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

                        ACCOUNTING ON TAX REFORM



                               before the

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

                      ONE HUNDRED TWELFTH CONGRESS

                             FIRST SESSION


                            FEBRUARY 8, 2012


                           Serial No. 112-19


         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
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
RICK BERG, North Dakota
DIANE BLACK, Tennessee
TOM REED, New York

        Jennifer M. Safavian, Staff Director and General Counsel

                  Janice Mays, Minority Staff Director

                            C O N T E N T S


Advisory of February 8, 2012 announcing the hearing..............     2


Mr. Michael D. Fryt, Corporate Vice President, Tax, FedEx 
  Corporation....................................................     6
Mr. Mark A. Schichtel, Senior Vice President & Chief Tax Officer, 
  Time Warner Cable..............................................    13
Ms. Michelle Hanlon, Associate Professor of Accounting, MIT Sloan 
  School of Management...........................................    21
Mr. Tom S. Neubig, National Director, Quantitative Economics and 
  Statistics, Ernst & Young LLP..................................    30
Mr. Timothy S. Heenan, Vice President, Treasury & Tax, Praxair, 
  Inc............................................................    42


The Honorable Jim McDermott......................................    96

                       SUBMISSIONS FOR THE RECORD

American Council for Capital Formation...........................    97
American Enterprise Institute....................................   107
Association for Financial Professionals..........................   117
Center for Fiscal Equity.........................................   120
Equipment Leasing and Finance Association........................   124
Fiscal Associates................................................   127
Institute for Research on the Economics of Taxation..............   137
United States Steel Corporation..................................   147

                        ACCOUNTING ON TAX REFORM


                      WEDNESDAY, FEBRUARY 8, 2012

             U.S. House of Representatives,
                       Committee on Ways and Means,
                                                    Washington, DC.
    The committee met, pursuant to call, at 9:05 a.m., in Room 
1100, Longworth House Office Building, the Honorable Dave Camp 
[chairman of the committee] presiding.
    [The advisory of the hearing follows:]


                 Congressman Camp Announces Hearing on

                    Interaction of Tax and Financial

                        Accounting on Tax Reform

Wednesday, February 8, 2012

    Congressman Dave Camp (R-MI), Chairman of the Committee on Ways and 
Means, today announced that the Committee will hold the first of two 
hearings on how accounting rules affect how businesses evaluate tax 
policy. This hearing will focus on the interaction of tax policy and 
financial accounting rules (such as Generally Accepted Accounting 
Principles, or ``GAAP''), and how this interaction affects how 
publicly-traded companies respond to tax policy. The second hearing 
will focus on the special challenges faced by small and closely-held 
businesses that are less concerned with GAAP but must confront 
tremendous complexity in dealing with tax accounting and related rules 
such as choice of entity. The hearing will take place on Wednesday, 
February 8, 2012, in Room 1100 of the Longworth House Office Building, 
beginning at 9:00 A.M.
    In view of the limited time available to hear witnesses, oral 
testimony at this hearing will be from invited witnesses only. However, 
any individual or organization not scheduled for an oral appearance may 
submit a written statement for consideration by the Committee and for 
inclusion in the printed record of the hearing. A list of invited 
witnesses will follow.


    Publicly-traded companies and other businesses that rely on outside 
investors must prepare financial statements (e.g., balance sheets and 
income statements) in conformity with GAAP. The impact of federal tax 
liability on certain key GAAP calculations, however, can diverge 
significantly from a company's actual cash tax liability. For instance, 
full expensing of capital investments can improve a company's cash flow 
in the short term, but it does not improve a company's earnings per 
share (``EPS'') as calculated under GAAP. Thus, comparing a rate cut 
with expensing requires consideration of the impact of financial 
accounting considerations on business investment decisions.
    More generally, tax policymakers might create unintended 
consequences when they enact tax policies without considering how such 
policies will affect financial statements. For instance, tax provisions 
might not work as intended if the GAAP treatment of such provisions 
diverges sharply from the effect on cash flows. Conversely, when 
policymakers structure tax policy around financial statement effects, 
they run the risk of adding complexity to the Tax Code in order to try 
to conform tax laws with financial reporting rules that were created 
without tax considerations in mind.
    In any case, the large and growing number of enacted and proposed 
temporary business tax incentives and other provisions creates planning 
and economic uncertainty for public and private companies alike, and 
diminishes the intended policy objectives of these provisions. As a 
result, companies across the business community have identified the 
need to bring stability to our tax laws as a key tax reform objective.
    In announcing this hearing, Chairman Camp said, ``As the Committee 
evaluates tax reform options intended both to make the United States a 
more attractive place to locate activity and to simplify tax compliance 
for business taxpayers, it is important to understand how financial 
accounting rules influence behavior. Tax policy does not exist in 
isolation, and the Committee needs to understand the interaction 
between tax policy and accounting rules so that we make informed 
decisions about which policy choices will help employers grow and 
create jobs.''


    The hearing will consider how public companies evaluate tax policy 
options in light of financial accounting considerations. It will 
examine whether tax legislation works as intended when Congress fails 
to account for the effects of financial accounting on corporate 


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February 22, 2012. Finally, please note that due to the change in House 
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    Note: All Committee advisories and news releases are available on 
the World Wide Web at http://www.waysandmeans.house.gov/.


    Chairman CAMP. Good morning.
    Today we are continuing our series of hearings on 
comprehensive tax reform. This morning's hearing will focus on 
the interaction of tax policy and financial accounting rules 
such as generally accepted accounting principles, or GAAP, and 
we will examine how this interaction affects the way in which 
publicly traded companies respond to tax policy.
    A later hearing will look at the special challenges faced 
by small and closely held businesses that might be less 
concerned with GAAP but must confront tremendous complexity in 
dealing with tax accounting and related rules such as choice of 
    During today's hearing, though, we will consider how public 
companies evaluate tax policy options in light of financial 
accounting or book considerations and, as such, will examine 
whether tax legislation works as intended when Congress does 
not consider the effects of financial accounting.
    When companies report profits in financial statements the 
primary purpose is to convey information about a company's 
financial condition to investors and creditors. Conversely, the 
primary purpose of tax accounting is to measure income for 
levying the Federal income tax. These two functions are not 
necessarily consistent and in some cases may even be at odds. 
For publicly traded companies focused on earnings per share in 
addition to cash flows, changes in tax policy might not produce 
intended results if the effective tax policy on earnings per 
share is not well understood.
    As a recent Tax Notes article suggests, when presented with 
an option between targeted tax benefits and lower corporate 
rate, many publicly traded companies might prefer a lower 
corporate rate over those tax benefits because of the book 
treatment. Similarly, tax provisions that provide cash benefits 
might not have their desired effect on behavior due to a less 
favorable book treatment.
    A variety of factors can affect publicly traded companies 
in their decision making processes differently. For instance, 
the high U.S. corporate rate is an important factor for 
companies that use either GAAP or international accounting 
standards. If the rate is too high, companies will, all other 
factors being equal, allocate capital to a location that 
provides more favorable tax treatment.
    Today, the current top Federal corporate income tax rate in 
the United States is 35 percent and the average combined 
Federal-State corporate income tax rate is 39.1 percent, second 
only to Japan's 39.5 percent rate. However, in fewer than 60 
days, effective April 1, 2012, Japan will lower its combined 
corporate rate to 38 percent. That will leave the United States 
with the highest corporate tax rate in the entire 
industrialized world. This dubious distinction will make it 
that much more challenging to attract businesses to hire and 
invest here at home where we need jobs.
    However, not all employers have the same tax profile. The 
impact of Federal tax policy on certain key book calculations 
can diverge significantly from the impact of the same policy on 
a company's cash tax liability. We need to understand better 
how public companies respond to tax policy when such 
divergences occur. If the goal is, as I believe, to transform 
the code and create a climate ripe for hiring and investment, 
then we must solicit input and insight from the very job 
creators who will do the hiring and investing.
    Properly designing tax reform requires an understanding of 
the financial accounting rules and how those rules might 
influence the investment decisions of public companies. I am 
pleased to have some of those businesses here today, along with 
members of the academic community, who have done extensive 
research on how financial accounting affects corporate 
behavior, and I look forward to hearing from them all.
    Chairman CAMP. With that, I will yield to the ranking 
member for purposes of an opening statement.
    Mr. LEVIN. Thank you very much, and welcome.
    When this hearing was scheduled on the interaction of tax 
and financial accounting on tax reform I thought I would take 
out my accounting book from law school. Fortunately, I could 
not find it. I remember so well the course taught by a 
brilliant teacher, and it convinced me I never wanted to be an 
accountant. That was I think the main lesson I learned from his 
    It is useful to have this hearing to discuss these various 
techniques, important as they are, and their impact on tax 
reform. I do think we need to continue to talk about tax reform 
and always to keep our eye on the ball, and that is what are 
the purposes of tax reform and what would be the impact on what 
our needs are. And this is why I think it is so essential that 
we not jump to conclusions or essentially embrace I think 
rather simplified alternatives.
    As we know, we asked Joint Tax to take a look at the code 
and to determine if the rate were lowered to a certain level 
what would be the impact. And they came back with the 
conclusion that even if we eliminated all of the specific 
provisions it would not bring the rate down to 25 percent; and 
I think the challenge is now intensified, because at long last 
we are beginning to understand fully the importance of 
manufacturing in the American economy. I think we somewhat lost 
that understanding.
    And now I think with the return of the auto industry, with 
the help of the Federal Government, not to run the companies 
but to get all of them back on their feet, I think it has 
helped to highlight how as we proceed as we must, talking about 
tax reform, we keep our eyes on the ball. And here I want to 
quote what the President said just a few weeks ago:
    ``If you are an American manufacturer''--and this was part 
of his plea that we continue to help American manufacturing get 
fully back on its feet. ``If you are an American manufacturer, 
you should get a bigger tax cut. If you are a higher tech 
manufacturer, we should double the tax deduction you get for 
making your products here. And if you want to relocate in a 
community that was hard hit when a factory left town, you 
should get help financing a new plant, equipment, or training 
for new workers.''
    The chairman and I--that is the end of the quote--for years 
have tried to expand, to strengthen the R&D tax credit; and 
here we are many, many months into this new session, a year 
plus a month now, and the R&D tax credit seems to be in 
    So I think we very much welcome the testimony. I think at 
first some of us were somewhat perplexed whether we would ever 
understand what you are talking about. We will try.
    I yield back.
    Chairman CAMP. Thank you.
    We are pleased to welcome our panel of experts, all of whom 
bring a wealth of experience, either from academia or the 
private sector; and I believe that their experience and insight 
will be helpful as we focus on the interaction of tax policy 
and financial accounting rules.
    First, I would like to welcome and introduce Michael Fryt, 
the Corporate Vice President for Tax for the FedEx Corporation. 
Mr. Fryt has spent the last 30 years as a tax attorney for 
different corporations and comes to us today from FedEx's 
headquarters in Memphis, Tennessee.
    Second, we will hear from Mark Schichtel, the Senior Vice 
President and Chief Tax Officer for Time Warner Cable. He is 
responsible for all areas of tax at Time Warner Cable, 
including policy planning, financial reporting, and compliance.
    Third, we welcome Michelle Hanlon, an Associate Professor 
of Accounting at the Massachusetts Institute of Technology 
Sloan School of Management. Ms. Hanlon's research focuses on 
the intersection of taxation and financial accounting.
    Fourth, we will hear from Tom Neubig, the National Director 
of Quantitative Economics and Statistics for Ernst & Young, 
LLP, and the former Director and Chief Economist for the 
Treasury's Office of Tax Analysis. Mr. Neubig leads a group of 
24 quantitative analysts who assist clients with tax and 
economic policy issues.
    And, finally, we welcome Mr. Timothy Heenan, the Vice 
President for Treasury and Tax at Praxair, Inc. Praxair is the 
largest provider of industrial gases in North and South 
America. Mr. Heenan joined Praxair in 2004 from Ernst & Young 
where he last served as a senior manager specializing in the 
development and implementation of international tax strategies.
    Thank you all very much 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 followed by 
    So, Mr. Fryt, we will begin with you. You are recognized 
for 5 minutes.

                       FEDEX CORPORATION

    Mr. FRYT. Thank you.
    Good morning, Chairman Camp, Ranking Member Levin, Members 
of the Committee. I very much appreciate this opportunity to 
appear before you today to discuss the importance of tax reform 
to FedEx. We believe that reducing the U.S. corporate tax rate 
significantly to be more in line with the rest of the developed 
world is essential to overall economic and job growth and will 
help our company continue to invest in critical infrastructure 
to compete and grow.
    Before I delve into the details of how we analyze tax 
reform, I would like to make a couple of points about FedEx and 
our business and our tax profile.
    With respect to our business, through our global expedited 
transportation network we connect more than 90 percent of the 
world's GDP in 48 hours or less. So if a business of any size 
wants to send its product from Beijing to Billings or Cleveland 
to Cologne, we can do that for them without them having to 
invest billions of dollars to build their own distribution 
networks. Our business is based on this global network. If our 
global network is competitive, it will grow, so will we, both 
around the world and in the United States.
    With respect to our tax profile, we are a full-rate 
taxpayer. Our effective tax rate has not been below 35 percent 
in more than 20 years. This is a real competitive disadvantage 
for us.
    We are also troubled by other aspects of the current 
corporate Tax Code. It creates distortions in economic decision 
making, it diverts capital from its most efficient and 
effective use, and it leads to lower wages in employment.
    Like many of you in Congress, our company has also been 
evaluating, and even modeling, some of the tax reform 
proposals. We look at these from the perspective of both what 
is good for our country and what is good for our company.
    Overall, we believe the ideal corporate tax system would 
include a materially lower tax rate, something at least close 
to the average OECD rate, along with capital investment 
incentives, such as 100 percent expensing.
    We have also said, however, that if tax reform must be 
revenue neutral so be it. We are willing to put all base-
broadeners, including expensing or accelerated depreciation, on 
the table in exchange for a materially lower tax rate. Doing 
so, however, would come with a cost, both macroeconomically and 
to our company.
    Strong capital cost incentives, like expensing, generate 
new investment and new productive assets in the United States; 
and, as reflected in the chart--this chart that I attached to 
my written testimony--there is an almost perfect correlation 
between new investment and jobs in this country.
    From our company's perspective, we would generally expect a 
lower tax rate to increase our cash flow, bottom line earnings, 
and earnings per share. To the contrary, reducing capital 
incentives would have a generally greater adverse effect on our 
cash flow. This is important because, as is often said, cash is 
the lifeblood of any business.
    Our investors pay close attention to our cash flow, as well 
as to our bottom line earnings and earnings per share, and they 
routinely quiz our CEO and CFO about all three. One of our 
biggest cash outflows that gets a lot of attention is capital 
expenditures, $4.2 billion in our current year, for example, up 
from $3.4 billion last year.
    So while there are other factors, assuming business tax 
reform must be revenue neutral, the most critical analysis from 
my company's perspective is a comparison of the cash flow 
detriment from slowing capital cost recovery versus the 
earnings and cash flow benefits of a lower tax rate. If a tax 
reform package cannot get us to a materially lower tax rate, it 
will not address our competitiveness issues, particularly if 
capital cost incentives are reduced as part of the deal.
    One other thing that needs to be considered in the mix of 
tax reform is simplification. This is difficult, if not 
impossible, to measure, but its value should not be 
    In closing, we commend the recent tax reform discussion 
draft released by you Chairman Camp. We think it is an 
excellent starting point, and we urge that you continue your 
efforts to lower the corporate tax rate to be consistent with 
the OECD average and to simplify. We need to get back to the 
basics, where businesses compete on the basis of the merits of 
their products and services, not on the basis of what the Tax 
Code says.
    Thank you.
    Chairman CAMP. Thank you very much, Mr. Fryt.
    [The prepared statement of Mr. Fryt follows:]


    Chairman CAMP. Mr. Schichtel, you have 5 minutes.


    Mr. SCHICHTEL. Thank you.
    Chairman Camp, Ranking Member Levin, and Members of the 
Committee, thank you very much for inviting me to share our 
views on corporate tax reform. I am the Senior Vice President 
and Chief Tax Officer for Time Warner Cable.
    I would like to first tell you about our business and the 
impact of taxes and tax policy on Time Warner Cable. Then I 
will explain why we believe that less complexity and a lower 
rate will benefit our investors, employees, and customers, as 
well as the overall economy and Americans at large.
    Spun off from Time Warner Cable nearly 3 years ago, Time 
Warner Cable is a Fortune 150 capital-intensive domestic 
company that provides high-speed data, video, and voice 
services to over 14\1/2\ million customers. We have over 48,000 
employees in 29 States. We offer our workers secure jobs and 
wages and benefit packages that are competitive and that 
support families, dreams, and retirements. Last year, we hired 
over 7,300 people, including hundreds of veterans.
    We are part of our Nation's communications backbone that 
enables domestic companies to compete regionally, nationally, 
and globally. We help small- and medium-sized businesses grow 
and thrive.
    Time Warner Cable spends about $3 billion a year on capital 
improvements, a third of which goes to wages. In 2012, we are 
continuing to extend our network to even more businesses and 
    Our investments also support a national network of 
suppliers, including nearly a quarter of a billion dollars 
spent annually with minority and female-owned businesses.
    Our effective tax rate is historically around 39 percent, 
while our cash taxes paid are lower, driven by temporary 
incentives such as bonus depreciation, the benefits of which 
are now reversing. Taxes are a significant business cost, 
ranking among our largest in terms of magnitude, along with our 
programming, employee, financing, and capital outlays.
    Although difficult to quantify and allocate, these taxes 
are ultimately borne by our investors, workers, and customers 
through lower returns in wages, less investment in training, 
and higher costs and prices. We are strongly influenced by tax 
policies that impact our net income, effective tax rate, and 
earnings per share.
    We do benefit from targeted incentives, like the research 
credit and Section 199. Given our capital intensity, however, 
we currently rely even more heavily on timing incentives that 
don't impact GAAP financial accounting, such as expensing and 
accelerated depreciation, which significantly enhance our cash 
flows and ability to invest in our people, technology, and 
network infrastructure. These policies have and continue to 
support our business.
    Over the decades, well-intentioned policy choices have 
helped produce a Tax Code and related regulations that are read 
in small print and measured in volumes. Each enacted policy 
objective is accompanied by nuanced rules needed to implement, 
clarify, and limit potential abuse.
    It is not just the complexity that burdens our economy, it 
is the year after year starts, fits, stops, changes, and 
uncertainty that frustrate business leaders, analysts, and 
investors alike. Often, the benefits are very large, swaying or 
thwarting decisions of what, when, and where to invest. Subtle 
changes from one year to the next, intentionally or 
unintentionally, deny one company a benefit while often heaping 
on an extra helping for another.
    It is time for American businesses to put aside our 
industry specific wish list and to work collectively to support 
a more coherent and equitable tax policy and corporate taxation 
structure. We recognize that competing priorities and deficit 
reduction efforts likely mean that corporate tax reform will 
need to be revenue neutral.
    As a member of the RATE coalition, we are willing to put 
all of our tax incentives on the table and broaden the base in 
order to bring America's corporate tax rate in line with the 
rest of the developed world. We advocate for a significantly 
lower rate, a simpler code, and a predictable, consistent set 
of tax rules upon which business can make long-term decisions.
    America has so many business advantages. Yet, we are 
saddled with an inefficient tax structure and an uncompetitive 
tax rate. We are pleased that there is growing consensus for 
reform that significantly reduces the corporate tax rate. We 
want to commend Chairman Camp and this committee for its 
leadership in this regard. We would welcome the opportunity to 
work with the committee and its members and staff in dealing 
with these issues as tax reform progresses.
    Once again, I want to thank Chairman Camp, Ranking Member 
Levin, and the members of this committee for inviting me today. 
I very much appreciate this opportunity to testify and would be 
happy to answer any questions you might have.
    Thank you.
    Chairman CAMP. Thank you, Mr. Schichtel.
    [The prepared statement of Mr. Schichtel follows:]


    Chairman CAMP. Ms. Hanlon, you are recognized for 5 


    Ms. HANLON. Thank you. Chairman Camp, Ranking Member Levin 
and distinguished members of this committee, thank you for the 
opportunity to testify before you today.
    The main point of my testimony is that the responsiveness 
to tax policies can be affected by the financial implications 
of those policies. I would like to first offer some general 
examples of the importance of financial accounting to managers 
of publicly traded companies.
    One example is found in a study of companies accused by the 
SEC of fraudulently overstating accounting earnings. It turns 
out that these companies also overstated their income to the 
IRS and paid taxes on their inflated accounting income. This 
suggests that these companies were willing to pay substantial 
sums of cash in order to report higher financial accounting 
earnings. In the literature we call this the book-tax tradeoff.
    A second example is found in a recent survey of tax 
executives of publicly traded companies. Eighty-five percent of 
the tax executives said that top management at their companies 
view the accounting effective tax rate as being as least as or 
more important than the actual cash taxes paid.
    To illustrate the financial accounting effect of tax 
policies, my written testimony discusses three current tax 
policies related to investments.
    As you know, the U.S. has one of the highest statutory 
corporate tax rates in the world, with a top rate of 35 
percent. Rather than reducing our corporate rates, our policies 
have instead included targeted tax provisions such as bonus 
depreciation and Section 199 in attempts to reduce economic 
effective tax rates and promote investment.
    In addition to high corporate statutory tax rates in the 
U.S., we have a worldwide tax system with deferral, which has 
in part led to multinational U.S. companies holding a great 
deal of cash overseas. Financial accounting has affected 
corporation tax policy responses in each of these cases. 
Because the details can become technical quickly, I will 
discuss only one of these in detail today, accelerated 
depreciation, including bonus depreciation.
    Accounting earnings are computed using the accrual method 
of accounting. This means, for example, that expenses are 
recorded in financial statements when incurred, regardless of 
when the actual cash is paid. The same method of accounting 
applies to the accounting for income tax expense.
    In the case of depreciation, most companies use straight-
line depreciation for both purposes and accelerated 
depreciation for tax purposes. Thus, the tax deduction for 
depreciation is larger than the depreciation expense for 
financial accounting in the early years of an asset's life. 
However, this is only temporary in nature, because the same 
amount will be depreciated for financial accounting and tax 
purposes over the life of the asset. The deduction for tax is 
just faster than the expense for book.
    To compute the income tax expense for financial accounting 
purposes in this case, the accounting rules require expensing 
not only the cash taxes actually paid but also accruing and 
expensing the future taxes that will be paid because a company 
used that tax shield early. Thus, accelerated or bonus 
depreciation does not reduce a firm's accounting income tax 
expense, it will not reduce their reported effective tax rate, 
and it does not increase reported accounting earnings relative 
to a world without accelerated depreciation for tax purposes.
    When asked, corporate management will often reveal a 
preference for a rate cut over bonus depreciation for several 
reasons, one of which is that there is no reduction in income 
tax expense on the income statement but there would be with a 
rate cut. In addition, empirical evidence on the responsiveness 
to accelerated depreciation relative to the investment tax 
credit which did reduce financial accounting income tax expense 
reveals that the responsiveness to the credit was greater 
holding the present value of the cash tax savings constant. 
This evidence suggests that the accounting effect is important 
and serves to mitigate the responsiveness to accelerated 
depreciation because there is no financial accounting benefit.
    In conclusion, the main point of my testimony is that what 
many consider to be cosmetic accounting effects actually play a 
role in responsiveness to tax policy. These financial 
accounting implications can often mitigate the effectiveness of 
policies, such as bonus depreciation for public firms.
    In addition, as I discuss more fully in my written 
testimony, sometimes the accounting implications lead to other 
unintended consequences, such as exasperating the tax 
incentives to leave cash overseas for U.S. multi-nationals.
    In addition, at times concern over the accounting 
implications has caused tax policy to be enacted in a 
particular manner, as was the case with Section 199.
    In sum, it is important to recognize that both tax and 
financial accounting effects are included in the set of factors 
that public corporations will consider in their decision making 
    Thank you for inviting me to testify today. I look forward 
to your questions.
    Chairman CAMP. Thank you, Ms. Hanlon.
    [The prepared statement of Ms. Hanlon follows:]


    Chairman CAMP. Mr. Neubig, you are recognized for 5 


    Mr. NEUBIG. Thank you for the opportunity to testify.
    I was an economist at the U.S. Treasury's Office of Tax 
Analysis from 1980 to 1990 during the development of the 1986 
Tax Reform Act. Financial accounting issues were not very 
important then, but over the last 25 years I have seen their 
importance grow, not only at the Federal level but also in 
terms of State tax policy and tax policy in other countries.
    In 2005, President Bush's Advisory Panel on Federal Tax 
Reform outlined a business cash flow tax that allowed first 
year 100 percent write-off of capital investment, like bonus 
depreciation. One might have expected that this plan, which 
many of my economist brethren claim results in a zero effective 
tax rate for new capital investment, would have received strong 
support from the business community, but it did not. This led 
me to consider a number of reasons why many economists often 
predict the effects of tax reforms much differently than the 
business community.
    Although I am not an accountant, in testimony before the 
Select Revenue Measure Subcommittee in 2006, I noted the 
importance of financial accounting rules when many corporate 
executives evaluate alternative tax reform proposals. I will 
restrict my comments to several reasons why many corporations 
may prefer a lower corporate tax rate to more targeted tax 
    I will use accelerated tax depreciation as one example, 
since its repeal has been proposed in combination with lowering 
the corporate tax rate in several recent tax reform plans.
    Also, a number of countries have moved towards economic 
depreciation to partially finance their reduction in their 
corporate tax rates.
    Timing of taxes matters, and particularly for cash 
constrained firms accelerated depreciation can provide 
important cash flow benefits. Accelerated deductions provide 
benefits similar to an unsecured zero interest rate loan from 
the Federal Government. At today's historically low interest 
rates, the value of accelerated tax deductions is relatively 
modest for corporations with access to capital markets.
    Many corporate tax executives, as Dr. Hanlon noted, focus 
not only on their cash tax liabilities but also on their 
reported financial statement effective tax rates and reported 
book earnings. Temporary book-tax differences, such as 
accelerated depreciation and many other provisions, do not 
affect the total financial statement effective tax rate, which 
is based on the total accrued tax expense, both current and 
    A lower corporate tax rate and accelerated depreciation 
both reduce the economic effective tax rate on tangible 
business capital investments, but a lower corporate tax rate 
also reduces many other tax distortions, including the double 
tax on corporate equity, the bias toward corporate debt, 
taxable income shifting across tax jurisdictions, the lock-in 
effect on corporate capital gain realizations, the lock-out 
effect on foreign dividend repatriations, and also reduces the 
tax on corporate entrepreneurship and innovation.
    A number of reports emphasize the necessity of combining 
permanent expensing with repeal of interest deductibility in 
order to prevent negative effective tax rates. In 1982, 
Congress scaled back accelerated depreciation as part of its 
deficit reduction efforts due to what were considered excessive 
tax benefits from combining an investment tax credit with 
accelerated depreciation and interest deductibility.
    The 1982 Tax Act was a key starting point for the 1986 tax 
reform process. The base broadening in 1982 enabled the lower 
individual income tax rates to continue to be indexed for 
inflation while also reducing the deficit. It was clearly a 
tradeoff between base broadening versus lower tax rates, which 
continued in 1984 and then culminated in the 1986 Tax Reform 
    Finally, I would like to point out a recent study by two 
Treasury economists. A report found that only 50 to 60 percent 
of corporations and only 30 to 40 percent of pass-through 
businesses took advantage of the recent bonus depreciation 
rules. The study notes that while accelerated depreciation in 
theory reduces the cost of investment, in practice various 
factors limit the use of bonus depreciation and its relative 
    Financial statement accounting is one of those factors that 
influence a company's business decisions and which economists 
generally don't include in their tax modeling.
    In addition to financial accounting, tax risk and 
uncertainty, compliance burdens and other non-income taxes also 
affect business decisions. Financial accounting is one of 
several reasons why many corporations may prefer a permanently 
lower corporate tax rate to more targeted tax incentives.
    I would be happy to answer any questions about my 
    Chairman CAMP. Thank you very much, Mr. Neubig.
    [The prepared statement of Mr. Neubig follows:]


    Chairman CAMP. Mr. Heenan, you are recognized for 5 

                       TAX, PRAXAIR, INC.

    Mr. HEENAN. Good morning. Thank you for inviting me today. 
I appreciate it.
    I would like to just start by commending you, Chairman, for 
tackling--and the rest of the committee for tackling this 
important topic of tax reform. We support the efforts and 
appreciate the time to talk about it here today.
    I would like to just start to give a little bit of a 
background about Praxair, not maybe a household name. We sell 
air. We sell the components in air. We have a diverse customer 
mix. We can sell to a food and beverage company for the 
nitrogen in your potato chip bag or the fizz in your soda. We 
also sell to big companies, steel companies, who use tons and 
tons of gases. So a very diverse customer group.
    We have about $11 billion in sales worldwide, and we are 
the largest industrial gas producer here in the United States.
    Importantly, we spend about $2 billion a year on new 
capital investment. We go through a very rigorous process. We 
sit at a table with the senior leaders on each new project, and 
they tend to be big projects, and we discuss capital 
investment, and we compare projects around the world. And for 
us cash is king.
    And to answer the question that was posed, in what way does 
financial accounting affect our business investment decisions, 
our answer is simple. It really does not affect our decisions. 
For us, it is about cash. Cash is king.
    You know, earnings will follow the cash. If we get more 
cash, we have more to invest, and the earnings will follow. So 
we do not focus on financial accounting.
    It is important to focus on earnings for other decisions in 
the business, but on the investment decisions, cash is king. So 
we use sort of a net present value cash flow model, and we 
don't vary from it.
    I can tell you, Thursday this week we will go through 10 
projects, and not one of those projects is going to say 
anything about earnings. All of them will talk about internal 
rate of return, which is a cash flow model we focus on.
    So while I support tax reform I think that we really have 
to take a close look at the targeted deductions that we may 
eliminate that pay for that tax reform. And specifically, you 
know, many folks here that have been testifying have mentioned 
accelerated depreciation. Under the current U.S. rules, that is 
a very important factor that helps influence our investment 
decisions. So if we are going to remove accelerated 
depreciation in favor of a lower rate, we really need to weigh 
the two very closely to see what it is going to do to 
investment decisions for companies like Praxair.
    So thank you, and I would be happy to take any questions 
you might have.
    Chairman CAMP. Well, thank you.
    [The prepared statement of Mr. Heenan follows:]


    Chairman CAMP. Thank you all for your excellent testimony.
    Now we will move into a question time; and, Mr. Fryt, Mr. 
Schichtel, and Mr. Heenan, I have a question for all of you. 
You were invited here today because you do represent capital-
intensive businesses that could be asked to consider trading 
off a substantial amount of tax benefit if there was a 
comprehensive reform plan put forward that could alter pretty 
dramatically the corporate tax rate and reduce it somewhat 
drastically. The committee wants to understand better how 
businesses such as yours evaluate those tradeoffs that will be 
part of tax reform.
    Now, I understand that we are not talking about details 
today, but especially with respect to choosing the right base-
broadening measures, could a revenue-neutral reform package 
that reduces the corporate rate to 25 percent and moves to a 
territorial system, could that improve the competitiveness of 
your companies?
    And if you each could take a few moments to answer that.
    Mr. FRYT. My answer would be yes. At 25 percent, I think 
that is close to the OECD average, which is about 25 percent 
right now; and given our international competition, that is 
about where we need to be at a minimum. You talk about base-
broadeners and the tradeoff. There certainly is, as I mentioned 
in my prepared remarks, and that is something that we take into 
consideration. The cash flow effects are detrimental. There is 
no question about it. But lowering a tax rate overall to 
something around 25 percent, I think, would be well received.
    Chairman CAMP. Mr. Schichtel.
    Mr. SCHICHTEL. I agree with Mike, a resounding yes. I think 
if we can get to a 25 percent rate, or something close to that 
that is in line with the rest of the developed world, you will 
find the vast majority of the business community coming out in 
support of it. I know it is a challenge to get there.
    From our perspective as a company, our health and growth is 
tied inextricably to the growth and health of the overall 
economy. No question about it. That is the biggest driving 
factor in how well we do over the long run. Our view is that a 
significantly lower rate and a simpler Tax Code will redound to 
the benefit of the entire economy, will encourage overall more 
growth and development, and that will in turn increase the 
returns that we have to our shareholders and the opportunities 
that we have out there.
    Chairman CAMP. Mr. Heenan.
    Mr. HEENAN. I would like to give you an answer yes or no, 
but, really, I have been doing this a long time and the devil 
is in the detail. And, in our view, clearly all tax 
expenditures are not created equal. And, you know, to just 
focus on accelerated depreciation, a tax rate will affect both 
our old business and our new investment, and so we have a 
large--we are the largest industrial gas company in the U.S. We 
will certainly benefit from a rate reduction.
    But to your specific question on investment decisions, that 
is a future question. A rate benefit is not going to impact our 
future decision. And so when I look at something like 
accelerated depreciation, that is very focused on new 
investment. New investment will bring growth and jobs.
    So, I think we just have to be very cautious as to which 
tax expenditure we are using, and we are particularly focused 
on accelerated depreciation because we think it has a special 
place in promoting new growth, and we think with that will come 
    Chairman CAMP. But if the right base-broadening measures 
were chosen, do you think a revenue-neutral package that 
reduced the rate to 25 percent would help the competitiveness, 
including a territorial system?
    Mr. HEENAN. Well, I can clearly say if accelerated 
depreciation remains the same and everything else goes, we 
    Chairman CAMP. From your point of view, I am asking your 
opinion. So if the right base-broadening measures were chosen, 
from your point of view, that it would be something that would 
increase the competitiveness of----
    Mr. HEENAN. Absolutely.
    Chairman CAMP. The other--just to follow up, could you 
envision a package, each, the three of you, being designed that 
would lead employers to invest more and hire more American 
    Mr. FRYT. Absolutely. I think the package--well, I 
described in my prepared remarks the ideal one--maybe not a 
practical, but the ideal one would be some rate close to the 
OECD rate with 100 percent expensing. I think you would see 
tremendous new investment, additional global expansion, U.S. 
expansion, and job growth, absolutely.
    And even if you went with the base-broadeners that you were 
talking about, Chairman Camp, if you got down to a rate of 
around 25 percent I think there is no doubt in my mind that 
also would increase growth.
    Chairman CAMP. Thank you.
    Mr. Schichtel.
    Mr. SCHICHTEL. I would love to keep our tax incentives like 
accelerated depreciation. I would love to see expensing 
extended as part of an overall tax reform that lowered the rate 
to 25 percent. But I don't see how that is possible in a 
revenue-neutral fashion. I think for the short term, until we 
do have corporate tax reform, I think expensing, extending 
bonus depreciation is tremendously important and impactful. 
Certainly from our vantage point and our C suite's vantage 
point--because I get calls all the time--it is tremendously 
    That being said, if we all put everything on the table and 
we start working towards a targeted rate and a simpler code, I 
think we will see more growth, and for us that will definitely 
result in more jobs and more investment.
    Chairman CAMP. All right.
    I have a question for Ms. Hanlon and Mr. Neubig.
    In Congress, we measure revenue neutrality by looking at 
cash taxes over a 10-year period without using a discount rate. 
And that is very different how public companies calculate book 
earnings under GAAP, and it is even very different how public 
companies calculate cash flow benefits. But if this committee 
succeeds in designing tax reform legislation that is revenue 
neutral over a 10-year period the way Congress measures it but 
that in the aggregate increases companies book earnings, do you 
think that such a tax reform package would lead to more 
economic activity being located here in the United States and 
therefore more jobs for American workers?
    Ms. Hanlon, why don't I start with you?
    Ms. HANLON. I guess the main thing I would say to that is 
that if you would, you know, remove the mitigating effect of 
financial accounting there seems to be no negative effect that 
would come from that. So to the extent that doing the tax side 
of it would increase jobs and investment, then releasing the 
mitigating effect from accounting could only help those 
    Chairman CAMP. All right.
    Mr. Neubig.
    Mr. NEUBIG. I think the companies are going to be looking 
at a lot of different measures of taxes. And you mentioned that 
although it might be revenue neutral over a 10-year period from 
a government scoring standpoint it might be actually higher 
total taxes on the corporate community. I think there would 
certainly be concern about that having some adverse effect. 
There are certainly lots of benefits from a lower corporate tax 
rate, but they are going to be looking at the total tax burden 
in the U.S. So they impact the other----
    Chairman CAMP. I am sorry, we are having microphone 
    Mr. NEUBIG [continuing]. Other tax base issues. So it 
really is the whole tax reform package that they will be 
looking at.
    Chairman CAMP. And to the two of you again, some 
commentators say that cash is king and that investors are 
sophisticated enough to sort of look through the differences 
between cash flow and book earnings. And how do you respond to 
the arguments that investors look through book earnings and see 
only cash?
    Ms. Hanlon, why don't you start? Then I will go to Mr. 
Neubig, briefly.
    Ms. HANLON. This is a great question. It has been asked 
many times in accounting workshops when we present research on 
earnings management, for example.
    So I think the first thing to recognize is that accounting 
earnings are used for two purposes, both equity markets and 
contracting purposes. So, for example, debt contracts and 
compensation contracts and the extent to which those are 
written based on accounting numbers, you will see managers 
respond to those same incentives. And the equity markets and 
these contract writers they are not stupid or not savvy enough, 
I wouldn't say, in using accounting earnings, because 
accounting earnings is generally kind of like a scorecard. In 
other words, there is research that shows that accrual 
accounting earnings can predict future cash flows better than 
current cash flows. So it is reasonable for these people to use 
accounting earnings.
    And, finally, the other thing is that investors may be 
savvy, but they are still only human. So there is a long line 
of behavioral finance research that shows investors have 
limited attention and limited processing ability to process 
very complicated information like you would find in an annual 
report of a complicated company.
    Chairman CAMP. All right.
    Mr. NEUBIG. There are differences across the different 
companies. And accelerated depreciation and the cash flow----
    Chairman CAMP. Maybe if you could borrow somebody else's 
    Mr. NEUBIG [continuing]. Cash-constrained companies deal 
with an economic downturn. There are an awful lot of cash-
constrained companies that can certainly benefit from the cash 
flow benefits from a number of the timing provisions. And so I 
think not all companies are alike. There are going to be a 
number of companies, as Dr. Hanlon noted, that do look 
specifically at the financial statement earnings and book 
earnings. I found that in terms of my discussions with a number 
of corporate executives. But, also, there are a number of 
corporations that do the type of project evaluations looking at 
the cash flow benefits.
    I would say that at the current time for companies that 
have access to capital markets interest rates are at a historic 
low. And to the extent that accelerated depreciation really is 
a zero interest rate loan from the Federal Government, the 
benefits of accelerated depreciation at the current time are 
modest for those that have access to capital.
    Chairman CAMP. All right. Thank you.
    And, Ms. Hanlon, just finally, you mention in your 
testimony the important point that some of the analysis that we 
have been talking about today doesn't really apply to closely 
held businesses. Could you just explain how closely held 
businesses might analyze tax reform differently than publicly 
held companies?
    Ms. HANLON. Yes. There is a long line of literature in the 
accounting research that examines this exact book-tax tradeoff. 
And often what we will find, if we can get the data, we will 
line up public companies and private companies and essentially 
find that private companies are much more responsive to the tax 
incentives and tax reporting incentives than are public 
companies. And the idea is that the public companies have this 
financial accounting constraint. So it is probably true that 
private companies will respond to these incentives more than 
public companies will.
    Chairman CAMP. Thank you very much.
    Mr. Levin is recognized.
    Mr. LEVIN. Except for the last few questions, we have been 
really discussing broader issues of tax reform and not book and 
tax accounting issues. We may be relieved by that, because we 
need to look at it. They are not easy issues, and you are going 
to have to, I think, have a few seminars with us on that 
subject as we look at these broader issues. So, it is really 
the broader issues that have been mostly discussed here, and 
let me just say a word about that.
    There is no doubt we need to look at tax reform. There is 
no need, as I said earlier, to look at it with care and not 
simply grab ahold of a specific figure without looking at its 
    Because, according to the Joint Tax analysis, when we asked 
them, they said, if the rate were reduced to 28 percent, half 
of that reduction would come from ending accelerated 
depreciation. So when people say they want the rate 
dramatically reduced but not at the expense of--expense in 
accelerated depreciation, that doesn't really fit; and it was 
interesting in the testimony of the first two of you that you 
referred to that.
    For example, in testimony--you know this well, Mr. Fryt--
you said, our investors applaud capital incentives like 
expensing, because our after-tax cash flow on a new capital 
investment can be up to 35 percent less than it would be 
otherwise in the first year. And of course that evens out. But 
it is kind of a broad embrace of the importance of that.
    And then I just--Mr. Schichtel, your testimony, if I 
might--you know it well. I will just read it. Because this is 
important for us to have a full, intelligent discussion of this 
vital issue. And this is on page 3:
    Given the capital intensity of our business, however, we 
rely even more on--let me just read above.
    Like most companies, we are strongly influenced by tax 
incentives that improve our reporting metrics, such as our 
reported income, effective tax rate, and our earnings per 
share. Items like the research credit and the Section 199 
domestic production incentives are differences that permanently 
reduce our taxes paid and concomitantly our effective tax rate, 
thereby encouraging new investments.
    And let me just indicate, I was looking as we were reading 
over your testimony last night at Marty Sullivan's analysis of 
winners and losers if there were a reduction in the rate to 30 
percent with slower depreciation, repeal of the domestic 
production credit, and repeal of the research credit. This is 
his analysis, and I think all of us need to look at this and do 
other analyses. And it is really interesting, and it is not 
very surprising.
    The industries that benefit from that--and I will just read 
a few that apply to you, I guess--securities, insurance, retail 
trade--these are winners. Bank holding companies, real estate, 
other services, it diminishes as I am going down the line. 
Wholesale. Mining is essentially even, as is construction.
    And then those who are losers: food manufacturing, 
utilities, other manufacturing, chemicals, metals, minerals, 
and machinery manufacturing, transportation, Internet--I don't 
quite understand that but--agriculture, technical services, 
computer and electronics very dramatically. Transferred 
equipment very dramatically. And electrical products most 
    So I think since the testimony has really mostly focused on 
these larger issues and not on the technical stuff that was 
headlined in the announcement of our hearing, I think your 
testimony today does underline the importance of our looking 
deeply into this issue. When we say everything is on the table, 
that doesn't really settle what is left on the table, right? In 
a sense, it is somewhat easy to say, put everything on the 
table. We do that all the time here. And the real issue becomes 
what is taken off and what is left.
    So we welcome your testimony, and I hope that today's 
hearing is another step towards our comprehensively looking at 
these issues so that we can come out with a proposed revision 
of the Tax Code that very much keeps in mind what our 
objectives are.
    And I go back to what I said in the opening. I do think 
that with the return of understanding of the importance of 
manufacturing we need to look at tax reform in terms of how we 
promote a continued growth in services, in agriculture, and the 
like but also in the industrial sector of the United States. 
And, Mr. Heenan, that is where you come from; and I think that 
somewhat motivates your--I won't say hesitation. I think it is 
kind of a well-rounded response.
    Thank you.
    Chairman CAMP. Thank you.
    Mr. Johnson is recognized for 5 minutes.
    Mr. JOHNSON. Thank you, Mr. Chairman.
    Mr. Fryt, how low would we have to get the rate before you 
guys could take over the Postal Service?
    Mr. FRYT. Do I have to answer that question?
    Mr. JOHNSON. Well, you are doing a good enough job right 
now. I have got a place out in New Mexico where you deliver to 
the door and the Postal Service doesn't even come.
    Mr. FRYT. Well, if you ever have a problem, just give me a 
call, please, and I'll help you.
    Mr. JOHNSON. In your testimony, you say the ideal reform 
would lower the rate to at least 25 percent, including 
incentives for investments such as bonus depreciation. However, 
you also say you are willing to put all base-broadeners on the 
table for a significantly simpler and reformed corporate Tax 
Code with a materially lower tax rate. What rate would that be 
if we were to give up all the other nicks?
    Mr. FRYT. It really depends, Mr. Johnson. It depends what 
is in the package. But, given our competition overseas, we 
think it would have to be something close to the OECD rate. If 
you get there, presuming that doesn't continue to decline, I 
think, as Chairman Camp asked earlier, I think it would be a 
good place to be.
    Mr. JOHNSON. Well, does that mean R&D tax credit and those 
kind of things would be--we could eliminate them if we got the 
rate low enough?
    Mr. FRYT. I am sorry, sir?
    Mr. JOHNSON. If we got the rate low enough, would you go 
along with that?
    Mr. FRYT. Yes, sir.
    Mr. JOHNSON. Okay. You know, I had a meeting with some of 
your guys in Dallas. They said 23 percent. Do you like that 
number better than 25? I bet you do.
    Mr. FRYT. I do like 23 better than 25. Yes, sir. If you can 
make that happen, that would be terrific.
    Mr. JOHNSON. Mr. Schichtel, given Time Warner is a capital-
intensive business, would you care to comment on that as well?
    Mr. SCHICHTEL. Yes. Thank you.
    We care tremendously about timing issues like accelerated 
depreciation. For us, it is enormous. But I think when you--
well, we have crunched the numbers, and we have looked at all 
the different policy proposals that are out there. We clearly 
care about the impact on cash flow, and I think lowering the 
rate clearly does improve our cash flow over the long run. If 
you get to a low enough rate and I think somewhere around a 
rate that is consistent with the developed world, say 25 
percent, I think it is a clear winner for us as well as the 
    Mr. JOHNSON. And you could get rid of all the other----
    Mr. SCHICHTEL. Yes.
    Mr. JOHNSON [continuing]. Okay. I am glad to hear it.
    Mr. SCHICHTEL. I am not delighted to. I would love to keep 
accelerated depreciation, but I am a realist as well.
    Mr. JOHNSON. Ms. Hanlon, in his testimony, Mr. Heenan 
argues that promoting investment accelerated depreciation is 
perhaps a more powerful tool than lower overall tax rates. You, 
however, say with respect to targeted tax incentives such as 
bonus depreciation there is very little evidence that these 
policies have spurred any investment. Can you comment on that?
    Ms. HANLON. Yeah. My statement is based on the weight of 
the evidence in the literature. And, basically, there are 
papers that will show there is a timing effect. So firms will 
shift the purchase of equipment to a period that is earlier, 
say by in December instead of January. There is also evidence 
that firms will purchase a different class of asset.
    But what we can't tell in the literature and what is very 
difficult to parse out is whether these are--you know, part of 
it is just timing, part of it is just shifting, and some of it 
could just be a change in reporting. So that, in other words, 
when you say a certain class of asset gets a certain benefit, 
they might just now record different assets differently. We 
can't tell that in the literature, and the research that tries 
to look at aggregate effects really find very little. So it is 
just the weight of the evidence, a large sample.
    Mr. JOHNSON. Have you done any studies on eliminating all 
the incentives and just lowering the tax rate?
    Ms. HANLON. Not directly, no.
    Mr. JOHNSON. Thank you, Mr. Chairman.
    Chairman CAMP. Mr. Davis is recognized.
    Mr. DAVIS. Thank you, Mr. Chairman. I am very interested in 
this discussion on both counts, having worked for many years in 
manufacturing before coming to the House of Representatives. 
First I would like to preface my question with I agree with the 
macro concern that Professor Hanlon talked about that a rate 
reduction overall is certainly more beneficial in the long term 
and certainly support that.
    But I would like to come back into a manufacturing or 
operations/capital investment question on trying to balance 
this out inside of or underneath the umbrella of strategy.
    I worked with many clients, I was discussing earlier three 
in particular, before some of the bonus depreciation issues 
came out after 9/11 and in subsequent years where they were 
very reluctant due to market cycles to make investment in 
machine tool technology and other systems that would be very 
helpful to them. This is particularly smaller businesses, under 
$100 million manufacturing firms, but surprisingly a number of 
my clients in the Fortune 500 had that same experience on a 
reluctance-based on market cycle, particularly with shareholder 
expectations in the long term.
    I guess the question that I would like to understand is how 
we address this issue of depreciation from a strategic 
standpoint within the long term. Bringing the rates down is 
certainly important to me from a tax perspective, but also 
having this incentive for investment is a bigger question.
    I guess considering the long-term, if we were able to work 
out a mechanism, and I would like to hear thoughts from all of 
you, but specifically Professor Hanlon and Mr. Heenan on this, 
since you have both been talking about this the most, if we 
were able to adjust depreciation schedules within the intent of 
the overall tax strategy that would provide the ability, 
knowing that the tax liability would be the same to your 
company in the longer term, but to do it on a more proportional 
    When there is a great year and the well is full of water, 
the idea of let's go ahead and make this capital investment to 
be leaned up and ready for more difficult times, being able to 
control costs when you have got the ability to invest in those 
technologies, knowing that there will be a down cycle 
eventually. I am thinking heavy manufacturing, the energy 
industry, areas that I saw that were very reluctant to get 
involved and make these investments. Or, say, maybe if you had 
a great year, a small $50 million company can invest in a 
couple of $800,000 machine tools and write it off in one year 
but know they are going to take that. Certainly there would be 
a lower profit, but the idea of longer term is those jobs are 
protected and they become more competitive.
    Where this gets particularly challenging to me is looking 
at a lot of our international manufacturing. Contrary to a lot 
of the politics in Washington, we are very robust, very strong 
and competitive in manufacturing, but there is still this 
reluctance with many of the tier one and tier two producers to 
make these decisions, and if they could reduce it down, say, 
into a 2, 4, 7-year schedule, if they want to go to the longer 
term schedules, that is perfectly acceptable. But how would 
that work inside of this idea of rate reduction if we could 
manage that to keep things revenue neutral and what would the 
impact of that be from a wider standpoint?
    Mr. HEENAN. Just to get on your bonus comment and make sure 
I understand your question, were you saying, hey, maybe we slow 
down depreciation a little bit and then bring bonus in and out 
to help encourage investment?
    Mr. DAVIS. What I am talking about is allowing the 
manufacturing company who is getting ready to make these 
capital investments. And I am not talking about all asset 
classes. I think that would be a grave error and would just 
totally stir up the tax system. But some specific areas that 
are very critical to our strategic manufacturing economically 
is that the employer would simply have the ability to pick the 
schedule, or the company would pick the schedule that is most 
advantageous to them, and rather than have these kind of boom-
and-bust cycles on policy, have that fit into the overall tax 
strategy, so that in a good year in one sector, say you can 
make the investment that maybe FedEx would not make based on 
what they are doing, or vice versa, but within those time 
    But coming back, how would you work that as well inside of 
the rate structure, keeping that lower rate because of the 
longer term implications?
    Mr. HEENAN. I think I understand your question. Just to 
focus on Praxair, we have, as I mentioned earlier, fairly large 
capital projects and these can take a couple of years before 
you start the process and finally sign somebody up and sell and 
implement it. So what we really need is a consistent process 
that we can follow, consistent rules. And, frankly, bonus has 
not been something that has been advantageous to us, because we 
have got--bonuses coming and going is not in the law today. We 
need something, whether it is the current system or another 
rate schedule, that we can depend on, because we have sort of a 
long cycle time and we have to think forward 2 and 3 years and 
make sure the law then is going to be the same as the law 
today. And if we can't, as with bonus, we are not going to 
model that.
    When we sit around the table and make our investment 
decisions, we are not going to put something and say, well, you 
know, they may re-up bonus in a couple years. Let's throw that 
in here in our decision on whether to invest.
    Mr. DAVIS. So that you are looking at predictability.
    Mr. HEENAN. We are looking for predictability. Accelerated 
depreciation has been a long time in our code, and it is in our 
sort of model today. Bonus is not.
    Mr. HERGER. [Presiding.] The gentleman's time has expired. 
Mr. Rangel is recognized for 5 minutes.
    Mr. RANGEL. Thank you, Mr. Chairman, and thank you all for 
coming down and giving us this testimony.
    One of you congratulated Chairman Camp for moving in this 
direction, and if he were here, I would congratulate him too, 
because what we are doing is keeping the idea alive. But it 
just seems to me with the outstanding representation from some 
of the nations and the world's most successful businesses, that 
while Chairman Camp has opened the door for reform, that it is 
going to be your responsibility to put your foot in that open 
door and don't let it close.
    It is absolutely no profile in courage for all of us to say 
reduce the corporate rates and expand the base, but not my 
base. I came down here as a tax reformer, and, believe me, 
Earned Income Tax Credit, Low Income Housing Credit, whatever 
we can do for our veterans, whatever it is, we have allowed 
probably a half a trillion dollars to get involved in what they 
call extenders. Is there anyone here who doesn't know what the 
extenders are? Or those tax provisions that expire, or at least 
we say they are going to expire, and all they want to do is to 
get them in the code.
    Someone said seeing tax law made is like seeing sausage 
made. You just don't want to see it.
    Now, what I am suggesting is that if this outstanding group 
of corporations that you have listed, how often do you meet, 
this group that--what is the name of it?
    Mr. FRYT. RATE, Reforming America's Taxes Equitably.
    Mr. RANGEL. Yes. Because our problem here is that the 
lobbyists represent the best tax interests of their clients. 
Reform is not on their agenda. If they came back to you vice-
presidents and presidents and said, what a great talk I had 
with Ways and Means people, we will have to give up accelerated 
depreciation and a whole lot of other things, but wow, would 
this be a fairer system, they would get fired. Their job is to 
broaden the gap or to create one, temporarily, but never allow 
it to sunset.
    So what we do need are people that have the credibility 
that you guys have, and ladies, to get in the room and to find 
out what we can get away with as elected officials. Nobody is 
talking about getting rid of charitable organizations and 
churches for exemptions. There is a lot of money there. And, of 
course, if you talked about mortgages, you have got to narrow 
the amount of money, the number of deductions that are in 
there. Who is going to bite the bullet to get rid of them in 
order to have a fairer system?
    I am asking FedEx and Time Warner, what can you do to get 
people in a room to say we are not agreeing to anything, or we 
are saying this will be the impact economically. How can we 
take this the next step? Because we need a climate--I was here 
until 1986. We had Tip O'Neill. All he knew was how to get 
along with Republicans. Why, I don't know, but that was the way 
Tip worked. We had Ronald Reagan, and he was blinded by party 
lines. And they were able, we were able to get what we thought 
at the time was reform.
    It is difficult to talk about reform. It is a question of 
whose ox is being gored. So what doesn't surprise me that if 
you are paying 35 percent tax, what does surprise me is that 
you are not outraged. Outraged. Don't thank us. What are you 
going to do about it? Because you have got a great argument in 
terms of equity. But nobody is going to be out front saying 
that we are going to get rid of some of the darn things that we 
put in the code, some of which we have forgotten. And when we 
extend them, it is the whole package. And you can see some of 
the things that my colleagues are talking about just to pay for 
the holiday tax package. They have got imagination, but it is 
not good law.
    So, Mr. Chairman, I was trying to negotiate with you an 
extended time period. I know I wasn't persuasive. But could one 
of you just say what you could do in terms of taking this to 
the next step?
    Mr. FRYT. Absolutely, Mr. Rangel. First off, I would like 
to commend you and the efforts you have put forth in this whole 
    Mr. HERGER. The gentleman's time has expired. Maybe, Mr. 
Fryt, you could respond by letter.
    Mr. RANGEL. I would ask unanimous consent to let our 
    Mr. HERGER. Mr. Nunes is recognized for 5 minutes.
    Mr. NUNES. Mr. Chairman, I yield the balance of my time to 
Mr. Tiberi.
    Mr. TIBERI. Thank you. Very interesting comments. I do want 
to point out just for the audience and for the record, when the 
former chairman mentioned that nobody is talking about getting 
rid of the charitable contribution, that actually in the 
President's prior three budgets, the President has capped the 
deduction on the charitable contribution at 28 percent. I just 
wanted to remind the gentleman from New York regarding the 
President's last three budgets and what he proposed. Obviously 
it wasn't adopted by the Congress, but there is one person in 
Washington who has talked about the issue in the context of 
reducing that charitable contribution. I wish Mr. Lewis were 
here, because he and I, as the chairmen of the Philanthropy 
Caucus, have both opposed that as co-chairmen of the 
Philanthropy Caucus.
    But to the witnesses today, starting on the left, those of 
you who are vice-presidents of companies dealing with tax 
issues, can you tell me who your major competitor is and how 
the current Tax Code causes you to make decisions based upon 
investments? Starting to my left.
    Mr. FRYT. Sure. Well, the United States Postal Service. 
They don't pay any tax. UPS. Their tax profile is fairly 
similar to ours. And we have several international competitors, 
DHL, TNT and others. As an example, DHL's reported ETR, its 
effective tax rates over the last 10 years, have hovered around 
20 percent vis-a-vis our 36-37 percent. That is why I say us 
paying at what we are right now is a real competitive 
disadvantage because they have additional after-tax funds that 
they can continue to reinvest in their global networks that we 
don't have.
    Mr. TIBERI. And they compete with you here and abroad?
    Mr. FRYT. Yes, sir.
    Mr. SCHICHTEL. Well, our main competitors are the two big 
boys, AT&T and Verizon, as well as the satellite companies, 
Direct TV and Dish. And then obviously we compete globally in 
the capital markets for investments. And as far as the impact 
on the communications industry, I think Verizon and AT&T are 
much more similar to us than maybe even the satellite 
companies, although the difference isn't that large. We are all 
capital-intensive companies.
    And for us, tax reform is more about getting this economy 
stabilized and growing, because that is really where our growth 
is going to come from.
    Mr. TIBERI. So even though you don't compete--I am trying 
to get more of an answer from you. I don't want to put words in 
your mouth, but let me tell you what I am trying to do and then 
maybe you can answer.
    Even though you don't have a, quote-unquote, international 
competitor, you are competing internationally for capital.
    Mr. SCHICHTEL. Yes.
    Mr. TIBERI. So the Tax Code impacts you how with respect to 
    Mr. SCHICHTEL. Well, I think if you look at some of the 
analysis and research that has been done, companies with lower 
effective tax rates do have an advantage when it comes to 
garnering investment from the global capital markets. So from 
our vantage point, that clearly is an issue. Also from just the 
perspective of raising capital and also being able to invest 
more and grow our business, an economy that is more robust is 
going to help us on both fronts.
    Mr. TIBERI. So because capital is fungible and it can go 
anywhere in the world, it is going to go where----
    Mr. SCHICHTEL [continuing]. It is going to go where they 
believe the highest return is at.
    Mr. TIBERI. On their investment.
    Mr. SCHICHTEL. Yes.
    Mr. TIBERI. So even though you are a company that is 
investing in the United States in terms of jobs, and more jobs 
in Ohio--thank you very much, that was just announced--even 
though you are a domestic company, domestic jobs, that 
international competition in terms of tax rate is very 
important to the growth of your business in America.
    Mr. SCHICHTEL. It is. And it is also very important to our 
customers. Our highest growth area is in the commercial 
services arena and our customers, small, medium and large, they 
do compete intensively in the global markets, and our success 
is tied to their success.
    Mr. TIBERI. Thank you. Praxair?
    Mr. HEENAN. Good morning. You know, I think in the U.S. we 
have--we are competing against Air Products, a U.S.-based 
multinational. Outside the U.S. we have Air Liquide and Linde, 
French and German companies. And when we look at the U.S., we 
are all--when we are doing business here, we are all competing 
at the same rate, but, as you said, you know, capital can move.
    So when we look at the foreign projects, you know, what we 
really want and I think we have today, maybe not perfectly, is 
to have a level playing field on the tax rates offshore. So if 
we are looking at a project in Mexico or France or Germany, we 
want to be on a level playing field with our competitors so 
that we can win our share of those projects. We are 
headquartered in Danbury, Connecticut. We have our R&D in 
Tonawanda, New York. That offshore growth comes back here to 
the U.S. So it is important for us to remain competitive on the 
offshore projects.
    Mr. TIBERI. Thank you, Mr. Chairman.
    Mr. HERGER. Mr. Brady is recognized for 5 minutes.
    Mr. BRADY. Well, thank you all for being here today. First, 
I appreciate the chairman holding this hearing. Secondly, I 
think the draft proposal on territorial and lower rates, the 
way it was laid out, has been a very positive and helpful 
movement toward fundamental tax reform. All the witnesses today 
have really opened up a lot of questions on how we move forward 
in doing it, doing it with the most pro-growth impact, weighing 
both the book and the accounting and tax-type requirements you 
are under. So I could ask all of you about a dozen questions.
    I wanted to ask our two business representatives from FedEx 
and Time Warner, both of you rightly make the case that in 
addition to lowering the corporate tax rate, that there is a 
need for capital investment incentives. And you are willing to 
put everything on the table; but recognize, looking at the last 
40 and 50 years, the single strongest correlating driver for 
new jobs is private business investment. You are building 
buildings, buying software, new equipment and technology, jobs 
along Main Street, growth.
    So my goal is at the end of the day, I want the lowest 
possible tax rate, but I want the strongest possible pro-growth 
Tax Code, one that allows us to have the largest economy in the 
world, not until China catches us or someone else, but for the 
next 100 years.
    So I want to ask, as you are willing to put everything on 
the table, which I think is very important, what are the 
strongest, looking at the cost of capital in investment, what 
is the strongest capital investment incentive that ought to be 
considered to remain in the Tax Code?
    Mr. FRYT. From our perspective, I think 100 percent 
expensing permanent, on a permanent basis, would be extremely 
strong. Investment tax credit can be crafted in a similar 
manner. There were some issues with that in the past. But 
expensing works quite well. It doesn't address the financial 
reporting-type issues that Ms. Hanlon was talking about 
earlier, but it still affects the cash flow, and it has a 
tremendous impact on our environment and other companies like 
    Mr. BRADY. So 100 percent expensing would be the top.
    Mr. FRYT. Yes.
    Mr. BRADY. Mr. Schichtel.
    Mr. SCHICHTEL. For us the biggest driver when it comes to 
investments is a growing economy. So I think if we can get 
there, all else, all other problems will eventually improve and 
rectify and remedy.
    As far as immediate sort of short-term policy, clearly 
bonus depreciation expensing is tremendously important right 
now. We are being hit by the reversal of prior year benefits 
from bonus depreciation just as our economy is struggling to 
pick up a little bit of momentum. I think now is not the time 
to have those reversals take full effect.
    I think overall, if you can get to a low enough rate, it 
will encourage growth and it will more than make up for the 
loss of some of the tax incentives, including even accelerated 
depreciation. But that requires us getting to really a much 
more meaningfully lower rate, somewhere around 25 percent.
    Mr. BRADY. Clearly, we know what we can do to get to 28 
percent. Getting down that final three points will be a 
thoughtful discussion.
    With what little time I have left, can I ask the other 
witnesses your thoughts on the strongest pro-growth Tax Code?
    Mr. HEENAN. Yes, just a little bit different than the 
profiles of some of the other companies. As I mentioned 
earlier, bonus depreciation really isn't helpful for us because 
it comes in and out. If it were to become a permanent fixture 
in the Tax Code, we would put that into our decisions.
    Mr. BRADY. Which is what we are seeking, permanent tax 
provisions rather than temporary ones.
    Mr. HEENAN. Right. But I think we recognize that that would 
be extraordinarily expensive and we need revenues. So the 
current provision like that is accelerated depreciation, so 
that would be the one I think that, practically speaking, you 
might be able to keep. If you go to a permanent bonus 
structure, you are going to have a very costly solution there. 
We would be happy to take it, but I think it would really cost 
too much for the country.
    Mr. BRADY. We are running short.
    Mr. NEUBIG. When tax policy analysts look at permanent 
bonus depreciation or permanent 100 percent first-year write 
off, they generally argue you would need to repeal the interest 
deduction in order to prevent negative effective tax rates. So 
you would need to think about not only expensing, but also the 
impact on the interest deduction.
    Mr. BRADY. Thank you.
    Mr. HERGER. Mr. McDermott is recognized.
    Mr. MCDERMOTT. Thank you, Mr. Chairman. I want the audience 
and the witnesses to recognize that this is a day in which we 
have all gathered here with sober faces for holy pictures. We 
are all for tax reform. Everybody in this room is for tax 
reform. We are on the Ways and Means Committee. We do tax 
reform, right?
    Now, Mr. Johnson has asked you, have you studied how low 
you could get the tax rate if you eliminated business tax 
expenditures, and none of the witnesses--all of the witnesses 
said they haven't. So I just want to enter--I am going to ask 
unanimous consent to enter into the record the study from Joint 
Tax, dated 27 October, 2011, which talks about what you would 
really have to do if you are serious here.
    [The information follows:]


    Mr. MCDERMOTT. Now, that study suggests that roughly 
half of the cost of a 7-point reduction, that is from 35 down 
to 28, would come from the repeal of accelerated depreciation. 
Yet all the companies have said this is very important, don't 
take away our accelerated depreciation. So you want to retain 
that. So that means you can only finance about a 3 percent 
reduction, 3.5 percent.
    This report says that if you are going to bring it down to 
28 percent, you are going to have to come up with $960 billion, 
of which $506 billion comes from the depreciation reduction. 
And I wonder what you would actually support, because, as Mr. 
Rangel suggested, tax reform in 1986 occurred after Ronald 
Reagan came in in 1981 and played golf with Tip O'Neill and 
Rostenkowski for 5 years, and it was before the global economy 
had really taken hold. So we are talking about a new world that 
we are trying to reform now than the one they were reforming in 
    So give me your views of what we should do. What are the 
things that are most important that you are willing to give up 
or shift off on to somebody else?
    Mr. NEUBIG. Yes, Congressman McDermott. We looked at the 
Joint Committee on Taxation's revenue estimate from October and 
we looked at the provisions they estimated and scored in terms 
of base broadening, and they represented $209 billion out of 
the total corporate tax expenditures of $545 billion. So it was 
only 40 percent that they actually scored. There was another 
$185 billion of non expiring non-international corporate tax 
expenditures that they had not yet estimated.
    So I am actually relatively optimistic that when you really 
take a hard look, that you can get down to 28 percent and even 
possibly 25 percent.
    When I look at the 1986 Tax Reform Act and I look at the 
base broadening that occurred from tax expenditures, it was 
only 60 percent of the base broadening. Forty percent of the 
corporate base broadening in 1986 was not from tax 
expenditures. I think the tax staffs at Treasury and elsewhere, 
if they look hard, will be able to find additional base 
broadeners beyond just the tax expenditure list.
    Mr. MCDERMOTT. Do you have that list, that 189 billion you 
talk about? Can you tell me what are the pieces in there we 
would have to get rid of?
    Mr. NEUBIG. I can't. I don't have those with me. But we 
have gone through the entire JCT revenue estimating list, and 
they have lots of provisions that are not yet estimated and we 
have linked that to the tax expenditure list, and 40 percent of 
the estimated tax expenditures have not yet been estimated.
    Mr. MCDERMOTT. I would appreciate and I think everybody on 
the committee would appreciate if you would give us what your 
estimate is. Anybody else have any ideas how to do this?
    Mr. HEENAN. I think I would just like to maybe echo Member 
Levin's comments. Sort of a quick-fix answer is difficult to 
give. I do think we have to look line-by-line at each of the 
expenditures and balance that. We need to weigh it against the 
benefits of a tax rate reduction. And certain expenditures are 
going to be more important towards growth, and that will equal 
jobs, and we will want to retain those. And others I think we 
can look at and throw away.
    So I think everything should be on the table, and we have 
to have a very serious conversation about which ones we want to 
take out and which ones we want to keep.
    Mr. MCDERMOTT. Thank you, Mr. Chairman.
    Mr. HERGER. Mr. Reichert is recognized.
    Mr. REICHERT. Thank you, Mr. Chairman. I want to try and 
get three quick questions in, so no speeches, I will just start 
with the questions.
    Try to think of these questions in terms of jobs. We all 
want tax reform and we want to energize the economy, but we 
want to get people jobs here, of course, in the United States. 
So Ms. Hanlon and Mr. Neubig, there are numerous provisions in 
the Tax Code that have the effect of providing preferential 
treatment to particular business behaviors or particular 
sectors of the economy. Do you agree that the primary objective 
of tax reform should be to address these kinds of distortions 
in tax law?
    Mr. NEUBIG. Well, I think tax reform really should have the 
goal of trying to make our tax system much more pro-growth, 
simpler and fairer. In 2010, the House as part of the expiring 
provisions included a provision, that was not ultimately 
enacted, that required the Joint Committee on Taxation to look 
at all of the expiring tax provisions and do an analysis in 
terms of the cost-benefit analysis, and who the beneficiaries 
were. And I think it is that type of analysis that really is 
important in terms of looking at all these provisions that 
Congress has previously enacted. Some of them very well may be 
worth keeping as part of tax reform. Others, if a thorough 
analysis has been done, may be outdated and should be 
    Ms. HANLON. I agree with Tom. I think the fairer, simpler 
approach would be the best approach to take. And what I hear 
most companies saying actually is that they are willing to make 
these trade-offs, they are willing to put things on the table. 
They would rather not, but they are willing to do it if it 
would get them to a lower rate.
    We conducted a survey of tax executives and we asked them 
point blank, we said, does the U.S. corporate tax rate hinder 
your competitiveness? And almost 80 percent of them said 
``yes,'' unequivocally. So I think these things are very 
important, and I think a permanent lower rate, a stable tax 
structure that is predictable, I think that is the best way to 
    Mr. REICHERT. So the cost-benefit analysis, a thorough 
review of pro-growth policies, a simpler Tax Code and a fairer 
Tax Code equals jobs. Would that be accurate? I see nodding 
heads, but I see Ms. Hanlon hesitating.
    Ms. HANLON. I am not hesitating.
    Mr. REICHERT. Just say ``yes.''
    Ms. HANLON. It certainly wouldn't hurt job creation. That 
is for sure.
    Mr. REICHERT. Okay. The second question, according to Mr. 
Fryt's written testimony, since 95 percent of the world's 
population and 70 percent of its purchasing power is today 
outside the United States, it goes without saying that global 
markets are a critical component of the future growth and 
success of the United States businesses. How does the success 
of U.S. global businesses impact jobs in the United States?
    Mr. FRYT. I think we are a great example of that, Mr. 
Reichert. Also in my written testimony I included some 
statistics about our growth since 1989 when we first got into 
the international--started growing our global network in 
earnest, and our U.S. team member count, for example, has grown 
from 56,000 members to 245,000 members today. It is symbiotic. 
Our global growth and U.S. growth have increased in tandem as 
our global network has grown, and we have seen that with our 
customers as well.
    As you pointed out, 75 percent of the world's purchasing 
power is outside the United States today. That is a huge market 
and it is increasing. And that seems to me to be something that 
we need to tap into very effectively in this country to address 
even some of our revenue issues.
    Mr. REICHERT. Anyone else like to comment?
    Mr. HEENAN. Yes. I would reiterate those comments. Praxair, 
as I mentioned earlier, our headquarters are in Danbury, 
Connecticut, our R&D is in Tonawanda New York. When we grow 
globally, when we win projects globally, we get jobs here. 
Those folks are working on those projects. It is not as good as 
a project here in the U.S. in terms of how many more jobs you 
get, but it is adding jobs. So global competitiveness is 
critically important.
    Mr. REICHERT. One of the things we struggle with here in 
this committee and Congress is we want to see United States 
trade, right? Ninety-five percent of our market, as we said, is 
outside this country. We can't all buy American here in the 
United States. We want other countries to buy American.
    My time is up but I want to ask your help. Please deliver 
the message that trade is good for our global economy. The 
global economy good for the United States economy, equals jobs. 
Thank you. I yield back.
    Mr. HERGER. Mr. Boustany is recognized.
    Mr. BOUSTANY. Thank you, Mr. Chairman. I want to clarify 
something that came up during Dr. McDermott's line of 
questioning, and that is the Joint Tax analysis that was done. 
Mr. Neubig pointed a couple things out, but I think this bears 
emphasis, reemphasizing these facts about that specific report.
    First and foremost, the estimates are not complete, and, 
secondly, they are not comprehensive. In fact, only 60 out of 
150 measures have been scored, and those are preliminary, and 
that gets us to a rate of 28 percent. So I am optimistic that 
we can actually get to a lower rate once we have a full 
analysis of all these measures. So I think we need to keep that 
in mind, that the Joint Tax analysis is not comprehensive at 
this stage, and incomplete, and our committee will have to 
continue to work to get to that point.
    Professor Hanlon, we have all been very concerned about the 
vast number of temporary provisions in the Tax Code and the 
uncertainty it has created. Oftentimes these get renewed 
retroactively. It creates a lot of problems certainly from a 
compliance standpoint. But I would like you to elaborate on how 
do you deal from a financial accounting standpoint with these, 
and talk about some of the problems that therein lie with these 
temporary measures.
    Ms. HANLON. The temporary provisions I think cause similar 
difficulties on the tax side and the book side in a way that 
they are just unpredictable. So it is hard for companies to 
plan. It is hard for them to make long-term investments given 
these fits and starts in the Tax Code. And the accounting just 
will fall out in the sense accounting just accounts for 
whatever happens.
    But, again, it is hard for them to predict what that 
effective tax rate will be, and they are benchmarked often on 
that effective tax rate to other companies and so forth. So I 
think it is just unpredictable for them. It is hard to make 
investment decisions when things are in flux like that.
    Mr. BOUSTANY. Thank you. And, gentlemen, you all are 
looking at this from the private sector. You have to deal with 
this. Could you comment on investment decisions and just the 
general uncertainty that arises as a result of these temporary 
    Mr. SCHICHTEL. Uncertainty is definitely a huge impediment 
to investment and to I think rational growth and overall 
development of the economy. It is very difficult for my boss, 
Irene Esteves, the CFO, and for our COO and CEO to figure out 
what we are going to do over the long term, and try to figure 
out how to analyze the impact of tax policy from both a book 
and tax perspective, much less explain it to our investors and 
our analysts. So it is always an issue that is brought up each 
quarter on our earning calls, and it is always brought up by 
the analysts when our investment relations folks are meeting 
with them.
    Mr. MCDERMOTT. Would the gentleman yield?
    Mr. BOUSTANY. I will yield to you.
    Mr. MCDERMOTT. My understanding that the Joint Tax study 
that I talked about and that you responded to, the chairman 
said that they should only analyze domestic tax expenditures, 
not international ones, because he intended to use the 
international ones for reform of international tax structure. I 
don't know that there is a single domestic tax expenditure 
still left on the table, unless you do.
    Mr. BOUSTANY. We need to recognize that we have incomplete 
information at this time, and just to proceed cautiously based 
on that. Thank you.
    Mr. Neubig, in your testimony you pointed out in the growth 
of intangible assets, and this is clearly a new area or an 
expanding area that we need to be looking at as we go forward, 
clearly lowering the corporate tax rate would bring down 
effective rates for both classes of assets, tangible and 
    Elaborate a little bit on the difficulties in applying 
appropriate tax policies to intangible assets. Can you further 
elaborate on that?
    Mr. NEUBIG. Well, I think the economy has clearly changed 
from 1986. In addition to globalization, what we have seen is a 
very significant increase in the amount of intangibles in terms 
of the programming, the copyrights, the patents, the R&D. 
Recent Federal Reserve Board economic studies showed that 
investments in intangible assets were as large as the 
investments in property, plant and equipment. When you look at 
the companies, they are concerned about both intangible 
investments and their tangible investments.
    So a lower corporate tax rate is a positive effect for both 
of those investments. In fact, the really high returns that are 
earned by the U.S. companies that are doing that type of R&D, 
they will benefit significantly from a lower corporate tax 
rate. It has also the benefit of trying to keep those 
intangibles in the U.S. versus offshore.
    Mr. BOUSTANY. Thank you. Anybody else want to comment on 
that issue?
    Mr. HERGER. The gentleman's time has expired.
    Mr. Neal is recognized.
    Mr. NEAL. Thank you very much, Mr. Chairman. The common 
theme this morning of the testimony that has been offered is 
really twofold. You are certainly asking for a lower rate, but, 
just as importantly, you are asking for greater certainty on 
how we go forward.
    I just have been reading Bruce Bartlett's book, and I 
always find how liberating it is for former staffers to leave 
the Hill and then to write what they deem to be a more truthful 
version of events. And David Stockman, as we all know, has 
taken the same position, divorcing himself from what commonly 
happens here in terms of embracing theology as opposed to the 
reality of trying to administer government.
    Mr. Schichtel, you indicated that the U.S. has lost 46 
Fortune Global 500 company headquarters between 2000 and 2011. 
Why do you think those companies specifically moved outside of 
the United States? And perhaps just as importantly, were tax 
considerations the only reason for those companies leaving?
    Mr. SCHICHTEL. I don't think taxes are the only factor or 
the only driver. I do believe that lower tax jurisdictions and 
the ability to produce greater returns for their shareholders 
have played a huge role in driving a lot of companies overseas.
    Mr. NEAL. And the other panelists?
    Mr. NEUBIG. Congressman Neal, I was the author of that 
analysis of the Fortune Global 500. I don't think we found any 
U.S. companies actually leaving the U.S. That is talking about 
the number of companies that happen to be in the top 500 around 
the globe.
    What we are seeing is there are an awful lot of large 
companies from the BRIC countries that now are among the top 
500, and they are now larger than a number of U.S. companies. 
So it wasn't that companies were actually leaving, at least in 
terms of this particular study. It is that we are definitely in 
a global environment where our U.S. companies are competing 
much more with companies from other countries, not only in 
Europe, but also in China, Brazil and India.
    Mr. NEAL. All right. Production can happen anywhere now, 
right? How about the other panelists?
    Mr. FRYT. Mr. Neal, I know there have been instances. I 
think the Chrysler merger a few years ago with Daimler-Benz was 
driven at least in part by tax considerations, and, as you 
know, that was one company that did end up with headquarters 
overseas. And certainly in the nineties, early 2000s, we saw 
some expatriations. Some of that was driven by tax 
considerations. Perhaps not all of it, but I do think it was a 
major consideration.
    Mr. NEAL. Mr. Heenan?
    Mr. HEENAN. I echo the comments. The rules now in terms of 
leaving the United States are pretty harsh. I think Congress 
has taken care of that movement for tax purposes offshore, and 
it is more, as Mr. Neubig said, you just have offshore 
companies are getting bigger is what you are seeing.
    Mr. NEAL. Ms. Hanlon?
    Ms. HANLON. I would agree with all these things. I think 
tax is one factor. The research is quite clear that investment 
is attracted to lower tax rates, but it is only one factor. 
There are a lot of other things that companies consider. 
Acquisitions do happen generally where the foreign acquirer 
will acquire the U.S. company. Oftentimes because of the tax 
considerations you wouldn't want to acquire--a U.S. company 
wouldn't want to acquire a foreign--it would be hard for them 
to acquire a foreign company and then pull that foreign company 
into the U.S. tax system. And this also depends on the type of 
business, what is the investment, how much tax drives where the 
investment goes based on the tax rates. Some companies just 
have to go where their customers are, but more intangible-based 
companies can move around more easily. So taxes will be a more 
important driver for those types of companies.
    Mr. NEAL. Mr. Neubig, maybe you could speak to the 
phenomena of Japan in the sense that stagnation has paralyzed 
that economy for decades. If we were sitting here just 15 years 
ago, the argument we are currently making about China would 
have been the argument that we were making about Japan. Are you 
arguing that it is their tax rates that have kept them from 
    Mr. NEUBIG. There are a lot of similarities. In the 1980s, 
Congress was facing not only intense competition from Japan, 
but also large deficits. I was impressed in 1982 and 1984 
leading up to the 1986 Tax Reform Act, that Congress did 
address the deficits. It did show that there could be some tax 
increases, which set up I think the right dynamic for a 
revenue-neutral corporate and individual tax reform in 1986.
    Clearly Japan's high corporate tax rate, that now is going 
to fall below the U.S. as of April 1st, I think was a factor in 
terms of the Japanese companies not being as successful in the 
world markets, in addition to all the other problems that 
occurred in their lost decade.
    I think a lower corporate tax rate can definitely be 
helpful in terms of economic growth. But when I look at the top 
50 economies in the world, the U.S. as of April 1st will have 
the highest combined corporate tax rate.
    Mr. HERGER. The gentleman's time has expired.
    Mr. Price is recognized.
    Mr. PRICE. Thank you, Mr. Chairman. We are all here 
interested in not just tinkering with the number to tinker with 
the number. We are interested in getting our economy growing as 
rapidly as possible so that people can get back to work and 
realize the benefits of their labor and their own dream. I 
would suggest that the deficit spending at the current level is 
a huge drag on the economy, but that is not the topic for the 
discussion today. The topic is tax policy. And I want to focus 
on hopefully three issues very quickly. One is the rate, two is 
the cost of compliance, and three on a potential alternative.
    We talk about the corporate rate being the highest in the 
industrialized world after April 1st. That is just astounding. 
All we are doing is punishing businesses who are trying their 
best just to stay in business here. So that is a disincentive 
to expand or to create a business here.
    I am not so certain that getting to 25 or 28 percent or 
whatever the OECD average is, isn't just a break even, isn't 
just a wash. If folks are looking at their balance sheet and 
they are saying well, if it is 25-28 percent, and that is the 
average of OECD countries, industrialized nations, then 
everything else being equal doesn't make a whole lot of 
    Wouldn't it be better for us to have a much lower rate than 
the average of the OECD countries, Mr. Fryt?
    Mr. FRYT. I couldn't agree with you more, Mr. Price. 
Actually the most destructive tax that can be levied from an 
economic growth standpoint is the corporate income tax. OECD 
has a good study on that. In an ideal state, you just take it 
to zero. You would get rid of it. Make the business community 
more productive.
    But to your point of 25 percent, if that is what it was, 
you know, you have to add to that the State rate as well, 3 to 
4 percent, so you are at 28-29. But at least it is a lot closer 
than where we are today. Maybe good old American ingenuity can 
bridge that gap. I don't know. But it is a fair point.
    Mr. PRICE. I have great faith in American ingenuity if we 
don't stifle it from here, and that is one of the concerns that 
I have.
    Isn't zero percent really the greatest pro-growth rate for 
business and job creation?
    Mr. FRYT. I would argue it is.
    Mr. SCHICHTEL. I agree.
    Mr. PRICE. Come on down. MIT?
    Ms. HANLON. Yes, I think the lower the better.
    Mr. PRICE. And zero percent would be the most pro-growth 
policy we could have as it relates to business.
    Ms. HANLON. Yes.
    Mr. NEUBIG. I think there are important government services 
that are provided--the highways, the airports, defense--and so 
I am not so sure a zero rate is what would necessarily be the 
    Mr. PRICE. But for pro-growth policies as it relates to 
businesses, isn't zero percent the best?
    Mr. NEUBIG. Again, I think businesses are looking at more 
than just the tax rate. They are looking at all the factors 
that will make the American economy successful. So I guess I am 
not convinced that a zero rate is the optimal rate.
    Mr. PRICE. Well, let me ask you then about the cost of 
compliance, the cost of compliance of our current code. Do you 
have any sense about what that is and how that challenges you 
in your business?
    Mr. NEUBIG. It clearly is very significant. And in addition 
to the 39.1 percent marginal statutory rate, you have also got 
to factor in the very high cost of compliance and the cost of 
uncertainty in our current U.S. tax system. I don't have the 
exact figures. I know some other academics have made those 
estimates. But you clearly have a benefit by simplifying and 
making more certain the code, that in combination with a lower 
corporate tax rate and those simplifications, could be very 
    Mr. PRICE. Do you have a sense about the magnitude of the 
cost of compliance? Is it another percent? Is it another 10 
    Mr. NEUBIG. I have seen some estimates that the efficiency 
costs, including compliance costs, could be as large as the 
entire corporate income tax.
    Mr. PRICE. As large as the tax itself. Astounding. So which 
brings me to the alternative. What would a consumption tax, 
doing away with the business tax, what would a consumption tax 
do for your businesses and for job creation and the economy? 
Mr. Fryt, do you have any thoughts on that?
    Mr. FRYT. From a very high level, I think a consumption tax 
is probably preferred to the corporate income tax because the 
corporate income tax in effect penalizes work, productivity. A 
consumption tax penalizes consumption. Whether it is realistic 
or not is a different----
    Mr. PRICE [continuing]. Or incentivizes savings and allows 
consumers to make their own choices, things like that.
    Mr. FRYT. Correct.
    Mr. SCHICHTEL. I agree with Mike's overall statement, but I 
think it requires a great deal of study and analysis because of 
the impact on prices and the impact on consumers, consumers 
that have limited discretionary income to buy our services as 
well as others. Also there is an element of regressivity that 
would need to be addressed. But overall it certainly should be 
something that is considered.
    Mr. PRICE. Thank you, Mr. Chairman.
    Mr. HERGER. Mr. Smith is recognized.
    Mr. SMITH. Thank you, Mr. Chairman, and thank you to our 
panel today.
    It is always interesting as we try to work with these 
issues, I don't think anyone is pretending that they are simple 
or that we have got an easy answer here. But I do want to 
reflect a little bit on, I guess, the interrelated nature of a 
lot of these businesses. I won't ask whether Time Warner uses 
FedEx or UPS. That is not what I am getting at here.
    Mr. SCHICHTEL. We do use FedEx.
    Mr. SMITH. You do. Okay. Nonetheless, is there any 
concern--knowing that FedEx, for example, is a consumer of 
manufactured products and that the manufacturing industry 
domestically has a bias in favor of the R&D tax credit, I would 
understand--is there any concern that maybe the products or 
services that you use within your own companies and outside 
your own companies would have an adverse impact if we don't get 
this right?
    Mr. FRYT. Absolutely, Mr. Smith, and I think you have put 
your finger right on one of the pressure points here, is that 
our current Tax Code has so many different provisions that 
attempt to direct economic activity one way or another. My 
personal feeling is we leave it up to the economy and the 
business community and try and minimize that as much as 
    You mentioned about manufacturing having R&D or 199. In 
effect, FedEx is part of the manufacturing business as well, 
but we are not generally categorized as a manufacturer. But we 
are in the distribution chains for a lot of manufacturers, but 
we don't qualify for 199, for example. Why did that line get 
drawn quite that way? But it is those kinds of issues, I think 
you are exactly right.
    Mr. SMITH. Anyone else?
    Mr. SCHICHTEL. I think you are right. I mean, all of our 
businesses are interconnected in one fashion or another. It 
just depends on the degree of separation. That being said, I 
agree with Mike here as far as the complexity and the inability 
to predict what is going to come from all these various 
different tax policies, and also a very real concern as far as 
    You have a situation here, if we can move away from this 
level of complexity and all of the different provisions, you 
can have a situation where fairness really fits in nicely with 
the overall free enterprise market and let the economy decide, 
let markets decide where things should go.
    Mr. SMITH. Mr. Heenan.
    Mr. HEENAN. I think our sole focus should be about growth 
and how do we get growth and jobs. So I think sometimes there 
is a difference between equal and fair, and we should be 
focusing on growth. So while I think lower tax rate certainly 
for us would put more cash in our pocket to spend on new 
investments, some of the targeted tax expenditures that are out 
there may have a bit more leverage than a lower tax rate. So we 
have to look at that very closely and we ought to do it. What 
is right, I think, is what promotes growth and jobs, and that 
might not be equal, but it is probably fair for the country 
    Mr. SMITH. Okay. Thank you. I yield back.
    Mr. HERGER. Mr. Kind is recognized.
    Mr. KIND. Thank you, Mr. Chairman. I want to thank the 
panelists for your testimony today. It is always very 
illuminating and interesting. Let me just raise a couple of 
concerns and get your reaction on a few things.
    Sometimes we are not really comparing apples to apples. I 
think everyone is in agreement that the goal should be to try 
to expand the base, lower the rates, and simplify the Tax Code. 
And if the goal is 25 percent, according to the OECD countries, 
that doesn't take into consideration the VAT systems that they 
have in place right now to supplement lost revenue from the 
lower corporate rates. There is no discussion about a possible 
VAT in this country in order to obtain that lower level. So if 
we are going to do this in a deficit-neutral fashion, we are 
going to need a way to pay for it as well.
    Here is one of the concerns I have been raising 
consistently. The best we can do on the corporate side, 
eliminating every tax expenditure, every tax credit, is moving 
from 35 to 28 percent rate. Would that be sufficient, Mr. Fryt 
and Mr. Schichtel, a 28 percent rate and eliminate every 
expenditure on the corporate side? Would that be enough to make 
us more competitive globally?
    Mr. FRYT. I don't think it would, Mr. Kind.
    Mr. KIND. Mr. Schichtel.
    Mr. SCHICHTEL. I agree with Mike.
    Mr. KIND. Well, then we are going to need to figure out a 
way to pay for the additional 3 percent to get to 25. If the 
proposition here is that we are going to go to the pass-through 
side, where a majority of entities are structured in this 
country, I don't think they are going to be that enthusiastic 
for pass-through entities, small business owners, S corps, 
individuals, to pay a higher tax rate in order to pay for lower 
corporate tax rates in this country. That ain't going to sell 
politically in this country.
    So we are going to have to find a different revenue source, 
then, in order to get to the 25 percent rate if the goal is to 
make this deficit neutral. That is where it is going to get 
difficult. And that is why you don't have a detailed plan from 
the majority on what specifically they are proposing, because 
they know they are going to have to get into those weeds 
immediately overnight and the political push-back is going to 
be tremendous.
    Now, I wanted to pick up on what Mr. Price was addressing, 
because I think it is very intriguing. Here are the numbers 
from last year. The Federal Government collected total revenue 
of roughly $2.3 trillion from all the revenue sources. Of that, 
$181 billion was on the corporation side. Roughly 7 percent of 
Federal revenue was collected on the C side. That is roughly 
1.2 percent of GDP. So we are tying ourselves up into knots 
trying to figure out a way to lower the rates when we are 
talking about roughly 7 percent of total Federal revenue to 
begin with.
    Maybe we should explore further, just eliminating the 
corporate rate entirely. But we are going to have to pay for 
it, and that again is going to be the rub of how we do it.
    Mr. Price talked about the consumption tax. I don't want to 
do it in a regressive fashion. My fear is that a consumption 
tax is going to be very regressive. It is going to hurt low-
income families that have to spend every dollar that they earn 
through that consumption tax. So maybe there is a different way 
that we could maintain progressivity and pay for it through 
some form of wealth tax.
    I don't know how many of you had a chance to see the New 
York Times op-ed page today, but David Miller I thought wrote a 
very interesting article. Did anyone see Mr. Miller's article 
today? It is called ``The Zuckerberg Tax.''
    Now, Zuckerberg, obviously, is going to get about $28 
billion worth of shares, most of which he will never pay a dime 
of tax on. And what Mr. Miller is advocating is why not mark to 
market those shares a given year and have him pay taxes on it, 
rather than waiting until it is realized, which may never occur 
in his lifetime, and if he passes it on to his heirs, they may 
never realize those gains from the shares. This I think is one 
of the reasons why we have huge wealth disparity in our 
country, because it favors those who are accumulating wealth 
through shares primarily that never get realized. They are able 
to borrow off those shares in order to maintain their living 
    So maybe there is a way for us to explore trying to 
eliminate the corporate tax rate entirely, given the small 
percentage of revenue it ultimately brings to the country, 
helping our country be more competitive, but keep progressivity 
in the Tax Code and make it fair, and start exploring ways to 
tax wealth to a greater extent to pay for lower or no corporate 
tax rates in this country.
    Now, what I am recommending would probably put you guys out 
of business. You guys would lose your jobs as far as corporate 
tax is concerned. But what I am hearing from you is the lower 
the better, and maybe zero might be ideal. That would be a real 
game-changer around here, rather than us going through this 
kabuki dance with these hearings with no detailed proposals 
because of what that is ultimately going to look like.
    And then further my last concern is, listen, if we even get 
to 28 percent by eliminating all the expenditures on the C 
side, what is that going to do to domestic manufacturing, who 
rely very heavily on depreciation for R&D, for 199 
manufacturing tax credit. Is that going to help domestic 
manufacturing or hurt domestic manufacturing if we take those 
expenditures away from them, and will that leave us less 
competitive in our ability to make things and invent things and 
create things and to grow things in our own country here?
    So those are some of the issues that we are raising. And 
maybe you guys can help us try to figure out a way of 
supplementing lost corporate tax revenue and get to a zero 
rate, but let's keep it progressive and fair ultimately.
    Chairman CAMP. The gentleman's time has expired. Ms. 
Jenkins is recognized.
    Ms. JENKINS. Thank you, Mr. Chairman, and thank you for 
holding this hearing. As a CPA who used to practice in this 
area, this has been a real delight to have you all here this 
morning. I am not sure I have had this much fun in the year 
that I have been on the panel. So thank you.
    Chairman CAMP. I am glad the gentlewoman is redefining fun.
    Ms. JENKINS. This is good stuff. And since the focus of the 
hearing has been on those areas of book and tax differences and 
where they diverge, do you all have some suggestions as far as 
reform goes to address that, because it appears what we have 
been talking about to this point has been to move towards 
having less differences in book tax, and you all have touched 
on it briefly.
    So can everyone on the panel just let me know your thoughts 
on the idea of book tax conformity?
    Mr. FRYT. To some degree I think there is some benefit 
there. I would caution about going to the extreme and putting 
control of the tax revenues in the hands of accountants, FASBs, 
with all due deference to the CPA, ma'am. But to the extent you 
get simplification out of that process, yes, I would agree with 
    Ms. JENKINS. Okay.
    Mr. SCHICHTEL. I agree that I certainly wouldn't want to 
see control ceded to the FASB as well as efforts to achieve 
conformity with GAAP and international standards, because I 
don't think they are necessarily reflective of real economic 
lives. I think when you look at different industries and 
different classes of assets, the lives that we have for tax 
purposes are much more consistent with reality than what you 
see from a GAAP reporting perspective.
    Mr. SCHICHTEL. But I do believe that if we move towards 
greater reform in a low enough tax rate that some of the 
differences--the large differences between book and tax would 
have to be eliminated in order to fund that. And that 
consistency probably would be beneficial overall.
    Ms. HANLON. This is a great question.
    I think one thing to notice is that book-tax differences, 
when we talk about them in this arena, it is not that all of 
them cause problems, it is just that the permanent kind are 
better than the temporary kind because that allows you also to 
increase your accounting earnings.
    I have done a lot of research on book-tax conformity, 
actually, and I think it is a bad idea. The first thing is 
accounting is very conservative in their rules, so that means 
we make expenses, we accrue expenses very early before they 
actually happen in cash flow, for example, bad debt expense and 
so forth; and I think the Tax Code generally has not favored 
such treatment.
    Also, there is a lot of evidence in the literature that 
book-tax conformity would reduce the information that is 
contained in financial accounting earnings. The rules are set 
up for two different purposes, and basically accounting 
earnings are made--the rules are set in order to inform 
stakeholders. And the evidence based on the 1986 Tax Reform 
Act, when a certain set of reforms were required to increase 
their conformity, the international evidence and several other 
studies basically show that the information that is in 
accounting earnings will go down if you conform those earnings.
    I also share the concern about who would make the rules 
after the conformity would happen, if it would be Congress, 
FASB, or the International Accounting Standards Board; and I 
think that would be very hard for the U.S. to handle, the 
International Accounting Standards Board determining our tax 
    So I think there is a lot of reasons why book-tax 
conformity wholesale is a bad idea. I think there are certain 
things that are different between book and tax that we could 
look at, but I think wholesale book-tax conformity is not a 
good idea.
    Mr. NEUBIG. I would agree with Dr. Hanlon's comments.
    Just as an example, the discussion about moving to IFRS has 
impacted in terms of some of the discussions about U.S. tax 
reform. Because if you move to IFRS then LIFO would not be 
allowed, and so it would automatically eliminate the current 
ability of some firms to use last-in, first-out accounting. 
There clearly are different goals for the accounting rules. As 
the tax writing committee you have different goals, including 
revenue, that are your objectives.
    Mr. HEENAN. I agree with most of what was said before me.
    I think really the accounting rules are there for something 
completely different than what our tax rules should be there 
for, our tax rules. It is to get revenue, but it should be done 
in a manner that promotes growth, investment, jobs, and those 
are just two completely different worlds, and so I would 
encourage us to keep them separate.
    Ms. JENKINS. Okay. I have just a few seconds left, so could 
businesses just quickly talk about--we talked about reforms and 
the challenges to reforms. Could you just briefly talk about if 
we do nothing the cost of inaction to your business if we keep 
the status quo?
    Mr. FRYT. Personally, I don't think that is a good option. 
I don't think the status quo is where we want to be.
    Mr. SCHICHTEL. I think we are seeing the results in the 
economy as far as what happens if you do nothing. I think 
taxes, although it is not going to be the only factor that 
drives economic growth, it is tremendously important. And I 
think our lackluster growth and difficulty in coming out of the 
recession are in part due to our overall tax structure and lack 
of competitiveness.
    Ms. JENKINS. Thank you.
    I yield back.
    Chairman CAMP. Mr. Paulsen, is recognized for 5 minutes.
    Mr. PAULSEN. Thank you, Mr. Chairman.
    I have really enjoyed the testimony this morning, and I 
think it just follows on the heels of a full year of hearings 
we have had on tax reform.
    And the message has been pretty clear from the folks here 
today, as well as the folks that have testified in the past, 
about the need to provide certainty for companies that are 
investing their capital on a 5-year and a 10-year and a longer 
horizon, rather than dealing with these temporary tax 
extensions or provisions or extenders that can create a lot of 
difficulties not only for the companies planning but the 
accounting side of the equation as well. And the U.S. is trying 
to play catch-up now to make sure we have got a Tax Code that 
is competitive along with a fairness and a simplicity 
component. And it is important to focus on the competitive side 
and the pro-growth side. So here is my question.
    I know that the United Kingdom in particular is moving with 
tax reform as well. Other countries are doing this. They have 
kind of staggered, kind of moved forward slowly, lowering their 
tax rates. Are we better off to sort of just rip the Band-Aid 
off, do this fast, lay out where we are going to be in the long 
term and take the pain, if you will, of what might be the 
effect in the short term of a year of some of the changes that 
will be out there? Or should we phase it in? Should it be 
gradual, as the United Kingdom or other countries might be 
doing? Which is the way to go?
    Mr. FRYT. I think there is a tension there from a business 
perspective, from my business's perspective. And I think from 
our economy's perspective it is better off doing it quickly, 
making a large-scale reduction in a corporate rate. There are 
some arguments to the other side that you save some revenues by 
ratcheting it down slowly over time, and maybe that helps you 
get to a revenue-neutral equation or solution.
    Mr. PAULSEN. Mr. Schichtel.
    Mr. SCHICHTEL. I agree. I think resetting the baseline, do 
it once and then move forward provides the predictability. 
There may be some items that you want to look at as far as 
transition rules, but I think overall it is time to just do it 
and do it now.
    Mr. PAULSEN. Mr. Heenan.
    Mr. HEENAN. I mentioned earlier we spend $2 billion in 
capital. We look at our projects; and, if we miss, it is a big 
deal. If we spend $2 million in the wrong place, it is a big 
    I commend Chairman Camp for taking on this difficult task. 
I would just say this is a big deal, and if we miss on how we 
do this we are going to regret it. So I agree that we should 
move quickly, but I think we really have to be cautious in 
looking at the specific expenditures and the specific way we do 
this. We don't want to miss on this one as a country.
    Mr. PAULSEN. Mr. Neubig.
    Mr. NEUBIG. I guess two points. Phasing down the corporate 
tax rate is what has been done in Canada and the United 
Kingdom. If the alternative is not doing a lower corporate tax 
rate I think phasing down would be much preferable.
    In the case of the United Kingdom, they have a 
parliamentary system; and they have announced that they are 
going to get to a 23 percent corporate tax rate by 2014, 2015. 
One interaction in terms of the financial accounting rules is 
they have not officially enacted the 23 percent rate. They are 
doing the reduction from 28 to 26 and now to 25 in the current 
year on an annual basis; and part of that is an interaction 
with the book accounting. Because when you lower the corporate 
tax rate there are effects in terms of deferred tax assets and 
deferred tax liabilities.
    It is a benefit in terms of companies with deferred tax 
liabilities. A majority of the top 50 companies have deferred 
tax liabilities, so they would benefit.
    There are some companies that have deferred tax assets from 
loss carry forwards and some types of compensation. A lower 
corporate tax rate would reduce the value of those deferred tax 
assets. And so they have decided instead of you going from 28 
to 23 in one fell swoop they were going to announce it, but 
they are going to enact it through Parliament over the next 4 
    Mr. HEENAN. If I could just add one quick comment that just 
came to mind.
    You know, one of the things about a--if we announced today 
a phased-in process, I think we have to be cautious about is 
does it really give us certainty. Other countries have 
announced phase-ins and the economy turns south or the revenues 
aren't there and the phase-in becomes a freeze.
    So going back to the certainty theme, the challenge of a 
phase-in is are we going to be convinced as businesses that 
that is going to be there in 2, 3, 4, 5 years? Will the phase-
in really happen or will we sort of put it on hold when revenue 
needs overweigh the tax reduction?
    Mr. PAULSEN. Mr. Schichtel, did you want to close?
    Mr. SCHICHTEL. I think the one-time, non-cash impact from 
repricing our deferred tax liabilities and deferred tax assets 
will be largely a nonevent from the investor and market 
perspective. What they will look at is the long-term impact on 
cash flows and operations.
    Mr. PAULSEN. Thank you, Mr. Chairman.
    I yield back.
    Chairman CAMP. Thank you.
    Mr. Stark is recognized.
    Mr. STARK. Thank you, Mr. Chairman. Thank you for the 
hearing, and thank the witnesses very much for their 
    I wanted to ask Professor Hanlon if she knew how much she 
and I had in common.
    Ms. HANLON. No I don't, but I would like to hear it.
    Mr. STARK. Well, you will. If you dig out the 1953--long 
before you were born--catalog of the Sloan School you will find 
at the very bottom of the list my name as a teaching assistant. 
Now, you got there through a resume that is of accomplishment 
in academia that is outstanding. I got there in a somewhat 
different manner.
    Up until 1953, MIT had a perfect record of placing its 
graduates with General Motors and General Electric and all the 
companies. But they came to the end of the list in about 
September, and one Stark was still unemployed. Well, they 
solved that problem. They said, we will make him a teacher.
    And I must say you have improved the appearance of the 
Sloan School magnificently and made accounting look a lot more 
attractive than I remember it being from whatever was next to 
the window. And I want to thank you.
    But, in some more seriousness, I am concerned about some of 
the issues that we create tax expenditures for and their 
usefulness. And I am going to ask you--you may not know now, 
but you may know someplace in your literature--has anybody done 
any study as to the usefulness of whatever is created through 
these tax expenditures?
    And I give as the example the idea that Orville Redenbacher 
got the R&D tax credit to develop microwave popcorn. Now, you 
could make a case if it doesn't stick in your teeth that maybe 
that was a good help to society.
    But, in all seriousness, I would love it if you know of or 
could dig out in the accounting research if anybody has done a 
study on what the actual usefulness, seriously, to society has 
been in many of these tax expenditure areas. And if you would 
be willing to spend a few minutes of your spare time and dig 
out something like that, I would sure love to have it.
    Ms. HANLON. I can certainly look at that for you.
    But I think the one thing that has been looked at in the 
literature is in an R&D study, for example, when they look at 
the data they might see what looks like an increase in 
spending. But what has been looked at is, is that really more 
R&D that results in more products or is it, say, a rise in the 
input prices.
    And there is actually one study that shows that all the 
increase in R&D spending actually goes to salaries R&D. So it 
is not more R&D. It is just paying the engineers more. You 
know, whether the input providers actually demand a higher 
price for the inputs when they know that the other party has an 
R&D credit.
    So that part has been looked at, and there is some mixed 
evidence on it. But I don't know of a study, because that would 
take a researcher, you know----
    Mr. STARK. Okay. I just thought you might have come across 
    I would add that there are people who I think would have 
advantage of it. I hung around in the tax area with a guy named 
Steve Jobs probably before you were born, and he didn't really 
pay much attention. I mean, he would take advantage, and he 
came to this committee to get some tax relief for giving 
computers away, but that didn't stop him from developing the 
iPhone and all these gadgets my kids want regardless of whether 
or not he got the investment tax credit. He was just an 
innovative guy.
    And I suspect that is true of most innovators. They are 
going to go ahead and develop these things whether or not they 
get the R&D tax credit, so that perhaps we are not getting much 
bang for our buck in that area.
    Thank you, Mr. Chairman.
    Chairman CAMP. Thank you.
    Mr. Berg is recognized.
    Mr. BERG. Thank you, Mr. Chairman.
    One of the most frustrating things for me out here is the 
uncertainty. And it seems like there is a lot of taxes that are 
short term. In fact, we miss a lot of deadlines and go back and 
reinstate tax incentives, et cetera, et cetera. So just to make 
sure I am not the only one that feels that way, my question for 
Ms. Hanlon is, do you think this instability in the Tax Code 
creates a problem, both a book and a tax problem?
    Ms. HANLON. Yes, I would agree that unpredictability and 
the uncertainty creates a lot of problems for companies when 
they try to make these long-term investments. I think a stable 
tax policy would be a lot better from both the tax and the 
accounting side.
    Mr. BERG. Well, I think I heard kind of those comments. I 
mean, whatever it is, if it is fair, if it is reasonable, 
hopefully lower, flatter, keep it there, and then we can make 
business decisions around that. So--and I know this has been a 
long hearing. My question, maybe if we could just go through 
and if there are some specifics that you could relate to the 
committee where you see the temporary nature of taxes creating 
a problem or the fact that certain incentives have expired and 
then gone back in and reinstated, if there is any specifics 
that anyone on the panel would have.
    Mr. Fryt, could you?
    Mr. FRYT. I think the biggest one in that regard right now 
for us, some of these extender--we actually have several of the 
extenders that apply to us, but the biggest one is probably 
expensing bonus depreciation, and that does have an impact. You 
know, if we had that in there permanently, or any of these--
permanency and certainty I agree with you is almost paramount, 
as long as it is a good code, but it is very important to us.
    Beyond that, I don't know that I would have any further 
    Mr. BERG. Again, I am just kind of looking for other 
examples that you see day in and day out that, again, are--you 
know, as we talked about, may be creating more cost and 
problems than really the incentive or disincentive was worth in 
the first place.
    Mr. SCHICHTEL. Definitely. It comes up all the time.
    I had a conversation with my old boss, who is now our 
president and chief operating officer, about some activities 
that do qualify for the Section 199 domestic production credit; 
and he was absolutely delighted and said, fantastic, we are 
going to bake this into our investment analysis and the return 
    And I had to caution him and say, wait a minute. I think we 
need to be careful. You probably can count on it for the next 
couple of years. Beyond that, I am not so certain.
    Those types of issues come up all the time. Whatever we do, 
it needs to be permanent and consistent to allow my boss and 
the CEO and the rest of the team to make business decisions 
that are based on something that they can understand and count 
    Mr. BERG. I believe that is one of the reasons why there is 
a lot of money sitting on the sidelines right now. People run 
their analysis, but they can only see clearly 1 year out or 2 
years out and so have to put so much risk in the remaining 8 
years or however long they do their analysis that it drives it 
from being a potential good investment to too much uncertainty.
    Mr. NEUBIG. Well, it is not just on the business side. A 
number of commentators have commented that we really have 
almost an entirely temporary tax system with so much expiring 
at the end of 2012, tax rates not only for the top income 
earners but throughout the entire tax schedule, including 
number of tax credits that are also going to be significantly 
changed. So it is a very important issue. When there was the 
possible expiration at the end of 2010 there was clearly 
activity that was occurring in late 2010 in anticipation of the 
rates and other things might be changing.
    Mr. HEENAN. I just echo all the same comments. I mean, 
certainty is going to help us a lot.
    Mr. BERG. I just have a rhetorical question. Is it better 
to address those issues that are coming up December, 2012, 
sooner or December 31st of 2012?
    You don't need to answer that. I am assuming done in a 
logical process where people can engage in the debate makes 
more sense.
    I will yield back, Mr. Chairman.
    Chairman CAMP. Thank you.
    Mrs. Black is recognized.
    Mrs. BLACK. Thank you, Mr. Chairman.
    Now that all the questions have been asked and people have 
said how much fun they have had, I do start to question some of 
my colleagues about what their definition of fun is. But it has 
been very educational to have you all here today. Mr. Berg has 
been running in and out, in and out, and he comes in and asks 
my question last minute. Since I am the last one here, Mr. 
Chairman, it does not seem fair.
    But, anyway, all that aside, this has really been very 
helpful, and much of your written testimony has also been 
    But I do want to add or just tag on to what Mr. Berg has 
said about the stability; and I want to go to one of the 
statements that you made, Mr. Fryt, that I thought was really 
very interesting. You said you wanted to compete on the merits 
of business and not on the Tax Code. So let me just take that a 
little further and ask you, with these temporary tax 
incentives, how you see those as affecting competitiveness.
    Because I will say, just as a sidebar, between the hearings 
that we have had in this committee this year, which have been 
very, very helpful, and then those business roundtables that we 
have had, I have a number of businesses say that, because of 
the complexity of the Tax Code, that not always are they aware 
of maybe some of those opportunities that they could possibly 
have and, therefore, they are not as competitive with someone 
else because either there isn't that competition naturally in 
there for them or they don't know about it.
    Could you talk about, especially since you have made that 
statement, Mr. Fryt, about how the temporary tax incentives do 
affect competitiveness?
    Mr. FRYT. You have hit a hot-button issue in our company. I 
cannot tell you how many times my CEO, CFO, and others in the 
executive management decisionmakers have lamented what my CEO 
likes to call an arcane Tax Code with all of these temporary 
extenders that come in and out and special provisions here that 
apply to us or maybe don't apply to us and apply to others.
    Overall, there is no question in my mind they would like to 
be unburdened from all of that, do their business, conduct 
their business, take all of those, if we can, reduce the tax 
rate as far as we can, so that they don't have to pay attention 
to any of that, pay the revenue that is appropriate, whatever 
is decided, and move on. That is our feeling.
    Mrs. BLACK. Thank you.
    Mr. Schichtel.
    Mr. SCHICHTEL. I agree.
    My title really could be changed to chief tax translator. 
It is a big part of what all tax directors do. And I think the 
complexity becomes even more of a challenge for medium-sized 
companies that may not have all of the resources that we have.
    Clearly, from a financial perspective, the compliance 
burden, the difficulty in dealing with all of it are a huge 
drag. I just went through another budget season, and it is 
always painful. And everyone is frustrated that we have to 
spend so much just to comply with the law, not even optimizing, 
I am just talking basic compliance. And then every time we have 
a transaction the level of risk and uncertainty and complexity 
in the law, it is just enormous. And, really, should tax be a 
high-risk area just because of the complexity and difficulty in 
applying laws? It certainly makes doing transactions more 
difficult, and I can't imagine what it is like for companies 
that don't have the kind of resources that we have.
    Mrs. BLACK. Ms. Hanlon.
    Ms. HANLON. I would agree with all these statements. I 
think the complexity takes a lot of time.
    As Tom was saying earlier with the compliance costs, they 
are very high. And I also agree with the small business. I 
think small businesses have a very hard time with complexity. 
They don't have the internal tax departments. And what they 
really should be doing is focusing on their business, but 
instead they spend a lot of time worrying about how should they 
compensate themselves, how should they structure their 
business, where should they structure their business, in the 
U.S. or somewhere else, because of the Tax Code. And I think 
making a more simple, more fair system would help the U.S.
    Mrs. BLACK. Thank you.
    Mr. Neubig, do you have a comment?
    Mr. NEUBIG. Well, again, I think this is another example of 
where oftentimes the economists don't give lower corporate tax 
rates the full benefit that would happen if there was a broader 
base and lower corporate tax rate. That uncertainty, 
complexity, and how lower corporate tax rates affect so many 
different business decisions really is very powerful. So when 
people talk about the bang for the buck in terms of a lower 
corporate tax rate, sometimes they worry about a lower 
corporate tax rate applying to old capital. But I think they 
really are missing so much of the power of a lower corporate 
tax rate that would also be simpler and more predictable.
    Mrs. BLACK. Thank you, Mr. Chairman; and if I just may make 
one final comment, since there are very few of us.
    What I continue to think about as we look at the complexity 
and the costs of the business, I think about how the service or 
the product--the cost of the service or the product is raised 
because of this complexity, and how ultimately it is the end 
user that has the cost borne.
    Thank you. Thank you, Mr. Chairman.
    Chairman CAMP. Thank you.
    Well, I very much want to thank all of our witnesses for a 
very good hearing this morning and for all of your time, all of 
your effort, all of your testimony. I appreciate it very much.
    I do just want to clear up a couple of items.
    There has been some question about a Joint Committee on 
Taxation estimate. I just for the record want to note I did not 
request the estimate. And, also, of the 90 remaining items, 
virtually all of them are domestic items.
    I just think we want to have the record to be clear on 
    But, again, thank all of you for being here.
    This hearing is now adjourned.
    [Whereupon, at 11:30 a.m., the committee was adjourned.]
    [Member Submissions for the Record follows:]



    [Submissions for the Record follows:]

                 American Council for Capital Formation


                     American Enterprise Institute


                Association for Financial Professionals


                        Center for Fiscal Equity


               Equipment Leasing and Finance Association


                           Fiscal Associates


          Institute for Research on the Economics of Taxation


                    United States Steel Corporation