    [House Hearing, 114 Congress]
    [From the U.S. Government Publishing Office]

                        FUNDAMENTAL TAX REFORM PROPOSALS
    =======================================================================

                                    HEARING

                                   before the

                           SUBCOMMITTEE ON TAX POLICY

                                     of the

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

                        ONE HUNDRED FOURTEENTH CONGRESS

                                 SECOND SESSION

                                   __________

                                 MARCH 22, 2016

                                   __________

                              Serial No. 114-TP05

                                   __________

             Printed for the use of the Committee on Ways and Means

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

                        FUNDAMENTAL TAX REFORM PROPOSALS

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

                                    HEARING

                                   before the

                           SUBCOMMITTEE ON TAX POLICY

                                     of the

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

                        ONE HUNDRED FOURTEENTH CONGRESS

                                 SECOND SESSION

                                   __________

                                 MARCH 22, 2016

                                   __________

                              Serial No. 114-TP05

                                   __________

             Printed for the use of the Committee on Ways and Means

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

                             U.S. GOVERNMENT PUBLISHING OFFICE

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                          COMMITTEE ON WAYS AND MEANS

                          KEVIN BRADY, Texas, Chairman

    SAM JOHNSON, Texas                   SANDER M. LEVIN, Michigan
    DEVIN NUNES, California              CHARLES B. RANGEL, New York
    PATRICK J. TIBERI, Ohio              JIM MCDERMOTT, Washington
    DAVID G. REICHERT, Washington        JOHN LEWIS, Georgia
    CHARLES W. BOUSTANY, JR., Louisiana  RICHARD E. NEAL, Massachusetts
    PETER J. ROSKAM, Illinois            XAVIER BECERRA, California
    TOM PRICE, Georgia                   LLOYD DOGGETT, Texas
    VERN BUCHANAN, Florida               MIKE THOMPSON, California
    ADRIAN SMITH, Nebraska               JOHN B. LARSON, Connecticut
    LYNN JENKINS, Kansas                 EARL BLUMENAUER, Oregon
    ERIK PAULSEN, Minnesota              RON KIND, Wisconsin
    KENNY MARCHANT, Texas                BILL PASCRELL, JR., New Jersey
    DIANE BLACK, Tennessee               JOSEPH CROWLEY, New York
    TOM REED, New York                   DANNY DAVIS, Illinois
    TODD YOUNG, Indiana                  LINDA SANCHEZ, California
    MIKE KELLY, Pennsylvania
    JIM RENACCI, Ohio
    PAT MEEHAN, Pennsylvania
    KRISTI NOEM, South Dakota
    GEORGE HOLDING, North Carolina
    JASON SMITH, Missouri
    ROBERT J. DOLD, Illinois
    TOM RICE, South Carolina

                         David Stewart, Staff Director

             Janice Mays, Minority Chief Counsel and Staff Director

                                     ______

                           SUBCOMMITTEE ON TAX POLICY

                 CHARLES W. BOUSTANY, JR., Louisiana, Chairman

    DAVID G. REICHERT, Washington        RICHARD E. NEAL, Massachusetts
    PATRICK J. TIBERI, Ohio              JOHN B. LARSON, Connecticut
    TOM REED, New York                   LINDA SANCHEZ, California
    TODD YOUNG, Indiana                  MIKE THOMPSON, California
    MIKE KELLY, Pennsylvania             LLOYD DOGGETT, Texas
    JIM RENACCI, Ohio
    KRISTI NOEM, South Dakota
    GEORGE HOLDING, North Carolina

                                C O N T E N T S

                                   __________

                                                                       Page

    Advisory of March 22, 2016 announcing the hearing................     2

                                   WITNESSES

    The Honorable Michael C. Burgess, a Representative in Congress
      from the State of Texas........................................    51
    The Honorable Devin Nunes, a Representative in Congress from the
      State of California............................................     5
    The Honorable Robert Woodall, a Representative in Congress from
      the State of Georgia...........................................    70

                           SUBMISSIONS FOR THE RECORD

    Alliance for the Defeat of Citizenship Taxation (ADCT)...........   216
    American Council of Life Insurers (ACLI).........................   218
    American Craft Spirits Association (ACSA)........................   220
    American Retirement Association (ARA)............................   222
    American Veterinary Medical Association (AVMA)...................   224
    Americans for Fair Taxation (FAIRtax)............................   226
    B. Quinton.......................................................   236
    Charles P. and Mary Lynn Bailey..................................   237
    Concerned U.S. Citizens..........................................   240
    Credit Union National Association (CUNA).........................   299
    Daar Fisher......................................................   307
    David H. Leake, CAPT, USNR-Ret...................................   310
    David Nicol......................................................   313
    Deborah Lee Soloway..............................................   315
    Eric Hooper......................................................   316
    Georgy Keating...................................................   320
    Heather Etchevers................................................   322
    James Foley......................................................   323
    James Stehr......................................................   324
    Jason Pedley.....................................................   327
    Jeffrey Locke....................................................   329
    Jo and Roger Corlett.............................................   330
    Joe Citizen......................................................   331
    John Dacey.......................................................   333
    John K. Dahlke...................................................   335
    Jude Ryan........................................................   337
    Kathryn Millirons Baston.........................................   341
    Kevin Kent Caldwell..............................................   342
    Leo Brunelle.....................................................   344
    Let Freedom Ring.................................................   346
    Marco Sewald.....................................................   348
    Matthew Lykken...................................................   355
    National Governors Association (NGA).............................   362
    National Retail Federation (NRF).................................   370
    National Association of Truck Stop Operators (NATSO).............   374
    Patheon Pharmaceuticals, Incorporated............................   378
    Paul Livingston..................................................   388
    Reginald Callaway................................................   391
    Ronald K. Evans..................................................   393
    Sophie Corlett...................................................   399
    Todd Stoudt......................................................   400
    Tony B. Graham...................................................   409
    Victor Rush......................................................   411

                        FUNDAMENTAL TAX REFORM PROPOSALS

                                  ----------

                            TUESDAY, MARCH 22, 2016

                 U.S. House of Representatives,
                           Committee on Ways and Means,
                                    Subcommittee on Tax Policy,
                                                        Washington, DC.

        The Subcommittee met, pursuant to notice, at 3:40 p.m., in
    Room 1100, Longworth House Office Building, Hon. Charles W.
    Boustany, Jr. [Chairman of the Subcommittee] presiding.

        [The advisory announcing the hearing follows:]

    ADVISORY

    FROM THE
    COMMITTEE
     ON WAYS
    AND
    MEANS

                           SUBCOMMITTEE ON TAX POLICY

                                                    CONTACT: (202) 225-3625
    FOR IMMEDIATE RELEASE
    Tuesday, March 15, 2016
    No. TP-05

                     Chairman Boustany Announces Member Day

                  Hearing on Fundamental Tax Reform Proposals

        House Ways and Means Tax Policy Subcommittee Chairman Charles
    Boustany (R-LA), today announced that the Subcommittee will hold a
    hearing on Member proposals relating to fundamental reform of the
    income tax system. The hearing will take place on Tuesday, March 22,
    2016, in Room 1100 of the Longworth House Office Building, beginning at
    2:30 p.m.

        This hearing will focus in particular on cash-flow and consumption-
    based approaches to taxation. It will be the first in a series of
    Subcommittee hearings on tax reform proposals by Members of Congress,
    with the next hearing focused on income-based approaches to taxation.

        Oral testimony at this hearing will be limited to Members of
    Congress who either have introduced or cosponsored legislation that
    presents an alternative to the current income-based approach to
    taxation. Members wishing to testify at this hearing should contact the
    Subcommittee at (202) 225-5522 or robert.cusmano@mail.house .gov by no
    later than noon on Friday, March 18, 2016. However, any individual or
    organization not scheduled for an oral appearance may submit a written
    statement for consideration by the Committee and for inclusion in the
    printed record of the hearing.

    DETAILS FOR SUBMISSION OF WRITTEN COMMENTS:

        Please Note: Any person(s) and/or organization(s) wishing to submit
    written comments for the hearing record must follow the appropriate
    link on the hearing page of the Committee website and complete the
    informational forms. From the Committee homepage, http://
    waysandmeans.house.gov, select ``Hearings.'' Select the hearing for
    which you would like to make a submission, and click on the link
    entitled, ``Click here to provide a submission for the record.'' Once
    you have followed the online instructions, submit all requested
    information. ATTACH your submission as a Word document, in compliance
    with the formatting requirements listed below, by the close of business
    on Tuesday, April 5, 2016. For questions, or if you encounter technical
    problems, please call (202) 225-3625.

    FORMATTING REQUIREMENTS:

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

        1. All submissions and supplementary materials must be submitted in
    a single document via email, provided in Word format and must not
    exceed a total of 10 pages. Witnesses and submitters are advised that
    the Committee relies on electronic submissions for printing the
    official hearing record.

        2. All submissions must include a list of all clients, persons and/
    or organizations on whose behalf the witness appears. The name,
    company, address, telephone, and fax numbers of each witness must be
    included in the body of the email. Please exclude any personal
    identifiable information in the attached submission.

        3. Failure to follow the formatting requirements may result in the
    exclusion of a submission. All submissions for the record are final.

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

        Note: All Committee advisories and news releases are available
    online at
    http://www.waysandmeans.house.gov/.

        Chairman BOUSTANY. The Subcommittee will come to order, and
    welcome to the Ways and Means Subcommittee on Tax Policy. And
    today we are going to have a Member Day, where we will hear a
    number of bills from Members regarding fundamental tax reform
    proposals.
        This is really the first in a series of hearings on
    fundamental tax reform, and we are honored to have three of our
    esteemed colleagues join us today so we can learn about the
    bills they have developed to take the tax system in a new
    direction, by moving away from income as the tax base and
    instead looking to cash-flow or consumption as a tax base that
    is more conducive to economic growth. These are important
    ideas, in which our colleagues have invested an enormous amount
    of time and energy. It shows the seriousness of their
    commitment to the effort to develop a pro-growth tax system for
    the 21st century.
        It is abundantly clear that our current Tax Code is broken.
    We are saddled with a Code that is littered with exclusions,
    deductions, and special rules, a Code that has grown to more
    than 4 million words, and that doesn't include all the forms,
    schedules, worksheets, and instructions that are required for
    Americans to comply with the law. The Code is so complex that
    Americans devote billions of hours a year to tax compliance,
    and they also spend tens of billions of dollars a year on tax
    preparation software or professional services. Imagine if all
    that time and money could be put to more productive use
    instead, jump-starting our lackluster economy.
        As we focus on tax reform, we want to take a fresh look and
    consider all ideas and proposals, including the three important
    proposals being presented today. Ultimately, the Ways and Means
    Committee must weave the most pro-growth concepts and ideas
    into a bold plan that fundamentally and comprehensively reforms
    our tax system: A tax reform plan that suitably marks this
    year's 30th anniversary of the last overhaul of the tax system.
        This hearing is just the beginning. The Subcommittee will
    continue to solicit and evaluate all ideas. We will be holding
    our next hearing on April 13th to examine Member bills that
    make fundamental reforms within the context of an income-based
    tax system.
        So thank you again to each of our witnesses for taking time
    from your busy schedules to be with us today, and we look
    forward to hearing about your bold proposals.
        And now I yield to the distinguished Ranking Member of the
    Subcommittee, Mr. Neal, for the purposes of an opening
    statement.
        Mr. NEAL. Thank you, Mr. Chairman, for calling this hearing
    and considering once again fundamental tax reform proposals. We
    are all aware of the great need to reform our broken and
    inefficient Tax Code, while replacing it with a Code that
    promotes job growth, lifts wages for all workers, and grows the
    middle class.
        One of the challenges, I think, for all of us today is to
    make sure we are not sitting here for the 35th anniversary of
    1986. And the truth is that this is very difficult work, it is
    very complex work. There is broad agreement on what needs to be
    done; there is less agreement on how to do it. And that is the
    challenge we face.
        We all know that tax reform cannot wait. The economy,
    clearly, cannot wait. And certainly the American people cannot
    wait. Today's hearing is yet another in a long line of hearings
    that we have had on this matter when both sides were in the
    Majority. I express my frustration at this hearing because
    oftentimes, even with the best proposals that step forward,
    they get caught up in partisan politics and we end up going
    backward, rather than forward.
        So, I want to take a moment to commend my friend and former
    Chairman of the Committee, Dave Camp. He put out a very earnest
    effort at reforming our Tax Code, the best effort since
    Chairman Rostenkowski in 1986. There were parts of his plan
    that I disagreed with, but I want to tell you the way that it
    was done with methodical bipartisanship is a very important
    model, as we go forward. The bipartisan effort included Members
    and stakeholders alike. We heard from everybody over the course
    of 3 years.
        Now, rather than building on this effort, we are instead
    holding another hearing on tax reform, instead of trying to
    roll up our sleeves and actually doing the hard work that
    reform invites. As time passes, the Code gets older, more
    inefficient, less competitive.
        Mr. Chairman, we are now on the verge of the opportunity to
    really do something, to get to work and put out a meaningful
    draft. Now is the time to reform the Code. And I thank you.
        Chairman BOUSTANY. I thank the gentleman. Without
    objection, other Members' opening statements will be made part
    of the record.
        Today's witness panel includes three of our fellow Members
    of the House of Representatives: The Honorable Devin Nunes,
    representing the 22nd District of California, and a Member of
    the Ways and Means Committee. He will be testifying about H.R.
    4377, the American Business Competitiveness Act of 2015, which
    would tax businesses based on their cash-flow, rather than
    based on their income.
        We will also hear from the Honorable Michael Burgess,
    representing the 26th District of Texas. He will be testifying
    about H.R. 1040, the Flat Tax Act, which would provide
    businesses and individuals with an election to be taxed at a
    flat rate, and to be taxed on a cash-flow basis for business
    activities.
        And we will also hear from the Honorable Rob Woodall,
    representing the 7th District of Georgia. He will testify about
    H.R. 25, the Fair Tax Act of 2015, which would impose a
    national sales tax on gross payments for the use or consumption
    of taxable property or services.
        Each of your tax reform bills will be made part of the
    formal hearing record. Traditionally, the Committee allots 5
    minutes to each witness to deliver oral remarks. However, today
    we will be somewhat lenient on the 5-minute rule, but just a
    bit, to ensure that each of you can fully introduce your
    proposals.
        So, we will begin with you, Mr. Nunes.

            STATEMENT OF HON. DEVIN NUNES, A REPRESENTATIVE
                IN CONGRESS FROM THE STATE OF CALIFORNIA

        Mr. NUNES. Well, thank you, Chairman Boustany and Ranking
    Member Neal, for inviting me to testify today before the Tax
    Policy Subcommittee. It is nice to be down here with the common
    folks, instead of up there.
        It is my honor to present H.R. 4377, the American Business
    Competitiveness Act, known as the ABC Act, a business tax
    reform plan that I have been developing for several years. I
    look forward to your questions and our continued dialogue on
    comprehensive tax reform.
        Many Republicans and Democrats agree the United States
    needs to adopt a broad-based consumption tax. We are paying the
    price through fewer jobs, less economic growth, and less tax
    revenue for being one of the only developed countries in the
    world without one.
        Most of the world's consumption taxes are sales taxes or
    value-added taxes, but the ABC Act is different. It would
    encourage business investment by allowing 100 percent expensing
    in the current year. This means that companies of any size, no
    matter how they are organized, would pay no tax on any of their
    spending for personnel, equipment, property, or any other
    expenditure related to the operation of their business in the
    United States.
        Today income tax penalizes new investment, but the ABC Act
    would eliminate that penalty, rapidly spurring economic growth.
        First and foremost, the ABC Act applies to all business
    entities, regardless of their structure, including
    corporations, S corporations, partnerships, sole
    proprietorships, LLCs, and any other business entity. The bill
    would lower the maximum tax rate on net business income to 25
    percent. Anything a company purchases, including property,
    services, compensation, and inventory would be fully expensed.
    With full expensing, all the business tax credits and
    deductions littered throughout the Tax Code would be
    systematically eliminated.
        The bill also replaces our complicated, duplicative, and
    uncompetitive international rules with a simple territorial
    system. In an increasingly interconnected world, we need to
    boost our global competitiveness. The ABC Act would achieve
    that goal by undoing our worldwide tax so that American
    businesses are only taxed on income effectively connected with
    business inside the United States. All the complicated deferral
    rules would be wiped away, leaving us with a simple and fair
    territorial Code. The only fee companies would pay for
    repatriating foreign-held earnings up to date in the United
    States would be a one-time toll charge of 5 percent assessed in
    the first year of enactment--on undistributed foreign earnings
    minus dividends paid out in that year.
        When combined with immediate expensing and new, lower tax
    rates, these provisions would make America the largest tax
    haven in the world. Companies would be scrambling back to
    reinvest money in the United States. This would boost American
    jobs, increase GDP, and spark widespread investment in all
    sectors of the economy.
        The ABC Act will not only kickstart economic growth, but it
    will also allow for the allocation of investment and
    decisionmaking based on best business practices, not the Tax
    Code. Inefficient business models based on our current Tax Code
    would be rendered irrelevant.
        The current Tax Code is over 70,000 pages long, and is
    plagued with senseless regulations and special interest
    loopholes. This unfairly benefits big businesses, which are
    often armed with high-priced accountants and tax attorneys who
    find ways to exploit the complicated provisions. Every day
    Americans who dream of starting their own business quickly
    realize that they lack the resources to fight these complex
    rules and regulations.
        My plan would drastically simplify the Tax Code by
    eliminating all the pet credits and deductions for businesses,
    which would no longer be necessary with full expensing.
        In my home State of California, where tax and business
    regulations are exceedingly convoluted, the ABC Act would
    vastly improve the business climate and encourage
    entrepreneurship. In fact, the ABC Act would provide every
    American the opportunity to start up a business without being
    penalized with steep taxes and burdensome regulations. Though
    this bill makes no changes to the individual Code, other than
    bringing down the rate on interest income, this efficient,
    fair, and simple plan would completely revamp business taxes in
    order to give all citizens a shot at the American dream of
    owning their own business.
        It is increasingly clear that simply lowering the corporate
    tax rate or adjusting specific provisions of the Code will not
    yield dramatic economic growth or drastically increase the
    number of start-ups. Instead, businesses of all sizes will
    continue to be burdened by a bewildering, punitive Tax Code,
    while jobs and investment will continue to transfer overseas.
        That is why I have been working on eliminating the income
    tax and moving to a consumption tax. The ABC Act does exactly
    that. The bill has 29 cosponsors representing a diverse cross-
    section of Members.
        And I look forward to your questions. I yield back.
        [The submission of The Honorable Devin Nunes follows:]

       [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        Chairman BOUSTANY. Thank you.
        Dr. Burgess, you may proceed.

       STATEMENT OF HON. MICHAEL C. BURGESS, A REPRESENTATIVE IN
                    CONGRESS FROM THE STATE OF TEXAS

        Mr. BURGESS. Thank you, Chairman. Thank you for holding
    this hearing. And I just want to say how grateful I am to the
    Chairman of the full Committee, Kevin Brady.
        You know, as the landscape stretches out ahead of us for
    the remainder of this term and whatever happens in the next
    term, I do feel that the accumulated weight of desire for some
    type of fundamental tax reform will finally achieve that goal.
        Now, as Mr. Woodall knows, this is the point in the
    discussion where I usually play a few lines from a Sheryl Crow
    song, ``Can't Cry Anymore.'' She says, ``Money comes in, but
    the fact is I don't make enough to pay my taxes.'' And I want
    to help Sheryl Crow. I want to help simplify her life, because
    I understand how----
        Chairman BOUSTANY. Mr. Burgess, that is the suspicion we
    have, that you want to help Sheryl Crow.
        [Laughter.]
        Mr. BURGESS. Well, the truth is, I want to help every
    American. And it is--we have made life so difficult for the
    average citizen with our Tax Code. And this Subcommittee knows
    it much better than I. I mean I am just a simple country
    doctor. What do I know about tax policy? Next to nothing. And I
    will readily admit that.
        But let me just tell you my own personal journey with the
    Flat Tax Act. It actually goes back to calendar year 1993. Bill
    Clinton and I that year earned exactly--exactly--the same
    amount of money. But when Bill Clinton's taxes were published
    in the newspaper and I calculated his effective tax rate, it
    was 19 percent. When I calculated my effective tax rate--
    remember the tax increases that were retroactive for the rich
    and the dead in 1993--I fell into that category. Not dead, but
    certainly well off. And my tax rate was 32 percent.
        Why that discrepancy? Why treat one American citizen who
    happens to have a very well-paying job--the President of the
    United States--why treat that person preferentially, as opposed
    to someone who is delivering your health care late at night in
    their local hospital?
        So, I started on this journey. And then, in 1995, my
    predecessor, Representative Dick Armey, Majority Leader Dick
    Armey, published a book called ``The Flat Tax.'' I read it on
    a--actually, I was on my way to a medical convention. I bought
    it at the airport. I read it and it was like a revelation. Why
    don't we do this? Why don't we simplify? Why don't we give
    people back, if not money, the gift of time, the amount of time
    it takes to keep that shoebox full of receipts and prepare your
    taxes every year?
        I actually spoke to Representative Armey about it early in
    1996. He assured me that President Dole would sign the bill
    into law early in 1997. But, as we all know, history took a
    different turn that year. So here we are today, many years
    later, still talking about some of these things.
        But again, I believe the accumulated weight of desire to
    affect the Tax Code in a positive way has reached the point
    where something is, in fact, going to happen.
        Now, look. This idea is not new to me. Congressman Armey
    obviously had a bill to create a flat tax. The Hall-Rabushka
    proposals from years before. The concept is simple. You fill
    out a form, your amount of income less some personal deductions
    and some family deductions. I have the form up there. It is
    really pretty simple. It is a one-page form. Fill it out on a
    postcard and mail it in. The obvious takeaway from that is you
    don't have to spend all of those hours and dollars with your
    accountant every year.
        My own personal situation, I have 2 half-days blocked off
    while we are out of session the next couple of weeks to
    accomplish this for myself. It is complicated. Even when
    everyone under the sun knows what the United States congressman
    earns, I still have to go through this exercise every year,
    lest I do something wrong and be called to account for it.
        But you could fill out a simple postcard. You could fill
    out a simple return, and then everyone of the same income level
    would pay the same amount. It would have no bearing on the
    cleverness or astuteness of your accountant. It is just a fact
    of life.
        And this was well illustrated by Ben Carson during one of
    the prayer breakfasts a few years ago. He related it to
    biblical tithing. My rate is a little higher than the biblical
    tithing rate, but he said, ``If 10 percent is good enough for
    God, it ought to be good enough for the IRS.'' You know, again,
    my rate is a little higher.
        The other thing that is different in the bill that I have
    introduced, H.R. 1040, different from what Congressman Armey
    had introduced previously, is that it is voluntary. If you like
    your tax, you can keep your tax. Can we just go ahead and say
    that, and make it as plain as day, that if you like your life
    under the Code, you don't have to change a thing, you can stay
    there.
        But if you have reached the point where your frustration
    level is high enough, and the difficulty with keeping up with
    all of the pieces of paper is high enough, you could opt in to
    a flat tax. You can only make the election one time, there
    would be a 19 percent rate for 3 years, followed by 17 percent
    for every year subsequent to that.
        My belief is that you would not run two systems
    simultaneously for long because giving people back the gift of
    time and simplicity in their lives, and allowing them--letting
    them make the choice. Rather than us making the choice that you
    are going to go into a flat tax, you are going to go into a
    consumption tax, rather than us making the choice, let people
    decide for themselves when the time in their life is right for
    them to elect into a flat tax.
        I stand by to answer your questions. I thank you for the
    opportunity.
        [The submission of The Honorable Michael Burgess follows:]

       [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

      Chairman BOUSTANY. Thank you, Dr. Burgess.
        Mr. Woodall, you may proceed.

          STATEMENT OF HON. ROBERT WOODALL, A REPRESENTATIVE
                 IN CONGRESS FROM THE STATE OF GEORGIA

        Mr. WOODALL. Thank you, Mr. Chairman. I appreciate you and
    the Ranking Member holding this hearing. I--reading the Wall
    Street Journal today, big data firms strike tax inversion deal.
    Why? Because our friends in the UK offer a 25 percent rate and
    we have a 35 percent rate. I agree with what Mr. Nunes has said
    about trying to lower that corporate rate, eliminating the
    deductions and exemptions. I agree with what the good doctor
    from Texas said about having all American families pay the same
    rate, ending the disparity.
        But rather than dealing with it from an income perspective,
    I deal with it from a consumption perspective. And, like the
    good doctor from Texas, this is not a new idea. H.R. 25, the
    Fair Tax, while it is the most widely cosponsored fundamental
    tax reform proposal in the House, while its roots are in
    bipartisanship--we first had one Republican and one Democrat,
    we then had two Republicans and two Democrats, then four
    Republicans and four Democrats, then two of those Democrats
    retired and one of those Democrats became Republican, and our
    bipartisanship was lost. But we started down that road.
        And this goes back, not just through Congressman John
    Linder, not just through Congressman Schaffer from Colorado,
    not just from Senator Dick Lugar, who pushed the sales tax
    back--it goes all the way back to Governor Jerry Brown, who I
    believe ran for President on this same kind of platform, this
    idea that we should be encouraging savings, we should be
    encouraging productivity, we should be dealing with
    consumption.
        I do share the Ranking Member's frustration that we are
    talking about it again, rather than doing something about it.
    Though, Mr. Chairman, it has been 15 years, by my count, since
    this Committee last held a Members panel to talk about the big
    fundamental proposals. And I am grateful to you for putting
    this on the calendar. It hasn't happened in years past.
        I have the front page from a Joint Committee on Taxation
    tax modeling project from 1997. This was when Bill Archer was
    running the Committee. And absolutely every group they brought
    in from the left to the right, modeling a consumption tax
    relative to our current system, said we could grow the American
    economy faster with a consumption tax. I could support any
    consumption tax we are talking about here. I think mine is
    best. I just need us to start moving. Mine is the furthest down
    the road. I want us on this road getting started.
        Fair Tax does a couple of things no other proposal does. It
    takes the corporate tax rate to zero. This fiction that
    businesses pay taxes has to be stopped. Businesses don't pay
    taxes. They collect them from their employees in lower wages,
    they collect them from their consumers in higher prices, or
    they collect them from their holders of capital in lower rates
    of return. Businesses do not pay taxes, they collect taxes from
    other entities and pass them along. I think we should be honest
    about that.
        My proposal deals with the payroll tax. Eighty percent of
    American families pay more in payroll taxes than they pay in
    income taxes, and yet we seem obsessed with the income Tax
    Code. If you really want to help working families move up that
    ladder, you have to deal with the payroll Tax Code. The Fair
    Tax does that.
        And the Fair Tax recognizes that compliance is not just an
    expense, not just a disincentive, but a solvable problem. You
    may not know, but the economic census that the Census Bureau
    conducts tells us that 908 businesses in this country sell 60
    percent of all the product. The bottom--or the top 10 percent,
    8.8 percent of businesses in this country, sell 87 percent of
    all of the product.
        What I am proposing is moving the Tax Code away from 200
    million individual American citizens and families, having them
    pay the tax when they purchase goods at the retail level, but
    have the tax collection and payment, the auditing process,
    focused on those folks who are doing the selling. Take
    businesses out of the role of paying taxes, but leave them in
    the role of collecting taxes. Take citizens out of the role of
    having to report taxes, leave them in the role of paying taxes.
        It frustrates me that I look at former Soviet bloc
    countries and they are all moving to low-rate, simple,
    consumption-based taxes. If it is good enough for the Soviet
    Union former republics to grow their economies, it has to be
    good enough to grow ours.
        I know if you sit on this Committee it is easy to see how
    picking winners and losers through the Tax Code can help
    Americans to succeed more. I don't want to do that. And I
    understand the kind of authority that takes away from this
    Committee and it takes away from this institution.
        But what I propose is a Tax Code with no exemptions, no
    exceptions, no deductions, just a simple rebate for folks up to
    poverty-level spending to insulate the poor from being
    punished, and a free-for-all above that level. If you drive
    that Mercedes, you pay for it. If you drive that used Ford
    Fiesta, we believe you deserve a break.
        And with that, Mr. Chairman, thank you so much for having
    me here today.
        [The submission of The Honorable Robert Woodall follows:]

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

     Chairman BOUSTANY. Well, thank you. All of you have given
    really excellent testimony and--about these ideas. And so we
    will now move to some questions.
        I--we all hear about the complexity in the Tax Code, the
    unfairness of it, when we go back to our districts. And our
    current income tax system certainly has very complex cost
    recovery rules that allow business investments to be recovered
    over time. In some cases over a period of many years. And the
    three bills today all have rules for business investments that
    are very different from the current Code.
        I would like each of you to describe--how does your bill
    change the impact of tax on investment decisions by business?
    Just briefly kind of cover that for the record.
        Mr. NUNES. Well, I think, clearly, a lot of--all three of
    these bills do something similar, because it moves to a
    consumption-based system. If you look at what--the way that we
    attacked this in the ABC Act is we take all business activity
    and you essentially are taxed on your net cash-flow. So you
    take your income, minus your expenses in that calendar year, so
    at the end of the year whatever is left over you will pay tax
    on.
        And what this does is encourages investment. So, unlike
    today, when you have--everybody has a special credit, or some
    deduction, or something that they want, where they are gaming
    out, like a lot of my constituents do and like I used to have
    to do before I was elected to Congress, you have to--by the end
    of the year you have to say, ``Okay, what can I buy that the
    Tax Code allows me to buy?'' And I am not sure that that is
    really--it wasn't an efficient use of my time, it wasn't an
    efficient use of capital, and it sure didn't help create jobs.
        And so, I think that that is how my bill achieves this, and
    I think the other bills are very similar, but tweaked just
    slightly different.
        Chairman BOUSTANY. Dr. Burgess.
        Mr. BURGESS. I spent most of my time talking about the
    individual income tax. There would also be a similar flat tax
    option for businesses, as well.
        Essentially, the bill, as written, would eliminate the
    capital gains tax. As far as the tax imposed on business
    activities, the deductions that would be allowed would be the
    cost of business inputs for the business activity, wages, and
    retirement contributions. So I--my assumption is that, since
    retirement contributions are removed from--are an allowable
    deduction, that those would not be adversely affected by the
    implementation or the election to a flat tax.
        Chairman BOUSTANY. And Mr. Woodall.
        Mr. WOODALL. Mr. Chairman, by eliminating business taxes
    all together, you no longer have the Tax Code involved in those
    decisions.
        I confess I am confused why, as Americans, we are trying to
    get ourselves in the middle of the pack, in terms of corporate
    tax rates. We are leaders in America. I want to be the leader
    of the pack in that space, wherever that turns out to be.
    Again, if we want to tax employees, tax employees. If you want
    to tax consumers, tax consumers. If you want to tax return to
    capital, tax return to capital.
        But, more importantly, the Fair Tax--again, the only
    proposal in Congress to eliminate the payroll tax, and that is
    going to impact the decision to invest in people. And if there
    is one thing we need this Tax Code to encourage, it is buy all
    the robotics you want to, but I need you to invest in people
    and workers, and the Fair Tax does that.
        Chairman BOUSTANY. Thank you. And I guess a followup
    question is, you know, many businesses use debt now to fund
    investment and growth. We have heard a lot of testimony from
    experts about the problems associated with debt financing and
    the risk associated with all that.
        But maybe comment, each of you, about what the impact would
    be on business with regard to debt financing, and how business
    is actually funded and how investments are carried out. Mr.
    Woodall, do you want to start?
        Mr. WOODALL. Because there would be no deductions, because
    there would be no tax at all, there would be no benefit to debt
    financing, and--under the Fair Tax there would be no deduction
    for those interest payments. So whether you wanted to finance
    through debt or whether you wanted to finance through equity,
    the Fair Tax would treat you the same.
        Chairman BOUSTANY. Dr. Burgess.
        Mr. BURGESS. Under the business tax section, the carryover
    of--credit equivalent of excess deductions, if in any year your
    deductions would exceed the amount of money posted in the--as a
    profit, that can carry over to subsequent years. So there would
    not be a penalty for not having--you would not lose the ability
    to have credit for those carryover expenses.
        Chairman BOUSTANY. Mr. Nunes.
        Mr. NUNES. So the way that it works is that, you know, in
    order to have a real consumption tax to function properly, you
    can't allow for interest expense. I think that is the primary--
    I think that gets to the heart of what your question is.
        And that is just--you know, so what does it do in the big
    picture? We really don't know, because nothing like this has
    ever been tried. I think when you start to game this out, and
    you look at what--business models that people have, those
    business models will all have to change, because people will be
    spending their time--similar to my example earlier--focusing on
    what they need to invest in, not how they have to structure
    their company and how much debt load they have to incur.
        So it would open up all sorts of new investment
    opportunities for the companies that are--a lot of the
    companies, the big equity companies in Boston, they would end
    up changing. I think it would benefit a lot of new investment-
    type equity firms that would have to develop. The banks would
    develop new products because capital would be more readily
    available under a plan like this.
        Chairman BOUSTANY. And one final, last question. Two of the
    proposals have been around for a while in some form. Mr. Nunes,
    yours is a new proposal. We have had a lot of discussion within
    the Committee about, should we proceed along the lines of the
    1986 reform approach, you know, using the income tax as the
    base, or do we move to something different.
        And I think, Mr. Woodall, you mentioned earlier the need to
    be competitive, to leapfrog ahead of our competitors. Do you
    think the timing--talk to me a little bit about the timing of
    these new proposals with regard to tax reform. Is the timing
    right? Should we really move forward in this direction, or
    should we, you know, perhaps consider the 1986 reform model as
    the way to go?
        Mr. WOODALL. Mr. Chairman, what I liked about the 1986
    reform model was the collaborative way in which it took place.
    I don't know of any other way to do the big things that we have
    to do in this country.
        But inversions are one of those things that bring us
    together. Why is it that folks want to leave? This is the best
    place in the world to do business. Why are we running folks
    off? I think it is the right time for that.
        And more than that, from a consumption tax perspective, we
    have a billion new middle-class consumers coming online in
    India, a billion new middle-class consumers coming online in
    China. If there is ever going to be a time to talk about
    bringing manufacturing back to America, getting back to our
    exporting roots, that time is now.
        Chairman BOUSTANY. Thanks. Dr. Burgess.
        Mr. BURGESS. You know, I wasn't here in 1986, but I was
    running a medical practice in 1986. It was a hard year in
    Texas. Energy prices collapsed, we had the collapse of savings
    and loans. Real estate prices went downhill, and that was
    exacerbated by the fact that things that used to be called tax
    shelters, bad business ideas that people would invest in--so
    that they could shelter dollars from income taxes at a much
    higher rate, those tax shelters went away, literally, overnight
    with the imposition of the 1986 Tax Code.
        Good thing or bad thing I am not here to decide. But what I
    do remember is there was a significant amount of disruption in
    the lives of people. That is why the concept that I am putting
    forward is a voluntary election that someone will decide that,
    hey, I want to change my Tax Code, rather than us decide up
    here in Washington. The time might not be propitious for
    someone back home to make a major change. They may have done
    significant investment.
        Scott Burns, who writes a financial column for the Dallas
    Morning News in my paper back home, always references the home
    mortgage deduction. The home mortgage deduction in San Antonio,
    Texas, when you really put pencil to paper in the average sales
    price of a home in San Antonio, you are really just pushing
    around a few dollars on a page. But if you bought a starter
    castle in Santa Barbara, and we suddenly alter the
    deductibility of your home mortgage, that is a big deal.
        So what I like about the ability for the constituent to
    decide is they decide when the time is right for them. As I
    said, if you like your tax you can keep your tax. If you want
    your life out of the Code, that is your decision. Now, of
    course, you can't go in and out as whatever would be favorable
    for you.
        But look, I remember the 2012 election. There was a lot of
    heartburn over the fact that Mitt Romney only paid an effective
    tax rate of 13 or 14 percent. We are going to put him in 19
    percent for 3 years, and then 17 percent thereafter. He is
    going to be paying more tax. Fundamentally, that is a fairer
    thing.
        Chairman BOUSTANY. Thanks. Mr. Nunes.
        Mr. NUNES. I really believe part of what led me to where
    this--where I am today with this legislation was when you try
    to do across-the-board reform it is very, very difficult,
    because everybody has their favorite credit. You have--the
    entire economy has been built upon the Code.
        And so, by taking the business activity and separating that
    out, anyone who is involved, or most people who are involved in
    business activity in the United States of America have
    accountants, lawyers, somebody--you know, even in my family
    small business we had--you know, had to have an accountant to
    do our--pay our taxes and file our tax returns.
        So I think it is achievable because it doesn't disrupt the
    wage side of the equation. To be honest with you, in a perfect
    world, I would prefer to have something more full-scale, like
    what Dr. Burgess is talking about or what Mr. Woodall is
    talking about. But part of what went into this calculation is
    what is actually achievable under the circumstances that we
    face today.
        And, look, anything we do is going to take Republicans and
    Democrats. I think that what I said in my testimony is
    Republicans and Democrats both agree on a few things: One, that
    we need to switch to a consumption-based system; and, two, that
    we need to fix--move to some type of territorial system. Those
    have to be done. Those are two things that we agree on. Why
    don't we do them, but let's do them in a way--one step at a
    time?
        Chairman BOUSTANY. Thank you. I now yield to the Ranking
    Member, Mr. Neal.
        Mr. NEAL. Thank you, Mr. Chairman. I appreciate the
    historic references, obviously, because I knew those
    individuals, I came here 2 years after that historic act. And
    those individuals, including Bradley and Gephardt,
    Rostenkowski, Packwood, Reagan, and O'Neill, they all saw that
    as one of their finest moments, because they were overcome--
    they were able to overcome the short-term objections.
        And not to miss the point that there were winners and
    losers that were created by what they did in 1986, but this is
    a much different atmosphere in which we all served--I mean we
    serve now. I mean that was a calm, rational, fact-based
    discussion of virtually every item.
        And a reminder, there was more opposition on the Republican
    side to what Dave Camp did than there was on the Democratic
    side. I think that is a fair statement. I advise colleagues on
    this Committee specifically to be very careful how they handle
    some of the Camp proposals because, in fact, they were long
    overdue and they were very, very genuine.
        But Devin, to your point--and correct me if I am wrong--you
    mentioned a 5 percent repatriation rate. And how did you arrive
    at that number?
        Mr. NUNES. Largely because it was--I kind of looked at all
    the different pieces of legislation that were out there that
    were dealing with the funds that are sitting overseas now, and
    that was kind of right in the middle. So I thought it was kind
    of a compromise of what Republicans, Democrats all over the
    spectrum wanted to do.
        And so, remember, when you--it is only necessary one time.
    If you switch to a system like the ABC Act, then you move to a
    territorial system, and then people can bring back money how
    they wish. But I just put, for repatriating the dollars that
    are sitting overseas now, a one-time fee of 5 percent. That is
    how I arrived at it.
        Mr. NEAL. Just again with institutional memory here, when
    we did this, when Chairman Thomas was the author of the major
    piece of legislation on that, we brought it back at--it was
    brought back over our objections at five-and-a-quarter. And the
    premise of the return was job creation.
        In this town, broadly, think tanks would all come to the
    same conclusion: There was no job creation. The money was
    passed on to shareholders. Now, if that had been the premise
    that was offered, then we could have had an honest debate about
    that. But the argument instead was, this is going to spur a lot
    of new investment. And that really didn't happen. I think that
    is a fair statement.
        So there is some suspicion as to the rate, and the
    Administration has proposed a 19 percent minimum tax, which I
    assume is negotiable. So we should perhaps begin to have a
    conversation along those lines, because we all agree that you
    can't have trillions of dollars sitting offshore for non-
    productive purposes when it could be better invested back here.
        And to Mr. Woodall, to your comment about the proposal that
    you have offered, the Bush treasury examined that proposal, and
    they came to the conclusion that it wouldn't work. That is W's
    Administration. His Treasury Department examined it from A to Z
    and they came to the conclusion that you run the risk of
    creating a whole new entitlement program in America.
        Mr. WOODALL. I certainly would not point to the Bush
    Administration as the place to go for good fundamental tax
    reform. He had a chance to reform the Code and he chose Social
    Security over tax reform.
        They also said that our proposal did the most for low-
    income American families to lift them from that one rung on the
    ladder up to the next. I think that is important. And thinking
    about the good old days, I would remind the Ranking Member that
    in those Rostenkowski days of calmness and reasonableness, the
    Catastrophic Care Act had his car being rocked left and right.
    Those days were raucous days, too. I still think we have an
    environment in which we can do this together.
        Mr. NEAL. Right, but it--I remember the description of what
    happened on that day. And remember, I was one of the ones that
    voted to repeal that Act. So there was--again, we weren't
    locked into the silos of partisanship. And I can tell you it
    certainly increased my name recognition with Chairman
    Rostenkowski that I voted to repeal that.
        [Laughter.]
        I thank the gentleman.
        Chairman BOUSTANY. I thank the gentleman.
        Mr. Tiberi.
        Mr. TIBERI. Thank you, Mr. Chairman. Thanks for holding
    this hearing.
        You know, Mr. Neal, before I leave here, it is probably
    going to be called the Camp-Levin-Obama tax draft.
        [Laughter.]
        I just--I don't seem to remember Democrats rushing to be
    supportive of it, in fairness.
        Mr. NEAL. Would the gentleman yield?
        Mr. TIBERI. I would love to yield to you, Mr. Neal.
        [Laughter.]
        Mr. NEAL. Mr. Larson is a witness to what I suggested in
    our caucus about how to respond to the Camp tax proposal. There
    were things in there that a Democrat would not have done. That
    was really--there were a lot of bipartisan things that Dave
    Camp did.
        Mr. TIBERI. Sure.
        Mr. NEAL. And I remember the fury when that proposal was
    released.
        And just another example to the newer Members, 52 Members
    of your caucus signed a letter to him.
        Mr. TIBERI. Sure.
        Mr. NEAL. That never would have happened in those days that
    Mr. Woodall described. There really would have been a let's
    digest it and talk about this calmly, quietly, and have a
    discussion.
        Mr. TIBERI. So, Mr. Nunes, as you know, I am a cosponsor of
    your legislation. I appreciate your hard work. And, you know,
    whether it is your proposal or Mr. Burgess' proposal or Mr.
    Woodall's proposal--and, by the way, you might want to take
    this on the road. When I originally ran for Congress, Mr. Armey
    did a road show that was quite entertaining. You guys are just
    about there.
        So, as a former small--the smallest of business owners, I
    was a one-person business, as a realtor, I am always concerned
    about, in terms of reform, what a reform proposal will do, how
    it will impact someone like I was, as a realtor.
        And so, Mr. Nunes, I will ask you first. As someone who
    paid his business income through his personal return, how would
    the ABC Act--first question--impact the small business owners?
        And a concern that I have heard--and if you could, clear up
    for me with respect to the ABC Act--how last-in, first-out
    accounting is impacted, how LIFO inventory under LIFO would be
    treated under the ABC Act.
        Mr. NUNES. Well, with LIFO we do away with it, because it
    is no longer necessary. A lot of the reason that we have LIFO
    now--and it is part of the example that I was giving earlier--
    at the end of the year, businesses have to start to dodge and
    weave their way over what inventory they are going to carry. It
    is a complete, you know, waste of people's time, and it is an
    inefficient use of one's resources.
        So, the way it works now--under the ABC Act--is business
    buys what they need to buy, and they put it in their inventory.
    And so, you know, effectively, you can--as long as you are
    growing and investing, you can actually drive your effective
    tax rate pretty low. But if you don't want to grow, you don't
    want to invest, then you are going to pay the 25 percent rate.
        As it affects a small businessman, I mean, from my
    perspective, I wrote it with that in mind. Because as someone
    who was dealing with the horrible Tax Code--especially in
    agriculture--that I worked in, it was very confusing, very
    complex, remains complex today. We have had to deal with some
    of those issues in last year's tax bill.
        So, I think this is just very simple, because--as in your
    case, you would just take all your business income that you
    have, you minus off your expenses, what you use on your wage
    side. You would pay--you would be under the old system,
    effectively.
        Now, look, it goes back to what I said earlier. I don't
    believe on the wage side we need to keep the system the way it
    is. I think it needs to be simplified. But, you know, that has
    to be figured out, how you get to that point. I think the Camp
    draft actually had a lot of good proposals in terms of what you
    could do on the wage side.
        Mr. TIBERI. Mr. Burgess, Mr. Woodall, do you have any
    comments?
        Mr. BURGESS. One of the things that struck me when I was in
    a small business like you, I was given advice that, in order to
    keep the dire wolf from the door, I ought to keep 3 months of
    operating capital in a readily-accessible liquid CD at the
    time. The problem with doing that is you go to the end of a
    calendar year, and the next year, if you bring that money out,
    it is brought out at your individual tax rate.
        So I, in fact, did that and got significantly criticized by
    my partners because then the money was paid out to partners in
    the corporation. They, in turn, paid at the highest rate. So we
    were taxed twice on that same money, but it seemed like a
    prudent business decision. And I guess part of my idea with the
    business side of this is we don't punish people for making
    prudent business decisions. I think it is a good idea to store
    up some surplus in good times to guard against the bad times.
        Mr. WOODALL. And, Mr. Tiberi, in our proposal the small
    business owner would still have to deal with the tax man by
    collecting taxes from whatever it was they were selling. But
    they wouldn't have to interpret the Tax Code, because it would
    just be those collections that would happen on each purchase
    that went out the door, everything being taxed once but only
    once.
        Chairman BOUSTANY. Mr. Larson.
        Mr. LARSON. Thank you, Mr. Chairman. This has been an
    enlightening day. We had a great hearing earlier this morning
    on fixing Social Security, or a portion thereof. And I
    especially appreciate it when Members get an opportunity to
    come before a committee. And it doesn't happen often enough.
    And the Congress, at the end of the day, should be about the
    vitality of ideas, and how we interact with those ideas, and
    how we interact with one another and hopefully achieve those
    bipartisan or non-partisan ends that we all would like to see.
    And I think everyone acknowledges in order to move the Nation,
    or to move a bill forward, that is exactly what we need.
        A lot of these--you know, a lot of the proposals here have
    been around for some time. That doesn't mean that they still
    don't have salience. Also, I think not to discuss these
    things--and, frankly, other forms of taxation--where there is
    broad agreement that we need reform, where there is broad
    agreement that we have to be more competitive, especially in
    manufacturing States like the State of Connecticut, there does
    seem to be an awful lot of reasonable ground.
        One of the questions I have that came up in your
    testimony--and feel free any one of you or all three of you to
    answer--is in dealing with the various consumption and Fair Tax
    proposals, how do you treat the payroll tax vis a vis FICA, or
    the Social Security program that we talked about this morning?
        Mr. BURGESS. Under H.R. 1040 it would not change.
        Mr. LARSON. Okay.
        Mr. NUNES. Same for my proposal.
        Mr. WOODALL. We would abolish the FICA tax as it exists,
    and build it into the purchase price of every item that you
    buy. Included in our rate is a statutory payment to the Social
    Security and Medicare trust funds, up to the amount of payroll.
        Mr. LARSON. How would that work, exactly?
        Mr. WOODALL. We anticipate this Committee solving our
    Social Security issues for generations to come. But in the
    interim we would say employers would still need to report their
    payroll so that we could properly credit that amount of FICA
    tax. But it would come from the sales, not from----
        Mr. LARSON. One of the things that I hope the Committee--
    and we addressed this earlier today--that I hope that we focus
    on is looking at the Social Security issue as one--as you all
    know, Social Security, by law, has to sustain solvency for 75
    years. Now we are not remotely close to that. And I think
    sustainability and solvency are the key words here to restore
    trust in the American people so that any underlying tax
    proposal--that if you have the trust of the American people
    going forward, you have the ability to sale--to sell your
    program.
        Further, I really believe--and again, tailing on the--or
    building upon the discussion we had earlier today, I really
    think that if we treat Social Security like a premium, which it
    is--it is called the Federal Insurance Contribution Act--and
    the contribution is yours, a.k.a. the citizen and the business
    who pays, that we bipartisanly can come to a very simplistic
    resolution.
        The thing I admire about your proposals is the simplicity.
    There is doubts about the efficiency, but we ought to be open
    to hear those. And, of course, we are very concerned about
    regressivity on our side of the aisle, and what that would mean
    to people, and whether or not you get there by dynamic scoring,
    and what that truly means.
        But certainly, all of these proposals, and certainly
    proposals that come from Members, are something that we ought
    to be discussing in this Committee. I commend Chairman Brady
    for doing that, Chairman Boustany for bringing it up. The more
    we engage like that--and I think the beauty of what Dave Camp
    did is he said, ``Look, let's get out of the spotlight. Let's
    make it Members-to-Members.'' You are the best representatives
    of your constituents. You are out there talking with them all
    the time. It would be nice if we had more of these
    conversations.
        I appreciate all the experts that we bring before the
    Committee, but you are the expert in your district, and we
    ought to hear more from you. Thank you for being here today.
        Chairman BOUSTANY. I thank the gentleman.
        Mr. Renacci.
        Mr. RENACCI. Thank you, Mr. Chairman. I really appreciate
    your doing this. I hope we can do additional panels like this.
    It is good to hear different proposals. I really appreciate all
    of you and your ideas.
        I am going to ask you some questions based on a CPA that
    has been in business, and not only practices as a CPA, but also
    is in business. And I think every one of your programs has some
    good points. I am going to touch on the negative side. And
    hopefully you can give me some answers on that, and just tell
    me what your thoughts are.
        First off, Mr. Nunes, I will start with you. I go back to
    my--how I started out in business. I had very little. I was
    able to go to a bank, borrow some money, get started in a
    nursing home business. There was a competitor down the road who
    had a lot more money, so he was able to acquire the asset, he
    was able to buy the building. I couldn't. I had to just buy the
    operation and lease it.
        So, he, on the other hand, under your proposal, would have
    a--if you are picking winners and losers, he would be a winner.
    He would have a deduction that I wouldn't have. He would be
    able to expense that facility, and I would be sitting over here
    having to pay a 25 percent tax on my earnings, based on your
    proposal.
        So the concern I have in that case is the picking of
    winners and losers: The guy who can afford to capitalize his
    business and the guy who can't. The small guy like myself, now,
    I was successful enough over 25 years to be able to build the
    business and acquire those assets down the road. But that is
    because we were in the system we are in today. So that is one
    question: How do you--help me on that one.
        And the other question--which is so concerning for me--is
    without that interest deduction I would definitely not be able
    to compete with them, because that is the only deduction I had,
    where he would be able to capitalize or write off his building.
        Mr. NUNES. So, thank you, Mr. Renacci. We have had
    discussions about this in the past. And I think you are very
    thoughtful and clearly have experience at dealing with this.
        I think one of the challenges that a lot of people have
    when they first look at this tax bill, the ABC bill
    specifically, is they look at it through the lenses of an
    income tax. And that is one of the challenges that I have when
    I am dealing with the business people is because they are
    looking at it like income tax. It is going to be income tax,
    just like income tax has always been, not realizing that this
    does away with the income tax for all business activity in the
    United States, and it becomes a consumption tax.
        So, I would argue that whatever that business model was--
    because I am not, you know, familiar with how you started out--
    that would not be the business model if this system was put
    into place.
        So, for example, you know, how would you do it? Well, I
    think there would be some--as I talked about earlier, about
    different equity opportunities that would come up, there would
    be so many more equity opportunities, because you would have so
    many more Americans that perhaps don't have a lot of capital,
    but what little capital they do have they would take risks with
    people like yourself. Today, those people don't invest. They
    really have no other options but to maybe invest in the stock
    market. They have no opportunity to get--invest in small
    business.
        And so, I think those types of investors would be open
    especially to a small business person like yourself. And so,
    when you come to the end of the year, what you would do, if you
    are continuing to grow as a small businessman, the end of the
    year you have--whatever money you have left over, you might
    want to go out that December and you might want to go out and
    make investments so that you don't get taxed at that 25 percent
    rate that year.
        Mr. RENACCI. The only other response I would have is that--
    I think I told you this on the floor--I am not too sure I would
    want to have 10 or 12 partners. I kind of like the idea, as you
    are growing a business, just to have the bank as a partner.
    Then you just have to answer to one. I wouldn't want 10 or 12
    people trying to tell me how to operate, which is the negative
    side of having equity investors.
        But I do appreciate that. I am supportive of a consumption.
    I just don't know how two business models exactly the same--one
    has more capital, can buy the building, one who can't, one of
    them is going to be a winner, one of them is going to be a
    loser.
        Mr. Woodall, I do 100 percent believe with you--believe
    what you said. Businesses do not pay taxes. And once we get to
    that point, if everybody can agree to that--because they pass
    it on--we can reduce the rate.
        Explain to me under your plan, which is the down side of
    the Fair Tax, that somebody who has lived their whole life,
    saved up money, paid taxes at 36 percent, 38 percent, whatever,
    now is sitting with a savings account, they are elderly, and
    all their spending, they are going to have a double taxation.
    They have already paid tax once, they are going to pay tax
    again. Explain how that is good for that individual.
        Mr. WOODALL. It is a rotten deal, generationally. Just the
    bottom line. We can either decide that because we are stuck in
    a bad deal today our kids are going to have to be stuck in that
    bad deal, too, or we can decide we are going to get the bad
    deal but our kids are going to do better.
        But many seniors living at the low end of the income
    spectrum--our prebate allows folks up to the poverty level to
    live tax free. We insulate Social Security payments against any
    one-time inflationary jump that may happen because of the
    imposition of a double-digit sales tax in the economy. Any sort
    of inflationary jump would be captured in outgoing Social
    Security payments.
        And finally, my hope is we would put the economy on fire.
    And folks, instead of getting a quarter percent on their CD or
    2 percent on their bond, are going to get back into the 6, 7, 8
    percent yields that they deserve.
        Mr. RENACCI. Mr. Burgess, I know I am pretty much out of
    time, but the one question I would have for you is you said
    that you can opt into your system. So if I am not paying taxes
    today, I am going to stay in the current system. But if I am
    paying 38 percent I am going to opt into your system. That is
    going to bring the treasury--the dollars coming into the
    treasury significantly down, because you are going to--
    everybody is going to pick the lower side, and you are going to
    have a rate of at least 19 percent or less, because the people
    who are already paying less than 19 percent aren't going to opt
    in. So how would you fix that disparity?
        Mr. BURGESS. Well, and with all due deference to your
    profession, the answer lies in the simplicity. Look, I have to
    visit my accountant every year and make sure I have spent down
    the equity of my corporation to where I am not going to be
    taxed. If you elect--and this would be a voluntary election, no
    one is going to force you into it, but if you elect into the
    flat tax, then that is going to be the rate from that day
    forward.
        On your question about the difference in treatment for
    someone who has bought the building and someone who I presume
    then is renting the building, that is treated equally under the
    section on inputs, business inputs in the flat tax, whether it
    is the cost of a building purchased, or the cost of rental. It
    is treated identically for the person who is invested in the
    building. That would be phased in over time, over the--the
    credit allowance would be phased in over time.
        Mr. RENACCI. Thank you, gentlemen. I appreciate your input.
    I yield back.
        Chairman BOUSTANY. I thank the gentleman.
        Mr. Holding.
        Mr. HOLDING. Thank you.
        Mr. Nunes, I believe in response to Mr. Tiberi's question
    you addressed the impact of your proposal, which I am a very
    proud cosponsor of, the impact of your proposal on pass-
    throughs. You know, pass-through businesses employ about 50
    percent of the private-sector workforce and earn more than 64
    percent of all business income. And I believe your answer to
    him covers my concerns there.
        But you know, there is another type of business--I mean
    they may be pass-throughs or C corps, and these are innovative
    pre-revenue start-up companies, you know, small businesses
    throughout the country, particularly in my part of North
    Carolina and pharmaceutical areas and technology sectors, as
    well as in my little area of North Carolina. And a lot of these
    companies faced losses for years before finally making a
    profit.
        In fact, some of these aren't such small companies. I was
    reading an article that Twitter has been around for 10 years,
    and I don't think it has ever made a profit. So how would these
    companies be taxed in fair--under your proposal?
        Mr. NUNES. Well, the--sometimes, to develop new technology,
    it takes investment like that. And I actually feel that--and
    this gets to Mr. Renacci's question also--that the current Tax
    Code is inhibiting innovation. Lack of capital is inhibiting
    innovation. And so, this proposal is perfect for those types of
    businesses that have to make huge investments year after year
    after year to develop technology in order to achieve the
    technology in order to then get to profitability.
        And so, what we really want--I mean through all these
    consumption taxes we talk about businesses not paying taxes.
    Essentially, that is what the consumption tax allows, as long
    as you are consuming. And that is what we are trying to get to,
    and that is what this proposal does.
        Mr. HOLDING. And your proposal, Mr. Nunes, as well as Dr.
    Burgess' and Mr. Woodall's, you know, truly would upend the
    system. And new business models would have to arise, you know,
    from these tax proposals, which gets me to the thought of
    transition.
        You know, we have companies that, you know, have hundreds
    of millions, if not billions of dollars of tax credits stored
    up, you know, deferrals, so forth. And that is baked into their
    business models for years to come. So I will just go down the
    line, ask each one of you your thoughts on transition, kind of
    big-picture thoughts on transitioning, you know, to this new
    form of taxation. So I will start with you----
        Mr. NUNES. Well, thank you, Mr. Holding. And we spent a lot
    of time with this proposal, thinking about just that. We have--
    because we are only dealing with business activity, and
    everybody that pretty much is in business, as I said earlier,
    has accountants and lawyers or advisors, you will be able to--
    there will--the transition--the needed transition will be
    known, for sure, by this Committee and these Members if you
    move a proposal like this, because everybody that would need
    transition would be in here.
        We have identified a lot of that. I am not sure how much is
    actually needed or not needed. You know, when you truly put the
    option to accompany--okay, you are saying you need some
    transition, but if your option is no transition but you get
    this new Code, would you take no transition? And I think
    oftentimes the answer is yes.
        But, for example, we do allow for loss carry-forward to be
    sort of businesses who have incurred losses or businesses who
    have made big investments to still be able to write those
    expenses off.
        Mr. HOLDING. Dr. Burgess.
        Mr. BURGESS. And under the--this section deals with the
    carryover of credit equivalent or excess deductions. And Mr.
    Renacci pointed out if a company is not paying taxes now, under
    a voluntary election to a flat tax, could continue under the
    model that they are in, where they are not paying any taxes.
    And that might be a satisfactory arrangement.
        But if they elected to go into a flat tax system and their
    deductions were in excess of their earnings, obviously there
    would be no tax liability at the end of the year. And that is
    based on an accrual method over time, that those deductions can
    accumulate and carry over from year to year, so the cost of
    capital for starting a business would be expensed over time.
        Mr. HOLDING. Mr. Woodall.
        Mr. WOODALL. Mr. Holding, when folks play by the rules,
    they ought to get--their expectations ought to be met. The 1986
    transition crushed folks, crushed commercial real estate,
    crushed folks in passive loss circumstances. Even as recently
    as the President's healthcare bill--I met with a couple who was
    in the tanning business, and that 10 percent gross receipts tax
    on tanning salons--they had been working their entire life
    playing by the rules, and now their asset was virtually
    worthless, because they weren't making that kind of margin.
    There is no satisfactory explanation for the folks who are
    going to lose because they have been playing by a convoluted
    set of rules for the last decade.
        But as Milton Friedman said when he testified before George
    Bush's tax panel, it may just be time to wipe the slate clean.
    We have one transition rule in the Fair Tax, and that is on
    inventory. If you bought inventory and the taxes were all baked
    in throughout the system, you shouldn't have to double tax that
    as you are trying to move that inventory out of the system.
        But I hope we will not let the unmet expectations of folks
    who have been playing by the rules prevent us from wiping the
    slate clean. And perhaps, if we do wipe the slate clean, we
    will never have to have the conversation about folks who
    counted on Congress maintaining the Tax Code in a constant
    state, only to be let down.
        Mr. HOLDING. Thank you. Thank you, Mr. Chairman.
        Chairman BOUSTANY. I thank the gentleman. We want to thank
    you guys for bringing these really important proposals forward.
    It is really a valuable addition to our--what we are looking at
    as we really are all committed to fundamental tax reform.
        So, also be aware that over the next 2 weeks there may be
    some additional questions we will submit to you in writing, and
    we ask you to follow up and answer those.
        And, with that, the Subcommittee stands adjourned.
        [Whereupon, at 4:41 p.m., the Subcommittee was adjourned.]
        [Submissions for the Record follow:]

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