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










                PERSPECTIVES ON THE NEED FOR TAX REFORM

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

                                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

                               __________

                              MAY 25, 2016

                               __________

                          Serial No. 114-TP08

                               __________

         Printed for the use of the Committee on Ways and Means




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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 May 25, 2016 announcing the hearing..................     2

                               WITNESSES

Dr. J.D. Foster, Vice President, Economic Policy Division, and 
  Deputy Chief Economist, U.S. Chamber of Commerce...............    15
Dr. Scott Hodge, President, Tax Foundation.......................    23
Dr. Douglas Holtz-Eakin, President, American Action Forum........     5
Dr. Martin Sullivan, Chief Economist, Tax Analysts...............    35

                       SUBMISSIONS FOR THE RECORD

AdvaMed..........................................................    66
American Innovation at a Crossroads..............................    71
Association of Equipment Manufacturers...........................    94
American Farm Bureau Federation..................................    97
Bond Dealers of America..........................................   100
Center for Fiscal Equity.........................................   102
Coalition for Fair Effective Tax Rates...........................   106
CompTIA..........................................................   111
Citizenship Based Taxation.......................................   114
New Markets Tax Credit Coalition.................................   118
National Rural Electric Cooperative Association..................   125
Master Limited Partnerships......................................   129

 
                PERSPECTIVES ON THE NEED FOR TAX REFORM

                              ----------                              


                        WEDNESDAY, MAY 25, 2016

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

    The Subcommittee met, pursuant to call, at 2:18 p.m., in 
Room 1100, Longworth House Office Building, the Honorable 
Charles Boustany [Chairman of the Subcommittee] presiding.
    [The advisory announcing the hearing follows:]
    
   
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    Chairman BOUSTANY. The subcommittee will come to order. 
Welcome to the Committee on Ways and Means, Subcommittee on Tax 
Policy's hearing on perspectives on the need for tax reform. 
Today, the subcommittee will hold a hearing to explore the 
drivers that are motivating the persistent calls for the reform 
of our broken Tax Code.
    At the highest level, that need can be seen in our 
lackluster economy over the last 8 years in the absence of 
robust projections for economic growth looking forward. Since 
the recovery began in 2009, real GDP growth has averaged just 
1.8 percent, far below the pre-recession average of 3.5 
percent.
    Going forward, CBO projects potential growth of just 2 
percent. While these shortfalls may seem small, they result in 
trillions of dollars of lost output and thousands of dollars of 
lost income for families. Slow growth is a choice, but it is an 
unacceptable choice, and our bleak economic future demands tax 
reform.
    Tax reform also is an imperative for small and large 
businesses alike. Our Tax Code simply isn't competitive 
anymore. We have the highest corporate tax rate in the 
industrialized world, and a 50-year old international tax 
approach.
    While the U.S. tax rules become more and more outdated, our 
international partners are moving full steam ahead to become 
even more competitive. And our inaction is costing us. American 
businesses are losing ground. American companies are getting 
acquired by foreign companies. New business startups are 
lagging. Companies can't expand as rapidly as they should, and 
capital investment is restrained.
    The need for tax reform is further evident in the mind-
numbing complexities of the Tax Code and the enormous 
compliance burdens it imposes on families and businesses in 
this country. Today's Tax Code consists of about 2.4 million 
words, and roughly 7.7 million words of regulations and 
countless more pages of case law, publications, and other 
guidance.
    Is it any wonder that taxpayers are frustrated, especially 
when they are paying more than $31 billion annually on software 
and professional tax preparation services just to figure out 
their taxes? Americans deserve a simple straightforward tax 
system that does not waste their valuable time or their money.
    Today, we have a very impressive panel of witnesses who 
will share their perspectives on the need for comprehensive tax 
reform. With the input the committee receives from today's 
witnesses and from stakeholders across the board, the committee 
has a responsibility to respond with a strong tax reform plan 
that is built for growth. We must harness these motivators for 
reform in order to advance the work to develop a new Tax Code 
that is ready for the next President to sign in 2017.
    To accomplish that goal, we should also consider ways to 
motivate tax reform from within Congress, approaches like the 
Tax Code Termination Act introduced by our colleague, Chairman 
Goodlatte. In the words of Grover Norquist, president of 
Americans for Tax Reform, quote, ``The idea here is simple. 
Unite the proponents of many competing replacement tax schemes 
to support legislation terminating the existing Tax Code by a 
certain time period to force action,'' end quote.
    Mr. Norquist and Chairman Goodlatte are right about this. 
We need to look at every avenue to catalyze the process within 
Congress and get a tax reform bill over the finish line.
    Without objection, Mr. Norquist's full statement will be 
made part of the record.
    Chairman BOUSTANY. Before I turn to Mr. Neal for his 
opening remarks, let me thank our witnesses for taking time 
today from your busy schedules to be with us. We really 
appreciate it. We certainly look forward to hearing your 
testimony.
    I am now pleased to yield to the distinguished ranking 
Member, Mr. Neal, for purposes of an open statement.
    Mr. NEAL. Thank you, Dr. Boustany.
    Mr. Chairman, I want to thank you for calling this hearing 
on Perspectives on the Need For Tax Reform. As you stated in 
your opening comments, the focus of this hearing is on the need 
for tax reform, but in particular, for economic growth.
    None of us can be encouraged by the Federal Reserve's 
recent suggestion that economic growth is going to be in the 
vicinity of 2 percent for perhaps the next decade. I agree with 
the whole notion of business expansion, job creation, and 
investment, and we all agree, certainly, on the challenges of 
the current Code. Where we tend to disagree is on the road 
forward.
    One of things that is nice about the panelists we have 
selected, they have been here many times in the past, and they 
are all of first class thinking.
    I agree with the goals that you have stated, and clearly 
applaud your commitment to hearing from these individuals in 
search of the best tax policies. These esteemed witnesses will 
testify on the need for tax reform, and I do not doubt the 
ferocity of their testimony. However, we should note that we 
have heard from them many times in the past on the same issue--
issues. And we have had a chance, I think, beginning with at 
least the piece that Chairman Camp put out to discuss it in 
more detail.
    We almost know what these witnesses are going to say, and I 
fear that we need to help them help us to break out of the 
impasse in which we find ourselves. I hold to the position that 
tax policy cannot be done on the basis of political philosophy 
and needs to be based upon policy philosophy.
    Mr. Chairman, I believe that we must expand our gaze going 
forward. We also should hear from the American public. And to 
your point, which I think is entirely correct, we should hear 
what the presidential aspirants have to say now, not just after 
that individual takes the oath of office. We need to hear from 
middle class families. We need to talk about expanding the 
child credit. We need to talk about how individuals qualify for 
EITC. The Tax Code's expansive reach touches everyone across 
this great county. As such, it demands a thorough examination 
to ensure when we fix it, we are doing our best job.
    If I might say, I think we have examined it in great detail 
time and again. But this will also include listening to the 
very people that the Code touches. Reforming our Tax Code 
remains of the utmost importance. I look forward to working 
with you to ensure that the Code will create jobs, promote 
economic growth, and once again help to grow the middle class. 
Thank you, Mr. Chairman.
    Mr. BOUSTANY. I thank the gentleman. Today's witness panel 
includes a number of leading experts on the conditions driving 
the urgent need to reform our broken Tax Code. We have Douglas 
Holtz-Eakin, president of the American Action Forum. From 2001 
through 2002, Dr. Holtz-Eakin was chief economist on President 
Bush's Council of Economic Advisers. From 2003 to 2005, he 
served as director of the Congressional Budget Office.
    Next, we have J.D. Foster, vice president of economic 
policy division and deputy chief economist at the U.S. Chamber 
of Commerce. Dr. Foster has previously served as economic 
counsel on the U.S. Department of Treasury, Office of Tax 
Policy, and as chief economist at the Office of Management and 
Budget for President Bush.
    Scott Hodge is the current president of the Tax Foundation. 
Prior to joining the Tax Foundation, Mr. Hodge served as 
director of tax and budget policy at Citizens for a Sound 
Economy. He also spent 10 years as a fellow at the Heritage 
Foundation.
    And Martin Sullivan is the chief economist and contributing 
editor for Tax Analysts, daily and weekly publications. 
Previously, Dr. Sullivan has served as a tax economist at both 
the U.S. Department of Treasury, and Joint Committee on 
Taxation.
    Gentlemen, we really appreciate you being here. I know this 
is one of many times that you have appeared before the full 
committee and subcommittees, and we certainly appreciate you 
being here today. And we will begin with Dr. Holtz-Eakin. You 
may begin, sir.

   STATEMENT OF DR. DOUGLAS HOLTZ-EAKIN, PRESIDENT, AMERICAN 
                          ACTION FORUM

    Mr. HOLTZ-EAKIN. Thank you, Chairman Boustany, Ranking 
Member Neal, and Members of the Committee. I appreciate the 
opportunity to be here today. You have a written statement. Let 
me simply emphasize three main points, and I look forward to 
your questions.
    Those points are that tax reform is an opportunity to 
improve the long-term trend for economic growth, that it is an 
opportunity to improve our international competitiveness and 
affect headquarter's decisions, and finally, it is an 
opportunity to restore lost faith in the Tax Code, and I want 
to say a little bit about each.
    The challenge of economic growth, I think, is the paramount 
challenge at this time. And to frame it, remember that from the 
end of World War II to 2007, the U.S. economy grew rapidly 
enough, 3.2 percent a year on average, that even with 
population growth, GDP per capita, roughly measured the 
standard of living, doubled roughly every 35 years. So in one 
working career, you could see a doubling of the standard of 
living, and that put American dream within the reach of many 
Americans, whatever it was to them.
    If we have 2 percent trend of economic growth, and you roll 
in projected population growth, you double the income per 
capita every 75 years. And I think that just puts the American 
dream too far over the horizon and that we have to focus on 
improving growth.
    There is great potential to do that. We know from some of 
the studies cited in my written testimony that the Tax Reform 
Act of 1986 contributed to better economic growth. That is 
looking at a real world effort. We know from work of Allen 
Auerbach and many of his colleagues, that if you were to do an 
income-style tax reform, you could raise GDP by something like 
a little under 5 percent. If you did a consumed income tax with 
a great deal of clarity and discipline, you could raise it by 
as much as 9 percent.
    So there is an opportunity there to contribute to better 
economic growth, which I believe is the top issue, and you 
ought to focus on it.
    The second is the international competitiveness, with which 
you are very familiar. The U.S. has a very high statutory rate, 
highest in the developed world. It also has a very high 
effective rate. If you look at the computations, it looks like 
the U.S. is about 28 percent versus 19 or 20 percent for our 
competitors. And our effective tax rate is higher than 53 out 
of 58 competitor countries, and it puts us at a tremendous 
disadvantage. That is compounded by our cling to worldwide base 
for our international tax system.
    Our competitor countries in the OECD have been moving from 
a worldwide to something more like a territorial, roughly one 
country per year. We remain the last country clinging to 
worldwide system, and it has produced a competitive 
disadvantage. It has produced an incentive to defer funds and 
keep them locked offshore, and it has produced this terrible 
situation where when any two companies merge or acquire across 
borders, when you run the numbers, the headquarters end up 
outside the United States. And the only way to fix that is to 
fix the Tax Code and do tax reform.
    The Section 385 rulemaking by the Treasury is not a 
solution. It is making things worse. And indeed, we want to 
make this a place where people want to locate their investment. 
Inbound investment is good for the United States. It is not 
something we should fear. We should have a tax system that 
incentivizes it.
    And then, the last issue is the issue of lost faith in the 
Tax Code. The U.S. has relied, from its inception, on voluntary 
compliance with the Tax Code. But as the complexity has risen, 
as the administrative costs have risen, and as the tails of 
people paying zero taxes have sort of proliferated, there is a 
real sense that I don't know if everyone is playing fair, why 
should I play fair? Tax reform is a chance to clear that out, 
and to restore faith in the tax system is something that 
Americans comply with and that they used to support public 
policy goals.
    I think those three things should be the focus. You have 
lots of criteria for tax reform. They can be growth, they can 
be income distribution, they can be complexity, simplicity, 
administrative and compliance costs. I think you should focus 
on growth competitiveness and restoring that faith. You can't 
do everything. You have other policy tools on the spending side 
to do deal with other issues. I think those are things to focus 
on, and I hope that this is the last time I testify on the need 
for tax reform, and I thank you for the chance to do it.
    Chairman BOUSTANY. We thank you.
    [The prepared statement of Dr. Holtz-Eakin follows:]
    
    
 
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    Chairman BOUSTANY. Dr. Foster, you may proceed.

 STATEMENT OF DR. J.D. FOSTER, VICE PRESIDENT, ECONOMIC POLICY 
 DIVISION AND DEPUTY CHIEF ECONOMIST, U.S. CHAMBER OF COMMERCE

    Mr. FOSTER. Thank you, Mr. Chairman, Ranking Member Neal, 
Members of the Committee. My name is J.D. Foster. I am the Vice 
President in Economic Policy and Deputy Chief Economist at the 
U.S. Chamber of Commerce.
    I would venture to say that in the decade since the last 
major tax reform was enacted, the Ways and Means Committee has 
held scores of hearings and had thousands of hours of testimony 
and debate on the need for comprehensive tax reform. In 
retrospect, it is a daunting task to think that one could add 
to that mountain of evidence. I am sure my co-panelists will 
equip themselves well in trying to do so.
    Little has really changed over the course of these many 
years relevant to comprehensive tax reform, little except the 
urgency for tax reform has itself grown, and the price of 
inaction has grown higher, as the relative economic strength of 
other nations and their businesses has grown rapidly.
    A related difference from the past is the apparent dimming 
of America's economic future to which you alluded. The weakest 
economic recovery in the modern era continues but just barely, 
and it is now showing distinct signs of slowing further. In the 
most recent quarters, the economy has slipped from a pedestrian 
2 percent growth to 1.4 percent, and the most recently, to 0.5 
percent. This is not a good sign.
    This comprehensive tax reform moves forward in fits and 
starts. It should always move forward with improving economic 
growth as the primary focus, not the simplification or 
improving transparency, or these other issues commonly raised 
are unimportant, they are important. But as the saying goes, 
they don't feed the bulldog. The only thing that really drives 
tax reform making the whole effort worthwhile is economic 
growth.
    The concept of economic growth is something of an 
abstraction. Gross domestic product is something we commonly 
cite, and the reality is few people really know what it means, 
and in any event, it is an imperfect measure of the economy. 
More critically, businesses, American businesses, workers, and 
families don't live in a world of abstractions. They deal with 
real issues day to day.
    In communicating the need for comprehensive tax reform 
then, the choices made in developing legislation something more 
real is needed, something which regular people can relate to.
    What does ``grow the economy'' really mean in simple 
English? Well, in simple English, it means more small 
businesses, more medium-sized businesses, more big businesses 
all doing more business. It is as simple as that. The U.S. 
economy doesn't grow until businesses are growing in number and 
size. Washington policies would result in more jobs, higher 
wages, and more opportunities if the frame of reference 
involved a stronger focus on the business environment.
    We would do better if Congress stopped believing its wisdom 
superior to that of individuals and businesses participating in 
markets channeling those actions.
    Comprehensive tax reform can play a very constructive role. 
What do businesses do to grow the economy? Very simply, they 
make more stuff people want. They hire more workers to make 
more stuff. They pay their workers better because they can and 
because they must to have a quality and quantity of workers 
needed to make more stuff. Businesses invest in new technology 
so they can have--do a better job of making stuff and making 
better stuff. They invest in new machines and facilities so 
they can make more stuff in the future, and to incorporate the 
new make-better-stuff technology in their production today. 
Businesses want a return for their investors, so the investors 
are willing to continue to invest, so businesses can make more 
stuff. You will notice a trend here. And yes, along the way, 
businesses collect a lot of tax.
    The businesses play a central role in the symphony of 
commerce. They raise capital, pay owners, buy stuff from other 
businesses, hire and pay workers, and the income paid out is 
the income that is then used by consumers to buy the stuff 
businesses make. It is a system where everybody contributes 
something, and everybody who contributes, gets something. It is 
a system of coordination guided by markets and prices and a 
system where competition drives everyone to do better in some 
way or another.
    Why, then, if a growing economy is all about growing 
businesses, is the economy not growing as it should? Have 
American businesses lost their edge? Has the American 
entrepreneurial spirit dimmed? No, it has not. The economy 
isn't growing as it should because for businesses to grow 
normally, they need government policies, including tax policy 
that are at least benign for the economic environment. 
Businesses generally don't need government to be their partner 
or to help. They mostly just need government to get the basics 
right and then get out of the way.
    And this is where comprehensive tax reform comes in with an 
unwavering focus on creating a better business environment. 
That means an unwavering focus on improving economic growth. 
Now, economists have a lot of fancy theories and ideas about 
how economies grow and don't grow. At some point in time, it is 
important to take a step back from all the fancy theories to 
consider basic realties. The basic reality is that a growing 
economy results from businesses doing well what businesses do 
naturally, and that depends on the government creating an 
environment where businesses can flourish.
    Comprehensive tax reform focused squarely on improving 
economic performance would go a long way toward creating that 
environment. Thank you, Mr. Chairman.
    Chairman BOUSTANY. Thank you, Dr. Foster.
    [The prepared statement of Dr. Foster follows:]
    
 
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    Chairman BOUSTANY. Dr. Hodge, you may proceed.

      STATEMENT OF SCOTT HODGE, PRESIDENT, TAX FOUNDATION

    Mr. HODGE. Thank you very much, Mr. Chairman, Mr. Neal, 
Members of the Committee. I want to focus my testimony today on 
the economic cost of tax complexity, which is a new topic for 
me today for this committee. I thought we would change it up a 
little bit this time around.
    In addition to robbing us of about 8.9 billion hours, and 
more than $400 billion in lost productivity, tax complexity 
punishes success and hard work, which robs the economy of its 
ability to create jobs and better living standards. Over the 
past few months, Tax Foundation economists have been measuring 
the cost of complex tax provisions using our taxes and growth 
macroeconomic model. And in 2 weeks, we will publish nearly 100 
of these case studies in a new book called, ``Options for 
Reforming America's Tax Code,'' and I hope that these case 
studies provide you some do's and don'ts as you think about how 
to reform the tax system.
    And we find that much of the tax complexity in, say, our 
individual Tax Code results from our attempts to make the 
system more progressive, either overtly through graduated tax 
brackets, or subtly through backdoor phaseouts and clawbacks. 
And high marginal tax rates matter to work incentives and 
dampen economic growth. Economists refer to these high marginal 
rates as success taxes.
    For example, we can make our current seven-bracket tax rate 
system simpler, more pro growth and still progressive, simply 
by reducing the number of brackets to 3, 10, 15 and 35 percent. 
And compared to that kind of an economic system, our model 
finds that the current Tax Code effectively reduces the long 
run level of GDP by 1.4 percent, lowers after tax incomes by an 
average of 3 percent, and costs the economy about 1 million 
jobs.
    You know, our policy's aim at helping the working poor can 
also have unintended consequences. The complex structure of the 
EITC has the ironic effect of encouraging more work as the 
subsidy phases in, but then discouraging work effort as the 
subsidy phases out as--because it penalizes workers for every 
dollar that they earn above the poverty line.
    However, we can reduce these tax penalties with a slower 
phaseout rate for the EITC. And compared to that kind of a, 
what I would call fairy EITC, our model finds that the current 
rules lower after tax incomes by more than 1 percent and costs 
the economy 164,000 jobs.
    I think we all want to simplify the number of itemized 
deductions and loopholes in the Tax Code, but we ought to use 
those savings to lower tax rates across the board. We found 
that if you were to eliminate most itemized deductions, except 
for the charitable deduction, home mortgage interest deduction, 
and use those revenues to lower tax rates across the board by 
10 percent, it would increase GDP by about 0.6 percent and 
create 577,000 jobs.
    On the business side, as we have already heard, everyone 
knows that the U.S. has the highest corporate tax rate in the 
industrialized world. Only Chad and the United Arab Emirates 
impose a higher corporate tax rate than we do, and we have an 
obsolete territorial system. So moving to a lower rate and--or 
we have an absolute worldwide, and moving to a territorial 
system would greatly simplify the tax system and make the U.S. 
more competitive.
    But just as importantly, we should replace our immensely 
complicated depreciation and cost recovery system with a much 
simpler system of full expensing of capital investments. Dollar 
for dollar, full expensing is one of the most pro-growth tax 
simplifications that Congress could enact.
    By our estimates, moving to a full expensing would boost 
GDP by over 5 percent, boost wages by over 4 percent, and 
increase the number of jobs by a million.
    Over the past year, Tax Foundation economists have gained 
special insights into what kind of tax policies boost economic 
growth, wages, jobs, and investment, and we have learned what 
not to do as well. We have scored the tax plans of every 
presidential candidate, as well as numerous tax plans proposed 
by Members of Congress, including some on this committee.
    And during this experience, we modeled every conceivable 
tax reform plan you can think of, flat tax, fair tax, Bradford 
X tax, value-added tax, and numerous plans that mix and match 
many of those features.
    And to one degree or another, these plans, the plans that 
produce the most economic growth tend to incorporate some of 
the lessons we have outlined here today. They simplify the Tax 
Code, they reduce marginal tax rates, they reduce taxes on 
capital, they reduce or eliminate the double taxation of 
savings and investment, and they move toward a neutral 
consumption tax base.
    So to wrap up, I hope that Members of this committee, as 
well as your fellow lawmakers, take some of these lessons at 
heart and move us down the road to fundamental tax reform as 
soon as possible. Thanks for your time. I welcome any questions 
you may have.
    Chairman BOUSTANY. Thank you, Dr. Hodge.
    [The prepared statement of Dr. Hodge follows:]
    
    
  
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    Chairman BOUSTANY. Dr. Sullivan, you may proceed.

STATEMENT OF DR. MARTIN SULLIVAN, CHIEF ECONOMIST, TAX ANALYSTS

    Mr. SULLIVAN. Good afternoon, Chairman Boustany, Ranking 
Member Neal, Members of the Committee, thank you for the 
privilege of appearing before you today.
    Tax reform presents many challenges for this subcommittee, 
but I believe in the current environment, the most critical of 
these challenges is reducing the harmful economic effects of 
the corporation tax, and doing so in a manner that is both 
fiscally responsible and does not reduce the progressivity of 
the tax system.
    Economists of all stripes have long recognized the 
shortcomings of the corporate tax, but in recent times, these 
problems have gotten much worse. In the olden days, these 
fellows will remember, the economic damage caused by the 
corporate tax was relatively small. The concern back then was 
that a U.S. corporation like GM or GE might reduce capital 
spending by a few percentage points if we raised the corporate 
tax. And in the olden days, most of the burden of the corporate 
tax was on shareholders who were at the top of the income 
scale.
    In our modern globalized economy, job-creating capital is 
highly mobile. Now, high corporate tax rates can induce both 
domestic and foreign multi-nationals to shift large chunks of 
their production and research out of the United States, and as 
a result, the burden of the corporate tax now falls 
increasingly on workers in the form of lost jobs and lower 
wages. And over time, these ill effects will only get worse.
    The rest of the world understands this. Every other major 
country has reduced its corporate tax rate. Most notably, in 
its latest budget, the United Kingdom has announced it will cut 
its corporate rate to 17 percent by 2020. In stark contrast, 
taking into effect State corporate taxes, the U.S. corporate 
tax rate is over 39 percent, the highest in the world.
    Criticizing the corporate tax is very easy. The hard part 
is figuring out how to pay for a lower corporate rate. The 
tepid response to Chairman Camp's tax reform plan pretty much 
proves that revenue neutrality within the corporate sector is 
not a useful guiding principle for 21st century tax reform. To 
promote long-term growth, we need to downsize our most 
economically damaging tax and substitute it with revenue from 
other sources.
    One option would be for the United States to follow the 
example of other nations and adopt a value-added tax. It would 
greatly enhance U.S. competitiveness if we could replace 
revenue from the capital-repelling corporate tax with a highly 
efficient consumption tax.
    Alternatively, replacing the corporate tax with a business 
cash flow tax with border tax adjustments, as proposed by 
President Bush's tax reform panel in 2005, would entirely 
eliminate the tax incentive to shift production out of the 
United States.
    Another job-creating approach would be to shift tax away 
from corporations and on to investors by increasing taxes on 
capital gains and dividends. The reason for doing this is 
simple. When you raise taxes on corporations, investments--
investment moves to lower tax jurisdictions. When you raise 
taxes on investors, they could move, but they usually don't.
    Yet another approach for improving international 
competitiveness would be to raise taxes on immobile capital, 
such as real estate, to pay for reductions on mobile capital 
such as investment and manufacturing.
    On the international side, we need to banish the lockout 
effect from our international tax rules. To the extent we 
impose tax on foreign profits, we should levy that tax as 
profits are earned, not when they are distributed to the U.S. 
parent. We also need tough earning stripping rules. It makes no 
sense that foreign headquartered multinationals doing business 
in the United States should be tax advantaged over U.S. 
companies. We should also consider, as both President Obama and 
Donald Trump have proposed, limiting deductions on excessive 
corporate borrowing. This would equalize the treatment of 
corporate debt and equity, and provide revenue for reducing the 
corporate tax rate.
    In conclusion, I would like to stress, for the economy's 
sake, corporate tax reform should be both fiscally responsible 
and bipartisan. Corporate rate cuts should be fully paid for on 
a permanent basis without gimmicks or overly optimistic 
assumptions about growth and dynamic scoring.
    Reckless budgeting not only spooks the bond markets, it 
greatly dilutes the positive supply side effects of business 
tax cuts because there is a high probability those cuts will be 
rescinded when the rosy budget scenarios are not realized. And 
when it comes to corporate taxation, we don't need a seesaw 
battle between the political left and the political right. If 
one party is able to enact its tax agenda by a narrow margin, 
there is a high probability there will be a major change right 
after the next election.
    Corporate tax reform should be bipartisan, not simply 
because it is nice for both parties to get along, but because 
tax policy that is the outcome of bipartisan compromise reduces 
uncertainty, and uncertainty is a major impediment to 
investment and long-term economic growth.
    Thank you, Mr. Chairman. I will be glad to answer any 
questions.
    [The prepared statement of Dr. Sullivan follows:]
    
    
   
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    Chairman BOUSTANY. I thank you all for your excellent 
testimony, and we will now proceed with a question and answer 
session, and I will start.
    I have long felt that as a country, we don't have a 
coherent foreign economic policy which looks at the strength of 
our own economy, domestically, and promotes growth here, and it 
also promotes top-of-the-line competitiveness abroad to put us 
in a strong economic position to lead. I just fundamentally 
believe that. And I have become increasingly concerned, over 
the last several years, that what we have as a Tax Code is a 
major contributor to that, and we have to start with 
fundamental tax reform.
    But--and I think all of you know, based on some of the work 
and things that I have written lately in a lot of my statement, 
I am really concerned about the competitive climate American 
companies here are facing, as well as abroad, and how this 
affects growth in the United States. And the recent global 
developments are very disturbing in my mind because if you look 
at OECD BEPS, State aid coming out of Europe, these 
investigations, they are clearly targeting American job 
creators overseas seeking to grab tax profits retroactively, 
increase the cost of doing business abroad. And our inertia in 
this, and Congress' inability or unwillingness to act rather 
than just simply talk about this is a problem.
    At home, I mean--and frankly, because of the inertia, the 
administration took it upon itself to issue the recent 385 
regulations, and I think these are punitive. They are actually, 
they are hurting American companies, and it is not just 
American companies that are large and trying to do business 
abroad, but it is also hurting companies and businesses here in 
the United States, making the United States less competitive, 
and a less attractive place to do business and invest.
    And I think, you know, yes, you guys have been in front of 
the committee for quite a while, numerous testimony--episodes 
of testimony. We have been just beating this dead horse. We 
have got to act and--but I wanted to at least have a clarifying 
moment, and this serves as that clarifying moment. In fact, my 
friend, the ranking Member and I joked a little bit about this 
earlier to the extent that we could probably have a unanimous 
consent agreement here let's just go reform the Tax Code and be 
done with it, but the fact is--you are there, right?
    Mr. NEAL. Yeah.
    Chairman BOUSTANY. There you go.
    So what--I mean, in light of what I just said about 
competitiveness and need for a coherent foreign economic policy 
for the United States to put us in a very competitive position, 
which encompasses not only growth here at home, but 
competitiveness abroad, would each of you just briefly comment 
on that in the time I have got left here?
    Mr. HODGE. Well, Mr. Chairman, I think we have reached a 
point in which either we define our tax base or the Europeans 
will. And right now----
    Chairman BOUSTANY. And they are doing it.
    Mr. HODGE [continuing]. Our major competitors are defining 
our tax base, and as you mentioned, they are trying to plunder 
it, and I think that is a real danger, not only to the economy, 
but also to the competitiveness of the United States. And the 
sooner that we move toward a competitive international tax 
system and lower the rate, as Mr. Sullivan has mentioned, as 
dramatically as possible, I would say around a 20--15 to 20 
percent in Federal corporate tax rate, the better. And the 
sooner that we will stop the hemorrhaging of profits abroad, we 
will stop the inversions, we will stop the plundering of our 
tax base, but it is up to us and we need to move quickly 
because they are not waiting for us.
    Chairman BOUSTANY. Thank you. Dr. Holtz-Eakin.
    Mr. HOLTZ-EAKIN. I think, you know, we need to recognize 
that. We have to stop playing defense. It is not a matter of 
just keeping the headquarters here or keeping our tax base or--
we need to aggressively make this a place where people want to 
be, so that we attract global companies from abroad that are 
highly successful, and that we increase the pace of economic 
growth. And I think the challenge, frankly, is that when we did 
the Tax Reform Act in 1986, it began in the late 1970s with 
people like Dick Gephardt and Bill Bradley saying the Tax Code 
is hurting the average American. It is harming the economy, so 
that Joe, you know, Handyman is not getting what he should.
    We need the public education that says on a bipartisan 
basis, a better Tax Code contributes to a better standard of 
living in the United States, and we want to go get that for 
Americans. And if we just look we are playing defense to hold 
on to things for big corporations, I don't think we are going 
to make the sale.
    Chairman BOUSTANY. Thank you. Dr. Foster.
    Mr. FOSTER. Thank you, Mr. Chairman. One way to summarize a 
component of Dr. Sullivan's testimony is if you treat capital 
poorly, it is going to leave. Right now the Europeans are 
treating capital poorly. They are going to suffer a penalty for 
that. We need to treat capital better. We need to encourage it 
to come to this country.
    After the 1986 Tax Reform Act, the United States was the 
leader in tax policy worldwide. We, then, basically sat on our 
hands for three decades. We made a few changes at the margins, 
but didn't do very much. The rest of the world kept changing. 
They took the lead that we started with and kept doing it, and 
they continue to do it today with further rate reductions and 
so forth.
    As Dr. Holtz-Eakin said, we cannot play defense on this. We 
are already so far behind. It is more than just playing catch-
up. If we have want to lead, if we want our economy to grow at 
faster than the 2 percent that Mr. Neal mentioned, we have to 
make this a place capital wants to come to and a place where we 
allocate capital wisely. So it is not just about making it a 
friendly place, but making it a rational place. We are not 
picking winners and losers. We are going to say we are going to 
have a neutral Tax Code, and we can all argue a little bit out 
on the margins what that means, but we understand the basic 
concept.
    We don't want to pick winners and losers. We are not going 
to do it through the Tax Code. We will let the markets figure 
out where the capital can go, but we want capital to 
understand, it is welcome here.
    Chairman BOUSTANY. Dr. Sullivan, you want to comment or----
    Mr. SULLIVAN. I would just add that I think the other 
panelists are absolutely correct. We want the United States to 
be a place that attracts capital, but we also have to be 
realistic about two impediments. Dr. Holtz-Eakin mentioned 
educating the American public. Look at what is going on now in 
this current election. Look at the economic populism. If 
anything, the American public will be less tolerant of business 
tax cuts now than they have ever been before, so we are 
actually moving in the wrong direction in that--unfortunately, 
in that dimension.
    And we have to think about the appearances of profit 
shifting, of tax shelters that are caught--whether they are 
just or unjust, how they are affecting the public's attitude 
towards business tax reduction. And the other thing we have to 
be very concerned about, and realistic about, is our budget 
deficits, which are going to be growing over the next decade. 
So it is one thing to want to lower the corporate tax rate. The 
hard part, of course, is finding out--is making the tough 
choices and finding the revenue to pay for that.
    Chairman BOUSTANY. Thank you. Mr. Neal.
    Mr. NEAL. Thank you, Mr. Chairman. To your point about the 
amount of time we have spent on this. I feel like I went to 
high school with all you guys. This is when the conversation 
started. But I also think it is a mindset that the four of you, 
given your institutional memories, would reinforce, and that 
is, Congress is made up more and more today of crusaders as 
opposed to legislators. I mean, the inability to hear what 
anybody else has to say about something that might work at any 
given time.
    So the ideology creates the intransigence. And so Dave Camp 
puts out a model, and that afternoon, 52 Members of his own 
side torpedo the model. You know, there was at least a time 
where we would have taken a look at that and said, well, maybe 
we can shape that part of it that they object to and that they 
might be more receptive to that down the road. But it is 
instant opposition. And we find ourselves back to the impasse 
on Tax Code where we, once again, all agree with the nature of 
the problem but none of us necessarily agree with the nature of 
what we need to do on the solution side.
    But let me speak to a moment on the issue of dynamic 
scoring. Really it was Dick Armey earlier in the 1990s who kind 
of hatched the idea in front of the Congress about dynamic 
scoring. One of the problems with dynamic scoring is it is 
always about tax cuts, where we find, again, the intransigence 
of trying to do a major highway bill.
    And I would submit that the way that the highway bill was 
done at the end of the session, not something that we ought to 
be crowing about, pretty poor way to do infrastructure. But at 
the same time, I have been pushing the idea, what about if we 
are going to exempt the notion of dynamic scoring as it relates 
to tax relief, what about the idea of using dynamic scoring for 
some investment in spending on long-held needs the America.
    And I would like the four of you to maybe speak to that 
directly, and then I am going to get around to the effective 
tax rate, because I think that bears consideration as well. So 
we can start from the--Mr. Holtz-Eakin, and move to the other 
side.
    Mr. HOLTZ-EAKIN. As you know, I am capable of going on at 
length about dynamic scoring. I will spare you.
    Mr. NEAL. Well, I didn't ask your favorite question today. 
I rehearsed it long and hard, but I didn't ask you because I 
knew what your answer was going to be.
    Mr. HOLTZ-EAKIN. Because tax cuts don't pay for themselves, 
and I knew you were going to ask that. You always ask me that.
    So I recently wrote a paper with Michael Mandel at 
Progressive Policy Institute on Dynamic Scoring of 
Infrastructure Spending, and there is no reason why dynamic 
scoring, which is simply good policy analysis, should apply to 
just one side of the budget. There are the usual implementation 
problems on the spending side as they are on the tax side, but 
I think it is something that has merit, and that certainly 
ought to be considered. And if you are going to have chairmen 
who have the power to say this is an economically significant 
piece of legislation, it should be dynamically scored, that 
should apply there as well.
    Mr. NEAL. Dr. Foster.
    Mr. FOSTER. Well, I think the first thing one has to note 
is, we talk about dynamic scoring and analysis, I have 
testified on it many times and studied it at great length, but 
the reality is we are in a very preliminary stage of 
understanding how to do dynamic analysis of tax policy. The Tax 
Foundation model is the state of the art, and they are in the 
process of learning how to do it.
    That said, there is no reason why the full range of 
policies--once the economic science can support the analysis, 
there is no reason for the full range of Federal policy not to 
be subject to that kind of analysis. When you are looking at 
legislation, if there is something a model can tell you about 
its economic consequences, you should have that information.
    Mr. NEAL. Mr. Hodge.
    Mr. HODGE. Well, as you know, Mr. Neal, the Tax Foundation 
does have a dynamic tax model. And one of the lessons that I 
try to teach people, and I do a lecture on it, we actually do 
public and private demonstrations, live demonstrations of the 
model so that people can see how it works. We pull back the 
curtain so that there is--it is not a black box. Well, 
actually, we can do--we would be delighted to do one here if 
you would like.
    But one of the things I try to point out to people is that 
the important element, or the important reason why you want to 
do dynamic scoring is because every tax change affects the 
economy differently. And what dynamic scoring does is it gives 
you an opportunity to understand the nuance differences between 
them.
    For instance, we took five different tax cuts that all had 
the same score of about $40 billion a year on a static basis, 
but doing it dynamically, you understand that a child tax 
credit has no impact on economic growth, but moving to full 
expensing actually has a substantially positive impact on our 
economic growth and can almost pay for itself over time. You 
want to understand those differences.
    We have also been responsive to folks who say, Well, you 
ought to do spending as well. And we are in the process of 
building out our tax model to what is known as a general 
equilibrium model so we can model the macroeconomic effects of 
spending as well, and we hope to have that portion of the model 
finished by the end of the year.
    Mr. NEAL. Would you let Mr. Sullivan answer the question as 
well?
    Mr. HODGE. My apologies for----
    Mr. NEAL. No, that is fine.
    Mr. SULLIVAN. Well, I would agree with Scott that the 
models are very good for educating Members on which policies 
some--you know, there is a whole range of economic policies, 
tax policies, some are better than others.
    But I think there are biases in the models. And it is not 
that the modelers are biased, but models that you can produce 
wide ranges of estimates. You can't emphasize enough the 
uncertainty. I could take you into a library and show you 
shelves of books that support high elasticity with lots of 
economic growth, and I can take you to another shelf of books 
that show you the exact opposite. So the uncertainty factor, I 
think, can't be emphasized enough.
    Chairman BOUSTANY. Mr. Hodge, you want to make--or Dr. 
Hodge, you want to make another comment?
    Mr. HODGE. Yeah. I want to point out that while there are 
differences among the models, they are all--they all tend to 
point in the same direction. So that our model, the JCT's 
model, you know, John Diamond's model at Rice University, all 
tend to point in the same direction, so they are not giving you 
competing estimates. They are all--they may be in a range, but 
if they all say that a policy promotes growth, it will promote 
growth. If they all say it has negative impact on growth, you 
can be sure of that. They may be a range, but at least you will 
have the confidence that all of these models are saying roughly 
the same thing.
    Chairman BOUSTANY. Thank you. Dr. Holtz-Eakin, briefly.
    Mr. HOLTZ-EAKIN. Real briefly, because I have said this to 
this group before. There is no more uncertainty in dynamic 
scoring than static scoring. And I can tell you all the 
terrible stories of my time in CBO scoring terrorism risk 
insurance, or death benefits for those killed in Iraq prior to 
the invasion, those things are fundamentally uncertain. There 
is nothing about this that should be considered different.
    Chairman BOUSTANY. Thank you. Mr. Reichert.
    Mr. REICHERT. Thank you, Mr. Chairman. So I really like the 
way, Dr. Foster, that you went into, you know, some language 
that people really understand, because you are talking to an 
old cop here. I am not a tax attorney or a CPA. I am just 
fortunate enough to be on this committee and learn from you and 
all these other smart people here.
    So you know, I think it is good that we put this in 
language where the average person can understand this and 
figure it out, because they do know, really, deep down what we 
need, and that is to simplify the Tax Code, right. They all 
feel, my constituents feel that--and I feel, over my career, 
that I have been working for the Tax Code. The Tax Code 
certainly is not working for me, and I think we need to turn 
that around so the Tax Code works for America, works for 
American workers, and American companies, and I think you have 
shared some ideas here that--and hopefully, we will get a 
chance to read the book coming out, Mr. Hodge, and get some--
and get some further ideas.
    But you know, the whole--the whole idea of businesses--more 
businesses, growing businesses can make more stuff, to sell 
more stuff, to buy more stuff, to hire more people to make more 
stuff, people get, and I get that. What they don't get are 
terms like repatriation, inversion, innovation box, you know, 
dynamic scoring, none of that makes sense.
    Now, I have learned those, about those things over the past 
few years being on this committee, but if you had told me years 
ago as a cop driving around in my patrol car that I would have 
been going through the Tax Code line by line in my career some 
time, I would have shot myself in the foot, but I am happy to 
be here today.
    So I mean, it is complicated, and you all know that as 
well. Look how hard this has been for us to get to a point, you 
know, where we actually--I mean, we had this conversation 
yesterday in a hearing where we, as a panel, really need to 
come together, and this has got to be a bipartisan effort, like 
Dr. Sullivan has mentioned. Otherwise, it doesn't mean 
anything.
    Certainty is one of the things I hear back in my district 
all the time. If my business had certainty, if my family had 
certainty, and I could make these decisions and we can move 
forward and be productive and be, you know, optimistic about 
the future.
    So there is some things, too, that, you know, are occurring 
that are kind of out of Congress' hand, and you mentioned the 
competitiveness issue of the U.S. system and how, you know, and 
sort of following up on Dr. Boustany's, the chairman's 
comments, and encouraging capital in the U.S., I am curious 
what your thoughts are on the impact of some of the 
administration's recent decisions, especially the 385 guidance. 
And maybe, Dr. Holtz-Eakin, you can comment on that?
    Mr. HOLTZ-EAKIN. I think what the administration has done 
under Section 385 might best be characterized as desperate, but 
it is certainly not good tax policy, and is, in the long run, 
quite counterproductive. Their rulemaking has been predicated 
on the notion that they are going to stop deals that have been 
entered into in mergers and acquisitions. And if I am a foreign 
investor looking to locate someplace, the last place I want to 
go is a place where the rules change in midstream or after the 
fact. That is not good policymaking. And, you know, they can 
decide to defend why they did it, but I think it is a damaging 
step from the point of view of high quality tax policy.
    Mr. REICHERT. So your point is it is the uncertainty issue 
again and----
    Mr. HOLTZ-EAKIN. Or worse. They are certain that we are 
going to get them once they get here. That is not a good 
message to send.
    Mr. REICHERT. Yeah. Mr. Foster.
    Mr. FOSTER. Thank you, sir. I think the--something to keep 
in mind, at the U.S. Chamber, we--when this regulation came 
out, we quickly reached out to our Members to ask them what 
does this mean for you? Weeks and weeks later, they are still 
going through the process of trying to figure out what it means 
to them. These are the smartest people in the corporate tax 
world, and as you know, there is a lot of smart people in that 
world, and every day there is another, oh, my gosh, look what 
that does. Another transaction, another normal business 
relationship suddenly is exposed. Another ownership pattern 
that is perfectly normal, it has nothing to do with the kinds 
of loopholes or behaviors that one might associate with bad 
behavior, perfectly normal transactions and arrangements are 
now subject and questioned.
    The administration wants to move very quickly to finalize 
this regulation, as we understand. Well, they need to 
understand it will be many, many weeks before the people who 
are subject to this regulation know what it means, and many 
weeks more before they can formulate any kind of comment on 
what it would mean, and perhaps there are actually a few things 
that the wizards at the Treasury Department haven't quite 
thought of yet.
    Mr. REICHERT. Okay. I yield back. Thank you, Mr. Chairman.
    Chairman BOUSTANY. I thank the gentleman.
    Mr. Doggett, you are recognized.
    Mr. DOGGETT. Mr. Chairman, and thank you, Members. Thanks 
to each of our witnesses for your comments.
    Mr. Hodge, if I understand, you believe, on the business 
side, we should simplify our Code by permitting businesses to 
expense immediately all assets that they might acquire instead 
of depreciating them, regardless of the amount, or the useable 
life of the asset?
    Mr. HODGE. That is correct.
    Mr. DOGGETT. And on the individual side, you believe that 
we should replace deductions with a larger standard deduction 
but eliminate itemized deductions?
    Mr. HODGE. I think that would greatly simplify the Code. 
Yes, definitely.
    Mr. DOGGETT. So you oppose the home mortgage interest 
deduction?
    Mr. HODGE. We have looked at the economics of it. 
Economists are on different sides of that issue.
    Mr. DOGGETT. What side are you on?
    Mr. HODGE. I would trade that off for a lower rate. I think 
you would have better economic performance.
    Mr. DOGGETT. Is the same true of charitable deductions?
    Mr. HODGE. It would, yes.
    Mr. DOGGETT. And is the same true of a deduction for State 
and local income and sales tax?
    Mr. HODGE. That one especially, I think, should be 
eliminated for lower rates immediately.
    Mr. DOGGETT. Thank you. Dr. Sullivan, directing your 
attention, especially to one of your concluding realistic 
recommendations. If I understand it, if your favored approach 
of substituting a value-added tax for the corporate tax doesn't 
get adopted anytime soon, you have emphasized the importance of 
assuring that any changes in corporate rates are paid for on a 
permanent basis without gimmicks or overly optimistic 
assumptions.
    So you believe, to use the term we are most familiar with, 
that any changes in our corporate tax structure, be they 
limited to one type of business entity, or one type of business 
transaction, ought to be revenue neutral?
    Mr. SULLIVAN. Yes.
    Mr. DOGGETT. And Dr. Holtz-Eakin, do you believe the same 
that changes in corporate taxes should be revenue neutral?
    Mr. HOLTZ-EAKIN. No. I think they should be budget neutral, 
so you could do the offsets on the spending side. I think that 
would actually be quite desirable.
    Mr. DOGGETT. You would do it on the spending side, and I am 
sure I know the position of our other witnesses on that. With 
reference to how one achieves revenue neutrality, Mr. Camp was 
not richly rewarded for being willing to say how, but he did 
suggest on--as part of his proposal, tax pay-fors that included 
changing the way advertising expenses are charged, changing 
accelerated depreciation, a problem, I guess, Mr. Hodge would 
eliminate for us, and repealing last-in/first-out inventory. 
Are those changes that you think are pay-fors we should be 
adopting, Mr. Sullivan? Dr. Sullivan?
    Mr. SULLIVAN. I think that accelerated depreciation is 
something that does promote economic growth. If we moved 
towards expensing, that would help promote economic growth. So 
we--I think one thing we have learned from the recent debate on 
tax reform and from the dynamic scoring coming out of the joint 
committee is that we need lower rates that helps promote 
economic growth. Expensing helps promote economic growth.
    And so once you take out accelerated depreciation as a 
revenue raiser, you are really running out of base broadeners 
inside the corporate tax. So that is why we need to look 
outside the corporate tax for additional revenues. And one--I 
think one possibility that is getting a lot of attention is 
looking at raising the taxes on capital gains and dividends in 
order to pay for a lower corporate rate because that would 
maintain the progressivity of the tax system.
    Mr. DOGGETT. You also refer, perhaps in somewhat more 
neutral terms than the chairman, to the OECD-based erosion, the 
BEPS project. And again, from a realistic standpoint that 
substantial value creation, sales and other indicators in a 
country is becoming increasingly the worldwide standard among 
advanced economies. Is that your view, and what is your 
perspective on the base erosion project?
    Mr. SULLIVAN. Well, I think what we are seeing, the base--
the fundamental--you know, it is very complicated, thousands of 
pages long. But I think the two things that you are seeing from 
the base erosion, the BEPS project is, one, we want to get rid 
of cash box, tax haven companies where there is no economic 
activity, but a lot of profits toward it, and I think the BEPS 
project is going to make a lot of progress along those lines.
    Mr. DOGGETT. You think it is positive?
    Mr. SULLIVAN. Yes, because of--that, in the long run, we--
it is not helping U.S. businesses to have the terrible 
appearance of not--of stateless income and----
    Mr. DOGGETT. Stateless income.
    Mr. SULLIVAN [continuing]. Abusive tax planning.
    Mr. DOGGETT. Thank you. I certainly agree.
    Chairman BOUSTANY. We thank the gentleman. Mr. Kelly.
    Mr. KELLY. Thank you, Chairman. Thank you all for being 
here. But I do think this is kind of recurring, right. We just 
keep talking about this, and I don't know if it was the sheriff 
that said it was somebody that said there was an old saying you 
keep shooting yourself in the foot and wonder why you are 
limping.
    Look, we have been talking about this for so long. Maybe 
some of you that can go back in time, in 1986, it was really 
tax reform. What was the magic then? What was so obvious then 
that is so clouded now?
    Mr. HOLTZ-EAKIN. As I said earlier, the 1986 reform started 
in the late 1970s with people on both sides of the aisle, the 
Dick Gephardts, Bill Bradleys, the Democratic side, the Alvin 
Ross, Jack Kemps on the Republican side and others, Art 
Laffers, talking about the damaging impact of the U.S. tax 
system and how this was something that was hurting average 
Americans.
    It took a decade of public education, and then it took a 
sitting President to run for re-election on the promise of 
doing tax reform, as Ronald Reagan did, and it took probably 
three or four legislative deaths and a pretty good beer-infused 
break in an Irish pub to get it done. It is really hard, but I 
think the essential piece there was the bipartisan nature. I 
want to emphasize that. I think Mr. Sullivan is right about 
that. And the public education.
    Tax reform for the elites, businesses getting something for 
them that doesn't appear to be connected to the average 
American, is not going to fly.
    Mr. KELLY. Okay. So looking at Mr. Neal, the idea is to get 
more Irish legislators. Is that right?
    Mr. HOLTZ-EAKIN. We know that it is not just going to the 
pub, because they tried that.
    Chairman BOUSTANY. It is really about the beer.
    Mr. NEAL. Sure, we got that part of it down pretty good.
    Mr. KELLY. Mr. Foster. Anybody, because this is----
    Mr. FOSTER. Yes, sir.
    Mr. KELLY [continuing]. So reoccurring that----
    Mr. FOSTER. What Doug Holtz-Eakin said about the history is 
terribly important. I date the 1986 Act's birth with a hearing 
of the Joint Economic Committee chaired by then-Senator Lloyd 
Bentsen of Texas, who began an exploration of the question of 
the capital gains tax, and it was that discussion which then 
led to legislation, which then led to further discussion and so 
forth, culminating 8 years later in the 1986 Tax Reform Act, 
which was, in fact, a bipartisan process.
    One of the interesting aspects of that is they--the 
proponents on both sides that Doug mentioned, had to still live 
down to an essential. That is what I tried to do in my 
testimony. What is comprehensive tax reform about, and as I 
described it, it is more businesses doing more business. They 
had to still live down to lower rates, a broader base. It was 
something everyone could understand. And as long as you adhered 
to that mantra and the product reflected that, you were 
successful, and that was something that both sides could agree 
on. It is still the correct mantra.
    Mr. KELLY. Let me just ask it because we are going to run 
out of time here, but you know, if this was an athletic team or 
if this were a business, and you had an opportunity to look at 
everybody else that you compete against. I mean, really a deep 
dive into what it is that is allowing them to capture market, 
it would be hard to be sitting here today and saying we still 
don't quite understand why these people are leaving the United 
States. They just must be un-American or selfish or something.
    Do you remember the Pogo comic strip in the 1950s? Another 
Irishman, a guy named Walt Kelly, Pogo said we have met the 
enemy, he is us. But I look at you all, and you all can go real 
deep into--listen, I am just a guy that tried to find the best 
people to do the job and then stay out of their way and let 
them do it.
    I am not like Mr. Renacci who understands taxes or loves 
taxes. I never understood them. I never loved paying them, but 
I did it anyways. The purpose of you being here today, though, 
is to, again, reiterate, this is like Captain Obvious, we are 
losing at the global level, and we can look around us about 
what everybody else is doing to capture our markets, and we are 
sitting here thinking what would it take for us to wake up?
    And so the question about 1986 was, a House working with 
the Senate working with the White House where everybody had the 
same goal, and that was to take advantage of all the things 
that we have, one-fifth to the world's fresh water, an ability 
to feed ourselves without having to rely on anybody else, more 
sources of energy that anybody in the world. We could build 
geopolitical relationships that would end some of this 
craziness that is going on, and we are sitting here and still 
trying to figure out what is the problem?
    I mean, isn't it so obvious? You guys must get to the point 
where you feel like you are hitting yourself in the head with a 
hammer, and the only reason you do it is because when you stop, 
it makes you feel better, but this is just insane.
    So I can't tell you how much I appreciate you being here. 
You don't need a lecture from me. Listen, you guys are deeper 
than the Pacific Ocean when it comes to tax policy. I am just a 
guy that is looking at it and thinking, I really do know what 
the problem is. It is people like us sitting here not able to 
get along with other people like us serving the American people 
and their best needs. It is pretty obvious.
    No response from everybody. I know you all are shaking your 
head. Yeah. Okay. All right. We are all together. Let's go. 
Let's go get them.
    Chairman BOUSTANY. Mr. Renacci. Follow that.
    Mr. RENACCI. Thank you, Mr. Chairman. Well, first, I am 
going to correct my colleague, Mr. Kelly. It is not that I like 
taxes. I had to live with taxes for 30 years, and because of 
that, I learned the system. And I have to say that I even went 
all the way back. I was thinking, I actually was involved in my 
first CPA firm prior to the 1985 and 1986 changes, so I got to 
see prior and I got to see the changes and had to live through 
all that as well.
    But I am going to ask you all some yes or no questions 
because I want to run through some things, and then I have got 
some questions that might take a little longer. But first 
question. I think it is important to understand who bears the 
burden of our high corporate rate. Isn't it true that the 
burden of the corporate income tax does not ultimately fall on 
corporations but, rather, on the people, the customers, the 
workers, the investors?
    And the reason I ask that question, I say that to people, 
they look at me, they don't understand what I am saying. But 
ultimately, I try and tell them, a business will not be in 
business if it doesn't pass on its corporate tax. So would you 
all agree, I take it, yes or no, across the panel?
    Mr. Eakin.
    Mr. HOLTZ-EAKIN. Yes.
    Mr. FOSTER. Yes.
    Mr. HODGE. Yes.
    Mr. SULLIVAN. Yes and then some.
    Mr. RENACCI. That was easy. It is clear that we have an 
outdated and anticompetitive Tax Code. And it is also clear how 
harmful corporate income taxes are to economic growth. Would 
moving to a consumption-based tax system be more pro-growth 
than a reform that sticks with the traditional income-based 
system?
    Mr. HOLTZ-EAKIN. Yes.
    Mr. FOSTER. Yes.
    Mr. HODGE. Yes.
    Mr. SULLIVAN. Yes.
    Mr. RENACCI. Wow. Okay. Next question. Would a zero 
corporate income tax with a single-digit consumption tax give 
us the most competitive tax system in the world?
    Mr. HOLTZ-EAKIN. Yes.
    Mr. FOSTER. That would depend on everything else going on. 
That's too general a question.
    Mr. RENACCI. That is all right. I don't expect all yeses.
    Mr. HODGE. Yes.
    Mr. SULLIVAN. Yes, if it is paid for.
    Mr. RENACCI. Okay. Over the last 3 decades, the average 
marginal corporate income tax rate among OECD countries has 
fallen from 48 percent to under 25 percent, and since 2000, we 
are one of only three of the 34 OECD countries that has not cut 
their corporate tax rate. Given that other OECD countries have 
a national level consumption tax, would other OECD countries 
have been able to cut their corporate income tax rates without 
increasing their VAT, value added tax, or the GST, goods and 
services tax? So would they have been able to cut their taxes 
without increasing the VAT or the GST tax?
    Mr. HODGE. Some have and some haven't. Canada, for 
instance, has cut their corporate tax rate without raising 
their GST. Some other countries, I think the U.K. may have 
ticked it up a little bit.
    Mr. RENACCI. How did they pay for it? I guess that is why I 
am asking the question.
    Mr. HODGE. Yeah, Marty?
    Mr. SULLIVAN. They raised a lot of other taxes. They have a 
bank tax. They reduced their depreciation allowances. They have 
a carbon tax. So they looked at other sources of revenue to pay 
for what is going to be a 17 percent rate.
    Mr. HODGE. But the Canadians, on the other hand, I have 
seen their corporate tax revenue's fairly stable, I would say.
    Mr. SULLIVAN. Yeah.
    Mr. HODGE. And a lot of it is because of profit shifting 
out of the United States to Canada. So they have been the 
beneficiary of our high tax rate by lowering theirs.
    Mr. RENACCI. Okay. I got to keep moving. Would raising the 
standard deduction and eliminating most itemized deductions 
provide a simple tax system for individuals without 
discouraging work and investment?
    Mr. HODGE. It depends.
    Mr. HOLTZ-EAKIN. Yeah. Depends how you do it.
    Mr. SULLIVAN. Yeah.
    Mr. RENACCI. Okay. Everybody is kind of shaking their head. 
Depends, yes. I mean, again, I am just trying to say----
    Mr. SULLIVAN. It would certainly simplify it.
    Mr. RENACCI [continuing]. Most people say if we simplify 
it----
    Mr. HODGE. I think that is one of the entries in our book, 
and you will know in 2 weeks when we release it.
    Mr. HOLTZ-EAKIN. So the mantra is low rate, broad base. You 
are keeping the same narrow base in a different form, or the 
raise.
    Mr. RENACCI. Okay. So let's go to this. So has the model of 
an entity-based tax with fully expensing been adopted by any 
other OECD country?
    Mr. HODGE. Say that again.
    Mr. RENACCI. A model of an entity-based tax with fully 
expensing been adopted by any OECD country?
    Mr. HOLTZ-EAKIN. I don't think so.
    Mr. FOSTER. I don't think so.
    Mr. HODGE. I don't think so.
    Mr. SULLIVAN. I don't think so, no.
    Mr. RENACCI. The answer is no. I just wanted to see if you 
would agree to it.
    Mr. HODGE. This is a test.
    Mr. RENACCI. So let me ask the question about fully 
expensing. I don't have a lot of time left on fully expensing. 
Because, look, I am a big believer in fully expensing, but here 
is the downside and this is from living in the real world. I 
always use Mr. Kelly as my example. He has a car dealership, I 
have a car dealership. I have cash, he has no cash. I can buy 
my dealership, he can't buy the dealership. He has to lease it, 
I can buy. I am going to fully expense my building. I am not 
going to pay any taxes. He is going to lease his building. He 
is going to pay taxes.
    Fully expensing is good in the sense if you have cash. It 
hurts the guy who doesn't have cash. That is coming from a guy 
who started his business with no cash. Tell me if you agree or 
disagree with that. This is when you stump the economists.
    Mr. FOSTER. I think I mostly disagree, because you leased 
it from a company that expensed it. So the savings from the 
leasing company expensing that building, then get passed 
through to you in a competitive market.
    Mr. HODGE. Right.
    Mr. RENACCI. But that is not the case, because I will pay--
so I will give you a better example. And I know I am running 
out of time. I was in the industry. I was in the nursing home 
industry. I had 23 facilities. I had $120 million in assets. I 
would have expensed those fully and I wouldn't have paid a dime 
of tax over 20 years. The guy who had the lease and had no 
cash, he would have been paying taxes. Somebody has to pay 
taxes in the fully expensing model. It is the guy who can't 
fully expense. And----
    Mr. HOLTZ-EAKIN. That is right, because we want the people 
who are making the investment, even if it is the leasing 
company, to have the appropriate tax incentives.
    Mr. RENACCI. So the----
    Mr. HOLTZ-EAKIN. If you want a Tax Code designed for 
growth, you have to reward people generating growth. And the 
leasing company that builds the facility is doing it.
    Mr. RENACCI. The only issue there is that Mr. Kelly, if he 
had 12 to 23 dealerships and I had 23, he could not be able to 
compete with me. We will leave it there. I know I am running 
out of time.
    I yield back.
    Chairman BOUSTANY. I thank the gentleman.
    Mr. Reed.
    Mr. REED. Well, thank you, Mr. Chairman, and thank you to 
the panel for kind of taking up my counterpoint to Mr. 
Renacci's point that we had that conversation not too long ago. 
So I appreciate those comments.
    You know, we are talking a lot here today about business 
reform. I want to focus a little bit more maybe on the 
individual side too as we deal with this issue. Seems to be a 
broad agreement as where we need to go on the business side. 
But I want to really stand up for the folks back in my 
district, for example, Western New York, a rural district. I 
want to talk about the mom-and-pops. I want to talk about the 
individuals there that are struggling under this broken Tax 
Code.
    So could any of you, as we deal with the goals of tax 
reform, as we deal with that, why do the individuals back in my 
district need tax reform today? Can you give me examples of 
what they are dealing with that maybe we need to highlight and 
be aware of as we go forward in tax reform?
    Mr. Hodge, Mr. Sullivan. We will go with Mr. Sullivan.
    Mr. SULLIVAN. I think the most important thing for small 
business and the easy--is simplification. All the data show 
that, you know, we all want simplification. Large businesses 
want simplification, individuals want simplification. But for 
small businesses, it is very expensive for them, and I think 
the best thing we could do for small business is tax 
simplification.
    Mr. REED. Tax simplification. In order to achieve tax 
simplification for the small businesses or the individuals, 
where should the priority be focused? I mean, obviously, we are 
talking about raising the standard deduction, full expensing 
rather than keeping track of archaic depreciation schedules and 
everything else. Would you agree those are types of concepts we 
should be looking at in regards to individual and small 
business?
    Mr. Eakin.
    Mr. HOLTZ-EAKIN. I think those things are important. If you 
think about all the discussion of sort of base broadening on 
the corporate side, that is going to flow over to the 
passthrough entities who are, in the end, the moms-and-pops. If 
they are not worrying about a thousand special tax rules that 
deal with advertising and foreign sales and this and that, then 
they just have a nice simple base with low rates, cash 
accounting, it will be much easier for them to comply.
    Mr. REED. And so going along those lines, and especially 
since a lot of folks down here down in D.C. are struggling with 
the handcuffs of revenue neutral, distributionally neutral and 
those types of conversations, how do you quantify that 
simplification for--like when I had a small business, I will 
tell you one of the things that frustrated me, when I dealt 
with my accountant, he would say, hey, Tom, I need you to find 
XYZ. All right, hold on. I got to stop everything I am doing. I 
have to go over here. Two weeks later, I get him the stuff. And 
the one time he said, oh, I forgot to tell you, I already had 
that information. I almost fired him on the spot. But that was 
a whole other situation.
    But how do you quantify those hours that I spent in the 
basement looking for receipts for an accountant that were 
really it was just because he needed to comply with a complex 
Code? How do you quantify that? How do we do a better job of 
putting a number on that?
    Mr. Hodge.
    Mr. HODGE. Well, actually, I put a number on that in my 
testimony. New data has come out of Reginfo, it is out of OIRA, 
that calculates the time in which we comply with OIRA's 
paperwork. And they have an account of all the provisions of 
the Tax Code and how many hours that we take as a Nation to 
fill out those forms. It now adds up to $409 billion a year.
    Mr. REED. Amen. So in your experience dealing in, Mr. 
Holtz-Eakin, I know on the CBO side, and you guys dealing with 
joint tax, what has been your experience with joint tax and 
their score mechanisms and their rules on scoring? Have they 
been really good at quantifying the hundreds of billions of 
dollars in simplification benefit that we are going to be 
seeing?
    Mr. HOLTZ-EAKIN. I can't speak for the joint committee, but 
the CBO is not good at that, doesn't even try.
    Mr. REED. Thank you. I thought that was the case.
    Mr. HODGE. And they are not in our economic model. Those 
are a side calculation from our macroeconomic model.
    Mr. REED. And that is one of the things I think I have to 
wrestle with down here in Washington getting in my relatively 
short time here since 2010, is recognizing we need good policy 
to lead this conversation. And a lot of times we wrestle in 
D.C., in this Beltway bubble, with the handcuffs of the score 
as opposed to recognizing there are going to be these other 
consequences, positive consequences of tax reform that really 
should be brought into the debate and say, look, if you want to 
hit me with the score, let me just hit you with the 
commonsense. Let me just hit you with the benefit that I am 
going to hear from my residents of having a simpler, easier 
Code to deal with.
    Is that a fair--is that a fair commonsense position to be 
able to take back to the district and say, this is why we are 
doing what we are doing?
    Mr. HOLTZ-EAKIN. I think that is very important because in 
the end, scores are measures of the budget cost of policy.
    Mr. REED. Right.
    Mr. HOLTZ-EAKIN. They don't say anything about the 
benefits. You have to talk about the benefits because that is 
why you are doing it.
    Mr. REED. And in 1986, did they do a good job? Is that a 
lesson we can learn from the 1986 reform? Did they do a good 
job of getting that out there?
    Mr. HODGE. No.
    Mr. FOSTER. No.
    Mr. HOLTZ-EAKIN. No.
    Mr. SULLIVAN. No.
    Mr. REED. And how best can we get that information out 
there, other than through the organizations, various 
organizations you represent? How do we get that out there?
    Mr. HOLTZ-EAKIN. I would argue it is you and all of your 
colleagues talking it at home. You know, for example, the point 
Mr. Sullivan made about the fact that our corporation income 
tax is increasingly hurting the wages of workers. They have a 
stake in getting this done, but they don't know it. And you are 
the best way to educate them of that.
    Mr. REED. And I appreciate that and I exactly agree with 
you.
    So with that I yield back. Thank you, Mr. Chairman.
    Chairman BOUSTANY. I thank the gentleman.
    Mrs. Noem, you are recognized.
    Mrs. NOEM. Mr. Sullivan, I found your testimony 
interesting. It says: As difficult as it has been in the past 
to enact stand-alone business tax cuts, the political 
environment now is probably less favorable to business tax 
relief than at any other time in living memory. And then you go 
into talking about kind of the political environment that we 
are living in this year. And it makes me think about other 
countries because they have, obviously, enacted business tax 
reform. Do they not have a political environment in these 
countries that has demonized businesses?
    Mr. SULLIVAN. You know, it is a puzzling question, because 
on the one hand in other countries, the outrage over loopholes 
and profit shifting is even larger, like in the U.K.----
    Mrs. NOEM. Right.
    Mr. SULLIVAN [continuing]. It is a very, very big political 
issue. It is a front-burner issue. But on the other hand, the 
United Kingdom is able to have a 17 percent corporate tax rate.
    Mrs. NOEM. Right. Right.
    Mr. SULLIVAN. So it is a little bit puzzling. And the only 
thing, only suggestion I can make is, I think what the U.K., 
and I was just in Ireland, what they have done is they have 
really focused on cracking down on loopholes, on what their 
voters perceive as being abuse. So they get that out of the way 
and then they can focus on providing tax benefits that really 
make a difference. So clearing, it is not just a matter of 
broadening the base and lowering the rates.
    Mrs. NOEM. Well, somebody said that earlier. I think it was 
Mr. Foster said the mantra is lower rates, broader base. And my 
question I wrote, does that still work? I mean, is that still 
enough?
    Mr. FOSTER. Enough as a way of communicating, yes. I think 
people can understand that. You have to elaborate a little bit, 
have a discussion. Okay, what does broadening the base really 
mean, because people will get a little nervous when you talk 
about that. So you explain what it means and what it doesn't 
mean. But then it is an expression they can sort of get and 
then you just say it again. And, oh, yeah, I remember, they 
were talking about that. That is a good concept.
    It does work because it is something that people can 
understand. And you can elaborate on it just a little bit 
without getting into a lot of detail to reassure them that it 
doesn't mean that they are going to lose something they really 
care about.
    Mrs. NOEM. Well, we use a lot of words when we talk about 
tax reform. We use simplicity, complexity, efficiency. Does 
growth still trump everything? Should we evaluate every single 
proposal that comes before this committee--and we have to keep 
our priorities straight. So should our number one priority be 
what gives you the most growth? You all agree with that?
    Mr. HODGE. I believe absolutely.
    Mr. FOSTER. Absolutely.
    Mr. SULLIVAN. Absolutely.
    Mr. HOLTZ-EAKIN. Absolutely. It is the paramount issue of 
the time.
    Mrs. NOEM. Mr. Hodge, you did your modeling that you talked 
about. You have run many of the candidate's plans through your 
modeling. What is the one thing that surprised you the most 
from watching all of those different plans? And I would be 
interested in seeing you run some of the plans that people have 
on this committee that have sponsored running through your 
modeling process too.
    What surprised you the most about the plans that you saw 
going through the modeling process, and what gave you great 
growth results when you ran them through the modeling process?
    Mr. HODGE. Well, here is the political irony, that the tax 
changes that produce the most economic growth, and that is 
really cutting the cost of capital, are the least politically 
popular that you can imagine, cutting the corporate tax rate, 
moving to full expensing, integrating the corporate or business 
income tax system. Whereas the tax cuts or tax changes that are 
most popular, cutting individual tax rates, child tax credits, 
education credits, have the least impact on economic growth.
    So that is the one challenge that you are going to have, is 
going out and trying to sell comprehensive tax reform in a way 
that is both politically popular but most pro-growth, and it is 
a real challenge.
    In 1986, they put an emphasis on cutting individual tax 
rates and, actually, it pushed some of the economic burden over 
on businesses. And I don't think it had quite the growth effect 
it could have had had they not done some of that shifting.
    Mrs. NOEM. Mr. Foster, you said in your testimony that tax 
reform should ensure industry-specific neutrality. What do you 
mean by that? Because there is no way to do tax reform--I don't 
agree that tax reform should be viewed through the lens of 
neutrality just because how much more complicated do we make 
the Tax Code in our provisions when we are constantly trying to 
keep everything equal for everybody? So tell me a little bit 
about what you mean. I know about not specifically hitting this 
industry hard because we hate this industry and the way it 
delivers energy or certain specifics, but what did you mean by 
putting that in your testimony?
    Mr. FOSTER. What I meant is a specific form of neutrality. 
So we are not talking about revenue nor distributional. We are 
talking about economic neutrality. What we have today is an 
economy that is incredibly complicated and a Tax Code that is 
incredibly complicated. The two intermixing in sometimes very 
unfortunate ways. We have a system now where the Tax Code is 
dictating where businesses should invest and how they should 
operate. That is the nonneutral.
    Mrs. NOEM. Okay.
    Mr. FOSTER. What I am talking about is getting rid of all 
of that.
    Mrs. NOEM. That is what I wanted to clarify. Is there 
anything new today that you guys have--I am out of time, I 
realize--but something from the last time you testified before 
this committee, is there something new that you have learned 
since then that you believe needs to be a part of our tax 
reform discussions? Or do you feel like you are just back here 
delivering the same message?
    Mr. HODGE. Well, the estimates on the hourly time that it 
takes to comply with the Tax Code has been increased by 50 
percent, according to the most recent estimates.
    Mrs. NOEM. Okay.
    Mr. HODGE. That is a shame. Time is the most precious thing 
that we have as human beings because we can't get it back. And 
the more time we comply with the Tax Code, I think is immoral.
    Mrs. NOEM. Okay.
    Mr. HODGE. And we can't get that time back. And I think you 
have an obligation to reduce the amount of time that we have 
complying with the tax system so that we can have more time for 
ourselves.
    Mrs. NOEM. As a mom who is in Washington, D.C. away from 
her children every single week hoping we can do tax reform, 
which is the reason I came here, I totally understand what you 
are saying. I am tired of wasting time too.
    I yield back, Mr. Chairman.
    Chairman BOUSTANY. Thank you.
    Gentlemen, we thank you for your testimony. It has been 
helpful. I hope we will now start the ball rolling on substance 
on tax reform. That is my hope. I think all of us share that 
goal. But we do thank you for being here to spur us on with the 
need for tax reform.
    Please be advised that Members will have 2 weeks to submit 
written questions to be answered later in writing. Those 
questions and your answers will be made part of the formal 
record.
    And with that, the subcommittee stands adjourned.
    [Whereupon, at 3:35 p.m., the subcommittee was adjourned.]

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