last resort instead
of the primary supplier.
And we are slowly going into that direction. So, to me,
this blueprint address helps to restore the profitability and
the competitiveness of the farmer in the U.S.
Mrs. NOEM. I am a lifelong farmer and rancher, and when I
talk about the BAT at home to other farmers and ranchers, I
talk about it how when our beef leaves the United States, it is
taxed. Then it hits the border of Japan, they add another
tariff to it, which makes it virtually unaffordable to be
purchased in that country. And the BAT could potentially shift
that to making it more affordable if we didn't do that.
But a lot of the farmers and the ranchers are worried. They
are concerned that with the BAT that potentially they sell
their commodity to ADM, ADM then sells to another country,
keeps more of a profit margin and doesn't necessarily let it
flow down to those guys producing the actual crops, the actual
commodities.
How would you answer that concern? Because I face that
quite often, that yeah, sure, maybe the big companies that
actually market the grain overseas get a bigger profit, but how
is that going to help my pocketbook?
Mr. LUCIANO. It is a very good question. In the U.S., the
product is commingled. We have the system. But you have to
understand ADM does not thrive unless there is a thriving
farmer. We don't own land. We don't farm.
So we cannot export, I mean, individually. The farmer
cannot export, we cannot export the production that doesn't
exist. So we work with the farmer. Our farmers are our partners
for 115 years, and we spend a lot of time in this community
supporting the farmer.
If you go and see what we do every day in an elevator, you
go into an elevator, it might have six commercial people from
our side--I mean a storage unit or origination unit--and then
you are going to have six or seven farmers sitting out there,
you know, reading the newspaper, but they are also evaluating
what they should do and getting from ADM what they should plan,
when they should sell.
So it is a very symbiotic relationship. ADM does not exist
without the farmer.
Mrs. NOEM. Thank you, appreciate that. I yield back.
Chairman BRADY. Thank you.
Ms. Sanchez, you are recognized.
Ms. SANCHEZ. Thank you, Mr. Chairman, and to our witnesses
for here being here today. Mr. Chairman, I would like to ask
unanimous consent to enter into the record a Bloomberg news
article in which Treasury Secretary Mnuchin states that one of
the problems with the border adjustment tax is that it doesn't
create a level playing field, it has very different impacts on
different companies, it has the potential to pass on
significant cost to the consumer, and it has the potential of
moving those currencies.
Chairman BRADY. Without objection.
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Ms. SANCHEZ. Thank you.
Today's hearing has definitely provided an interesting mix
of perspectives on what most consider to be the centerpiece of
the Republican tax reform plan, and I think it is high time
that we began to dig into this brand new proposal that sort of
blind-sided everybody last year.
I happen to believe that a proposal of this size deserves
some thoughtful consideration, and I am pleased that we are
finally starting that process today. But I can't help but note
that I wish we were here discussing a bipartisan idea that came
together through substantive committee process rather than a
few pages of talking points.
I want to share some of the concerns that my colleagues
have highlighted. Number one is an ill-advised gamble on the
value of the U.S. dollar to not tank world economic markets,
should the rate not adjust immediately to the very
optimistically projected level.
Second, the fear that adopting the Republican plan would
set the United States up for a huge loss at the WTO, which
could have lasting implications on domestic producers and
consumers for many years to come.
And thirdly, a system that could incentivize some of the
largest corporate exporters to merge with large importers,
creating even bigger behemoth multinational corporations to
game the new tax system.
Those are just three of my concerns.
Ms. Clausing, I would like to spend my time focusing on the
issue of distribution that you raised in the slides that you
provided. I find those numbers to be truly staggering. So can
you provide a little more insight into how the proposed
Republican plan not only exacerbates the divide between the
rich and the poor in this country, but how the middle class
households specifically will be squeezed by this policy?
Ms. CLAUSING. Sure. You are exactly right to focus on
income distribution. It has been a big issue for the last 35
years. If you look at the last 35 years of data, you will see
that the middle class wages have been growing very slowly and
that the vast majority of GDP growth has gone to those at the
top of the income distribution. So this is an important thing
to consider.
The problem with this tax plan is that the tax cut is much
higher for those at the very top of the distribution who have
already been benefitting a lot from the global economy and from
technological change and from other forces that have been
hitting our economy. So it seems in a way the opposite of what
you would want to do.
When you have shocks to an economy, like trade disruption,
technological change and other things, you want the tax system
to sort of insulate people from shock so that everybody's
after-tax income can go up. You know, a rising tide should lift
all boats. But if your response to those shocks is to give a
huge tax cut to the top, at the top 1 percent, and then give
$200 to the bottom 80 percent, then that is going to be the
opposite of what would be helpful in the current context.
Ms. SANCHEZ. Following up on that, right now middle class
families in my district are forced to make what I call
unwinnable choices, such as using the majority of one-parent
salary to pay for childcare or having a parent leave the
workforce entirely because the cost of childcare means that
what they effectively take home at the end of the year is not
going to--is not worth it.
And I think we should be highlighting those issues that we
force our constituents to try to figure out, you know, for
themselves when we have a Tax Code that can help blunt those
effects and hopefully make those working families not have to
make those difficult choices.
So with the time I have left, I would like you to address
alternative ways that we could address international tax reform
in a way that would actually help working families?
Ms. CLAUSING. Absolutely. There are a lot of good ways that
we could do better to protect our corporate tax base from
erosion. One option is to simply end deferral and combine that
with a lower rate, but a minimum tax, done on a per-country
basis, could also be very effective. Ninety-eight percent of
all the profit-shifting is done with countries that have
effective tax rates below 15 percent, and 80 percent of it is
done with just a few havens.
So expanding the corporate tax base would help buttress
revenues, and that is important because a lot of our
priorities, including infrastructure, education, healthcare,
require government revenue. So having an adequate revenue base
is very important.
Ms. SANCHEZ. Great. Thank you so much for your testimony.
And I yield back.
Chairman BRADY. Thank you.
Mr. Holding, you are recognized.
Mr. HOLDING. Thank you, Mr. Chairman.
I think we all agree we have got a Tax Code that is 30
years old, despite having an economy that is vastly different
than it was 30 years ago. And I think we can all probably agree
that we need to undertake a permanent comprehensive tax reform.
My concern, like I know the concern of a lot of us here,
for 8 years we have had ballooning debt, well over $20
trillion. We need to ensure that we put in place a Tax Code
that spurs the economy in a fiscally responsible way, promotes
growth, and puts us in a position to be able to reduce the
debt.
So I am worried when I hear from Ms. Clausing's testimony,
when she states that when trade deficits turn into surpluses,
the border adjustment will lose revenue. So, Mr. Lindsey, do
you agree with this statement, and could you walk us through
the impact that the border adjustment will have, perhaps, on
the deficit long and short term?
Mr. LINDSEY. Certainly, Mr. Holding. I would also take just
30 seconds to say, to comment on something Congresswoman
Sanchez just said, that this was a new idea that was just
sprung out of some talking points.
This was a tax system, a tax structure that was discussed
when I was in graduate school and was considered one of the
best systems we could have. And I assure you I was not in
graduate school yesterday.
As to your particular question, I am sorry.
Mr. HOLDING. The particular question has to do with the
border adjustment.
Mr. LINDSEY. Right, being permanent. Thank you. See, I
wasn't in school yesterday; I can forget things.
First of all, we have had a trade deficit now for 50 years.
So saying that trade deficits will turn into surpluses gives
new meaning to the word ``theoretical.'' However, I think that
the right thing to focus on is how we finance that trade
deficit. And what we do now is we basically put it on our
credit card. We sell our debt overseas. That is the main way we
finance it. This is called the capital account.
What this bill will do instead is it will finance it by
encouraging foreign direct investment into America. And I think
that is a much better way of financing a trade deficit than
simply selling Treasury bonds.
Mr. HOLDING. Another function that we are trying to get, a
goal we are trying to reach is protecting our national tax base
from base erosion, whether it be from the erosion of the
corporate tax base, and I also think we need to be worried
about the erosion of our human capital base here. It is a
stunning fact that the number of expatriations from the United
States has been rising just at a tremendous rate.
In 2016, we had 5,400 people expatriate from the United
States; compared to 2008, when you had 231 people expatriate.
Mr. Chairman, I would like to introduce into the record a
recent article from the international tax blog regarding
expatriation rates.
Chairman BRADY. Without objection.
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Mr. HOLDING. Back to the tax base on a corporate level. So
is there any other plan that achieves, other than the border
adjustment, what we are trying to achieve with protecting the
national tax base?
Mr. LINDSEY. Yes, there is. A lot has been discussed, and
some of the comments have come out today. And this committee
considered a number of options a few years ago to try and crack
down on the ability of firms to go overseas. You know, there is
an old saying that the beatings will stop once morale improves,
which I think kind of has it backward.
And what I think we need to focus on is that all of those
other plans punish American companies by putting more rules on
American companies, but do not touch foreign companies. And I
just think that is simply the wrong way to go about it. We need
to start thinking about why it should be attractive to be
headquartered in America, and why it should be attractive to
move our production facilities here.
Mr. HOLDING. Thank you. Mr. Chairman, I yield back.
Chairman BRADY. Thank you.
Mr. Higgins, you are recognized.
Mr. HIGGINS. Thank you, Mr. Chairman.
The border assessment adjustment tax is a poorly-conceived
tax, because it will be adjusted a second time domestically,
internally, in higher consumer prices for every American.
Target and Walmart don't make things; they sell to
Americans what other countries make, particularly China.
America is 5 percent of the world's population and 23
percent of the world's economy. The United States is the
world's largest economy and 70 percent consumption. We consume
much more than we make. China is 20 percent of the world's
population and 90 percent of the world's economy.
America's largest goods trading partner is China. Last
year, we sold to China $115 billion worth of goods, and they
sold to us $462 billion. We had a good trade deficit with China
last year of $347 billion. So the border adjustment tax will
hit China mostly, which I would be okay with, but we know that
the border adjustment tax will really result in higher consumer
prices and hurt American retailers.
There is lots of tough talk in Washington about challenging
China's ambitions to become the world's economic leader, but
that tough talk lacks guts or backbone. What do I mean by this?
Washington whines about China's currency manipulation,
about China's poor quality of their air and their water and
their land, about how poorly they treat their own people, but
you know what China just did?
China announced a $1 trillion investment to open up China,
to connect to 47 other Asian countries, to sell the stuff that
they make to 47 brand new markets much more efficiently.
The United States, under this administration, is looking
inward. The United States wants to build a $38 billion wall
along its southern border; and the United States has responded
to $2 trillion in infrastructure needs with a pathetically weak
$200 billion investment in American infrastructure, maybe.
Look, I think you get the point. China is making an
aggressive challenge to the United States' leadership in the
world. China knows that infrastructure is how you dominate.
China's peaceful rise is driven by economic growth rather than
military force. The United States, under this administration,
wants to spend another $50 billion on war. It wants to take
healthcare from those who need it most, and it has a tax scheme
to take away money from those who need it to give it to people
who don't.
I am not quite sure what I am missing here, but a tax
policy that doesn't put money into the hands of people that
will spend it in the world's largest economy that is 70 percent
consumption is a policy that can't work.
I often hear here that these tax cuts will pay for
themselves. There is not a tax cut in human history that has
paid for itself. The most conservative economic estimates are
that maybe a third of tax cuts would be paid for by ensuing
economic growth.
What you have to do to grow your economy is to invest in
it. People to bring them to and beyond the current technology.
Your infrastructure, which, based on any objective analysis,
puts the quality of our infrastructure at a very, very poor
rate as it relates to the rest of the world.
So you can talk about tax policy all we want here, but
unless we are going to back it up with serious investments to
compete on a global scale with places like China, the
platitudes about where we want our tax policy to take us will
never take us there. I have pretty much used all the time, and
I apologize for that, but I think it is a statement that needed
to be made and I think it is very important relative to this
debate.
And I yield back.
Chairman BRADY. Thank you.
Mr. Schweikert, you are recognized.
Mr. SCHWEIKERT. Thank you, Mr. Chairman.
This is going to be one of those hearings when we all go
back and actually read the transcript. It is going to be
absolutely fascinating trying to follow some of the
intellectual consistency on the lines. But at least we now have
heard that many of our brothers on the left, our brothers and
sisters on the left now are supporting much more trade and a
lot of these other things. I cannot wait to grab my highlighter
and go over this.
Mr. Simon, you actually have one of the most unique work
experiences in history, and that was a massive company trying
to restructure parts of your supply chain. Can you put a little
more detail on that experience, because I just a moment ago--
which your company I absolutely love, it is in my neighborhood.
But we actually grow vegetables in Arizona in the winter. We
supply the Nation's lettuce crop, and we can do a lot more
except right now the rest of the world has a financial
arbitrage on us south of the border.
Tell us about rebuilding supply chains that became domestic
from products that were foreign before?
Mr. SIMON. Well, Mr. Cornell is right, 97 percent of
apparel is made outside of the U.S. today. A good percentage of
it is made with American cotton. So imagine the irony: Cotton
grown in the U.S., 12 million bales a year exported, much of it
to Asia, where it is made into apparel, then reimported into
the U.S. It makes no sense. The labor component isn't the
driver of that. You have transportation in two directions and
all the other things that go with it.
But my mother-in-law in North Carolina used to make blue
jeans at a factory there. And that product migrated. It
migrated because initially labor, but eventually tax and
infrastructure eroded. In order for it to come back, we need to
rejigger the puzzle pieces. We need incentives like some of the
things that have been discussed today that will allow that to
happen. It won't happen on its own. We can't survive as a
service economy.
The gentleman mentioned 70 percent of our economy is
consumption. It is. But I can't go to the movies and you can't
go to a restaurant every day and have the economy be buoyant.
We have to make things.
Mr. SCHWEIKERT. But did you have that experience where a
product that, as Walmart had been an international supply
chain, and the skepticism, and then a couple years later you
had found a way to domestically source?
Mr. SIMON. Every product that Walmart has been able to
repatriate--and the list is quite long now--has taken an
incredible amount of effort from both the supplier and the
company. They sit down and they analyze the cost components of
every single leg along the way. And we are overcoming 30 years
of muscle memory, where the way that we have done things, the
way that we have accounted for costs that are in the system,
costs like currency.
And we had that discussion earlier. Currency in most
companies is a footnote on their earnings statement, and they
say, our earnings were $3 a share, that is up or down versus
last year because of currency. And then Wall Street usually
doesn't reward or penalize a currency adjustment. So our whole
thinking isn't around currency adjustments. Our whole thinking
is about how much earnings per share can you deliver.
We found out that the transportation costs and the time
value of money from paying FOB in Shanghai versus delivery at
your dock in Delaware is 3 months, and that 3 months on, you
know, a billion dollars of imports is a significant amount of
money. So as you restructure your supply chains, you also have
to restructure your practices and the way that you look at your
business.
Mr. SCHWEIKERT. And look, it has everything from currency
exposures to environmental costs to moving things of those
dimensions.
Look, hopefully we have a universal agreement of all the
Members on the right and the left here. We actually have a
wealth gap issue. We actually have an income-worker mobility
issue. And yet I keep hearing, because we are, you know, taking
little shots at each other, almost defense of the status quo,
which is absurd. And as we sort of walk through this, look, I
am fixated on some of the technologies.
We have been talking about apparel. And the articles that
are now coming out that last year we finally now know how to
laser-cut cloth, where before that was always the excuse of why
it had to be done with labor. Now we actually have a technology
that can change that predictive capacity. There are
technological solutions that actually will make repatriation of
some of these supply chains possible. And I know there are so
many things.
Ms. Clausing, can you help me, just because you have
actually said a couple of things that I found absolutely
fascinating. And I must give you a compliment. I have been
actually reading some of the things you have done. Thank you
for being a person of the left, but also caring about what is
happening debt-wise and the destruction that does for our next
generation and why we must actually step up and deal with it.
With that, I yield back.
Chairman BRADY. Thank you.
Ms. DelBene, you are recognized.
Ms. DELBENE. Thank you, Mr. Chair.
And thanks to all of you for being here today and,
Professor Clausing, for being here from my alma mater.
Actually, I want to start with a question for you. I have
heard from small brewers in my district. They are very
concerned about the border adjustment proposal, because they
rely on imported ingredients in barrels to produce specialty
beers, and often they only sell domestically.
So, despite the fact that they are supporting jobs and
economic activity right here at home, they would be hit by
border adjustment with no offset. And so I wondered, do you
agree with that and how would you respond to their concerns?
Ms. CLAUSING. Yes, I agree that there are substantial risks
here to import-intensive industries, because of the possibility
that the exchange rate won't adjust perfectly.
And one thing that this testimony has reminded me of is the
fact that we can't really do everything in one country. Like we
have international and trade for a reason. We don't want
absolutely everything to be done in the United States. It might
make more sense to do the apparel abroad.
But that doesn't mean, you know, that we can't be sensitive
in terms of thinking about how trade has affected American
workers. And one way that you can help the workers who have
been hurt by the downsides of international trade is by a tax
system that favors, for instance, the earned income tax credit
at the low end, or middle incomes as well.
But there are many industries, including brewing and the
wine makers of Oregon and others, that are worried about this,
because of the possible lack of an exchange rate offset.
Ms. DELBENE. Our tax system, when we talk about things, we
generally talk about physical goods, the movement of something
or nexus where something is located. But I wonder if you can
comment on digital goods and intangible goods, how they would
be treated right now under this proposal, or do we even have
enough information to have a sense of how they would be
treated?
Ms. CLAUSING. One of the difficult things with digital
goods is that they are more difficult to observe. And so this
has actually raised a huge issue with countries that have VATs,
for instance, because they need to observe the passage of a
good across a border; and with a digital good, that is often
difficult to observe, and so that generates possible avoidance
opportunities.
In general, the economic literature in taxation suggests
that the more physical or real something is, the less
responsive it is to taxes. So if you look, for instance, at
U.S. multinational firms, where they have jobs abroad is often
other countries that have high tax rates and high regulations,
but where they have their profits are in these low-tax havens.
And so you get this big difference in how responsive things are
to tax, based on how easy they are to move. And digital goods
are one example of things that are very, very easy to move.
Ms. DELBENE. Do we have enough information right now in
terms of how border adjustment in particular might impact
digital goods, specifically this plan?
Ms. CLAUSING. I think it would raise enforcement concerns,
but this is one of several things that haven't been fully
worked out in the plan. Another big issue is finance, because
the financial sector would have to be treated differently under
this plan, and this creates huge headaches in terms of thinking
about how to administer this tax with respect to the financial
sector.
Ms. DELBENE. One other issue that was alluded to earlier is
that manufacturing is moving to more automation, using
technology, artificial intelligence, robots, and so may not use
as many people for that work. And if we look going forward, do
economists look at this as we estimate kind of future impact
and impacts on families and workers? Is that part of the
modeling, because I haven't heard people talking about that as
much.
Ms. CLAUSING. I think technological change is a huge issue.
And one thing to think about, when we think about what it means
to bring something back to the United States, if we bring it
back and use robots to make it, it is not clear that that is
generating any more American jobs than if we had left it
somewhere else.
Adapting to technological change requires both tax policy
that is sensitive to the needs of the middle class, but also
spending policy. We want workers who can use technology to
their advantage, not be replaced by it. So if you have an
engineering degree or you write software, technology is your
friend; but if you are a low-skilled worker, technology hurts
you.
So the answer to that seems to be upgrading the skill
levels of our population, and that is going to require
investments in education, investments in infrastructure, not
just hard infrastructure like roads, but other types of
infrastructure, like internet access and computing access and
the like. So I think our spending priorities need to reflect
that.
Ms. DELBENE. Thank you very much. And, Mr. Chair, I yield
back.
Chairman BRADY. Thank you. Mr. Rice, you are recognized.
Mr. RICE. Mr. Lindsey, I have a question for you. If you
have an American company and an Irish company, and they both
make the exact same product, and they both compete worldwide
for the materials to make that product, and they both compete
worldwide for customers to sell that product to, and the
American company pays a 35 percent income tax, and the Irish
company pays a 13 percent income tax, at a VAT, can you tell me
the outcome of that story?
Mr. LINDSEY. It is very simple. Obviously, the Irish
company is well advantaged.
Mr. RICE. So either the American company is going to end up
bankrupt, right, or bought by the Irish company, correct?
Mr. LINDSEY. Well, it is certainly going to be less
competitive. There is no question.
Mr. RICE. Do you disagree with that, Ms. Clausing?
Ms. CLAUSING. I think that some of the competitiveness
issues here are misunderstood. In particular, any company that
is serving a particular market----
Mr. RICE. You disagree with that is what you are saying?
You disagree with that?
Ms. CLAUSING. Yeah. I disagree.
Mr. RICE. You know, I ask that theoretical question all the
time. You are the first person I have actually heard disagree
with that. But you know, that point, I ask it as a theoretical
question. But we have a real live instance of it right here.
Mr. Luciano has made a much better case for that point than I
ever could when he says that our American manufacturers are
facing competition from Ukraine and from Brazil on grain
exports, correct?
Mr. LUCIANO. Right.
Mr. RICE. And they have for what period of time, Mr.
Luciano?
Mr. LUCIANO. Sir?
Mr. RICE. What period of time have we faced this
competition?
Mr. LUCIANO. Well, we have faced it for the last 50 years,
but I would say in the last five years it has accelerated.
Mr. RICE. And Brazil and Ukraine have these consumption
taxes that we are talking about here, the border adjustment. Is
that correct?
Mr. LUCIANO. That is correct.
Mr. RICE. So the effect of that, as you said earlier, is
that to sell to worldwide markets, the price they charge for
their product is less.
Mr. LUCIANO. [Nonverbal response.]
Mr. RICE. By how much?
Mr. LUCIANO. Enough to make the U.S. uncompetitive for long
periods of time.
Mr. RICE. So if China is one of the big markets for our
agricultural exports, the question is, I suppose, if our tax
system, our income tax system, creates a 15 percent higher cost
on American farmers, are the Chinese going to pay 15 percent
more for American corn than they are for Ukrainian corn or for
Brazilian corn? Is that right?
Mr. LUCIANO. I think what end up happening is that the
actual price that the U.S. farmer will get for the product, in
order to compete with those markets, will be lower than the
price that the Brazilian farmer or the Ukrainian farmer----
Mr. RICE. But we have seen the effects of it already over
the last decade, right? And what has been the effect? I mean,
what has happened to our market share?
Mr. LUCIANO. We have been declining. We lost it by half.
Mr. RICE. Mr. Lindsey, does that line of reasoning just
apply to agricultural products or any other products made in
America with this higher tax bracket?
Mr. LINDSEY. All right. Obviously, it applies to all
products. I would also point out the number of companies, how
many companies have switched and moved intellectual property
from here to Ireland versus the number of Irish companies that
have moved back. I think I would point out to the ranking
member how smart the Irish are in this regard.
Mr. RICE. Well, you know, and they are. And they have
designed a tax system that has a low income tax and a higher
VAT. Correct? Why would they do such a thing?
Mr. LINDSEY. Why would the Irish do such a thing?
Mr. RICE. Yeah. Yeah.
Mr. LINDSEY. Because they are very clever people.
Mr. RICE. Because they want to be competitive, correct?
Mr. LINDSEY. They want to be competitive.
Mr. RICE. And it has worked, hasn't it?
Mr. LINDSEY. It has worked beautifully. Ireland 30 years
ago was not a particularly prosperous place, and now it is. And
they have done a very good job.
Mr. RICE. I think that if the playing field is leveled, the
American worker can compete with anybody. But since 1986
Washington has stood by and let the rest of the world tilt the
playing field against the American worker.
My friends on the left spend their time arguing about the
distribution of the tax reductions. And I sure want to work and
make that fair. But, in my opinion, that is small potatoes.
Median household income in the United States is just about
equal today to what it was in 1990. The American middle class
has not had a raise in 27 years. The American middle class was
50 percent of the population in 1990. Today, it is 43 percent.
So our middle class is shrinking, and its income is stagnant.
We have to do better. We can't stay where we are. In my
opinion, the growth and GDP from this plan will dwarf any
reduction in taxes. In my opinion, we will see a resurgence in
American manufacturing. In my opinion, we will see a resurgence
in the American middle class. In my opinion, we will see a
reduction in income disparity.
I yield back, Mr. Chairman.
Chairman BRADY. Thank you.
Mr. Curbelo, you are recognized.
Mr. CURBELO. Mr. Chairman, thank you for hosting yet
another important hearing on a comprehensive tax reform. And I
thank the witnesses for their participation today.
I want to build on my comments from last week and reiterate
my support for permanent, revenue-neutral and comprehensive tax
reform. That is the surest way to bring the U.S. economy into
the 21st Century.
And, again, I am pleased to hear that there is so much
bipartisan consensus in favor of permanent, revenue-neutral tax
reform. I think that is absolutely critical, as it is important
that individuals, and families, as well as business of all
sizes, have confidence in knowing their tax system is
permanent, fair, and that it strives to achieve the lowest
rates and the most simplicity for all taxpayers.
I want to ask Mr. Simon, I would like you to take into
account the region I represent, Miami, oftentimes mentioned the
gateway to the Americas, many export opportunities in South
Florida. We have access to many markets all over the world.
But, also, the Port of Miami sees a lot of imports.
So looking at our blueprint more broadly and then honing in
specifically on today's topic, border adjustability, how do you
think an area like Miami, like South Florida, where there is
this great entrepreneurial spirit, where we have immigrants who
are thirsty to contribute to our country, to start new
businesses, who bring new ideas, how does an area like ours
fair under the house blueprint? And specifically with regards
to the policy that we are considering today?
Mr. SIMON. Well, I mean, by all accounts, American
exporters will be more competitive because they will have a
substantially different tax situation than they do today.
So the port and all the activity around the Port of Miami
and all of our ports will remain vital.
By most accounts, at least in the short and medium term, we
will still be very, very heavily importing because the supply
chain, supply lines, won't be there.
I think the risk--and we have talked about it quite a bit--
is that if we can't figure out a transition plan and prices go
up, consumer prices go up, which I think everybody in the room
doesn't want to have happen, if we can't figure that out, we
could see a slowdown in some of the imports.
But, fundamentally, what will happen in most of the economy
in the U.S. is that because of the revitalization of our export
base and our manufacturing base, we will start to see rising
consumer household incomes, and increased participation of
consumers in the market, and retail industry will begin to
become more vital, both large and small retailers, because of
the spending power of the middle class, which, as we heard
eloquently just a moment ago, has been eroded over the last 20
years. And once that is rebuilt, a lot of really, really
exciting things happen.
Mr. CURBELO. And, Mr. Simon, what is your message for
businesses who rely on textile imports? Of course, South
Florida has been a great beneficiary of many wonderful trade
deals like DR-CAFTA and other bilateral deals throughout the
region.
And we do receive a lot of imports through our South
Florida ports. And, of course, there are American businesses
that rely on these imports who employ many people in my
community. They have very serious concerns that they have
conveyed to me. How would you address those concerns?
Mr. SIMON. I really commend my friend, Mr. Cornell here,
for being here and being at the table. Because that is the way
we are going to get this done, particularly in some of these
more challenging industries. We need to sit down together, and
understand the impact, and then try to find ways, the best
ways, to mitigate them, and not with theory, and not with hope,
and not with plan. And build in bridges and safety nets so
these industries that may be impacted--and, to be quite honest
with you, we are all, you know, have our own opinions.
But let's not have our opinions determine the outcome of
his company or his industry. Let's figure out ways to bridge
the gap, and build a transition so that we can get to the other
side of this, and get rid of that 30 years of muscle memory
that is having us doing things this way and has no other option
besides offshore for apparel and many other industries. Once we
do that, we will be able to move forward.
Mr. CURBELO. Mr. Cornell, briefly, I will give you the
balance of my time.
Mr. CORNELL. I think Mr. Simon has talked about some of the
issues. But I think you have hit a really important topic.
Short-term, all the products that are imported into your
district today will be impacted in a very negative way. And
knowing your district pretty well, you have hundreds and
hundreds of small businesses. And I know that they depend on
import products.
So the short-term implications are significant. They could
be devastating.
Mr. CURBELO. Thank you, Mr. Cornell. Thank you, Mr.
Chairman.
Chairman BRADY. Thank you. Ms. Chu, you are recognized.
Ms. CHU. Ms. Clausing, I represent a district in Los
Angeles county that relies on its cars. In fact, our survival
in that area depends on owning a vehicle and navigating the
freeways. For many middle class and working families,
purchasing a vehicle is often one of the largest household
expenditures of their lives, and I am concerned about the
effect of a border adjustment tax on vehicle prices for these
families.
Now, the automakers that have come in to see me tell me
that automakers in the U.S. are part of a highly globally
integrated industry, and because of the integrated supply
chain, no vehicle made in the U.S. contains exclusively
domestic content. Also, there are studies such as from the
Center for Auto motive Research which estimates that the
average auto price will increase by $2,000, and the Roland
Berger study estimates that the average price increase would be
about $3,300. That sounds to me pretty prohibitive.
So I would like to know how you think this plan will effect
the American consumers of automobiles and the auto industry as
a whole. And there are others on this panel who are saying that
the rise in wages will mitigate price increases. Is that true?
Ms. CLAUSING. Yes. Thank you for your question.
I think the auto industry is one that is highly globally
integrated as you point out. Whether you buy a Ford or whether
you buy a Toyota, if you look at that sticker, you will see
that both of those cars come from many, many different
countries. And so any globally integrated industry like the
auto industry is going to have some risk associated with it.
On the import side, if the exchange rate doesn't
appreciate, that is going to drive up the auto prices of
imported cars, which will, of course, increase the price of
domestic cars as well, because they compete with each other in
the economy as a whole. And so that would be one risk for the
auto consumer.
For exporters of cars, there are also risks associated with
the potential for WTO problems and trade and tariff
retaliation. The auto sector would be an obvious one to target
in retaliatory tariffs. So that would be one worry that I would
have there.
And I would also point out that our auto exporters in
general are competing on a level playing field with other
countries with respect to a sales tax. If a country like
Ukraine has a sales tax, or a VAT, you know, that is, of
course, rebated when they export to another country. We could
add a sales tax here and rebate it, but that is not going to
make our companies more competitive. We already have a level
playing field with respect to sales tax.
Ms. CHU. Well, I was shocked to see that this proposal
could have very different effects for the top 1 percent versus
the bottom 80 percent. In fact, you point out that the top 1
percent would get a tax cut averaging $213,000, the bottom 80
percent will get a tax cut averaging $210. That means that the
upper 1 percent benefit by a thousand times more than the
bottom 80 percent.
And we see also that the cost of everyday products that
average consumers purchase would rise, like food. And the USDA
says that certain food products are very import heavy, like
fish, fruit and nuts, and that almost all bananas, mangoes,
coffee, cocoa, tea, spices, tomatoes, melons, and grapes are
imported.
So I have families in my district that live on a limited
income, seniors that live on a fixed income. Thinking about all
these families and seniors, does this tax plan and the BAT
result in a regressive tax on consumers and especially those on
a fixed income?
Ms. CLAUSING. Yes. And there are three ways in which I
would worry about this. One, as you point out, if the exchange
rate doesn't adjust, people would pay more for all of their
imported products. And we know that the poorer you are, the
higher the share in your consumption bundle is imported goods.
And so that is my first concern.
Second, if you just look at the estimates, even ignoring
the exchange rate effects, the tax cuts are just much larger at
the top, as you point out, a thousand times larger than they
are for the bottom 80 percent.
And, third, returning to this wage issue that you mentioned
in your last question, we really have to ask, what is going to
drive American wages higher? I think this plan is premised on
the idea that it will unleash a new wave of investments and
increase the supply side of the economy to drive up wages. But
if you look again at corporate profits after tax, they are
higher than they have ever been in all of our lifetimes.
So if they really need more after-tax profits in order to
generate more investments, you kind of wonder, well, where is
the investment paradise over the last 15 years? Because we have
had really high profits, but without big investments. So I
think a strong middle class is the answer to big investments.
Chairman BRADY. Thank you. Time has expired. Mr. Reed, you
are recognized.
Mr. REED. Well, thank you, Mr. Chairman. And I know I went
down to three minutes, so I will be quick. That is the penalty
of coming late, you have to go a little shorter, which I
appreciate.
To the panel, I want to just--one, I think there is broad
agreement. We cannot maintain the status quo. The status quo of
the American Tax Code is just fundamentally flawed and puts us
at such a competitive disadvantage that we have to do
something. Would everybody agree with that at least?
Okay. So we got common agreement there, heads shaking. I
want to focus on repatriation, because it is important to a lot
of folks back in my district and some interests that we have in
the district.
The holiday of 2004 was just that, a holiday. And when that
occurred, there was a lot of concern about that going to
corporate shareholders and others. Obviously, I believe, there
is a reason for that. Don't you have a fiduciary obligation to
your shareholders in America? And if you got a holiday, and you
get a one-time injection of cash, is there the fiduciary
obligation that has to be satisfied to give that to your
shareholders?
So is that a concern if we do another holiday going
forward, Mr. Lindsey?
Mr. LINDSEY. I would not do another holiday. That is one
reason I like this bill. Not only is it not a holiday, it takes
care of the problem permanently. And I----
Mr. REED. And Ms. Clausing----
Mr. LINDSEY [continuing]. Estimate was a hundred billion a
year by ending profit sharing.
Mr. REED. Reclaiming my time.
So for the democratic witness, you would agree with that
too correct?
Ms. CLAUSING. Correct.
Mr. REED. So doing it permanent is the way to go? That is
the general consensus of the panel?
Ms. CLAUSING. I am sure we disagree on the rate, but I
agree that it should be permanent, and the holidays are a bad
idea.
Mr. REED. I totally appreciate that.
The other source of agreement that I want to get to is when
you look at the overseas trapped earnings. My understanding of
it is you got, essentially, two types of overseas trapped
earnings that are there. You have cash or cash equivalents, and
you have investment oversea earnings that are sitting in brick
and mortar and other type of investments overseas. Does that
not encourage us to make sure that we have a bifurcated rate as
opposed to one rate?
And, Mr. Lindsey, could you offer some comment?
Mr. LINDSEY. My instinct--and, obviously, it just my
instinct--is no, because the way that money was repatriated
over there, retained over there, was due to the combination of
the foreign tax credit and the delay in repatriation.
What they chose to do with that money, given that it was
over there, that issue should be irrelevant to how we have
deemed repatriation.
Mr. REED. So you are advocating for a single rate, as
opposed----
Mr. LINDSEY. Single rate.
Mr. REED [continuing]. To bifurcated?
Anyone disagree with that assessment? Any of you have
overseas trapped earnings? I know you are retail. ADM, doesn't
matter either way?
Okay. Well, I am very concerned because I do know Uncle
Sam, and Uncle Sam does not take payments in regards to brick
and mortar. He wants cash. And if you don't have the cash on
your books to pay, I am very concerned that an impact of a
single rate could have on those companies is that they would be
significantly hit from a cash flow perspective and a cash
balance sheet.
So, with that, I yield back.
Chairman BRADY. Thank you. Mr. Bishop, you are recognized.
Mr. BISHOP. Thank you, Mr. Chairman.
Sitting here, I know that I have a thousand questions for
all of you. Thank you for the time you have taken. And I am
sorry I only have three minutes to ask the question.
I am from the Detroit area, home of the Motor City, autos,
component parts, manufacturing, big deal for us.
Mr. Simon, your comment that we have to make things is very
important to me. I do believe that. We are not a service-
centered economy. In my area, that is very important. And I
would like to, if I could, drill down on the manufacturing
issue a little bit more.
Tool and dye in our country is on the verge of extinction.
We are the Arsenal of Democracy. We are the home of the Big
Three, home of Henry Ford, home of the greatest auto industry
in the world. Yet, in the blink of an eye, we have lost 70
percent of the tool and dye industry and a full 80 percent of
its skilled workforce.
In a magazine article that I have here dated May 15, Mark
Schmidt, who is the president of Atlas Tool in Roseville,
Michigan, made some alarming statements and a very dire
prediction. And in his article he said that China is under a
deliberate and predatory economic attack right now. He talks
about how they are undercutting all the prices in the United
States and making it impossible for American folks to compete.
And he also says that soon we will not have the sufficient
capacity because we will be pushed out of the industry
entirely. China will completely take over, and, as a result,
will become the dominant automotive manufacturer and supplier
in the world.
This represents a huge threat to the United States, not
just in the area of the economy and jobs, but also all the way
into the realm of national security. What are we doing? This is
the craziest thing I have ever heard. If we are not doing
something today, or in this process, that will address this
concern, I would like to know from all of you what we can do to
try to address this. But this is insanity to me if we can't do
something about this. And I don't know if border adjustment is
the solution.
But, Mr. Lindsey, can you comment on that? I am sorry to
have taken so much time.
Mr. LINDSEY. I think that there are a number of things.
Again, it comes back to, How do you make America the best place
in the world to invest and produce things? And I think we are
targeting that in this bill, particularly with the expensing
component. Because we are going to be accelerating the
incentives to, you know, have a new plant and new equipment
here. I think that that is number one.
I also think the general reduction in rates is probably
helpful. But I would go back to the most important answer I
think is the expensing component.
Mr. BISHOP. Thank you. And one quick question for all of
you. How important is it for us to get this done before 2018.
Mr. LINDSEY. Oh, vital, vital, vital, vital.
Mr. BISHOP. Mr. Simon.
Mr. SIMON. Every day is important. We are eroding. We are
running out of energy.
Mr. BISHOP. I would ask you all, but I----
Chairman BRADY. Thank you. All time has expired. Mrs.
Walorski for the last question.
Mrs. WALORSKI. The last question. Thanks again for being
here. I represent Northern Indiana, and I come from the medical
device and pharmaceutical industries. So inversions have been
extremely detrimental to our State and could potentially be as
well.
Another issue, Zimmer Biomet is a global leader in
orthopedic medical devices, is headquartered in Indiana. I met
with their head of global tax a few months ago, and he put this
in stark terms. This is why I bring this up.
He said: Indiana is a consistent leader in quality
infrastructure, high skilled labor, reliable and low energy
costs. A few years ago, they were considering expanding their
manufacturing footprint, and excluding the Tax Code, Indiana
was the clear leader. But when you factored in the U.S. Tax
Code, Indiana dropped to dead last. And that is jarring.
Mr. Luciano, is there a solution to make the U.S.
competitive and attract investment other than tax reform? Is my
one question. I got to do this quick.
How important for ADM, and others in your industry, is
moving away from a worldwide tax system and ending the lockout
effect? And then, what ripple effects do you see when companies
are acquired by foreign competitors or inverters?
Mr. LUCIANO. Yeah, I think I said this before. I think that
what we see in this proposal, to us, addresses that competitive
issue that you are describing, and I think allows us to move
freely investments to whatever we need to make those
investments that makes sense.
And our intention is always to make it here, to improve the
competitiveness of the U.S. It is a very competitive market out
there, and if we are not allowed to help, in my case a farmer,
or any other manufacturers, we are going to be falling behind
to other countries that are challenging the U.S. supremacy in
all of this.
Mrs. WALORSKI. I appreciate it.
Mr. Chairman, I yield back just one minute.
Chairman BRADY. So noted.
So, a couple of things. One, I would, for the record, like
to introduce the Freund and Gagnon study for the Peterson
Institute that shows in review of 34 countries that adopted or
adjusted their border adjusted taxes since 1970, all but one, a
full depreciation of the currency to balance trade effects.
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Chairman BRADY. Another research paper by Alan Auerbach and
Larry Kotlikoff remarks to show destination-based consumption
tax more progressive than corporate taxes.
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Chairman BRADY. I would like to thank our witnesses today.
You have brought incredible insight to this well-watched
hearing. You can tell, some have already given up on U.S.
manufacturing in agriculture. You have heard it: We don't make
that anymore, it is not coming back.
I am heartened, though, by discussions we have heard here
today, that that is not necessarily the case. And I know with
Mr. Simon, you have told me before about when you bring back
manufacturing capability for lawn furniture, you bring it back
to manufacturing hair dryers--not that I use those anymore--and
on, and on, and on down that supply chain.
I am heartened by Rich Noll, who is the Chairman of Hanes
company. They have got the Hanes, Champion, Playtex, apparel,
you know, very import sensitive, who makes the case that if we
had this Tax Code in place today, these supply chains would be
back here in America.
And I also am heartened by the fact that we all recognize
that moving forward with this type of bold change requires
thoughtful transition, deliberate transitions, addressing
successfully the valid concerns we have heard today.
So we are going to continue on that track. And please be
advised that Members of Congress on the committee have two
weeks to submit written questions to you, to be answered later
in writing, so those questions and your answers will be made
part of the formal hearing record.
Again, on behalf of Mr. Neal and myself, thank you for
being here today. The meeting stands adjourned.
[Whereupon, at 1:24 p.m., the committee was adjourned.]
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