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





                        HOW BUSINESS TAX REFORM
                       CAN ENCOURAGE JOB CREATION

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

                                HEARING

                               before the

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

                      ONE HUNDRED TWELFTH CONGRESS

                             FIRST SESSION

                               __________

                              JUNE 2, 2011

                               __________

                           Serial No. 112-13

                               __________

         Printed for the use of the Committee on Ways and Means












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                      COMMITTEE ON WAYS AND MEANS

                     DAVE CAMP, Michigan, Chairman

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

                       Jon Traub, Staff Director

                  Janice Mays, Minority Staff Director












                            C O N T E N T S

                               __________
                                                                   Page

Advisory of June 2, 2011, announcing the hearing.................     2

                               WITNESSES

Ashby T. Corum, Partner, KPMG LLP................................     6
Walter J. Galvin, Vice Chairman of the Board, Emerson Electric 
  Co.............................................................    11
Judy L. Brown, Executive Vice President & Chief Financial 
  Officer, Perrigo Company.......................................    16
James H. Zrust, Vice President, Tax, The Boeing Company..........    23
James Misplon, Vice President, Tax, Sears Holdings Management 
  Corporation, Hoffman Estates, IL, testifying on behalf of the 
  National Retail Federation.....................................    30
Mark Stutman, National Managing Partner of Tax Services, Grant 
  Thornton.......................................................    40

                       SUBMISSIONS FOR THE RECORD

Mr. Levin, Question..............................................    75
Walter J. Galvin.................................................    75
Judy L. Brown....................................................    76
James H. Zrust...................................................    80
James Misplon....................................................    82
Research and Development Incentives in the U.S. and Abroad.......    84
Aerospace Industries Association.................................    88
The Depreciation Fairness Coalition..............................    92
President and CEO, South Carolina Small Business Chamber of 
  Commerce.......................................................    96
American University Kogod School of Business.....................   102
Retail Industry Leaders Association..............................   111

 
                        HOW BUSINESS TAX REFORM
                       CAN ENCOURAGE JOB CREATION

                              ----------                              


                         THURSDAY, JUNE 2, 2011

                     U.S. House of Representatives,
                               Committee on Ways and Means,
                                                    Washington, DC.
    The committee met, pursuant to call, at 10:06 a.m., in Room 
1100, Longworth House Office Building, the Honorable Dave Camp 
[chairman of the committee] presiding.
    [The advisory of the hearing follows:]

HEARING ADVISORY

FROM THE 
COMMITTEE
 ON WAYS 
AND 
MEANS

  Camp Announces Hearing on How Business Tax Reform Can Encourage Job 
                                Creation

May 26, 2011

    Congressman Dave Camp (R-MI), Chairman of the Committee on Ways and 
Means, today announced that the Committee will hold a hearing on major 
business and corporate tax issues and how changes to those aspects of 
the Tax Code, as part of comprehensive tax reform, might promote job 
creation and economic growth. Whereas the two most recent Committee 
hearings on the business aspects of tax reform focused on international 
taxation, this hearing will address the taxation of domestic business 
operations. The hearing will take place on Thursday, June 2, 2011, in 
Room 1100 of the Longworth House Office Building, beginning at 10:00 
A.M.
      
    In view of the limited time available to hear witnesses, oral 
testimony at this hearing will be from invited witnesses only. However, 
any individual or organization not scheduled for an oral appearance may 
submit a written statement for consideration by the Committee and for 
inclusion in the printed record of the hearing. A list of invited 
witnesses will follow.
      

BACKGROUND:

      
    At a combined federal-state rate of over 39 percent, the United 
States has the second-highest corporate income tax rate in the 
developed world, trailing only Japan. The average for countries in the 
Organization for Economic Co-operation and Development (OECD) is only 
25.5 percent. And as the Committee learned at its May 24, 2011, hearing 
on foreign tax systems, the Japanese Government intends to reduce its 
corporate rate by five percentage points, which soon will leave the 
United States with the highest corporate rate among our major trading 
partners. Extensive economic research, meanwhile, has found that most 
of the burden of corporate tax rates is borne by workers. Furthermore, 
pass-through entities pay tax at the individual income tax rates, and 
uncertainty surrounding the individual rate structure after 2012 has 
serious implications for business planning and job creation.
      
    In addition, the Committee must consider a number of issues related 
to business taxation as part of comprehensive tax reform. These issues 
include differences between tax accounting and financial accounting, 
the treatment of inventories and depreciable property, and trade-offs 
between marginal tax rates and targeted business tax preferences. The 
Committee must investigate the purposes behind these various rules and 
provisions, and whether such rules and provisions serve their intended 
purpose. The fact that the United States is an outlier with respect to 
the rates at which it taxes business income, combined with the 
complexity of the rules governing business taxation, make it important 
for the Committee to explore whether tax reform that broadens the base 
and lowers marginal rates could benefit the U.S. economy and American 
workers.
      
    In announcing this hearing, Chairman Camp said, ``While our major 
trading partners have spent the last two decades reducing their 
corporate tax rates, the U.S. corporate rate is actually higher than it 
was 20 years ago, and the rates that apply to small businesses are 
scheduled to go up in the near future rather than down. At the same 
time, the Tax Code is full of tax preferences that attempt to pick 
winners and losers rather than just allowing the most promising 
business investments to flourish. As the Committee continues to 
investigate how best to reform the tax system for American families, we 
also need to take a close look at the major elements of business 
taxation and evaluate those elements against the principles of 
simplicity, fairness, stability, and economic growth.''
      

FOCUS OF THE HEARING:

      
    The hearing will inquire about the potential benefits to companies 
and workers of lowering marginal tax rates on business income, and the 
trade-offs that such companies might be willing to make given current 
fiscal constraints. The hearing also will examine major elements of 
business and corporate taxation in anticipation of future efforts to 
evaluate policy options that might encourage job creation in the United 
States.
      

DETAILS FOR SUBMISSION OF WRITTEN COMMENTS:

      
    Please Note: Any person(s) and/or organization(s) wishing to submit 
written comments for the hearing record must follow the appropriate 
link on the hearing page of the Committee website and complete the 
informational forms. From the Committee homepage, http://
waysandmeans.house.gov, select ``Hearings.'' Select the hearing for 
which you would like to submit, and click on the link entitled, ``Click 
here to provide a submission for the record.'' Once you have followed 
the online instructions, submit all requested information. ATTACH your 
submission as a Word document, in compliance with the formatting 
requirements listed below, by the close of business on Thursday, June 
16, 2011. Finally, please note that due to the change in House mail 
policy, the U.S. Capitol Police will refuse sealed-package deliveries 
to all House Office Buildings. For questions, or if you encounter 
technical problems, please call (202) 225-3625 or (202) 225-2610.
      

FORMATTING REQUIREMENTS:

      
    The Committee relies on electronic submissions for printing the 
official hearing record. As always, submissions will be included in the 
record according to the discretion of the Committee. The Committee will 
not alter the content of your submission, but we reserve the right to 
format it according to our guidelines. Any submission provided to the 
Committee by a witness, any supplementary materials submitted for the 
printed record, and any written comments in response to a request for 
written comments must conform to the guidelines listed below. Any 
submission or supplementary item not in compliance with these 
guidelines will not be printed, but will be maintained in the Committee 
files for review and use by the Committee.
      
    1. All submissions and supplementary materials must be provided in 
Word format and MUST NOT exceed a total of 10 pages, including 
attachments. Witnesses and submitters are advised that the Committee 
relies on electronic submissions for printing the official hearing 
record.
      
    2. Copies of whole documents submitted as exhibit material will not 
be accepted for printing. Instead, exhibit material should be 
referenced and quoted or paraphrased. All exhibit material not meeting 
these specifications will be maintained in the Committee files for 
review and use by the Committee.
      
    3. All submissions must include a list of all clients, persons and/
or organizations on whose behalf the witness appears. A supplemental 
sheet must accompany each submission listing the name, company, 
address, telephone, and fax numbers of each witness.
      
    The Committee seeks to make its facilities accessible to persons 
with disabilities. If you are in need of special accommodations, please 
call 202-225-1721 or 202-226-3411 TTD/TTY in advance of the event (four 
business days notice is requested). Questions with regard to special 
accommodation needs in general (including availability of Committee 
materials in alternative formats) may be directed to the Committee as 
noted above.
      
    Note: All Committee advisories and news releases are available on 
the World Wide Web at http://www.waysandmeans.house.gov/.

                                 

    Chairman CAMP. The hearing will come to order.
    Good morning. And thank you for joining us today for 
another in a series of hearings on comprehensive tax reform.
    Whether at the full committee, the subcommittee, or the 
Joint Committee on Taxation, this committee has been actively 
engaged in a systemic review of the Tax Code for a very simple 
reason: Today's Tax Code is preventing, not promoting, job 
creation. And on the eve of what is widely expected to be a 
disappointing jobs report, this committee remains focused on 
what action must be taken to reform our Tax Code and make 
America a more attractive place to invest and create the jobs 
we need.
    Today's hearing will examine the potential benefits to 
companies and workers of lowering marginal tax rates on 
business income. The hearing also will look at major elements 
of business and corporate taxation to evaluate policy options 
that can encourage job creation here at home.
    The challenges created by the Tax Code for job creators of 
all sizes are many: high statutory rates, compliance and 
administrative burdens, the impact of temporary and expiring 
tax provisions, just to name a few. And pile on top of that a 
dizzying array of credits, deductions, exemptions, and it is no 
wonder that the Tax Code is distorting economic behavior.
    America's high and uncertain tax rates are barriers to 
growth and competition. With a combined Federal-State corporate 
tax rate of 39.1 percent, we are well above the average of the 
rest of the industrialized world.
    Some might find comfort in the fact that the December tax 
relief package prevented an immediate tax hike on job creators 
organized as passthroughs, who pay their taxes at the 
individual rate. These employers are primarily small 
businesses. But that relief will be fleeting, as they again 
face higher taxes in less than 2 years unless Congress acts. 
The uncertainty surrounding their future tax rates makes it 
even harder for them to plan, invest, and create jobs.
    Consider this fact: Over 200 Federal tax provisions are 
scheduled to expire between 2010 and 2020, whereas in 1998 
there were only 50 such expiring provisions. With uncertainty 
at every turn, it is no wonder that the optimism of small 
employers remains at recessionary levels, according to NFIB's 
Small-Business Optimism Index. And, today, through the 
testimony of both job creators and tax practitioners, we hope 
to gain insight into how the current structure of taxation 
affects the ability of businesses to invest, grow, and create 
jobs.
    Before we move to our panel and begin our discussion on tax 
reform, I want to make one final comment. Tax reform cannot and 
should not be confused with increasing taxes. It must be done 
in a revenue-neutral manner. We will not grow if Washington is 
taking an ever-increasing share of economic output in the form 
of Federal taxes. We do not have a vibrant economy when we 
increase taxes on job creators. We have a vibrant economy when 
we get spending down, keep taxes low, and get Washington out of 
the way of our entrepreneurs. As we discuss tax reform, I 
intend to move the dialogue in that direction.
    I look forward to the testimony of today's witnesses. Thank 
you all for being here.
    I will now yield to the ranking member, Mr. Levin, for his 
opening statement.
    Mr. LEVIN. Thank you very much, Mr. Chairman.
    And thank you, all the witnesses, for coming. Many of you 
have Michigan roots. In fact, I think that is the majority. And 
I want to put on the record that this is not a result of a 
grand conspiracy between Mr. Camp and myself.
    Shall I yield to you for a special word?
    Chairman CAMP. That is fine.
    Mr. LEVIN. Mr. Camp and I join together in welcoming 
everybody, whether you are from Michigan or not.
    In announcing this hearing, Chairman Camp indicated that it 
would include an examination of, and I quote, ``the tradeoffs 
that companies might be willing to make given current fiscal 
constraints,'' end quote. I think most of us agree that a lower 
corporate rate is desirable, but--and I emphasize this--the 
tradeoffs involved in getting there truly matter.
    We have learned in our prior hearings that businesses seem 
generally to agree that tax reform should be revenue-neutral. 
The inevitable consequence of that would be a shifting of the 
burden of current level of taxation, and there would be winners 
and losers. We must now examine the true impact on domestic 
companies if we repealed important tax benefits that encourage 
investment in jobs in our country.
    Considering that we have spent the last four full committee 
hearings on tax reform, mostly at a 30,000-foot level, we 
welcome this opportunity to move beyond generalities and 
examine the benefits that companies would be willing to give up 
in order to achieve the goal laid out in the Republican budget 
of a top corporate and individual tax rate of 25 percent.
    We, indeed, need to carefully examine these issues so that 
we can reform our Tax Code and our corporate Tax Code in a way 
that encourages economic growth, investment, and job creation.
    With that in mind, I join my colleagues in looking forward 
to your testimony.
    If I might, Mr. Chairman, I would like to add just a word. 
Mr. Neal, our colleague, was surely planning to be here, but he 
will not be, because he has returned to his district because of 
the tornado that occurred there in western Massachusetts.
    If I might add on another personal note, the father of 
Allyson Schwartz, who has been a member of this committee, 
passed away over the weekend. I think she will be here today, 
and, if so, I think you might want to give her a special hello 
and a special hug.
    Thank you, Mr. Chairman.
    Chairman CAMP. Well, thank you.
    We are pleased to welcome our panel of experts, all of whom 
have either extensive experience as tax practitioners or have 
handled tax matters for American businesses. I believe that 
their experience and insight will be helpful as we focus on the 
potential benefits to businesses and workers of lowering 
statutory income tax rates.
    First, I would like to welcome and introduce Ashby Corum, a 
partner at KPMG in Detroit, Michigan. Mr. Corum is an expert on 
the relationship between tax and financial accounting. And 
since joining the Detroit office in 2003, he has been actively 
involved in resolving accounting-related income tax issues for 
major corporations.
    Second, we will hear from Walter Galvin, the Vice Chairman 
of the Board at Emerson Electric Company in St. Louis, 
Missouri. In his current role, he is responsible for Emerson's 
financial planning and financial services. Until February of 
last year, Mr. Galvin served as Emerson's chief financial 
officer, a position he held for 17 years.
    Third, we welcome Judy Brown, the Executive Vice President 
and Chief Financial Officer of Perrigo Company in Allegan, 
Michigan. Perrigo is the world's largest manufacturer of over-
the-counter pharmaceutical products for the store brand market, 
and Ms. Brown is responsible for all aspects of the company's 
corporate financial management.
    Fourth, we will hear from James Zrust, the Vice President 
of tax for the Boeing Company in Chicago, Illinois. With 30 
years of tax experience, Mr. Zrust has spent considerable time 
working on all aspects of Federal and State income taxes, as 
well as major international transactions.
    And, fifth, we welcome James Misplon, the Vice President of 
Tax for Sears Holdings Management Corporation in Hoffman 
Estates, Illinois. Mr. Misplon is responsible for the design 
and implementation of comprehensive structural and 
nonstructural tax strategies for Sears. Today, Mr. Misplon is 
testifying on behalf of the National Retail Federation and is 
the chair of the federation's Taxation Committee.
    And, finally, we will hear from Mark Stutman, the National 
Managing Partner of Tax Services for Grant Thornton in 
Philadelphia, Pennsylvania. In that role, Mr. Stutman has 
overall responsibility for the quality of services, the 
profitability of operations, and the welfare of clients for 
Grand Thornton's core and specialty tax practices.
    Thank you all again for your time today.
    The committee has received each of your written statements, 
and they will be made part of the formal hearing record. Each 
of you will be recognized for 5 minutes for your oral remarks.
    And, Mr. Corum, we will begin with you. You are recognized 
for 5 minutes.

         STATEMENT OF ASHBY T. CORUM, PARTNER, KPMG LLP

    Mr. CORUM. Good morning, Chairman Camp, Ranking Member 
Levin, and other Members of the Committee. I appreciate the 
opportunity to appear before you today as an invited witness to 
assist the committee in understanding the importance of 
financial accounting and the relationship between tax and 
financial accounting, particularly as affected by changes in 
tax law. The views expressed here are my own and do not 
necessarily reflect the views of KPMG.
    The accounting and reporting of income taxes by corporate 
enterprises in their financial statements is a critical element 
of their overall reporting to stakeholders. Income tax expense 
is often a significant expense for an enterprise, and it can 
have a major impact on earnings. Accordingly, investors, 
analysts, and other stakeholders monitor the income tax amounts 
reported by businesses closely and make assumptions about the 
long-term trends of the reported amounts.
    The Internal Revenue Code specifies how an enterprise's 
annual Federal current income tax liability is determined. 
Accounting standards provide for the financial accounting and 
reporting of the effects of income taxes that result from an 
enterprise's activities during the current and preceding years.
    The objectives of accounting for income taxes are to: 
recognize the amount of income taxes payable or refundable for 
the current year; and recognize deferred tax liabilities and 
assets that reflect the future tax consequences of events that 
have been recognized in the enterprise's financial statements 
or tax returns.
    Total income tax expense of an enterprise consists of both 
the current tax expense and the deferred tax expense or benefit 
associated with changes in the balance of the deferred tax 
liabilities and assets. The result of dividing total income tax 
expense by pretax accounting income is commonly known as the 
``effective tax rate'' and may differ substantially from the 
statutory tax rate of a group's parent company or the rate of 
current tax paid.
    Financial statement pretax income for a global enterprise 
can differ substantially from taxable income in a particular 
jurisdiction. Most of these differences are attributable to: 
when income or expense is recognized for tax purposes versus 
when it is recognized for financial reporting; items of income 
or expense that are permanently allowed or disallowed for 
taxable income purposes; and the allocation of income to 
different jurisdictions around the world with different 
statutory tax rates.
    Changes to the tax law often produce financial accounting 
consequences, some of large magnitude. I will read to you a 
single example of the impact of a change in tax law. My written 
testimony provides other examples.
    If an enterprise were to have a post-retirement obligation 
for which a pretax book expense of $100 was recognized in a 
prior period but for which a tax deduction is not permitted 
until the liability is settled, the entity would have a 
deferred tax asset of $35. If the statutory tax rate were 
reduced from 35 percent to 25 percent, then the applicable rate 
used to measure the deferred tax asset would be adjusted 
downward since the company would now expect to receive a 
smaller future tax benefit upon settling the liability.
    This would result in a reduction of the deferred tax asset 
from $35 to $25 and an income tax expense of $10 in the period 
of enactment. In other words, an enterprise's book net income 
for the period of enactment would be reduced by $10. The 
opposite effect would occur in the period of enactment for an 
enterprise's deferred tax liabilities, where a reduction in tax 
rates would result in an increase in book net income.
    In future periods, that same enterprise may have reduced 
income tax expense due to the reduced statutory rate--that is, 
a rate reduction will impact book income for the period of 
enactment to the extent that existing deferred tax assets and 
liabilities are remeasured and for the effects of retroactive 
provisions. That is why the enactment of a rate change for 
future periods does not necessarily affect the current tax 
position of the company during the period of enactment and may 
have a significant effect on reported earnings.
    I am happy to answer any questions you may have. Thank you.
    [The prepared statement of Mr. Corum follows:]




    Chairman CAMP. Thank you very much.
    Mr. Galvin, your written statement is also part of the 
record, and you have 5 minutes.

  STATEMENT OF WALTER J. GALVIN, VICE CHAIRMAN OF THE BOARD, 
                      EMERSON ELECTRIC CO.

    Mr. GALVIN. Good morning, Chairman Camp, Ranking Member 
Levin, and Members of the Committee. I am Walter Galvin, vice 
chairman and former CFO of Emerson, a $25 billion global 
manufacturing company based in St. Louis.
    With 57 percent of our sales outside the United States, 
operations in more than 150 countries, and over 130,000 
employees, Emerson is a large U.S. taxpayer. Last year, we paid 
U.S. income taxes of approximately $500 million, with an 
effective tax rate on U.S. profits of 36 percent.
    In the words of former Secretary of State Dean Rusk, one-
third of the world is asleep at any given time and the other 
two-thirds is up to something. Indeed, much of the world is up 
to something. They are reworking their Tax Codes to boost 
international competitiveness. We need to wake up and join them 
if we want the U.S. to stay competitive.
    There are three specific challenges that place Emerson and 
American jobs at a substantial disadvantage: The first is our 
worldwide system of taxation. The second is the high U.S. 
corporate income tax rate. And the third is the lopsided 
incentives in our Tax Code, encouraging foreign companies to 
take a huge amount of debt in the United States.
    The first disadvantage is that most of our foreign 
competitors don't pay a significant second tax on non-U.S. 
earnings repatriated to their home countries. The U.S., on the 
other hand, taxes the worldwide profits of American companies 
at the high 35 percent rate, minus credits to any foreign taxes 
paid.
    I know the committee recently held hearings on this issue, 
so I would just point out some practical consequences that for 
Emerson are very real.
    In 2006, Emerson sought to buy APC, a Rhode Island-based 
company that produces high-tech electronic equipment. Over 50 
percent of APC's earnings came from outside the United States. 
We competed against Schneider Electric, a French company, to 
buy APC. Emerson offered $5 billion, but Schneider ultimately 
acquired the company by offering $6 billion. Why was Schneider 
willing to pay more? Quite simply, APC profits were worth more 
to Schneider because, as part of a French company, APC's 
dividend sent to France would be taxed at under 2 percent.
    Another important impact of the worldwide system is the 
incentive to keep the profits we make in our international 
locations. Last year, Emerson bought a company in the U.K. 
called Chloride for approximately $1.5 billion with cash we had 
earned abroad and kept abroad. We considered other options for 
that cash, such as bringing it to the U.S., but the U.S. Tax 
Code would charge us an extra 10 to 15 cents in taxes on every 
dollar. Where is our return higher, a dollar invested in the 
U.K. or 85 cents in the United States?
    Secondly, we, as a country, have been tinkering with 
credits and deductions that, while well-intentioned, have done 
little more than encourage complex tax planning. Eliminating 
the bulk of deductions and credits, exchanged for a lower 
corporate tax rate, will keep U.S. companies competitive and 
create jobs.
    Third, I would like to address the lopsided incentive to 
debt-load in the United States. In recent years, countries 
around the world have been tightening tax rules, regulating a 
company's ability to load up on debt, take huge interest 
deductions, and lower their tax liabilities. These strict 
regulations prevent multinational companies, for example, from 
using excessive leverage financed by debt to acquire other 
companies.
    If Emerson wants to acquire a company in India or China, we 
must generally come to the table with cash, not debt. If one of 
their companies or other international companies want to 
purchase an American company, U.S. tax law encourages them to 
finance that acquisition with debt. Foreign corporations 
typically load up on debt in the U.S. and enjoy the interest 
expense deduction, thereby minimizing U.S. taxes paid to the 
Federal Government.
    America's high corporate tax, worldwide system, and 
lopsided incentives to debt-load contributed to the 2008 
acquisition of Anheuser-Busch by Belgian-based InBev in 
Emerson's home city of St. Louis. At the time of the 
acquisition, Anheuser-Busch paid over $900 million in taxes. 
InBev loaded up on debt to acquire Anheuser-Busch and are now 
enjoying huge tax deductions. Based upon my experience, I would 
suspect InBev won't pay much in income taxes to the Federal 
Government on the U.S. profits it earns from Anheuser-Busch for 
at least a decade.
    The prospect of tax reform is an opportunity to level the 
playing field with our international competitors, but I urge 
the committee to keep two things in mind. First, U.S. tax 
policy should be equitable so as not to distort business 
decisions. Equitable tax policy treats all business income 
equally notwithstanding the industry, how a company is 
structured, or whether it is headquartered in the U.S. or 
offshore. Second, tax reform should be revenue-neutral. Our 
fragile economy would likely react negatively to a large money 
grab through higher corporate taxes.
    In closing, we can't create jobs at home if we punish those 
who are headquartered here rather than overseas. There is no 
reason why American companies should not be able to compete and 
win anywhere in the world, but we need a level playing field.
    Thank you, Mr. Chairman.
    [The prepared statement of Mr. Galvin follows:]




    Chairman CAMP. Thank you.
    And, Ms. Brown, you also have 5 minutes. Thank you, and 
welcome.

STATEMENT OF JUDY L. BROWN, EXECUTIVE VICE PRESIDENT AND CHIEF 
               FINANCIAL OFFICER, PERRIGO COMPANY

    Ms. BROWN. Thank you.
    Chairman Camp, Ranking Member Levin, and distinguished 
Members of the Committee, thank you for this opportunity to 
share my views on how business tax reform can encourage job 
creation.
    Before doing so, I would like to first provide an overview 
of Perrigo's business and how we are creating many new jobs 
today. Then I will address the role that taxes play in our 
decision-making processes.
    Perrigo was founded 124 years ago in the small town of 
Allegan, Michigan, where we still maintain our global 
headquarters today. Our mission is to provide quality, 
affordable health care, and we do so through our unique 
offering of store-brand pharmaceutical and infant-nutrition 
products in the over-the-counter, or OTC, space.
    Our products are comparable in quality and effectiveness to 
nationally advertised brand products, but the cost of our 
products to the retailer is significantly lower, as is the 
price the consumer pays. Therefore, the retailers are happy and 
consumers are happy. We estimate that our business model saves 
consumers approximately $1.5 billion annually in their health-
care spending.
    Perrigo is sometimes referred to as the largest health care 
company you have never heard of. But most Americans have at 
least some of our products in their cabinets. Each year, we 
produce over 44 billion tablets and over 350 million liquid 
doses. Simply stated, this means that every second of every 
day, 1,400 Perrigo tablets are being taken.
    No one has more products requiring FDA approval in the OTC 
universe than Perrigo. Our more than 450 products are custom 
labeled and packaged under the names of all major drug, club, 
and supermarket chains in the U.S., which means we have a 
tremendously complex supply chain. And, yet, we believe we are 
one of the most cost-effective health-care manufacturers in the 
world. We have benchmarked our labor and plant efficiencies 
against competitors in so-called low-cost countries, like India 
and China, and still believe that our plants in Michigan, South 
Carolina, Vermont, Florida, Ohio, New York, and soon Minnesota 
can compete with anyone, all while maintaining high product 
quality under strict American standards.
    Over 70 percent of our revenues and earnings before tax 
come from U.S. activity, although we are looking to expand into 
new markets globally. Although we export some products from the 
United States and do import others from international 
operations, the majority of our products are manufactured in 
the countries in which they are sold to end consumers.
    We have grown from approximately $1 billion in revenue in 
2005 to nearly $3 billion in 2011, an 18 percent compound 
annual growth rate. In that time, we have invested over $2 
billion in 12 acquisitions, two-thirds of which were in the 
U.S., adding manufacturing footprint and employee head count 
along the way. Today, we employ over 8,000 people globally, 
with more than 5,000 in the U.S. and over 3,500 of them in 
Michigan.
    Through the success of our business model and acquisitions, 
our total U.S. employment has grown 57 percent over the last 6 
years. I would like to note that Perrigo's growing global 
footprint has increased the need for many well-compensated 
scientific, managerial, and other white-collar roles at our 
global headquarters in Michigan.
    Now, with that brief background on our business, let me 
switch to the topic at hand, taxes, which is, without question, 
an important issue for us. One of the top strategic issues I 
face as CFO of Perrigo is the increasing disparity of the U.S. 
corporate tax rate relative to other countries and the impact 
this disparity has on our long-term decision-making.
    Perrigo is currently looking to invest tens, if not 
hundreds, of millions of dollars in the next few years to build 
manufacturing capacity to meet the strong demand for our 
quality, affordable health-care products. We would prefer to 
invest those dollars in the most optimal place for our supply 
chain--that is, close to our distribution centers and our 
customers, which, as I indicated, is mostly in the United 
States.
    When we consider where to make an investment that could be 
made in either the U.S. or abroad, we model our return on 
invested capital on an after-tax basis. In such an analysis, 
for a foreign investment we use the statutory rate imposed by 
the foreign jurisdiction and assume the earnings will not be 
repatriated to the United States.
    When we model a U.S. investment, we used the statutory 
Federal income tax rate, plus the applicable State and local 
tax rates, because they are a real cost and impact cash flow. 
While Congress cannot change State and local rates, any 
discussion regarding tax reform should take into account the 
reality of these other increasing tax burdens, as well.
    These models show that the tax rates we have to pay on a 
U.S. investment are now much higher than what we would pay on a 
foreign investment. In light of this, our return on invested 
capital tells us that foreign investments need to be taken ever 
more seriously, even where our first preference would be to 
continue investing in the United States. As a CFO, I don't 
believe that taxes should be the main strategic driver of our 
next investment dollar.
    In summary, I am acutely aware of our national budget 
situation and the need to make difficult choices on revenue and 
expenditures. Perrigo believes that increased transparency, 
simplification, and certainty are desirable and, in fact, worth 
paying for. We do not need the world's lowest rate to compete, 
but our increasingly disparate rate is putting us at a 
disadvantage.
    We want our business model to continue to shine on its own 
accord, as it saves U.S. consumers billions of dollars while, 
at the same time, providing attractive shareholder returns. We 
want to continue to compete well in a global economy by being 
able to bid competitively against foreign players. And, 
therefore, we support an overall lower corporate rate, combined 
with a territorial model that would enable better use of global 
capital, thereby ensuring the continued positive effects of 
investment and job creation in the U.S.
    On behalf of Perrigo, I would like to thank the Ways and 
Means Committee for the opportunity to provide our views on the 
impact of business taxation on job creation, and look forward 
to working with all of you and other tax policymakers on this 
and other related issues.
    [The prepared statement of Ms. Brown follows:]




    Chairman CAMP. Thank you. Thank you very much.
    Mr. Zrust, you have 5 minutes.

STATEMENT OF JAMES H. ZRUST, VICE PRESIDENT OF TAX, THE BOEING 
                            COMPANY

    Mr. ZRUST. Chairman Camp, Ranking Member Levin, and Members 
of the Committee, thank you for the opportunity to testify on 
the need for business tax reform.
    I have worked in corporate tax for over 30 years, and I can 
say unequivocally that the U.S. corporate tax system must be 
reformed to ensure that U.S. companies are not put at a 
disadvantage when competing in the global marketplace with our 
foreign counterparts.
    First, I would like to provide a brief overview of The 
Boeing Company. The Boeing Company is the world's largest 
aerospace company, the largest U.S. manufacturing exporter, and 
leading manufacturer of commercial jetliners and defense, 
space, and security systems. With our corporate headquarters in 
Chicago, Illinois, Boeing has over 160,000 employees in the 
U.S., with major operations in 34 States.
    Boeing is organized into two business units: Boeing 
Commercial Airplanes and Boeing Defense, Space, and Security. 
Importantly, The Boeing Company contributes more than $1 
billion each week into the U.S. economy. In 2010, Boeing paid 
over $32 billion to more than 22,000 U.S. businesses, 
supporting an additional 1.2 million supplier-related jobs 
across the country.
    The Boeing Company is proud to have customers located in 
more than 90 countries. Historically, 70 percent of the 
commercial airplane business is derived from outside the United 
States, and we are rapidly growing our defense business outside 
the U.S.
    Although a significant portion of our customers are outside 
of the United States, our employees, manufacturing and support 
operations, research and development activities, and 
intellectual property are predominantly located in the U.S. 
Over 95 percent of our net income is attributable to these 
domestic activities. Unlike other large multinational 
companies, almost all of our current worldwide income is 
subject to U.S. tax, and our effective rate is generally 
between 31 and 33 percent.
    In addition to a significant percentage of our customers 
being outside the U.S., many of our competitors are, as well. 
It is well-known that our largest competitor is located in 
Europe, and new competition is rapidly emerging from China, 
Canada, Brazil, and Russia, all with lower combined Federal and 
local statutory rates than the U.S.
    Everyone here today is well-aware that the combined U.S. 
statutory tax rate is almost 15 percentage points higher than 
the average combined rate of other OECD member countries. It is 
our view that significantly reducing the corporate tax rate 
will improve U.S. competitiveness. We believe lowering the 
corporate rate would dramatically reduce tax policy pressure 
and rhetoric by ensuring that U.S. companies are competitive 
and, importantly, would not tip the scale in favor of foreign 
production.
    Recently, a commercial aircraft customer located in the 
Middle East approached Boeing with a concern regarding the lack 
of U.S. companies willing to bid on a contract in that region. 
The general sentiment is that price bids received from 
companies based in Asia, Europe, and Australia are consistently 
lower than those made by U.S. aerospace companies due to our 
tax system and high corporate rate.
    This is not the outcome we should want. We believe that a 
concerted effort to enact a corporate rate reduction to ensure 
that the U.S. remains competitive and an attractive place to do 
business in the global marketplace needs to be made now.
    We appreciate the current deficit position and are not 
asking Congress to ignore the costs associated with a 
meaningful rate reduction. Like many of the bipartisan 
proposals outlined recently, we agree that tax expenditures 
should be on the table if a meaningful rate reduction is 
considered. It is our position that we could support 
eliminating tax expenditures in order to obtain a meaningful 
lower corporate tax rate.
    Turning toward the issue of the complexity, I often tell my 
team, ``Complexity breeds opportunity.'' This is not an ideal 
situation for either the government or the taxpayer. The 
complexity of our present tax system leads to considerable 
uncertainty with regard to issue resolutions and is burdensome 
in terms of the cost of compliance.
    Each year, we spend millions of dollars to comply with the 
complexities of the U.S. tax system. This entails detailed 
analysis of the over 500 book tax accounting differences in our 
Federal income tax return. In addition, the determination of 
the R&D credit, the domestic manufacturing deduction, and the 
U.S. taxation of foreign activities involve incredible degrees 
of complexity.
    Our compliance obligations not only include the filing of 
our Federal tax return but also the continuous audit by the 
Internal Revenue Service. The IRS has over 30 agents assigned 
to our case and maintains permanent offices in 3 of our 
locations. Our most recent case to be resolved covered the 
years 1998 to 2003 and was only concluded in December of last 
year.
    Compliance is built in to Boeing's business culture. While 
compliance is and should be a crucial element to all 
businesses, a less complicated system will inherently increase 
transparency and result in improved productivity.
    In conclusion, over the course of several decades, U.S. 
competitors, both new and old, have lowered their corporate tax 
rate, but the U.S. corporate tax rate has remained virtually 
unchanged. In today's global economy, now is the time to act to 
ensure that the U.S. is a place where companies want to do 
business from as well as in. We believe a meaningful lower rate 
and a less complex system would make U.S. companies like Boeing 
more competitive with the rest of the world.
    [The prepared statement of Mr. Zrust follows:]




    Chairman CAMP. Thank you very much.
    Mr. Misplon, you have 5 minutes.

STATEMENT OF JAMES MISPLON, VICE PRESIDENT, TAX, SEARS HOLDINGS 
   CORPORATION, TESTIFYING ON BEHALF OF THE NATIONAL RETAIL 
                           FEDERATION

    Mr. MISPLON. Chairman Camp, Ranking Member Levin, and 
Members of the Committee, my name is Jim Misplon. I am vice 
president of tax for Sears Holdings Corporation, parent company 
of Sears, Roebuck and Co., Kmart and Lands' End.
    Sears Holdings has 280,000 employees and over 3,500 stores 
in the United States. We have stores in all 50 States, as well 
as Puerto Rico, U.S. territories, and Canada. Like most 
retailers, the vast majority of our operations are domestic.
    I am the chair of the National Retail Federation's Taxation 
Committee and am testifying today on behalf of the National 
Retail Federation. Accompanying me today is Rachelle Bernstein, 
vice president and tax counsel for the NRF. We appreciate the 
opportunity to present the views of the retail industry on the 
subject of corporate tax reform.
    The NRF supports business tax reform that will lower 
corporate tax rates and broaden the tax base. We believe this 
type of income tax reform will be good for the retail industry 
and good for the economy as a whole.
    Sears Holdings and other members of NRF believe that the 
most important aspect of any tax reform measure is its impact 
on the economy and jobs. We believe that the reform of the 
income tax, by providing a broad base and lower rates, will 
bring the greatest economic efficiency to the Federal tax 
system. These changes will lead to greater investment, more 
jobs, and greater economic growth.
    Tax reform must be applicable to all businesses, not just C 
corporations. The retail industry has one of the highest 
Federal effective tax rates of any industry. Because their 
industry is so competitive, NRF believes that most of the tax 
rate reduction will be passed forward to consumers through 
lower prices. As a result of this price cut to consumers, 
retailers will increase sales, hire more employees, and 
purchase more inventory, all of which will increase investments 
and jobs.
    Lower tax rates will create more investment opportunity. If 
the corporate tax rate is lowered, investment proposals will 
more likely meet a company's required internal rate of return, 
and a decision to invest will more likely be made. These 
investments, like building or improving stores and distribution 
centers, the investment in online and mobile shopping 
platforms, create jobs both within and outside the retail 
industry.
    In addition, lower tax rates reduce incentives for entering 
into tax-motivated business strategies. This will also 
eliminate much of the tax complexities from the business tax 
system and reduce controversy between the taxpayer and the IRS.
    Any new tax system will need to provide for the recovery of 
the cost of capital assets and inventories. We recognize and 
support the tax reform goal of substituting lower tax rates for 
tax incentives. However, the new tax system should also not 
burden investments by extending the tax write-off of an asset 
beyond its economic life.
    These rules must be applied fairly so that similarly 
situated taxpayers are not treated differently. Thus, any new 
tax system should eliminate the current tax law bias that 
provides more favorable depreciation rules for taxpayers that 
lease their property than for taxpayers in the same industry 
that own their own property.
    In the retail industry, tax rules relating to inventories 
and depreciation create the greatest compliance burdens. If the 
rules are to be changed, we urge that every effort be made to 
keep the new system as simple as possible. We recognize that 
the specifics of inventory and depreciation reform are not the 
subject of today's hearings; however, because these issues are 
so important to the retail industry, we respectfully request 
the opportunity to offer our views on these issues when the 
committee considers them in more detail.
    Finally, one of the most harmful things that could be done 
to our economy at this time would be to place a direct Federal 
tax on consumption. A recent study performed for the NRF by 
Ernst & Young and Tax Policy Advisors found that if a VAT were 
adopted in addition to income tax, economic growth would 
decline for several years. It would cause a loss of 850,000 
jobs in the first year and 700,000 fewer jobs over the long 
term.
    In conclusion, the NRF urges the committee to move forward 
with business income tax reform. This will encourage 
investment, create jobs, and simplify administration of the tax 
system.
    Mr. Chairman, thank you for the opportunity to express 
NRF's views on business tax reform, and we would be pleased to 
answer any questions.
    [The prepared statement of Mr. Misplon follows:]




    Chairman CAMP. Thank you very much.
    Mr. Stutman, you have 5 minutes.

  STATEMENT OF MARK STUTMAN, NATIONAL MANAGING PARTNER OF TAX 
                    SERVICES, GRANT THORNTON

    Mr. STUTMAN. Thank you.
    Mr. Chairman, Mr. Ranking Member, and other members of this 
distinguished committee, it is an honor to appear before you 
and participate in this hearing on comprehensive tax reform and 
the role it can play in promoting job creation and economic 
growth.
    My name is Mark Stutman, and I am the tax practice leader 
for Grant Thornton LLP, the U.S. member firm of Grant Thornton 
International, one of the six global accounting tax and 
business advisory organizations. Grant Thornton helps thousands 
of the most dynamic and entrepreneurial businesses in America 
to budget and plan their business activities, report their 
earnings to creditors and shareholders, and fulfill their 
Federal, State, and local tax obligations.
    Grant Thornton supports tax reform aimed at lowering 
effective business tax rates in order to promote global 
competitiveness for U.S. businesses. Low effective tax rates 
encourage investment and business activity, spur job creation, 
and, ultimately, increase national wealth.
    Tax reform should benefit the dynamic businesses that are 
the backbone of American economic growth and the driving force 
behind expanding employment. Included in this category are many 
privately held businesses, the Russell 2,000, and similar 
groups.
    I urge Members of the Committee to make their highest 
priority those tax reform proposals that will lower effective 
business tax rates, will preserve valuable incentives for 
domestic business activity, and will not disproportionately 
burden any one segment of the business community.
    It is important for policymakers to focus on effective 
business tax rates, not just the statutory corporate tax rate. 
The effective tax rate measures how much tax is actually paid 
and is a true measure of the burden taxes place on business 
activity.
    Much has been made of the fact that the U.S. has a higher 
statutory corporate tax than many of our trading partners. The 
statutory corporate tax rate is an important factor in 
determining the effective rate a business must pay, but it is 
by no means the only factor. Rules that produce an unintended 
or inappropriate result are properly called ``loopholes.'' 
Where these rules serve a specific and intended policy goal, 
they are better described as ``tax expenditures.''
    It is also important to consider the presence of other 
taxes that apply to business activity. Virtually every country 
with a statutory corporate tax rate lower than the U.S. also 
burdens business activity with some form of a value-added tax. 
The effective business tax rate can only be measured by 
considering all of these factors, not just the statutory 
corporate tax rate.
    Many reform proposals envision going significantly beyond 
loopholes to cover some or all of the costs of a statutory 
corporate tax rate reduction by eliminating existing business 
tax expenditures. This may result in a lower statutory 
corporate tax rate but will not necessarily improve effective 
business tax rates. If the committee chooses to reduce or 
eliminate tax expenditures, caution should be exercised so as 
not to unduly burden domestic business activity.
    Existing business tax expenditures are predominantly 
directed at encouraging investment, production, and research in 
the U.S. According to a December 2007 Treasury Department 
report, the three largest business tax expenditures in the 
Internal Revenue Code are accelerated depreciation, the 
domestic production activity deduction, and the research 
credit. Each of these is an incentive to domestic economic 
activity. The tax benefits realized by dynamic organizations 
through these incentives are significant drivers of domestic 
economic growth and job creation. A reduction in these tax 
expenditures, even if combined with a reduction in statutory 
rates, could result in an increase in the effective rate on a 
domestic business activity.
    In a recent Grant Thornton national survey of 318 U.S. CFOs 
and senior comptrollers, over 60 percent of respondents said 
they would prefer to retain their existing tax benefits unless 
the statutory corporate tax rate was reduced to 25 percent or 
lower, and 17 percent preferred keeping their incentives 
regardless of the size of the rate cut.
    I also urge the Members of the Committee not to consider 
tax reform proposals that would disproportionately burden any 
one segment of the business community. Dynamic organizations, 
frequently organized as passthrough entities, are the backbone 
of American economic activity and a driving force behind 
expanding American employment. Passthrough businesses represent 
an ever-increasing share of the U.S. economy and are 
responsible for an increasing proportion of all business 
receipts, rising from 7 percent in 1980 to over 30 percent in 
2007.
    The earnings of passthrough businesses, such as S 
corporations and partnerships, are generally taxed at 
individual rates. Any tax reform proposal that eliminates 
business tax benefits but provides only a statutory corporate 
tax rate reduction would significantly increase the effective 
tax rate on many dynamic passthrough companies.
    In conclusion, Grant Thornton supports tax reform efforts 
that seek to reduce effective business tax rates. Low effective 
business tax rates encourage investment and business activity, 
spur job creation, and, ultimately, increase national wealth.
    Reducing statutory corporate tax rates can be an important 
part of reducing effective business tax rates. However, it is 
important to remember that other factors contribute to 
determining the effective tax rate of any business. I urge the 
Members of the Committee to support tax reform proposals that 
will lower effective business tax rates, preserve valuable 
incentives for domestic business activity, and not 
disproportionately burden any one segment of the business 
community.
    Thank you for giving me the opportunity to share this 
information with the committee, and I am pleased to answer any 
questions.
    [The prepared statement of Mr. Stutman follows:]




    Chairman CAMP. Well, thank you very much, Mr. Stutman.
    I want to thank all of our witnesses for their testimony.
    Now, we will move into the question period, and each Member 
will have 5 minutes to ask questions. I will begin.
    I have a question really for Mr. Galvin, Ms. Brown, Mr. 
Zrust, and Mr. Misplon, if you would all give me an answer down 
the line.
    We heard from several of you that the U.S. has a high 
corporate tax rate, the second highest in the world except for 
Japan, and Japan is in the process of lowering their rate. We 
will be the highest after that occurs. In this world of 
increasingly mobile capital--and I think everyone would agree 
that capital is mobile--how does this high rate, this high U.S. 
corporate tax rate, make business investment and job creation 
decisions in the U.S. more difficult for your companies?
    And if you could each just comment on that, I would 
appreciate it.
    Mr. Galvin, why don't we you start with you?
    Mr. GALVIN. Well, certainly, the high corporate U.S. tax 
rate makes us less competitive with competing companies around 
the world. And, in that context, Emerson's major competitors 
are large companies based in Germany and Switzerland. And the 
risk you have, if the U.S. is not put on a level playing field, 
is that more and more smaller-cap U.S. companies will be 
acquired, perhaps, by large international companies in Europe 
and probably, in a few years, by Asian-domiciled companies.
    When you have those acquisitions made, you tend to lose a 
significant number of jobs, as we have seen in St. Louis as 
Anheuser-Busch was acquired or in the acquisition of APC. 
Generally, when a company is acquired, the headquarters staff 
jobs are lost. So not having a competitive tax rate with the 
rest of the world causes more and more jobs to be lost.
    Chairman CAMP. All right. Thank you.
    Ms. Brown.
    Ms. BROWN. Certainly.
    For the committee to understand, as a CFO I spend a lot of 
time meeting with the investment community. And, interestingly 
enough, I spend about half of my time in many conversations 
talking about our tax rate.
    Our business model has been very successful, and our income 
statement is very attractive to investors, all the way through 
operating margins. So we have been very good at delivering 
profitability for shareholders, and, as I mentioned, adding a 
considerable amount of jobs--57 percent employment growth in 
the last 5 years.
    However, the one area where we are not competitive versus 
our Swiss, Israeli, Canadian, European--I can go down the 
list--competitors is on the tax line. And so we get questioned 
very frequently on why can't we be more like them, to which I 
have to respond that we have a different tax rate because we 
compete in different jurisdictions and are heavily U.S.-focused 
today. Our business model is focused there, too.
    And combined with the fact that, as we are making 
investment decisions, our investment decisions are based on 
where we need to be to serve our customers, where our global 
supply chain is based. And that means that, today, as we go 
through a portfolio of investment decisions, we want to make 
decisions based on the talented people that we can get to work 
in our factories, the supply chain and marketing expertise that 
we need to run our business. And we think that that can be done 
very, very well right here in the U.S. We have great people 
doing that.
    However, when the model gets run and we look at a return on 
invested capital, the tradeoff between making the next dollar 
investment in the U.S. versus somewhere else, unfortunately, 
many times comes back to the beneficial tax impact that we 
would have as a company and for our shareholders and owners by 
being in a more multi-jurisdictional footprint globally.
    So it very much comes into play as we talk about decisions 
with our analysts.
    Chairman CAMP. Thank you.
    Mr. Zrust.
    Mr. ZRUST. As I mentioned before, we are facing new 
competition from countries like China, Canada, Brazil, and 
Russia in the single-aisle space. And all of those countries 
have considerably lower tax rates than the U.S.
    And so, one of the decisions we are going to have to make, 
or our businesses are going to have to make, and they have 
publicly talked about, is a decision as to when they are going 
to build a new airplane in the single-aisle space. And to the 
extent that the U.S. lowers the tax rate and is competitive 
with countries like that, down into the mid-20s, I think that 
is going to make that decision easier and allow us to be more 
competitive going forward.
    Chairman CAMP. Mr. Misplon.
    Mr. MISPLON. As you know, the National Retail Federation 
and the companies that it represents are predominantly 
domestic. Sears Holdings' effective tax rate averages between 
38 and 36 percent, which is an extremely high effective tax 
rate, which really is a barrier to additional investment.
    To the extent that we would need a return on investment of 
a certain percentage to build a new store, build a new 
distribution center, the impact of a 38 percent effective tax 
rate on that decision makes many of the investment decisions 
decline, in that they just are not returning the sufficient 
amount of income.
    Chairman CAMP. Some have suggested, Mr. Misplon, that the 
U.S. should adopt a national consumption tax or a VAT to either 
bring additional revenue to the Federal Government or to pay 
for corporate rate reduction.
    You mentioned in your testimony the impact that a 
consumption tax would have on the U.S. economy and, 
particularly, jobs. And I wondered if you could just explain in 
more detail why, from your perspective, the consumption tax 
would be problematic and what its potential impact on the U.S. 
economy would be.
    Mr. MISPLON. Well, first off, we certainly think that a VAT 
tax is a regressive tax and puts more of the tax burden on the 
low- to middle-income families.
    But, that said, the studies show that, since it is a direct 
impact on consumers, which really is the engine that drives our 
economy, and that higher prices resulting from the VAT tax 
would lower consumer spending, which is going to put a real 
dampening effect on our economy--there is actually a very close 
example of what happens with a VAT, and that is up in Canada, 
where, 10 or 15 years ago, a VAT was instituted in Canada, and 
Sears Canada, from that day forward, for the next 5 years, lost 
money, and the Canadian economy did very poorly over that same 
period of time.
    Chairman CAMP. All right.
    And I have one just last question for the four of you, Mr. 
Galvin, starting with you.
    There has been some testimony today about the positive 
impact on your companies and your employees from a lower 
corporate tax rate in exchange for specific tax preferences 
being given up. Can you explain how this kind of tradeoff might 
benefit your company, if it did not necessarily reduce your 
effective tax rate?
    Mr. GALVIN. Well, certainly, Emerson is at a competitive 
disadvantage with our worldwide competitors who have a much 
lower tax rates. We would be in favor of eliminating all or 
substantially all tax credits and deductions, including the 
manufacturing and R&D tax credits. I do favor the 199 section.
    But, clearly, because of the complexity of the current Tax 
Code and system, you have a lot of unintended consequences. A 
lot of money is spent, that is not necessarily productive, on 
tax lawyers, tax planning, and other factors.
    Get rid of as many as you can, lower the rate, and keep the 
revenue across all corporate America revenue-neutral. We would 
then be more competitive with our international competitors, 
and this country would be much better off in preserving jobs.
    Having a noncompetitive tax rate hurts U.S.-headquartered 
companies.
    Chairman CAMP. All right.
    Ms. Brown.
    Ms. BROWN. Certainly. I will answer this building off of my 
earlier statement, which is, for us, we would be open to 
eliminating expenditures. We utilize today the R&D credit and 
the 199 manufacturing credit. But to make the tradeoff to 
reduce our overall tax burden and to make our system, our tax 
rate more comparable to the international competitors that our 
analysts are comparing us to today anyway, have a lower overall 
tax burden, reduce the complexity, as my colleague just noted 
as well, and be able to then make investment decision much more 
elegantly based on the real returns of the business decision, 
as opposed to defaulting so much--or placing so much weight on 
financial matters like tax.
    Chairman CAMP. Thank you.
    Mr. Zrust.
    Mr. ZRUST. As I mentioned in my statement, there is 
incredible complexity associated with putting together the 
information to comply with respect to the R&D credit, the 
domestic manufacturing deduction, and with the U.S. taxation of 
foreign income tax, in particular.
    And so, from our standpoint, though we spent last year $4 
billion in R&D, given the way the R&D credit is administered 
right now and the fact that the renewal is constantly in 
question, we would certainly, in return for a significantly 
lower rate, give up the R&D credit, even given the magnitude of 
our spend. We would certainly, given the fact we are a large 
manufacturer--and we would also give up the domestic 
manufacturing deduction.
    And I think, though the complexity is not in the same 
arena, I think another thing that could go on the table is 
something along the lines of bonus depreciation. So, I mean, in 
return for complexity--or, in return for simplicity, we would 
like to get rid of the complexity.
    Chairman CAMP. All right. Thank you.
    And, finally, Mr. Misplon.
    Mr. MISPLON. As I mentioned, the retailers traditionally 
have a very high effective tax rate to start with. So, 
certainly, in the spirit of tax reform and the lowering of 
rates, we understand that other tax preferences to be subject 
to change, as well, and we would welcome that.
    The other panelists also mentioned simplicity and the lack 
of complexity, and that really is another important issue, in 
that it is such an adversarial relationship between the 
taxpayer and the IRS. And to eliminate much of the complexity 
and have, actually, the IRS and the taxpayer work together for 
a change, as opposed to oppose one another, would be welcome 
change.
    Chairman CAMP. Thank you.
    Mr. Levin may inquire.
    Mr. LEVIN. Let me just ask a few questions. Time is 
limited. I don't want to only ask questions of the witness we 
invited. I think it is useful to have as much back and forth as 
possible. So I want to try to do that.
    I just want to say to Mr. Misplon, it is true that the 
retail industry has the highest effective tax rate generally. 
But remember, in countries that have a lower effective tax 
rate, they have a value-added tax. And that has been, more or 
less, the tradeoff.
    And as we talk about lowering tax rates, we have to look at 
the tradeoff. And I think you would not trade off a lower tax 
rate for a value-added tax, would you?
    Mr. MISPLON. We believe that the problem is going to be 
that the dampening effect on the economy for the first 10 
years, in the present state of our economy, would be extremely 
damaging and that our economy could not support the increase in 
prices that would go along with a VAT tax.
    Mr. LEVIN. All right. So I think your answer is ``no.'' And 
I think that is understandable.
    Let me just ask Ms. Brown, what is the effective tax rate 
for your company?
    Ms. BROWN. Our global effective tax rate today is 
approximately 30 percent, excluding one-off items.
    Mr. LEVIN. Excluding what?
    Ms. BROWN. Any one-off items.
    Mr. LEVIN. But you can't exclude.
    Ms. BROWN. Okay. So last year's rate was approximately 30 
percent. We paid 38 percent in the United States.
    Mr. LEVIN. Okay. I think we need to look at that, because 
the information we have is quite different. So I think all of 
us should take a look at effective tax rates, and our 
information is that yours was considerably lower.
    You are a Michigan company. I want to treat you gently.
    Ms. BROWN. Yes. We are a Michigan company. So we have 
approximately 70 percent of our earnings before tax are in the 
U.S., heavily domiciled in Michigan. Our U.S. rate, again, is 
approximately 38 percent, including State and local, and then 
less the, give or take, about 2-percentage-point credit we get 
between the R&D credit and manufacturing credit. The remaining 
30 percent of our earnings before tax are from international 
locations.
    So the weighted average rate over the last several years 
for our company has been high 20 percent or approximately 30 
percent. So that is the basket of overall tax rates that we are 
paying globally.
    Mr. LEVIN. Uh-huh. Okay. And so we will talk about that 
further.
    Mr. Galvin, let me just ask you about your statement. At 
the end, you say, ``U.S. tax policy should be equitable so as 
not to distort business decisions. Equitable tax policy treats 
all business income equally notwithstanding the industry, how a 
company is structured, or whether it is headquartered in the 
U.S. or offshore.''
    So let me just ask you, if you can operate overseas and 
bring back the income without paying any tax, why wouldn't that 
be an incentive to move operations overseas?
    Mr. GALVIN. The major reason that our operations are 
overseas are, in fact, because 57 percent of our sales are 
overseas.
    And as you look at Emerson today and also for the last 3 
years, if you look at Emerson's U.S. exports to third parties 
and to our subsidiaries overseas and compare that to our 
international subsidiaries' imports into the United States and 
what they ship to third parties into the U.S., we, in fact, 
export more than we import from our subsidiaries.
    And we look at things according to our after-tax return on 
investment. And while tax needs to give us a level playing 
field with our competitors----
    Mr. LEVIN. You say ``level playing field,'' but consider 
your competitors who are domestic. If you can operate overseas 
and bring back the income without any taxation, how does that 
effect the competition between you and somebody who is 
domestic?
    Chairman CAMP. And if you could just answer briefly, 
because time has expired.
    Mr. GALVIN. Fine.
    We would be quite competitive, yes, if the repatriation 
rate were similar to the international companies of 2 percent, 
yes.
    Mr. LEVIN. I am asking about your domestic competitors.
    Chairman CAMP. Time has expired.
    Mr. Herger is recognized for 5 minutes.
    Mr. HERGER. Thank you, Mr. Chairman.
    I have a question I would like to address to Mr. Galvin, 
Ms. Brown, Mr. Zrust, and Mr. Misplon.
    The United States will soon have the highest corporate tax 
rate among the OECD countries. Most analysts would agree that 
that is a problem for U.S. competitiveness. However, some have 
argued that the key factor is the average or effective tax 
rate, not the marginal rate. They contend that the effective 
rate for U.S. companies is comparatively low.
    I assume that as you try to expand your company, multiple 
investments opportunities are competing for the same resources. 
When you are deciding to build a plant or make an acquisition, 
do you factor taxes into your analysis, and if so, do you look 
more at your marginal rate or your overall average tax rate and 
why?
    And Mr. Galvin, beginning with you, please.
    Mr. GALVIN. Thank you.
    Yes, we look at the marginal rate and we also look at our 
effective rate. For Emerson, for the last 3 years, our U.S. 
effective rate has varied between 35 and 37 percent, so it is 
not a big difference. As we look at our return on where we 
decide our plants should be, we first determine where 
manufacturing locations are closest to the customer.
    We also have to consider that while taxes are important, if 
you look at Emerson's P&L in round numbers and $100 of sales, 
35 percent of our costs are material costs. Often having the 
locations closer, and the competitiveness on material costs 
dictates where the production goes.
    Secondly important is compensation costs. About 25 percent 
of sales dollars is in compensation, about 20 percent is in 
other expenses, in manufacturing, administrative costs, 
marketing costs, et cetera. Our taxes represented as a percent 
of sales, even being a large taxpayer, is 4 percent. Where we 
have a problem is taxes, we can be competitive with our 
competitors on material, on compensation, other expenses--
freight is also a factor, we spend 3 percent of sales on 
freight, being closer to our customers reduces our rate costs. 
With taxes, we can't be competitive at the current time with 
the U.S. corporate tax rate.
    Mr. HERGER. Ms. Brown.
    Ms. BROWN. In Perrigo, as I mentioned, we do a vast 
majority of our manufacturing in the United States. And we also 
believe having benchmarked globally that our operations are 
absolutely unequivocally competitive, if not lower cost, 
because of the tremendous labor force we have, our people and 
the technology that we have invested in the United States.
    That being said, we have gotten to a place because when we 
model, we model on a return on investment capital, and we are 
in fact right now live in the process of looking at investing 
in additional manufacturing capacity because the tremendous 
success of our business model. What does that mean?
    We have to now consider, where do we place that plant, and 
we have to think about the return after tax in reference to the 
comments already made, which are where ending cash flows are 
going to be generated. So we take into consideration the rate 
in each jurisdiction that we would be looking at. The effective 
rate is great on a global basis. It is a general rate for us, 
and we look at the competitiveness of that line. But we are 
really looking at the after-tax return against the different 
plants.
    So we will start first with the supply chain, and that has 
got to be the key driver. But that marginal rate that we would 
have to pay at each location comes into play, and right now, we 
are pulling the tax rate into our consideration because it is 
just not competitive for us in the U.S. on that line item.
    Mr. HERGER. Mr. Zrust.
    Mr. ZRUST. When we make additional investments, we also 
look at the marginal tax rate, and thus we look at things on an 
after-tax basis.
    And so from a competitive standpoint, I mean, the high U.S. 
rate puts us at a disadvantage against some of our competitors. 
As I mentioned, the new competition that we are facing on the 
single aisle is a good example of that.
    Mr. MISPLON. For a retailer, the marginal tax rate and the 
effective tax rate are virtually the same and any ROI 
calculation would use either one of those in the comparison of 
whether it will meet the threshold.
    Mr. HERGER. Thank you.
    Chairman CAMP. Thank you.
    Mr. Johnson may inquire.
    Mr. JOHNSON. Thank you, Mr. Chairman.
    Mr. Zrust, in your testimony you say each year Boeing 
spends millions of dollars to comply with the complexities of 
our tax system. And you mentioned you are continuously under 
audit by the IRS. I was amazed by the number of people you have 
there. As you know, many of our corporate structures have to 
provide office space for the IRS. And then the IRS turns around 
and sues you, don't they? So, first of all, can you quantify 
what your company spends just to comply with the corporate Tax 
Code?
    Mr. ZRUST. We haven't quantified that in terms of a hard 
number, but I think it is certainly safe to say it is well into 
the millions of dollars, if not maybe--I can say it is well 
into the millions of dollars in terms of wages of Boeing 
employees, both in the tax area and then within the business 
units in the finance area. And then to deal with the complexity 
of the law, we also have, we also have a high degree of spend 
with tax consultants as well to help us wade through the 
complexities of the existing law.
    Mr. JOHNSON. So the guys sitting in your building don't 
help you, the tax guys?
    Mr. ZRUST. The in-house guys do. The IRS guys, no, they 
don't help us.
    Mr. JOHNSON. Thank you. I am aware of the companies in 
Dallas griping at me about that, too. It is a shame you all 
didn't move there. You know you had the opportunity.
    As a matter of curiosity, do you know what your expense is 
to house those IRS agents.
    Mr. ZRUST. I am sorry, could you repeat that?
    Mr. JOHNSON. Yeah. Do you know what your cost is to house 
the IRS guys?
    Mr. ZRUST. I don't.
    Mr. JOHNSON. But it is significant?
    Mr. ZRUST. Typically, as I said, we have IRS agents in 
three locations. And there, depending upon the given day, there 
is in excess of 30 agents in the aggregate at the three 
locations.
    Mr. JOHNSON. Maybe we ought to cut the IRS by about 20 
percent. What do you think?
    Second, can you tell me, the committee, what the impact the 
cost of compliance has had on your bottom line or your ability 
to grow?
    Mr. ZRUST. Well, again, on an annual basis, we spend 
millions of dollars in order to comply.
    And I think that those funds, to the extent that we could 
reduce the complexity associated with the compliance effort, 
would be better put to investment in new products and jobs.
    Mr. JOHNSON. I know. Sell airplanes. So you talk about 
battling the IRS over the R&D tax credit. I know you have had 
some problems with that. Has your experience made the company 
more cautious toward using that tax credit?
    Mr. ZRUST. I can't say that we are going to be more 
cautious in using it. I can say that since it is less certain 
as to what the incentive is, because of the complexity and 
because of the--let's call it the ongoing battle with regard to 
quantifying that credit, and so it does have an impact. And the 
ongoing complexity is considerable.
    Mr. JOHNSON. Does it hamper your R&D work?
    Mr. ZRUST. I don't think it has a direct impact on the 
engineering or anything, no.
    Mr. JOHNSON. Okay. In the context of reform, do you have 
any suggestions of what we can do to ease the compliance burden 
associated with the R&D tax credit, and would you consider 
doing away with the credit in return for a lower rate?
    Mr. ZRUST. Well, if you we look at our, at our competing 
countries, I mean, many of these countries, in addition to 
having lower rates, do incentivize research and development. 
Because of the way the R&D is presently structured, I think we 
would be in a position, and because of the lack of certainty 
associated with the ongoing legislation of that credit, we 
would be willing to take a rate reduction and in return give up 
the R&D credit, given the way it is presently structured.
    Mr. JOHNSON. Thank you, sir.
    Thank you, Mr. Chairman. I yield back.
    Chairman CAMP. Thank you.
    Mr. McDermott may inquire.
    Mr. MCDERMOTT. Thank you, Mr. Chairman, for gathering this 
panel together.
    Mr. Galvin, I want to understand, if we lower the tax rate 
to 25 percent, will you stop laying off people in the United 
States? Will that make you competitive so you don't have to lay 
off anybody here? Because everybody here is worried about jobs.
    I have been waiting for six months for a jobs bill, and 
they keep saying if we lower the tax rate to the corporations, 
somehow we will get jobs in this country. So I want to hear you 
tell me that you will stop laying people off in Alabama and 
other places.
    Mr. GALVIN. Certainly the issue is very complex, as you 
understand, and we have no crystal ball on the economic 
outcome. And the unfortunate situation that occurred in 2008 
with the financial crisis, when our underlying sales declined 
13 percent between 2008 and the middle of 2009, we had to 
reduce our employment in the U.S., in Europe, in Asia. In fact, 
the reductions actually are higher in Asia because of the 
commodity.
    So I have no crystal ball as to the sales revenue we will 
have with the state of the economy.
    I can say this: If the state of the U.S. economy improves 
and there is higher growth in the U.S., we will obviously grow, 
but I have no crystal ball as to that.
    You said Alabama. I assume it is in Huntsville.
    Mr. MCDERMOTT. Yes.
    Mr. GALVIN. That is a difficult market with a lot more 
incoming products, and that acquisition we made about a year 
and a half ago.
    Mr. MCDERMOTT. Well, the reason I ask the question is 
because today's Washington Post says: ``U.S. Economy: 
Manufacturing Slowdown the Latest Sign Recovery is Faltering.''
    So lowering the tax rate is not going to stop the faltering 
of the manufacturing in this country, is it? Or do you think if 
we lowered it quickly down to 25 we would have no loss in jobs.
    Mr. GALVIN. I think there are many factors that need to be 
considered, and there is not one single silver bullet that will 
help.
    Mr. MCDERMOTT. I get that, because you gave me some data 
that I thought was very interesting, and I appreciate your 
candor, 25 percent for material.
    Mr. GALVIN. No. I think what I said was 35 percent is 
material costs; about 25 percent is compensation costs.
    Mr. MCDERMOTT. That is 60 percent.
    Mr. GALVIN. Yes.
    Mr. MCDERMOTT. And then 4 percent was taxes?
    Mr. GALVIN. Yes.
    Mr. MCDERMOTT. So we are talking about the tail wagging the 
dog here, aren't we?
    Mr. GALVIN. No. The reason is when you look at material 
costs in a competitive environment, we can be competitive with 
any country, any competitor around the world on material 
purchases of buying from suppliers in a competitive fashion. We 
can be competitive on compensation with companies like Germany 
and others by basing it in the same locations as they do.
    But we cannot be competitive against the Chinese, which 
have a much lower tax rate, and Germany, Switzerland and other 
countries that are not competitive.
    Mr. MCDERMOTT. Let me ask you a question. You said that--I 
mean, everybody graciously has said we want to have revenue-
neutral. I like that idea. I like that idea that somebody else 
is going to pay it, because you are going to get a 5 percent 
reduction or a 10 percent reduction. Whose taxes are going to 
go up in this process?
    Mr. GALVIN. Well, certainly. You as Members have often 
talked about the effective tax rate of U.S. companies being 
much lower than our current rate.
    Mr. MCDERMOTT. But tell me who is going to pay more taxes 
if we take away those.
    Mr. Stutman, can you give me an idea who is going to pay 
more taxes? Who is it shifted to if it is a zero-sum game here?
    Mr. STUTMAN. Well, if it is a zero-sum game, you are 
absolutely right that you don't get to zero sum by everybody 
having the same result.
    But in fact, when we look at Grant Thornton and our client 
base, and we have what I would call not just a horse in this 
race but 10,000 horses in this race relative to our client 
base, we know that they are each in different places. The 
tradeoffs that are made affect each taxpayer differently.
    So the only thing that we can urge the committee on is to 
be fair and equitable relative to how you balance and measure.
    Mr. MCDERMOTT. I want to stop you there because my time is 
almost up.
    I hope the chairman will have another hearing where we get 
a hearing from the squealing ones who have gotten bit by this 
new getting rid of all the tax credits and lowering the rates. 
There is going to be somebody in this country who is going to 
squeal, and I want to hear from them as well, Mr. Chairman.
    I hope we will have that. Thank you.
    Chairman CAMP. Mr. Tiberi is recognized.
    Mr. TIBERI. Thank you, Mr. Chairman. Thank you for your 
leadership. Great witnesses. Little time, so much to talk 
about.
    Thank you for your testimony. Mr. Levin may have missed 
last week with respect to the VAT issue. Clearly, at our most 
recent hearing there were witnesses from other countries who 
said that the VAT issue and the corporate tax reduction were 
two separate issues, so I just want to remind everybody of the 
testimony from last week's hearing.
    Mr. Stutman, your testimony on pass-through entities is 
right on. I hope you have some influence at Treasury and can 
talk to them about their thoughts on pass-through entities. In 
Ohio, we have lost a ton of jobs, 400,000 jobs, 600,000 jobs in 
the last 4 years. We have lost corporate headquarters in Ohio. 
The new Governor has stopped that. We are open for business 
again. So we are not only competing against India; we are 
competing against Indiana.
    And by the way, for the two of you from Illinois, we are 
open for business. You can come look at Ohio to headquarter as 
well. Don't just look at Dallas.
    Mr. Galvin, what great testimony, all of you. But I want to 
follow up on what Mr. McDermott said. Because the bumper 
sticker, the bumper sticker, the easy issue out there that 
everyone kind of points to is you go overseas because you want 
to avoid taxes.
    And that is so far from the truth in terms of the policy. 
And you talked about that today. In fact, our Tax Code and I 
want you to expand upon this, because you are a U.S. company 
and your major competitors from what I understand, are foreign 
competitors, when you had an opportunity to acquire a U.S. 
company, it was acquired ultimately by a foreign company, and 
you were at a competitive disadvantage because of the double 
taxation issue.
    Can you expand upon that quickly for the members of this 
committee: How the Tax Code actually hurt a U.S. company from 
acquiring another U.S. company?
    Mr. GALVIN. In my testimony, I talked about the acquisition 
of a company formally headquartered in Providence, Rhode 
Island- APC in 2006. In that year, or in the previous 3 years, 
in excess of 50 percent of APC's earnings -because it is an 
electronics company -was outside the United States.
    When Emerson looks at acquisitions, we look at the after-
tax cash flows as the money comes back eventually to the U.S. 
So even though their tax rate was much lower, in our discounted 
cash flows, we assumed that that cash eventually would come to 
the U.S. and be taxed at the 35 percent rate, even though the 
Asian taxes were much lower. And we priced that out. We bid up 
into the $5.2 billion, $5.3 billion. Schneider, the French 
company, paid in excess of $6 billion range. We looked at the 
difference in the cash flows of the international earnings in 
perpetuity from our estimate, and it would have exceeded $800 
million. Because if you have a 10 percent tax rate in Asia, we 
would have been paying an additional 25 percent tax rate, 
bringing the cash back to the U.S.
    Mr. TIBERI. Because of repatriation.
    Mr. GALVIN. Because of repatriation. We assume in all 
transactions cash eventually comes back to the U.S.
    Mr. TIBERI. The French company didn't have that issue?
    Mr. GALVIN. The French company, you are correct, didn't 
have that issue. The French tax law exempts 95 percent of 
dividends, and so the effective tax rate in France is about 1.5 
percent.
    Mr. TIBERI. So that company that you looked at acquiring is 
now a French company?
    Mr. GALVIN. Correct.
    Mr. TIBERI. So the headquartered corporate jobs that were 
in Rhode Island are now in----
    Mr. GALVIN. In France. And the engineering R&D also shifted 
to consolidation within France.
    Mr. TIBERI. All those jobs are gone. So you in St. Louis, 
where are your best jobs for Emerson, that is your 130,000 
jobs?
    Mr. GALVIN. As you know, we employ a lot of people in Ohio.
    Mr. TIBERI. Your best jobs?
    Mr. GALVIN. Our best jobs are----
    Mr. TIBERI. Are they in France?
    Mr. GALVIN. No.
    Mr. TIBERI. Where are they?
    Mr. GALVIN. Our best jobs would probably be in the U.S. 
with the competitiveness of high-tech areas.
    Mr. TIBERI. So when a corporate headquarters leaves, their 
best jobs leave. Have you seen that in St. Louis?
    Mr. GALVIN. We have seen that in spades in St. Louis. 
Somebody can just look at what has happened; when a company is 
acquired the headquarters jobs are lost.
    Mr. TIBERI. If the Federal Government, if we, Congress, 
don't do something about the current Tax Code, is Emerson, are 
your three companies, at risk from a foreign competitor at some 
point in time?
    Mr. GALVIN. At some point in time, but I would certainly 
think smaller companies would be acquired first. Our market cap 
currently exceeds $40 billion.
    Ms. BROWN. I would say any company is always at risk of 
takeover. You always have to worry about that. But because of 
the comparative disadvantage that the American bidders in an 
acquisition would go through because of the net after-tax cash 
flow, certainly we would be at risk. We would all be thinking 
about that.
    Chairman CAMP. Thank you. Your time has expired.
    Mr. Reichert is recognized.
    Mr. REICHERT. Thank you, Mr. Chairman.
    Well, you know, what we are all trying to do and I have 
said this as an opening part of my statement each hearing we 
have is we are all trying to work hard to make American 
companies successful and create jobs for people here in the 
United States.
    And part of that process is listening to all of you and 
trying not to make this a partisan issue where some are intent 
upon doing that.
    So I really appreciate the presence of all of you here, and 
I thank the chairman for his, and the ranking member, for 
putting this hearing together. I represent a district that has 
22,000 Boeing workers, so you can see where my focus might be 
going this morning.
    It is a pleasure to have you and see you again, Mr. Zrust. 
And I want to ask the question about your future competition 
and how you plan to face that, because you and I have talked 
about that future competition for Boeing in connection with the 
tax structure. How do you plan to face that competition if the 
structure essentially stays the same?
    Mr. ZRUST. Well, historically, our European competitor in 
Boeing have dominated the single-aisle airplane space at 100 
passengers or greater. And a number of companies--a number of 
countries have built airplanes at the size of less than 100 
passengers. And what is happening, as I mentioned, the 
Canadians, the Russians, the Chinese and the Brazilians are 
starting to move up into and have indicated that they are 
moving up into, let's say, into the space that has historically 
been dominated by both our European competitor in Boeing.
    And as I mentioned in my statement, all of those new 
competitors reside in countries where the tax rate there is 
considerably less than the U.S. rate, and so that is going to 
present an issue for us in terms of competition. Because the 
decision we are going to have to make at some point is, what 
are we going to do to face that new competition and where are 
we going to get the capital in order to compete with that new 
competition. And to the extent that we are put on a level 
playing field with that new competition in terms of tax, that 
is going to free up capital and allow us to put more jobs in 
the U.S. and potentially more bricks and mortar, because as you 
know, all of our manufacturing facilities are in the U.S., and 
the vast majority of our jobs are in the U.S. as well. And the 
intention is to keep it that way for now.
    Mr. REICHERT. So freeing up capital----
    Mr. ZRUST. That is right.
    Mr. REICHERT [continuing]. With a different tax structure 
is what you are hoping?
    Mr. ZRUST. That is right.
    Mr. REICHERT. And to follow up on Mr. Tiberi's questioning, 
could you explain how Boeing might face foreign companies or 
competition even in the U.S. markets and how the tax laws 
affect you and your ability to compete against foreign 
companies right here in the United States? So your major 
competitor----
    Mr. ZRUST. Well, our major competitor, obviously, is in 
France. I mean, the rate with France is slightly less than that 
of the U.S. I think to the extent that they are putting bricks 
and mortar in the U.S., I think we are probably on a level 
playing field. But if we look at right now who is buying 
airplanes, the customers for the most part are outside the 
U.S., and so we are dealing with issues, you know, the 
interaction of the U.S. tax laws with the income that we are 
driving outside the U.S.
    So I think so long as our competition would stay with our 
one European competitor, let's say, in the twin aisle planes--
--
    Mr. REICHERT. Last week, for example, I flew on an Airbus--
usually Boeing.
    Mr. ZRUST. I mean, the bottom line is, it goes to freeing 
up capital and keeping--trying to get the U.S. rate down to a 
level that is consistent with where our competition is.
    Mr. REICHERT. I yield back. Thank you.
    Chairman CAMP. Thank you.
    Mr. Becerra is recognized.
    Mr. BECERRA. Thank you, Mr. Chairman.
    And thank you all for your testimony, I appreciate it. And 
hopefully, we are able to use some of your testimony in the 
future as we try to move forward on a reform of the Tax Code.
    I thought, Mr. Galvin, you made a statement that I think 
perhaps encapsulates this entire discussion and, quite 
honestly, this entire debate about how we reform the code. And 
you said something, I caught just this part of it where you 
said, in response to Mr.--I think it was Mr. McDermott, who was 
asking questions about jobs, because there is no easy yes or no 
answer to anything, and you said, there are many factors that 
need to be considered. You went on to say other things.
    But again, if we lower rates tomorrow, will you be able to 
retain employees tomorrow. Lots of things have to be considered 
beyond the code. And so as we go about trying to figure out 
what to do, lots of things have to be considered, not just the 
rates, the corporate rates.
    You mentioned--you used two very good examples of the 
competition you lost with a French company for a particular 
firm you were looking to buy. And you mentioned how their 
territorial rates make it easier for them to compete with you 
and prices that we would have to pay under our worldwide rates 
of corporate taxation. Lots of things have to be considered.
    That French company takes advantage of their corporate 
rates, their territorial rates. France has a 19 percent VAT, a 
VAT. Would you ask us to have a 19 percent tax on every product 
that the end stream for Americans to pay on top of what they 
pay today for milk, clothes and the rest?
    Mr. GALVIN. That is also, again, unfortunately, a 
multifaceted question. I think for the short-term, overall 
corporate tax reform needs to be addressed.
    Mr. BECERRA. Let me hold you there because I am going to 
run out of time, and we will keep talking, but my point is 
this: Lots of things have to be considered.
    The French are able to charge a lower rate on corporations 
for work and business that is done abroad through their 
territorial rates because they probably have done other things 
to make up for that.
    Mr. GALVIN. Correct.
    Mr. BECERRA. One of those is the VAT, which--the value 
added tax--which a French citizen will pay at some point, in 
this case, it is about 19 percent. They also have income tax 
rates that are in the 40s, high 40s. I imagine if I asked you, 
would you want Americans to have income tax rates that go up 
into the high 40s, you would probably say lots of things have 
to be considered, but you probably wouldn't be all that excited 
about having Americans' income tax rates go up as well.
    Mr. GALVIN. I would say, again, in the short-term this 
committee is on the corporate tax side. A VAT or a national 
sales tax is a later discussion.
    Mr. BECERRA. Let me stop you there because, see, we won't 
have an opportunity if we don't deal with this entire subject 
matter together, we may push one side and not realize the pull 
on the other, and we have to take all those things into 
consideration. So, in reforming the code, obviously, we are 
talking today about corporate rates.
    Mr. GALVIN. Right.
    Mr. BECERRA. But whatever we do on corporate rates may have 
an impact, as I think Mr. Stutman tried to make the case, on 
individual rates, whether it is because of these pass-through 
entities and otherwise. And so we will have to have a fuller 
discussion.
    But your points are all very well taken that we have to 
figure out a way to reduce the rates and let you be more 
competitive.
    I think the operative word here is competitive. Because 
most American companies, I think you will all agree, are still 
able to compete with anyone so long as the playing field is 
equal, and I think that is what you all would like.
    Let me move on. I would love to let you have more time, but 
I need to move on because I am going to run out of time. One of 
the other issues that affects Americans' perception of what we 
are doing is they get the sense that we are not doing this for 
them but for others. For example, today we are giving oil 
companies tax breaks to go search for oil and drill for oil. 
And they wonder what the heck do we need to do that for when 
they are making tens of billions of dollars in profits and 
charging us over $4 a gallon in some places for gasoline? But 
we do that.
    The second thing they see is that in the 1990s, we were 
creating jobs in America at the same time that a lot of our 
companies were also creating jobs in other parts of the world 
outside of the U.S. But in the 2000s, the first decade of the 
21st century, we created more jobs, our American companies 
created more jobs abroad than were created in the U.S. 
Essentially, there was a flight of jobs by American companies.
    So it is all an issue of how the American people perceive 
what we are trying to do. I appreciate your testimony, and I 
hope what we can do is be able to incorporate everything you 
said to come up with that solution that deals with the whole 
mix of things.
    Mr. Chairman, I appreciate the time, and I thank the 
witnesses for coming.
    Chairman CAMP. Thank you.
    Mr. Buchanan is recognized.
    Mr. BUCHANAN. Thank you, Mr. Chairman, for holding this 
important hearing. I also would like to thank all of our 
panelists today for being here.
    I would like to, Mr. Stutman, talk to you on some of your 
testimony you gave today. It is basically about pass-through 
entities. I represent the Tampa Bay area, the Sarasota 
community. But also being the only member of Ways and Means 
from Florida, I look at it in terms of the impact on pass-
through entities. In Florida alone, there are 600,000 S corps, 
and I am sure a lot of LLCs and partnerships. Would you agree 
that we need to keep these small businesses in mind when we do 
any kind of tax reform?
    Mr. STUTMAN. Well, as I mentioned in my testimony, the 
proliferation of pass-throughs over the course of the last 15 
to 25 years has been dramatic and significant. And they are 
more a part of the business community than ever before. And I 
tend to stay away from classifying pass-throughs by reference 
to size, because we have some small, as you referenced. But we 
have some really significant and large partnerships and S 
corporations that would rival some of the companies perhaps 
that have testified here today and before.
    And it is pretty clear that they are drivers of the 
economy. They are drivers of jobs, and therefore, they need to 
be included in the debate. And therefore, if we are talking 
simply corporate rate reduction, there is an element for which 
then caution needs to be exercised around how we handle pass-
throughs. They will continue, I believe, to grow in size and 
numbers as we continue to have alternate structural entities 
that allow for corporate liability protection at the same time 
being able to accommodate the pass-through nature of the tax 
laws.
    Mr. BUCHANAN. My understanding in terms of flow-through or 
pass-through entity businesses compared to C corporations, is 
that they employ more workers in 48 out of 50 States in our 
country. But yet there is some discussion of the possibility, 
even within the Administration--the President mentioned it 
yesterday at our conference that he is interested in lowering 
corporate rates, which I think we need to do, whether that 
number is 25 percent or another number. But there is, at the 
same time, a sense of increasing taxes on individuals, and a 
lot of them that make over $250,000 are job providers. Are you 
concerned also about the impact that would have if you raised 
individual rates and lowered corporate rates, what that would 
do to jobs?
    Mr. STUTMAN. Well, certainly in the context of pass-through 
entities, you know, as long as you follow the current construct 
of the Internal Revenue Code, they are taxed at individual 
rates in terms of the owners of those entities. And so if you 
have a pure corporate rate reduction and either neutrality or 
rate increase for individuals or do not somehow cover pass-
throughs as businesses within the context of a corporate rate 
reduction, then yes, there is a high level of concern, 
especially in terms of our client base.
    Mr. BUCHANAN. Again, as a past chairman of the Chamber in 
Florida, 99 percent of businesses that are registered in the 
State of Florida are small- and medium-size businesses. They 
create probably 70 percent of the jobs, probably not just in 
Florida but around the country. So that is why I am concerned. 
I would love to see us deal with the C corp rate, but I don't 
know how you deal with the C corp rate without dealing with 
also the pass-through entities. It all has to be looked at.
    And that is why if you raise the personal income tax rate 
and lower the corporate rate, you are going to have a lot of 
people in the same industries that are going to have a huge 
advantage over another business. Because I just recall back in 
the 1980s, everybody had a C corp. Then it went to an S corp. 
Then everybody was doing LLCs. But all this has to be taken 
into consideration, don't you agree?
    Mr. STUTMAN. Yes. I think in terms of the testimony that I 
presented is about there are multiple moving parts relative to 
this issue. And we have talked about the various components, 
including corporate rate, including tax expenditures, including 
the impact of the burdensome reference to the possibility of 
any particular segment of our taxpaying business community, and 
right now in terms of certainly what you are saying would go to 
the pass-throughs.
    Mr. BUCHANAN. And Mr. Corum, do you want to add something 
to that as a tax specialist?
    Mr. CORUM. I am here really to look at the financial 
accounting impacts of that. Those pass-through entities don't 
necessarily reflect taxes in their own separate financial 
statements because the taxes are borne by the owners and the 
shareholders of it. So therefore, a corporate rate change 
affects corporate financial statements primarily.
    Mr. BUCHANAN. Thank you, Mr. Chairman.
    I yield back.
    Chairman CAMP. Mr. Smith is recognized.
    Mr. SMITH. Thank you, Mr. Chairman.
    And thank you to our panel for sharing their expertise. We 
have been reading more and more about companies with either a 
zero effective tax rate or close to it. And I was wondering if 
any of you would care to speculate on what would be in it for 
companies such as those with the currently low effective tax 
rate, if they would perhaps see their effective tax rate go up, 
could there still be some benefit to public policy in a bigger 
picture? Maybe no one wants to answer that, but Mr. Galvin.
    Mr. GALVIN. With a high effective tax rate, I guess I am a 
safe person to answer. In the newspapers, and it has been on a 
lot of different shows on TV, certainly one thing to consider 
is that sometimes the press stories are rather one-sided and 
misleading.
    So while they might be technically correct, they are 
definitely misleading when you look at the complexity of the 
Tax Code and the fact that the effective tax rate was negative 
over the last 3 years. It goes to show why we need U.S. 
corporate tax reform, because you have all these complexities, 
unintended consequences. And I am sure all of them, from what I 
have heard from the companies, fully comply with the U.S. tax 
law. It is an example that U.S. tax reform on the corporate 
side is needed so we don't have these unintended consequences.
    And there is added complexity with getting refunds over a 
3-year period. Some of the staffers in the back could be paying 
more in taxes than the corporations. I mean, it is a very 
unfortunate situation. It just proves that corporate tax reform 
for simplification is needed.
    Mr. SMITH. And I will let anyone else who----
    Mr. ZRUST. I might comment on that. As I mentioned in my 
statement, at the Boeing company, we have over 500 differences 
between how we account for items in our financial--in our 
annual report for financial reporting and then how we reflect 
those same items on our tax return.
    And many of these items result in differences of 
recognition of income and expense, differences in just periods; 
it is timing, not permanent. So when we talk about effective 
tax rates from a tax standpoint, people look at things of a 
permanent nature; R&D credit, how you affect States, State 
income taxes, the interaction of U.S. income and foreign 
income. Those things--domestic manufacturing deduction--those 
things are of a permanent nature. But there are distortions in 
cash taxes paid, and it is a difference in periods.
    For instance, funding a pension in a given year results in 
a current tax deduction and may result with the drop in the 
markets the last few years in a large current deduction, but 
yet for financial reporting, that does not result in a current 
reduction in book income. And so there is an appearance that 
something is wrong because there might be a large amount of 
book income but yet there are no taxes paid when it is simply 
due to the differences in tax accounting between what happens 
for GAAP, Generally Accepted Accounting Principles, and then 
what the Internal Revenue Code mandates.
    Mr. SMITH. Thank you.
    Shifting gears just a bit, we heard earlier that it is 
oftentimes wise that the manufacturing be done close to the 
customers. That makes sense. In fact, we are already seeing a 
lot of that type of policy taking shape in terms of energy 
conservation and even incentives.
    And we know that a good portion of the world's population 
lives and works outside of the borders of the United States. We 
have seen companies obviously from overseas locate here in 
America and hiring Americans. I see that as a positive thing as 
well.
    But I was wondering, Mr. Stutman, if a company that is 
based in the U.S. hires people overseas, or opens a plant that 
is closer to their customers, would you characterize that as 
jobs fleeing the shores of America.
    Mr. STUTMAN. In terms of answering the question, if in fact 
we have a global economy and we know that some of what we do is 
capable of being done in the U.S. and some of which is capable 
of being done across border, you know, it is really a function 
of, you know, in terms of your question, whether or not there 
are skills or reasons, such as being closer to your customers, 
or other factors that will come into play relative to 
ultimately making the determination of where to create those 
jobs.
    As I think most of the panelists talked about, there is a 
return-on-investment calculation that they all go through that 
relates to making those determinations. I would not suggest 
that automatically you come to a conclusion that by going 
overseas that you are taking jobs away from America.
    Mr. SMITH. Okay. Thank you.
    Chairman CAMP. Mr. Stark is recognized.
    Mr. STARK. Thank you, Mr. Chairman.
    And thank the panel for their input to this hearing. I am 
going to ask the chair to insert in the record the Citizens for 
Tax Justice initial report on 12 corporations that pay a tax 
rate of a negative 1.5 percent on $171 billion in profits and 
got $62 billion in tax subsidies, which does happen to include 
Boeing. And in the report, it says that Boeing made a profit of 
almost $4.5 billion in 2010 and had negative Federal taxes. The 
same held true for 2009 and 2008. And over those 3 years, 
Boeing made almost $10 billion and had a negative tax rate of 
1.8 percent.
    And I think in testimony that I heard earlier from Mr. 
Zrust that Boeing would like a lower tax rate. So how much 
lower a tax rate should we give Boeing and why?
    Mr. ZRUST. So Mr. Stark, let me address that. Over the last 
3 years, we have not paid a----
    Mr. STARK. How much lower rate do you need now to survive?
    Mr. ZRUST. Well, let me talk about what that is 
attributable to.
    Mr. STARK. I know what it is attributable to.
    Mr. ZRUST. Well, it is attributable to new products and it 
is investments in our workforce, so there are three things: One 
is contributions to our pension plan. As we know, there are two 
major development programs.
    Mr. STARK. All companies do that. That is not unusual. But 
how much lower rate do you need to survive?
    Mr. ZRUST. Well, what will happen with those items, as I 
mentioned before, there are things of a permanent nature and 
there are things that are temporary. So those same things that 
gave rise to low tax payments in the last 3 years are going to 
reverse in the next few years and result in considerable tax 
payments.
    Mr. STARK. Oh, yeah? We are going to get more from Boeing 
in the next few years?
    Did you know that, Mr. McDermott?
    Mr. MCDERMOTT. I didn't know that.
    Mr. STARK. I didn't know that either. How much more do you 
think Boeing is going to pay us in the next few years?
    Mr. ZRUST. Well, sir, as we start delivering airplanes, the 
787, for instance, that is going to result in a reversal of the 
inventory accounting differences that are reflected in the last 
3 years that resulted in current tax deductions. It is going to 
result in book tax deductions, but yet not a corresponding 
deduction on the tax return, so that difference is going to be 
reflected in increased tax payments.
    Depending upon the magnitude of the deliveries, it is 
possible that the company could be paying a rate of tax in 
excess of the statutory rate of 35 percent. So this is a 
function of the differences in tax accounting between the 
Internal Revenue Code and what is mandated under Generally 
Accepted Accounting Principles.
    Mr. STARK. You pay your taxes based on the Internal Revenue 
Code, don't you?
    Mr. ZRUST. That is correct.
    Mr. STARK. Mr. Chairman, I would just like to submit for 
the record the Citizens for Tax Justice analysis of 12 
corporations that pay an effective tax rate of negative 1.5 
percent, and a further report will be coming later, and it 
illustrates that Boeing over the last few years has had a 
negative 1.8 percent rate. It paid a Federal tax of--a rebate 
of $178 million on profits of almost $10 billion, so that it 
just gives us the example of what many of these corporations 
are able to do and does illustrate why we should make some 
changes in the Tax Code.
    I thank the gentleman for yielding.
    Chairman CAMP. Without objection, the document will be 
placed in the record.
    [The information follows:]




    Chairman CAMP. Ms. Jenkins is recognized.
    Ms. JENKINS. Thank you, Mr. Chairman.
    Thank you all for being here today. I want to share with 
you an excerpt from a recent article in the New York Times 
entitled ``The Logic of Cutting Corporate Taxes'' by Laura 
D'Andrea Tyson. She is a professor at Haas School of Business 
at the University of California, Berkeley, also a former chair 
of the Council of Economic Advisors under President Clinton.
    She said this: ``Shouldn't the government raise the 
corporate tax rate to require corporations to contribute their 
fair share to deficit reduction and to enhance the 
progressivity of the tax system? The answer is no.''
    And she goes on to say, in today's world of mobile capital, 
increasing the corporate tax rate would be a bad way to 
generate revenues for deficit reduction, a bad way to increase 
the progressivity of the Tax Code and a bad way to help 
American workers and their families.
    For many years, I think the conventional wisdom has been 
that the corporate income tax is principally borne by owners of 
capital in the form of lower returns. Now with more mobile 
capital, workers are bearing more of the burden in the form of 
lower wages and productivity as investments move around the 
world in search of better tax treatment and higher returns.
    In this environment a high corporate tax rate, not only 
undermines the growth and competitiveness of American 
companies, but it also increasingly is ineffective as a tool to 
achieve more progressive outcomes in the taxation of capital 
and labor.
    There appears to be an emerging consensus that the 
corporate tax burdens workers in the form of lower wages, and 
higher retail prices are a reflection of this as well. So I 
just wanted for you all to comment, if you would, and elaborate 
on how a high corporate tax rate is reflected in terms of 
prices, wages and productivity.
    Mr. Galvin.
    Mr. GALVIN. Certainly the issue, in my opinion, is not just 
a high corporate tax rate but the noncompetitiveness, which I 
have said before, and the consequences are an additional loss 
of jobs. Fifty years ago, the U.S. economy was so large, we 
could do whatever we wanted. Now we are much more competitive 
with emerging countries in Asia, and that forces us to be 
competitive with the rest of the world. And I would hope that 
while initially our study, at this hearing, is over the 
corporate tax rate longer term, intermediate term, whatever, in 
several years, I think the committee might consider looking at 
overall U.S. tax reform and the issues that were raised about 
the VAT and others to be competitive with the rest of the 
world, and the impact we would have if we choose a tax system 
that is isolated from the rest of the world as we currently 
have it. So I agree with the comments, and we need to study 
more economically the issues on a value added tax, not for the 
short-term, but intermediate term.
    Ms. JENKINS. Ms. Brown.
    Ms. BROWN. In our universe, it is interesting because in 
terms of productivity, employment growth, we have been 
continually providing wage increases, becoming more productive, 
adding a tremendous amount of head count. I just checked my 
statistics. We added 450 new jobs in Michigan since just July. 
So, in our universe, that is a big number.
    But I think about, to your point, how does higher income 
tax affect the big basket of what we are thinking about long-
term? The strategic landscape for us has changed. There has 
been massive consolidation in our industry. And the players who 
are the most active in buying up companies, many with U.S. 
footprints, and consolidating out the higher-paying jobs, 
consolidating out the headquarters, are foreign players in many 
instances who are taking advantage of that better after-tax 
return that they are able to utilize because of our, again, 
relatively higher corporate tax rate.
    So we haven't seen necessarily on a day-to-day basis higher 
taxes pushing through price changes of our product. We have 
been able to manage that entire process through our own 
productivity, but we look at the bigger-term, long-term 
strategic landscape of what is going to impact our long-term 
growth and what we can share with our shareholders and add new 
jobs, and that is where it really becomes problematic for us 
long term.
    Chairman CAMP. All right. Thank you very much.
    Mr. Berg is recognized.
    Mr. BERG. Thank you, Mr. Chairman.
    I, first of all, want to thank the panelists for being here 
today. This is an extremely important matter. I look back at my 
home State of North Dakota, and we have reformed the Tax Code. 
We lowered the property tax. We lowered the income tax. We 
lowered the corporate income tax. And North Dakota business 
understood that. What we have heard from you today is not 
rocket science. It is pretty simple, pretty straightforward. 
Our business knew when we did that that we were not going to 
change the rules. We were going to set the Tax Code, and they 
can make investments that they are expecting a 10-year return 
on or a 15-year return. And when times got tough, we weren't 
going to just change the Tax Code and take away their return.
    In fact, it is that stability, quite frankly, that has made 
North Dakota one of the top job creators in the Nation. We have 
a 3.5 percent unemployment rate. This is what happens when you 
encourage business and have stability. You know, there is no 
question that what we have heard today and we have heard from 
the past several months is how our Tax Code, the uncertainty of 
it, has a cloud over business, you don't know what the rules 
are. I have been stunned by all the changes in the Tax Code, 
the size of the Tax Code and the difficulty in anticipating 
commonsense business decisions for your company, what that 
really means after you filter it through a very complicated Tax 
Code.
    So, from my perspective, also being at the end of the 
questioning here, what I would like to do is kind of get back 
to what brought us here in the beginning. And maybe if we could 
real simply just go through the panelists, and again, at a high 
level, I want to ask two questions. The first question is what 
does it mean to your company and your job creation if we 
simplify the Tax Code and have a competitive Tax Code? And so 
again, Mr. Corum, if you could start.
    Mr. CORUM. I might pass that down the aisle since I am not 
really representing a company.
    Mr. GALVIN. It would certainly help us, because at the 
current time, certain jobs that we have historically had in the 
U.S., where we could afford a 5 percent or less overall product 
differential against our competitors in Asia, with the way the 
Tax Code is working and the way different incentives are given 
in Asia, reform might reduce the impact of a loss of further 
jobs. We have been, as I said, a very large exporter, not as 
large as Boeing, but we export more than we import. And the 
noncompetitiveness hurts us on doing that because we need to be 
competitive with our competitors. It is very simple. In the tax 
line, we are not competitive.
    Ms. BROWN. A very simple example. Right now, we are going 
through a process of evaluating investment and manufacturing 
footprint. And certainty of tax rate, long-term certainty, take 
out one-offs and anomalies, but that long-term certainty as we 
go through this process right now, if I know, and I am very 
pleased to be sitting here on this panel and knowing that you 
are all talking about this and taking it very seriously, 
because if we know that that rate will be lower in the U.S. 
longer term, the decision of are we going to put it in the U.S. 
or are we going to put that manufacturing footprint ex-U.S. 
becomes much easier. And we know that the comparable rates will 
be closer; it makes a decision easier because we like to keep 
that manufacturing close to where our customers are. Very 
simple.
    Mr. BERG. A great example.
    Mr. ZRUST. On the airplane side of the business, our 
manufacturing is in the U.S. Our competition is outside the 
U.S., and for the most part, our customers are outside the U.S. 
And so what we need to do is come up with a way if we lower the 
rate and free up capital that allows us to invest in 
innovation, in a new product line to better compete with the 
emerging competition that we are facing from other competitors 
with significantly lower tax rates.
    Mr. MISPLON. Well, certainly we believe that simplifying 
the Tax Code and reducing the income tax rate, that reduction 
in the tax rate will be passed down to the consumer, which will 
equate to increased sales. It will allow us to hire more 
employees and allow us to purchase more inventory to keep the 
economy going.
    Mr. BERG. Thank you.
    Mr. STUTMAN. Well, certainly, as to Grant Thornton being a 
service provider, I am sure the question isn't aimed at us 
directly but at our client base.
    Mr. BERG. Absolutely.
    Mr. STUTMAN. We would recognize that, again, of the 
thousands of clients we have, many of them would appreciate 
simplicity, uniformity.
    But at the same time, you mentioned the fact that in North 
Dakota there is now a consistency and uniformity about the 
decisions you are making and how they play out. And it is the 
moving parts here as to how you get there, because people have 
already made those decisions based upon the complexity, and 
then how do you wind them through the process as you move 
forward towards getting that consistency and uniformity in the 
Internal Revenue Code.
    Mr. BERG. Thank you.
    Chairman CAMP. All right. Thank you.
    Mr. Rangel is recognized.
    Mr. RANGEL. Thank you so much, Mr. Chairman.
    Thank the panel for their patience. Basically when it gets 
to the later questions, everything that has to be answered has 
already been answered. Everyone is seeing from the same page, 
and it sounds like the American thing to do, paying this 
equity, lower taxes, eliminate unfair preferences, competition, 
job creation, give the corporations a break, and they will do 
the right thing by America and their stockholders.
    There is something wrong with this picture. If we are all 
in agreement where is the Chamber of Commerce in all of this? I 
put out a bill, and they thought it would be great. I talked 
with the Secretary of Treasury, and he said, there is any 
number, there are billions of wasteful provisions in the bill. 
There are waivers, exemptions, credits that shouldn't be there. 
So we should have a more equal playing field. Something is 
wrong with this picture.
    And there are liberals and conservatives, Republicans, 
Democrats agreeing with you; we should do it, and we should do 
it fast.
    I kind of believe everyone in business doesn't agree with 
you. I think that those people that we describe as having 
unfair preferential tax treatment are the guys behind the tree. 
Do you remember Senator Long, don't tax me, don't tax me, tax 
the guy behind the tree? Somebody has got to pay to make this 
revenue neutral, right? Right. Somebody who is getting unfair 
tax breaks is going to lose them, right? Right. Are they 
speaking out? Do we know who they are? Do they come to meetings 
like this and say, hey, I like it the way it is? I don't want 
any changes, I love R&D, rapid depreciation, all of those 
gimmicks will be a gimmick for you, but it is okay for me. Now, 
where do we go from here? We all are reading from the same 
page. We are your public servants; reform, reform, reform, 
competition, jobs creation.
    Mr. RANGEL. What is the problem? Mr. Corum, what is our 
problem? I mean, why don't we do these things? Why are people 
afraid to say--is there an elephant--strike that--is there a 
big animal in the room that we don't want to talk about? Come 
on, who is the lead--come on. I know, once you get your books 
straight, you want to pay more taxes, you want to do the fair 
things, and it just looks bad for you. Who is it that we have 
to drag to this table? Something is wrong with this picture.
    Boeing?
    No. Okay, gang.
    If the answer is not here, Mr. Chairman, there is something 
wrong with this equation.
    The last time I ventured on this very thin ice, the people 
that were talking about reform started saying that Rangel is 
increasing taxes. I said, how could that be? Said, well, we 
don't pay taxes now, and he is talking about reform; that is 
increasing taxes. Who would want to increase taxes at a time 
that we are in today? Wow. You have heard that one before, 
right?
    So this thing is not on the level. And I just don't know 
why I hear such deafening silence since--I don't remember the 
last time everybody has been on the same page. So here I am, a 
liberal, progressive, left-wing, saying, ``Let's lower the 
corporate rates. What is going to stop us from doing this 
together?'' And no one is going to help me out? You are going 
to sit there and say, ``I have said what I had to say''?
    What do you want us to do? Any volunteers that have any 
recommendations or suggestions about what we do? How come the 
chairman says he has solidarity with the committee, that we 
ought to do these fair, equitable things to create jobs, and 
now he is being asked--we are asking you, what is the next 
move? Can anyone of you bring us the support of the United 
States Chamber of Commerce? Any one of you? Have you discussed 
it with them?
    Mr. Galvin, you are biting at the bit.
    Mr. GALVIN. Well, I would generally be first on the list. 
What I have said before is that I think the Chamber--and I am a 
member of the U.S. Chamber, as you saw in my biography--But you 
need overall corporate tax reform, because the last time you 
had massive tax reform I believe was in 1986. And other 
countries have now substantially reduced their taxes.
    A simple thing that I think most corporations would say, 
simplify the tax system, lower the rate, make it revenue-
neutral.
    Mr. RANGEL. Why aren't we doing this? How long have you 
been with this Chamber? Because I don't ever remember getting 
any notices from them, ``When are you guys going to reform the 
system so we can be competitive again?''
    Mr. GALVIN. Well, I would think the Chamber would answer, 
``Lower the rate.'' And I will see about getting you something.
    Mr. RANGEL. Thank you for your great contribution.
    Chairman CAMP. Thanks.
    Mrs. BLACK. is recognized.
    Mrs. BLACK. Thank you, Mr. Chairman.
    First, I want to thank the panel for being here to testify. 
And I apologize for being out briefly, but I had another 
committee where we were talking about Fannie, Freddie, and FHA, 
so another important subject.
    I want to go to the picking winners and losers, because I 
have heard this as I have traveled throughout my district in 
the last 4 or 5 months, in talking to various businesses, all 
the way from very small businesses to the larger businesses--
and, of course, there is a different tax structure; some are 
corporate, and some are using the passthrough--but winners and 
losers in the different business activities or sectors.
    So there are numerous provisions in the Tax Code that have 
an effect of preferential treatment to a particular business 
behavior or to a particular sector of the economy. Do you agree 
that the objective of tax reform should be to address these 
kinds of disparities in the tax law? Is that one of the areas 
we should focus on, these disparities?
    And any of the panel members can certainly pick up and 
speak to that.
    Ms. BROWN. I would say, certainly. And I am assuming, and 
from what I have read, that this is exactly what the committee 
is planning to talk about, is look at the interlocking parts of 
tax reform and how it would affect the overall economy and job 
creation. And, today, obviously, we are talking about corporate 
rates, but how that all fits together.
    And, you know, my role, as CFO of a corporation--we are 
formed as a corporation. We also depend very heavily on a 
complex ecosystem of smaller businesses, be they the local shop 
that makes sandwiches for the folks in our corporate 
headquarters or if it is folks who supply raw materials and 
plastic bottles to put our product into. It is a very complex 
web of different companies that have different structures.
    And simplifying the rates, simplifying the code, it may 
mean that some of the smaller businesses choose to form 
themselves as a corporation, a small corporation but a 
corporation nonetheless. But as long as you are encouraging 
each of the different players in our supply chain to be able to 
compete with their other competition locally, or if they in 
their universe have foreign players, it would make a lot of 
sense to us, looking at it all together.
    Mr. ZRUST. I think if we are going to look at comprehensive 
tax reform, we need to put everything on the table and review 
it. And I think our system is perceived to be based on 
fairness, or at least that is what should be--there should be 
equity in the system. And in doing so--you know, if we talk 
about changing the status quo now and there is winners and 
losers, but that is just based upon where the tax system sits 
right now, and it doesn't necessarily mean the tax system is 
perceived as equitable and fair right now. I mean, it is in the 
eyes of the beholder.
    And so I think what we need to do, in terms of 
comprehensive tax reform, is put everything on the table and go 
back and review and determine what creates a fair, simple, and 
equitable system.
    Mrs. BLACK. Thank you.
    Mr. Galvin.
    Mr. GALVIN. Yes. I would also think, as you look at 
corporate tax reform, you certainly have to address the 
transition rules as you look at passthrough entities. Because, 
certainly, I surmise that one of the significant reasons of the 
growth of passthrough entities is you get a tax advantage, vis-
a-vis paying the complex corporate tax rate and then either a 
dividend tax or a capital gains tax rate to your shareholders.
    So if the passthrough entities are hurt with a higher 
personal rate, to allow them appropriate transition rules to go 
to a corporate structure, especially the larger ones--because a 
lot of passthrough entities are not necessarily small entities.
    Mrs. BLACK. Right.
    Mr. GALVIN [continuing]. Have them go to a C structure, and 
then have the double taxation that currently exists, so they 
are competitive with the rest of the businesses that they 
compete with.
    But you have to address those things, as well, and not just 
automatically switch off passthrough entities because of the 
tax advantages they get.
    Mr. STUTMAN. Yeah, I would add on that, you know, as I 
mentioned in my testimony, there are a significant number of 
moving parts. And the winners and losers ultimately are 
determined by effective tax rate, not statutory tax rates.
    But we have the issue of passthroughs versus corporates. We 
have the tax expenditures. We have other issues on the table 
that, you know, the panel has addressed that all need to be 
measured, all need to be factored in. And, you know, I 
understand that is the responsibility of the committee, to take 
this information and work through what would be a reasonable 
approach to how business could be impacted, to create jobs, and 
to move the economy forward.
    Mrs. BLACK. Thank you, Mr. Chairman. I yield back my time.
    Chairman CAMP. Thank you.
    Mr. SCHOCK. is recognized.
    Mr. SCHOCK. Thank you, Mr. Chairman. I really appreciate 
this hearing. It has been fantastic.
    First, I want to address the outrage expressed by many in 
this committee about, apparently, some businesses in this 
country paying zero effective tax and what I perceive to be a 
little disingenuous demagoguery on their part.
    You know, it is one thing to say you don't like the rules; 
it is another thing to write the rules and then criticize 
people for following the rules.
    I went through my neighborhood McDonald's a couple months 
ago. It was a brand-new building. Now, the hamburger didn't 
taste any better. The fries were pretty much the same. And I 
happened to meet the proprietor of the restaurant--true story. 
And I asked him, I said, why would you tear down what I thought 
was a perfectly good building, close your business, and rebuild 
this building from scratch? And he looked at me and he said, 
well, thanks to you and the Obama administration, I can write 
off the entire cost of this building this year. And he said, as 
a result, I won't pay any taxes this year.
    Now, I know that my local franchisee of McDonald's is not 
the only business doing this. In fact, the Obama administration 
was quite proud of pushing for this initiative last fall--
actually, in August. I have a copy of the press release from 
the White House where it says, ``The President is proud to push 
for targeted tax cuts and has been a long proponent of 
expanding the accelerated depreciation and the bonus 
depreciation.''
    So I think it is important to point out the fact that this 
is something that was passed under a Democratic House, 
Democratic Senate, and signed into law by a Democratic 
President. I would also say that I supported it, given our 
economic times, to further encourage investment. However, we 
should not demagogue those companies, then, who practice 
exactly the type of investment and business practices that, in 
fact,] we were incentivizing and asking for.
    To that end, I also have a copy of the latest Citizens for 
Tax Justice news release that just came out, criticizing 12 
corporations for paying, effectively, a negative tax rate. One 
of them, of course, is one of my home State companies, Boeing.
    And I just thought I would give Mr. Zrust the opportunity 
to respond to this criticism and perhaps maybe address the 
issue I raised about bonus depreciation and perhaps other tax 
methodologies that have played into a very low effective rate 
today and maybe next year, and what effect that will have, if 
any, by taking 100 percent of the depreciation this year on 
further years' tax liabilities.
    Obviously, if you don't depreciate something over 5 years 
or 7 years or 30 years, you get that depreciation this year, 
but now your effective tax rate could be higher later on.
    So I guess my question to Mr. Zrust would be, what will be 
Boeing's effective tax rate, not for 2008 and 2010, but perhaps 
from 2008 to 2018, over a 10-year period, as a result of you 
implementing these type of tax methodologies?
    Mr. ZRUST. Well, first of all, as I mentioned in my 
statement, our effective tax rate--and, again, I talk in an 
accounting sense--is 31 to 33 percent.
    Now, given that--over the last few years, that is true, we 
have paid a relatively low amount of tax. Now, that is cash 
taxes, as opposed to effective rate. And the reason for that is 
principally three things.
    One is the investment in our new products, so we have two 
large development programs, the 787 and the 747-8. And there 
have been well-documented issues associated with those 
programs. And the inventory accounting method that we are on 
allows us to deduct certain items for tax purposes that are not 
currently deductible for book purposes.
    However, as we start delivering those airplanes, it flips. 
So, in other words, in the future, we will have lower book 
income but higher taxable income. So we are going to pay tax, 
and this is a timing difference.
    Mr. SCHOCK. So, basically, the short answer is your 
effective tax rate will go up? It will be higher in later 
years?
    Mr. ZRUST. Our cash payments will go up higher than you 
would expect in future years as this difference reverses.
    Mr. SCHOCK. Okay. My time is almost up, so I apologize.
    Real quickly, given all of that, my understanding is 
everyone at this table still would put everything on the table 
in exchange for a lower effective tax rate. Is that the case? 
And if you could all quickly respond. And, if not, what is not 
on the table, in your perspective?
    Mr. GALVIN. Yes. Everything is on the table.
    Mr. SCHOCK. So even with all these loopholes and gimmes 
and, you know, all the things we have heard about here today, 
you are willing to put it all on the table to lower the 
effective rate?
    Mr. GALVIN. Drop everything, lower the rate, make it 
corporate revenue neutral.
    Ms. BROWN. Agreed. Drop everything, lower the rate, lower 
the tax burden net overall.
    Mr. ZRUST. We are in agreement, as well.
    Mr. MISPLON. Agreed.
    Mr. STUTMAN. Everything needs to be considered. I am not 
suggesting that when you consider everything you get to an 
ultimate conclusion that you would trade off everything, for 
our client base, relative to a lower rate.
    Mr. SCHOCK. All right. Thank you all.
    Chairman CAMP. Thank you, Mr. Schock.
    And, again, I want to thank all of the witnesses for 
participating in this hearing on corporate tax issues in light 
of comprehensive tax reform. This will conclude the fifth----
    Mr. LEVIN. Mr. Chairman.
    Chairman CAMP [continuing]. Full committee hearing on tax 
reform; six Ways and Means Committee hearings on this issue.
    And Mr. Levin.
    Mr. LEVIN. For the record, because the effective tax rate 
that we obtained from your filings is different than you 
indicated today, I am not saying you are wrong; there may be an 
explanation, I would ask each of you, for the record, to 
indicate how you calculated your effective tax rates. We will 
send you the question. I want to be sure that it is precise.
    Chairman CAMP. If the witnesses would accommodate the 
committee in responding to any written requests that they may 
receive, we would certainly appreciate that. Obviously not 
conveying any proprietary information in any answer----
    Mr. LEVIN. No.
    Chairman CAMP [continuing]. But that might help clarify an 
issue.
    Thank you very much.
    This hearing is now adjourned.
    [Whereupon, at 12:19 p.m., the committee was adjourned.]
    [Questions for the Record follow:]





                                 
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