[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 

22-335                         WASHINGTON : 2017 
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                          Washington, DC 20402-0001
    












                      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 [email protected] .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:]
    
    
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 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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