[House Hearing, 114 Congress]
[From the U.S. Government Publishing Office]
REPATRIATION OF FOREIGN EARNINGS
AS A SOURCE OF FUNDING FOR
THE HIGHWAY TRUST FUND
=======================================================================
HEARING
before the
SUBCOMMITTEE ON SELECT REVENUE MEASURES
of the
COMMITTEE ON WAYS AND MEANS
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED FOURTEENTH CONGRESS
FIRST SESSION
__________
JUNE 24, 2015
__________
Serial No. 114-TP02
__________
Printed for the use of the Committee on Ways and Means
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COMMITTEE ON WAYS AND MEANS
PAUL RYAN, Wisconsin, Chairman
SAM JOHNSON, Texas SANDER M. LEVIN, Michigan
KEVIN BRADY, Texas CHARLES B. RANGEL, New York
DEVIN NUNES, California JIM MCDERMOTT, Washington
PATRICK J. TIBERI, Ohio JOHN LEWIS, Georgia
DAVID G. REICHERT, Washington RICHARD E. NEAL, Massachusetts
CHARLES W. BOUSTANY, JR., Louisiana XAVIER BECERRA, California
PETER J. ROSKAM, Illinois LLOYD DOGGETT, Texas
TOM PRICE, Georgia MIKE THOMPSON, California
VERN BUCHANAN, Florida JOHN B. LARSON, Connecticut
ADRIAN SMITH, Nebraska EARL BLUMENAUER, Oregon
LYNN JENKINS, Kansas RON KIND, Wisconsin
ERIK PAULSEN, Minnesota BILL PASCRELL, JR., New Jersey
KENNY MARCHANT, Texas JOSEPH CROWLEY, New York
DIANE BLACK, Tennessee DANNY DAVIS, Illinois
TOM REED, New York LINDA SANCHEZ, California
TODD YOUNG, Indiana
MIKE KELLY, Pennsylvania
JIM RENACCI, Ohio
PAT MEEHAN, Pennsylvania
KRISTI NOEM, South Dakota
GEORGE HOLDING, North Carolina
JASON SMITH, Missouri
ROBERT J. DOLD, Illinois
Joyce Myer, Staff Director
Janice Mays, Minority Chief Counsel and Staff Director
______
SUBCOMMITTEE ON SELECT REVENUE MEASURES
DAVID G. REICHERT, Washington, Chairman
PATRICK J. TIBERI, Ohio RICHARD E. NEAL, Massachusetts
ERIK PAULSEN, Minnesota JOHN B. LARSON, Connecticut
TOM REED, New York LINDA SANCHEZ, California
TODD YOUNG, Indiana MIKE THOMPSON, California
MIKE KELLY, Pennsylvania
JIM RENACCI, Ohio
C O N T E N T S
__________
Page
Advisory of June 24, 2015 announcing the hearing................. 2
WITNESSES
Thomas A. Barthold, Chief of Staff, Joint Committee on Taxation.. 4
Curtis S. Dubay, Research Fellow in Tax and Economic Policy, The
Heritage Foundation............................................ 20
Jane G. Gravelle, Senior Specialist in Economic Policy,
Congressional Research Service................................. 36
Dirk Suringa, Partner, Covington & Burling LLP................... 27
SUBMISSIONS FOR THE RECORD
American Chemistry Council (ACC)................................. 73
American Road & Transportation Builders Association (ARTBA)...... 76
American Sustainable Business Council (ASBC)..................... 80
American Traffic Safety Services Association (ATSSA)............. 82
National Retail Federation (NRF)................................. 85
PeopleForBikes................................................... 88
Public Citizen................................................... 90
RATE Coalition................................................... 93
U.S. Chamber of Commerce......................................... 95
REPATRIATION OF FOREIGN EARNINGS
AS A SOURCE OF FUNDING FOR
THE HIGHWAY TRUST FUND
----------
WEDNESDAY, JUNE 24, 2015
U.S. House of Representatives,
Committee on Ways and Means,
Subcommittee on Select Revenue Measures,
Washington, DC.
The Subcommittee met, pursuant to call, at 2:26 p.m., in
Room 1100, Longworth House Office Building, Hon. Dave Reichert
[Chairman of the Subcommittee] presiding.
[The advisory announcing the hearing follows:]
ADVISORY
FROM THE
COMMITTEE
ON WAYS
AND
MEANS
SUBCOMMITTEE ON SELECT REVENUE MEASURES
CONTACT: (202) 225-3625
FOR IMMEDIATE RELEASE
Thursday, June 17, 2015
No. TP-02
Chairman Reichert Announces Hearing on
Repatriation of Foreign Earnings as a Source
of Funding for the Highway Trust Fund
Congressman David Reichert (R-WA), Chairman of the Subcommittee on
Select Revenue Measures, today announced that the Subcommittee will
hold a hearing on the taxation of the repatriation of foreign earnings
as a funding mechanism for a multi-year highway bill. The hearing will
take place on Wednesday, June 24, 2015, in Room 1100 of the Longworth
House Office Building, beginning at 2:00 p.m.
Oral testimony at this hearing will be from the invited witnesses
only. However, any individual or organization may submit a written
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Chairman REICHERT. Good afternoon. The Subcommittee will
come to order. Thank you all for being here, especially the
witnesses.
Today we have the opportunity to follow up on last week's
hearing where we discussed long-term funding solutions to the
Highway Trust Fund. Like many of my colleagues, I too believe
we should secure a long-term funding source, but we need time
to develop a solution.
As we continue these conversations on both sides of the
Capitol, it is hard to ignore a topic often tied to these
discussions: The repatriation of overseas earnings as a source
of funding for a multi-year highway bill.
However, as you will hear today, current repatriation
proposals are not that simple, nor are they without serious
policy implications. That is why we are here today having this
hearing--to drill down on what people mean when they say
repatriation and how different forms of repatriation work. A
key but often overlooked part of this discussion is that
repatriation includes taxing earnings that have been reinvested
abroad.
What we know to be true is that repatriation cannot be done
as stand-alone policy. It must be a part of a transition to a
more competitive system. I expect to hear today that, taken
outside of the context of a transition, mandatory repatriation
would be a tax increase, a tax increase that American companies
would be forced to pay, unlike their foreign competitors.
Therefore, this hearing also provides a chance to talk
about our current international tax system and how it should be
modernized to boost the competitiveness of American companies.
This is timely, timely because outside of our discussions the
OECD BEPS project is moving forward and impacting the decisions
of American companies operating globally today.
Thank you again to our witnesses, and I look forward to
hearing from you about the key differences between current
repatriation proposals.
Mr. Neal, you are recognized for your opening statement.
Mr. NEAL. Thank you, Mr. Chairman. And let me thank you for
calling today's hearing.
The Highway Trust Fund's longstanding tradition has been
based on a user-pays principle. We have long matched the cost,
a gas tax, with the benefits of improved infrastructure. It is
my hope that we will continue this long-held position and once
again not let the lure of repatriated earnings distract us.
This is not the first time that Congress has debated using
repatriation as a cure to fix our economy. Back in 2004, there
are some of us on the Committee that still remember that debate
as it played out. We were promised that with the cut in taxes
for corporations' foreign earnings, those dollars would be
brought back for the purpose of creating thousands of new jobs.
However, rather than invest the collective $362 billion
that these companies brought back, they reduced their American
workforces and devoted less money for R&D and business
investment. Instead, these companies increased executive pay,
purchased shares, and paid dividends.
It's interesting that we are here again just 11 years later
discussing how this new and improved version of repatriation
will fix our ailing infrastructure. I hope we are going to
learn from the history of how this was handled, and also point
out that if we are not careful with the discussion of
repatriation and we present another tax holiday, we will never
get tax reform.
My last comment is not part of my official opening
statement, but as you cited OECD, I had a chance to review some
statistical data over the weekend and once again I'm presented
with the interesting argument that as our NATO allies rushed to
the bottom with corporate taxes, they simultaneously are
reneging on their commitment to spend more on national defense,
because in large measure they have had the best argument for
national defense. It is called the American taxpayer.
Recall that even during the height of the Reagan years 6
percent of GDP was used for defense in America while our
European allies were struggling to get to 1 or 2 percent. And
if we are now reviewing the idea that it is still the American
taxpayer and the American soldier that is going to pay for the
national defense of our European friends, then they do have the
opportunity to cut taxes.
So thanks for calling the hearing. And I hope that this
will offer us an opportunity to discuss many of these measures.
Chairman REICHERT. Thank you, Mr. Neal.
Before I introduce today's witnesses, I ask unanimous
consent that all Members' written statements be included in the
record. Without objection, so ordered.
We will now turn to our panel of distinguished witnesses. I
would like to welcome first, Mr. Thomas Barthold, Chief of
Staff, Joint Committee on Taxation; second, Mr. Curtis Dubay,
Research Fellow in Tax and Economic Policy, The Heritage
Foundation; third, Mr. Dirk Suringa, Partner, Covington &
Burling LLP; and fourth, Ms. Jane Gravelle, Senior Specialist
in Economic Policy, Congressional Research Service.
Thank you all for joining us today. You will each have 5
minutes to present your oral testimony. Your full written
testimony has been submitted for the record.
And, Mr. Barthold, you are recognized first.
STATEMENT OF THOMAS A. BARTHOLD,
CHIEF OF STAFF, JOINT COMMITTEE ON TAXATION
Mr. BARTHOLD. Well, thank you, Mr. Chairman and Mr. Neal.
As you said, my name is Thomas Barthold, and I am the Chief of
Staff of the Joint Committee on Taxation.
The Chairman asked me to provide an overview of three
recent proposals to tax one time at reduced rates untaxed
foreign earnings of foreign subsidiaries of U.S. parent
companies. Just by way of background, the United States under
present law taxes both the U.S. and foreign earnings of U.S.
businesses. A U.S. multinational firm generally may delay or
defer U.S. taxation of business earnings of its foreign
subsidiaries by reinvesting those earnings rather than
distributing those earnings.
The earnings, however, are subject to tax when a dividend
is paid back or repatriated to the parent with a foreign tax
credit allowed for any foreign taxes incurred on the foreign
source income. Under special rules, as the Committee Members
know, subpart F of the Code defines certain situations in which
the earnings of a CFC are taxed on a current basis and for
which foreign tax credits are already allowed.
So let me turn to three recent proposals to impose a one-
time tax at reduced rates on untaxed foreign income of
controlled foreign corporations. Two of these proposals were
included as part of larger international tax reform
initiatives, and the third is really a stand-alone targeted at
directing funds to the Highway Trust Fund.
I will start first with H.R. 1 as introduced in the last
Congress. That was the initiative of former Chairman Camp, his
Tax Reform Act of 2014. Chairman Camp's international tax
reform, which applies to earnings derived after the reform
takes effect, has two broad features.
On one hand, it largely eliminates U.S. residual taxation
of repatriations of untaxed CFC earnings by allowing a 95
percent deduction for dividends received by the U.S. parent
company from their CFC. No foreign tax credit would be allowed.
Consequently, the reform replaces the current U.S. credit
system for eliminating double taxation.
On the other hand, former Chairman Camp's reform provided
broad new rules intended to address shifting of profits out of
the United States, in part by creating a new category of
subpart F income, foreign-based company intangible income. H.R.
1 also proposed other changes in the international rules.
As a consequence, U.S. multinational corporations would be
subject to a substantially different U.S. scheme for taxing
cross-border income than under current law. And it was in this
context that transition provisions were proposed to address the
question of what should be the treatment of untaxed earnings
that were derived before the tax reform was to take effect.
The proposal for the transition tax generally requires that
for the last taxable year prior to when the participation
exemption system comes into effect, that a U.S. shareholder of
a foreign corporation must include a pro rata share of
nonpreviously taxed, post-1986 foreign earnings of the
corporation.
That inclusion was to occur in such a way that the
shareholder was allowed a 90 percent deduction for noncash
earnings and a 75 percent deduction for those earnings that
were deemed to be held in cash or liquid form. The effect of
that is that the effective maximum residual tax rate on the
noncash earnings would be 3.5 percent, on the cash earnings,
8.75 percent.
The transition tax had special rules for inclusion of
losses of CFCs, provided for a 10-year installment payment of
the liabilities that were deemed to be incurred under the
transition tax with a special rule for S corporation
shareholding. Funds from the deemed repatriation tax were to be
directed to the Highway Trust Fund.
Another proposal has recently been put forward by the
Administration. The Administration has a broad set of
international tax reform proposals as part of their 2016
budget. These include a mandatory 14 percent tax on foreign
earnings.
Again, the Administration's reform starts by imposing a 19
percent minimum tax on CFC earnings and removes residual
taxation of repatriations that are subject to that minimum tax.
This minimum tax therefore also provides a partial exemption
system for relief of double taxation. On the other hand,
somewhat as in Chairman Camp's proposal, the Administration
would strengthen certain anti-profit-shifting rules applicable
to multinational corporations.
So as with former Chairman Camp's proposed reform, the 14
percent tax on untaxed foreign earnings answers the question of
how historic earnings of the CFC should be treated in a
transition to the new set of rules. In short, the proposal uses
a different base of prior earnings than does Chairman Camp, all
earnings prior to the date of enactment, as opposed to just
1986 earnings.
There are certain open questions not described by the
Administration. But of some interest, the Administration,
somewhat like Chairman Camp, would provide a 5-year installment
period. The Administration said the intent was to direct those
funds to Highway Trust Fund or other infrastructure purposes.
I realize I have run over. If you would grant me an
additional 45 seconds, I wanted to briefly make note of the
third proposal that the Chairman asked me about, and that is
the Invest in Transportation Act introduced by Senator Paul and
cosponsored by Senator Boxer.
Unlike the prior two proposals, this proposal would have a
voluntary repatriation. The Invest in Transportation Act's
voluntary repatriation is somewhat like that which the Congress
enacted in 2004 as part of section 965. It differed in terms of
measuring the base upon which the beneficial tax rate, which I
should note is an effective residual tax rate of 6.5 percent,
would apply; it also had some different provisions in terms of
plan requirements for reinvestment of the earnings and would
not permit the deduction for any company that was deemed to be
an inverted corporation.
I provided, as you have before you, additional detail
related to both of these proposals and the estimated revenue
effects that my colleagues have estimated for those proposals,
and I would be happy to answer any questions that the Members
might have.
[The prepared statement of Mr. Barthold follows:]
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Chairman REICHERT. Thank you.
Mr. Dubay, you are recognized for 5 minutes.
STATEMENT OF CURTIS S. DUBAY, RESEARCH FELLOW IN TAX AND
ECONOMIC POLICY, THE HERITAGE FOUNDATION
Mr. DUBAY. Good afternoon, Chairman Reichert, Ranking
Member Neal, distinguished Members of the Committee. Thank you
for inviting me here today. My name is Curtis Dubay. I am
Research Fellow in Tax and Economic Policy at The Heritage
Foundation. The views I express in this testimony are my own
and should not be construed as representing any official
position of The Heritage Foundation.
Changes to repatriation policy have been spoken about often
as a way to fill the hole in the Highway Trust Fund, but
details have been scant. There may be confusion caused by this
because there are usually two distinct policy options discussed
when it comes to using changes to repatriation as a way to fill
up the gap in the Highway Trust Fund. It is important to
differentiate between those two options, because they would
have distinctly different ramifications.
The first option would be Congress either granting a
repatriation holiday on the untaxed overseas earnings of U.S.
businesses at a lower rate than under current law or deeming
those earnings repatriated and taxing them at a lower rate. In
this option, repatriation would be a stand-alone policy to fund
the Highway Trust Fund.
The second option would be to establish a territorial
system in place of our current worldwide one and deem the
foreign earnings repatriated to help facilitate the transition
to that better system.
The stand-alone option would not be sound policy. A
territorial system would strongly boost economic growth. It is
badly needed because the current worldwide system is one of the
biggest inhibitors of growth for the U.S. economy today.
Moving to a territorial system, no matter in the context of
fundamental tax reform, business-owing tax reform, or as an
independent policy improvement, would be a boon for job
creation and wage growth for American families.
Under the current worldwide system, with deferral,
businesses understandably delay paying U.S. tax on their
earnings because paying it would make them highly uncompetitive
compared to their foreign competition.
Regardless of how Congress proceeds on tax reform, changes
to the repatriation policy should always be handled in
conjunction with international reform that switches from the
worldwide system to a territorial one. After all, the worldwide
system has caused businesses to compile those earnings abroad.
It only makes sense that changes to how they are taxed be used
to repair the harm that it caused.
Deeming those earnings repatriated and taxing them at a
lower rate than under current law would make moving to a
territorial system easier. The revenue can be used to offset
the tax cut that JCT is likely to score a territorial system
as. And the revenue can also be used to compensate those
businesses that stand to lose because of the devaluation of
deferred tax assets. This is not a tax hike because it would be
part of a broader reform.
Making changes to repatriation policy within tax reform
that establishes a territorial system stands in stark contrast
to using repatriation changes to fund the Highway Trust Fund
without moving to a territorial system. Taxing the overseas
earnings of U.S. businesses to fund the Highway Trust Fund
would break the sensible user-pay principle that has long
underpinned the Highway Trust Fund.
There is no connection between U.S. multinational
businesses and domestic highway use. A repatriation holiday,
one of the policies offered by some under the stand-alone
option, is unlikely to raise revenue in the traditional 10-year
budget window. To counteract this some have floated a stand-
alone deemed repatriation because it would unambiguously raise
revenue.
As a stand-alone measure, deemed repatriation is a tax
hike, even though the rate applied to the overseas income would
likely be less than under current law. This makes a stand-alone
deemed repatriation yet another tax-and-spend scheme. In
addition to that, it is also more troubling than a holiday
because it is compulsory rather than voluntary.
Either a repatriation holiday or a stand-alone deemed
repatriation would be a temporary fix. Congress should instead
focus on other reforms to the highway program that would be
sustainable, would not break the user-pays principle, and would
not raise taxes.
Thank you, again, and I look forward to your questions.
[The prepared statement of Mr. Dubay follows:]
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Chairman REICHERT. Thank you.
Mr. Suringa, you are recognized.
STATEMENT OF DIRK SURINGA,
PARTNER, COVINGTON & BURLING LLP
Mr. SURINGA. Chairman Reichert, Ranking Member Neal, and
Members of the Committee, my name is Dirk Suringa. I am a
partner with the law firm of Covington & Burling. I appreciate
very much the opportunity to testify today before you. I appear
before you on my own behalf and not on behalf of my firm or any
firm client.
I would like to make three basic points. My first point is
that international tax reform is needed now to address the
increased risk of double taxation faced by U.S. companies
operating abroad. Reform also is needed to address new foreign
tax incentives, so-called patent boxes, that are intended to
lure U.S. researchers and innovators to relocate abroad.
You may have heard of the OECD's BEPS, Base Erosion and
Profit Shifting project. This is a think tank project that was
started in 2013 to try to come up with ways to tax so-called
stateless income or income that is not subject to tax anywhere.
The project is still ongoing, but the results to date are
disturbing. The main result so far has been to encourage
foreign countries to come up with new and creative ways to tax
U.S. companies operating abroad. This has led to increased
double taxation of their foreign income.
At the same time, many foreign countries have started to
adopt patent box tax incentives over recent years. These are
incentives for intangible income arising out of research
activities performed in their country. These incentives,
combined with threats of increased taxation under BEPS, are
putting more and more pressure on U.S. companies to move
themselves and their high-skilled jobs outside this country.
My second point is that adopting an innovation-friendly
exemption system and our own version of an innovation box would
help to address these problems. Of course, the best way to
address these problems would be to adopt comprehensive tax
reform, including rate reductions. But these specific problems
also can be addressed in sequence by first adopting an
exemption system and a U.S. innovation regime and then moving
on to broader reform. Countries like the United Kingdom, Japan,
Spain, and others have shown that this can be done. Each of
those countries adopted an exemption system and then in
subsequent years reduced corporate tax rates.
The adoption of an exemption system would help reduce the
immediate risk of double taxation caused by BEPS. Under current
law, active foreign income is subject to tax at 35 percent when
repatriated and a foreign tax credit is allowed for foreign
taxes imposed on that income. But the foreign tax credit is
subject to many limitations under current law, and U.S.
companies, as a practical matter, are not able to credit all of
the taxes asserted by countries under BEPS.
Under an exemption system, active foreign income would
simply be exempt from U.S. tax. There would be no threat of
current or residual U.S. tax on the same income. An exemption
system also would end the lockout effect on foreign earnings
and level the playing field in foreign markets for U.S.
companies.
The adoption of a U.S. innovation box would help to
counteract the incentive to move U.S. research activity abroad.
The innovation box would be broad in terms of the technology
covered and the returns to IP covered, but it could be narrow,
and I think it should be narrow, in requiring the underlying
research to be performed in the United States.
My third point is that any tax revenue raised by changing
to an exemption system should be used in the design of that
system to encourage U.S. job growth and innovation. Active
foreign earnings are currently subject to tax at 35 percent
when they are brought home. Under an exemption system, active
foreign earnings going forward would be largely exempt from tax
when they are brought home. Rather than requiring companies to
trace which pools of earnings are exempt and which are still
subject to the deferred taxation, it would make sense to have a
transition rule to tax those earnings at a low rate over an
extended period of time.
The reason for the low rate and the extended time period is
because a majority of those earnings are invested in foreign
operating assets that cannot readily be sold to pay the tax.
Most importantly, however, any tax revenue generated by the
transition tax should be used to design an exemption system and
an innovation regime that favor U.S. job creation and U.S.
research.
There are many different ways to design an exemption
system, including ways that increase taxes on the very same
companies that are now confronting BEPS and foreign tax
incentives to relocate. At the same time, there has been a
discussion of imposing a one-time tax on foreign earnings that
have been permanently reinvested abroad--again, a tax on the
same companies that are confronting these foreign tax
pressures.
From a policy perspective, it would make the most sense to
use any revenue generated from taxing those earnings to provide
tax relief to the companies that are paying those taxes.
Congress can, of course, choose to credit those revenues to the
Highway Trust Fund accounts upon receipt should it so desire.
But the transition tax revenue should be used in designing an
international tax system that solves the problems that U.S.
companies are now facing.
Thank you for allowing me to testify, and I look forward to
your questions.
[The prepared statement of Mr. Suringa follows:]
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Chairman REICHERT. Thank you for your testimony.
Ms. Gravelle, you are recognized.
STATEMENT OF JANE G. GRAVELLE, SENIOR SPECIALIST IN ECONOMIC
POLICY, CONGRESSIONAL RESEARCH SERVICE
Ms. GRAVELLE. Thank you very much.
Traditionally, the Highway Trust Fund has been
financed by user fees, primarily gasoline tax. The collections
from these taxes have declined, both because they have not been
adjusted for inflation--if they were, the 18.3 cents per gallon
excise tax on gasoline would be 31 cents now--and because of
increases in fuel economy. As a result, the Highway Trust Fund
faces a shortfall in revenues relative to spending.
Proposals have been made to finance the shortfall with a
repatriation holiday. To be a little repetitive of Tom, under
current law firms pay taxes on worldwide income but not for
foreign subsidiaries until the income is paid as a dividend to
the parent, or repatriated. Firms have a substantial amount of
untaxed earnings abroad that they have not returned to the
United States, perhaps because of the 35 percent corporate rate
and perhaps because it is reinvested in physical assets. A
repatriation holiday would allow additional earnings to be
returned and taxed at a lower rate.
There are several issues surrounding the use of taxes on
the repatriation of accumulated earnings as a source of revenue
for the Highway Trust Fund. First, even if these proposals
could raise revenue, they are transitory and will not address
the long-term needs of the Trust Fund. Voluntary repatriations,
or ``holidays,'' which allow firms to choose to repatriate
additional earnings, are scored as revenue losers rather than
revenue gainers.
For example, the Paul-Boxer Invest in Transportation Act
would tax these voluntary repatriations at a rate of 6.5
percent by allowing an 81.4 percent exclusion. The Joint
Committee on Taxation estimated that the proposal, while
gaining $30 billion in the first 3 years, loses $148 billion
over the next 8 years for a total loss of $117.9 billion from
fiscal year 2015 to fiscal year 2025. All of the other
estimates of repatriation holidays have projected an overall
revenue loss in the budget horizon.
A different type of repatriation, called deemed
repatriation, has also been proposed to be used for
infrastructure spending. A deemed repatriation would impose a
tax on the stock of untaxed overseas earnings, and it is
normally part of a transition in an international tax reform.
The Tax Reform Act of 2014, introduced in the 113th Congress by
then Chairman of the Ways and Means Committee Dave Camp, would
have transferred $126.5 billion of taxes to the Trust Fund
through a deemed repatriation. That would have left the
remainder of that revenue bill at a revenue loss over the 10-
year period.
The Administration's fiscal year 2016 budget proposals also
include a deemed repatriation as a transition to a new
international system allocating $205 billion to surface
transportation.
Deemed repatriations subject to a mandatory tax have never
been suggested as stand-alone policy. If they were, they might
also lose revenue, and they raise important policy concerns.
Estimates indicate that over half of the $2.1 trillion of
untaxed income abroad is invested in physical assets, such as
plant and equipment. These earnings cannot be returned and
imposing a tax on them is just a lump sum tax on assets.
A deemed repatriation could be imposed on cash. However,
depending on the tax rate, a deemed repatriation of either type
could lose revenue--could lose revenue--because it would allow
firms to reduce future repatriations, which would have been
subject to a higher tax rate.
It is important to note that the revenue gain in the Camp
proposal is not a guide to the revenue effect of a deemed
repatriation, because it is estimated under the assumption and
other provisions of the bill that future dividends would be
taxed at close to a zero rate rather than a 35 percent rate.
When you look at revenue estimates, it is very important to
look at where they are stacked in order of estimation.
Deemed repatriations as a transition rule for a shift to a
new type of international tax system would lead to numerous
contentious and difficult issues that are currently far from
agreed upon and that are unrelated to the more narrow concern
about the Highway Trust Fund.
In addition, much of the interest in international tax
reform has been associated with the proposal to lower the
corporate tax rate, which introduces some further issues, and
that in turn with an overall individual and corporate tax
reform.
If there is a desire to link spending on transportation
infrastructure with increased revenue from foreign source
income, however, there are numerous proposals that have been
advanced to address profit shifting and other issues in the
international system. Some of them are in the President's
budget proposals.
Thank you.
[The prepared statement of Ms. Gravelle follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Chairman REICHERT. Well, thank you all for your testimony.
And now Members of the panel, I am sure, would like to ask some
questions regarding your testimony to drill down a little bit
on some of the information you provided. It also gives us an
opportunity to learn a little bit.
So, Mr. Barthold, in our full Committee hearing last week
on the Highway Trust Fund some of the witnesses testified that
a permanent solution to the Trust Fund shortfall would take
several years to implement. I believe we need to get there and
that we will eventually, but it seems we are in need of an
interim option.
Mr. Barthold, can a deemed repatriation of foreign earnings
that is used as a transition rule or moving to an exemption
system in a pro-growth revenue-neutral package help us to get
to an interim option?
Mr. BARTHOLD. Well, thank you, Mr. Chairman.
Perhaps the best model to look at to answer your question
is to return back to former Chairman Camp's H.R. 1. In his
comprehensive reform bill, the legislation itself would have
directed revenues from the deemed repatriation to the Highway
Trust Fund. His plan had payments directed to the Highway Trust
Fund. Taxpayers themselves had up to 10 years to pay.
So if you are asking a question about cash flow and what
cash goes to the Trust Fund as opposed to a unified budget, it
would seem that if the Congress chose to use funds from a
repatriation in the way that Chairman Camp did, that you could
direct that in pretty much any scale and over any time period
that you would choose to the Highway Trust Fund.
Chairman REICHERT. So we could direct that to any scale or
any timeframe. Do you think we can design it to provide a
specific amount of revenue to the Highway Trust Fund on an
annual basis for the duration of a multi-year highway
authorization?
Mr. BARTHOLD. Well, that would depend upon, as I think your
question anticipates, the design. Former Chairman Camp's
proposal provided for a 10-year installment payment. Now, that
was at the election of the taxpayer. Some taxpayers might
choose to accelerate their payments, depending upon their
business situation. Others might choose the full 10 years. So
if you were trying to think of the payments that the taxpayers
made and link them up on a year-by-year basis, you might want
to revisit the design.
Chairman REICHERT. Thank you.
Mr. Suringa, I hear concerns that if we reform our
uncompetitive international tax rules now, we will lose
momentum for the very important goal, which I share and am
committed to achieving, of reducing the corporate rate.
In your testimony you describe how the U.K. and Japan, the
two most recent major economies to shift from a worldwide
system to an exemption system, first enacted legislation
transitioning systems in 2009. Shortly thereafter, both
countries reduced their corporate rates by about 8 points.
Mr. Suringa, should the experience of the U.K. and Japan
reassure us to some degree that if we act now to reform our
international tax rules to meet risks, such as the OECD BEPS
project, there will still be sufficient political momentum, not
to mention economic need, to reduce our high corporate rate in
the next couple of years?
Mr. SURINGA. Thank you, Mr. Chairman.
I do think there is going to be continued momentum to get
the corporate rate down regardless of what is done with respect
to this particular issue. I think in terms of transitioning to
an exemption system, that is probably the most important thing
to do to relieve double taxation of U.S. companies operating
abroad and to end the lockout effect, to bring that money, the
untaxed foreign earnings home and also to level the playing
field in foreign markets between U.S. companies and their
competitors.
I think that is a narrow enough reform that the domestic
reform push in terms of lowering the rate and the other
measures that have been suggested in Chairman Camp's draft and
the other proposals will continue to face a lot of pressure to
be taken up in the near term. My testimony is really focused on
the pressures in the international sphere that companies are
now facing. I think these are measures that are appropriate to
take in the short term.
Chairman REICHERT. Thank you.
Mr. Neal.
Mr. NEAL. Thank you, Mr. Chairman.
We have heard a number of times--this is a point of
clarification for some of our panelists--we have heard a number
of times that there are a huge amount of earnings stashed
overseas by multinational companies. In fact, a recent report
by Credit Suisse claims that as much as $2.1 trillion in
foreign earnings is invested overseas.
Now, some of that is reported on company statements as
permanently reinvested overseas--that is, in actual buildings,
brick and mortar, or in operations--while some in cash is being
held overseas and not being taxed under current deferral rules
until that cash is repatriated.
Ms. Gravelle, could you discuss what portion of that
approximately $2.1 trillion in cash and easy to repatriate,
what portion is permanently invested overseas and more
difficult to liquidate?
Ms. GRAVELLE. Well, according to the Credit Suisse report,
they based their analysis on financial reports, and for the
companies that reported cash holdings, they found that about 45
percent of the assets abroad were held in cash. So a little
over half was in plant and equipment. Now, they really don't
know for sure how to extrapolate to other firms, but that
should be sort of a reasonable measure of how much of those
assets are invested.
They also had some very interesting data on which firms had
these cash holdings with actually a handful of firms, about
five or six firms, I believe, holding about half of it.
Mr. NEAL. Okay. And, Mr. Barthold, I assume that you and
your colleagues at the Joint Committee have done estimates of
the makeup of the overseas earnings. Can you elaborate for us
on those findings?
Mr. BARTHOLD. Thank you, Mr. Neal. I believe you are,
again, referring to our estimates of former Chairman Camp's
proposal, since he would have applied a differential tax rate
to the unrepatriated earnings of foreign corporations based
upon whether it is cash, liquid assets, or nonliquid assets.
I can't actually give you the details of our breakdown on
the estimate on that partly just because one of my colleagues
is currently in Scotland attending the commencement of his son
from the University of Glasgow and he was the primary economist
working on that. But I can tell you that from our background
work, we looked at some of the work that Ms. Gravelle reported.
There is also some academic work based on 10 years of data by
Blouin, Krull, and Robinson which suggests that perhaps maybe
45 percent of retained earnings are held in cash or liquid
forms.
In terms of doing our estimate, and in terms of your
potential policy design, there are a number of difficult
questions to think about. Do you treat working capital the same
as nonworking capital? How do you treat some of the portfolio
investments that a business might have in a related enterprise,
where in order to gain partial control of an entity that is in
your line of business, you are perhaps a 25 percent shareholder
in an otherwise public corporation, would that be considered
invested in a business, bricks and mortar, or would that be
considered a portfolio holding?
Those are some of the issues that we looked at in terms of
analyzing Chairman Camp's proposal.
Mr. NEAL. Could you provide the Members of the Subcommittee
with a breakdown of the estimated $2.1 trillion that is
overseas and at that point let us know what is liquid, what is
illiquid, and some further detail on the financial industry's
holdings overseas given that oftentimes the local sovereign
reserve requirements really make holding cash overseas a lot
more comfortable than something permanently invested more in
the nature of bricks and mortar?
And I call that question up, Mr. Chairman, because I think
that number, $2.1 trillion, is easily thrown around. When you
have a chance to drill down on the statistical data, you come
to a very different conclusion. And I hope that with Mr.
Barthold and his staff, they can provide us some of that
information. I think it would be helpful to the totality of the
conversation.
Mr. BARTHOLD. Mr. Neal, Mr. Chairman, my colleagues and I
will provide some additional information of the sort you
mentioned. If I could indulge you for an additional minute, we
have done some work based--and I should note that the reported
$2.1 trillion, and in our testimony we reported $2.3 trillion,
of indefinitely reinvested earnings, remember, that is a
financial statement concept and that is different than what we
look at in terms of tax returns.
Some U.S. businesses may invest funds abroad but do not
list them for financial statement purposes as indefinitely
reinvested, which means that they don't have to carry a
deferred tax liability on their income statement. But if they
were to pay a dividend back, there would still be a cash tax
liability in the United States. To look at some of the cash tax
liabilities, we have looked at in detail a lot of the reported
controlled foreign corporation returns that the parent
companies must provide to the IRS.
And to go a little bit to your question about the
insurance, banking, and other financial sectors, looking at
industries that report themselves to be in insurance, banking,
other foreign services, we found in the 2010 data that
approximately 10 percent of total untaxed unrepatriated foreign
earnings were in the banking, insurance, and other financial
services sector. So about 10 percent of whatever the total
might be.
But my colleagues and I will provide a little bit more
detailed discussion in a written response.
Chairman REICHERT. The gentleman's time has expired.
Mr. NEAL. Thank you.
Chairman REICHERT. I appreciate the detailed answer. I let
you go a little bit longer than usual. This is a highly
interesting, complicated, and important topic. So I appreciate
that. But if you could provide the additional information in
writing.
Mr. BARTHOLD. I will.
Chairman REICHERT. Thank you.
Mr. Tiberi.
Mr. TIBERI. Thank you, Mr. Chairman. Thank you for holding
this hearing as we try to come up with a long-term solution to
fund our country's roads and infrastructure, and also urgently
try to fix our international tax system to make U.S.
multinationals more competitive in today's global marketplace
and hopefully not taken over by a foreign competitor.
And it seems, Mr. Chairman, we have an opportunity to
address both of these policies in the coming year, in the
coming months, and hopefully the issues that we are discussing
today at this hearing, including repatriation, will move us one
step closer toward those goals.
If the only thing that you understand today is one thing
from these panelists, I hope it is that not all forms of
repatriation are created equally.
Mr. Dubay and Mr. Suringa, thank you. Thank you for
explaining that precisely to the point. There are two
significant pieces of Camp's draft, one is that repatriation is
done as a transition from a worldwide system to an exemption
system--we have to put a dollar in a bowl, Mr. Dubay, if we say
territorial system--so exemption system. That was a joke, and
no one laughed. I guess not. I should keep my day job.
But the other point is that illiquid assets are treated
differently than liquid assets. Liquid assets are taxed at a
higher rate than illiquid. So anyway, that's a really good
point.
One thing is clear, a highway bill is urgently needed. Just
this morning a markup in the Senate occurred on the Inhofe-
Boxer 6-year bill that requires $107 billion, billion with a
``B'', for the Highway Trust Fund. Others have said they prefer
to extend it through the election, which is about a $25 billion
nut for the Trust Fund. We have to come up with that. They
don't.
Another thing is clear, Speaker Boehner has made this
clear, a gas tax is not going to happen. Chairman Ryan made
that clear last week. And I think most of us agree that a user-
pay system is the way to go for funding our highways and our
infrastructure.
At last week's hearing we heard about different
alternatives. We also heard from witnesses that a vehicle miles
traveled tax would take years to implement. So we want to
continue to look at those issues, but nothing is imminent in
terms of user pays this year.
So we have a couple of other options to come up with $25
billion to $100 billion. We can cobble together a bunch of
revenue raisers, either $25 billion through the election or
$100 billion. We have done that in the past. People in this
room up here usually aren't unanimously happy. I wouldn't be
happy with a number of random pay-fors. The low-hanging fruit
is gone.
So we really have two options as I see it. We can cobble
together a bunch of things or we can explore this option that
Chairman Camp had in his draft. And by doing that, by the way,
we transition our U.S. multinationals to an exemption system
that makes them more competitive. That is the key. Reporters
and others throw around repatriation like it is all the same
stuff. It is not all the same stuff. Policy matters. How it is
done matters. Going to an exemption system is critically
important to making this work.
So, Mr. Suringa, Mr. Dubay, based upon your testimony, what
do you think? Is it better policy to cobble together a bunch of
revenue raisers or to do repatriation the right way, which we
clearly did not do in 2004, going to an exemption system
treating illiquid assets differently than liquid assets?
Mr. Suringa.
Mr. SURINGA. Thank you, Congressman Tiberi.
I think doing a 6-year repatriation-related funding measure
would make the most sense to give Congress the opportunity to
look for a more permanent solution that we can all get behind,
and repatriation is a good way to do it, particularly and
really only if it can be used as a way to transition to a new
system for taxing foreign income of U.S. multinationals.
Mr. TIBERI. Mr. Dubay.
Mr. DUBAY. Thank you. As long as you are transitioning to
an exemption system and using repatriation to help grease the
skids for that improvement, I think it could be doable. I would
just say that you can't spend the same dollar twice, although I
don't want to discount Congress' ability to do that.
Mr. TIBERI. That was a joke, right?
Mr. DUBAY. Yes, that was a joke.
So you have to have some revenue to pay for the tax cut
that Mr. Barthold and JCT will score moving to an exemption
system rule. And in tax reform there is always winners and
losers, so just keep in mind when doing that, there are other
needs for the revenue that pertain specifically to tax reform.
Chairman REICHERT. Thank you.
Mr. Thompson.
Mr. THOMPSON. Thank you, Mr. Chairman. Thank you for
holding the hearing.
And, witnesses, thank you all very, very much for being
here.
I just wanted to reiterate something that Mr. Neal said in
his opening testimony, and I just want to make sure that
everybody got the full gravity of that. He basically pointed
out that we, American taxpayers, are subsidizing the European
tax rates in large part because of our defense budget. I think
it is really important to have that understanding when we look
at how we are dealing with this issue, probably as important as
the explanation from the witnesses today that the previously
thought of $1.2 trillion, if you recognize the fact that some
of those assets aren't liquid, you are really talking about a
trillion dollars. And those are just some basic facts that we
ought to have at hand while we are doing this hearing.
Much has been said about Chairman Camp's previous draft,
and I think it has been pointed out by a number of folks that
there was a little budget trickery or double counting that went
into that too. So I think we would be much better off if we all
were working with the same set of facts rather than what we may
perceive as the bottom line, and I just think that is
critically important.
Ms. Gravelle, if a tax holiday loses the government money,
a mandatory repatriation is politically unpopular and the
revenue effects are unknown because it depends on the rate,
that leaves repatriation as part of international or business
tax reform. However, if we use the revenue to fund lower
corporate rates and/or make other international reforms, where
does that leave funding for the Highway Trust Fund?
Ms. GRAVELLE. Well, I think that is the problem with this
discussion of the Camp transition. The $126 billion is supposed
to go to the Trust Fund, but then it is supposed to go to
offset the revenue losses in the bill. If you take the $226
billion out of the bill, then you have approximately a $120
billion revenue loss. So I think that is where the double
counting is.
So certainly in isolation that deemed repatriation will
raise revenue, particularly if it is stacked after no tax on
any--zero tax. But you can't use it--well, maybe you can try to
use it twice, but technically speaking, it is only there once.
So that is a problem.
Mr. THOMPSON. So you can't spend the money twice?
Ms. GRAVELLE. Right.
Mr. THOMPSON. Can you think of any economically efficient
way to invest in the Highway Trust Fund using repatriation?
Ms. GRAVELLE. Well, frankly, I am puzzled about how one is
supposed to be connected with the other. I mean, I think the
sort of natural thought you would have is we have traditionally
always financed roads with user fees. Economists approve of
those in a lot of ways, because they really mimic the private
market as closely as you can for any public good. So they are
viewed as benefiting the people, the people who benefit pay. So
if I were a Martian coming down here I might wonder why that is
not kind of an obvious solution. But, of course, CRS never
recommends anything. So----
Mr. THOMPSON. Could we use repatriation to both fund the
Trust Fund and do business tax reform and do it effectively?
Ms. GRAVELLE. Well, you can't--I mean, if you wanted to
make true revenue-neutral tax reform, say, for the Camp
proposal, and you want to use that money for the Highway Trust
Fund, then you need to set it up so it raises, if you want to
make it neutral with the budget, so it raises $126 billion. And
I think adding to that is the fact that outside of the budget
window, it is actually going to lose a lot of revenue.
Mr. THOMPSON. Mr. Barthold, is this double counting, budget
trickery? Can we spend the money twice?
Mr. BARTHOLD. Let me tell you what we estimated. The Joint
Committee estimates on a unified budget basis for the Members,
and Congress decides what
they do with the unified budget. I mean, there are many
proposals that Congress has considered that have effects. We
report, for example, an effect for excise taxes that are
dedicated to the Highway Trust Fund as having offsetting
effects on payroll tax and income tax receipts, but we report
to the Congress on a unified basis. What we reported for
Chairman Camp's bill was on a unified basis.
Mr. THOMPSON. If we can spend it twice, we can solve a lot
of problems. It would be good to get an answer on that.
Chairman REICHERT. Could you provide that in writing for
us, Mr. Barthold? Thank you.
Mr. BARTHOLD. I will provide our scoring in writing, yes,
sir.
Mr. THOMPSON. Thank you.
Chairman REICHERT. Mr. Paulsen.
Mr. PAULSEN. Thank you, Mr. Chairman, for calling this
hearing. It is obviously sort of a combination hearing, right?
I mean, we have had the components of the transportation
funding and then you have the issue of fixing the international
Tax Code.
If you look back, I think there is a reason that Chairman
Camp, when he did his three different drafts of different white
papers that came out on how to adjust the Tax Code, I mean, I
think there is a reason that the international tax component
was the first one that he looked at, right, and it is this
issue of making sure that we are competitive vis-a-vis the rest
of the world. The Tax Code has clearly not kept pace with the
modern economy, and certainly not with the international Tax
Code.
So if you look at 1960 where 17 of the top 20 companies in
the world were U.S. companies, and then by 1985 there were only
13, and then today we are in the single digits, and so there is
a reason, again, that Chairman Camp, I think, wanted to focus
on this, rightfully so. And this modernization is needed now to
stop the Tax Code from causing our companies here in the United
States to be acquired by foreign companies.
Let me just ask you, Mr. Suringa, there have been a lot of
additional news reports about U.S. companies that are being
acquired by foreign companies with substantial tax savings as a
part of that, and that is being cited as the driving factor for
those acquisitions. Do our tax rules provide incentives
currently for foreign competitors to acquire U.S. companies?
Mr. SURINGA. Yes, I think they do. I think the way that the
current rules are structured places U.S. companies that have
competitors that have inverted at a competitive disadvantage,
and that is what tax departments in a lot of cases are ending
up looking at. Their competitors have moved to Ireland and now
are paying tax at 12% or less, and management is saying: Can we
compete with these people now that they are paying so much
less, and the investors are looking to us to say, hey, why
haven't you guys done this too.
It is very disturbing, and I think the foreign tax
incentives for research are going to make it more disturbing,
because historically you would think of an inversion as having
two main benefits. One benefit is that the inverted company can
try to extract earnings from the offshore subsidiaries at the
former U.S. parent without paying the residual tax, they would
distribute it up to the foreign parent and not pay the U.S. tax
in the middle.
The second benefit was and continues to be base erosion,
which is putting deductible payments in the U.S. system and
making those deductible payments deductible at 35 percent and
includable at the foreign parent at some lower tax rate to get
a net tax benefit. But historically, there wasn't as much of a
concern that the U.S. activities would be, other then through
base erosion, that the U.S. activities would not have a reduced
rate of taxation. They would still be taxed at the full 35
percent rate.
The concern with the foreign tax research tax incentives is
now you have a foreign tax incentive to actually move the
people who are doing the work, the high-skilled jobs that are
creating innovation in the United States, to move that offshore
as well. And that is something that is new and particularly
disturbing.
Mr. PAULSEN. So since it is new, should our tax rules
provide such incentives as well?
Mr. SURINGA. Well, I think as a part of a change to a new
system we should put that on the table, because that is where
28 out of the 34 countries in the OECD are using exemption
systems. It used to be that it was sort of half and half, but
over the last few years more and more countries have gone to
exemption systems for relieving double taxation.
Now you have 15-plus countries that have introduced patent
box regimes. I think that is the trend of where corporate
international taxation is going and our companies are at a
competitive disadvantage when they deal with our rules instead
of their rules.
Mr. PAULSEN. And it seems like, of course, as the
headquarters move overseas, the jobs move overseas as well.
Mr. Dubay, would you say this illustrates more of an
immediate need as well for the modernization of our antiquated
international tax regime?
Mr. DUBAY. Thanks for the question. I think it is important
that we modernize quickly because I think our businesses do
look very enticing to foreign competition. They are just more
valuable as a foreign company than they are as a U.S. company
because our tax rate is so out of whack and because of the
worldwide system.
I think the recent wave of inversions has now ended. I
don't think we are going to see another inversion. I think the
next step is going to be a moderate-sized European or foreign
business buying a really big U.S. business. They are not going
to bother with the inversion, they are just going to buy it
outright. It is going to be similar to what InBev did with
Anheuser-Busch a few years ago. And as was mentioned, it is
dangerous because you start losing highly-skilled, highly-
talented people to those foreign locations.
Mr. PAULSEN. Thank you, Mr. Chairman.
Chairman REICHERT. Ms. Sanchez.
Ms. SANCHEZ. Thank you, Mr. Chairman. And I want to thank
the witnesses for joining us here today.
You know, there hasn't been a whole lot of debate on how to
address the insolvency in the Highway Trust Fund until last
week when the Ways and Means Committee finally took up this
issue. And I am sitting here wondering why, because we can't
continue to use the lack of funding in the Highway Trust Fund
as a political football when our infrastructure is crumbling.
Our economy cannot continue to run if we don't have the
infrastructure to move goods and people efficiently throughout
the country.
But that is what we have been doing for quite some time.
Since 1998 there have been 24 short-term patches to the Highway
Trust Fund, including one that just occurred last month. And we
are watching literally our infrastructure crumble because of
the inability to act, to come up with some ideas for fixing the
problem. We want to talk about them, and I guess Congress is
pretty good at talking, but there comes a day when you really
have to put up or shut up, as my father used to say, and you
have to do something about it, you can't just discuss it. We
cannot continue to kick the can down the road.
I think short-term patches to our Highway Trust Fund are
not the way to go. They don't provide certainty for local
jurisdictions to plan their budgets and get construction
projects underway, construction projects, I might add, that
create millions of jobs.
But it is my belief, in having listened to the testimony,
that a repatriation holiday isn't a viable solution to the
problem because a one-time repatriation, which has been offered
as a solution to the Highway Trust Fund issue, we have already
seen in the past what a one-time repatriation does to our
economy.
My colleagues have mentioned that in 2004 repatriating
firms didn't reinvest that money to create U.S. jobs here in
the United States. Instead, they repurchased their own stock
and paid bigger dividends to their shareholders. So I am, quite
honestly, a little bit baffled why we think that this is such a
great panacea for fixing a very real need that we have.
Companies that have the resources to transfer profits and
jobs abroad have an unfair advantage, in my opinion, over truly
domestic companies that do their research here, that provide
good-paying jobs here, that manufacture their products here in
the United States. And we can't, in my opinion, allow
multinational corporations to avoid paying taxes on almost $2
trillion without doing something to level the playing field.
So while it is great that we can have this discussion about
the international tax regime, we need to have that broader
discussion again, a serious one about overall comprehensive tax
reform, because without that we are not going to get to a
fairer, simpler solution for our tax fund, and again we are not
going to really focus in on what the steps are that we can take
to shore up the Highway Trust Fund.
With that, I am going to ask Ms. Gravelle, we are
discussing international-only reforms, which creates an
advantage, a competitive advantage against our domestic
manufacturers, so how can we use the Tax Code instead to help
create good-paying jobs here in the United States so that our
domestic manufacturers aren't at a competitive disadvantage?
Ms. GRAVELLE. Well, there are some provisions that we could
shift to favor lower tax rates in the United States compared to
abroad. Our biggest corporate tax expenditure is deferral of
foreign-source income, so we don't have to move to a
territorial system, and that would probably encourage more
investment abroad.
We can also look at things among the extenders. R&D tax
credit might be something to think about, but there are also
some international extenders that could go the other way. But I
think ultimately there is a limit to how much you can do with
tax provisions because taxes, corporate taxes aren't that big.
But there are a lot of spending things, one of them being
infrastructure. I mean, infrastructure is crucial to
productivity. If you can't move around, you can't produce. And
also things like education, even health, all of those things
that include the workforce, productivity of the workforce,
would be beneficial to productivity and wages of workers.
Ms. SANCHEZ. So if I were to ask you, like, how could we
specifically tailor--the Tax Code is a system of carrots and
sticks, fundamentally boiled down, and raises revenue obviously
for the Federal coffers. But how could we specifically tailor
the Tax Code to sort of help domestic businesses who take on
the risk of doing research and development and manufacturing
here in the United States?
Ms. GRAVELLE. Well, I think we already help them with very
generous tax incentives. We could go further in encouraging the
investment up-front, like with the R&D credit and the expensing
of R&D. Those create negative tax rates already. We could
expand those, because there is a justification for subsidizing
R&D.
But I am not sure whether economic theory supports a patent
box, because some economic theory actually says it is better to
have the subsidy at the beginning instead of the end because
the government shares in risk taking as well as returns. So
there are a lot of theories that say doing up-front subsidies
is better.
Chairman REICHERT. The gentlelady's time has expired.
Ms. SANCHEZ. Thank you, Mr. Chairman.
Chairman REICHERT. Mr. Reed.
Mr. REED. Thank you, Mr. Chairman.
Thank you to our witnesses. This is an important issue and
I am glad to have this conversation.
Ms. Gravelle, you just said tax extenders, maybe there is
something to do on R&D. I would assume that you think the
permanency of those tax extenders should be taken into
consideration and therefore I would assume that you support
permanent extension of those tax extenders for business
planning purposes. Yes or no?
Ms. GRAVELLE. CRS does not support any.
Mr. REED. All right, very good.
Ms. GRAVELLE. But I would say, if you give me a second,
that there is a lot of evidence that the social return to R&D
on average is considerably larger than the private return,
which would create a reason to have very significant,
potentially, incentives for R&D.
Mr. REED. And so to make it a permanent policy, I would
just assume that is a much better way for businesses to have
those social returns and the benefits of such a tax policy.
Ms. GRAVELLE. There is just a general argument for
certainty in the Tax Code so that if you are going to have it,
and we have had it since 1981, there is certainly an argument
for throwing the towel in and saying we are making it
permanent.
Mr. REED. I appreciate you recognizing that argument.
A question for you, just to get into the nuts and bolts and
the practical effect of switching from the present system to a
new system. I am very interested and concerned about the
complexity of that transition, especially with the old
earnings, if you would, that are trapped overseas. Because when
I was in my private life, in private business, cash is king.
And a lot of these investments, it is my understanding, are
tied up in inventory, facilities, capital investments, capital
structures, equipment, et cetera.
How would you recommend--I am going with Mr. Dubay--how
would you recommend the best way to avoid that complexity and
also allow that cash flow consequence to be minimized to the
extent practicable?
Mr. DUBAY. Thank you. I think the best way is to give ample
time for the businesses to figure out what to do with it. So
like Chairman Camp did last year, give the full 10-year window
and then close it off. So you give them a full decade to figure
out how to unwind that. And you do give them a lower rate in
the interim period, because they started to pay tax at the 35
percent rate with the foreign tax credit on the overseas
earnings.
That stays in place, as far as I understand how the law
goes, if you move to a territorial system, but it just makes
sense to get everything over to the territorial system as soon
as you can, but give them time to figure it out on their own
and not try to write too many rules.
Mr. REED. How would you write that legislation, essentially
just saying it is up to you to determine how much you are going
to pay each year of that 10-year window?
Mr. DUBAY. I would give them a lot of discretion as to when
they pay it back during the 10-year window, but I would not
allow it to go past the window.
Mr. REED. Okay. And then how would you define what is
qualifying trapped foreign earnings versus nonqualifying?
Mr. DUBAY. I would have to think about it more, I haven't
looked into that too much, but, I mean, I think you are looking
at--everything that has not been repatriated I think is where
you start and then you start looking at the stuff that has been
permanently reinvested and figure out and try to break that
into buckets like we do with----
Mr. REED. So does that not create an unintended consequence
of those foreign earnings if someone sees the reform coming
down the pipeline to immediately make those investments into
capital structures, capital equipment, and other items overseas
rather than what we want them to do, and that is bring the cash
back and make investments on American soil?
Mr. DUBAY. I think it certainly does, and I think that is
something that will have to be grappled with.
Mr. REED. I appreciate it.
Mr. Suringa, can you offer any insight into that?
Mr. SURINGA. I think I would agree that a long period and a
relatively low concessionary rate on the earnings are the best
way to ensure that it can be done smoothly.
Mr. REED. And then how about the unintended consequence
that I potentially saw on the horizon, how would you minimize
that?
Mr. SURINGA. I think if that was a significant concern--and
I also would have to look at sort of exactly how it would be
derived, because what you would presumably do is take a
snapshot of the earnings and profits as of the date of
enactment or a particular date that is chosen by Congress and
then spread that out over the period and say the tax associated
with those earnings has to come back in.
So I think the way to deal with it would be to provide one
rate and let people sort it out for themselves rather than try
to say, well, we are going to give a concessionary rate to this
piece and not to that piece, because then you have people
interested in----
Mr. REED. One rate for the old earnings and the new
earnings.
Mr. SURINGA. To my mind, one rate is easier. I mean, it
certainly is easier to administer. There may be companies that
come in and say: No, that just isn't going to work for us. But
you have a lot of complexity associated with trying to
categorize assets and you may have gamesmanship.
Mr. REED. And that is one of the big concerns I have too as
we go down this path. If one of our fundamental goals of tax
reform is to simplify the Code, both corporate and individuals,
I am fully in on both, does this not generate much more
complexity and isn't that a concern that has to be taken into
serious consideration as we go forward?
Mr. SURINGA. Well, this particular complexity would only be
with respect to the transition rule, then it would be done. So
the system as a whole could be much simpler going forward than
it is now. It wouldn't be hard for it to be simpler than it is
now.
Mr. REED. Very good. I appreciate that.
I yield back, Mr. Chairman. Thank you.
Chairman REICHERT. Mr. Larson, you are recognized.
Mr. LARSON. Thank you, Mr. Chairman. I thank you and Mr.
Neal for holding this hearing. I thank the witnesses.
I wish we had an opportunity to further delve into some
proposals made by our colleagues, Mr. Renacci, Mr. Pascrell,
and Mr. Blumenauer, to really tackle this issue. But we are
talking about repatriation. Is repatriation an economic term or
is it a political term of art?
Mr. Dubay. I mean, what does it mean economically, or is it
a political term of art?
Mr. DUBAY. I think I am going to go with political.
Mr. LARSON. Is it political, Mr. Suringa?
Mr. SURINGA. I only see things from a tax perspective, so I
view it as a tax term of art.
Mr. LARSON. A tax term of art. So repatriation, what would
patriation be as a tax term?
Mr. SURINGA. So patriation refers to the United States.
Mr. LARSON. Oh, it is the United States?
Mr. SURINGA. Yes.
Mr. LARSON. Well, I am just trying to help out the people
at Augie & Ray's who are trying to figure out when we talk
about this repatriation, patriation is United States,
repatriation is----
Mr. SURINGA. Bringing it back to the United States.
Mr. LARSON. Bringing it back because it went where?
Mr. SURINGA. It was earned abroad and we are bringing it
home.
Mr. LARSON. Oh, it is earned abroad, so it is overseas. So
then what would deemed repatriation be?
Mr. SURINGA. Even if you didn't bring it back, we treat you
as if you did.
Mr. LARSON. Okay, so patriation is United States,
repatriation is bringing it back, and deemed is we deemed it so
even if you didn't?
Mr. SURINGA. Yes.
Mr. LARSON. And those are economic policies?
Ms. Gravelle, do you agree with that or----
Ms. GRAVELLE. Well, there are economic concerns and
considerations with repatriation because our laws limit in some
ways the freedom with which you can use the money abroad,
although experience with 2004 showed that it didn't have
anything to do with investment.
So without some kind of a scheme, which these gentlemen or
at least you may know more about it than I do, to try to get
that money back without paying the tax, you are not supposed to
use it for investment in your own firm or for paying dividends
to your shareholders. So it does matter.
Mr. LARSON. Mr. Barthold, deemed, what does that mean when
we say it is deemed? Because, again, I am trying to just help
out the people back home trying to figure out this policy,
because we are dealing with infrastructure, and yet we are
dealing with patriated, repatriated, deemed repatriated, and it
is kind of confusing, I would daresay even to Members of
Congress.
Mr. BARTHOLD. Well, as Mr. Suringa pointed out, when we
talk about a proposal about deemed repatriation, we are first
of all talking about subjecting to current U.S. tax foreign-
source earnings. We permit under present law the tax on
foreign-source earnings to be deferred until you repatriate or
bring the money back to the parent corporation. Deemed
repatriation says, regardless of what you actually do with that
money, we are going to pretend that you bring it back and
subject it to taxes.
Mr. LARSON. I think that phrase, ``regardless of what we
do,'' I think that is the operative phrase.
Mr. BARTHOLD. Regardless of what the business does.
Mr. LARSON. And so this hearing, while I wish it was
delving into the very substantive proposals that our colleagues
on both sides of the aisle have addressed, we are going to deem
as kicking the can down the road because it is politically not
safe to make decisions, whether it relates to a gas tax,
whether it relates to a carbon tax, whether it relates to any
of the solid proposals that are out there, because you are
never going to get profiles in courage when the country is
crumbling around us. We have these faux hearings on a
complicated set of terms when all American citizens want us to
do is reinvest and rebuild the country as it is crumbling
around us.
And deeming it so doesn't make it so. And I think this
Congress and this Committee has to face up to its
responsibility, and that is to make sure that in order for
commerce to travel, as a number of you have pointed out, we
need to make those very investments which will continue to help
our economy flourish.
Mr. Chairman, I do thank you for this opportunity. I do
hope we get to our colleagues' proposals. But let's all be
clear about this. This is all punting until after the session,
deeming until after this session is over to an opportunity
politically to maybe put a big bow around an omnibus bill. And
I have said this before and I will say it again, that the House
of Representatives and this Committee shouldn't be a
sophisticated messaging body. We should actually legislate.
And with that, I will yield back my time.
Chairman REICHERT. Thank you, Mr. Larson.
Mr. Young.
Mr. YOUNG. Well, I thank the Chairman, and I will begin the
same way I began last week as we discuss the Highway Trust Fund
and the need to invest in infrastructure. I think it is
important, Mr. Chairman, that we are focusing on this issue and
I thank our witnesses.
So start beyond that by acknowledging there are things
beyond direct funding that we can be doing to help solve our
longer-term infrastructure problems, and some of that pertains
to tax policy that encourages the development of public-private
partnerships, and I think we need to do more of that. I also
want to be clear that I understand the need to safeguard the
Highway Trust Fund so it can fund more of these infrastructure
improvement projects.
I am opposed to the enactment, as are so many of my
colleagues and for so many of the same reasons, of a one-time
repatriation. So go on record with that, but do not rehash the
same questions.
I think if a repatriation is done, it is going to have to
be done in conjunction with broader improvements in our own
competitive international tax system. That is really where I
want to go with my line of questioning.
Companies are being forced in my home State of Indiana and
across this country to move their operations overseas. And so
many foreign countries are getting a jump on us with respect to
changing their tax rules in a way that will cause more U.S.
companies to leave unless we act fairly quickly here.
Indiana on a per capita basis is the biggest U.S.
manufacturing State we have, and we have a robust life sciences
industry. So research and development on both the manufacturing
side and the life sciences side is quite important. Some
countries have already changed their tax rules, so it will
effectively force these types of companies to move operations
overseas.
And I want to get your sense, Mr. Dubay and Mr. Suringa, as
to why this is happening, just from a very basic standpoint.
Why are they locating operations
from our manufacturing and life science companies in Indiana
overseas?
Mr. DUBAY. Thank you for the question.
I think there are two reasons why. First is nontax, and
that is that overseas markets are growing, that is where the
growth markets are, so you will see businesses opening up
operations there to meet those growing demands. And as I always
point out when the issue of jobs overseas and outsourcing comes
up, is let's not lose sight of the fact that if a U.S.
business' products are in more demand around the world, that is
a good thing for the business and for the United States Let's
not denigrate that.
There also is certainly a tax aspect to it. It is just more
advantageous, it is more profitable to locate overseas. Tax
rates are lower, there are other issues besides just the tax
rate that go into it. But it just is more profitable to invest
overseas right now than it is here in the United States because
of our high rate.
Mr. YOUNG. Mr. Suringa, focusing not on the demand-related
reasons, but specifically the tax-related component, please.
Mr. SURINGA. So I think it is a combination of lower rates,
it is an increasing prevalence of tax incentives, and it is
also pressure to make those tax incentives specifically focus
on moving people. So part of BEPS is that tax policy should
follow where the people are. And so countries that have these--
historically the patent box regime was where you just
registered a patent in a tax haven, it didn't matter where it
was created, you got a special tax rate. Now you have to move
the people there.
Mr. YOUNG. So, Mr. Dubay, I know you work at Heritage, you
are here representing yourself. Heritage, as someone who worked
there for a very short period of time, I know is not just a
think tank, but you also take into account political factors
when it comes time to making policy recommendations. So I would
ask you if you could factor in what is realistic, what can
Congress do between now and, say, the end of the year to help
address some of these dynamics that are hurting Indiana
workers?
Mr. DUBAY. Sure. Thanks again for the question.
So recently I released a paper that hit on this very topic.
I don't think there is time left in this year for broad
fundamental tax reform. I think the window is closing on
business owner reform, but I thought for a while there was a
window with President Obama and Congress where there was
interest on both sides for business or corporate tax reform. I
think that is less likely as time goes on.
But I see no problem with not only breaking down to
business individual, but breaking down business into its
component parts, which would be a lower rate or fixing the
cumbersome and outdated depreciation rules or moving to
international. Any of those three pieces would be tremendously
beneficial. You could also do things like make bonus
depreciation permanent, and that is a big step in the right
direction on depreciation.
Mr. YOUNG. Thank you. I yield back.
Chairman REICHERT. Mr. Doggett.
I might point out that Mr. Doggett and Mr. Blumenauer and
Mr. Pascrell, who just disappeared, are not Subcommittee
Members, but they are part of the full Ways and Means Committee
and are invited here.
And we are pleased to have you.
And they will be asking questions.
Mr. DOGGETT. Thank you, Mr. Chairman. I am just following
you from our last Subcommittee working together.
I want to begin by commending the National Association of
Manufacturers, the Business Roundtable, the Alliance for
Competitive Taxation, and the National Retail Federation for
speaking out this week against repatriation as a means of
financing the highway system which needs not only moneys, but
it needs certainty. These groups have noted that this is not
the way to go either for our highway system or for our tax
system.
These various repatriation proposals are certainly a loser
for the United States Treasury. And the suggestion that, well,
we are going to have repatriation and it is only a step to
moving toward a territorial system that we can't get this year,
but maybe we will get it after the election, or maybe we will
get it in 5 or 6 years, is really misleading. All we are really
doing is just repeating the failure of 2004, the so-called
American Jobs Creation Act, when it came through this Committee
and the floor of the House.
And I think it is understandable why this approach is being
advanced. Indeed, one of the Members of this Subcommittee is
quoted this afternoon in Politico as saying that repatriation
is the only thing the Republicans can agree on as a means of
financing our highway system. And it is extremely appealing.
You have a handful of multinational companies that benefited in
2004, that really got away with highway robbery in paying a
nickel on the dollar, a deal that any American working family
would love to have as their tax rate on all their earnings, 5,
6 cents, less whatever credit they might have had overseas.
And they are out there saying we would love the government
to tax this, just don't tax us more than a nickel, a dime would
be extortion, don't tax us more than a nickel on a dollar of
our earnings. And all this money is available right now, we are
begging you to take it, so we can bring back our earnings as we
did in 2004 and pay our executives more and give more stock
buybacks and dividends, but not create jobs with it as we
promised we would do.
That kind of system is extremely appealing when the only
other alternatives which could be initiated immediately and
should have been initiated years ago are to provide reliance on
a user-pay system, which built our highway system beginning
with President Eisenhower and which has been the means of
bipartisan support for transportation infrastructure in the
past.
The cost of moving to repatriation in any form is very,
very real. That is one of the reasons as far as any kind of
temporary system that Senator Grassley with the Senate Finance
Committee promised that it would be one time only when it was
done in 2004, because he realized what a costly approach it
was. Of course, it is not one time only because ever since then
there have been those whose appetite was whetted by this one-
time opportunity and what they got away with, and so they are
asking it be done again, and they will ask that it be done
again if this is permitted.
These profits that are allegedly trapped offshore are often
at work right here in America. They can be invested in Treasury
bills here, they can be invested in a hedge fund, they can be
invested elsewhere. They just can't be used to pay executives
more money or stockholders more dividends.
The deemed repatriation approach, Dr. Gravelle, that you
talked about, isn't it true that even if the--they call it
deemed, it is really forced repatriation, and in the case of
some businesses it really amounts to tax on wealth as held
abroad, a concept that hasn't been a principle of our taxation
system here in the United States. But isn't the effect really
revenue-wise likely to be a loss for the Treasury, whether you
call it forced mandatory repatriation or voluntary
repatriation?
Ms. GRAVELLE. Well, it depends on the rate and whether, of
course, you have a large rate on this fixed wealth amount or
the stuff that can't be brought back anyway. So it would
depend. But the point is at the rates, for example, in the Camp
bill, there would probably be a revenue loss at those low rates
because it will still allow you, if you had it within our
current system, that is a stand-alone, because it would still
say that you don't then have in the future to repatriate at 35
percent. You have already done it, you already got that money
to send back without paying tax. And plus you again have this
moral hazard sort of problem, this incentive to say: Well, they
gave us a great deal here, so maybe we will get one in the
future, so better to stash your money abroad.
Chairman REICHERT. The gentleman's time has expired.
Mr. DOGGETT. Thank you.
Chairman REICHERT. Thank you.
Mr. Renacci.
Mr. RENACCI. Thank you, Mr. Chairman. It is really clear--
and I appreciate you having this hearing and I appreciate what
I have heard from the witnesses--but it is really clear that
our international tax system is outdated and anticompetitive,
our current rules discourage domestic investment and make U.S.
companies vulnerable to foreign takeovers.
I also recognize the urgency for reform. I am aware that
actions resulting from the BEPS project will not only further
erode the U.S. tax base, but also force U.S. multinationals to
consider relocating their skilled professionals abroad. I think
I heard one of the witnesses say that. That is why I really
believe reforming our international tax rules to make the U.S.
companies more competitive in the global marketplace is one of
the most important things this Congress can do this year.
We need to stabilize our tax base, to ensure that we still
have that tax base when we actually have an Administration that
is serious about engaging in comprehensive tax reform.
What I have heard so far, though, I think there is a
consensus, at least with Mr. Dubay and Mr. Suringa, is there is
a consensus that in conjunction with moving to a territorial-
based dividend exemption system, some form of deemed
repatriation is acceptable.
Mr. Dubay, do you agree with that?
Mr. DUBAY. Yes, I agree.
Mr. RENACCI. Mr. Suringa, do you agree with that?
Mr. SURINGA. Yes, sir.
Mr. RENACCI. The purpose, though, is not really to talk
about good repatriation, bad repatriation. And one of the
things that is important to me--and I do have a bill out there
with several colleagues and it really says we need to look at
all these options, and repatriation is one of the options we
should look at. But bad repatriation or good repatriation in my
mind wasn't the purpose of this hearing. This hearing is really
to understand better repatriation of foreign earnings as a
source of funding for the Highway Trust Fund.
So I was trying to make some notes. Mr. Suringa, you said
actually in your testimony: ``The best use of any revenue
generated by the move to an exemption system would be to design
the system in a way that provides meaningful tax relief to the
companies paying the tax and encourages job creation and
creation of intellectual property in the United States.'' I
assume you agree with that comment.
Mr. SURINGA. I do.
Mr. RENACCI. You also made a comment earlier, though, to
Mr. Tiberi that the use of the revenue could be used for the
Highway Trust Fund.
Mr. SURINGA. I think that is more of a--that is a
government accounting issue. I am not an expert on government
accounting, but it seems the money comes in and how it is
allocated from the general fund to the Highway Trust Fund is a
matter Congress can decide.
Mr. RENACCI. But you would agree the best use would be to
design the system in a way that provides meaningful tax relief
to those individuals----
Mr. SURINGA. Yes, sir.
Mr. RENACCI. I am trying to really again better understand
repatriation and what some of your thoughts are.
Mr. Barthold, do you have the expertise on whether
repatriation--and, again, this just gets back to, is
repatriation a good idea for the Highway Trust Fund? I am
looking for that answer. Do you have the expertise on whether
repatriation of foreign earnings is a viable source of funding
for the Highway Trust Fund?
Mr. BARTHOLD. Mr. Renacci, that really isn't a question for
me representing the Joint Committee to answer. We try to
provide
the Members with information about technical policy aspects,
economic aspects of different proposals that you consider, but
I wasn't elected to make a tough decision like that one.
Mr. RENACCI. Okay, I appreciate that answer, that is why I
am asking the question.
Mr. Suringa, do you have the expertise on whether
repatriation of foreign earnings is a viable source of funding
for the Highway Trust Fund?
Mr. SURINGA. My focus is international tax, but what I
guess I could say is, look, it is 6 years' worth of revenue and
it gives you time to think of a long-term funding solution,
which I think we all agree is necessary for the Highway Trust
Fund. So to the extent it scores like that, I think it is worth
thinking about, it is worth putting it on the table.
Mr. RENACCI. So if it all went to the Highway Trust Fund--
--
Mr. SURINGA. That is right.
Mr. RENACCI [continuing]. But you have also said that the
best use is to lower the tax rates for----
Mr. SURINGA. That is right, that is right, sir.
Mr. RENACCI. Mr. Dubay, do you have the expertise to tell
me whether repatriation of foreign earnings is a viable source
of funding for the Highway Trust Fund?
Mr. DUBAY. Partially. As long as enough revenue is
available to facilitate the change to the territorial system or
a dividend exemption regime from the worldwide system, how the
rest of the revenue is used I will leave to the budget experts
to decide whether that is good or bad policy. Enough revenue
needs to be used to make sure that you can get to a good and
proper dividend exemption regime, and that does require a
portion of the money that would be raised from deemed
repatriation.
Mr. RENACCI. Thank you.
I do believe it is important for Congress to act this year
to make our international tax rules more competitive, although
I do have concerns on whether international tax reform can
truly be a source of funding. I appreciate your comments. I do
know that we need to address a long-term, sustainable Highway
Trust Fund. And we cannot continue to pass this on to our
children and grandchildren.
Mr. Chairman, I yield back.
Chairman REICHERT. Thank you, Mr. Renacci.
Mr. Blumenauer is recognized.
Mr. BLUMENAUER. Thank you, Mr. Chairman. I appreciate your
courtesy and Mr. Neal allowing us to sit in on the proceedings.
It has been fascinating. I appreciate the big picture that is
being asked. There are those who float repatriation as sort of
a Holy Grail, that it is a painless way to somehow weave our
way through the minefield that has eluded us for 22 years with
the Transportation Trust Fund.
And I think the breadth of testimony indicates that there
are some complexities here. There are policy questions, there
are severe questions about tradeoffs, cost to the general fund.
As has been pointed out, this is not free money, depending on
how it is structured. It may well just be deferred money that
ultimately will have a cost. And there are competing interests.
I think all of us who have worked on the Ways and Means
Committee for more than 15 seconds agree that we need to make
significant adjustments to the corporate tax scheme. And we
appreciate our colleague, Chairman Camp, working hard on that
in a number of sessions that we were involved. I thought some
progress was made.
And I think it is important to approach it in the way that
you have done. And this for me, I think, points out that this,
even if it meets the criteria that I think are necessary for
meeting the needs of the Highway Trust Fund, that is, it has to
be enough money, it has to be dedicated, and it has to be
sustainable, so that we are not back in the same pickle in 2
years, or 4 years, or 6 years. And so I think what I am hearing
is there are some questions about that based on the give and
take that we have had at this point.
I would just make one point, and I won't take my full 3
minutes, but I do think that it is important to note that we
are making this slightly more complex than it needs to be.
There is an action that this Committee could take 1 week after
we come back from the 4th of July recess.
The gas tax is not complex. It is extraordinarily simple,
it is a one-page bill. The gas tax is not something that is
expensive to administer, the mechanism is right there. I have
had extensive conversations, as I know others have, with our
friend the Chairman of the T&I Committee, Mr. Shuster, and
Ranking Member DeFazio, who are chomping at the bit to be able
to come forward with reauthorization. But the key is they have
to have a number, they have to know what they are working with.
And if Congress in its wisdom, with the Ways and Means
Committee following regular order, with men and women who have
been in this hearing room over the last 10 days, really dove in
with this for 2 or 3 days of extensive hearings like we used to
do, I mean, real work sessions, a markup, we could answer the
questions that people have about the economic impact, the
burden, the costs, and consequences. And before the month of
July is out, we could give them a number, and they could give
us a transportation bill before the end of the fiscal year,
September 30. They can do this.
The other thing that I am struck with, and I really like
how our leadership, Mr. Boehner, Mrs. Pelosi, the three
committees of jurisdiction, came together on the SGR fix. That
kind of felt good. We had, I don't know, 290 votes or whatever
it was, we jammed the Senate for a change. And did something
that eluded us for over 15 years.
And I just think we could have at this dais at the next
hearing the president of the AFL-CIO, the president of the U.S.
Chamber, we could have truckers and AAA, local government, we
could have bicyclists and people who care about transit and the
people who build and maintain roads, we could have this room
filled with experts who were all on the same page, supporting
what has happened already this year in six Republican States,
raising the gas tax.
So I think this is helpful to provide the context. I
appreciate the role this Subcommittee has played in the past.
And I hope that we would consider maybe having a couple, 3 days
someday doing a deeper dive on the gas tax, because we can
provide Mr. Shuster with what he wants in 2 weeks.
Thank you. I am sorry, I did take the 3 minutes. I
apologize.
Chairman REICHERT. Yes, you did.
Mr. BLUMENAUER. Thank you for your courtesy.
Chairman REICHERT. I thank the gentlemen for his comments.
We are going to go to Mr. Pascrell next. Mr. Kelly wanted
to be present for your comments.
Mr. PASCRELL. I am glad he is here. Kelly and I, Kelly and
Pascrell will end on a very docile note, I am sure it will be
peaceful.
Mr. Barthold, thank you, by the way, for your service. Can
you explain briefly why a repatriation holiday would create
revenue at first, but then add billions to the deficit in
subsequent years? Can you explain that?
Mr. BARTHOLD. I will try for a brief version, Mr. Pascrell.
Mr. PASCRELL. Thank you.
Mr. BARTHOLD. Remember, we start from baseline projections.
One thing to observe is that foreign-source income of U.S.
persons is growing. There is repatriation under present law
under the baseline on which there is residual income tax paid.
And so there are multiple effects that go into our analysis of
a proposal such as the Paul-Boxer proposal for a repatriation
holiday.
In terms of early year pluses, we think that the
attractiveness of the lower rate does mean that companies will
try to pay back more dividends. Even at the low rate, if more
comes back that can lead to an increase in cash receipts to the
Treasury.
I should note that as part of that analysis we recognize
that when companies repatriate some of the earnings, that they
also have had in the past a tendency to increase dividends paid
to individual shareholders or to engage in share buyback
programs in lieu of dividends. Both of those are taxable events
under the individual income tax, so that is another source of
increased cash receipts to the Treasury in the early years.
As a longer-term matter, we view some of the repatriated
earnings that would occur during the qualifying period--and in
the Paul-Boxer bill that is a 5-year period--as being earnings
that potentially would have been repatriated later in the
budget window. And so that means what is a plus in the front of
the budget period is a negative in the back of the budget
period.
And then also, as has been noted, having elective repeated
holidays does give an incentive to perhaps shift more of the
U.S. corporate tax base abroad to affirmatively make an
investment decision to invest abroad rather than in the United
States, which lowers, over the long haul, the corporate tax
base. That is another factor in our estimate that this loses
money in the outyears.
Mr. PASCRELL. Thank you very much, I appreciate that.
I don't sense a sense of urgency here on this. I mean, we
only had our first hearing just recently, and now we have a
second hearing thanks to the Chairman. I don't sense urgency at
all.
In recent years everything has changed. I am trying to
change what is being changed to break through the political
games that are being played here.
Our Federal Highway Trust Fund is dead broke. In the past
10 years no one has had the political courage to fix it. I have
serious concerns with the proposals that we have seen both in
the House and the Senate. The tax-deferred corporate income or
repatriation to temporarily fund the Highway Trust Fund, that
is not urgency, that is not a long-term solution.
Let's look at the record. We have heard today, 2004 is the
last time we did this, the repatriation holiday, and what
happened? Most of that money, the top 15 corporations which,
combined, repatriated more than $150 billion during the
holiday, cut their workforces by 21,000 employees between 2004
and 2007.
I also worry that enacting a tax holiday would only create
incentives for corporations to keep holding cash abroad. Why
would a corporation invest earnings in the United States and
pay full taxes on it when they can keep it in a tax haven, then
be rewarded with a lower repatriation tax and use the earnings
to pay themselves? Let's talk about all of the folks that got
paid themselves through that money that was available in 2004.
No, I think the bipartisan Bridge to Sustainable
Infrastructure Act, which myself and my good friend from Ohio,
Mr. Renacci, have sponsored, is a good way to do this, a
bicameral commission to fund, find a way to fund the Highway
Trust Fund, a long-term, sustainable way. If the commission
tells us that the repatriation is part of the solution, I would
have to consider it as part of the solution.
But I cannot stress enough that whatever we do, we must
also reinstitute the policy of users paying for our
transportation system and address the long-term revenue. The
fact is that repatriation cannot and must not be just a more
complicated and expensive patch which allows the Congress to
avoid the hard decisionmaking on our highway system.
Today's hearing should give pause to those banking on
repatriation. Our witness last week said VMT will take 10
years.
Chairman REICHERT. The gentleman is over his time.
Mr. PASCRELL. I will yield back to the Chairman.
Chairman REICHERT. Thank you, Mr. Pascrell.
Mr. Kelly.
Mr. KELLY. Thank you, Chairman.
Mr. Pascrell, it's always good being with you.
And, panel, thanks for being here.
Mr. Suringa, just so I have this clear, you said that if we
were to do the repatriation, it would be a 6-year window,
depending on the percentage that we charge to bring this money
back. It would provide enough money, is that correct, for the
Highway Trust Fund for 6 years? Did I understand that
correctly?
Mr. SURINGA. That is my understanding based on the revenue
score from Chairman Camp's proposal and the estimates that I
have read of the needs for the Highway Trust Fund. But I would
defer to experts on the Highway Trust Fund.
Mr. KELLY. And I understand about referring to experts. I
have to tell you, these hearings are oftentimes very
complicated. I know Mr. Larson was trying to get down to
everyday terms of what people understand and what they don't
understand.
And I appreciate my friends on the other side who may talk
about in 2004 we had an opportunity for repatriation, we
brought the money back, and we gave the money to the people,
they paid a low percentage on it, then they got to spend their
money the way they wanted to. I am assuming they probably
bought some other things and maybe created jobs in that market.
I think there is a bounce effect with that.
But I also know that in 2009, with the American Recovery
and Reinvestment Act, we spent $800 billion-plus of taxpayers'
future money, and with interest now it is $1 trillion. I would
have loved to have seen the same appetite then for the Highway
Trust Fund, because we used about $30 billion of that $800-and-
some billion to actually put into shovel-ready projects. My
God, if that wasn't a jobs bill, what the hell was? That was an
opportunity to change the face of this country and put us in a
much better position. And the residual benefits of it would
have been phenomenal.
My son just came back. I am in the automobile business. We
meet quarterly, and they call it a 20 Group, and they sit down
and they exchange their financial statements and they talk
about best business practices.
I would just say that what we are talking about today, we
don't live in a void, we know what is going on around the
world, and for us to sit here with hands over both eyes and
plugs in our ears and say: No, I don't want to hear what is
going on overseas because, quite frankly, that doesn't appeal
to me, is wrong.
People are not leaving this country because they are not
patriotic. They are leaving this country because they are not
going to stand here and try to operate a business model where
the exact people who depend on their profitability for the
revenue to drive the machine make it hard for them, whether
through taxes or through regulations. You all have looked at
these things.
Now, Mr. Barthold, you are in a very interesting position.
You are a statistics guy. You can tell. If the manager for the
Nationals asked you, ``Listen, how is my lineup doing? Pretty
good? How should I change it?''
``I don't tell you how to change it. All I can tell you is
you have the 3, 4 and 5 hitters that are not doing what they
are supposed to do.''
So I understand where you are coming from. But for the
rest, you see it every day. Mr. Dubay, you see it. Mr. Suringa,
you see it. Ms. Gravelle, you see it. There is no reason for
this country with its assets to be sitting where it is and
looking at crumbling infrastructure. It is a lack of political
will to get it done.
It just doesn't seem like it should be that hard. And
whether it is Mr. Pascrell's and Mr. Renacci's bill, it really
doesn't matter to me as long as we get these things fixed.
The upside from an economic standpoint of how this country
would profit from that is off the charts. The problem is how do
you get the money and where do you get it from? And I will tell
you this, a drowning man grasps at all straws. Right now we
have an opportunity at repatriation which will help us to a
certain degree, but if we don't have comprehensive tax reform,
both internationally and right here at home, we are still in
the middle of a really bad situation.
I want to go back to what you said. So tell me again about
this. Repatriation now would supply enough revenue to do--is it
a 6-year? And not just to get us through the end of the year,
but going forward, if we were able to do repatriation and
dedicate that money to infrastructure, would that not raise the
profitability of all the people that live in this country, the
companies that work in this country, wouldn't that also just by
the very nature of becoming more profitable raise tax revenue?
Mr. SURINGA. I think it would.
Mr. KELLY. Well, I mean, you can't say you think it would.
It absolutely would. It is just math. I mean, the President
says all the time do the arithmetic on it. More profitable
companies pay more taxes, right? We are hoping for tax revenue,
how do we get there? We get there by roads, rivers, railways,
and runways.
So why in the heck do we sit back and let it unravel on us
when we do have things available? This repatriation is a very
important part of an overall fix, yes or no, to all of you,
just tell me? I know you can't talk Tom.
Mr. DUBAY. As long as a dividend exemption regime or
territorial system is established beforehand and the money is
there to make sure that that gets established, I see it could
possibly be a solution, yes.
Mr. KELLY. Okay.
Mr. SURINGA. I would think it also is important to consider
an innovation box to keep research jobs here, highly-skilled
jobs here.
Mr. KELLY. Yes. Ms. Gravelle.
Ms. GRAVELLE. A holiday loses money. Most deem repatriation
stand-alone would lose money. And with tax reform it is used to
finance other parts of tax reform. So it is hard for me to see
how repatriation would play a role in financing the highways.
Mr. KELLY. No role at all?
Ms. GRAVELLE. It is hard to see it.
Mr. KELLY. It is hard to see it?
Ms. GRAVELLE. Yes.
Mr. KELLY. Okay. So revenue that could possibly come back
in, I mean, it is part of it.
I would just say this. The other thing is when you collect
this money, why not spend it on the people that put it in? I
have to tell you, the people that I represent back home say:
Listen, we don't mind paying more money, just don't use it for
something else, keep it where it is supposed to be.
We have an excellent opportunity right now to bring this
around and turn the whole country around. It is going to be
through fixing our highways and our railways and our rivers and
our runways. It is just that simple. This isn't magic. The old
saying it is magic just doesn't ring true. Pulling a rabbit out
of the hat isn't magic, it is how you get the rabbit in the hat
to begin with.
So thanks to all of you for being here.
And, Chairman, thank you.
Chairman REICHERT. Thank you, Mr. Kelly.
Our last two speakers were interesting. It kind of brings
me back to my old profession of police officer, hostage
negotiator. We have differences of opinion that we need to
smooth over, and we will continue the discussion at a later
time.
But thank you all for the time that you took today to be
here with us, because this is complicated. And I think, as Mr.
Larson said, all of us are in a learning mode and trying to
understand this and how it may help us or may not help us.
There have been, as you heard last week, a lot of ideas on how
we might move ahead on a permanent basis to fund our highway
trust fund.
Here is what I heard today from folks on the panel. We are
in agreement that we can't continue to kick the can down the
road. We are in agreement that user fees are a must have in any
solution as we move forward. And we are in agreement this is
critical to our Nation, its productiveness, and our ability to
lead in a global economy.
So, once again, I thank all of you for your testimony.
I have to read one last paragraph here because it is part
of the rules. That concludes today's hearing. Please be advised
that Members may submit written questions to the witnesses.
Those questions and the witnesses' answers will be made a part
of the record.
I would also like to thank all of our witnesses for
appearing today. It has been an educational discussion.
And with that, the Committee is adjourned.
[Whereupon, at 4:15 p.m., the Subcommittee was adjourned.]
[Submissions for the Record follow:]
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