[Senate Hearing 115-286]
[From the U.S. Government Publishing Office]


                                                        S. Hrg. 115-286

                       COMPREHENSIVE TAX REFORM: 
                        PROSPECTS AND CHALLENGES

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

                                HEARING

                               BEFORE THE

                          COMMITTEE ON FINANCE
                          UNITED STATES SENATE

                     ONE HUNDRED FIFTEENTH CONGRESS

                             FIRST SESSION

                               __________

                             JULY 18, 2017

                               __________

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                          COMMITTEE ON FINANCE

                     ORRIN G. HATCH, Utah, Chairman

CHUCK GRASSLEY, Iowa                 RON WYDEN, Oregon
MIKE CRAPO, Idaho                    DEBBIE STABENOW, Michigan
PAT ROBERTS, Kansas                  MARIA CANTWELL, Washington
MICHAEL B. ENZI, Wyoming             BILL NELSON, Florida
JOHN CORNYN, Texas                   ROBERT MENENDEZ, New Jersey
JOHN THUNE, South Dakota             THOMAS R. CARPER, Delaware
RICHARD BURR, North Carolina         BENJAMIN L. CARDIN, Maryland
JOHNNY ISAKSON, Georgia              SHERROD BROWN, Ohio
ROB PORTMAN, Ohio                    MICHAEL F. BENNET, Colorado
PATRICK J. TOOMEY, Pennsylvania      ROBERT P. CASEY, Jr., Pennsylvania
DEAN HELLER, Nevada                  MARK R. WARNER, Virginia
TIM SCOTT, South Carolina            CLAIRE McCASKILL, Missouri
BILL CASSIDY, Louisiana

                     Chris Campbell, Staff Director

              Joshua Sheinkman, Democratic Staff Director

                                  (ii)
                            
                            
                            C O N T E N T S

                              ----------                              

                           OPENING STATEMENTS

                                                                   Page
Hatch, Hon. Orrin G., a U.S. Senator from Utah, chairman, 
  Committee on Finance...........................................     1
Wyden, Hon. Ron, a U.S. Senator from Oregon......................     3

                               WITNESSES

Talisman, Hon. Jonathan, former Assistant Secretary for Tax 
  Policy, 2000-2001, Department of the Treasury, Washington, DC..     7
Olson, Hon. Pamela F., former Assistant Secretary for Tax Policy, 
  2002-2004, Department of the Treasury, Washington, DC..........     9
Solomon, Hon. Eric, former Assistant Secretary for Tax Policy, 
  2006-2009, Department of the Treasury, Washington, DC..........    11
Mazur, Hon. Mark J., former Assistant Secretary for Tax Policy, 
  2012-2017, Department of the Treasury, Washington, DC..........    13

               ALPHABETICAL LISTING AND APPENDIX MATERIAL

Hatch, Hon. Orrin G.:
    Opening statement............................................     1
    Prepared statement...........................................    43
Mazur, Hon. Mark J.:
    Testimony....................................................    13
    Prepared statement...........................................    44
    Responses to questions from committee members................    50
Olson, Hon. Pamela F.:
    Testimony....................................................     9
    Prepared statement...........................................    53
    Responses to questions from committee members................    59
Solomon, Hon. Eric:
    Testimony....................................................    11
    Prepared statement...........................................    61
    Responses to questions from committee members................    67
Talisman, Hon. Jonathan:
    Testimony....................................................     7
    Prepared statement...........................................    70
    Responses to questions from committee members................    76
Thune, Hon. John:
    ``Reforming the Taxation of Pass-Through Businesses,'' 
      Bipartisan Policy Center, April 2017.......................    81
Wyden, Hon. Ron:
    Opening statement............................................     3
    Prepared statement...........................................    89

                             Communications

Air Conditioning Contractors of America, et al...................    91
American Citizens Abroad, Inc. and American Citizens Abroad 
  Global Foundation..............................................    93
American Institute of Certified Public Accountants...............    95
Biomass Power Association........................................   102
Biomass Power Association, et al.................................   103
Center for Fiscal Equity.........................................   105
Christian Science Church.........................................   107
Church Alliance..................................................   108
Coalition to Preserve Cash Accounting............................   113
Education Finance Council........................................   116
Henderson, Martha................................................   119
Like-Kind Exchange Stakeholder Coalition.........................   120
NRS Inc..........................................................   122
Perry, Judith....................................................   123
Starkman, Jay, CPA...............................................   124

 
                       COMPREHENSIVE TAX REFORM: 
                        PROSPECTS AND CHALLENGES

                              ----------                              


                         TUESDAY, JULY 18, 2017

                                       U.S. Senate,
                                      Committee on Finance,
                                                    Washington, DC.
    The hearing was convened, pursuant to notice, at 9:04 a.m., 
in room SD-215, Dirksen Senate Office Building, Hon. Orrin G. 
Hatch (chairman of the committee) presiding.
    Present: Senators Grassley, Crapo, Enzi, Thune, Isakson, 
Portman, Toomey, Heller, Scott, Cassidy, Wyden, Cantwell, 
Nelson, Menendez, Carper, Cardin, Brown, Bennet, Casey, Warner, 
and McCaskill.
    Also present: Republican Staff: Mark Prater, Deputy Staff 
Director and Chief Tax Counsel; Tony Coughlan, Tax Counsel; and 
Chris Hanna, Senior Tax Policy Advisor. Democratic Staff: 
Joshua Sheinkman, Staff Director; Tiffany Smith, Chief Tax 
Counsel; and Ryan Abraham, Senior Tax and Energy Counsel.

 OPENING STATEMENT OF HON. ORRIN G. HATCH, A U.S. SENATOR FROM 
              UTAH, CHAIRMAN, COMMITTEE ON FINANCE

    The Chairman. The committee will come to order. Welcome, 
everyone, to our first hearing of the day, where we will 
discuss the ongoing effort to reform our Nation's tax code.
    We have a distinguished panel of bipartisan experts before 
us today to help shed some light on issues surrounding tax 
reform. I look forward to a productive discussion and 
appreciate your attendance, and you are here a bit earlier than 
our normal meeting time.
    In 1984, President Reagan called for a reform of the tax 
code. He laid out three main goals for tax reform: fairness, 
efficiency, and simplicity.
    Those three goals are as relevant today as they were a 
generation ago. For our current efforts, I would add a fourth 
goal: American competitiveness. This goal is essential in 
today's global economy, as we must also consider what is 
happening outside our borders.
    When discussing tax policy or legislation, it is very easy 
to find oneself heading down byzantine paths of complexity, but 
I think we would do well to keep focused, and to frequently 
remind ourselves of these basic principles. Therefore, I will 
repeat them: fairness, efficiency, simplicity, and American 
competitiveness.
    The Tax Reform Act of 1986 is generally considered to be a 
great success. However, one question people should ask 
themselves is, if the law we passed in 1986 was such a success, 
why did it disintegrate so quickly?
    Obviously, there are a number of competing interests out 
there, with many of them focused on narrow provisions or 
benefits in the tax code. Some of these interests have employed 
efficient lobbyists to make compelling cases for changes, while 
others have elected efficient legislators who have done the 
same. That is one reason for the more or less constant change 
we have seen to the tax code since 1986.
    Another reason might be that the theoretical underpinnings 
of the 1986 bill were not as sound as many assumed. For one 
thing, the 1986 reform was a shift towards pure taxation of 
income. But in the last couple of decades, there has been an 
increasing awareness of the efficiency of taxing savings and 
investment lightly--or not at all--and instead basing the tax 
system on consumption.
    And indeed, a number of the subsequent changes to the tax 
code would be described as a shift away from taxing income 
toward taxing consumption. This helps to explain things like 
decreased tax rates on capital gains and dividends, more rapid 
depreciation schedules, and more qualified retirement plan 
options.
    Many of the major reform proposals we have seen in recent 
years--including the House's Better Way Blueprint--would take 
us further in that direction. And while some of these changes 
have been very good, the piecemeal fashion in which they have 
happened was not consistent with simplicity. And many of the 
changes have been bad, in my opinion.
    Another way of looking at the unraveling of the 1986 tax 
reform law is that it had a sound theoretical basis at the 
time, but technological changes in the intervening decades have 
required us to make changes in the years since. For example, 
the tax base is far more mobile today than it was in 1986. And 
a mobile tax base is inherently less reliable, making efforts 
to heavily tax highly mobile assets an exercise in futility.
    Whatever the case, we know that the myriad changes to the 
tax code in the past 3 decades have left us with a status quo 
that is simply unsustainable. American families, individuals, 
and businesses collectively spend hundreds of billions of 
dollars a year--not to mention countless hours--simply trying 
to comply with our tax code.
    Tepid growth rates for the U.S. economy have seemingly 
become the new normal for some. America's multinational 
businesses find it difficult to compete abroad and are often 
targets for acquisition by foreign companies.
    All of this should be very unacceptable to every member of 
the Senate. Senator Wyden was correct when he recently 
described the current tax code as a ``rotting economic 
carcass.''
    There is no longer any question as to whether we should 
reform the tax code. The only questions remaining are ``how?'' 
and ``when?''
    For this reason, we are engaged in a long-term effort to 
fix these problems. And in my view, the momentum in favor of 
comprehensive tax reform is stronger now than at any point 
since the 1986 reform was signed into law.
    I know Republicans, both on this committee and elsewhere, 
are united in our commitment to fix our broken tax system, and 
efforts in both chambers of Congress and on both sides of 
Pennsylvania Avenue are ongoing. My sincere hope--which I have 
repeated numerous times--is that our Democratic colleagues will 
be willing to join in this effort.
    Tax reform should not have to be a partisan exercise. 
Indeed, the negative impact of the status quo falls on 
Republican and Democratic voters alike. So we should all be 
willing to work toward solutions.
    I know that many of my colleagues on the other side of the 
aisle recognize the need for reform. However, much of the 
Democratic leadership's rhetoric on this issue has been less 
than encouraging.
    We have heard condemnations and claims about tax plans that 
do not yet exist. We have heard demands--sometimes stated as 
preconditions to any bipartisan cooperation--for concessions 
that are unrelated to tax reform. And on a similar note, we 
have heard demands that Republicans make significant procedural 
concessions for moving a tax reform bill as a prerequisite for 
any bipartisan engagement on the substance of potential 
legislation.
    I will not belabor this issue too much at this point. I 
will simply say that, historically speaking, this is not how we 
have worked on bipartisan tax policy, and I hope that the 
statements we have heard from some of the Senate Democratic 
leaders discouraging bipartisan efforts on tax reform do not 
reflect the views of all our Democratic colleagues.
    Today, we have a panel of four very skilled experts who 
represent both parties. They are all former Assistant 
Secretaries of Treasury for Tax Policy. They have been on the 
front lines of tax policy for some time, and I am certain that 
their insights can help us today as we work to address both the 
shortcomings of our current tax system as well as the divisions 
that could hamper our tax reform efforts.*
---------------------------------------------------------------------------
    * For more information, see also, ``Overview of the Federal Tax 
System and Policy Considerations Related to Tax Reform,'' Joint 
Committee on Taxation staff report, July 14, 2017 (JCX-36-17), https://
www.jct.gov/publications.html?func=startdown&id=5015.
---------------------------------------------------------------------------
    And with that, I am very pleased to turn to my colleague 
and partner, Senator Wyden.
    [The prepared statement of Chairman Hatch appears in the 
appendix.]

             OPENING STATEMENT OF HON. RON WYDEN, 
                   A U.S. SENATOR FROM OREGON

    Senator Wyden. Thank you, Mr. Chairman. And on this side, 
we very much would like to work in a bipartisan way and have a 
true partnership on this issue for a tax code that gives all 
Americans the chance to get ahead.
    I want to begin by saying that everyone here wishes Senator 
McCain a full and speedy recovery. John McCain is about as 
tough as anybody around, and with Cindy, his wife, in his 
corner, we are all counting on him being back with us soon.
    Mr. Chairman and colleagues, it is hard to imagine a member 
of Congress, Democrat or Republican, who would stand up before 
a crowd at a business or town hall meeting at home and say, ``I 
am a big fan of the tax system on the books.'' Insanely 
complicated, riddled with sweetheart deals, and plagued by the 
inversion virus, I just do not see a lot of members of Congress 
out there stumping for business as usual tax policy.
    What is needed is bipartisan tax reform that focuses on 
progressivity and helping the middle class, cleaning out the 
flagrant tax loopholes, fiscal responsibility, and giving all 
Americans the chance to get ahead. Now, those were all key 
principles of what happened 3 decades ago when Democrats and 
Republicans got together for major bipartisan tax reform.
    Unfortunately, in the first months of this administration, 
the majority party has not shown any concrete interest in this 
kind of approach. Before his confirmation, Secretary Mnuchin 
embraced what has come to be known as the Mnuchin Rule--no 
absolute tax cut for the wealthy.
    I think it would be fair to say that stirred a lot of 
interest on our side of the aisle. But it was not very long 
before Secretary Mnuchin and the Trump economic team made a 
full-scale retreat from that principle.
    Now the administration has a one-page plan of tax reform 
bullet points. There is a lot of detail about how the fortunate 
few get their taxes cut, but not much detail about how relief 
is going to go to the middle class.
    And we all remember when Henry Ford said, ``Look, I want to 
be successful. For me to be successful, working people have to 
have the money to buy my cars.'' So it is all about the working 
class.
    And in fact, under the Trump plan, independent analyses 
said millions of working Americans were in line for a tax 
increase. Furthermore, in the last few weeks, the Treasury 
Department has begun to wipe out tax rules designed to crack 
down on corporate inversions, protect jobs, and close estate 
tax loopholes. But without a plan waiting in the wings to 
replace those rules, that means that the Treasury Department 
risks a new outbreak of the inversion virus--an outbreak that 
would put more jobs at risk and condone tax avoidance.
    Here in the Congress, there are widely circulated pictures 
of a meeting of a group called the ``Big Six''--big blow-up in 
The Wall Street Journal--comprised entirely of Republican 
Senators, Representatives, and Trump officials. And it says, 
these folks are going to do the tax overhaul.
    Now, Republican members have already telegraphed a plan to 
transplant the Trumpcare tax breaks for the wealthy into a big, 
regressive tax cut later this year. And majority leadership in 
the Senate has said repeatedly in the media that they plan to 
move tax legislation with the same my-way-or-the-highway 
approach--we all know that as reconciliation--that has been 
used, and clearly has not turned out well, on health care.
    It is hard to look at that concrete evidence--concrete 
evidence--and find proof that the majority party wants real 
Democratic involvement in tax reform. And I would just say to 
my colleagues, you go back and read those histories of the 
1980s, and by this time in 1986, Democrats and Republicans were 
hip-deep into going back and forth about how you would do 
bipartisan tax reform.
    Now anybody can write a bill that slashes tax rates for the 
fortunate few and the biggest corporations, and you might even 
be able to get enough support to get it enacted into law, 
particularly if you use a partisan-only approach. I would just 
say as we launch this, that is not a good way to get the 
certainty and predictability that is really needed to create 
good-paying jobs and expand opportunity.
    It might be a good way to create tax windfalls for the 
fortunate few, but it is not a good way to grow our economy and 
respond to the numbers that we saw just last week that showed 
that wage growth is flat. The jobs numbers were not bad, but 
wage growth was flat. And having middle-class people with money 
to buy cars and get education and childcare and houses, that is 
how you make an economy.
    Mr. Chairman, I will close with this. You and I have talked 
about this often, and you and your staff know that I have spent 
hundreds of hours, literally, to produce what are still the 
only two bipartisan comprehensive Federal tax reform bills 
since 1986. One was with our former colleague, Senator Gregg, 
whom Mitch McConnell looked to on economic issues, and most 
recently I worked with our friend who sat down there, Senator 
Dan Coats, now at the Office of the DNI.
    They gave everybody a chance to get ahead. They were built 
around progressivity--progressivity and tax reform that puts 
growth first by putting money into the pockets of wage-earning 
Americans. It is lasting and bipartisan.
    I am interested in hearing from our witnesses who can talk 
to us about the lessons of the past in terms of finding common 
ground and moving ahead.
    And the last point I just want to make deals with health 
care. Obviously, there were major developments last night. I 
hope after it has become clear that the partisan approach, 
trying to just ram a bill through that raises premiums, hurts 
those with preexisting conditions, slashes Medicaid--it has now 
failed twice.
    So I would hope, as we start this tax reform discussion 
this morning, we would say that using a partisan approach for 
the major issues of our time, health care and tax reform, is a 
prescription for trouble. It is a prescription for gridlock. It 
is a prescription that will make it harder to solve the 
problems that the American people sent us here for.
    Now, I will just close, Mr. Chairman, because you have a 
long history--and we joke a lot about it--going all the way 
back to Senator Kennedy. So you have a long history of working 
in a bipartisan way. On this side of the aisle, we would like 
to bring that kind of focus both to health care and tax reform 
in the days ahead.
    Thank you.
    The Chairman. Well, thank you, Senator.
    [The prepared statement of Senator Wyden appears in the 
appendix.]
    The Chairman. Today we have the distinct pleasure of 
welcoming four former Assistant Secretaries for Tax Policy to 
our committee. I want to thank you all for agreeing to appear 
here today and for being willing to talk about such an 
important topic.
    First we will hear from Mr. Jonathan Talisman, a founding 
partner of Capital Tax Partners. Mr. Talisman served as the 
Assistant Secretary for Tax Policy for the U.S. Treasury 
Department during the Clinton administration. Previously, Mr. 
Talisman had also served at the Treasury as the Deputy 
Assistant Secretary for Tax Policy and the Tax Legislative 
Council.
    Before joining the Treasury Department, Mr. Talisman served 
from 1995 to 1997 as the chief Democratic tax counsel of the 
Senate Finance Committee under Senator Moynihan, and from 1992 
to 1995 as legislative counsel to the Joint Committee on 
Taxation.
    Prior to his tenure in government, Mr. Talisman worked in 
the Washington office of Akin, Gump, Strauss, Hauer, and Feld 
from 1984 to 1992, where he specialized in transactional tax 
planning.
    Mr. Talisman currently serves on the board of advisors to 
the Tax Policy Center and was chair of the Formation of Tax 
Policy Committee, American Bar Association Tax Section. He also 
currently serves as an adjunct tax professor at Georgetown 
University Law Center, where he teaches tax policy.
    Mr. Talisman holds a bachelor's degree from the University 
of Virginia and a juris doctorate from the University of 
Virginia School of Law.
    Next up will be Ms. Pamela F. Olson, the U.S. Deputy Tax 
Leader and Washington National Tax Services leader of 
PricewaterhouseCoopers. Prior to joining PwC, Ms. Olson led the 
Washington tax practice at Skadden Arps and served as Assistant 
Secretary for Tax Policy at the U.S. Department of the Treasury 
from 2002 to 2004.
    Ms. Olson has also previously served as a senior economic 
advisor to two presidential campaigns and as Federal tax 
advisor to the National Commission on Economic Growth and Tax 
Reform. Ms. Olson has also held positions with the Chief 
Counsel's Office of the IRS as Special Assistant to the Chief 
Counsel, Attorney Advisor in the Legislation and Regulations 
Division, and trial attorney in San Diego District Counsel. In 
2001 and 2002, Ms. Olson was the first woman to serve as chair 
of the American Bar Association Section on Taxation.
    Ms. Olson received her BA, MBA, and JD from the University 
of Minnesota.
    Third, we will hear from Mr. Eric Solomon, the codirector 
of the National Tax Department of Ernst and Young in 
Washington, DC. Mr. Solomon formerly served at the Treasury 
Department and IRS, holding various roles in the Office of Tax 
Policy at Treasury from 1999 to 2009 in both the Clinton and 
George W. Bush administrations.
    He was the Assistant Secretary for Tax Policy from 2006 
through 2009. At the IRS, he headed the Corporate Tax Division 
in the Office of Chief Counsel from 1990 to 1995.
    Before his government service, he practiced in law firms in 
New York City and was a partner at Drinker, Biddle, and Reath 
in Philadelphia.
    Mr. Solomon is a member of the Executive Committee of the 
Tax Section of the New York State Bar Association and has been 
an officer of the American Bar Association Section of Taxation, 
and he teaches corporate taxation in the LLM program at 
Georgetown University.
    He is a graduate of Princeton University and the University 
of Virginia Law School, and received his LLM in taxation from 
New York University.
    Finally, we will hear from Mr. Mark J. Mazur, the Robert C. 
Pozen director of the Urban Brookings Tax Policy Center.
    From 2012 until early this year, Mr. Mazur served as the 
Assistant Secretary for Tax Policy at the Department of 
Treasury. Prior to this service, Mr. Mazur served in the 
Federal Government for 27 years in various positions, including 
policy economist at the congressional Joint Committee on 
Taxation, Senior Economist at the President's Council of 
Economic Advisers, Chief Economist and Senior Policy Advisor 
and Director of Policy at the U.S. Department of Energy, as 
Acting Administrator of the Energy Information Administration, 
Director of Research and Analysis and Statistics at the IRS, 
and Deputy Assistant Secretary for Tax Analysis in the Office 
of Tax Policy.
    Before entering public service, Mr. Mazur was an assistant 
professor in Heinz College at Carnegie Mellon University. He 
has a bachelor's degree from Michigan State University as well 
as master and doctorate degrees from Stanford University.
    Mr. Talisman, please kick us off with your opening remarks, 
and we will go from there.

STATEMENT OF HON. JONATHAN TALISMAN, FORMER ASSISTANT SECRETARY 
    FOR TAX POLICY, 2000-2001, DEPARTMENT OF THE TREASURY, 
                         WASHINGTON, DC

    Mr. Talisman. Thank you, Chairman Hatch, Ranking Member 
Wyden, and distinguished members of the committee. Thank you 
for inviting me to discuss tax reform once again with my 
colleagues and friends. I am appearing here on my own behalf.
    Several of us appeared on a similar panel 6 years ago at a 
hearing entitled ``How Did We Get Here?'' Given the consensus 
for tax reform, this hearing might be entitled ``Why Are We 
Still Here?'' But in all seriousness, significant progress has 
been made in the interim.
    First, the fiscal cliff agreement largely fixed the 
encroachment of the AMT and prevented it from morphing from a 
class tax to a mass tax. Similarly, in 2011, we had well over 
100 structural extenders, and these were fixed in the PATH Act 
by permanent extensions or for 5 years. In addition, over the 
last 5 years, both tax-writing committees have conducted a 
thorough examination of the principle tax reform options that 
exist, including numerous hearings, bipartisan working groups, 
and comprehensive reform bills by committee members.
    I believe it is time for Congress to heed the instructions 
Yoda gave to Luke: ``Do. Or do not. There is no `try.' ''
    Let me briefly explore some of the remaining impetuses for 
reform and impediments that remain.
    Competitiveness and growth. As has been well-discussed, the 
United States has the highest statutory corporate tax rate 
among our major trading partners. Broadening the base and 
lowering the rate would improve productivity, reduce 
distortions, and attract foreign direct investment. Also, our 
worldwide international tax system is out of step with the rest 
of the world, which generally has adopted some form of 
territorial system.
    This combination often causes U.S. businesses to be at a 
competitive disadvantage in foreign markets and creates a 
``lockout'' problem for redeployment of foreign earnings. Other 
countries are taking significant steps to attract headquarters, 
IP ownership, and other cross-border investment. We must 
respond soon to these global tax developments to avoid a 
detrimental effect to our economy and U.S. receipts in general.
    Efficiency. Broadening the corporate tax base could improve 
the efficiency and neutrality of our tax system. However, we 
must recognize that many tax expenditures are longtime and 
desired features of our system embedded in the fabric of our 
economy. Whether to retain them should be based on whether the 
purpose is still valid, whether the expenditure is efficient, 
and what the potential economic and social dislocations would 
be if it were eliminated.
    Also, in seeking offsets, policymakers must be careful to 
avoid reforms that do more harm than good, such as revenue 
proposals that limit ordinary and necessary business expenses. 
As I have written in Tax Notes, a case in point is limits 
imposed on the deductibility of business interest to eliminate 
the purported debt bias.
    This would overstate economic income and act as a negative 
tax expenditure. A better solution would be Chairman Hatch's 
proposal for a form of corporate integration.
    Fiscal responsibility and long-term deficits. CBO Director 
Keith Hall has said that to put debt on a sustainable path, 
lawmakers would have to increase revenues, substantially reduce 
outlays, or adopt some combination thereof. Obviously, 
policymakers must keep this in mind in crafting tax reform.
    Income inequality and a shrinking middle class. The issue 
of rising income inequality and the thinning of the middle 
class is a critical issue that should be addressed as part of 
tax reform. This is not a partisan issue.
    In the campaign, President Trump talked about a hollowed-
out middle class and a system rigged against average Americans. 
Economists warn that it may be slowing overall economic growth. 
Glenn Hubbard, Senior Economic Advisor in the Bush 
administration, suggests that the pro-growth agenda may not be 
sufficient to generate inclusion and mass prosperity.
    One positive step would be adoption of legislation proposed 
by Senators Brown and Bennet to expand the EITC for childless 
workers and to strengthen the child credit for families with 
young children.
    And finally, fairness. The fairness of the tax code is 
highly subjective, but it will be critical to the success of 
tax reform that it be perceived by the general public as fair.
    Let me turn to the impediments. Obviously, there is a 
strong consensus in favor of tax reform. Why has it not 
happened? Well, it is hard.
    Health-care reform affects only 17 percent of GDP. Tax 
reform affects 100 percent of GDP. And while agreement exists 
that tax reform is needed, there is no clear consensus as to 
approach.
    It will be important to agree on the goals and intended 
benefits of tax reform. And then the President and policymakers 
must market those goals to the American public. The success of 
the 1986 Act was largely attributable to the efforts of 
President Reagan and Chairman Rostenkowski, initially, in 
selling it to the American public.
    Rostenkowski famously asked people to ``write Rosty'' to 
stand up for fairness and lower taxes. He received more than 
75,000 letters and one package with a wooden two-by-four with 
instructions to use it on any interfering lobbyists.
    Engaging and educating the public is essential to build 
support and minimize blowback. Bipartisanship is also important 
to develop major legislation that does not divide the American 
public and is lasting. While a partisan approach to tax reform 
seems easier to accomplish, the truth is it creates numerous 
impediments that will be difficult to overcome. For example, 
use of budget reconciliation can be a ``Faustian bargain,'' 
invoking the Byrd rule and other procedural protections.
    Finally, while most business leaders are anxious for tax 
reform, they are not yet unified in their vision. For example, 
a dispute still exists regarding the form of base erosion in a 
shift to a territorial system. The business community must find 
a way to come together.
    I would like to close with two final thoughts. First, do 
not worry about solving all perceived problems at once. 
Incremental progress will be a significant accomplishment. 
Debates over more fundamental reform should not delay or 
preclude meaningful reforms to improve the code.
    Second, be careful not to worsen or inhibit our ability to 
address our impending long-term problems. Hopefully if this 
happens again in 6 years, I will be retired.
    I stand ready to assist the committee in any way that I 
can. And I would be happy to answer any questions that you 
might have.
    The Chairman. Well, thank you so much.
    [The prepared statement of Mr. Talisman appears in the 
appendix.]
    The Chairman. Ms. Olson, we will take your testimony.

 STATEMENT OF HON. PAMELA F. OLSON, FORMER ASSISTANT SECRETARY 
    FOR TAX POLICY, 2002-2004, DEPARTMENT OF THE TREASURY, 
                         WASHINGTON, DC

    Ms. Olson. Thank you.
    Good morning, Chairman Hatch, Ranking Member Wyden, and 
distinguished members of the committee. I appreciate the 
opportunity to appear this morning. I am tempted to say ``what 
he said,'' and leave it at that.
    I am here today on my own behalf and not on the behalf of 
PwC or any client. The views I express are my own.
    The late Treasury Secretary William Simon once observed 
that the Nation should have a tax system that looks like 
someone designed it on purpose. Unfortunately, the tax system 
we have leaves much to be desired. We have already heard a lot 
about that this morning.
    Tax reform is just one of a number of critical issues 
facing the country, but reforming the tax system is 
foundational to fixing many of the problems we face. Tax reform 
would set the stage for stronger economic growth, more jobs, 
higher wages, and a more broadly shared prosperity.
    It is critical that the committee's effort at tax reform 
succeed. No one doubts that tax reform is hard--so hard that it 
has its own hashtag--#TRIH. A better indicator is that it has 
been 31 years since Congress last enacted comprehensive tax 
reform.
    Before highlighting a few points from my written statement, 
which is focused on business tax reform, I want to note that 
there is a need to make the tax code simpler for individuals 
and families seeking to save for education and retirement, and 
less burdensome for entrepreneurs seeking to start and grow 
their own businesses. Families and small businesses, in 
particular, spend far too much time on paperwork and record-
keeping to comply with the intricacies of the Internal Revenue 
Code.
    There will always be concerns about whether benefits and 
special provisions have been targeted appropriately to the 
intended recipients. These concerns inevitably lead to 
intricate details that complicate compliance. Moreover, they 
often lead to drawing lines that may be entirely rational and 
justifiable in the abstract, but that in the real world lead to 
differential treatment that adversely affects individuals' 
perception of whether the tax system is fair.
    To the maximum extent possible, Congress should resist the 
urge to write narrowly targeted rules in favor of broadly 
applicable provisions.
    With respect to business tax reform, it is important to 
keep in mind--as I think we have already heard this morning--
that opportunities for investment are increasingly global, and 
the competition for investment is fierce. Every decision to 
invest elsewhere makes more logical the next decision to invest 
elsewhere, as the locus of activity shifts to other locations.
    The U.S. market remains globally attractive, but that is 
despite our tax system which impedes investment, not because of 
it. By failing to address the features of our tax system that 
discourage investment here, we will leave investments on the 
sideline. Moreover, if we broaden the base in ways that make 
U.S. investment less rewarding, we will lose investments to 
other jurisdictions.
    With that in mind, Congress should aim for comprehensive 
tax reform as opposed to temporary tax cuts, which will require 
careful consideration of competing interests and of the 
country's pressing fiscal concerns. Congress should aim for 
reform that is sustainable. To be sustainable, tax reform must 
produce sufficient revenue to cover the cost of what Congress 
agrees to spend. And it must result in a system that attracts 
and retains the business investment needed for the economy to 
grow.
    A system that leaves an unlevel playing field that 
continues to discourage capital investment and business 
formation in this country is an inherently unsustainable 
system. The elements of a well-designed tax system include a 
tax rate competitive with the rest of the world and an 
international tax system that creates a level playing field and 
eliminates barriers to domestic reinvestment.
    With respect to revenue neutrality, Congress should focus 
on base-broadening measures that close loopholes or eliminate 
provisions that distort investment decisions, as distinguished 
from measures that would have the effect of increasing the cost 
of capital and discouraging investment in the United States.
    With respect to international, the need to protect our tax 
base is self-evident, however all anti-base erosion measures 
are not created equal, and the unintended consequences of anti-
base erosion rules could be significant. The best anti-base 
erosion measure is a well-designed system starting with a low 
rate that attracts investment and reduces the incentive to 
avoid the tax system.
    The world is changing rapidly. I do not think we can any 
longer afford to look at tax reform as a once-in-a-generation 
exercise. Once reformed, the United States must maintain a tax 
code that promotes economic growth and improves the well-being 
of all Americans, which will require each succeeding Congress 
to examine the tax system and build on prior reforms.
    So, to quote Dr. Seuss, ``The time has come. The time is 
now.''
    Thank you again for the opportunity to testify. I would be 
pleased to answer questions the members may have.
    The Chairman. Well, thank you.
    [The prepared statement of Ms. Olson appears in the 
appendix.]
    The Chairman. Mr. Solomon?

STATEMENT OF HON. ERIC SOLOMON, FORMER ASSISTANT SECRETARY FOR 
TAX POLICY, 2006-2009, DEPARTMENT OF THE TREASURY, WASHINGTON, 
                               DC

    Mr. Solomon. Mr. Chairman, Senator Wyden, and distinguished 
members of the committee, thank you for the opportunity to 
testify today on tax reform. I am here today speaking on my own 
behalf.
    For many years, policymakers have expressed a desire to 
reform the Internal Revenue Code. Much has changed since the 
last major overhaul in the Tax Reform Act of 1986. All of us 
recognize that updating the code is a necessity. We hope we are 
at a climax in this effort, and that in the coming months we 
will see the enactment of significant reform.
    In March 2011, I had the privilege of testifying before 
this committee about tax reform. As I stated in my testimony 
then, the primary purpose of the Federal tax system is to 
collect the revenues needed to fund the government.
    We would all agree that the goals of an optimal tax system 
would include promoting economic growth, minimizing 
distortions, and supporting the competitive position of 
American businesses around the globe. In addition, our tax 
system should be as simple as possible for all Americans. It 
should also be fair and stable. It should also be administrable 
for individual and business taxpayers as well as for the 
Internal Revenue Service. Our current tax system is suboptimal 
in achieving these goals.
    We live in a constantly changing world. Economic, social, 
and political developments, including accelerating advancements 
in technology, are changing our Nation and its role in world 
affairs and the global economy.
    As the global economy evolves, we need to re-evaluate our 
tax laws to ensure they are responsive to current and 
anticipated domestic and global conditions. We must also 
recognize that our tax system does not operate in a vacuum. It 
is one of many tax systems around the world. And as other 
countries revise their tax systems, we must respond as 
necessary to ensure that our tax system is in the best possible 
position to facilitate outbound and inbound investment and 
maximize the welfare of the American people.
    Numerous tax bills have been enacted since 1986. The 
Internal Revenue Code is a patchwork of provisions serving a 
wide variety of purposes. As the code grows, and the regulatory 
and administrative guidance interpreting and implementing the 
code also grows, our enormously complex tax system becomes even 
harder for taxpayers to understand and for the IRS to 
administer.
    There is a pressing need for tax reform. We need tax reform 
to promote economic growth. We need reform to reduce 
complexity. We need to fix a system that taxes some taxpayers 
at high effective rates but others at much lower effective 
rates because of special provisions. We need reform to address 
the incentives to use debt rather than equity.
    We also need tax reform to address our inadequate 
international tax system, which creates a lockout effect that 
encourages corporate taxpayers to keep their foreign earnings 
offshore because those earnings will not be subject to tax 
until they are repatriated. This repatriation tax does not 
exist in other countries.
    Moreover, we need tax reform to reduce the incentive for 
American businesses to move their activities offshore.
    The debate about tax reform has been ongoing for over a 
decade. Extensive groundwork has been laid by the work of 
policymakers such as yourselves, academics, taxpayers, and 
practitioners. It is now essential to take the next step and 
enact reform that, among other things, reduces tax rates, 
eliminates various preferences, simplifies the law, modernizes 
the international tax system, and helps American workers and 
families.
    If possible, these reforms should be permanent. All of this 
should be achieved in a fiscally responsible manner. Everyone 
is aware of the long-term fiscal challenges our Nation faces as 
spending, especially mandatory spending, continues to increase. 
We need to reform our tax system in a manner that does not 
disadvantage us in addressing our long-term budget imbalances.
    There are a number of important issues that need to be 
addressed in crafting a bill. These issues are described in my 
written testimony. They include, for example, whether reform 
should be revenue-neutral, how much tax rates can be reduced, 
what deductions, credits, and other provisions should be 
eliminated, how cost recovery should be handled, whether 
interest deductions should be limited, whether border 
adjustments should be adopted, what base erosion rules are 
needed, and how to deal with pass-through entities.
    The list of issues that must be addressed may appear to be 
daunting. Nevertheless, it is important to enact legislation as 
quickly as possible that will end uncertainty and benefit 
American businesses, workers, and families.
    There will necessarily be compromises along the way, but 
the most important objective is to enact tax reform that moves 
the tax law in the proper direction. There is a window of 
opportunity now, and it is important to act before that window 
shuts.
    In March 2011, I closed my testimony before this committee 
by referring to the story in Greek mythology about the fifth 
labor of Hercules. His task was to clean the Augean stables, 
which had not been cleaned in 30 years. More than 30 years have 
passed since the Tax Reform Act of 1986. We need to complete 
the Herculean task of reforming our Internal Revenue Code.
    Thank you for the opportunity to testify today.
    The Chairman. Well, thank you very much.
    [The prepared statement of Mr. Solomon appears in the 
appendix.]
    The Chairman. We will now turn to Mr. Mazur.

STATEMENT OF HON. MARK J. MAZUR, FORMER ASSISTANT SECRETARY FOR 
TAX POLICY, 2012-2017, DEPARTMENT OF THE TREASURY, WASHINGTON, 
                               DC

    Mr. Mazur. Chairman Hatch, Ranking Member Wyden, members of 
the committee, thank you for inviting me here to testify today 
and to discuss issues surrounding broad-based tax reform.
    The views that I express are my own and should not be 
attributed to the Tax Policy Center, the Urban Institute, the 
Brookings Institution, their boards, or their funders.
    What I want to do today is put some guardrails around the 
tax reform effort, guardrails that are necessary to have a 
serious conversation about making the tax system more 
efficient, more effective, fairer, and simpler.
    The first of the guardrails is ensuring that the Federal 
tax system generates adequate revenue to pay for the goods and 
services that Americans demand from their Federal Government.
    Today the Federal tax system raises around $3.3 trillion a 
year. That is about 17 or 18 percent of gross domestic product. 
And this still leaves us with a Federal budget deficit of about 
$500 billion per year. And given demographic trends, 
expenditures are going to increase with the growing retirements 
of baby boomers.
    So if we are serious about getting our fiscal house in 
order, realistically we need to put higher revenues on the 
agenda for the medium- and longer-term. If you recall, the last 
time that we balanced the budget, fiscal years 1998 until 2001, 
revenues were in the 19- to 20-percent of GDP range.
    A second guardrail is fairness of the tax system. 
Economists have a term called ``horizontal equity.'' That means 
similarly situated people are treated similarly. Generally, 
this means a source of income should not determine the tax rate 
unless there is a compelling reason to do so.
    So a construction worker should be taxed the same as the 
owner of a construction firm if their incomes are about the 
same. A teacher should be taxed about the same as a farmer with 
similar incomes, and a lawyer at a partnership--law firm--
should be taxed the same as a legislator with similar incomes. 
To violate this notion of fairness brings into question the 
overall fairness of the tax system.
    A third guardrail is another version of fairness, what 
economists call ``vertical equity.'' That simply means that 
those with the greatest ability to pay taxes should bear a 
proportionally larger financial share of the responsibilities 
of government. This concept is associated with a progressive 
tax system where the average effective tax rate increases with 
income.
    The overall Federal tax system today is mildly progressive, 
and the individual income tax is fairly progressive. This 
relationship holds through most of the income distribution, 
though the very, very top of the income distribution--say the 
top 0.01 percent--they actually pay lower taxes than those with 
slightly lower incomes.
    A fourth guardrail is simplicity. There is a sense among 
taxpayers that the tax code is too complex for ordinary 
Americans to understand. And this sense of complexity is 
evidenced by the robust tax preparation and software 
industries.
    A lot of the existing complexity just reflects the 
increasingly complex world in which we live. Individuals and 
businesses can enter into almost a limitless number of 
transactions. These possibilities reflect economic and social 
complexity, globalization, and long-standing efforts at 
financial engineering.
    However, we all have been complicit in the growing 
complexity. Over the past 3 decades, increasing amounts of 
social policy have been driven through the tax code.
    Every one of these provisions might be an efficient way to 
deliver benefits to particular taxpayers, but every one carries 
with it eligibility rules and benefit calculations, and these 
can overwhelm taxpayers with their complexity.
    So with these guardrails in mind, we can think about 
undertaking tax reform. Previous reform efforts have taught us 
three lessons. (1) Tax reform is technically difficult. There 
are a lot of moving pieces that need to be looked at together. 
(2) Tax reform is even more difficult politically. When 
undertaking true reform--kind of the broaden-the-base, lower-
the-rate variety--key constituencies often break along 
geographic, or demographic, or industry lines, not partisan 
lines.
    And this leads to a third lesson, which is that bipartisan 
tax reform may prove to be durable reform. And this committee's 
long tradition of bipartisan legislating bodes well for playing 
a leading role in developing a durable consensus on tax reform.
    There are some targets of opportunity for tax reform. 
Perhaps the largest is business tax reform. My colleagues on 
the panel have talked a lot about this.
    If we look back at the Camp plan or the Obama 
administration plan for business tax reform, there is a lot of 
overlap there and a lot of good ideas on what you could do 
going forward on business tax reform. And there are a lot of 
smaller opportunities where tax reform progress can be made. 
These include tax incentives for education, which could be 
comprehensively overhauled and simplified in a revenue-neutral 
way that would make them more effective.
    There are also changes to income inclusion rules for debt 
forgiveness associated with student loan debt that could be 
addressed. Every one of you has students in your States who 
have been victimized by unscrupulous schools, and this really 
cries out for an equitable solution.
    And finally, increased access to cash accounting is another 
opportunity for low-hanging fruit--on the business side of the 
ledger, you can take some steps to improve the tax system.
    So to sum up, the country would surely benefit from tax 
reform. Tax reform is politically hard, but the benefits of 
doing it can be substantial. Tax reform should not make our 
medium- and long-run fiscal situation worse. And there are both 
big and small opportunities for undertaking bipartisan reform.
    Thank you for your attention. I would be happy to answer 
questions you may have.
    Senator Wyden [presiding]. Thank you all.
    [The prepared statement of Mr. Mazur appears in the 
appendix.]
    Senator Wyden. This has been an excellent panel, and we 
appreciate your walking us through some of the history that is 
so important.
    I am going to start with a question that I think goes right 
to the heart of the debate. I would just like to hear your 
thoughts and get you on record.
    The tax code is insanely complicated. Yet, determining the 
centerpiece of bipartisan tax reform should not be. The 
centerpiece needs to be creating opportunities for working 
families in America to get ahead, especially policies that help 
increase their take-home pay so that they can make those kinds 
of purchases that drive an economy where the consumer is 
responsible for 70 percent of the activity.
    I want to just zip down the row--starting with you, Mr. 
Mazer--to get your thoughts on the importance of focusing on 
the middle class and their opportunities to get ahead as a 
centerpiece.
    Mr. Mazur. Thank you, Senator Wyden.
    Focusing on the middle class is really what you want to do. 
You want to make sure that folks who are in the middle of the 
income distribution feel that the tax system is fair and that 
they are getting fair amounts of return on their taxes paid.
    A larger issue, though, I think, is ensuring that there are 
adequate jobs and wage growth in the economy. And that may----
    Senator Wyden. Why? That is why I linked the two--wage 
growth, more growth--and the middle class driving it.
    Mr. Mazur. If you want to look at that, probably the area 
of business tax reform is the one where you could make the best 
progress.
    Senator Wyden. Okay.
    Mr. Solomon?
    Mr. Solomon. Tax reform needs to help all Americans, 
including the middle class. As Mr. Mazur has pointed out, 
economic growth from a better system will create jobs and 
opportunities. Also, due to the fact that there will be fewer 
distortions, reform will make economic decisions more neutral 
and will help the economy and all Americans.
    Also, simplification will be important to reduce compliance 
burdens. Simplification will help Americans understand the 
benefits that are available to them through the tax code. For 
example, all the various education benefits are hard to 
understand, and simplifying them, perhaps combining them, would 
be extremely useful.
    One other point is, we have a voluntary compliance system, 
and having a fairer, more understandable system will promote 
confidence in the fairness of our system.
    Senator Wyden. Okay.
    Ms. Olson, talk about the importance of the middle class as 
the centerpiece of tax reform.
    Ms. Olson. Yes. I think that tax reform is all about 
creating a stronger economy, and a stronger economy is going to 
generate more jobs, it is going to generate rising wages, and 
it is going to generate a more broadly shared prosperity.
    So, if we can get the foundations right for tax reform to 
increase investment, that is going to get us where we want to 
go. It is going to get us more jobs, higher wages.
    Senator Wyden. Good.
    Mr. Talisman?
    Mr. Talisman. Senator Wyden, I agree with the notion that 
tax reform should be judged by how it increases our standard of 
living for the middle class and others. I think that, 
obviously, corporate reform must also be judged by whether it 
increases job and wage growth. And I think--as I testified in 
my written testimony--that we also have to make sure that we 
increase opportunity for people at the low end and in the 
middle at the outset, because those efforts will save us money 
in the long run.
    Senator Wyden. I think that last point is important. One of 
the areas I have been very interested in and I know Bob Casey 
and Sherrod Brown have been very interested in is, we doubled 
the Earned Income Tax Credit, and we were able to get 
Republicans in support of that. So that is a good point.
    A question for you, Mr. Talisman--maybe we will put you 
into this as well, Mr. Mazur. The Trump plan proposes a special 
15-
percent tax rate for partnerships and limited liability 
corporations. I have a lot of concern about this.
    The 15-percent special rate could create a massive new tax 
shelter that would allow the wealthy to funnel their money 
through sham partnerships and limited liability corporations. 
Now the administration's nominee Mr. Kautter--and we will be 
hearing from him--has testified that the so-called rate parity 
could be accomplished quite simply by taking the amount of a 
taxpayer's Schedule C income and Schedule E income and 
multiplying that by 15 percent. And somehow this is going to be 
some hocus-pocus.
    Now, what do you think of this? Is this going to create a 
big loophole?
    Mr. Talisman. Well, it would be good for me, because we are 
in pass-through form. [Laughter.] But seriously, I think it 
could be costly and prone to abuse. I think you obviously do 
not want to allow taxpayers to convert service income into this 
special pass-through rate income. And so it will be necessary 
to separate service income from capital income.
    We have in the past provided, through our regulations, 
various ways of doing that. Those should be looked at. They are 
in the payroll tax area as well as in the passive loss area.
    And I think another thing that could be looked at is maybe 
providing some sort of payroll tax credit to pass-throughs--
rather than looking at a rate reduction--which would encourage 
job growth.
    Senator Wyden. Very good.
    I think, looking at the order of our colleagues, it goes 
next to Senator Casey and then to Senator Isakson in order of 
appearance. Senator Casey?
    Senator Casey. Thank you very much.
    I want to start by saying that each of you has given the 
country substantial public service in the positions you held in 
the United States Government, and you are continuing that 
service with testimony like this. It is critically important 
that, as we take the time to consider ideas about how to reform 
the code and also undertake an effort to put in place a good 
process, having your experience brought to bear on that is very 
helpful. So thanks for that continuing service.
    I guess I will start with Mr. Talisman, and maybe I will 
jump over to Mr. Mazur as well. As you know, the White House 
put forth a proposal, a brief--I guess it was a one-page 
proposal, an outline. And one of the features of that was to 
repeal, except for three, all deductions. I guess they exempted 
charitable, home mortgage interest, and retirement. So I guess 
most would consider that a repeal of above-the-line deductions.
    I want to ask--maybe I will ask the whole panel. That might 
be easier, just to go from left to right, starting with you, 
Mr. Talisman. What do you believe the impact would be if you 
enacted a tax reform bill that repeals above-the-line 
deductions and deductions like the State and local tax 
deduction?
    Mr. Talisman. Senator Casey, the State and local tax 
deduction was put in place and kept in place because of notions 
of federalism, the ability to pay and also to protect against 
double taxation. We actually provide a Federal tax credit. 
Nobody views that as an expenditure, and it also provides 
double taxation relief.
    Eliminating the State and local tax deduction could be 
viewed as an unfunded mandate, in my opinion, because it will 
make it more difficult for States to raise revenue. So I think 
that we also have to look at the collateral consequences of 
getting rid of the State and local tax deduction. It also has 
an effect, indirectly, on the charitable deduction as well as 
other itemized deductions.
    Senator Casey. Ms. Olson?
    Ms. Olson. I think this is proof that the effort to 
simplify the Internal Revenue Code is incredibly difficult. I 
do think that all of the itemized deductions should be on the 
table for consideration.
    One of the things that the Treasury Department looked at 
when I was the Assistant Secretary was a plan to get rid of the 
alternative minimum tax by, among other things, putting both a 
floor and a ceiling on State and local tax deductions. It would 
have a progressive effect on the income tax because the 
deductions skew towards the upper end of the income spectrum.
    So I think it is a complicated question. I think there are 
a lot of things to look at in connection with it, but in 
addition to the points that Jon made, I think it is important 
to look at the positive aspects of limiting it in some fashion 
as well.
    Senator Casey. Thank you.
    Mr. Solomon. Senator Casey, I would like to approach the 
question from a slightly different direction. One of the 
objectives of tax reform is to lower rates on individuals and 
broaden the base.
    So all of this is part of a larger fabric, and in 
determining which deductions that one might eliminate, one can 
figure out how much one can lower the rates. The lower the 
rate, the better. So it would be necessary to put all of this 
together and go through it on a 
deduction-by-deduction basis and decide whether or not the 
benefit that each brings is worth the additional complexity 
that it adds to the code.
    So unfortunately, as Pam points out, it is a very difficult 
process that will require both determining how much we can 
lower the rates and also looking at the value of each of the 
particular deductions. For example, as you know, the purpose of 
the home mortgage interest deduction is to promote housing, and 
the purpose of the charitable deduction is to promote 
charitable contributions.
    But I think it would require that an analysis be done that 
combines both of those elements.
    Senator Casey. Thank you.
    Mr. Mazur?
    Mr. Mazur. Senator Casey, as you point out, the Trump 
administration tax plan was basically a one-page outline. The 
Tax Policy Center did an analysis of what we know and do not 
know about the Trump tax plan.
    And basically, the takeaways of that are (1) it cuts taxes 
a lot--by trillions of dollars over the budget window; (2) the 
benefits are tilted toward high-income individuals and, even 
though some of the deductions, like the State and local 
deduction, are taken out, the benefits of those are tilted more 
to the middle, not the very tiptop of the income distribution; 
and (3) a significant fraction of families would actually see a 
tax increase under that plan, namely those who had large 
deductions that were taken away and were not compensated for by 
rates that lowered enough to reduce their taxes overall.
    But we have done some analysis on that. We look forward to 
seeing some more detail from the administration.
    Senator Casey. Thanks very much.
    Senator Cantwell [presiding]. Senator Isakson?
    Senator Isakson. Thank you, Senator Cantwell.
    Let me follow up on what Ranking Member Wyden asked. He 
asked about what would be most--if I remember correctly, and 
somebody please correct me if I heard this wrong--what would be 
most beneficial and helpful to the middle class. Is that not 
correct?
    [No response.]
    Senator Isakson. I think every one of you in whole or in 
part, beginning with Mr. Mazur, talked about the corporate tax 
or the business tax. That tax rate that a business pays is 
going to have the greatest effect on the middle class, because 
that is the money with which they employ people, expand the 
business, et cetera.
    Ironically, I was at a dinner last night with two of the 
major corporations in the United States. They are competitors, 
both in the same business. It was not a private meeting. It was 
not a violation of the antitrust laws, I can assure you of 
that. We were learning about them, what they thought about tax 
reform if it comes before the Senate.
    Both of them, in the course of the conversation, said the 
effective tax rate they paid in the United States was 34 
percent. They are both C corps. They have one major foreign-
based competitor whose effective tax rate is 19 percent.
    You are getting to the point where the taxes, the 
differential on investment that competitors would make one to 
another in their companies, in the end is going to determine 
where that money is going to go as far as the middle class is 
concerned. Are we at the point where we really have to take a 
look at our competitiveness as a Nation and look specifically 
at the tax code to make that differential more fair?
    Mr. Mazur?
    Mr. Mazur. Senator Isakson, if you look at the United 
States corporate tax system, we have just about the highest tax 
rate in the world. We have an effective tax rate that is around 
the middle of our trading partners. That indicates that it 
should be possible to broaden the base and lower the rate and 
get the rate down to around the middle of our trading partners.
    We are never going to have the lowest tax rate in the 
world. I think you do not want to get into a race to the bottom 
on tax rates, but with some serious thought about doing tax 
reform, we can lower the corporate tax rate and get it down to 
where it is within shouting distance of many of our trading 
partners.
    Senator Isakson. That is an excellent point, because one of 
the points that came up last night is, we are a better place to 
do business because of the transportation, because of safety, 
because of security, because of environment, and all of those 
things. But there is a point at which you run out of those 
benefits when you are talking about so much of your income 
being paid in taxation. So I appreciate that point. It is an 
excellent one.
    Let me go to consumption tax versus income tax. I come from 
the State where the author of the book called ``The Fair Tax'' 
comes from. He is on the radio all the time. If I do not end up 
asking some question about consumption tax when we have a 
hearing like this, I get chastised at home.
    So just to go down the row, how many of you are familiar 
with the fair tax proposal, which is to convert from an income 
tax to a sales tax? And what is your general thought, or do you 
have any thought about it at all?
    Mr. Mazur, we will start with you.
    Mr. Mazur. I guess my basic thought about our tax system is 
that we have a portfolio of taxes. Some are based on income, 
some based on consumption. We have payroll taxes--so, a 
portfolio of taxes.
    Having a consumption tax would make some sense. Almost 
every one of our trading partners has a value-added tax. So you 
can imagine having that as part of a portfolio of taxes.
    A shift from an income tax to a consumption tax--that is a 
huge change, and probably beyond the tolerance of the American 
public to adjust to the change. But having a consumption tax as 
part of the portfolio of taxes, that is what every other 
country does.
    Senator Isakson. Okay. Does anybody else have a comment? 
Yes, ma'am?
    Ms. Olson. I included support for consumption tax as part 
of a portfolio in my written statement. I think the approach 
that Professor Michael Graetz has been advocating for a number 
of years, as well as a bill introduced by Senator Cardin, would 
take us a long way in that direction and would match our system 
with the tax systems of other countries, which is how those 
other countries have managed to significantly reduce their 
corporate taxes and create a system that is more conducive to 
investment.
    Senator Isakson. I think the most important thing, if we 
make a change like that, is how you convert the taxpayer from 
the old system to the new one. One of the big problems we had 
in 1986 was passive loss. We went back and clawed back and 
changed the treatment of passive loss and changed the treatment 
of investments and changed the balance sheets of a lot of 
corporations, particularly, construction corporations. So 
transition is critical.
    Yes, sir? Were you going to----
    Mr. Solomon. Just to add, even our income tax is in part 
consumption tax. It is not a pure income tax. There are many 
consumption tax aspects of our current income tax; for example, 
retirement savings are not subject to tax.
    So even what we consider an income tax is really a hybrid. 
If we were to move to a consumption tax, then transition is a 
very important issue.
    I also think that dealing with income distribution would be 
a very important aspect, to understand how it affects income 
distribution as compared to our current system. Also if you 
switch completely to a consumption tax, you would also have to 
think about what rate it would be imposed at and what effect 
that might have.
    Senator Isakson [presiding]. Thank you all for your 
testimony. I guess Senator Warner is next.
    Senator Warner. Thank you, Mr. Chairman.
    I guess it is interesting. I appreciate very much the panel 
being here, and this is one of the first hearings we are having 
on tax reform. It is a little disturbing. It is down to Johnny 
Isakson, Mark Warner, and Bill Cassidy as the only members who 
are still here at this point.
    Senator Isakson. If they will leave it to us, we will fix 
it up good.
    Senator Warner. I thought it was interesting when we talked 
about this issue, at least the first three panelists quoted 
``Star Wars,'' Dr. Seuss, and Greek mythology. I am not sure 
what that all meant, but it did say maybe how challenging this 
is.
    I want to make a bit of a comment, then ask a question. 
Here is my worry. And I agree very strongly with Mr. Mazur that 
I want to do tax reform. I want to bring our corporate rates 
much lower. I believe very strongly we need to do repatriation 
and bring those earnings that are offshore, back.
    But as somebody who spent a couple of years trying to put 
together the Simpson-Bowles Plan, I really worry whether we are 
going to ever have the wherewithal to really make the trade-
offs you need to make in terms of broadening the base to really 
lower the rate.
    Six or 7 years ago, when this was the vogue, the bid and 
the ask, I think, on the corporate rate was--you know, the 
Democrats were more like 28 percent; the Republicans more 25. 
But because the world has not stayed static, I think we have 
seen many of our industrial competitors lower their corporate 
rates down closer to 20 percent, and at least aspirationally, 
the administration looks at a rate that is closer to 15.
    My memory serves, and correct me if I am wrong, that the 
rule of thumb is, for every point that you lower the corporate 
rates, you are talking basically $100 billion a point. So it is 
fairly straight math. If you want to bring it down to 25, you 
have to raise an additional trillion dollars. If you want to 
bring it down to 15, you have to raise $2 trillion.
    One of the things I do not think, sometimes, my colleagues 
realize--this is where we actually, I think, have to at least 
get common facts--is that if you add up all of our State, 
Federal, and local taxes combined, America actually ranks as 
one of the lowest-taxed industrial nations in the world.
    The data I have amongst OECD nations shows that America is 
at 31st out of 34 nations. So, you start with nominally the 
highest tax rate. When you actually look at collections, we are 
31 out of 34.
    What I worry about--and this goes to where Senator Isakson 
was at--all of these nations that a lot of my friends and 
businesses like to refer to that have business or corporate 
taxes in the low teens, they all still raise dramatically more 
revenue than we do. We are at about 24.5 percent of GDP.
    I actually think it is unique. I hear a lot of people refer 
to Germany and their great apprenticeship programs and what 
have you. They raise close to 35 to 36 percent of their GDP.
    Do you think realistically, with so many built-in biases 
that we have on our tax expenditures--every business is for tax 
reform until it comes to their tax expenditures--that we can 
ever get to a rate that would keep us competitive--and let us 
say for argument's sake that is the low 20s on the corporate 
side--by actually broadening the base and lowering the rate? Or 
will we not have to look at what Senator Isakson said, look at 
a VAT, look at a carbon tax, look at some other broad-based 
revenue raiser that will allow us to really bring down rates to 
a competitive level? And I would argue, hopefully, on a 
permanent basis. I have no interest in another short-term tax 
holiday without some broad-based new revenue source.
    We can take it from Mr. Mazur on down, or we can start at 
the other end and go up the list.
    Mr. Mazur. I will just jump in quickly.
    So first, on your $100 billion per point, it is true for 
the first point, but each point gets progressively more 
expensive as the base gets broader. So it is even more than $2 
trillion. So the problem is a little bit harder than you think.
    Senator Warner. And that is just on C rates. That does not 
even talk about pass-throughs.
    Mr. Mazur. Exactly. And then the second point--I think Mr. 
Isakson hit on this--is that if you want to look at other 
countries with a low corporate rate, you need another revenue 
source. It could be a value-added tax like other countries 
have, or it could be something else. But, you cannot just 
broaden the base and lower----
    Senator Warner. I just do not think we are ever going to 
get to broadening the base, because it gets to extremes, but 
correct me if I am wrong, gentlemen and ladies, please.
    Mr. Solomon. I would just add, though, I think it is 
important to take the steps as far as we can to get the rate 
down as much as possible. This goes back to my answer to the 
previous question, which is, how can we push the rate down? If 
we really want to push the rate down, we really have to take on 
a lot of the tax expenditures.
    Senator Warner. Could we end up saying, all right, let us 
try as hard as we can on broadening the base and then, if we 
still have a delta that says we want to get to 20, you could 
take whatever that delta is and you could put in some form of a 
consumption tax?
    Mr. Solomon. Then you have to make the very hard decision 
of whether or not you want to move to a consumption tax. But I 
think during this process at the present time, if you really 
want to push the rate down, you really are going to have to 
give very hard thought what tax expenditures to eliminate.
    Senator Warner. I doubt----
    Mr. Solomon. And then the question is, how far can you get 
the rate down?
    Senator Warner. I doubt if we could even get to 25 on--but 
please, the last two comments.
    Ms. Olson. No. I agree. I think it will be very difficult 
to eliminate enough tax expenditures to bring the rate down as 
far as we need to bring it down in order to be competitive. I 
certainly agree, we are a low-tax country relative to the rest 
of the world in terms of overall taxes as a share of GDP, but 
there are differences in the portfolio of taxes that other 
countries look to, as shown by a chart in my written statement. 
And what they do to make up the difference that allows them to 
have a much more attractive corporate rate is, they have a 
value-added tax as part of their portfolio.
    So do as much as we can, as Mr. Solomon says, but then I 
think at some point we are going to have to come back, in any 
event, to look at another tax to add to the list of taxes in 
order to better align our tax system with the tax system of 
every other developed country.
    Senator Warner. And those value-added taxes actually can 
deal--a little bit--with border adjustments.
    Mr. Talisman? I know I have taken more than my time.
    Mr. Talisman. Senator, I will take this in a slightly 
different direction, because they have said everything I would 
have said, but this goes to why both bipartisanship and 
marketing to the American public are important. The only way 
this gets done is for these difficult issues to actually get 
sold to the American public, that this is going to raise their 
standard of living.
    So anything you do that is basically going to bring down 
the corporate rate, if you are going to raise taxes on them 
through a consumption tax or through tax expenditures, that has 
to be sold as something that is going to be good for them in 
the long run.
    Senator Warner. And bipartisanship is not reconciliation.
    Senator Wyden [presiding]. We are going to have to move on, 
and I share Senator Warner's view.
    Senator Menendez?
    Senator Menendez. Thank you, Mr. Chairman.
    Thank you all for your testimony. You know, the President's 
tax proposal and the House Republican Blueprint called for the 
elimination of the State and local tax deduction, which would 
hike up taxes on thousands of New Jerseyans and millions of 
Americans across the country. The purpose of the deduction is 
to save families from double taxation by the State and Federal 
Governments.
    Nevertheless, the Trump administration has advocated for 
its repeal, arguing that the Federal Government should not be 
subsidizing the tax and spending policies of individual States. 
Now, I find it hard to understand. And I want to ask Mr. 
Talisman--I think you had a little bit of a dialogue on this 
before. Do you believe that it is fair to force individuals and 
families to face double taxation while large, multinational 
corporations are able to avoid such treatment?
    Mr. Talisman. Well, as I said before, I think that the 
State and local tax deduction is about double taxation, as well 
as about ability to pay and notions of federalism. I think that 
the foreign tax credit is about double taxation as well. It is 
not listed as a tax expenditure. The State and local tax 
deduction is.
    I think if we eliminate the State and local tax deduction, 
we have to be worried about some collateral consequences. 
Obviously, our State governments--we are putting more pressure 
on them to fund infrastructure and education, and those issues, 
obviously, would suffer if we were to remove the State and 
local tax deduction.
    So I think it actually could be treated as an unfunded 
mandate, except that it is not on the spending side. It is on 
the tax side. So, yes, Senator, I am concerned about it and 
appreciate the question.
    Senator Menendez. If one believes that the State and local 
tax deduction subsidizes ``progressive States,'' it seems to 
follow that the foreign tax credit subsidizes European 
socialism with American tax dollars. I do not think that is a 
far stretch. So I do not know that if we get to our logical 
conclusion of the arguments that are being presented that we 
would not be adverse to the idea that foreign corporations get 
the deduction, and they are getting it, in essence, for 
activities abroad that ultimately, I think, some of my 
Republican friends would find far more objectionable than what 
State and local municipalities are doing.
    Let me ask you this. Do you believe that the President 
should sign a tax reform bill that raises taxes on almost a 
quarter of all middle-class families? And I would open that to 
anybody.
    Mr. Mazur. Senator Menendez, I think if that was all that 
it did, then probably no. But you have to look at the totality 
of what the entire bill does.
    Senator Menendez. Well, in my focus on this committee, part 
of what I want to do is help middle-class families afford a 
home, an education, and retirement. While on the campaign 
trail, the President promised to cut taxes on the middle class. 
What we see under his plan, at least the schematic that we 
have, is that the top 1 percent of millionaires and 
billionaires would receive nearly half of all the tax cuts, 
getting an average of $175,000 back, while almost a quarter of 
middle-class families would actually see a tax increase.
    I do not know that that is tax equity at the end of the 
day. I do not know how you help middle-class families in that 
context.
    Let me ask you this: is it fair to say that doing tax 
reform under regular order is more preferable than 
reconciliation, because of all the policy restrictions that 
come with reconciliation? Anyone who wants to answer that 
question, can you elaborate on the weakness of doing tax reform 
through reconciliation?
    Mr. Talisman. Well, I think reconciliation--first, you need 
a budget resolution which, obviously, is somewhat difficult to 
get, as we saw with health-care reform. Secondly, once you have 
a budget resolution in place, the margins are narrowed and any 
dispute could cause the bill to fail. And finally, and most 
importantly, I think--going to your question, in my testimony I 
called it a Faustian bargain a little bit, because you bring in 
the Byrd rule and other procedural protections in 
reconciliation that could cause you to then have to engage in 
gimmickry to avoid them.
    Therefore, we sunsetted the 2001 and 2003 tax cuts because 
of the Byrd rule. And that is an example. And we would have to 
do things to avoid that in the context of something that was 
run through reconciliation.
    Senator Menendez. And what I have heard consistently from 
corporate leaders across the country in the last 2 years is, 
give me predictability and certainty. I do not know that 
reconciliation does that.
    One final question, Mr. Chairman.
    The administration has advocated changing the way the cost 
of tax legislation is calculated or scored for the purposes of 
analyzing its impact on the budget. But as I think all of you 
note, different so-called ``dynamic scoring models'' produce a 
wide range of results depending on what the assumptions are.
    The Joint Committee on Taxation is a nonpartisan, highly 
respected institution that provides the members of Congress and 
the general public with objective analysis regarding the cost 
of tax legislation. Do you agree that Congress and the 
administration should continue to use and respect the 
nonpartisan Joint Committee on Taxation as the ultimate arbiter 
on the cost and impact of tax reform legislation?
    Mr. Mazur?
    Mr. Mazur. Senator Menendez, as a Joint Tax alum, of 
course, I would say that. But I think even as a taxpayer, that 
is the right thing to do, to look at the professional staff of 
the Joint Tax Committee and look at their expertise as a way to 
help Congress get to a rational decision.
    Senator Menendez. Does anyone disagree with that?
    [No audible response.]
    Senator Menendez. You are shaking your heads. So for the 
record, I will say that no one disagrees and everyone agrees.
    Thank you, Mr. Chairman.
    Senator Wyden. Thank you, Senator Menendez.
    Senator Thune is next.
    Senator Thune. Thank you, Mr. Chairman.
    And I want to thank all of you for appearing here today. We 
have, collectively here today, witnesses who have served in the 
last three administrations, and that is a particularly valuable 
asset to this committee as we continue working to reform the 
tax code.
    As many of you have noted, today's tax code is overly 
complicated and excessively burdensome. And it has not kept 
pace with the dramatic changes that we have seen in our economy 
over the past 20 years, making it a major drag on the economy. 
So I am hopeful that we can change the code in a way that 
fosters greater economic growth and that benefits all 
Americans.
    I want to come back to the pass-through rate issue for just 
a moment. The administration's tax reform framework and the 
House Blueprint both propose a separate tax rate for pass-
through businesses like partnerships, LLCs, S corps, and also 
sole proprietorships.
    This is an area that we have been exploring in particular 
detail. At first blush, it sounds simple. Just tax the income 
earned by a pass-through business at a separate rate, which 
some have proposed be tied to the corporate tax rate.
    But, as we dig deeper, there are a number of challenging 
questions that arise. For example, how do we account for pass-
through owners who are also actively engaged in the business 
and treat them similarly to an owner of a C corporation who is 
also an employee of that company?
    Should the pass-through tax rate for active owners be based 
on the return on the capital that they invest in the business 
or compensation that they pay themselves, recognizing that only 
S corps can pay an owner-employee wages? If so, how should 
industry and geographic differences be taken into account? How 
do we create an equitable system that treats passive owners, 
pure capital investors, of pass-throughs and C corporations 
similarly?
    And finally, how can a pass-through rate take these factors 
into account in a way that will be administrable for the 
business owner and the IRS? So these are just a few of the 
issues that arise as we explore the proposed separate rates. 
Some have offered thoughtful approaches that begin to address 
these issues, like the Bipartisan Policy Center's paper, 
``Reforming the Taxation of Pass-Through Businesses.'' I ask 
unanimous consent to insert a copy of this into the record.
    [The paper appears in the appendix beginning on p. 81.]
    Senator Thune. I want to put that out there in terms of a 
framework to each of you and would welcome your thoughts on 
these issues and the concept of a pass-through rate overall.
    So, is there anybody who would like to take that on? I know 
I raised a lot of issues, but if you would care to comment, I 
would appreciate your thoughts.
    Mr. Talisman. Senator Thune, thanks for the question.
    Obviously, the argument for parity in rates must first take 
into account the fact that there is a double-level tax on C 
corporations. But also, designing a special tax rate on pass-
throughs is difficult, as you allude to, and could be costly. 
So we would have to figure out a way of constraining it and 
making sure it is not prone to abuse.
    Differentiating service income from capital income has been 
a nutty issue for all of us over the course of many years. We 
put out regs in the mid-1990s that subsequently got withdrawn 
that may actually provide some framework for what you are 
trying to do. But, again, I think it is a very, very difficult 
issue and difficult to constrain.
    Senator Thune. Ms. Olson?
    Ms. Olson. So I think that the report that you are 
inserting in the record from the Bipartisan Policy Center does 
a good job of setting out what the alternatives are as well as 
what the issues are. It is, indeed, a very complicated issue 
and one that will be difficult to administer going forward.
    I want to go back to the 1986 Act and what happened in the 
1986 Act. So in 1986, we cut the individual rate to 28 percent. 
We set the corporate rate at 34 percent and then fully taxed 
dividends and capital gains from corporations at another 28 
percent.
    The result of that disparity was that we drove all sorts of 
business out of the corporate sector and into the pass-through 
sector. So the incredible growth that we have seen in S corps, 
LLCs, and partnerships started back in 1986 when the Tax Reform 
Act was enacted.
    If we were to do corporate reform that made being in 
corporate solution much more attractive than being in pass-
through solution, I think we would see, as we did back in the 
late 1980s, a migration out of pass-through form and into C 
corp form. So the problem could take care of itself, even 
without a special rate.
    Senator Thune. Thank you.
    Mr. Solomon?
    Mr. Solomon. I would just add that if one is going to level 
the playing field by eliminating from the code various 
deductions and preferences, presumably that would also apply to 
pass-through entities. So that may be a reason for lowering the 
rate with respect to pass-through entities.
    The way partnership taxation works, as you know, is the 
distributive share flows out to the various owners of the 
entity. That is true for S corporations, it is true for 
partnerships, it is true for LLCs.
    What you are going to have to do is then create various 
baskets of income. Once you identify the basket of income that 
is related to active business, presumably that would flow 
through and would enjoy the lower rate. But, as my colleagues 
have pointed out, to the extent it is attributable to services, 
you presumably will want to figure out a compensation element.
    I think the biggest challenge is going to be to figure out 
what that compensation element is, and you could use a 
reasonable compensation approach, but a reasonable compensation 
approach, as we all know, is extremely difficult to administer. 
So it may require some sort of formula, for example, to treat a 
certain percentage of the income as being compensation income, 
or to figure out what capital contribution the owner has made. 
And to the extent of that, earnings on the capital contribution 
can enjoy the lower rate and the rest might be subject to the 
higher rate.
    But it is a very difficult issue, to figure out exactly how 
that compensation element would be determined. I think that is 
the nub of the issue.
    Senator Thune. Mr. Chairman, I have another question. I am 
out of time, so I will submit it for the record. It has to do 
with a gig economy and the tax rules that apply there. I think 
we are going to have to take a whole new look at that, and we 
have a bill that does that. But I will submit that for the 
record.
    Senator Wyden. I am another who thinks that this is an area 
that needs to be looked at. So I appreciate that.
    Senator Portman?
    Senator Portman. Thank you, Mr. Chairman.
    This has been terrific, and I enjoyed hearing the testimony 
from all four of you. You are all four experts from various 
administrations, Republican and Democrat, and yet you all find 
consensus on the fact that not only is the code broken, but 
remarkable consensus on how to fix it.
    As I listen to you and look at your testimony, I am 
reminded of the fact that this is not new. Let me quote Ms. 
Olson's testimony: ``Your efforts are timely, particularly in 
light of the changing global landscape. In reforming the tax 
system, we must be cognizant of the changes shaping other 
countries' tax systems, because capital is mobile and these 
changes are affecting investment decisions and capital flows in 
and out of the United States.'' Well said.
    She said that 6 years ago at this same hearing where three 
of the four of you were present. And all of you said something 
similar. So, it is not just a question of finding common ground 
today.
    I think you have been on this for quite a while, this basic 
proposition that we need to broaden the base, we need to lower 
the rate, we need a simpler system, we need a fair system. The 
devil is in the details, and the details are important.
    And Senator Thune just mentioned one of them: how do you 
deal with the pass-through entities? If you have a lower 
corporate rate and the individual rate is relatively high, that 
differential causes some unfairness, in my view. And yet, the 
prescriptions to deal with it--and Mr. Solomon just talked 
about some of the ideas--do not take away the complexity of the 
tax code. So it is not just that solutions are difficult 
philosophically to find, it is that once you find them, the 
compliance is going to be a huge problem.
    Let me just ask, do you all agree with that? Nodding of 
heads.
    Ms. Olson. Absolutely.
    Senator Portman. Okay.
    So we have our work cut out for us. We need your help on 
that.
    I want to go back to something that Senator Wyden said 
earlier about wage growth. I think this is really important. We 
have talked about this. We have known it for years, maybe even 
decades, since the 1986 Act.
    We do not focus enough on ``why?'' And a lot of it has to 
do with the very real problems in our current economy, which 
are, yes, slight growth and better job numbers in the last 
several months when you take them in aggregate, but no wage 
growth. You know, when you take inflation into account, wages 
are flat, maybe even declining on average. This is one way to 
provide some economic growth, but also wage growth.
    Kevin Hassett, who is the incoming Council of Economic 
Advisers Chairman, says with a 1-percent increase in corporate 
tax rates, wages decrease 1 percent. He has some good studies 
around that.
    A 2009 study--a famous CBO study that I refer to a lot by 
William Randolph--says 70 percent of the burden on the 
corporate side, the higher taxes we talked about today, is on 
workers. In other words, you have higher pay, better benefits 
if you can deal with the fact that the United States does have 
the highest corporate rate of all the developed countries. 
Professor Mihir Desai, who came here in 2015 before this 
committee and testified, said 67 percent of the burden of our 
high corporate tax rate and the way we tax on a worldwide basis 
falls on workers.
    So, you want to get wages up, which all of us do, and this 
is, I think, a great opportunity to do it. So I know about 
#TRIH--``tax reform is hard''--I assume that is what you are 
referring to. How about ``TRIM,'' because that is easier to 
remember: ``tax reform is mandatory.'' And we have got to do 
it.
    So let me just ask quickly, if I could, about a specific 
issue, and that is interest deductibility, because that, along 
with the pass-through issue, has been a tough one for us.
    Can someone tell me--maybe you, Mr. Solomon, because you 
mentioned it in your testimony--is the preference for equity 
financing versus debt financing an economic policy issue that 
you think is important to address, and if so, what would you do 
about it in the tax code?
    Mr. Solomon. Well, certainly in the code today, as you all 
know, there is a difference in the treatment between a payment 
of dividends and the payment of interest. And it does create 
distortions, because having additional debt in our system 
encourages companies to take on debt. It may affect the 
relative portion of debt they would otherwise undertake, and 
could affect financial stability.
    So that is an example of a distortion in the tax code that, 
if you would try to level the playing field, you would 
certainly pay attention to.
    Senator Portman. And what would you do about it? Senator 
Hatch and his team have been talking about actually making 
dividends deductible. That is one way to do it. Another way is 
to, as the House bill does, limit deductibility of interest. 
Any thoughts on that from the panel?
    Mr. Talisman. Well, I testified in my testimony, Senator 
Portman, that I thought corporate integration was a better 
approach than going after interest deductibility. Based on my 
discussions with capital-intensive businesses, interest 
deductibility is actually more important to them than most 
other issues that we face.
    I actually somewhat disagree with my colleague, here, Eric, 
because I believe that the debt bias has not led to 
overleveraging, based on the research that I have seen 
recently, in the nonfinancial sector. So we have to demonstrate 
that the distortion is actually having negative economic 
consequences.
    Senator Portman. Pam?
    Ms. Olson. Yes, I agree. I think that a better approach 
would be to go in the direction of corporate integration, 
rather than limiting the deduction of interest. There are a lot 
of businesses that depend on debt financing because they do not 
have access to the equity markets.
    So those are just some of the things that need to be taken 
into account if you think about doing an interest limitation. 
Obviously, a lot of other countries have put limitations on 
interest deductibility. So there is a theme out there, 
internationally, of doing that.
    But I think that the limitations that other countries have 
put on interest deductibility are not so severe that they 
actually impede companies from getting the financing they need 
and being able to deduct the expenses associated with it.
    Senator Portman. My time has expired, but if you would not 
mind, Mark, if you would give me your views on it in writing. 
And also, Eric, I see you want to follow up. You can follow up.
    I am going to talk about the sweet spot, and where is it, 
and what is, actually, the best tax policy to address the issue 
of bias.
    Thanks.
    Senator Wyden. I thank my colleague. That is an important 
area.
    Senator Carper?
    Senator Carper. Thanks so much.
    Welcome. We appreciate your being here today. We appreciate 
your service to our country, your continuing service to our 
country simply by your presence today.
    My colleagues have heard me ask four questions with respect 
to tax reform proposals. And I have been asking these same four 
questions for a while, and I will probably take them to my 
grave. It may take that long before we actually do tax reform. 
So we will see--hopefully not.
    I ask, is it fair? Does it foster economic growth? Does it 
simplify the tax code or make it even more complex? What is its 
fiscal impact? Those are the four questions I ask.
    One of the questions I have to ask here today--and it is 
less a tax reform question, though, but it is one we need your 
input on. We underfund the IRS. We ask them to do more than is 
humanly possible.
    We change the tax code at the last minute, and we expect 
them with not enough people, not enough money, not enough 
technology, to somehow be able to make it all work.
    Any advice for what we should do with respect to funding 
the IRS? Please?
    Mr. Mazur. Sure, Senator Carper. One of the ways I like to 
think about the Internal Revenue Service is, it is like a giant 
credit card company, in that what they do is bill people and 
make collections.
    Senator Carper. In Delaware.
    Mr. Mazur. Exactly. And so you know how it works. They bill 
people, they make collections. They go after people who do not 
pay.
    Underfunding the IRS is like underfunding your accounts 
receivable department. No rational business would do that. And 
I think there are a number of studies that show----
    Senator Carper. That is a great line. I am going to use 
that.
    Mr. Mazur. Okay. Feel free. It is not copyrighted.
    But there are a number of studies that show that if the IRS 
gets an extra $1,000, they will bring back an extra $4,000 or 
$5,000 in revenues. So it really pays for itself and then some.
    Senator Carper. Good. Thanks.
    Anyone else? Please, pile on; go ahead.
    Mr. Solomon. The IRS, of course, as we all know, collects 
the revenues that are needed to fund our government, and so it 
is very important that the IRS have the capability, both in 
services and enforcement, to collect the revenues called for by 
the law in a fair and efficient manner.
    Senator Carper. All right.
    Others, please?
    Ms. Olson. I agree with all of that. I have been thinking 
back to a story that involved a credit card company that 
Senator Portman used to tell back in the late 1990s when he was 
part of the IRS restructuring commission, or the group that 
looked at restructuring the IRS, about the kind of service that 
you expect.
    And it was, American Express does not come back to you 2 
years later and say, ``What about that bill?'' We really need 
to fund the IRS to make sure that they have the technology that 
they need and to make sure, particularly, with all of the 
identity theft and cybersecurity issues going on, that they are 
able to safeguard the information that they collect. So it is 
really important to make sure that they are adequately funded.
    Senator Carper. Good. Thank you.
    One more.
    Mr. Talisman. Yes, I agree with Mark about the one out of 
four. I mean, obviously, if we fund the IRS, we can reduce the 
tax gap. Reducing the tax gap, I think, actually helps with the 
perception of fairness of the code.
    What happened, obviously, in 1986, one of the things we 
did, was we shut down loopholes. We are also putting additional 
responsibilities on the IRS without increasing their funding.
    One example of that, obviously, is health-care reform. We 
run a lot of health reform through the Service, and yet we have 
not increased their funding. In fact, we have cut their 
funding.
    Senator Carper. That is a good point.
    Let me ask you a question. I ask a lot of ``yes'' or ``no'' 
questions, but this one--I would be happy with a ``yes'' or a 
``no'' on this one, if you will.
    Do you all think that the administration has responsibility 
here to put out a rigorous, well thought-out opening offer on 
tax reform, something beyond what I think are rather vague 
general principles? Please?
    Mr. Mazur. Yes.
    Senator Carper. Thank you.
    Mr. Talisman. Yes. I think it is essential, because I think 
it is essential that the President and other leaders who want 
to push for tax reform market whatever they are trying to 
market to the American people and demonstrate that it is going 
to increase our standard of living, especially for the middle 
class.
    Senator Carper. All right. Thank you.
    Others, please?
    Ms. Olson. I think the Treasury Department has enormous 
resources that could offer a lot in the consideration of tax 
reform.
    Senator Carper. Good.
    Thank you.
    Mr. Solomon. It is important that both the Congress and the 
administration work together in a bipartisan way to achieve tax 
reform.
    Senator Carper. How important is it that tax reform does 
not further balloon our Nation's deficit? I just saw a news 
report last week that said the budget deficit, which would have 
hit about $1.4 trillion close to 10 years ago, during the bout 
of the Great Recession, went down, down, down, and bottomed out 
at about $400 billion now. And last year it was up to about 
$575. The administration, so far, is heading for adding about 
another $100-plus billion to that. For the current fiscal year 
we could be looking $700 billion.
    People do not talk about that anymore, but the idea of just 
simply cutting taxes by another couple of trillion dollars, is 
that something we should just proceed to without much thought?
    Go ahead. Anyone?
    Mr. Mazur. Obviously, I think you need to be concerned 
about the medium- and long-run fiscal situation. So unpaid-for 
tax cuts that make the situation worse is just like digging the 
hole deeper.
    Senator Carper. All right. Thanks.
    Others, please?
    Mr. Solomon. Yes, as I said in my testimony, our tax reform 
should be achieved in a fiscally responsible manner, and we all 
recognize that spending is going to continue to increase, 
including mandatory spending. We need to do reform, but we have 
to do it in a way that does not disadvantage us in addressing 
our long-term budget imbalances.
    Senator Carper. Well, thanks.
    Briefly, two others, please, if you would?
    Ms. Olson. So I addressed this in my written statement as 
well. To my mind, we need to look at both sides of the ledger, 
both the spending side as well as the revenue side.
    And clearly, spending is growing out of control, and we 
really do need to take a hard look at it. But we have to be 
fiscally responsible. Whatever Congress agrees to spend, we 
have to fund. Tax reform has to be sustainable. That means, in 
part, generating enough revenues to cover what we agree to 
spend.
    Senator Carper. Good. Thank you.
    Yes, sir?
    Mr. Talisman. I agree. That is what I said in my testimony 
as well.
    Senator Carper. All right.
    I would just say to colleagues, these folks are brilliant, 
are they not?
    Senator Wyden. Yes, they are.
    Senator Carper. We should bring you back.
    Senator Wyden. I thank my colleague.
    We are going to have to move on, in order to get everybody 
in before 11.
    Senator Cassidy?
    Senator Cassidy. Thank you all for being here.
    The highly mobile intangibles--Microsoft can move licenses 
to their Irish subsidiary, and they do not pay a single cent of 
tax. We have seen a lot of these issues.
    As one example--but others do it as well--U.S. 
multinationals use international tax rules to shift IP and 
associated earnings offshore. How do we handle this? If we are 
going to do tax reform, is it just a matter of lowering the 
corporate rate so it does not profit them to move overseas? If 
we cannot, because you mentioned earlier that it is so 
expensive to lower the corporate tax rate--can we get it down 
to Ireland's? Maybe not. So how do we balance these highly 
mobile intangibles and the ability of folks to move overseas? 
Just kind of down the row, if you will.
    Mr. Talisman. I think that, obviously, there are approaches 
that are being looked at in international tax reform regarding 
the structure of a minimum tax that could help address those 
issues. We, obviously, do have to look at our transfer pricing 
and cost sharing rules and make sure that they work 
appropriately, but I think the chairman and Senator Enzi both 
had a carrot and stick sort of approach to encourage IP to be 
redomesticated into the United States and taxed at a rate that 
was commensurate, that would give us the first right of 
taxation and not give Ireland the first right of taxation.
    Ms. Olson. So the first and best anti-base erosion measure 
is a well-designed tax system. If the tax system is well-
designed, it is going to attract income back to the country and 
eliminate a lot of the issue.
    That has to start with a rate that is competitive with the 
rest of the world. No, that does not have to mean Ireland's 
12.5 percent. But we have to get somewhere in the ballpark, and 
right now we are at the top of the heap.
    So that is the first thing. The second thing that I think 
we should look at is a consumption tax base, because a 
consumption tax base is what other countries use to ensure that 
they are taxing a share of the value that is delivered in goods 
and services.
    Senator Cassidy. Well, let me interrupt, just because a 
consumption tax--I cannot help but note that we are more 
prosperous than every country which has a consumption tax. And 
if we are going to speak about taking care of the working 
middle-class families, they are the ones who, obviously, pay a 
greater percent of their income in a consumption tax.
    Obviously, you are taxing consumption. Now, you could hold 
them harmless by some type of rebate. But again, I have to note 
that folks in our kind of lower socioeconomic class have more 
disposable income because of the absence of a consumption tax. 
I just, again, note that as you answer, it does seem a little 
bit like we have conflicting kind of goals and priorities.
    Ms. Olson. There are lots of ways to address the potential 
regressivity of a consumption tax. They include lessening the 
tax burden in other ways. So that could be done through an 
expanded Earned Income Tax Credit. That could be done by taking 
more people off the income tax rolls. So there are lots of ways 
to deal with those issues.
    I do not necessarily always agree with economists, but I do 
in this case think they are probably right when they say that a 
consumption tax base is more conducive to economic growth, and 
the best thing that we can do for the middle class is to do 
things that will encourage more economic growth.
    Senator Cassidy. So let me ask one more time, because, if 
you look at a consumption tax, I have to admit the economists 
think, okay, if I lower it here and I raise it there, that has 
no influence on behavior.
    As it turns out, if I go out and something is priced 20-
percent higher than it formerly was, or whatever you pick your 
VAT to be, I may not buy it even though I have more money over 
here. And it seems as if we see that countries like China and 
Germany that have a consumption tax, they have a higher rate of 
savings, which they promote--and an export-based economy--but 
they do not consume as much.
    So again, the economists, of course, would say that it is 
all a wash. I am not quite sure that practically speaking, it 
is a wash for the person looking at the higher price. I 
digress.
    Gentlemen?
    Mr. Solomon. I would just add that a lower corporate rate 
will reduce some of those incentives. The question is, how low 
can we get the rate down? If the rate is still 25 percent, we 
are, nevertheless, going to need some base erosion rules, and 
there are a number of base erosion rules that might be 
considered.
    Senator Cassidy. And you all know the technical aspect to 
this far better than I. By the way, I am just learning from you 
all. I am not trying to challenge just to be difficult.
    It seems like some of these high-tech companies have very 
low effective tax rates, very low effective tax rates. And so, 
how much lower can you get than zero?
    So they are moving their IP, and maybe you can say, well, 
that is what is lowering their effective tax rate. But even on 
their income in the United States, they have a low effective 
tax rate. I think I read one year Apple paid zero. And GE pays, 
in a few years, zero.
    So, any comment on that? Again, how low can you go?
    Senator Wyden. You have to be quick, folks, because we have 
a lot of colleagues waiting.
    Mr. Mazur. Okay, so just one quick comment on that. If you 
are going to move to something like a territorial system, you 
need to be concerned about base erosion issues, and that is 
what my colleagues have said.
    One approach could be to set a global minimum tax. And so, 
if you have a global minimum tax of, say 15 percent, then no 
matter where the income is earned, they pay at least 15 
percent. They pay zero in the Cayman Islands. They pay 15 
percent to the U.S. And that is a way to kind of stop the race 
to the bottom and keep at least some minimal amount of tax on 
those transfers of intangibles.
    Senator Cassidy. Thank you.
    Senator Wyden. All right.
    Senator Cardin?
    Senator Cardin. Thank you, Senator Wyden.
    Let me thank all of our witnesses. I think this is 
extremely helpful. Tax reform, in order to be successful, must 
have certain conditions met. One is an open process, 
transparency. We have been talking about that. This hearing 
helps us in talking out some of these issues. So I want to 
thank the chairman for convening this hearing. I hope this is 
how we will proceed with tax reform: in an open way with this 
committee being engaged.
    Secondly, it has to be fair, which means middle-income 
taxpayers should not pay any more of the cost of our government 
percentage-wise than they are paying today. And I think most 
members of Congress agree on that. We want to make sure this is 
not an additional burden on middle-income families.
    And third, we have to raise the revenue that we say we are 
going to raise so we do not add to the deficit.
    So I have listened to the exchanges about the desires to 
reduce the marginal business tax rates, and I agree with that. 
Senator Cassidy's point is well-taken, because there are 
distortions as a result of high marginal tax rates. Planning is 
done in order to avoid the taxes, which is not always in the 
best economic interest of our country.
    And I also listened to the exchanges with other of my 
colleagues as to how we could get down the business tax rates 
within the income tax code. And then Senator Warner's point 
about every one of these issues being difficult to achieve is 
correct.
    When you have winners and losers, the losers are not going 
to be quiet. And it is going to be very difficult to get that 
done--to get up to the revenues you need--and if you just deal 
with the C rate, a 10-percent reduction is about $1 trillion. 
If you deal with those who have pass-through incomes or use the 
individual rates, it is about $1.6 trillion to get a 10-percent 
rate reduction, which is not easy to find real offsets for to 
equal those numbers, which brings me to the exchanges we had 
with several of our colleagues--and I am glad they were talking 
about it--concerning the consumption taxes.
    I think there is no other way to get competitive marginal 
business tax rates in this country without bringing different 
revenues into funding government other than income tax 
revenues.
    Ms. Olson, I appreciate your written statement where you 
say economists across the political spectrum have concluded 
that 
consumption-based taxes are a more efficient way of raising 
revenue in an open economy than the corporate income tax.
    So, the major concern we heard today is, will middle-income 
families pay more? That is something which I said I would not 
support. So I just urge my colleagues to take a look at the 
progressive consumption tax that I filed, working with those 
who do our scoring at the Joint Tax Committee, to make sure the 
middle-income families will not pay any more than they are 
paying today.
    Ms. Olson, you are absolutely correct. There are ways of 
adjusting other parts of the income tax code to make sure that 
this is progressive. But then there is concern on the other 
side that we will raise more revenue than we say we are going 
to raise. That has been an issue I have heard from many of my 
colleagues: that it will grow government.
    One of the conditions is, we raise the revenue we say we 
are going to raise. And in my progressive consumption tax, we 
have a way of rebating additional revenues if they are over 
what we say we are going to raise, so therefore, it will not be 
a justification to grow government. I want to make sure we have 
the revenues we need, but not an exercise of growing government 
through tax reform.
    So, Ms. Olson, what am I missing here? Is there a way of 
getting this done that is easy within the political system, 
without bringing in consumption, to get down business tax 
rates? And I know the old saying about the VAT tax. Some people 
have come out against it. I do point out, as you did, this is a 
credit invoice method, which is different than a value-added 
tax.
    So would you just comment as to whether the observations I 
have just made are accurate? How do you see this playing out?
    Ms. Olson. I agree with you, Senator Cardin. I think that 
adding a consumption tax like a value-added tax to the 
portfolio of taxes that we use would go a long way towards 
making tax reform easier, because it would allow us to keep 
something like our current base and then to lower the rates in 
a way that would make the U.S. more competitive as a place to 
invest.
    As I look out into the future, we have a rising difference 
between what we expect to be collecting in revenues and what we 
expect to be spending. And we have to find some way, in 
addition to making tax reform easier, to close that gap, and a 
consumption tax seems to me to be something that is a very 
viable alternative and should be carefully considered by the 
committee.
    Senator Cardin. Thank you. I appreciate that.
    Thank you, Mr. Chairman.
    Senator Wyden. Thank you.
    Next is Senator Scott.
    Senator Scott. Thank you, Mr. Chairman, or Mr. Ranking 
Member.
    Mr. Mazur, you made a comment to Dr. Cassidy about imposing 
a minimum global tax rate of 15 percent. How does that work 
when the companies invert and are no longer American companies?
    Mr. Mazur. So the issue is, how do you tax companies where 
you have the jurisdiction to tax them? So in the case of a 
company that, say, was a U.S. company acquired by a foreign 
company--this still is a U.S. entity that is subject to U.S. 
tax, and what you want to ensure is that there are sufficient 
base erosion rules so that that U.S. entity cannot just shift 
income that really is subject to U.S. tax abroad and have it 
subject to no or low tax rates abroad.
    So you really need to have tight base erosion rules. One 
approach in the case of shifting intangible income, intangible 
property income, is to have something like a global minimum 
tax, so that no matter where the income is pushed around the 
world, it is still subject to at least some minimal rate in the 
U.S.
    But you need additional tools as well, like a belt-and-
suspenders approach, in order to make sure that you have enough 
of a hook on the U.S. operations that you can actually subject 
them to tax.
    Senator Scott. All right. Thank you.
    The next question is for Ms. Olson, and perhaps Mr. 
Solomon.
    The south has become a manufacturer's haven. We have a 
number of companies that do business around the world, whether 
it is Boeing or GE--GE is selling major turbines around the 
world.
    The current system of global taxation seems to be a major 
impediment to growing jobs in our economy here at home, and 
specifically in the south. Can you talk for just a few minutes 
about the improvements that could be made to our national 
economy if we went to a specific territorial system and allowed 
for large companies to bring home their resources to build 
plants here, hire more employees here, as opposed to the 
challenge that we face around the world today?
    Ms. Olson. Certainly. Thank you, Senator Scott.
    Two issues are the high rates, and then our worldwide 
system. And when you put those two issues together, what you 
end up with is a lockout effect that several of us have talked 
about already in our testimony.
    We really do need to get rid of the worldwide system, which 
I think is the worst of all possible worlds, a system that does 
not raise a lot of revenue because it does not encourage 
earnings to come back and results in income being invested 
somewhere other than the United States.
    So I think key here is to look at bringing the corporate 
rate down to something that is competitive with the rest of the 
world and then to fix the international rules so that we do not 
have the lockout effect.
    Senator Scott. Thank you.
    Mr. Solomon. Yes, just to briefly add to that, an example 
of the situation that you are positing is a situation where you 
have a U.S. company wanting to do business in a foreign 
country. We have a worldwide system, where if money is brought 
back, it is subject to tax. But, if there is a company from 
another country, from a third country, trying to do business in 
that particular second country, it will not be subject to the 
repatriation tax.
    So if both are trying to compete for an investment in a 
particular country, a company that is in a country that does 
not have a repatriation tax will have an advantage.
    Senator Scott. Thank you, sir.
    In my last minute or so of questions, if you will walk with 
me through the process of, if we were successful at reducing 
our corporate rate from 35 percent down to 22/23 percent, if we 
allowed for permanent repatriation--we currently have 6 million 
jobs that are open. So we would create a million more jobs. If 
we do not end the conversation in tax reform, regulatory 
reform, with making sure that our workers are able to do the 
work that we are creating, I think we have really shortchanged 
our economy.
    So my question really is on using the tax code, if we are 
not able to achieve the elimination of all credits--would we 
want to focus more of our attention on apprenticeship programs 
and other vehicles to make sure that the workforce that we have 
is prepared for the new opportunities in a world that has been 
successful at tax reform?
    Ms. Olson. Yes, I think we have probably focused too much 
on people going to college, which does not necessarily prepare 
them for the jobs of the future, the jobs that are available 
today. So doing more to focus on apprenticeship programs, on 
technical schools, community colleges that prepare people to 
take jobs, and then also something that focuses on the fact 
that we need to constantly be retraining because the world is 
changing so much and the jobs that are out there are changing 
so much, the skills that are necessary.
    Senator Scott. Thank you.
    Senator Wyden. Thank you, Senator Scott. You will have a 
lot of us on this side of the aisle interested in the 
apprenticeship issue. I am glad you brought it up.
    Senator McCaskill?
    Senator McCaskill. Thank you, Senator Wyden.
    Let me ask a ``yes'' or ``no'' question to all four of you, 
since all of you represent different parties, two and two in 
terms of who you worked for. So you are a bipartisan panel. A 
lot of us are spending a lot of time yearning for the 
bipartisanship right now in the United States Senate. So let me 
ask you all a ``yes'' or ``no'' question. Do you believe that a 
major tax reform bill that restructures our tax code should be 
bipartisan?
    Mr. Mazur. Yes. If you want it to be a durable reform, it 
should be bipartisan.
    Mr. Solomon. It would be preferable if it were bipartisan.
    Ms. Olson. What Mark and Eric said.
    Mr. Talisman. And I included that in my testimony.
    Senator McCaskill. So, the chairman is not here, but I 
would once again turn to the chairman and say to the chairman, 
``Mr. Chairman, will we have a hearing on the tax reform bill? 
Will the Republicans allow us to have a hearing in the Finance 
Committee on the proposal that is going to restructure our tax 
code? Is that going to be possible?'' Do you have any idea as 
the ranking member, Mr. Wyden?
    Oh, good. Here is the chairman. Mr. Chairman, I am asking 
my question again. I am asking you, Mr. Chairman, will we have 
a hearing in the Finance Committee on the tax reform proposal 
that you all plan to vote on on the floor of the Senate?
    The Chairman. Well, I would like to. I do not know as of 
right now.
    Senator McCaskill. Would not that be normal order?
    The Chairman. Yes and no. It depends. It depends on who is 
running things. I have seen--there were some Democrat times 
when it was not regular order, but be that as it may, I would 
prefer to do hearings if we can.
    Senator McCaskill. Well, that is great to hear, Mr. 
Chairman.
    The Chairman. I am not saying we are going to, but I would 
prefer it.
    Senator McCaskill. I am a new member, and I had this idea 
that I was coming to this committee to actually consider 
important items of finance to our government, and there is no 
more important item of finance to our government than the 
structure of the tax code. There is nothing that is more 
impactful on our economy or on businesses and job creation in 
this country than the tax code.
    If we cannot have a hearing in the United States Senate on 
the Committee on Finance, on tax code reform, then I do not 
know why we have this committee. It does not make sense to me.
    So I am very hopeful, Mr. Chairman, that there will be a 
proposal. You said in your opening statement you hope the 
Democrats want to work on tax reform. You were not sure that 
all want to work on tax reform; you hope some do. I can assure 
you, Mr. Chairman, all the Democrats want to work on tax 
reform. We all want a seat at the table, and so I am imploring 
you to use your influence on Senator McConnell to allow us to 
have a hearing in the committee.
    The Chairman. Well, you would be idiots if you didn't want 
to work on tax reform. And I know you all do, and I intend to 
see that you do. That is what this hearing is about, by the 
way.
    Senator McCaskill. We do not have a proposal, Mr. Chairman. 
This is all hypothetical and policy, which is great. I am glad 
we are having it, but this is not on a proposal that would 
actually change the tax code. We have nothing in front of us in 
terms of a proposal. Nothing from the administration, nothing 
from the Republican majority. It is a far cry from the Finance 
Committee hearings that you have sat through for decades in 
this Senate that have looked at the specifics of legislation.
    The Chairman. Well, I am listening.
    Senator McCaskill. Okay, good. I am so glad you are.
    Let us talk about temporary tax code changes, versus 
permanent. If we go through the partisan exercise of 
reconciliation, those tax code changes would be temporary. They 
would only be good for 10 years.
    I would ask any of you to comment on whether or not it 
would make sense to make major changes around the deductibility 
of interest or a territorial tax system if the business 
community knows these are only for a 10-year window?
    Mr. Mazur. I would say I think a permanent set of changes 
is preferable, that businesses want certainty. They are making 
long-term decisions. They basically deserve to know what the 
rules are going to be in years 11, 12, and 13.
    Mr. Solomon. Certainty is very important, so permanence is 
better.
    Ms. Olson. And the more significant the change, the more 
important something being durable, long-term, and sustainable 
is.
    Senator McCaskill. As an example, if we were just doing 
rate changes, that is one thing, but if we are doing structural 
reform, that is a whole other set of challenges to do on a 
temporary basis.
    Ms. Olson. It will have a much stronger economic effect if 
it is lasting reform.
    Mr. Talisman. I agree, planning is very difficult if the 
changes are not permanent. And as you say, it is important for 
structural changes to be permanent.
    Senator McCaskill. Another good reason that we should not 
be using reconciliation to make major tax structure changes, 
since it is only a temporary change in the tax structure.
    Thank you, Mr. Chairman.
    The Chairman. Senator Heller?
    Senator Heller. Mr. Chairman, thank you. I want to thank 
you and the ranking member for holding this important hearing. 
I want to thank our witnesses, also, for being here. I think I 
may be the second to the last to question you today. So I am 
going to anticipate that most of the questions I am going to 
ask you, perhaps have already been asked or are a part of your 
testimony. But I am going to ask you anyway.
    I am from the State of Nevada, and it was hit particularly 
hard during this Great Recession. I am seeing a lot of 
recovery, but we have a long way to go.
    The question is, what is standing in the way of full 
recovery, and I do believe that a tax reform package, 
comprehensive or changes in our tax code, would go a long way 
to solving some of these problems.
    I want to thank the chairman for holding this hearing. And 
in my discussions with him, and with the White House and with 
the House of Representatives--they do want to have something in 
concept by somewhere around September 1st so that we can have 
open hearings. And I know the tendency for the chairman is to 
have open hearings so that we can discuss in detail some of the 
concerns that my friend from Missouri may have.
    But back in 1986, one of the key elements of that act--
which was the last time, of course, we had tax reform--was to 
broaden the tax base, to reduce tax rates, and to simplify the 
code. I guess my question for the panelists--and I will start 
with you, Mr. Solomon--is whether or not you believe that those 
three key points, broadening the base, reducing rates, 
simplifying the code, are still the key moving forward on this 
proposed movement of tax changes?
    Mr. Solomon. I think they are very important. I also think 
revising our international tax system is a very important part 
of this because of all the cross-border business activity that 
occurs and will be increasing over time.
    Senator Heller. We talk about these words, ``broadening the 
base, reducing the tax rate, simplifying the code.'' Easy to 
say.
    Ms. Olson, what does that actually mean for the average 
taxpayer?
    Ms. Olson. So, for the average taxpayer, it might not have 
an effect, because the average taxpayer today is not 
necessarily affected by a lot of things that are an issue here. 
They may not be itemizing deductions, for example. So, if you 
do a lot of simplification, you could do some things like 
greatly expanding the bracket for the standard deduction. That 
would take a lot of people entirely out of itemizing 
deductions, and that would have a very positive effect on them 
and reduce the recordkeeping burden and make the tax code a lot 
simpler.
    So there are things that we can do that would involve 
broadening the base, lowering the rate, greater 
simplification--all good things to do that would be positive 
for that average taxpayer.
    Senator Heller. So, I just do not want to make this an 
exercise about Washington, DC. I want the average taxpayer out 
there to know that if we go through this activity and this 
process, that there is something at the end of the day that 
works for them.
    I had a meeting at the White House, talking to the Treasury 
Secretary, and one of the things that he mentioned--I cannot 
remember exactly what his percentage was. It was 85 percent, 90 
percent, but he wants that percentage of Americans to be able 
to calculate their own taxes.
    In other words, it is going to get complicated for some, 
but for the average American, they should be able to calculate 
their own taxes. Is that a goal that is a worthy goal moving 
forward?
    Mr. Solomon. Simplification is definitely a goal that we 
should try to achieve. And making Americans think that the tax 
system is fair by understanding what their tax obligation is 
and being able to fill out their own forms is very important.
    Mr. Mazur. I think I agree with that. I think that one of 
the important roles of the tax system--it is like an annual 
civic ritual that we all participate in. If you understand what 
it is, you can appreciate it more. And I think you can use 
technology to do this.
    People talk about filing a tax return on a postcard. My 
kids have to go to the museum to find a postcard, right? So 
they would like to file their returns on an app where 
everything gets downloaded electronically. So, if you could 
think a little bit forward, you could probably have a situation 
where it is simple, you understand what the rules are, you know 
how to comply.
    Senator Heller. Okay. So we get over that hump and they are 
thrilled, it is simplified, we have done a great job. In your 
opinion, what would you anticipate GDP to be if we do this 
right?
    Mr. Mazur. Look, we at the Tax Policy Center have done a 
fair amount of analysis on dynamic scoring. If you are talking 
about doing something in a revenue-neutral way, you will 
improve incentives a little bit. You should improve the economy 
a little bit.
    You are not going to get a giant improvement in the 
economy. I think one of the things that is a bit unfortunate 
is, people seem to sell dynamic scoring effects as giant 
effects. They really are not going to be that large. We have a 
$20-trillion economy. You are not going to move the needle all 
that much. You can move it some.
    Senator Heller. Can you quantify it at all?
    Mr. Mazur. So, when Congress passed the PATH Act in 2015, 
the Joint Tax Committee did an estimate of this. I will make 
the numbers up, but it is about right. With conventional 
scoring it cost around $700 billion; with dynamic scoring it 
costs around $600 billion.
    And that was doing things like making the R&E credit 
permanent and some other incentives permanent that actually 
should have an effect. So one-sixth or one-seventh of the 
amount.
    Senator Heller. Mr. Chairman, my time has run out. Thank 
you.
    The Chairman. Thank you, Senator.
    Senator Nelson?
    Senator Nelson. Thank you, Mr. Chairman.
    Mr. Chairman, when I was a young Congressman, I happened to 
see tax reform and see it pass in 1981. And then some of the 
things that were mistakes in the 1981 bill were changed in a 
comprehensive tax reform in 1986. You could not pass either one 
of those without bipartisanship.
    I would like to ask you all, with your experience and your 
expertise on tax, do you want to venture a comment about 
passing it just with one party as opposed to in a bipartisan 
way?
    Mr. Mazur. Senator Nelson, I think if you want tax reform 
to be durable and to last for decades and have some positive 
effect, you want it done in a bipartisan way.
    Senator Nelson. I think that is pretty obvious. I thank you 
for reaffirming that.
    May I ask your opinion on--what would you say is a 
realistic target for getting the tax rates down to, both 
corporate and individual, to still have some money left over 
for a significant infrastructure package?
    Mr. Mazur. I talked a little bit about that. The Obama 
administration did a business tax reform plan, and could find a 
way to get, in a long-term, revenue-neutral way, the corporate 
tax rate from 35 percent to 28 percent and to generate a couple 
hundred billion dollars for infrastructure.
    So that is 7 percentage-point reduction in the corporate 
rate. On the individual side, I think it goes back to the 
points that Eric and Pam were making: it basically depends on 
how bold you want to be on reducing tax expenditures on the 
individual side as to how low the rates can go.
    Senator Nelson. Does anybody else want to venture a guess 
on the individual rate, because on the corporate side, as Mr. 
Mazur has just mentioned, you would only end up getting, under 
the Obama proposal, about a couple hundred billion. But we have 
trillions of dollars of needs in infrastructure.
    So what would you have to take individual rates to to have, 
let us say, a trillion dollars for infrastructure?
    Ms. Olson. That sounds to me like you are talking about 
taking rates up if we are going to produce money for 
infrastructure.
    Senator Nelson. No, no; in tax reform.
    Ms. Olson. Okay, so in tax reform. In Dave Camp's 2014 Tax 
Reform Act, it took the corporate rate down to 25 percent, took 
the individual rate down to 35 percent, and earmarked some 
revenue from repatriation of offshore earnings for use as 
infrastructure spending.
    Note that there is an awful lot of capital that would be 
invested that is offshore. Some of it is U.S. corporate cash. 
There are also a lot of other funds available.
    I was over in Asia last week and heard an awful lot about 
capital available for investment in the United States, in 
particular with an interest in investing in infrastructure in 
the United States. If we get our tax system reformed, we may 
need some more treaties, and we may need to address some issues 
in the tax code that are impediments to infrastructure, but I 
think there is an awful lot of capital around the globe that 
would like to help with our infrastructure needs here in this 
country.
    Mr. Solomon. As I mentioned before, earlier this morning, 
how far we can get the individual rate down depends upon what 
deductions, credits, and other incentives you would eliminate.
    Senator Nelson. That is correct--the tax expenditures.
    So I will just summarize my comments, my thoughts here, 
which is why I asked the question of you all. If you get rid of 
a lot of the tax expenditures, which will allow you to then 
have the revenue to lower the rates, both corporate and 
individual, you can design that in a way that you still have 
revenue left over, over a 10-year period, in order to invest in 
infrastructure.
    Now, the only way you are going to get to that goal is to 
do it bipartisan. And that is the bottom line of my comments.
    Thank you. Thank you, Mr. Chairman.
    The Chairman. Well, thank you, Senator.
    We want to thank this eminent group of people, of experts, 
for taking time to be with us today and to give us their 
excellent testimony. We are grateful to you. Most all of you 
have been here before the committee a number of times, but we 
just cannot tell you what it means to us.
    [Whereupon, at 11:12 a.m., the hearing was concluded.]

                            A P P E N D I X

              Additional Material Submitted for the Record

                              ----------                              


              Prepared Statement of Hon. Orrin G. Hatch, 
                        a U.S. Senator From Utah
    WASHINGTON--Senate Finance Committee Chairman Orrin Hatch (R-Utah) 
today delivered the following opening statement at a hearing entitled, 
``Comprehensive Tax Reform: Prospects and Challenges'':

    Welcome, everyone, to our first hearing of the day, where we will 
discuss the ongoing effort to reform our Nation's tax code. We have a 
distinguished panel of bipartisan experts before us today to help shed 
some light on issues surrounding tax reform. I look forward to a 
productive discussion and appreciate your attendance here a bit earlier 
than our normal meetings.

    In 1984, President Reagan called for a reform of the tax code. He 
laid out three main goals for tax reform: fairness, efficiency, and 
simplicity.

    Those three goals are as relevant today as they were a generation 
ago. For our current efforts, I would add a fourth goal: American 
competitiveness. This goal is essential in today's global economy, as 
we must also consider what is happening outside our borders.

    When discussing tax policy or legislation, it's very easy to find 
oneself heading down byzantine paths of ever-greater complexity, but I 
think we would do well to keep focused, and to frequently remind 
ourselves of these basic principles.

    Therefore, I'll repeat them: fairness, efficiency, simplicity, and 
American competitiveness. The Tax Reform Act of 1986 is generally 
considered to be a great success.

    However, one question people should ask themselves is: if the law 
we passed in 1986 was such a success, why did it disintegrate so 
quickly?

    Obviously, there are a number of competing interests out there, 
with many of them focused on narrow provisions or benefits in the tax 
code. Some of these interests have employed efficient lobbyists to make 
compelling cases for changes while others have elected efficient 
legislators who have done the same.

    That's one reason for the more or less constant change we've seen 
to the tax code since 1986. Another reason might be that the 
theoretical underpinnings of the 1986 weren't as sound as many assumed.

    For one thing, the 1986 reform was a shift toward pure taxation of 
income. But, in the last couple of decades, there has been an 
increasing awareness of the efficiency of taxing savings and investment 
lightly (or not at all), and instead basing the tax system on 
consumption. And indeed, a number of the subsequent changes to the tax 
code could be described as a shift away from taxing income toward 
taxing consumption. This helps to explain things like decreased tax 
rates on capital gains and dividends, more rapid depreciation 
schedules, and more qualified retirement plan options. Many of the 
major reform proposals we've seen in recent years--including the 
House's Better Way Blueprint--would take us further in that direction.

    And while some of these changes have been very good, the piecemeal 
fashion in which they have happened was not consistent with simplicity. 
And many of the changes have been bad.

    Another way of looking at the unraveling of the 1986 tax reform law 
is that it had a sound theoretical basis at the time, but technological 
changes in the intervening decades have required us to make changes in 
the years since. For example, the tax base is far more mobile today 
than it was in 1986. And a mobile tax base is inherently less reliable, 
making efforts to heavily tax highly mobile assets an exercise in 
futility.

    Whatever the case, we know that the myriad changes to the tax code 
in the past 3 decades have left us with a status quo that is simply 
unsustainable.

    American families, individuals, and businesses collectively spend 
hundreds of billions of dollars a year--not to mention countless 
hours--simply trying to comply with the tax code.

    Tepid growth rates for the U.S. economy have seemingly become the 
new normal for some. America's multinational businesses find it 
difficult to compete abroad and are often targets for acquisition by 
foreign companies.

    All of this should be unacceptable to every member of the Senate. 
Senator Wyden was correct when he recently described the current tax 
code as a ``rotting economic carcass.''

    There is no longer any question as to whether we should reform the 
tax code. The only questions remaining are ``how?'' and ``when?''

    For this reason, we are engaged in a long-term effort to fix these 
problems. And, in my view, the momentum in favor of comprehensive tax 
reform is stronger now than at any point since the 1986 reform was 
signed into law.

    I know Republicans--both on this committee and elsewhere--are 
united in our commitment to fix our broken tax system and efforts in 
both chambers of Congress and on both sides of Pennsylvania Avenue are 
ongoing.

    My sincere hope--which I've repeated numerous times--is that our 
Democratic colleagues will be willing to join in this effort. Tax 
reform should not have to be a partisan exercise. Indeed, the negative 
impact of the status quo falls on Republican and Democratic voters 
alike. So, we should all be willing to work toward solutions.

    I know that many of my colleagues on the other side of the aisle 
recognize the need for reform. However, much of the Democratic 
leadership's rhetoric on this issue has been less than encouraging.

    We've heard condemnations and claims about tax plans that do not 
yet exist.

    We've heard demands--sometimes stated as preconditions to any 
bipartisan cooperation--for concessions that are unrelated to tax 
reform.

    And, on a similar note, we've heard demands that Republicans make 
significant procedural concessions for moving a tax reform bill as a 
prerequisite for any bipartisan engagement on the substance of 
potential legislation.

    I won't belabor this issue too much at this point. I'll simply say 
that, historically speaking, this is not how we've worked on bipartisan 
tax policy, and I hope that the statements we've heard from some of the 
Senate Democratic leaders discouraging bipartisan efforts on tax reform 
do not reflect the views of all our Democratic colleagues.

    Today, we have a panel of four very skilled experts who represent 
both parties--they are all former Assistant Secretaries of Treasury for 
Tax Policy. They've been on the front lines of tax policy for some 
time, and I am certain that their insights can help us today as we work 
to address both the shortcomings of our current tax system as well as 
the divisions that could hamper our tax reform efforts.

    With that, I'll turn to Senator Wyden.

                                 ______
                                 
 Prepared Statement of Hon. Mark J. Mazur, Former Assistant Secretary 
         for Tax Policy, 2012-2017, Department of the Treasury
    Chairman Hatch, Ranking Member Wyden, and members of the committee, 
thank you for inviting me to appear today to discuss issues surrounding 
broad-based tax reform. The views I express are my own and should not 
be attributed to the Tax Policy Center, the Urban Institute, the 
Brookings Institution, their boards, or their funders.
                               background
    There is a broad consensus that the U.S. tax system is in need of 
reform. The tax system raises more than $3 trillion a year. Almost half 
(47 percent) comes from individual income taxes, over a third (34 
percent) comes from Social Security and Medicare payroll taxes, just 
under 10 percent comes from corporate income taxes, and about 2-3 
percent comes from excise taxes (see figures 1 and 2; note that the 
small percentage for excise taxes translates into almost $100 billion a 
year).

 [GRAPHIC] [TIFF OMITTED] T1817.001


    The Federal tax system has raised aggregate revenues of between 15 
and 20 percent of GDP for most years in the last couple decades (see 
figure 3).

[GRAPHIC] [TIFF OMITTED] T1817.002


    One goal of tax policy is to raise the revenues needed to pay for 
the goods and services the public demands from the Federal Government. 
By this measure, the United States is falling short, running persistent 
budget deficits. The time the Federal Government ran a budget surplus 
in the past four decades was in fiscal years 1998-2001, when revenues 
as a share of GDP were around 19-20 percent. Given the changing 
demographics, it seems almost unconceivable that the Federal budget can 
be brought into balance at smaller amounts of revenue as a share of 
GDP. The implication is that fiscally responsible tax reform would 
likely raise aggregate revenues as a share of GDP above current levels 
in the longer run. To put it another way, net tax cuts in the medium 
and long run will worsen the Federal fiscal situation. Therefore, 
responsible tax reform should raise at least as much revenue as current 
law.

    The U.S. tax system was last overhauled in 1986, and the current 
system, especially as it applies to business income, is woefully out of 
date. Three decades of changing business practices, increased 
globalization, changing tax laws in other countries, and expanding 
aggressiveness in tax-planning activities have led to a system with 
very many critics and precious few defenders.

    Concerns about the business tax system include a maximum statutory 
corporate income tax rate that is among the highest in the world; 
special tax provisions that enable many firms to pay an effective tax 
rate far below the statutory rate; incentives for U.S.-based 
multinational firms to shift profits abroad and to claim the profits 
are permanently reinvested there; incentives for multinational firms 
(both domestic and foreign-parented) to locate deductions in the United 
States and income in lower-taxed jurisdictions; incentives for certain 
firms to organize as pass-through entities in order to avoid corporate-
level taxation; and immense amounts of complexity that make compliance 
difficult and raise questions about the tax system's administrability 
and fairness.

    But the corporate income tax raises approximately $300-400 billion 
a year, so it is an important revenue source for the U.S. Treasury. 
Moreover, it serves as a backstop for other taxes, such as the 
individual income tax. Maintaining this revenue source while addressing 
its most glaring inefficiencies is a key challenge for business tax 
reform.
                        principles of tax policy
    Tax policy is guided by three basic notions: efficiency, equity, 
and simplicity. An ideal tax system would advance all three goals to 
some extent, while recognizing that sometimes the goals conflict. 
Similarly, a tax reform effort would acknowledge that all three goals 
are important but would manage trade-offs among them. An efficient tax 
system would distort economic choices as little as possible while 
raising the appropriate amount of revenue. Typical characteristics of 
an efficient tax system are relatively low tax rates, broad bases for 
taxation, a portfolio of different types of taxes to limit reliance on 
any single revenue source, and an understanding of the incentives 
provided by the tax system so policymakers minimize the enticements for 
taxpayers to reduce their tax bill though otherwise uneconomic actions.

    Equity, as applied in tax policy, has two components: horizontal 
and vertical. Horizontal equity means that taxpayers in similar 
economic circumstance are treated similarly. In income taxation, this 
means treating taxpayers with equal incomes equally. Strictly speaking, 
this would mean that the source of income would be disregarded in 
determining tax treatment and, ultimately, tax liability. Vertical 
equity means that tax liability should be distributed in accordance 
with the ability to pay taxes. That implies that those with larger 
incomes have a greater ability to pay taxes and therefore should 
shoulder a larger than proportionate share of the cost of pubic goods 
and services. This concept is associated with a progressive tax system, 
where the average tax rate paid (or average effective tax burden) goes 
up with a taxpayer's incomes. As a concept, vertical equity makes more 
sense when applied to the individual income tax or the entire tax 
system than when applied to the corporate income tax. The U.S. Federal 
individual income tax is progressive throughout almost the entire 
income distribution. The overall U.S. tax system is similarly 
progressive (see table 1).

    Simplicity is the third principle of desirable tax policy. The 
Internal Revenue Service (IRS) regularly assesses the overall burden of 
the U.S. tax system by the number of hours required to understand one's 
tax obligations, keep appropriate records, file the necessary tax 
forms, and interact with the IRS after filing. Individual taxpayers 
spend around 2 billion hours a year complying with the individual 
income tax, and the cost to businesses is estimated to run to over $100 
billion annually.

    But beyond the hours and dollars, there is a sense among taxpayers 
and tax policy observers that the tax code is too complex for ordinary 
Americans to understand their tax obligations and comply with them. 
This sense of extreme complexity is evidenced by the robust tax 
preparation and tax software industries, as well as a belief among 
taxpayers that they are missing out on benefits being claimed by 
others. A lot of the existing complexity merely reflects the 
increasingly complex world in which we live. Individuals and businesses 
can enter into a nearly limitless number of possible economic 
transactions. These possibilities reflect economic and social 
complexity, globalization, and long-standing efforts at financial 
engineering. Congress, however, is complicit in this sense of growing 
complexity; over the past three decades, increasing amounts of social 
policy have been run through the tax code. While this can be an 
efficient way to deliver benefits to particular taxpayers, every one of 
these provisions carries with it eligibility rules and benefit 
calculations that can overwhelm taxpayers. This proliferation of tax 
expenditures itself fosters complexity.

    But tax incentives should not be avoided simply because they lead 
to complexity. In some instances, overriding public policy 
considerations argue for deviating from one or more of the three major 
tax policy principles. For example, our economic system by itself may 
lead to an insufficient amount of activities with important spillover 
benefits (such as basic research) or to an excessive amount of some 
activities with negative spillover benefits (like tobacco or alcohol 
consumption). In these cases, specific provisions in the tax code (such 
as the research and experimentation tax credit or excise taxes on 
alcohol or tobacco purchases) can address under- or over-supply.

    It is important to be aware of the trade-offs among tax policy 
principles. An optimal system will seek to balance out the 
contributions of each dimension and carefully weigh deviations. When 
Congress enacted the 1986 Tax Reform Act, it devoted much time, energy, 
and debate to considering how far to pursue each of these desirable 
traits in the legislation. Given three decades of incremental movement 
away from the 1986 agreement on all these policy goals, it is time to 
refocus on designing a tax system that meets them to the maximum extent 
possible.


                                               Table 1. Average Effective Federal Tax Rates--All Tax Units
                                                        By Expanded Cash Income Percentile, 2018
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                   Tax Units                                As a Percentage of Expanded Cash Income
                                         ---------------------------------------------------------------------------------------------------------------
   Expanded Cash Income Percentile \1\                                 Individual
                                             Number      Percent of    Income Tax    Payroll Tax    Corporate    Estate Tax    Excise Tax    All Federal
                                           (Thousands)      Total          \2\           \3\       Income Tax                                  Tax \4\
--------------------------------------------------------------------------------------------------------------------------------------------------------
Lowest Quintile                             48,780.00         27.70         -4.71          6.36          0.66             -          1.80          4.10
Second Quintile                             38,760.00         22.01         -1.13          7.50          0.98             -          1.32          8.67
Middle Quintile                             34,290.00         19.47          3.78          7.89          1.18             -          0.97         13.82
Fourth Quintile                             28,870.00         16.39          6.78          8.31          1.40          0.05          0.80         17.33
Top Quintile                                24,300.00         13.80         16.05          6.02          2.62          0.22          0.57         25.48
All                                        176,100.00        100.00         10.01          6.93          1.95          0.13          0.80         19.82
 
Addendum
80-90                                       12,490.00          7.09          9.18          8.65          1.58             *          0.71         20.15
90-95                                        6,020.00          3.42         11.35          7.95          1.88          0.13          0.65         21.95
95-99                                        4,650.00          2.64         15.96          6.09          2.41          0.17          0.58         25.23
Top 1 Percent                                1,140.00          0.65         25.06          2.46          4.14          0.48          0.40         32.54
Top 0.1 Percent                                120.00          0.07         25.80          1.38          5.45          0.43          0.33         33.39
--------------------------------------------------------------------------------------------------------------------------------------------------------
Source: Urban-Brookings Tax Policy Center Microsimulation Model (version 0217-1).
* Less than 0.05; ** insufficient data; *** less than 5 in absolute value.
 
\1\ The income percentile classes used in this table are based on the income distribution for the entire population and contain an equal number of
  people, not tax units. The breaks are (in 2017 dollars): 20% $25,000; 40% $48,600; 60% $86,100; 80% $149,400; 90% $216,800, 95% $307,900; 99%
  $732,800; %99.9 $3,439,900. Includes both filing and non-filing units but excludes those that are dependents of other tax units. Tax units with
  negative adjusted gross income are excluded from their respective income class but are included in the totals. For a description of expanded cash
  income, see http://www.taxpolicycenter.org/TaxModel/income.cfm.
\2\ After tax credits (including refundable portion of earned income and child tax credits).
\3\ Includes both the employee and employer portion of Social Security and Medicare tax.
\4\ Excludes customs duties.

                  lessons from previous reform efforts
    Previous tax reform efforts have taught us three lessons:

      1.  Tax reform is technically difficult. It has many moving 
pieces. But the essence of reform is viewing these pieces as part of a 
whole legislative package that meets the over-arching goals of 
improving on the efficiency, equity, and simplicity dimensions while 
meeting the overall revenue target for the legislative effort.

      2.  Tax reform is even more difficult politically. The book 
Showdown at Gucci Gulch explains how the 1986 Tax Reform Act came 
together and notes how often-uneasy political alliances were formed to 
push the legislation to the next step. When undertaking true reform of 
the ``broaden the tax base, lower the tax rate'' variety, key 
constituencies often break along geographic or demographic or industry 
lines, not partisan ones.

      3.  This leads to a third lesson, which is that bipartisan tax 
reform may prove to be durable reform. And this committee's long 
tradition of bipartisan legislating bodes well for playing a leading 
role in developing a durable consensus on tax reform.

    Those undertaking tax reform would do well to remember the 
hierarchy of responses to tax law changes developed by Joel Slemrod (a 
tax scholar at the University of Michigan). Slemrod notes that it is 
easier for taxpayers to shift the timing of transactions or their 
accounting treatment or to undertake paper transactions than to change 
their underlying economic behavior (Slemrod 1992).

    An implication from Slemrod's hierarchy is that if tax rates are 
changed (or expected to be changed) on capital gains income, then 
investors will try to time the realization of gains (Slemrod 1992). We 
saw this happen in the pattern of capital gains realizations before and 
after the Tax Reform Act of 1986 and in the acceleration of bonuses and 
other compensation payments into the year before the 1993 tax law 
increased tax rates on upper-income Americans and the cap on Medicare 
payroll taxes was eliminated in 1994.

    Similarly, when tax rates or tax provisions change, tax payers will 
reorganize entities or undertake financial engineering to maximize 
their after-tax well-being. Two examples are the shifts from C 
Corporations to S Corporations after the Tax Reform Act of 1986 reduced 
the top income tax rate on individuals below the rate on corporations, 
and the shifting of forms of borrowing once the Tax Reform Act of 1986 
no longer allowed nonmortgage personal interest as a deductible 
expense.

    A more recent example occurred at the State level when Kansas 
eliminated all income taxation on income from pass-through businesses 
in 2012. Over the next couple years, more than 100,000 pass-through 
businesses were created as Kansas taxpayers rearranged their finances 
to avoid paying the 5 percent State individual income tax. But the 
hoped-for increase in actual small business activity did not occur, 
which provides a cautionary tale.

    As Slemrod notes, changes in real economic behavior--labor supply, 
investment, saving, business output--are least responsive to tax law 
changes. That doesn't mean that they cannot happen: some studies 
indicate a positive labor supply response by single mothers in response 
to changes in the earned income tax credit (Eissa and Liebman 1996). 
But it does suggest that some degree of caution is warranted when we 
hear claims about very large shifts in economic activity in response to 
tax law changes.
                     what can be done in tax reform
    There are several potential areas where tax reform appears feasible 
and where large benefits can be gained from undertaking this difficult 
policy task. In theory, the business tax base can be broadened and the 
revenue generated used to reduce both the statutory corporate income 
tax rate and the tax burden on smaller pass-through businesses. For 
example, the Camp plan and the Obama administration plan presented 
pathways where the business tax system could be reformed and improved. 
The Obama administration plan was revenue neutral in the long-run and 
would have reduced the corporate tax rate from 35 percent to 28 
percent.

    One issue in need of attention is how to address the taxation of 
multinational firms in the context of a very globalized economy. The 
Obama administration plan addressed this issue by creating a hybrid 
system where U.S. firms would owe no tax on profits of foreign 
subsidiaries if they faced a tax rate above 19 percent. This was 
described as a territorial system with a global minimum tax rate of 19 
percent. Regardless, you would still need base erosion and mobile 
income restrictions (like current law subpart F) to prevent 
multinational firms from shifting profits from the United States to a 
lower-taxed foreign jurisdiction. But if the rate differential is 
lessened, the pressure to undertake these activities is also lessened.

    As noted, it is possible in reforming business taxation to reduce 
taxes on smaller pass-through entities by expanding access to Section 
179 expensing and cash accounting rules, and by providing more generous 
treatment of start-up and organizational expenses (especially important 
to new businesses). Since most pass-through businesses are small, these 
steps will benefit the clear majority of pass-through entities. But 
since total business activity in the pass-through sector is dominated 
by a relatively small percentage of firms, these larger firms (and 
their high-income owners) would likely experience a net tax increase 
from the base broadening related to business income.

    Another area where there may be scope for tax reform that improves 
the tax system is in rationalizing the numerous incentives for similar 
activities in the tax code. Today, taxpayers are confronted with 
several incentives related to paying for higher education; these 
multiple options may confuse and burden taxpayers and may inhibit their 
take-up rate. A thorough review of tax provisions related to higher 
education (tax credits and deductions for tuition, student loan 
treatment, saving incentives, and income exclusions) could rationalize 
the tax treatment in this area and make the tax code more efficient, 
more equitable, and simpler.

    A similar effort could prove useful in determining income and 
expenses for people who participate in the gig or sharing economy. 
These individuals tend to be classified as sole proprietors and face 
different tax rules than employees, but may not understand their tax 
obligations or have enough information from the platform company to 
comply with the tax law. Legislative steps to improve information 
sharing and to clarify rules for recognizing income and claiming 
appropriate expenses could help improve compliance among and reduce 
burden on millions of taxpayers.
                                summary
    Congress has the opportunity to undertake significant reforms to 
the tax code. These reforms can improve the efficiency and equity of 
the tax system and reduce its complexity. But undertaking tax reform is 
hard work, and this committee has embarked on this effort, knowing the 
difficulties involved. However, these are targets of opportunity where 
bipartisan tax reform can and should occur. These include business tax 
reform and streamlining several aspects of the individual income tax. 
As the Congress and the administration identify specific opportunities 
for reform and develop potential solutions, these activities should be 
driven by data and evidence. The last major tax reform occurred over 30 
years ago; it is almost surely time to take up the mantle of reform 
once again.
References
Birnbaum, J. and Murray, A. 1987. Showdown at Gucci Gulch. Vintage 
Books.

Eissa, Nada, and Jeffrey B. Liebman. 1996. ``Labor supply response to 
the earned income tax credit.'' The Quarterly Journal of Economics 
111(2): 605-637.

Slemrod, Joel. 1992. ``Do Taxes Matter? Lessons from the 1980s.'' 
American Economic Review 82(2): 250-6.

                                 ______
                                 
        Questions Submitted for the Record to Hon. Mark J. Mazur
               Questions Submitted by Hon. Orrin G. Hatch
          simplification of tax system--impact on individuals
    Question. Individuals and small business owners spend billions of 
dollars complying with a labyrinth of tax rules every year.

    What is the single most important thing Congress can do to help 
Americans save their hard earned time and money complying with our 
overly complex tax system?

    Answer. Congress should recognize that there is a continuum of 
complexity faced by individual taxpayers that ranges from wage earners 
to self-employed individuals to businesses with one or a few employees 
to larger businesses. Similarly, there is another continuum of 
complexity along the dimension of capital income that ranges from no 
capital income to limited amounts from traditional savings vehicles to 
investors with stocks, bonds, and mutual funds to investors with very 
complicated asset holdings that may involve tiered entities and complex 
financial instruments. Laws being considered should be evaluated 
through the lens of these complexities to ensure that the new statutes 
do not add to the underlying economic complexity. In addition, Congress 
should increase IRS funding so the agency can effectively interpret and 
administer the laws enacted by Congress.
                        growth and progressivity
    Question. Many of us are very disturbed at the low rates of growth 
our economy has experienced for several years now.

    So, one of the main drivers of tax reform is the desire to help 
achieve higher growth rates.

    But we also hear a lot about progressivity and distribution.

    So, my question is, to what extent, if at all, are the goal of 
growth and the goal of progressivity in tension with each other?

    Answer. There is not necessarily a tension between the goals of 
improving economic growth and ensuring a fair distribution of tax 
burdens. Progressivity simply means having the share of tax burdens 
reflect taxpayers' ability to pay taxes, which generally is interpreted 
as having effective tax burdens increase with income. The United States 
tax system today exhibits a reasonable degree of progressivity, though 
it has been higher and lower at various times in the past. Revenue 
adequacy means that the tax system is raising sufficient revenue to 
meet the demands of the American public for goods and services. 
Adequate revenue can be raised at relatively low tax rates by paying 
attention to base-broadening when designing tax law changes. It must be 
noted that U.S. tax rates today are relatively low by historic 
standards for individuals and, to a lesser degree, corporations. Tax 
reform that broadens the tax base for both the individual and corporate 
income taxes could modestly lower tax rates, which would be a pro-
growth step, without significantly reducing progressivity.
          distortion in debt financing versus equity financing
    Question. A number of you in your written testimonies addressed the 
differing tax treatment of debt and equity.

    The corporate marginal effective tax rate on equity financing is 
about 35% while the corporate marginal effective tax rate on debt 
financing is negative. This creates a huge distortion in terms of 
financing.

    Corporations are incentivized by the tax code to engage in debt 
financing rather than equity financing.

    As part of tax reform, should we create greater parity in the tax 
treatment of debt financing and equity financing and if so, how should 
we accomplish that?

    Answer. To start, it is helpful to recognize a tension inherent in 
an income tax, because interest paid is a cost of generating income and 
generally would be deductible under a classic income tax. So, providing 
a ``haircut'' on interest payments--making a portion nondeductible--to 
move in the direction of equal treatment for debt and equity financing, 
means stepping away from a pure income tax. However, a tax reform that 
provided a modest ``haircut'' on net interest payments and also moved 
depreciation schedules in the direction of economic depreciation (which 
reflects an asset's actual decline in market value) would help address 
negative effective marginal tax rates on debt-financed corporate 
investment.
                    what if there is no tax reform?
    Question. What are your views on the consequences of not achieving 
comprehensive tax reform this year or early next year?

    Does the lack of tax reform this year mean continued anemic 
economic growth and stagnant wages?

    Does the lack of tax reform this year mean continued pressure for 
U.S.-based multinational firms to relocate abroad or be acquired by 
foreign multinational companies?

    Answer. The most important thing is to get tax reform right for the 
long term. Recall that the last time Congress enacted comprehensive tax 
reform was 1986, so the life of a reform effort can be decades. Given a 
long-term perspective, it is better to take an adequate amount of time 
to seriously consider all aspects of a desirable tax reform and to 
build bipartisan support for that approach than to rush the process to 
meet an artificial deadline.
                       benefits-received taxation
    Question. You discussed the importance of fairness in the tax 
system in your testimony. I agree with you as to the importance of 
fairness.

    My question is, to what extent, if any, do you think that an 
appropriate measure of a tax's fairness is that the amount of the tax 
correlates with the benefit the taxpayer receives from the government?

    Answer. When there are clear benefits associated with the 
provisions of a good or service, then it may be appropriate to have a 
``user pays'' style of tax or fee structure. This works well for things 
like toll roads and could also be applied to providing funding for 
highways. But, generally, the provision of public goods and services 
that benefit all Americans should be financed with general revenues 
raised through broad-based taxes that are subject to ``ability to pay'' 
conditions.
                               inversions
    Question. I am concerned about the wave of foreign acquisitions of 
American job-creating companies. I'm not just worried about existing 
U.S. jobs moving offshore, I'm worried about retaining the job 
prospects for future generations of Americans.

    Does the relocation of a corporate headquarters impact local jobs 
in U.S. communities?

    How can we help stem the tide of foreign acquisitions?

    What type of tax rules would help American companies stay here and 
use the United States to not just serve U.S. customers but also to 
service foreign markets?

    Answer. You are right to be concerned that relocation of corporate 
headquarters can have a disparate impact on the local community. The 
tax system should strive to not provide incentives for firms to 
relocate operations abroad to secure more favorable tax treatment. The 
reforms most likely to address this concern involve the rules affecting 
multinational firms. It should be a goal to reform the U.S. corporate 
income tax system in a long-run, revenue-neutral manner by broadening 
the tax base and lowering the maximum tax rate to a level comparable 
with our major trading partners. As part of this reform, it probably 
makes sense to institute a global minimum tax to lessen the tax 
reductions available by shifting income and perhaps operations to tax-
haven countries. Congress could also consider repealing the ``check the 
box'' rule, which allows firms to more easily shift income among 
subsidiaries. Two sources for ideas about provisions along these lines 
are the Obama Administration Business Tax Reform plan released by the 
Treasury Department and the tax reform draft produced by Chairman Camp.
                                land tax
    Question. Dr. Peter Orszag recently asserted that ``To fight 
inequality, tax land.''\1\ Is he correct that a tax on land would be 
distributionally progressive? That's not clear to me. If such a tax 
were to buy down tax rates on savings and investment, would such a tax 
be pro-growth?
---------------------------------------------------------------------------
    \1\ See https://www.bloomberg.com/view/articles/2015-03-03/to-
fight-inequality-tax-land.

    Answer. The idea of taxing land is a long-standing concept in the 
area of public finance, going back a couple hundred years and most 
closely associated with Henry George. It is true that land is an 
immobile asset in fixed supply, so imposing a tax on land can have some 
efficiency effects. Given that land holdings closely track wealth, this 
can be a progressive tax as well. However, imposing such a tax would 
require assessments to be made of the value of all parcels of land, 
assuming there were no improvements on the property. This can be 
challenging in many jurisdictions. It is the case that many localities 
impose property taxes (usually on both the value of land and 
improvements), so there is a form of land taxation already in place. 
But it is not obvious to me that imposing a sizable tax on land is a 
desirable Federal policy.
                            summary question
    Question. Given your prior role as the top tax policy advisor at 
the Treasury Department, what big-picture/summary advice do you have 
for us as we continue down this path toward comprehensive tax reform?

    Answer. I would provide four pieces of big-picture advice for the 
committee. First, ensure revenue adequacy for the short and long term. 
The fiscal imbalance we are experiencing today is likely to get worse 
as the Baby Boom generation fully reaches retirement age. Unmitigated 
and large Federal budget deficits are irresponsible and pass along 
fiscal problems to the next generation of Americans. Second, get the 
tax system right for the long term. Tax reform is a difficult process, 
and the results tend to last for years. So, proceeding methodically and 
obtaining durable and economically desirable results can deliver the 
type of reform that can have long-term payoffs. Third, be guided by 
principles, not politics. Undertaking tax reform is hard work 
technically, but the benefits to the Nation can be substantial if the 
main guiding force is concern for the public good. And finally, realize 
that bipartisan reform is more likely to lead to a better product and 
one that is more durable and long-lasting.

                                 ______
                                 
Prepared Statement of Hon. Pamela F. Olson, Former Assistant Secretary 
         for Tax Policy, 2002-2004, Department of the Treasury
    Chairman Hatch, Ranking Member Wyden, and distinguished members of 
the committee, I appreciate the opportunity to appear this morning as 
the committee considers the prospects and challenges for enacting 
comprehensive tax reform legislation. I had the honor of serving as 
Treasury's Assistant Secretary for Tax Policy from 2002 to 2004, and am 
currently U.S. Deputy Tax Leader of PricewaterhouseCoopers LLP and 
leader of PwC's Washington National Tax Services practice. I am 
appearing on my own behalf and not on behalf of PwC or any client. The 
views I express are my own.
                              introduction
    Fixing our problems. As the chairman's statement announcing this 
hearing noted, Congress will face tough decisions in designing a 
simpler and fairer tax system that will better serve American 
individuals, families, and job creators.

    The fact that tax reform is hard is obvious from the fact that it 
has been 31 years since Congress last enacted comprehensive tax reform. 
The fact that tax reform is hard is so familiar it has its own 
hashtag--#trih.

    Meaningful comprehensive tax reform, as opposed to temporary tax 
cuts, will require careful consideration of competing interests and 
taking into account the country's pressing fiscal concerns. As 
demonstrated by last week's reports from the Social Security and 
Medicare trustees, measures to control rising spending levels must be 
carefully considered, but whatever spending decisions are made, to be 
sustainable, tax reform must produce sufficient revenues to cover the 
cost of what Congress agrees to spend. In addition, to be sustainable, 
a reformed tax system must attract and retain the business investment 
that is needed for the economy to grow. A system that leaves an unlevel 
playing field that continues to discourage capital investment and 
business formation in the country is an inherently unsustainable 
system.

    The current political environment adds to the challenge of finding 
common ground on certain issues, but there is no body more capable of 
demonstrating how to work for the greater good on a bipartisan basis 
than this committee. Rather than focusing on the challenges, I want to 
focus on the rewards of tax reform if we succeed, and the risks to the 
country if we fail.

    The potential rewards of a well-designed system--stronger economic 
growth, increased attractiveness to capital investment, faster job 
creation, rising wages--will lead to a more broadly-shared prosperity 
and make the effort well worth undertaking.

    Conversely, as described in my testimony to this committee in 2015, 
the risks of inaction are great; moreover, they have increased during 
the intervening period. Over the last 30 years, the global economy has 
grown faster than the U.S. economy and other countries have changed 
their tax systems to increase their attractiveness as a location for 
investment. We must make tax policy choices that encourage U.S. 
investment and level the playing field for American companies and 
workers in the global marketplace.
                 prospects for comprehensive tax reform
    There is widespread consensus that the United States needs to 
reform its tax system. Since the last comprehensive tax reform in 1986, 
the U.S. business tax system has not kept pace with the rest of the 
world as other countries have lowered their corporate tax rates, 
adopted territorial tax systems, and increased their reliance on 
consumption taxes, like value-added taxes, that are adjustable at the 
border.

    While my testimony is focused primarily on business taxation, there 
is also a recognition of the need to make the tax code simpler for 
individuals and families seeking to save for education and retirement 
and less burdensome for entrepreneurs seeking to start and grow their 
own businesses.

    As the members of this committee are well aware, revenue neutral 
tax reform produces vocal losers and largely silent winners. The base 
broadening that permits further rate reduction on a revenue-neutral 
basis is unpopular with those whose base is broadened, but the greater 
the rate reduction, the more palatable the base broadening will be, and 
the greater the benefit will be for the U.S. economy because taxes will 
have a reduced effect on decisions to work, save, and invest.

    A competitive business tax system. The U.S. corporate tax rate, 
including State and local taxes, is the highest among advanced 
economies. The combined U.S. Federal and State statutory corporate tax 
rate currently is more than 15 points higher than the average of other 
Organisation for Economic Co-operation and Development (OECD) 
countries. Moreover, the rest of the developed world continues to lower 
their rates, as shown in the chart below highlighting changes in the 
global tax environment since the last time the United States enacted 
comprehensive tax reform legislation.

    We have acquired our top rank and increased the distance between 
the United States and OECD average countries' corporate rates over a 
period of years because we have held our rate constant since 1993 
(following a one point increase in the rate) while other countries have 
reduced their rates, a trend that may have slowed, but does not appear 
to have stopped nor certainly to have reversed direction. Nor does it 
seem likely to because, in contrast to the United States, other 
countries have increased their reliance on more stable sources of 
revenue that are more conducive to economic growth--in particular, 
consumption taxes like value-added taxes.

    Taking into account the double taxation of corporate earnings that 
is part of the U.S. tax system, the United States remains on the leader 
board, but its ranking falls from first to third among OECD countries. 
Although the double tax was reduced through a reduction in the tax rate 
on dividends in 2003, the tax rate was increased in 2010 and again in 
2013. Reducing the double tax, particularly using the corporate 
dividends paid deduction mechanism the committee staff has considered, 
could provide effective tax rate relief to U.S. corporations as part of 
a comprehensive tax reform package.

    Bills introduced by members of this committee in prior Congresses, 
including bills introduced by Senator Wyden and Senator Cardin, would 
have significantly reduced the corporate tax rates in recognition of 
the need for a competitive business tax system. Senator Wyden's bills 
from 2010 and 2011 would have reduced the U.S. Federal corporate tax 
rate to 24 percent.

    In the 7 years since Senator Wyden first proposed a 24-percent 
Federal corporate tax rate as part of comprehensive tax reform 
legislation, however, other countries have reduced their corporate tax 
rates further. Together with average State corporate income tax rates 
of about 6 percent, even a 24-percent Federal rate would leave the 
United States about 5 percentage points higher than the average rate 
for all other OECD nations. I strongly encourage you to find a way to 
achieve an even greater level of corporate rate reduction.

    This committee's 2015 bipartisan business income tax working group, 
chaired by Senators Thune and Cardin, recognized the fact that the high 
U.S. corporate tax rate places American companies at a disadvantage in 
the global economy. The working group on international reform, chaired 
by Senators Portman and Schumer, reached a similar conclusion about the 
need for a lower rate to attract income from innovation.

    The business income tax working group also examined how to achieve 
lower business income tax rates while maintaining revenue neutrality 
through various base broadening measures. Base broadening measures that 
close loopholes or eliminate provisions that distort investment 
decisions are worthy of consideration. Those should be distinguished 
from measures that broaden the base for the sake of a broader base but 
that would have the likely effect of discouraging investment in the 
United States. The latter represent a false choice; they may appear to 
increase revenue but, because they discourage investment, the increase 
is illusory.

    Opportunities for investment are increasingly globally and the 
competition for investment is fierce. Every decision to invest 
elsewhere makes more logical the next decision to invest elsewhere as 
the locus of activity shifts to other locations. The U.S. market 
remains globally attractive but that is despite our tax system, which 
impedes investment, not because of it. By failing to address the 
features of our tax system that discourage investment here, we will 
leave investments on the sideline. Moreover, if we broaden the base in 
ways that make U.S. investment less rewarding, we will lose investments 
to other jurisdictions.

    In summary, tax reform must produce a competitive tax rate for 
American companies to thrive in the ever-changing global marketplace. 
Our tax system should serve to facilitate, not impede, investment in 
the United States and to promote the efficient, effective, and 
successful operation of American businesses in today's global 
marketplace. A tax system that allows U.S. companies to compete more 
effectively will translate into increased domestic investment, jobs, 
and wages.

    Modern international tax rules. In addition to cutting corporate 
tax rates, other countries have moved to modernize their international 
tax rules to reduce barriers to domestic investment. By contrast, the 
U.S. international tax system remains mired in a system of worldwide 
taxation established more than a century ago. The worldwide system may 
have served us well in the past. It no longer does. Its adverse effect 
is exacerbated by the disparity between the U.S. corporate tax rate and 
those of other countries.

    The United States is the only OECD country to combine a high 
statutory rate with a worldwide tax system. No other developed country 
in the world subscribes to such a toxic brew--not one. Under U.S. tax 
rules, Federal corporate income tax on active foreign earnings 
generally is deferred until those earnings are repatriated to the 
United States. All but five of the other 34 OECD countries allow 
companies to repatriate foreign earnings to their home countries with 
little or no additional tax, as shown on the chart below.

    Regardless of one's view on the taxation of foreign income, it is 
difficult to see the current system as anything other than the worst of 
all possible worlds. It produces little tax revenue; yet, because of 
the disparity between U.S. and foreign tax rates, creates a ``lockout 
effect'' discouraging U.S. companies' reinvestment of foreign earnings 
in the United States. A now retired tax director described it as ``the 
35-percent investment tax credit to leave my money offshore.'' The 
Joint Committee on Taxation (JCT) staff estimates that the amount of 
unrepatriated foreign earnings of U.S. companies increased to $2.6 
trillion by the end of 2015, up from $1.7 trillion in 2010.

    The Senate Finance Committee international tax reform working group 
chaired by Senators Portman and Schumer called for ending this lockout 
effect by adopting a dividend exemption system with ``robust and 
appropriate base erosion rules.'' The international tax reform working 
group examined the need to make the United States a more hospitable 
environment for headquartering companies so as to remove incentives for 
``inversions'' and also cited the global effort to address base erosion 
and profit shifting (BEPS) led by the OECD.

[GRAPHIC] [TIFF OMITTED] T1817.003


    While the need to protect our tax base is self-evident, all anti-
base erosion measures are not created equal, a point acknowledged in 
the international tax reform working group report. The effects of anti-
base erosion rules must be carefully considered. The unintended 
consequences could be significant. The best anti-base erosion measure 
is a well-designed system, starting with a low rate that attracts 
investment and reduces the incentive to avoid the tax system. A well-
designed system would also prevent base erosion by clearly defining the 
base subject to tax.

    What has been called a foreign minimum tax is the anti-base erosion 
measure that has generated the most proposals. The concept has 
significant flaws. While it can be drafted to clearly define the base 
subject to tax, it does so as a secondary right to tax. As a secondary 
measure, it may discourage some tax planning, but it would do nothing 
to discourage other countries from trying to tax a greater share of 
U.S. companies' global profits. Indeed, it may even encourage them to 
do so. Other countries have been active in redefining their tax bases 
legislatively and administratively to the detriment of the U.S. 
Treasury since before the OECD commenced work on the BEPS project. A 
minimum tax does not address or even respond to those actions. Thus, it 
does nothing to give the United States a means of proactively 
responding to the threats to our tax base.

    Because a minimum tax would only apply to U.S.-based companies, it 
would put U.S. companies at a competitive disadvantage relative to 
their global competitors. The United States can raise the tax paid by 
U.S.-based businesses on their foreign operations, though perhaps only 
temporarily, but it cannot raise the tax paid by foreign companies on 
their foreign operations. The effect of a minimum tax would likely be a 
continued disadvantage to U.S. ownership of businesses and assets and 
to U.S. headquartering. It would thus have the effect of discouraging 
U.S. investment. Stronger subpart F or controlled foreign corporation 
rules may well have the same effect. Because they apply only to the 
subsidiaries and activities of U.S.-based businesses, they put those 
businesses at a disadvantage in the global marketplace.

    While reducing their corporate rates and adopting territorial 
systems, other countries have focused their attention on increasing 
revenues from activities within their borders. While this has involved 
some broadening of domestic income tax bases, the primary increase has 
come from increased reliance on consumption taxes, such as value-added 
or goods and services taxes. Because the tax base for a consumption tax 
is goods and services consumed within a country's borders, it provides 
a relatively fixed definition of the tax base and may have an anti-base 
erosion effect on the country's income tax base as well. The House 
Republican proposal for tax reform released in June of last year uses a 
similarly defined tax base. Unlike other countries, however, the House 
proposal is the effective repeal of the corporate income tax and 
replacement of it with a domestic consumption tax. In so doing, it 
necessarily excludes from the tax base all income attributable to goods 
and services consumed outside the United States.

    Need for tax certainty. It is important to consider how global tax 
policy changes have heightened the level of uncertainty for U.S. 
companies competing globally since the 2015 Senate Finance Committee 
international tax reform working group completed its report. Global tax 
controversies continue to increase, creating ever higher levels of 
uncertainty for U.S. businesses competing around the world.

    It is worth noting that a core part of the OECD's mandate is to 
reduce tax controversies and minimize the risk of double taxation. The 
OECD historically has consisted of a small group of relatively like-
minded countries focused on helping member countries agree on uniform, 
consistent international tax rules, in order to minimize double 
taxation that could inhibit cross-border trade and investment. With 
more than 90 countries now participating in OECD's BEPS tax work, there 
are fundamental questions about the OECD's ability to achieve the 
consensus that will allow it to continue operating in coming years as a 
standard-setting body for international tax rules.

    The BEPS project highlighted difficulties in achieving consensus 
with a large number of participating countries whose interests may not 
be aligned. Where such a consensus proved elusive, the final BEPS 
reports resorted to a ``menu of options'' approach, the antithesis of 
certainty. Without clarity from the United States, this puts U.S. 
companies at greater risk of double taxation at worst, and increased 
global tax controversies at best.

    Although the U.S. Treasury was a very active participant in the 
BEPS discussion, the work began and proceeded without the direction 
from Congress that should have preceded the effort given what was at 
stake for the U.S. treasury. It is critical that Congress move forward 
with reform of our tax rules and provide the clarity needed for the 
continuing discussions of international tax rules.

    The most dramatic example of the clash between outdated U.S. 
international tax rules and the actions of foreign authorities has been 
the European Commission's (EC) ongoing ``State aid'' investigations. 
The EC State aid investigations have been a matter of ongoing 
bipartisan concern by members of Congress. The U.S. business community 
appreciated the efforts in early 2016 of Chairman Hatch, Ranking Member 
Wyden, and Senators Portman and Schumer in writing to then-Treasury 
Secretary Jack Lew to express objections to the EC's actions in this 
arena.

    Secretary Lew communicated U.S. concerns about the EC State aid 
investigations to European authorities. A 2016 Treasury white paper 
highlighted the potential for lost U.S. tax revenue, increased barriers 
to cross-border investment, and the undermining of the multilateral 
progress made toward reducing tax avoidance.

    The EC's subsequent actions suggest that U.S. objections have had 
no discernable effect on the EC's approach to its State aid 
investigations and rulings that seek retroactive recoveries of EU taxes 
the EC asserts should have been paid. In the absence of U.S. action on 
tax reform, such controversies appear likely to continue as foreign tax 
authorities seek to claim a portion of the foreign earnings of U.S. 
companies that remain unrepatriated or ``locked-out'' of the United 
States.

    Changing views on taxation. A key challenge facing U.S. tax reform 
efforts is how best to raise needed revenue in a manner that is both 
efficient and conducive to the economic growth that will produce jobs 
and rising wages. Over the course of recent decades, foreign 
governments in both the developed and the developing world have adopted 
policies that reflect a changing view of business income taxes.

    This changing view reflects a recognition that the share of GDP 
attributable to intangible assets, such as patents, knowhow, and 
copyrights, has increased substantially. Unlike property, plant, and 
equipment, intangible assets are highly mobile and more likely to be 
exploitable on a global basis, increasing their value. This shift has 
been accompanied by the reorganization of economic activity around 
global value chains and strategic networks that flow across national 
borders.

    The rise in the value of intangibles and the interconnected nature 
of the global economy has led to a recognition that it is more 
difficult to measure and tax income earned within a country. To fund 
their governments, other countries have addressed this issue by relying 
more heavily on consumption-based taxes, such as value-added or goods 
and services taxes, that are applied to a tax base that is more easily 
measured and less mobile. Consumption taxes have the added benefit of 
being more conducive to economic growth.

    At the same time, many foreign governments have recognized the 
global mobility of capital and intangible assets and have come to view 
changes to business income tax rates as a competitive tool that can be 
used to attract investment. By reducing statutory business income tax 
rates, adding incentives for research and development, innovation, and 
knowledge creation, and adopting territorial systems that limit the 
income tax to activities within their own borders, governments have 
sought to attract capital that will yield jobs, particularly high-
skilled jobs for scientists, engineers, and managers.

    These trends reflect a practical recognition of the challenge of 
taxing highly mobile intangibles and capital and also the fact that 
economists across the political spectrum have concluded that 
consumption-based taxes are a more efficient way of raising revenue in 
an open economy than the corporate income tax.

    The approach taken by other countries is reflected in a bill 
introduced by Senator Cardin during the last Congress. It included a 
progressive consumption tax that would reduce the U.S. corporate tax 
rate to 17 percent and exempt most individual taxpayers from income 
taxation by lowering rates and providing a family allowance of $100,000 
for joint filers and $50,000 for single filers. The 10-percent credit-
invoice, border-adjustable value-added tax included in Senator Cardin's 
bill contained an exemption from collecting the tax for small 
businesses with under $100,000 in annual receipts.

    The extent to which the United States is out of sync with the 
competitive and pro-growth tax policies of other nations can be seen in 
the chart below, which shows the Federal Government's primary reliance 
on income taxes in contrast to most of the world's major economies, 
which rely to a more significant degree on consumption taxes. Other 
OECD countries on average rely equally on income and profits taxes and 
goods and services taxes while the United States relies 2.7 times more 
heavily on income and profits taxes than goods and services taxes.

    While the addition of an alternative tax base may be beyond the 
reach of the current tax reform effort, there are practical limits to 
generating sufficient revenues through our existing income and payroll 
tax bases to meet the obligations for Social Security, Medicare, and 
other Federal programs without incurring unsustainably high levels of 
Federal debt or imposing levels of spending reductions that appear 
politically unlikely. An alternative tax base, coupled with lower rates 
on existing tax bases, would better align our tax system with the tax 
systems of every other developed country.

[GRAPHIC] [TIFF OMITTED] T1817.004


    In conclusion, I believe that Congress must move swiftly to reform 
the tax code. To be sure, there are challenges to doing so, but the 
opportunities for a stronger economy, job and wage growth, and more 
broadly-shared prosperity will reward the effort. Tax reform is also 
essential to respond to the risk inherent today in other countries' 
continued updating of their tax systems to be more internationally 
competitive.

    In a rapidly changing world, I do not think our country can afford 
to look at tax reform as a once-in-a-generation exercise. I would 
challenge the Congress to look at tax reform as an exercise regularly 
undertaken. Much as the 2015 PATH Act served as a stepping stone to the 
current tax reform effort by making the research credit and other 
significant provisions permanent, Congress should not view the 
meaningful tax reform achieved by this Congress as the final word for 
another generation. It should be the responsibility of each succeeding 
Congress to examine the tax system and to build on the reforms enacted 
by this Congress. The United States first must regain, but then must 
maintain, a tax code that promotes economic growth and improves the 
economic well-being of all Americans.

                                 ______
                                 
       Questions Submitted for the Record to Hon. Pamela F. Olson
               Questions Submitted by Hon. Orrin G. Hatch
          simplification of tax system--impact on individuals
    Question. Individuals and small business owners spend billions of 
dollars complying with a labyrinth of tax rules every year.

    What is the single most important thing Congress can do to help 
Americans save their hard-earned time and money complying with our 
overly complex tax system?

    Answer. Replacing itemized deductions with an expanded standard 
deduction, and combining, eliminating, or replacing the wide variety of 
credits available for education, saving, health care, etc., with lower 
rates would dramatically simplify the tax system for a large percentage 
of the population.

                      high importance for business
    Question. Each of you interacts with and advises small and large 
businesses on a daily basis.

    What are these businesses telling you is most important to them as 
part of tax reform?

    What are the major themes you're hearing from large and small 
businesses alike?

    Answer. Generally, businesses that are globally engaged or face 
global competition believe lower tax rates and a territorial system 
like the systems adopted by much of the developed world are the most 
important parts of tax reform. Businesses that are purely domestic 
believe tax reform should deliver lower tax rates and a simpler system 
that requires less paperwork and recordkeeping to comply.
          distortion in debt financing versus equity financing
    Question. A number of you in your written testimonies addressed the 
differing tax treatment of debt and equity.

    The corporate marginal effective tax rate on equity financing is 
about 35% while the corporate marginal effective tax rate on debt 
financing is negative. This creates a huge distortion in terms of 
financing.

    Corporations are incentivized by the tax code to engage in debt 
financing rather than equity financing.

    As part of tax reform, should we create greater parity in the tax 
treatment of debt financing and equity financing and if so, how should 
we accomplish that?

    Answer. Greater parity is desirable and could be achieved through 
integration of the corporate and individual tax systems through a 
dividends paid deduction or similar mechanism.
                twenty-four percent corporate tax rate?
    Question. Ms. Olson, in your testimony, you state that we need to 
get the corporate rate below 24%. I agree.

    But is it better to get the rate to 24%, if that's the best we can 
do, or better to keep working for something better, and reject a deal 
getting us to a 24% rate?

    Answer. The perfect shouldn't be the enemy of the good. While I 
believe Congress should find a way to achieve a more competitive 
corporate tax rate than 24%, Congress should make as much progress as 
possible towards a more competitive tax system, and plan to return to 
it again. As I stated in my testimony, I don't believe tax reform can 
continue as a once-in-a-generation event. The rapidity of dramatic 
changes in the economy means that we should not expect that Congress 
can enact a system today that won't require further changes for another 
generation. The dramatic economic changes have been met by swift and 
equally dramatic changes to tax systems by much of the rest of the 
developed world. It is important for the United States to keep pace.
                    what if there is no tax reform?
    Question. What are your views on the consequences of not achieving 
comprehensive tax reform this year or early next year?

    Does the lack of tax reform this year mean continued anemic 
economic growth and stagnant wages?

    Does the lack of tax reform this year mean continued pressure for 
U.S.-based multinational firms to relocate abroad or be acquired by 
foreign multinational companies?

    Answer. By failing to respond to other governments' tax changes 
that have made their countries more attractive places for investment, 
the United States has been running a multi-year experiment on the 
economy, and the experiment has failed.

    Delay in enacting tax reform is likely to retard investment in the 
United States with a corresponding negative effect on economic growth, 
including wage growth.

    The United States' current tax system puts a discount on the value 
of business assets in the hands of a U.S. company relative to that of a 
foreign acquirer. If the United States were to fail to enact a more 
competitive tax system, there would be renewed pressure on American 
companies because they would be more globally competitive if owned by a 
foreign headquartered company.

                               inversions
    Question. I am concerned about the wave of foreign acquisitions of 
American job-creating companies. I'm not just worried about existing 
U.S. jobs moving offshore, I'm worried about retaining the job 
prospects for future generations of Americans.

    Does the relocation of a corporate headquarters impact local jobs 
in U.S. communities?

    How can we help stem the tide of foreign acquisitions?

    What type of tax rules would help American companies stay here and 
use the United States to not just serve U.S. customers but also to 
service foreign markets?

    Answer. Recent research finds that a move in corporate headquarters 
resulting from an inversion leads to a smaller share of employees and 
investment in the United States than for non-inverting companies. This 
move in operations and activity abroad has a negative effect on the 
communities from which the operations are moved as the impact ripples 
through the community. To stem the tide of foreign acquisitions, the 
United States Congress should act to create a level playing field so 
that headquartering a company in the United States and investing in the 
United States do not carry a tax disadvantage. Reducing the corporate 
tax rate to an internationally competitive level, adopting a 
territorial tax system, and increasing reliance on consumption taxes 
would make the United States a more attractive location for operations 
serving both U.S. and foreign markets and eliminate the tax benefit of 
a foreign acquisition.

                                land tax
    Question. Dr. Peter Orszag recently asserted that ``To fight 
inequality, tax land.'' \1\ Is he correct that a tax on land would be 
distributionally progressive? That's not clear to me. If such a tax 
were to buy down tax rates on savings and investment, would such a tax 
be pro-growth?
---------------------------------------------------------------------------
    \1\ See https://www.bloomberg.com/view/articles/2015-03-03/to-
fight-inequality-tax-land.

    Answer. I am uncertain whether a tax on land would be 
distributionally progressive. Most state and local governments levy 
annual taxes on real property so (at least in some states) land, as a 
component of total real property value, is taxed and produces 
significant revenue to fund state and local government. In determining 
the distributional effect, the use to which the revenue is put should 
---------------------------------------------------------------------------
also be considered.

                            summary question
    Question. Given your prior role as the top tax policy advisor at 
the Treasury Department, what big-picture/summary advice do you have 
for us as we continue down this path toward comprehensive tax reform?

    Answer. Capital is mobile. To be sustainable, tax reform must 
produce a globally competitive system or the United States will lose 
investment and corporate headquarters to other countries. That means a 
lower corporate rate and a territorial system like the rest of the 
developed world.

    Tax reform should yield a system that is simpler so that 
individuals and small businesses, in particular, find it easier to 
comply and spend less of their time and resources complying with the 
tax laws. A simpler system would be a more transparent system that 
would increase taxpayers' confidence that the system is fair.

    Congress should not treat tax reform as a one-and-done exercise, 
but rather should commit to reexamining the tax system regularly to 
ensure it is competitive and fit for purpose.

    Congress should examine the mix of taxes on which we rely. In 
particular, consumption taxes are widely viewed as being more conducive 
to economic growth but the United States relies very little (relative 
to other countries) on consumption taxes, especially at the Federal 
level. Adopting a consumption tax at the Federal level could help meet 
our revenue needs in the coming years with less harm to economic 
growth.

                                 ______
                                 
Prepared Statement of Hon. Eric Solomon,\1\ Former Assistant Secretary 
         for Tax Policy, 2006-2009, Department of the Treasury
---------------------------------------------------------------------------
    \1\ I was Assistant Secretary for Tax Policy at the Treasury 
Department from 2006 to 2009. I have been asked to testify in my 
individual capacity. My written and oral remarks are my own and do not 
necessarily represent the views of Ernst and Young LLP or its clients.
---------------------------------------------------------------------------
    Mr. Chairman, Senator Wyden, and distinguished members of the 
committee, thank you for the opportunity to testify today on tax 
reform. I had the privilege to testify before this committee in March 
2011, with other former Assistant Secretaries for Tax Policy. We 
testified on how changes since the Tax Reform Act of 1986 have affected 
the tax code. That hearing was one of a series of hearings held by 
Congress to advance the process of reforming our tax system.

    For many years, policymakers have expressed a desire to reform the 
Internal Revenue Code. Much has changed since the last major overhaul 
in the Tax Reform Act of 1986. All of us recognize that updating the 
code is a necessity. We hope we are at a climax in this effort, and 
that in the coming months we will see the enactment of significant 
reform.

    As I stated in my 2011 testimony, the primary purpose of the 
Federal tax system is to collect the revenues needed to fund the 
government. We would all agree that goals of an optimal tax system 
would include promoting economic growth, minimizing distortions, and 
supporting the competitive position of American businesses around the 
globe. Another goal is that our tax system should be as simple as 
possible, fair and stable. It should also be administrable for 
individual and business taxpayers as well as for the Internal Revenue 
Service. Our current tax system is suboptimal in achieving these goals.

    We live in a constantly changing world. Economic, social, and 
political developments, including accelerating advancements in 
technology, are changing our Nation and its role in world affairs and 
the global economy. As the global economy evolves, we need to re-
evaluate our tax laws to ensure they are responsive to current and 
anticipated domestic and global conditions. We must also recognize that 
our tax system does not operate in a vacuum--it is one of many tax 
systems around the world, and as other countries revise their tax 
systems, we must respond as necessary to ensure that our tax system is 
in the best possible position to facilitate outbound and inbound 
investment and maximize the welfare of the American people.

    Numerous tax bills have been enacted since 1986. The Internal 
Revenue Code is a patchwork of provisions serving a wide variety of 
purposes. As the code grows, and the regulatory and administrative 
guidance interpreting and implementing the code also grows, our 
enormously complex tax system becomes even harder for taxpayers to 
understand and for the IRS to administer.

    The debate about tax reform has been ongoing for over a decade. 
Extensive groundwork has been laid by the work of policymakers, 
academics, taxpayers and practitioners. It is now essential to take the 
next step and enact tax reform that, among other things, reduces tax 
rates, eliminates various preferences, modernizes the international tax 
system, and helps American workers and families. If possible, the 
reforms should be permanent. In addition, tax reform should be 
distributionally neutral, so the relative burden of income taxation 
does not shift.

    All of this should be achieved in a fiscally responsible manner. 
Everyone is aware of the long-term fiscal challenges our Nation faces 
as spending, especially mandatory spending, continues to increase. We 
need to reform our tax system in a manner that does not disadvantage us 
in addressing our long-term budget imbalances.

    Despite the challenges in designing a new system, we have an 
opportunity we do not want to miss. There will necessarily be 
compromises along the way, but the most important objective is to enact 
tax reform that moves the tax law in the proper direction. As quickly 
as possible, it is important to enact legislation that will end 
uncertainty that could deter business and investment activity. Tax 
reform will provide benefits to American businesses, workers and 
families. There is a window of opportunity now, and it is important to 
act before that window shuts.
                            why tax reform?
    The reasons for tax reform are well-known. Some of the reasons for 
tax reform include:

    (1)  An evolving business and global landscape. The U.S. economy is 
very different than it was at the time of the Tax Reform Act of 1986, 
the last major overhaul of the Internal Revenue Code. The world economy 
and the U.S. role in that economy is vastly different than it was in 
1962, when the basic structure of our international tax system was 
enacted. The U.S. economy is increasingly integrated and interdependent 
with the economies of other nations. Both capital and labor have become 
increasingly mobile. Traditional manufacturing has declined in relative 
size, while technology, services, financial innovation, and intangible 
assets have become more important. It is necessary to reform the code 
in light of these significant changes.

    (2)  Increasing global competitive pressures. While the code has 
grown in size and complexity, its structure generally has remained 
unchanged over the past several decades. In contrast, other countries 
have responded to increased global competition, lowering their 
corporate tax rates and shifting to territorial tax systems. Taxes are 
one factor businesses consider in deciding where to locate their 
activities. Businesses take into account other factors as well, such as 
labor costs and political and financial stability. As its competitive 
edge in other factors narrows, the United States must adapt its tax 
system to meet global competition.

    (3)  The inclusion of many special provisions in the code. The 
Internal Revenue Code does much more than raise revenue necessary to 
fund the Federal Government. The Code contains many provisions for 
individuals and businesses that address social and economic policy 
issues. As a result, the code has grown enormously and is increasingly 
complex. Because of special provisions, the code taxes some taxpayers 
at high effective rates and others at much lower effective rates. It is 
necessary to reform the code to simplify it and remove distortions. 
Simplification would make it easier for individuals and businesses to 
comply with their tax obligations and would make it easier for the IRS 
to administer the law. A simpler Code would improve taxpayer 
perceptions regarding the fairness of the tax system.

    (4)  Inadequacies of the U.S. international tax system. The United 
States has a unique international tax system that provides for deferral 
of tax on active foreign earnings until they are repatriated to the 
United States. Most other countries have adopted a territorial tax 
system, which generally exempts from tax earnings from foreign 
operations. The high U.S. corporate tax rate and repatriation tax 
encourage U.S. companies to move activities offshore and keep the 
earnings offshore (the so-called ``lockout effect''). The U.S. 
international tax system also creates an incentive for U.S. companies 
to use transfer pricing among affiliates to shift income to lower-tax 
jurisdictions. Furthermore, it creates an incentive for U.S. companies 
to engage in inversions. It is necessary to reform the code to address 
these international tax problems.

    (5)  Incentives to use debt financing. The current U.S. tax system 
favors the use of debt financing rather than equity financing. Business 
interest expense is deductible, whereas dividend payments are not. The 
deduction for interest creates an incentive for businesses to borrow 
more than they otherwise would, increasing the risk of financial 
failure. The tax law should be made more neutral in its treatment of 
debt and equity.

    (6)  The need for stronger economic growth. It is important to 
increase the rate of economic growth in the United States. Economists 
agree that faster write-off of capital investments promotes economic 
growth by encouraging such investments. Lower tax rates will also 
promote growth. Higher economic growth will help U.S. businesses, 
workers, and families.
                         key issues to address
    In designing a tax reform package, there are a number of important 
issues that need to be addressed. The following is a discussion of 10 
issues. Many of the issues are interrelated and decisions about an 
issue will affect decision-making about other issues.
1. Should tax reform be revenue-neutral? What baseline should be used 
        to measure this? What scoring method?
    Congress will need to decide whether to make tax reform revenue-
neutral. In making this decision, Congress must select a baseline and a 
scoring method.

    There are two options for a baseline, a current law baseline or a 
current policy baseline. A current law baseline assumes that current 
law will continue to apply, including future changes in the law already 
enacted, such as expiring provisions. A current policy baseline assumes 
that various expiring provisions will be extended.

    Congress must decide whether to use conventional or dynamic 
scoring. Conventional scoring assumes a fixed gross national product 
(GNP). Dynamic scoring takes into account the effect of significant tax 
changes on GNP and the resulting effect on tax revenues.

    If the reconciliation process is used for tax reform, no title of 
the bill can lose revenue outside the budget window; otherwise the 
title will be subject to a point of order requiring 60 votes. If the 
point of order is not overcome, the title will be stricken from the 
bill. To avoid this, provisions can be designed to sunset at the end of 
the budget window and not lose revenue outside the budget window. 
Congress would need to select a budget window for this purpose--10 
years or perhaps longer.

    If the point of order is overcome by obtaining 60 votes or if the 
reconciliation bill is revenue-neutral outside the budget window, it 
can be permanent. Permanence provides tax certainty for business and 
investment decision-making. In addition, a revenue-neutral bill has 
less potential to worsen our country's long-term fiscal imbalance. 
However, maintaining revenue neutrality would prevent tax reform from 
providing greater benefits, such as a greater reduction in the U.S. 
corporate tax rate to make it more competitive with tax rates in other 
countries.

    In addition to revenue neutrality, distributional neutrality is an 
important consideration in tax reform. Distributional neutrality 
ensures that no particular income class receives an advantage over 
another.
2. How much can tax rates be lowered?
    The resolution of the question of how much tax rates can be lowered 
depends in large measure on whether tax reform would be revenue-
neutral, what deductions, credits, and other provisions would be 
eliminated for individuals and businesses, and what revenue raisers 
would be included. It is anticipated that a broader income tax base 
would remove distortions, resulting in a more efficient system 
fostering improved economic growth.

    How much the U.S. corporate income tax rate can be lowered is a 
critical question for business tax reform. Today the United States has 
one of the highest statutory corporate income tax rates in the world 
(35% plus State corporate taxes). Over the years, other countries have 
lowered their corporate tax rates significantly below the U.S. rate. 
This disparity in rates encourages U.S. companies to move activities 
overseas, and the U.S. deferral system of international taxation that 
imposes a tax on repatriated earnings encourages U.S. companies to keep 
their active foreign earnings offshore. The disparity in tax rates also 
encourages U.S. companies to engage in inversions to reduce their U.S. 
tax burden.

    A substantial reduction in the U.S. corporate tax rate would lessen 
the incentives described above. The greater the reduction, the more 
those incentives would be diminished.
3. What deductions, credits, and other provisions should be eliminated?
    Selecting individual and business deductions, credits, and other 
provisions to eliminate will be a difficult process. Over the years 
many provisions have been added to the code to address social or 
economic issues. The deduction for home mortgage interest was enacted 
to encourage home ownership. The charitable deduction was enacted to 
encourage charitable giving. Many special provisions, such as the 
research credit, encourage activity that has favorable spillover 
benefits that benefit more than the taxpayer engaging in the activity.
4. Should tax reform include a territorial system? With base erosion 
        provisions?
    Most other countries have adopted a territorial tax system, which 
generally exempts from tax the active earnings from foreign operations. 
As indicated above, the United States has a unique international tax 
system that permits deferral of tax on active foreign earnings until 
they are repatriated to the United States. The repatriation tax puts a 
U.S. multinational at a disadvantage compared to a multinational 
company from a territorial country with respect to operations in a 
third country. The multinational from a territorial country is not 
subject to a repatriation tax on income earned in the third country.

    If Congress enacts a territorial tax system where active foreign 
earnings are generally not subject to U.S. tax even when repatriated to 
the United States, there will be continuing incentives to shift 
activities from the United States to low-tax jurisdictions. 
Commentators generally agree that base erosion provisions must be 
included in tax reform to combat this shifting.

    Several possible base erosion provisions have been suggested, 
including for example a proposal to tax ``foreign-based company 
intangible income'' in Chairman Camp's Tax Reform Act of 2014, the 
Obama administration's proposal for a minimum tax on foreign income in 
the 2012 Framework for Business Tax Reform, and the border adjustments 
proposed in the House Republican Blueprint.

    It is anticipated that international tax reform would include a 
deemed repatriation provision that would impose a tax on unrepatriated 
foreign earnings. There is more than $2 trillion of unrepatriated 
foreign earnings held by U.S. multinationals. The tax rate on the 
deemed repatriated amounts might vary depending on whether the offshore 
earnings are invested in liquid assets or invested in other assets such 
as plant or equipment. Issues include how the amount of unrepatriated 
foreign earnings would be calculated, at what point in time they would 
be calculated, and how the earnings would be allocated between liquid 
assets and other assets.
5. Should tax reform include border adjustments?
    Using a cash-flow based approach for businesses applied on a 
destination basis, the House Republican Blueprint would exempt from 
U.S. tax products, services, and intangibles that are exported outside 
the United States regardless of where they are produced. Products, 
services and intangibles that are imported into the United States would 
be subject to U.S. tax regardless of where they are produced. Stated 
another way, income from exports would be exempt from tax (but 
associated deductions would be permitted), whereas deductions for 
imports would be denied (but associated income would be taxable).

    Border adjustments would have the advantage of reducing incentives 
to move or locate operations outside the United States, because 
products exported from the United States would be exempt from U.S. tax 
just like products produced outside the United States. Border 
adjustments would also raise a substantial amount of revenue, because 
the United States is a net importer.

    U.S. companies that import a significant portion of their inputs 
fear that their tax burden would increase substantially as a result of 
border adjustments (the same amount of income with substantially fewer 
deductions). Some economists assert that, because of correlative 
adjustments in exchange rates (or price levels or wages), border 
adjustments that are symmetrical as to exports and imports would not 
harm importers and would not result in a change in the levels of U.S. 
exports and imports or the balance of trade.

    Under this reasoning, denial of deductions for imports would raise 
the U.S. cost of imports and consequently reduce U.S. demand for them. 
This would result in an increase in value of the dollar as compared to 
other currencies (because of weaker U.S. demand for imports), which 
would reduce the cost of imports, mitigating the reduction in U.S. 
demand for them. Similarly, the exclusion of income from exports would 
lower the U.S. cost of exports and increase foreign demand for them. 
This would result in an increase in the value of the dollar as compared 
to the currencies (because of stronger foreign demand for U.S. 
exports), which would make U.S. exports more expensive for foreigners, 
mitigating the increase in foreign demand. As a result of the currency 
adjustments, for importers the lower cost of imports would offset the 
additional tax from the denial of deductions for imports, and for 
exporters the reduced tax from the exclusion of income from exports 
would be offset by reduced revenue from exports.

    There has been considerable debate about how these adjustments 
would operate in actual practice, including how quickly the relative 
value of the U.S. dollar would adjust, and whether the effect of the 
anticipated increase in the relative value of the U.S. dollar on the 
cost of imports would completely offset the tax increase for importers.

    Furthermore, there are various uncertainties in the border 
adjustments as outlined in the House Republican Blueprint. For example, 
it might be relatively clear how to identify export income or import 
expenses related to tangible goods, but it is not as clear for income 
and expenses from intangibles and services. Also, special rules would 
be required for financial institutions.

    Moreover, it is not clear whether the border adjustments as 
outlined in the House Republican Blueprint would comply with World 
Trade Organization rules. Irrespective of WTO issues, it is uncertain 
how other countries might respond if the United States were to enact 
such border adjustments. It is also uncertain how U.S. bilateral tax 
treaties would apply to the border adjustments and whether the border 
adjustments would violate treaty obligations.

    Finally, an increase in the relative value of the U.S. dollar would 
increase the value of U.S. assets held by foreigners and decrease the 
value of foreign assets held by U.S. persons.
6. Should tax reform include limitations on the deductibility of 
        interest expenses?
    As previously discussed, the current tax system favors the use of 
debt financing rather than equity financing because business interest 
expense is deductible, whereas dividend payments are not.

    Over the years, there has been considerable discussion of corporate 
integration as a means to eliminate the distortions caused by the 
double tax imposed by the U.S. corporate tax system (tax on earnings at 
the corporate level and a second tax on shareholders with respect to 
dividends and capital gains). The distortions include: (1) the 
incentive to use pass-through businesses (partnerships, limited 
liability companies, or S corporations) or sole proprietorships rather 
than C corporations; (2) the incentive for corporations to use debt 
financing rather than equity financing; (3) the incentive for 
corporations to retain earnings and not pay dividends; and (4) the 
incentive for corporations to pay out earnings in ways other than 
dividends (such as the payment of deductible compensation, interest, 
rent, or royalties).

    Corporate integration could equalize the treatment of debt and 
equity financing for tax purposes (for example by making dividend 
payments deductible like interest payments) or make their tax treatment 
more symmetrical (for example by providing a dividend exclusion for 
shareholders, so that dividends would be nondeductible and not 
includible in income, whereas interest payments would be deductible and 
includible in income). In 1992 the Treasury Department issued a study 
about various options for corporate integration. More recently, in 
December 2014 the Republican staff of the Senate Finance Committee 
released ``Comprehensive Tax Reform for 2015 and Beyond,'' which 
includes an extensive discussion about corporate integration.

    There are a number of potential options for limiting deductions for 
business interest expenses, including for example: (1) denying a 
deduction for net interest expense, as proposed in the House Republican 
Blueprint; (2) disallowing net interest expense to the extent it 
exceeds a formulaic amount (for example, in excess of a certain 
percentage of income); or (3) disallowing net interest expense to the 
extent the ratio of U.S. interest expense to U.S. income exceeds the 
worldwide ratio for the company's corporate group, as proposed in 
Chairman Camp's Tax Reform Act of 2014. If tax reform includes a 
provision limiting interest expense, special rules would be necessary 
for financial institutions, such as banks.
7. How should tax reform deal with cost recovery?
    The House Republican Blueprint proposes immediate cost recovery for 
investments in both tangible property (such as equipment and buildings) 
and intangible assets (such as intellectual property). It would not 
apply to land.

    Economists believe that expensing would encourage business 
investment and result in significant economic growth. However, 
expensing cannot be combined with interest deductions--otherwise there 
would be a negative tax rate on leveraged capital investments.

    There are various taxpayers who are not enthusiastic about 
expensing and would prefer retention of a deduction for business 
interest expenses. For example, purchasers of land, which would not 
qualify for expensing, would like to continue to deduct interest 
expenses on the debt used to acquire the land. In addition, small 
businesses already have expensing under section 179 and would prefer 
not to lose a deduction for interest expenses. Also, many businesses 
are satisfied with 50% bonus deprecation.
8. How should tax reform deal with pass-through entities?
    The treatment of income earned by pass-through entities, such as 
partnerships, limited liability companies, and S corporations, raises 
challenging issues. It is expected that income earned by pass-through 
entities would be taxed at a lower rate than compensation income. The 
reason for this proposal is that the tax rate for corporate income 
would be reduced, so therefore similar business income earned by pass-
through entities should also benefit from a reduced tax rate.

    It is anticipated that the benefit of the lower rate would not be 
available for income earned by a pass-through entity related to an 
owner's performance of services. The basis for this exclusion is the 
concern that the tax that would otherwise be owed on compensation 
income should still apply if business is conducted through a pass-
through entity.

    Exactly how this system for pass-through entities would operate is 
not clear. Presumably income earned by a pass-through entity would be 
divided into different parts (such as business or investment income). 
Each owner's distributive share of business income would be taxed at 
the lower rate, except that some portion (or all) of this distributive 
share would be taxed as compensation if the partner materially 
participates in the entity's operations. An owner's compensation 
portion taxable at higher rates could be calculated in one of several 
ways, such as: (1) an amount equal to ``reasonable compensation,'' (2) 
the entire distributive share reduced by a return on capital 
contributed by the owner to the entity, or (3) a fixed portion of the 
distributive share (say 70%).

    Similar issues are also presented by earnings of sole 
proprietorships. Because there is no legal separation between a sole 
proprietorship and its owner, rules would need to separate the owner's 
business activity from other activity and further separate income 
taxable as compensation from income taxable at the lower rate.
9. What transition rules should be included?
    Consideration would need to be given to transition issues. For 
example, if full expensing is enacted, how would property placed in 
service before enactment be treated? Would continuing depreciation 
deductions be permitted for property placed in service before 
enactment? Would deductions be phased out over time?

    If limitations on deductibility of interest expenses are enacted, 
how would debt incurred before enactment be treated? Would continuing 
interest deductions be permitted? Would deductions be phased out over 
time?

    Transition rules would soften the impact of new rules on pre-
enactment activity. However, transition rules could delay or lessen the 
anticipated benefits of tax reform.
10. How would tax reform restructure the Internal Revenue Service?
    The House Republican Blueprint calls for remaking the IRS into a 
streamlined organization dedicated to delivering world-class customer 
service. Our tax system relies on voluntary compliance. Voluntary 
compliance depends in large measure on the belief of the American 
people that the tax law is equitable and is administered fairly. Any 
restructuring of the IRS should make sure the agency has the 
capability, both in services and enforcement, to collect the revenues 
called for by law in a fair, consistent and efficient manner using 
modern information technology.
                               conclusion
    The list of issues that must be addressed may appear to be 
daunting. Nevertheless, there is a pressing need to make our tax system 
better. We need to take advantage of our window of opportunity before 
it shuts.

    In March 2011, I closed my testimony before this committee by 
referring to the story in Greek mythology about the fifth labor of 
Hercules. His task was to clean the Augean stables, which had not been 
cleaned in 30 years. More than 30 years have passed since the Tax 
Reform Act of 1986. We need to complete the Herculean task of reforming 
the Internal Revenue Code.

                                 ______
                                 
        Questions Submitted for the Record to Hon. Eric Solomon
               Questions Submitted by Hon. Orrin G. Hatch
          simplification of tax system--impact on individuals
    Question. This question is for each witness: individuals and small 
business owners spend billions of dollars complying with a labyrinth of 
tax rules every year.

    What is the single most important thing Congress can do to help 
Americans save their hard earned time and money complying with our 
overly complex tax system?

    Answer. The most important thing Congress can do to help 
individuals and small business owners comply with the labyrinth of tax 
rules is to simplify the calculation and reporting of tax liability. 
Our tax system would be improved if taxpayers could fill out and file 
their own tax returns. By doing so, taxpayers would save time and money 
and they would better understand and appreciate their civic obligation.

                      high importance for business
    Question. Each of you interacts with and advises small and large 
businesses on a daily basis.

    What are these businesses telling you is most important to them as 
part of tax reform?

    What are the major themes you're hearing from large and small 
businesses alike?

    Answer. Businesses have four primary concerns: (1) the need to 
revisit our antiquated tax code; (2) the desire for certainty; (3) a 
lower business tax rate; and (4) for businesses that operate across 
borders, an improved international tax system.

      (1)  The need to revisit our antiquated tax code. We live in a 
constantly changing world. Economic, social and political developments, 
including accelerating advancements in technology, are changing our 
nation and its role in world affairs. We need to re-evaluate our tax 
laws to ensure they are responsive to current and anticipated 
conditions. The last major reform of the Internal Revenue Code occurred 
in 1986, when the United States was very different than it is now. We 
need to update our tax system to ensure that it is in the best possible 
position to facilitate investment and maximize the welfare of the 
American people.
      (2)  The desire for certainty. Businesses need certainty in order 
to make their plans for the future. They need certainty to compute the 
projected return on their investments. They need to know their expected 
costs, including their anticipated tax liability. For this reason, 
businesses desire a stable tax code with permanent provisions. In 
addition, tax reform has been discussed and debated for over a decade, 
and businesses are uncertain if and when tax reform will occur. 
Businesses would benefit if tax reform is enacted as soon as possible.
      (3)  A lower business tax rate. The United States has one of the 
highest statutory corporate tax rates in the world. Our tax code has 
many special provisions and consequently taxes some taxpayers at high 
effective rates and others at much lower effective rates. It is 
necessary to reform the tax code to lower business tax rates and remove 
special provisions.
      (4)  An improved international tax system. For businesses that 
operate across borders, it is important to modernize our international 
tax system. Most other countries have adopted a territorial tax system, 
which generally exempts from tax earnings from foreign operations. The 
U.S. system provides for deferral of tax on active foreign earnings 
until they are repatriated to the United States. The high U.S. 
corporate tax rate and tax upon repatriation encourage U.S. companies 
to move activities offshore and keep earnings offshore (the lockout 
effect). The U.S. international tax system also creates an incentive 
for U.S. companies to use transfer pricing to shift income to lower-tax 
jurisdictions, and creates an incentive for U.S. companies to engage in 
inversions. Our international tax system needs to be fixed to address 
these problems.

          distortion in debt financing versus equity financing
    Question. A number of you in your written testimonies addressed the 
differing tax treatment of debt and equity.

    The corporate marginal effective tax rate on equity financing is 
about 35% while the corporate marginal effective tax rate on debt 
financing is negative. This creates a huge distortion in terms of 
financing.

    Corporations are incentivized by the tax code to engage in debt 
financing rather than equity financing.

    As part of tax reform, should we create greater parity in the tax 
treatment of debt financing and equity financing and if so, how should 
we accomplish that?

    Answer. Our corporate tax system is distortive because, unlike its 
treatment of other forms of doing business, it imposes two taxes on 
corporate earnings, once at the corporate level and again at the 
shareholder level (either on capital gains on disposition of stock or 
on dividends). The distortions caused by the corporate tax system 
include: (1) the disincentive to use C corporations (two levels of tax) 
rather than pass-through businesses (partnerships, limited liability 
companies, or S corporations) or sole proprietorships, for which there 
is a single level of tax at the owner level; (2) the incentive for 
corporations to use debt financing rather than equity financing; (3) 
the incentive for corporations to retain earnings and not pay 
dividends; and (4) the incentive for corporations to pay out earnings 
in ways other than dividends (such as the payment of deductible 
compensation, interest, rent and royalties).

    Corporate integration could help eliminate the distortions caused 
by our corporate tax system. Integration could help equalize the 
treatment of debt and equity financing (for example by making dividend 
payments deductible like interest payments) or make their tax treatment 
more symmetrical (for example by providing a dividend exclusion for 
shareholders, so that dividends would be nondeductible and not 
includible in income, whereas interest payments would be deductible and 
includible in income).

    There have been many studies of integration and the various ways it 
could be implemented. For example, in 1992 the Treasury Department 
issued a study about various options for corporate integration. More 
recently, in December 2014, the Republican staff of the Senate Finance 
Committee published ``Comprehensive Tax Reform for 2015 and Beyond,'' 
which includes an extensive discussion about corporate integration. 
Each form of integration poses its own issues, and it would be 
necessary to evaluate those issues to determine which form would be 
best. It would also be important to consider each form of integration 
in the context of the overall tax reform package being considered to 
understand how it would fit within the larger package.
                 faster depreciation stimulates growth?
    Question. Mr. Solomon, in your testimony, you state that 
``economists agree that faster write-off of capital investments 
promotes economic growth by encouraging such investments.''

    I agree with that, but sometimes we hear from the management of 
publicly traded corporations that say they don't care about faster 
write-offs, because for financial accounting and reporting purposes, 
it's only a ``temporary difference.''

    Now, you work at an accounting firm with a lot of accountants. You 
have a lot of publicly traded corporate clients. But you accurately 
reflected the views of a lot of economists.

    So, who is right, the economists or corporate management?

    Answer. Although faster cost recovery for capital investments might 
only result in a temporary difference for accounting or reporting 
purposes, timing of cost recovery deductions has important consequences 
for the overall cost of an investment for cash flow purposes. 
Accelerated cost recovery results in lower taxes earlier in the life of 
an investment, which reduces the present value of taxes and results in 
a higher return. Higher returns lead to more investment, more 
production and a stronger economy, with accompanying benefits for 
workers and their families.
                    what if there is no tax reform?
    Question. What are your views on the consequences of not achieving 
comprehensive tax reform this year or early next year?

    Does the lack of tax reform this year mean continued anemic 
economic growth and stagnant wages?

    Does the lack of tax reform this year mean continued pressure for 
U.S.-based multinational firms to relocate abroad or be acquired by 
foreign multinational companies?

    Answer. It is important to enact tax reform as soon as possible, to 
end uncertainty that could deter business and investment activity, and 
to provide benefits to American businesses, workers and families. Tax 
reform is necessary to adapt our tax system to an evolving U.S. and 
global landscape, to respond to global competitive pressures, to lower 
tax rates and remove distortions, to improve our international tax 
system, and to grow our economy. There is an opportunity now that we do 
not want to miss.

    Without tax reform, problems caused by our current tax system will 
persist. For example, the problems caused by our current international 
tax system will continue, including the incentive to move activities 
and income offshore and keep earnings offshore (the lockout effect), 
the incentive to use transfer pricing to shift income to lower-tax 
jurisdictions, and the incentive for U.S. companies to engage in 
inversions.
                               inversions
    Question. I am concerned about the wave of foreign acquisitions of 
American job-creating companies. I'm not just worried about existing 
U.S. jobs moving offshore, I'm worried about retaining the job 
prospects for future generations of Americans.

    Does the relocation of a corporate headquarters impact local jobs 
in U.S. communities?

    How can we help stem the tide of foreign acquisitions?

    What type of tax rules would help American companies stay here and 
use the United States to not just serve U.S. customers but also to 
service foreign markets?

    Answer. The United States is a favorable place to invest because of 
its large markets, its educated labor force, its level of innovation, 
its strong economy and its stable government. From a tax point of view, 
the best way to encourage U.S. companies to stay and invest here, and 
to encourage foreign companies to invest in the United States, is to 
provide a competitive tax system with low tax rates. As other countries 
revise their tax systems to adapt to global changes, the United States 
must respond as necessary to ensure that our system is in the best 
possible position to facilitate investment and maximize the welfare of 
the American people.
                                land tax
    Question. Dr. Peter Orszag recently asserted that ``To fight 
inequality, tax land.''\1\ Is he correct that a tax on land would be 
distributionally progressive? That's not clear to me. If such a tax 
were to buy down tax rates on savings and investment, would such a tax 
be pro-growth?
---------------------------------------------------------------------------
    \1\ See https://www.bloomberg.com/view/articles/2015-03-03/to-
fight-inequality-tax-land.

    Answer. I am not an economist and do not have expertise about the 
progressivity of a tax on land. I have consulted with economists at my 
firm, who indicate that whether a tax on land would be progressive, and 
how progressive, is a difficult issue. One question is whether 
progressivity is measured by income or wealth (for example, retirees 
generally have relatively lower income but may have relatively greater 
wealth). A second question is the identity of landowners (higher income 
or wealthier people versus lower income or less wealthy people). A 
third question is whether land can be disentangled from structures on 
land for purposes of the computing the tax. A fourth question is 
whether taxes on land are in fact borne by landowners or whether they 
can be shifted to other people, such as renters. At this point there is 
an active debate about the progressivity of a tax on land.
                            summary question
    Question. Given your prior role as the top tax policy advisor at 
the Treasury Department, what big-picture/summary advice do you have 
for us as we continue down this path toward comprehensive tax reform?

    Answer. The debate about tax reform has been ongoing for over a 
decade. Extensive groundwork has been laid by the work of policymakers 
such as yourselves, academics, taxpayers, and practitioners. It is now 
essential to take the next step and enact tax reform that, among other 
things, reduces tax rates, eliminates various preferences, modernizes 
the international tax system, and helps American workers and families. 
If possible, the reforms should be permanent. In addition, tax reform 
should be distributionally neutral and fiscally responsible.

    Despite the challenges in designing a new system, there is an 
opportunity now that we do not want to miss. It is important to act 
before the window shuts.

                                 ______
                                 
    Prepared Statement of Hon. Jonathan Talisman, Former Assistant 
    Secretary for Tax Policy, 2000-2001, Department of the Treasury
    Chairman Hatch, Ranking Member Wyden, and members of the committee, 
it is a privilege to appear before you once again on a panel with my 
close friends and colleagues to discuss my thoughts regarding the 
important issue of tax reform. I want to commend the committee for your 
continued examination and pursuit of tax reform, to ensure that our tax 
system is fair, competitive and efficient, while raising the revenues 
we need to fund our Government. I am appearing here on my own behalf 
and not on behalf of my firm or any client.

    I served at the Treasury Department beginning in early 1997 through 
President Bill Clinton's second term. Before that, I served on the 
Joint Tax Committee staff from 1992 to 1995, and then as Chief 
Democratic Tax Counsel to the Senate Finance Committee under Senator 
Daniel Patrick Moynihan.

    Several of us appeared on a similar panel here over 6 years ago at 
a hearing entitled ``How Did We Get Here?'' \1\ Given the general 
consensus among policymakers that tax reform has been needed, one might 
wonder why this hearing wasn't called ``Why Are We Still Here?''
---------------------------------------------------------------------------
    \1\ Hearing on ``How Did We Get Here? Changes in the Law and Tax 
Environment Since the Tax Reform Act of 1986,'' Senate Finance 
Committee (March 1, 2011).

    But, in all seriousness, I believe significant progress has been 
---------------------------------------------------------------------------
made in the interim period.

    First, a few critical issues we discussed that needed reforms in 
2011 have already been addressed. Because of structural defects, the 
Alternative Minimum Tax (AMT) was exploding and threatened to reach 
deep into the middle class, absent annual patches by Congress. As one 
commentator put it, the AMT was morphing from a ``class'' tax to a 
``mass'' tax. As part of the fiscal cliff negotiations at the end of 
2012, Congress agreed to boost the AMT exemption retroactively for 2012 
and to index future exemption levels to keep pace with inflation. While 
some still want to eliminate the AMT entirely, this step prevented the 
unintended creep of the AMT, eliminated the need for annual patches, 
and provided taxpayers with greater certainty.

    Similarly, in 2011, we had well over 100 extenders that were 
scheduled to expire later that year or the following year, including 
the 2001 and 2003 tax cuts. I said at the previous hearing, ``It is 
unsustainable for much of our tax code to exist on a temporary basis.'' 
Fortunately, in the Protecting Americans From Tax Hikes (PATH) Act 
enacted in December 2015, Congress addressed a large part of the 
problem by extending numerous items either permanently or for 5 years. 
This included important provisions like the research credit, expanded 
small business expensing under section 179, bonus depreciation, and 
individual credits, such as the child tax credit, the earned income tax 
credit (EITC) and American opportunity tax credit. Unfortunately, a 
small number of expiring provisions were extended forward for only 1 
year and thus expired at the end of last year. These need to be 
considered once again and include tax provisions for individuals and 
businesses, as well as several energy incentives.

    Second, in both tax-writing committees, we have had a thorough 
examination of the principal options that exist to address the 
significant issues that remain (discussed below). Numerous hearings 
have been held (some have been repeated) and staff reports produced. 
Bipartisan working groups sought comments from outside sources and have 
made recommendations based on that input. Thoughtful discussion drafts 
and bills have been produced by Ranking Member Wyden, Senator Enzi, 
former Chairman Baucus, and former House Ways and Means Committee 
Chairman Camp that have allowed us to have an honest conversation about 
the tradeoffs likely in 1986-style reform that broadens the base to 
lower the rates. And the House Republican Blueprint, together with 
bills introduced by Senator Cardin, Representative Renacci, and 
Representative Nunes, have explored whether we should adopt a 
consumption (or quasi-consumption) tax to replace all or a portion of 
our income tax. All of these were important building blocks in the tax 
reform process.

    I believe it is time for Congress to heed the instructions Yoda 
gave to Luke: ``Do. Or do not. There is no `try.' ''

    The prospect of tax reform has created uncertainty in planning, and 
crowded out work on other tax matters. So, in an effort to advance the 
cause of tax reform, let me briefly explore the principal remaining 
issues that should be addressed together with a few admonitions, and 
discuss some of the impediments to tax reform that remain.
       significant issues still remain that need to be addressed
    The major impetuses for tax reform are: competitiveness and growth; 
efficiency; fiscal responsibility and long-term deficits; a shrinking 
middle class and economic inequality; fairness; and removing 
unnecessary complexity and administrative burdens. The first two have 
received the most attention to date, but all are important. My views on 
each of these are briefly summarized below.

    Competitiveness and Growth. The United States has the highest 
statutory corporate tax rate among our major trading partners. When we 
lowered corporate tax rates in 1986, our rates were well below the OECD 
average. The problem is that all of our trading partners soon followed 
suit and kept moving past us. According to a report issued by the 
President's Economic Recovery Advisory Board (PERAB) in 2010, a high 
corporate tax rate ``causes or exacerbates many . . . significant 
economic distortions.'' \2\ The report called for broadening the tax 
base and lowering the corporate tax rate to ``increase the stock of 
available capital--new businesses, factories, equipment, or research--
improving productivity in the economy.'' The report also says that 
lowering the corporate rate would reduce the incentives of U.S. 
companies to shift operations and employees abroad. It would also 
enhance the attractiveness of the United States as a location for 
foreign direct investment.
---------------------------------------------------------------------------
    \2\ The President's Economic Recovery Advisory Board, ``The Report 
on Tax Reform Options: Simplification, Compliance, and Corporate 
Taxation'' (August 2010).

    At the same time, our quasi-worldwide international tax system,\3\ 
adopted in 1918 and last structurally revised in 1962, has also become 
out of step with the rest of the world. Virtually all of our major 
competitors have adopted some form of territorial system, with the UK 
and Japan being the last major economies to switch away from a 
worldwide system in 2009. Among their stated reasons for changing their 
systems were to enhance their competitiveness as headquarter locations 
for multinational businesses and to spur repatriation of foreign 
income.
---------------------------------------------------------------------------
    \3\ Our international system is actually a hybrid--a worldwide tax 
system that permits deferral (i.e., effective territorial treatment) 
until earnings are repatriated and provides foreign tax credits to 
avoid double taxation. This may be the worst of all worlds. As one 
commentator has written, our international tax rules ``are universally 
reviled as just a half-step short of utter madness.''

    The combination of our worldwide tax base with the high U.S. tax 
rate often causes U.S. businesses to be at a competitive disadvantage 
in foreign markets relative to their competitors that are based in 
jurisdictions with lower tax rates or in countries that exempt foreign 
income. While deferral can mitigate competitiveness concerns, it does 
so only by creating a ``lockout'' problem--discouraging redeployment of 
foreign earnings for domestic investment. Our worldwide international 
tax system can hinder U.S. companies in bidding for foreign 
acquisitions, while at the same time making them more susceptible to 
---------------------------------------------------------------------------
foreign takeovers or to seek inversions.

    Yet, with all of this, our current international tax system fails 
to raise much additional revenue from U.S. multinational corporations 
and, unlike a pure worldwide system, it does not achieve equity or 
capital export neutrality.

    Globalization and migration of capital have heightened concerns 
about the competitiveness of U.S. businesses and our tax system, and 
focused attention on the need for international tax reform. Other 
countries are taking significant steps to attract headquarters, IP 
ownership, and other cross-border investment. At the same time, they 
are aggressively asserting additional rights to taxation at source--
oftentimes seeking to tax profits that have only a tenuous connection 
to their country. The United States must respond soon to these global 
tax developments to avoid a detrimental impact to our economy and U.S. 
tax receipts in general.

    Efficiency. Expanding the corporate tax base by eliminating special 
deductions, credits, and other tax expenditures could improve the 
efficiency of our tax system. In many cases, a broader tax base would 
improve neutrality by removing distortions that favor or disfavor 
various investments and industry sectors. Other countries have taken a 
similar approach when they have reduced their corporate tax rates over 
the past decade.

    However, there are a few important caveats and tradeoffs that 
should be considered. Many of the largest ``tax expenditures'' are 
long-time features of our system embedded in the fabric of our economy. 
Moreover, as Stanley Surrey, the father of tax expenditure analysis, 
wrote with Paul McDaniel that ``the classification of an item as a tax 
expenditure does not in itself make that item either a desirable or 
undesirable provision,'' and concluded that most were assistance ``the 
legislators really do want to provide.'' \4\ These include items such 
as the research credit (passed 15 times and made permanent in the PATH 
Act), employer-provided health exclusion (which has survived two recent 
health-care reform debates), deductibility of home mortgage interest, 
deductions for charitable contributions, incentives for retirement 
savings, reduced rates on capital gains and dividends, and exemptions 
for State and local bonds.
---------------------------------------------------------------------------
    \4\ Surrey and McDaniel, Tax Expenditures (1985).

    The primary consideration regarding whether to retain certain tax 
expenditures should be whether the intended result of the expenditure 
is still valid, whether the tax expenditure achieves its intended 
results in an efficient manner relative to the foregone revenue, 
whether these results are best achieved through the tax code (e.g., 
relative complexity and administration), and what the potential 
---------------------------------------------------------------------------
economic and social dislocations would be if they were eliminated.

    I would like to make two additional points. First, the definition 
of a tax expenditure is very broad (i.e., any item that differs from 
the base of an idealized measurement of income) and subjective. For 
example, the State and local income tax deduction is designed to 
mitigate double taxation, like the foreign tax credit. One is listed as 
a tax expenditure; the other is not.

    Second, in searching for additional sources of revenue to offset 
the cost of corporate tax reform, policymakers must be careful to avoid 
tax reform proposals that do more harm than good--that is, revenue 
proposals that limit ordinary and necessary business expenses. These 
proposals are counter-productive to the goals of tax reform. By 
overstating economic income, they arbitrarily raise certain businesses' 
effective rates above statutory rates, reducing fairness and impeding 
investment and growth. Such proposals would act as negative tax 
expenditures.

    As I have written in Tax Notes, a case in point is the suggestion 
by certain policymakers that limits be imposed on the deductibility of 
business interest. Proponents argue that the imposition of such limits 
will reduce economic distortions caused by the different tax treatment 
of corporate debt and equity. But recent research suggests that the so-
called ``debt bias'' has not led to over-leveraging or distress in the 
non-financial sector. In fact, Duke University Finance Professor John 
Graham has found that there is a significant degree of conservatism in 
corporate debt policy. Moreover, lowering the corporate tax rate will, 
by itself, reduce the value of the corporate interest deduction by 20 
percent or more.\5\ It also significantly lowers the double-level tax 
on equity. Finally, as Chairman Hatch has suggested, a partial or full 
dividends paid deduction would address the real problem (i.e., the 
double level tax on corporations) and be a better solution. Tax Notes 
chief economist Marty Sullivan admits, ``it would be far better to 
eliminate double taxation than to expand it through an elimination of 
interest deductions.'' \6\
---------------------------------------------------------------------------
    \5\ See Carroll, R. and Neubig, T., ``Business Tax Reform and the 
Tax Treatment of Debt: Revenue Neutral Rate Reduction Financed by an 
Across-the-Board Interest Deduction Limit Would Deter Investment'' 
(Ernst and Young, May 2012), at 6.
    \6\ See Sullivan, ``Treat Corporate Interest Deductions Like Any 
Tax Expenditure,'' Tax Notes, August 6, 2012, at 632.

    Fiscal Responsibility and Long-term Deficits. In a response to 
questions for the record, CBO Director Keith Hall explained in detail 
---------------------------------------------------------------------------
the fiscal situation facing policymakers:

        If current laws generally remained the same, CBO projects, 
        Federal spending would grow from 20.7 percent of GDP this year 
        to 23.4 percent in 2027; Federal revenues would grow more 
        slowly over that period--from 17.8 percent of GDP to 18.4 
        percent. About 70 percent of the growth in outlays over the 
        next 10 years is attributable to just three sources: Social 
        Security, Medicare, and net interest on Federal debt. To avoid 
        the negative consequences of high and rising Federal debt and 
        to put debt on a sustainable path, lawmakers would have to 
        significantly change tax policies to increase revenues above 
        what they are projected to be under current law, substantially 
        amend spending policies to reduce outlays for large benefit 
        programs below the projected amounts, or adopt some combination 
        of those approaches.\7\
---------------------------------------------------------------------------
    \7\ Answers to questions for the record following a hearing on the 
budget and economic outlook for 2017 to 2027 conducted by the Senate 
Committee on the Budget, Congressional Budget Office (April 6, 2017).

    Obviously, it will be important for policymakers to keep our long-
term fiscal situation and the impending demographic problems in mind in 
---------------------------------------------------------------------------
crafting tax reform to ensure we do not exacerbate our budget concerns.

    Income Inequality and a Shrinking Middle Class. The issue of rising 
income inequality and the thinning of the middle class is a critical 
issue that should be addressed as part of tax reform.

    According to my former Treasury colleague Len Burman, ``the middle 
class has been in a 30-year recession.'' \8\ Brookings Institution 
economist Adam Looney recently testified that earnings have stagnated 
for middle- and lower-income households, while they have ``risen 
dramatically at the top--by more than 250 percent over the past 30 
years for households in the top 1 percent of the income distribution.'' 
\9\
---------------------------------------------------------------------------
    \8\ Testimony of Leonard E. Burman, hearing on ``Tax Reform 
Options: Marginal Rates on High-Income Taxpayers, Capital Gains, and 
Dividends,'' Senate Finance Committee (September 14, 2011).
    \9\ See testimony of Adam Looney, hearing on ``Supporting Broad-
Based Economic Growth and Fiscal Responsibility Through Tax Reform,'' 
Senate Budget Committee (May 22, 2013).

    The progressive income tax has long served as an important bulwark 
against inequality: graduated tax rates require that high-income people 
pay a larger share of their income in taxes than lower-income people. 
According to Looney, ``Changes in the tax system over the past 30 years 
have exacerbated these problems; the very people who have received the 
biggest income gains in the past three decades have also seen the 
---------------------------------------------------------------------------
largest tax cuts.''

    This is not a partisan issue. President Obama called rising 
inequality ``the defining challenge of our time.'' Similarly, in the 
campaign, President Trump talked about a hollowed-out middle class and 
a system ``rigged'' against average Americans. Economists warn that it 
may be slowing overall economic growth. And the campaign demonstrated 
that a significant segment of the public feels left out, creating a 
``festering distrust of government and of corporate leaders whose 
promises of better times ahead never fully materialized.'' \10\ One 
result has been a backlash against globalization and free trade that 
many Americans feel tilted the economy against them.
---------------------------------------------------------------------------
    \10\ See ``Why It Matters: Income Inequality,'' Associated Press 
(August 18, 2016).

    A recent op-ed by Glenn Hubbard, former chairman of the Council of 
Economic Advisors in the George W. Bush administration, suggests that 
the pro-growth agenda may not be sufficient to generate inclusion and 
mass prosperity.\11\ I agree with him that policymakers ``must confront 
the question of what happens when growth does not generate inclusion.'' 
Social factors may be at play that need to be overcome to provide 
greater opportunity. For example, as Senator Moynihan predicted years 
ago, single-parent families are more likely to be poor than other 
families and less likely to ascend the income ladder. Hubbard suggests 
the tax code should provide greater encouragement of human capital 
formation, education, and skills development.
---------------------------------------------------------------------------
    \11\ See Glenn Hubbard, ``Tax Reform Is the Best Way to Tackle 
Income Inequality,'' Washington Post (January 10, 2014).

    Another positive step would be adoption of legislation proposed by 
Senators Brown and Bennet to expand the EITC for childless workers and 
to strengthen the child credit for families with young children. 
Studies have shown that economic insecurity has detrimental effects on 
children's long-term health, education, and employment outcomes, 
---------------------------------------------------------------------------
ultimately costing the U.S. economy hundreds of billions per year.

    Fairness. The fairness of the tax code is highly subjective, but it 
will be critical to the success of any tax reform effort that it be 
perceived by the general public as fair. Fairness is generally based on 
ability to pay and notions of horizontal and vertical equity. 
Horizontal equity is the concept that similarly situated taxpayers 
should be taxed similarly. Vertical equity compares the treatment of 
taxpayers at various income levels and is generally measured by the 
progressivity of the overall system.

    Certain tax expenditures are meant to address fairness and should 
be judged on that basis. For example, allowing deductions for 
catastrophic health expenses addresses the fact that these taxpayers 
have less disposable income and ability to pay. Also, ensuring that 
taxpayers cannot evade or avoid taxes imposed on other similarly 
situated taxpayers is important to perceptions of the tax system's 
fairness. The shutting of loopholes in the 1986 Tax Reform Act was a 
significant reason it was perceived to enhance fairness.

    Simplification. The complexity of our tax rules is a significant 
concern. It affects economic growth by imposing substantial costs and 
administrative burdens on taxpayers. Complexity can also increase 
uncertainty as taxpayers struggle to ensure they are compliant in 
effecting their business decisions. In designing rules, we often should 
accept rough justice, rather than seeking to target the provision 
perfectly. For example, in response to a question from Senator 
Menendez, I testified at the last hearing that consolidation of the 
various education incentives is a good idea. The myriad of currently 
available incentives with different requirements creates confusion and 
complexity.

    However, while simplification is desirable, some of the complexity 
of the code is unavoidable, and would be necessary in any tax system 
that is adopted. We have a complex economy and society that requires 
special rules to take into account different or unique circumstances in 
order to be fair or to prevent abuse. Another factor is our political 
dynamic. Since the early 1980s, there has been pressure not to increase 
spending but the political desire for new programs did not disappear. 
Accordingly, many new programs are being run through the tax code. 
Finally, much of the complexity and current instability in the code is 
caused by legislative efforts to meet our budget rules. Phase-ins, 
phase-outs, timing shifts, short-term extensions, and sunsetting of 
provisions are generally included to satisfy revenue constraints or 
other budget rules.
                  overcoming impediments to tax reform
    So, given the strong consensus among policymakers that tax reform 
is needed, why hasn't it happened yet? Well, frankly, like health-care 
reform, it's hard. Health-care reform is visceral because it affects 
choices and our ability to care for our families and us. But it impacts 
only roughly 17 percent of GDP. Tax reform may be less visceral, but it 
impacts our everyday choices and our ability to provide for our 
families. And it impacts virtually 100 percent of GDP.

    Also, while agreement exists that tax reform is needed (and despite 
all the work that has been done), there is still no clear consensus as 
to approach. Tax reform is defined in different ways. Important goals 
may conflict with each other. It will be important to agree on the 
goals and intended benefits of tax reform. Once these are established, 
it will be important for the President and other political leaders to 
market these goals and intended results to the American public.

    The success of the 1986 Act was in no small part attributable to 
the initial sales job by President Reagan and Ways and Means Chairman 
Dan Rostenkowski. President Reagan delivered an Oval Office speech that 
called for revenue neutral tax reform to close loopholes and lower 
rates, saying ``No other issue will have more lasting impact on the 
well-being of your families and your future.'' Rostenkowski delivered 
the Democratic response, saying that they were committed to a tax 
system that was simple and fair and would support the President if 
``his plan is everything he says it is.'' He then asked them to write 
Rosty: ``Just address it to R-O-S-T-Y, Washington, DC. And stand up for 
fairness and lower taxes.'' He received more than 75,000 letters and 
one package with a wooden two-by-four with instructions to use it on 
any interfering lobbyists.

    By definition, revenue-neutral tax reform will create winners and 
losers and cause disruptions. As Columbia Law Professor Mike Graetz has 
written:

        Since responsible tax reform in the current context cannot cut 
        taxes overall, it inevitably will produce both winners and 
        losers. Simplifying the tax code requires cutting back on 
        someone's deductions or credits, eliminating someone's special 
        tax breaks, and closing someone's loopholes. In exchange, 
        everyone can have lower tax rates. So there should be more 
        winners than losers. But the losers may lose a lot, while the 
        more numerous winners will gain only a little. If so, the 
        losers will scream loudly enough to drown out the winners' 
        quiet applause.\12\
---------------------------------------------------------------------------
    \12\ Michael Graetz, 100 Million Unnecessary Returns (Yale Press 
2008), p. 47.

    Engaging and educating the public is essential to build support and 
minimize blowback. While Chairman Baucus and Chairman Camp were on the 
right track with their road show, the electorate (and even rank-and-
file members) has not truly been engaged yet in my opinion. Health-care 
reform has predominated the public's attention. How the goals for tax 
reform are established and marketed will determine whether any 
significant tax reform is accomplished, and how it is judged 
---------------------------------------------------------------------------
politically.

    Another important lesson of the 1986 Act, as evidenced by the 
recent health-care debate, is that bipartisanship is important to 
develop major legislation that does not divide the American public and 
is lasting. As President Clinton recently said in a panel appearance 
with President Bush, ``The truth is in an interdependent complex world, 
diverse groups make better decisions than homogeneous ones. . . .''

    Consequently, like Chairman Hatch said in his recent speech to 
Bloomberg, ``I am still hoping that tax reform can be bipartisan.''

    While a partisan approach to tax reform seems easier to accomplish, 
the truth is it creates numerous impediments that will be difficult to 
overcome. To provide reconciliation protection in the Senate, a budget 
resolution will need to be passed by both Houses, which will not be 
easy. Even if this can be accomplished, the margin for error in both 
bodies will be extremely slim, again as evidenced by the current 
problems facing the health-care bill. Finally, use of budget 
reconciliation can be a ``Faustian bargain,'' as one of my Republican 
friends has termed it, invoking the Byrd rule and other procedural 
protections. This can inhibit what is ultimately accomplished, and may 
require that all or part of tax reform sunset outside the budget window 
a la the 2001 and 2003 tax cuts (or that artificial devices be adopted 
to avoid sunsetting).

    Most business leaders are anxious for tax reform, but they are not 
yet unified in their vision for business tax reform. For example, a 
dispute still exists regarding the form of base erosion in a shift to a 
territorial system. The business community must find a way to come 
together and collectively help policymakers find solutions to reform 
the tax code in a manner that collectively benefits all, makes our 
system more competitive, and encourages domestic investment and job 
growth.

    The recent focus on health-care reform and the novel issues raised 
by the border tax adjustments in the House Republican Blueprint have 
crowded out focus on other important, and potentially controversial, 
tax issues. These issues are just beginning to surface and may take 
time for members and staff to fully consider. For example, not much 
attention to date has been spent on proposed changes to individual 
taxation to double the standard deduction and eliminate the State and 
local tax deduction. This combined change will not only affect State 
and local governments, but also the charitable community and the 
housing sector. When Chairman Camp made a similar proposal in his tax 
reform bill, the number of itemizers eligible to take the charitable 
deduction and the home mortgage interest deduction was estimated to 
fall to 5 percent of all taxpayers, down from over 30 percent.

    Another important but difficult issue that has not yet been vetted 
is the special tax rate for pass-throughs included in the 
administration's tax reform proposal, as well as the House Republican 
Blueprint. A detailed proposal for the design of a special pass-through 
rate has not been released. How it is perceived will depend in part on 
how it is designed.

    I would like to close with a few final thoughts. First, do not 
worry about solving all perceived problems at once. Incremental 
progress will be a significant accomplishment. In particular, debates 
over more fundamental tax reforms should not delay or preclude 
meaningful reforms to improve the current code that will provide relief 
to individuals and help stabilize the global tax environment and 
improve competitiveness for businesses operating in the United States. 
Second, be careful not to worsen or inhibit our ability to address our 
impending long-term fiscal problems. It will be more difficult 
politically to reverse course and unwind changes later.

    Thank you for inviting me, once again, to share my observations. I 
stand ready to assist the committee in any way that I can as you move 
forward in your consideration of tax reform. I would be happy to answer 
any questions you might have.

                                 ______
                                 
      Questions Submitted for the Record to Hon. Jonathan Talisman
               Questions Submitted by Hon. Orrin G. Hatch
          simplification of tax system--impact on individuals
    Question. Individuals and small business owners spend billions of 
dollars complying with a labyrinth of tax rules every year.

    What is the single most important thing Congress can do to help 
Americans save their hard earned time and money complying with our 
overly complex tax system?

    Answer. To paraphrase my former boss Senator Moynihan, while the 
thought of a new set of simple rules is always appealing, we must 
recognize that we live in a complex society. Some amount of complexity 
is necessary and inevitable. Also, a major source of complexity is the 
need to file separate returns at the Federal and State level (often 
several States).\1\
---------------------------------------------------------------------------
    \1\ For another time, this is an issue that should be examined. 
States should be encouraged to piggyback on the Federal system, and to 
eliminate duplication of effort. This could be modeled after the 
streamlined sales tax project (SSTP).

    Thus, I do not believe there is a single magic bullet. We should 
strive to eliminate needless and inefficient complexity. For example, 
each tax expenditure should be reexamined and evaluated as to whether 
the intended result of the expenditure is still valid, whether the tax 
expenditure achieves its intended results in an efficient manner 
relative to the foregone revenue, whether these results are best 
achieved through the tax code (e.g., relative complexity and 
administration), and what the potential economic and social 
---------------------------------------------------------------------------
dislocations would be if it is eliminated.

    As an illustration, I believe simplification through consolidation 
of the various education incentives is a good idea, and something that 
can be realistically achieved. The myriad of currently available 
incentives with different requirements creates confusion and 
complexity. We should also conform qualification requirements (e.g., 
the definition of qualified educational expenses), to the extent 
possible.
                        growth and progressivity
    Question. Many of us are very disturbed at the low rates of growth 
our economy has experienced for several years now.

    So, one of the main drivers of tax reform is the desire to help 
achieve higher growth rates.

    But we also hear a lot about progressivity and distribution.

    So, my question is, to what extent, if at all, are the goal of 
growth and the goal of progressivity in tension with each other?

    Answer. According to a recent study by the IMF analyzing tax rates 
in OECD countries between 1981 and 2016, there is no strong 
relationship between how progressive a tax system is and economic 
growth. Indeed the study adds that for countries wanting to address 
income inequality, there may be ``scope for increasing the 
progressivity of income taxation without significantly hurting 
growth.''

    Also, as I stated in my testimony, growth does not necessarily 
foster inclusion. We have had significant economic growth in this 
country over the past 3 decades, but ``the middle class has been in a 
30-year recession.'' Growth by itself is not enough--it has to 
translate to jobs and middle-income wage growth. A recent op-ed by 
Glenn Hubbard, former chairman of the Council of Economic Advisors in 
the Bush administration, agrees that the pro-growth agenda may not be 
sufficient to generate inclusion and mass prosperity. Hubbard suggests 
the tax code should provide greater encouragement of human capital 
formation, education, and skills development.

    Economists have warned that rising income inequality may be slowing 
overall economic growth. Thus, addressing income inequality and the 
thinning of the middle class should be a priority and is consistent 
with a pro-growth agenda. Conversely, reform that is pro-growth, by 
itself, is not enough to address inequality.
                      high importance for business
    Question. Each of you interacts with and advises small and large 
businesses on a daily basis.

    What are these businesses telling you is most important to them as 
part of tax reform?

    What are the major themes you're hearing from large and small 
businesses alike?

    Answer. The combination of our worldwide tax base with the high 
U.S. tax rate has caused our tax system to be an outlier from the rest 
of the world. U.S. businesses believe they are at a competitive 
disadvantage in foreign markets relative to their competitors based in 
jurisdictions with lower tax rates or in countries that exempt foreign 
income. While deferral can mitigate competitiveness concerns, it does 
so only by creating a ``lockout'' problem--discouraging redeployment of 
foreign earnings for domestic investment. Our worldwide international 
tax system can hinder U.S. companies in bidding for foreign 
acquisitions, while at the same time making them more susceptible to 
foreign takeovers or to seek inversions.
          distortion in debt financing versus equity financing
    Question. A number of you in your written testimonies addressed the 
differing tax treatment of debt and equity.

    The corporate marginal effective tax rate on equity financing is 
about 35% while the corporate marginal effective tax rate on debt 
financing is negative. This creates a huge distortion in terms of 
financing.

    Corporations are incentivized by the tax code to engage in debt 
financing rather than equity financing.

    As part of tax reform, should we create greater parity in the tax 
treatment of debt financing and equity financing and if so, how should 
we accomplish that?

    Answer. As I stated in my testimony, I believe it would be a 
mistake to eliminate interest deductibility to reduce any purported 
debt bias. Interest expense is as an ordinary and necessary business 
expense that is essential to fairly compute the economic income 
generated by U.S. businesses.

    Also, by itself, lowering the corporate tax rate should 
significantly mitigate any tax bias for debt by decreasing the value of 
the corporate interest deduction and reducing the impact of the double-
level tax on equity. The real problem is the double-tax on C 
corporations.\2\ A far better solution would be to adopt some form of 
corporate integration.
---------------------------------------------------------------------------
    \2\ Tax Notes chief economist Marty Sullivan admits, ``it would be 
far better to eliminate double taxation than to expand it through an 
elimination of interest deductions.''

    While debt and equity both raise needed investment capital, they 
serve distinct non-tax purposes for both the investors and the 
corporation and are not substitutes for each other. Generally, debt is 
a secured liability, with fixed and determinable repayment obligations 
and priority of repayment in the case of bankruptcy. The issuance of 
debt is non-dilutive for the shareholders. Also, debt generally is 
cheaper to issue than equity and is often easier to access to meet 
unforeseen business needs, particularly for small and privately held 
businesses. Equity is the ownership interest held by shareholders who 
control corporate decision-making. Shareholders are entitled to 
residual profits and going-concern value after all business expenses, 
including interest expense and taxes, are paid. Unlike debt, the return 
of equity is less predictable and is not guaranteed, and equity 
---------------------------------------------------------------------------
interests are more expensive because they are unsecured.

    Finally, studies show that any tax-driven bias for debt, leading to 
significant overleveraging, may be exaggerated. For example, a recent 
study found that there is a significant degree of conservatism in 
corporate debt policy, perhaps partially impacted by the tax cost of 
debt to individuals. Any purported tax bias for debt may also be muted 
because corporate decisions regarding the level of debt are policed by 
numerous non-tax market forces, such as requirements imposed by 
lenders, investors, regulators, rating agencies, analysts, and others.
                    what if there is no tax reform?
    Question. What are your views on the consequences of not achieving 
comprehensive tax reform this year or early next year?

    Does the lack of tax reform this year mean continued anemic 
economic growth and stagnant wages?

    Does the lack of tax reform this year mean continued pressure for 
U.S.-based multinational firms to relocate abroad or be acquired by 
foreign multinational companies?

    Answer. Other countries are taking significant steps to attract 
headquarters, IP ownership and other cross-border investment. At the 
same time, they are aggressively asserting additional rights to 
taxation at source--often times seeking to tax profits that have only a 
tenuous connection to their country. It is important that the United 
States respond soon to these global tax developments. However, it is 
also important that any tax reform efforts be balanced and not impede 
our ability to respond to the impending demographic and fiscal 
challenges.
                       benefits-received taxation
    Question. You discussed the importance of fairness in the tax 
system in your testimony. I agree with you as to the importance of 
fairness.

    My question is, to what extent, if any, do you think that an 
appropriate measure of a tax's fairness is that the amount of the tax 
correlates with the benefit the taxpayer receives from the government?

    Answer. ``Benefits-received'' taxation is a long-recognized measure 
of fairness in taxation. It works well when the benefits received are 
directly correlated with the tax being imposed. The best examples of 
this are a toll imposed for use of a bridge or highway, or postage paid 
for mailing a letter. Social security taxes are arguably another 
example, although benefits are not perfectly correlated with the amount 
of tax collected.

    Benefits-received taxation works less well when the benefits 
received are highly subjective and difficult to measure. For example, 
what is the value of a justice system or national defense to each 
particular household? In general, one would think that property owners 
and wealthier households have more to lose if anarchy prevails or the 
country is overtaken. Thus, imposing a higher tax on these households 
may make sense but by how much? Also, the benefits principle does not 
work well with respect to anti-poverty programs. If we were to tax the 
people who received benefits from these programs, the programs (when 
combined with the taxes) would not accomplish much to reduce poverty. 
This is why we use an ``ability to pay'' concept to impose income and 
certain other taxes to cover general government services.
                               inversions
    Question. I am concerned about the wave of foreign acquisitions of 
American job-creating companies. I'm not just worried about existing 
U.S. jobs moving offshore, I'm worried about retaining the job 
prospects for future generations of Americans.

    Does the relocation of a corporate headquarters impact local jobs 
in U.S. communities?

    How can we help stem the tide of foreign acquisitions?

    What type of tax rules would help American companies stay here and 
use the United States to not just serve U.S. customers but also to 
service foreign markets?

    Answer. Corporations seek inversions because of a few fundamental 
features of the U.S. tax code: the differential treatment of foreign 
earnings by U.S.-based and foreign-based companies, the ability to 
strip earnings overseas, and the lockout effect on foreign earnings 
exacerbated by the high U.S. corporate tax rate.

    According to recent testimony before the Committee by Professor 
Grinberg, recent studies ``suggest that when foreign companies expand 
outside the United States, related headquarters investment and 
employment would tend to accrue in their home country. Importantly--
this turns out to be the case even with formerly U.S.-tax resident 
corporations that have substantial presence in the United States but 
change their country of tax residency.''

    Legislation has been used as a stopgap measure to halt inversions, 
but it has not solved the fundamental problems that cause companies to 
invert. Also, these approaches can frustrate non-tax motivated mergers 
designed to capture synergies between companies.

    Corporate tax reform is the best way to slow the spate of foreign 
acquisitions and inversions. Reducing the corporate tax rate while also 
changing the taxation of foreign earnings to a dividend exemption 
(territorial) approach would certainly help make inversions less 
attractive. However, U.S. companies may continue to have an incentive 
to relocate to a foreign country to avoid U.S. base erosion rules and 
our subpart F regime, and possibly to continue to strip earnings into a 
country with a still lower tax rate. The benefits of a lower rate and 
adoption of a territorial approach will need to be carefully weighed 
against the potential consequences for the U.S. economy if it leads to 
a significant overall reduction in tax revenue, and creates incentives 
to shift U.S. profits and operations overseas.
                           interest deduction
    Question. Some proposals for tax reform have suggested that 
interest deductibility should be replaced with 100% immediate capital 
expensing.

    Do you believe that eliminating interest deductibility in favor of 
100% expensing is a reasonable trade-off for companies? If not, why?

    Also, conceptually, should individuals be able to claim a deduction 
for interest expense that helps generate investment income? If such 
interest should be deductible, should it be deductible as an itemized 
deduction, or rather as an above-the-line deduction in arriving at 
Adjusted Gross Income?

    Answer. As I testified, I do not believe that eliminating interest 
deductibility for 100% expensing of capital investment is a wise trade-
off. It may have a short-term benefit. Over time, however, it will 
raise the cost of capital, reducing investment, job creation and 
economic growth. A recent Goldman Sachs report confirms this, saying 
``The two policies would roughly offset over the first year, boosting 
investment by less than 1 percent,'' but over the longer run, the 
proposals ``would raise the user cost of capital and reduce 
investment.'' Interest is an ordinary and necessary cost of doing 
business that should continue to be deductible to accurately measure 
economic income.

    If we had an ideal income tax, all interest expenses incurred in 
profit-seeking activities should be currently deductible. But because 
our income tax is a hybrid with consumption-like features (exclusions, 
deferral, and rate differences), there is potential for tax arbitrage 
if a current deduction is allowed for the interest expenses associated 
with the production of tax-favored income. Thus, the investment 
interest limitation was adopted as a means to match income and expense 
and limit any arbitrage.
                                land tax
    Question. Dr. Peter Orszag recently asserted that, ``to fight 
inequality, tax land.''\3\ Is he correct that a tax on land would be 
distributionally progressive? That's not clear to me. If such a tax 
were to buy down tax rates on savings and investment, would such a tax 
be pro-growth?
---------------------------------------------------------------------------
    \3\ See https://www.bloomberg.com/view/articles/2015-03-03/to-
fight-inequality-tax-land.

    Answer. I agree with Dr. Orszag that a tax on land is 
distributionally progressive, since high value property owners 
generally are higher income taxpayers. However, as the question points 
out, the level of its overall effects on progressivity will depend on 
whether it is an add-on tax or substitutes for another progressive tax 
---------------------------------------------------------------------------
(e.g., taxes on savings).

    This begs the question whether it is a good idea. A tax on land is 
hard to avoid, helps to address income inequality and may foster 
investment in more productive forms of capital. On the other hand, it 
is not clear to me that singling out land from other wealth for federal 
taxation is fair or makes sense. Also, it is important to note that 
many states already impose property taxes on land values. Imposing a 
double tax on land could discourage home ownership and property 
development. Finally, assessing the land without improvements could be 
difficult.
              reinsurance premiums and earnings stripping
    Question. Are reinsurance premiums often paid to affiliated foreign 
corporations for the purpose of stripping taxable income from the U.S. 
tax base?

    Aren't there many ways to engage in earnings stripping?

    Is it reasonable to think Congress could devise one rule to 
restrict all types of earnings stripping?

    Answer. Use of deductible reinsurance payments to a foreign 
affiliate is a common means for foreign-parented insurance companies to 
strip income out of the United States to a low-tax or no-tax 
jurisdiction.

    Over the past 2 decades, several companies have formed or moved 
abroad to take advantage of this income-stripping technique, through 
inversions, redomestications and foreign acquisitions. For example, 
Bermuda and Swiss-based Ace recently acquired Chubb, previously one of 
the largest U.S. P&C companies. Just this past month, U.S.-based 
Assurant announced it would merge into the Warranty Group, a Bermuda-
based company presumably to take advantage of the use of affiliate 
reinsurance. According to industry experts Dowling and Partners, the 
proposed shift by Assurant overseas could ``put the outside range of 
loss to the U.S. Treasury at approximately one-half of Assurant's 
current tax bill ($240M in 2016).''

    While affiliate reinsurance is similar to many other forms of 
related-party payments (e.g., interest, royalties) used to strip income 
overseas, one significant difference is that affiliate reinsurance is 
used primarily to shift a company's investment reserves out of the U.S. 
to avoid tax.

    Insurance companies have two forms of income that are subject to 
tax: (1) underwriting income--generally, the amount by which premiums 
earned exceed losses incurred plus expenses; and (2) investment 
income--the earnings from investing reserves before claims are paid. 
Because the combined ratio \4\ for many lines of business is close to 
(or even over) 100%, much if not all of an insurance company's taxable 
income is derived from its investment income. Consequently, if a 
company can strip its investment reserves on U.S. business outside the 
U.S., it can avoid tax on much of its net income from U.S. written 
business. It also allows them to avoid U.S. rules requiring discounting 
of loss reserves, which accelerate the payment of taxes by domestic 
groups.
---------------------------------------------------------------------------
    \4\ The combined ratio is the losses incurred plus expenses over 
earned premiums.

    If a one-size-fits-all approach is adopted to adopted to address 
base erosion from related-party payments, it will need to account for 
these two unique and essential features.
                            summary question
    Question. Given your prior role as the top tax policy advisor at 
the Treasury Department, what big-picture/summary advice do you have 
for us as we continue down this path toward comprehensive tax reform?

    Answer. For the sake of consistency, I would reiterate a few themes 
from my testimony. First, I believe engaging and educating the public 
is essential to build support and minimize blowback. The electorate has 
not fully been engaged yet in my opinion. How the goals for tax reform 
are established and marketed will determine whether it is perceived as 
fair, whether it is accomplished, and how it is judged politically. 
Second, do not worry about solving all perceived problems at once. 
Incremental progress will be a significant accomplishment. Debates over 
more fundamental tax reforms should not delay or preclude meaningful 
reforms to improve the current code that will provide relief to 
individuals and help stabilize the global tax environment and improve 
competitiveness for businesses operating in the U.S. Finally, be 
careful not to worsen or inhibit our ability to address our impending 
long-term fiscal problems. It will be more difficult politically to 
reverse course and unwind changes later.

                                 ______
                                 
     Submitted by Hon. John Thune, a U.S. Senator From South Dakota

           Reforming the Taxation of Pass-Through Businesses

              Bipartisan Policy Center Staff Working Paper

                               April 2017

ACKNOWLEDGMENTS

The lead author of this paper is Warren S. Payne, fellow at the 
Bipartisan Policy Center.

BPC staff contributors include: G. William Hoagland, senior vice 
president; Michele Stockwell, senior vice president; John Richter, 
senior advisor; and Shai Akabas, director of fiscal policy.

DISCLAIMER

The findings and policy options expressed herein do not necessarily 
represent the views or opinions of the Bipartisan Policy Center's 
founders or its board of directors.

Executive Summary

The Trump administration and Congress are actively developing tax 
reform legislative proposals. One key issue policymakers will address 
is how to reform the tax treatment of pass-through businesses. Pass-
through businesses are businesses, large and small (including S 
Corporations, partnerships, LLCs, and sole proprietorships), where the 
business itself does not pay tax but instead where taxes are paid 
directly by the individual owners of the business.

In this type of business structure, income, credits, and deductions 
realized by the businesses ``pass through'' to the individual owners, 
who pay tax on that income according to the tax rates and brackets on 
the individual side of the tax code, as opposed to the rate for C 
corporations. Thus, if tax reform eliminates or curtails business-
related credits or deductions and does not provide them with a 
corresponding reduction in the tax rates, these types of businesses 
could experience a significant tax increase.

In 2013, the latest year for which IRS statistics are available, 3.6 
million partnerships and 4.3 million S corporations filed tax returns. 
This compares with 5.9 million C corporations who filed tax returns 
that year.\1\ These pass-through businesses include small start-ups and 
mom-and-pop businesses that represent the entrepreneurial spirit of the 
U.S. economy. How pass-through businesses are treated in any tax reform 
agenda is critical to the future of American business.
---------------------------------------------------------------------------
    \1\ IRS, Statistics of Income, Business Tax Statistics. Available 
at: https://www.irs.gov/uac/tax-stats.

This paper provides a menu of options policymakers could consider when 
reforming the taxation of pass-through businesses. This paper does not 
assume that the tax rates for pass-through businesses have to be 
identical to those applied to income earned by individuals unrelated to 
the pass-through business. These options attempt to balance the desire 
to avoid tax increases on pass-through businesses while also ensuring 
that pass-through businesses do not become a means for wealthy 
individuals to avoid tax on income that should be properly subject to 
---------------------------------------------------------------------------
tax at individual tax rates. These options include:

      Limiting what types of businesses or business activity could 
benefit from lower tax rates on pass-through businesses;

      Creating incentives for the owners of pass-through businesses to 
reinvest profits into the business; and

      Rules to limit the total amount of income that could qualify for 
a lower pass-through rate.

Introduction

The Bipartisan Policy Center engaged in a yearlong examination of the 
issues surrounding corporate- and business-tax reform. BPC's goal 
throughout has been to increase and enhance the competitiveness of U.S. 
companies and workers, increase economic growth, and thereby increase 
job creation, wage growth, and investment.

This paper, which results from that effort, focuses on one aspect of 
business-tax reform: pass-through businesses. It is intended to 
identify the issues that must be confronted by policymakers when 
integrating corporate-tax reform with pass-through entities. It also 
provides policymakers with a range of options for addressing this 
integration as they reform the business aspects of the U.S. tax code.

The project focused on reform of the business-related aspects of the 
tax code and therefore is not dependent on tax reform that might make 
changes to the individual code. In addition, when considering the 
various policy options, it is necessary to be able to consider them in 
the context of what the current tax rate on C corporations would be 
after reform. For the purposes of this paper, BPC has assumed a post-
reform corporate-tax rate of 25 percent.\2\
---------------------------------------------------------------------------
    \2\ This paper assumes a flat corporate rate of 25 percent applied 
to the first dollar of taxable income.

It is assumed that the revenue loss associated with lowering the 
corporate rate to the post-reform rate of 25 percent (an estimated 
reduction in tax revenues of approximately $1.2 trillion over 10 years) 
would be offset, at least in part, by broadening the tax base.\3\ This 
would be accomplished through the elimination or curtailment of 
credits, deductions, and other policies that businesses currently use 
to lower their effective tax rates. Because BPC's work focused on 
business-tax reform, it does not assume changes in individual tax 
rates. Therefore, any broadening of the tax base would increase the 
pass-through businesses' tax liability, without any offsetting benefit 
of a reduction in tax rates.\4\
---------------------------------------------------------------------------
    \3\ $1.2 trillion assumes each percentage-point reduction in the 
corporate rate results in approximately $120 billion in revenue loss 
over the 10-year budget window.
    \4\ The increase in taxes on pass-through businesses that would 
occur if tax reform broadened the tax base on pass-through businesses 
without any accompanying reduction in tax rates would make pass-through 
businesses less competitive vis-a-vis C corporations in situations 
where the pass-through business competes directly with the C 
corporation.

This paper describes a series of options for addressing broad policy 
issues to ensure pass-through businesses are not made less competitive 
---------------------------------------------------------------------------
by tax reform that does not simultaneously lower individual rates.

Proposed options for four broad policy questions:

    1.  What tax rate should be applied to pass-through businesses?

    2.  What types of business activity should qualify for the pass-
through tax rates?

    3.  What share of qualifying income should benefit from the pass-
through tax rates?

    4.  What policies should be included to prevent abuse and simplify 
administration of the reformed code?

This paper also concludes with a discussion of other related policy 
changes that could be incorporated into the integration process.

Question 1: What Tax Rate Should Be Applied to Pass-Through Businesses?

Options for Tax Rates for Pass-Through Businesses

Effective Federal Marginal Tax Rates

BPC's work on business tax reform does not assume the elimination of 
the existing second layer of tax on corporate income that results from 
the taxation of dividends. As a result, the effective tax rate on 
corporate income paid out to shareholders may be higher than the 25 
percent assumed in this paper, as this income is still subject to taxes 
on dividend income received by shareholders. Pass-through entities, 
which are not subject to corporate tax at the entity level, do not face 
this double-tax situation. As a result, policymakers may consider that 
full parity between the corporate rate and the maximum rate on the 
business income of pass-throughs is not essential.

Analysis by the Treasury Department has found that under current law, C 
corporations face an effective federal marginal tax rate of 
approximately 30 percent, while pass-through entities face an effective 
tax rate of approximately 25 percent.\5\ (This analysis does not 
include state corporate tax rates that can increase the effective 
marginal tax rate.) In a similar analysis, the Congressional Budget 
Office found that C corporations in 2014 paid an effective rate of 31 
percent, while pass-throughs paid an average rate of 27 percent. Thus, 
because pass-throughs are not burdened by the double tax, currently 
their marginal rates are effectively between 4 and 5 percentage points 
lower than those for corporate-rate taxpayers. As a result, pass-
throughs could be subjected to a somewhat higher tax rate than C 
corporations and still be effectively on parity with the effective tax 
rate for C corporations.
---------------------------------------------------------------------------
    \5\ Economic Report of the President, February 2015, 230. Available 
at: https://www.gpo.gov/fdsys/pkg/ERP-2015/pdf/ERP-2015.pdf.
---------------------------------------------------------------------------

Interaction With Progressive Individual Tax Rates

In addition, under current law, pass-throughs receive the benefit of 
the lower individual tax rates (relative to the rate for corporations) 
that apply at lower income levels.\6\ Thus, some amount of income is 
taxed at rates much lower than the current C corporation rate of 35 
percent. If pass-through entities are provided with a lower rate on 
qualifying income, policymakers could choose to maintain pass-throughs' 
access to the lower individual rates.
---------------------------------------------------------------------------
    \6\ For example, an individual filer is subject to a tax rate of 10 
percent on the first $9,275 in income, a tax rate of 15 percent on 
income over that but not exceeding $37,650, a rate of 25 percent on 
income over that but not exceeding $91,150, and so on with 
progressively higher income brackets and rates. See: IRS, ``IRS Tax 
Brackets and Deduction Amounts for Tax Year 2016: Federal Tax Rates, 
Personal Exemptions, and Standard Deductions,'' 2016. Available at: 
https://www.irs.com/articles/2016-federal-tax-rates-personal-
exemptions-and-standard-deductions.

For example, if the maximum pass-through rate were 28 percent, pass-
throughs could be taxed at the lower rates of 10, 15, and 25 percent on 
income below $190,151--the threshold for entry into the current 33 
percent bracket. Allowing pass-throughs access to these lower rates 
would reduce the effective rate of taxation.\7\ Alternatively, pass-
throughs could be subjected to one flat rate on all their business 
income, in a manner analogous to how various tax-reform proposals would 
treat C corporations.
---------------------------------------------------------------------------
    \7\ For example, assume a pass-through with $250,000 in qualifying 
income. The effective tax rate on that income would be approximately 
25.2 percent: (10% * $9,275) + (15% * ($37,650 - $9,276)) + (25% * 
($91,150 - $37,651)) + (28% * ($250,000 - $91,151)).

For purposes of this options paper, as previously stated, BPC assumes 
that corporations would be subject to one flat rate of 25 percent. 
Therefore, policymakers should consider whether applying one flat rate 
could result in some small pass-through entities facing a tax increase. 
For example, a pass-through owner who had taxable income of $100,000 
would face an effective tax rate of approximately 21 percent if filing 
as an individual and approximately 19 percent if filing a joint return. 
Both are below 25 or 28 percent under current law. Thus, the 
application of one flat rate would result in a tax increase, even 
before the impact of any base broadening.

``Claw Back'' of High-Income Pass-Throughs

If policymakers are concerned about the revenue loss or distributional 
consequences associated with permitting pass-through entities to 
maintain access to the lower rates, policymakers could include a 
``claw-back'' option for high-income pass-throughs.\8\ A claw-back 
provision would recapture the benefit of the lower rates for pass-
throughs with income over a certain threshold. Such a policy could be 
implemented in a way that protects smaller pass-through entities from 
tax increases that would result from the loss of access to the lower 
rates. For example, the phase-out could be implemented in a way that 
does not increase the effective tax rate for pass-throughs with taxable 
income below the top pass-through rate. At the same time, this policy 
would reduce the overall revenue loss from the new top pass-through 
rate by limiting the benefit of the lower rates for high-income pass-
throughs.
---------------------------------------------------------------------------
    \8\ A similar concept applies in current law with regard to the 
corporate rate. Although often glossed over, the current corporate tax 
rate is progressive with a rate of 15 percent on the first $50,000 in 
taxable income, 25 percent on the next $25,000 in taxable income, and 
34 percent on income between $75,000 and $10 million. As a 
corporation's taxable income rises, it loses the benefits of the 15- 
and 25-percent rates (beginning when a corporation has taxable income 
over $100,000) and the 34 percent rate (beginning when a corporation 
has taxable income over $15 million). See Joint Committee on Taxation, 
``Overview of the Federal Tax System as in Effect for 2016,'' JCX-43-
15, May 10, 2016. Available at: https://www.jct.gov/
publications.html?func=
startdown&id=4912.

Question 2: What Business Activity Should Qualify for the Pass-Through 
---------------------------------------------------------------------------
Rate?

Options for Determining What Business Activity Qualifies for Lower 
Pass-Through Business Rates

When creating a separate tax rate structure for pass-throughs, 
policymakers must also identify what type of activity is eligible for 
the separate rate structure. Conceptually, policymakers may wish to 
permit only certain types of income directly related to the business 
activity of the pass-through business to benefit from the separate rate 
structure. In particular, they may want to limit the access to the 
lower rates to only what policymakers would consider non-labor income, 
which would result in the lower rate applying only to income that is 
generally analogous to the types of income that would benefit from a 
reduction in the corporate tax rate.

As noted, policymakers may wish to treat certain types of activity, 
regardless of whether it's related to a pass-through or a C corporation 
business, the same when the individuals engaging in that activity would 
typically be taxed under the individual side of the tax code. For 
example, the provision of certain services can be done through both 
pass-through and C corporation businesses. Policymakers may wish to 
ensure that the individuals providing such services are taxed in the 
same manner. These types of activity include, among others, legal and 
accounting services where individuals provide the same types of service 
in both pass-through and C corporation businesses, but in the context 
of the pass-through businesses, the individuals may also be the owners 
of the business. If these types of activity were eligible for the pass-
through tax rates, the income of the pass-through owners would qualify 
for the same pass-through rates.\9\
---------------------------------------------------------------------------
    \9\ An extreme option would be to require all companies providing 
such services to be taxed as corporations, such as by subjecting them 
to taxation as personal service corporations as defined in IRC 269A.

Policymakers, therefore, could limit access to the separate pass-
through regime by excluding certain types of activity from qualifying. 
For example, they could exclude income arising from the provision of 
personal services from qualifying for the lower pass-through rates. 
Such personal services are already defined in the tax code as any 
activity performed in the fields of health, law, engineering, 
architecture, accounting, actuarial science, architecture, performing 
arts, or consulting.\10\
---------------------------------------------------------------------------
    \10\ Internal Revenue Code 448(d)(2)(A).

Also, policymakers could limit the type of income that qualifies by 
prohibiting passive income, from investments or other sources, from 
qualifying for the pass-through tax rates.\11\ Income from such sources 
as royalties, rents, dividends, and interest would therefore be 
excluded from qualifying. Such a limitation would focus the benefits of 
the pass-through tax rates on active income.
---------------------------------------------------------------------------
    \11\ Policymakers could define such income as income covered by 
Internal Revenue Code 1362(d)(3).

Alternatively, policymakers could specify what types of income qualify, 
with all other income not qualifying for the pass-through rates. For 
example, policymakers could determine that only certain manufacturing 
income would qualify. They could limit the benefits of the pass-through 
structure to only activity that currently qualifies under the Section 
199 deduction for manufacturing.\12\ There is considerable precedent as 
to what types of activity qualify for Section 199, thereby making the 
administration of the separate rate easier. In contrast, however, there 
are several different types of business activities that would not 
qualify for Section 199, such as retail businesses that are generally 
considered ``small businesses.''
---------------------------------------------------------------------------
    \12\ Section 199 (or the domestic-production deduction) provides a 
deduction against qualified business income that is intended to provide 
tax relief equivalent to a 3-percent reduction in the taxpayer's 
effective tax rate.

Policymakers could develop additional definitions to Section 199, such 
as for retail establishments. The Census Bureau maintains a definition 
of what qualifies as retail sales for the purpose of reporting on 
economic indicators.\13\
---------------------------------------------------------------------------
    \13\ U.S. Census, Monthly and Annual Retail Trade, March 2017. 
Available at: https://www.census.gov/retail/index.html.

Question 3: What Share of Qualifying Income Should Benefit From the 
---------------------------------------------------------------------------
Pass-Through Rates?

Options for Determining What Share of Qualifying Income Benefits From 
the Lower Pass-Through Rates

In addition to determining what types of income can qualify for the 
separate pass-through rate, policymakers can also make determinations 
as to the amount of such income that can qualify. Determining how much 
income can qualify is predicated on policymakers' goals for how the 
separate rate would impact taxpayer behavior. For example, if 
policymakers have a goal of encouraging pass-through owners to invest 
more in their company, then rules would be designed to encourage that 
activity. However, if they wish to reduce administrative complexity, 
they might permit all the qualifying income to benefit from the pass-
through tax rate.

In addition, a certain amount of the income earned by the business 
owner is likely compensation for work performed by the owner, as 
opposed to a return on the owner's capital. Therefore, some share of 
the income may be better qualified as analogous to wages or salary and 
therefore taxed at the regular individual tax rates. Under current law, 
notions of ``reasonable compensation'' apply for S corporations. In 
this circumstance, the owner is required to receive a reasonable amount 
of compensation to ensure that income that is more accurately 
considered labor income is taxed at individual rates and therefore 
subject to payroll taxes. That same concept can be applied in a 
separate rate structure for pass-throughs.

From a design standpoint, policymakers can approach this question by 
distinguishing between income and assets. An income-based approach may 
be less complicated to administer but also less likely to create 
incentives to reinvest in the business. An asset-based approach would 
more directly tie to incentives for the owner to increase their capital 
investment in the business, but it would also be more complicated to 
account and administer.

Income-Based Approach

An income-based approach is less complex, and potentially, one 
structure could be applied to all types of pass-through entities. Under 
this approach, the pre-tax profit of the entity that is attributable to 
the owner based on their share of ownership in the entity would be 
eligible for the pass-through tax rates. Thus, if an S corporation has 
four owners each with an equal share in the company and the pre-tax 
income of the entity is $1 million, then each owner would be able to 
qualify an amount up to $250,000 for the pass-through tax rates.

Policymakers could further limit the amount of income that qualifies by 
limiting the share of qualifying income to a ratio equivalent to income 
reinvested in the business by the owner or by imposing other explicit 
ratio limitations to be discussed below.

Policymakers could limit the benefit of the pass-through tax rates in 
circumstances where the business is in a loss position by prohibiting 
the owners from applying their share of those losses to other, non-
qualifying income. In such a circumstance, the losses could be carried 
forward as a net operating loss applied against future positive 
qualifying income.

Asset-Based Approach

Using an asset-based approach to determine the share of income 
qualifying for the pass-through rate, the income associated with the 
return on contributions of capital by the owner of the pass-through 
entity would determine the amount of income that qualifies. Income 
associated with the return on labor or services provided by the owner 
of the pass-through could continue to be taxed at the regular 
individual rates.

Each of the types of pass-through entities--for example, S-Corp, 
partnerships, LLC, sole properties--have existing rules and structures 
that can be used as the basis for measuring the amount of return on 
capital invested by the owner in the business. One asset-based policy 
that is common to all forms of pass-throughs requires that any 
capital--in the form of property, equipment, equity, etc.--contributed 
to the business by an owner be valued according to fair market value at 
the time of the contribution. Any built-in gain at the time of the 
contribution would therefore be included in the valuation.

S Corporations

S corporations present a special case for determining the share of 
income qualifying for pass-through rates when using an asset-based 
approach for valuation. In an S corporation structure, the owners 
receive stock in the company. This stock forms the basis of the owner's 
share of the corporation. Stock is received in exchange for 
contributions of capital, including property. The owner's basis (i.e., 
the value at the time of contribution) in the stock changes over time 
based on earnings, distributions, and depreciation. One policy option 
would be to use the value of the owner's stock (i.e., outside basis) in 
the S corporation as the metric for tracking the amount of, and return 
on, capital contributed and owned by the individual owner.\14\ Such an 
approach would likely require some businesses that currently do not 
closely track the value of their stocks to begin doing so. It may also 
require companies to clearly establish basis value at the time of the 
new tax structure.
---------------------------------------------------------------------------
    \14\ Generally, the inside basis of an S corporation is a measure 
of the value of the property held by the business entity. The outside 
basis is a measure of the value of the owner's S corporation stock.

This structure could be applied on a prospective basis only and require 
the owner to have identified and documented the value of their basis 
before being able to qualify income for the separate rate structure. 
Policymakers could also require that the owner's basis in the pass-
through be positive before any income could qualify for the pass-
through rate. Thus, capital invested to return the owner's basis to a 
positive basis would not be included in the calculation as to how much 
---------------------------------------------------------------------------
of the owner's income is eligible for the pass-through rate.

The net change in basis at the end of a specified period would 
determine the amount of income received by the owner that qualifies for 
the pass-through rate. This rate would be applied to the share of the 
individual's ownership in the S corporation. In order to smooth out 
volatility, the change could be averaged over more than one year. For 
example, assume that after year one the owner's basis increased by 20 
percent, at the end of year two the owner's basis declined by 10 
percent, and at the end of year three the owner's basis increased by 8 
percent. Over the three-year period, the owner's basis increased by an 
average of 6 percent. Thus, the owner could qualify 6 percent of any 
income for the pass-through rate.\15\
---------------------------------------------------------------------------
    \15\ Over the first two years in which the pass-through entity 
participates in this structure, the calculation would be performed only 
for the years actually recorded. For example, year one the percentage 
would be measured relative to the owner's starting basis. In year two, 
the change would be measured averaging years one and two.

The change in basis could be calculated more simply. The owner's 
initial basis in year one is $1 million. In year two, the owner 
contributes $200,000 in new capital. In year two, the owner's share of 
the depreciation is $50,000. The net change in capital (new capital 
less depreciation) is $150,000. So, the percentage applicable for that 
---------------------------------------------------------------------------
year would be 15 percent (150,000/1 million  100 = 15 percent).

This 15 percent would be used to determine the share of the owner's 
income from the pass-through that would be subject to the pass-through 
rate. Assuming the pass-through owner keeps access to the lower 
individual rates (as discussed in the prior section) this ratio would 
apply only to the share of income above the threshold for the top pass-
through rate. For example, assuming the pass-through rate is 28 
percent, the 15 percent ratio would be applied to any income received 
in excess of $190,151, the entry point of the 33 percent bracket for 
single filers. In this tax structure, if the owner's basis in the 
company declines year over year, the owner could not qualify any income 
for the pass-through rate.

Further, policymakers could limit this tax structure only to owners who 
have contributed capital to the corporation regardless of the owner's 
status as an active or inactive participant. Thus, passive owners who 
do not contribute capital to the business would not be eligible for the 
pass-through rate. In the case of ownership in an S corporation where 
the owner's share was a gift, policymakers could apply existing 
carryover rules under current gift rules. This would effectively reduce 
or eliminate any basis in the S corporation the recipient of the gift 
could claim. If policymakers took this approach, it would create a 
strong incentive for the new owner to invest new capital into the 
business in order to obtain the basis used to qualify income for the 
pass-through rate.

Partnerships and LLCs

Unlike S corporations, partnerships already have a formal structure for 
tracking the partner's ownership interest and capital contributions to 
the partnership--the partner's capital account. This account tracks the 
partner's capital contributions to the partnership, profits and losses 
earned by the partnership, and any distributions paid to the partner. 
Thus, the partnership capital account can serve as a reasonable measure 
of the amount of capital invested by the partner and the return to that 
investment.

The percentage change in the partner's capital account from one tax 
year to the next or calculated as an average of a set period could 
serve as the percentage of the partner's distribution that qualifies 
for the pass-through rate. Any remaining distribution would be taxed at 
individual rates.

Question 4: What Policies Should Be Included to Prevent Abuse and 
Simplify Administration of the Reformed Code?

Options for Preventing Abuse and Simplifying Administration

A significant disparity between the top individual rate and the pass-
through rate will create strong incentives for owners to try to qualify 
as much income as possible for the pass-through rate. Therefore, in 
addition to the options discussed above, policymakers may want to 
include certain explicit limitations on taxpayers' ability to qualify 
income for the pass-through rate. They may also wish to adopt these 
policies as guards against abuse with the understanding that these 
policies may be stronger protection against abuse than the current 
rules--such as reasonable compensation rules--that have led to concerns 
about abuse of pass-through structures. Among other ideas, this can be 
accomplished by:

      Minimum or safe-harbor ratios of how much income could qualify 
for the pass-through rate;

      Caps on the annual return to capital for each year; or

      Maximum ratio for how much income could qualify for the pass-
through rate.

Safe-Harbor Ratio

A minimum or a safe-harbor ratio could be established to determine how 
much income could qualify for the pass-through rate. For example, 90 
percent of the income received by the owner could be taxed at the 
individual rate, and 10 percent of the income received by the owner 
could be taxed at the pass-through rate. The owner could opt instead to 
perform the calculations described in the previous section if that 
would provide a more beneficial tax result. By setting a default ratio 
that would deem at least some percentage of the income as eligible for 
the pass-through tax rate, the owner is guaranteed at least some 
recognition of return on ``sweat equity'' if there is no other capital 
investment made in the business. In addition, it would ensure that in a 
situation in which the value of the owner's share in the business 
declines, the owner can still qualify some income for the pass-through 
rate. A safe harbor also provides administrative simplicity for 
businesses, therefore obviating the need for the taxpayer to conduct 
the calculations.

Cap on Annual Return

Incorporating a cap on the percentage increase as it is calculated and 
applied in order to determine what share of income qualifies for the 
pass-through rate would serve as a limitation in situations where large 
percentage increases result from relatively large gains off a small 
base. The proposal could rely on existing provisions in the code, such 
as the long-term applicable federal rate (AFR). Today, the AFR ranges 
from X percent for short-term to Y percent for long-term investments. A 
formula to establish AFR plus a percentage (X) could be created.\16\ 
Determining how much income qualifies for the pass-through rate would 
be the lower of the percentage calculated according to the asset-based 
approach described above, or AFR plus X.
---------------------------------------------------------------------------
    \16\ The applicable federal rate (AFR) is an interest rate 
determined by the IRS for income-tax purposes. There are three AFRs: 
short-term, mid-term, and long-term. See Internal Revenue Code 1274(d).
---------------------------------------------------------------------------

Maximum Cap

An alternative or compliment to the minimum-ratio or safe-harbor 
concept would be to set a maximum, or cap, on the overall share of 
income that could qualify for the pass-through rate. For example, the 
maximum ratio could be set at 50/50, thereby establishing that a 
maximum of 50 percent of the income received by the owner could be 
taxed at the pass-through rate. If policymakers apply a maximum cap, 
they would need to consider whether the cap might be more generous than 
typical practice for S corporations when satisfying reasonable 
compensation requirements.

In addition, if policymakers provide more than one approach to the 
taxation of pass-through entities, they may wish to limit a business's 
ability to pick and choose what approach to adopt. Companies could be 
required to elect into one option and have such an election be 
permanent. Alternatively, policymakers could limit the number of times 
an entity could switch between options over any specified period of 
time.

Options for Extending Tax Concepts to Other Income

Finally, decision-makers will confront secondary issues that need to be 
addressed when deciding how to structure the new pass-through system. 
Among other items, this would include how to apply payroll taxes, 
carried interest, standard deductions for small businesses, and a 
myriad of related issues.

Application of Payroll Taxes

The proposed structures described above could be extended to determine 
what income is subject to FICA/SECA taxes. The proposal could apply 
FICA/SECA to all income subject to tax at individual tax rates (subject 
to the tax maximum for old age, survivor, and disability insurance, or 
``OASDI''). For S corporations in particular, this would expand the 
amount of income subject to payroll taxes. However, such a policy would 
largely address any concerns about abuse of the S corporation structure 
as a means to avoid SECA taxes. It would also significantly reduce the 
tax pressure on reasonable-compensation rules.

Application to Carried Interest

The underlying theory behind the asset-based option is that returns to 
capital should be taxed at business rates, not individual tax rates. 
The same theory can apply to carried interest. Thus, policymakers could 
extend the asset-based option and carried-interest profits. Some 
analysts have suggested that if the carry were subject to individual 
tax rates, the investors would be able to claim a deduction for the 
equivalent of wages paid to the service provider.\17\
---------------------------------------------------------------------------
    \17\ Donald Marron, Goldilocks Meets Private Equity: Taxing Carried 
Interest Just Right, Tax Policy Center, Urban Institute and Brookings 
Institution, October 6, 2016. Available at: http://
www.taxpolicycenter.org/sites/default/files/alfresco/publication-pdfs/
2000956-Goldilocks-Meets-Private-Equity-Taxing-Carried-Interest-Just-
Right.pdf.
---------------------------------------------------------------------------

Standard Deduction

For small pass-through businesses that already pay lower rates because 
they have low amounts of taxable income, base-broadening could result 
in a tax increase even if access to the lower rates is maintained. 
Therefore, policymakers should consider adding a ``standard deduction'' 
for pass-through businesses. Such a deduction could be designed to 
ensure that these pass-throughs do not experience a sharp and 
unintended tax increase. This deduction could be phased down as the 
amount of income that qualifies for the pass-through rate increases.

Other Issues

Integrating corporate tax reform with pass-through entities means 
tackling the various related policy issues that reflect the complexity 
of the current system and the challenges decision-makers must confront 
to protect the integrity of the system. As an example, the proposal 
could incorporate some existing S corporation tax-policy proposals, 
such as the existing rules that automatically terminate an S 
corporation when it has excessive passive income. Other changes could 
include making the time period for electing S corporation status line 
up with the deadline for filing S corporation taxes for that tax year; 
there could also be provisions that allow for an easier transition from 
C corporation to S corporation.

Similarly, the application of a new structure could impact 
partnerships. Various conforming changes could be made to partnership 
rules to ensure proper inclusion of capital contributions into the 
partner's capital account. Among such changes:

      Repeal provisions permitting guaranteed payments and liquidation 
distributions. Under this structure, such contributions would be 
included in the partner's capital account and included in the 
calculation to determine the segregation of income between individual 
and corporate tax rates.

      Extend current requirements for mandatory basis adjustments upon 
the transfer of any partnership interests within the partnership or the 
distribution of property to a partner.

      Ensure proper tracking of any built-in gain in property 
contributed by a partner to the partnership.

      Ensure that partnership interests provided as a gift to a 
partner are excluded from the partner's capital account.

      In order to prevent the unintended termination of the 
partnership when capital in the partnership is transferred, the 
proposal could repeal the existing rule that would terminate 
partnerships when 50 percent or more of the capital in the partnership 
is sold or is exchanged in any 12-month period.

Conclusion

Tax reform is inherently difficult. It is not only intricate, with 
myriad potential interactions, but it also affects virtually every 
American. Accordingly, it requires policymakers to weigh an array of 
potentially competing priorities and goals.

The paramount mission for policymakers should be to develop a business 
tax code that is seen as fair and equitable in its treatment of 
businesses both large and small, and to provide the incentives for 
individuals to become entrepreneurs who will, in turn, create jobs and 
economic growth. This approach is vital with respect to reforming the 
tax treatment of pass-through entities. Policymakers must resolve 
concerns about raising taxes on pass-through businesses while also 
ensuring that any new rules or structures do not become an avenue of 
abuse. The options presented in this paper reflect the breadth of 
issues, challenges, and potential paths forward that policymakers 
should consider when wrestling with this crucial and complex 
undertaking.

                                 ______
                                 
                 Prepared Statement of Hon. Ron Wyden, 
                       a U.S. Senator From Oregon
    Let me begin by saying that everybody here is wishing Senator 
McCain a full and speedy recovery from his recent surgery. John McCain 
is tougher than just about anybody out there, so I'm sure he'll be back 
in these halls soon.

    It is hard to imagine a member of Congress, Republican or Democrat, 
who would stand up before a crowd at a business or town hall meeting at 
home and say, ``I'm a big fan of the tax system on the books.'' 
Insanely complicated, riddled with sweetheart deals, and plagued by the 
inversion virus, I don't find many members of Congress who argue for 
the tax status quo.

    What's needed is bipartisan tax reform that focuses on 
progressivity, helping the middle class, cleaning out flagrant tax 
loopholes, fiscal responsibility, and giving everybody in America the 
chance to get ahead. In short, bipartisan tax reform would build on key 
principles that brought Democrats and Republicans together for major 
bipartisan tax reform slightly more than 3 decades ago.

    Unfortunately, in the first months of this administration, the 
majority party has not shown any interest in such an approach. Before 
his confirmation, Secretary Mnuchin debuted the Mnuchin Rule--no 
absolute tax cut for the wealthy. In my view, it's fair to say that 
stirred quite a bit of interest on this side of the aisle. But it 
wasn't long before Secretary Mnuchin and the Trump economic team were 
making a full-scale retreat from that principle.

    The administration's one-page plan of tax reform bullet points gave 
the fortunate few a lot of detail about how their taxes would be cut. 
Not so for working Americans and the middle class. In fact, independent 
analyses said millions of working Americans were in line for a tax 
increase under the Trump plan. Furthermore, in the last few weeks, the 
Treasury Department has begun to wipe out tax rules designed to crack 
down on corporate inversions, protect jobs and close estate tax 
loopholes. But without a plan waiting in the wings to replace those 
rules, that means the Treasury Department is risking a new outbreak of 
the inversion virus, putting jobs at risk, and condoning tax avoidance.

    Here in Congress, there are widely circulated pictures of a meeting 
of a group called the ``Big Six'' comprised entirely of Republican 
Senators, Representatives, and Trump officials. Republican members have 
already telegraphed a plan to transplant the Trumpcare tax breaks for 
the wealthy into a big, regressive tax cut package later this year. And 
majority leadership in the Senate has signaled that they plan to move 
tax legislation with the same my-way-or-the-highway approach called 
reconciliation they're using to force a vote on Trumpcare. It's hard to 
look at that evidence and find any proof that the majority party wants 
real Democratic involvement in tax reform.

    Anybody can write a bill that slashes tax rates for the fortunate 
few and the biggest corporations, and it might even get enough support 
to become law. It's not a great way to provide certainty and 
predictability needed to create good-paying jobs and expand economic 
opportunity, but it is a great way to create tax windfalls for the 
wealthy.

    I've written two comprehensive, bipartisan tax reform bills, and 
the core principle that I brought to both was that tax reform needed to 
give everybody a chance to get ahead.

    That only happens with a tax system that retains the progressivity 
that has been the hallmark of all modern tax reforms. Tax reform that 
drives economic growth by putting money in the pockets of wage-earning 
Americans only works if tax reform is lasting and bipartisan. I look 
forward to hearing from our witnesses today about how lessons from past 
tax debates could help promote real bipartisan tax reform today.

    Finally, there is one last issue that needs to be raised this 
morning. There's no question that tax reform is an important subject. 
But the dominant business before the Senate for the last several weeks 
has been health care. And now the partisan approach to jam through a 
bill that raises premiums, hurts those with pre-existing conditions, 
and slashes Medicaid has failed for a second time. This ought to be a 
sign that Trumpcare just isn't the answer, that repealing the ACA isn't 
the answer, and that the majority should work with Democrats on the big 
health-care challenges facing the country.

                                 ______
                                 

                             Communications

                              ----------                              


            Air Conditioning Contractors of America, et al.
August 1, 2017

The Honorable Orrin Hatch           The Honorable Ron Wyden
Chairman                            Ranking Member
Senate Committee on Finance         Senate Committee on Finance
219 Dirksen Senate Office Building  219 Dirksen Senate Office Building
Washington, DC 20510-6200           Washington, DC 20510-6200

Dear Chairman Hatch and Ranking Member Wyden:

    We write to thank the Senate Committee on Finance for holding a 
hearing on ``Comprehensive Tax Reform: Prospects and Challenges'' on 
July 18, 2017. Our companies and organizations share the common goal of 
pursuing tax reforms that will grow our economy and create jobs. To 
that end, we welcome the opportunity to highlight the positive 
contributions of tax incentives for energy efficient investment. In 
particular, the Section 179D tax deduction for energy efficient 
commercial and larger multifamily buildings has leveraged billions of 
dollars in private capital, resulted in energy efficient enhancements 
to thousands of buildings, and created and preserved hundreds of 
thousands of jobs since its inception. Reforms to Section 179D can 
boost these economic fundamentals even more.

    These benefits are confirmed by a recent economic impact study 
conducted by Regional Economic Models, Inc. (``REMI''), the executive 
summary of which is attached to this statement as an appendix. REMI's 
conclusion is unequivocal, finding that ``Section 179D is an engine of 
economic and employment growth.'' In particular, an enhanced tax 
incentive for energy-efficient commercial buildings, including reforms 
geared toward retrofits of privately owned buildings, could support up 
to 76,529 jobs and contribute almost $7.4 billion toward our national 
GDP each year. These results represent a significant return on the 
taxpayer investment in Section 179D, well in excess of the provision's 
revenue cost.

    The study also confirms that extending the current version of 
Section 179D or making more modest changes to the incentive would have 
a substantial positive impact on economic and employment growth.

    We urge you to keep the economic impact of Section 179D in mind as 
you consider comprehensive tax reform. Section 179D's proven ability to 
support economic growth and job creation aligns with the Committee's 
goals for tax reform. We look forward to working with you to ensure 
that tax incentives for energy efficient investment continue to be an 
engine of growth for our economy. Thank you for your consideration.

Sincerely,

Air Conditioning Contractors of America
Alliantgroup, LLC
Ameresco
American Council of Engineering Companies
American Institute of Architects
American Society of Interior Designers (ASID)
APPA--Leadership in Educational Facilities
BLUE Energy Group
Building Owners and Managers Association (BOMA) International
CCIM Institute
Concord Energy Strategies
Consolidated Edison Solutions
Daikin US Corporation
E2 (Environmental Entrepreneurs)
Energy Optimizers, USA
Energy Systems Group
Energy Tax Savers, Inc.
Entegrity
Green Business Certification Inc.
Institute of Real Estate Management
Insulation Contractors Association of America
Johnson Controls, Inc.
Lexicon Lighting Technologies
LightPro Software, LLC
LuNex Lighting
Micromega Systems, Inc.
National Apartment Association
National Association of College and University Business Officers 
(NACUBO)
National Association of Electrical Distributors
National Association of Energy Service Companies (NAESCO)
National Association of Real Estate Investment Trusts (NAREIT)
National Association of State Energy Officials (NASEO)
National Electrical Manufacturers Association (NEMA)
National Multifamily Housing Council
National Association of REALTORS
National Roofing Contractors Association
OpTerra Energy Services
Plumbing-Heating-Cooling Contractors--National Association
Polyisocyanurate Insulation Manufacturers Association (PIMA)
PowerDown Holdings, Inc.
PowerDown Lighting Systems, Inc.
Rampart Partners LLC
The Real Estate Roundtable
Sheet Metal and Air Conditioning Contractors' National Association 
(SMACNA)
Sustainable Performance Solutions LLC
U.S. Green Building Council

  Analysis of Proposals to Enhance and Extend the Section 179D Energy 
              Efficient Commercial Buildings Tax Deduction

Prepared by Regional Economic Models, Inc. (REMI), May 2017
Executive Summary
Section 179D of the Internal Revenue Code, the Energy Efficient 
Commercial Buildings Deduction, was originally enacted by Congress as 
part of the Energy Policy Act of 2005 to promote energy independence. 
Section 179D promotes the proper allocation of incentives in the real 
estate development process. A key challenge to realizing the benefits 
of energy-efficient improvements is that the associated cost savings 
flow to building occupants, not developers. By helping offset the cost 
of energy efficient investments, Section 179D allows building owners to 
share in the incentive to install energy-efficient improvements that 
help their occupants save money on electricity, water, and climate 
control costs. In so doing, Section 179D promotes private-sector 
solutions to improve conservation practices and modernize national 
infrastructure.

In this analysis, REMI evaluates the economic impact of three potential 
approaches to the Section 179D deduction, which most recently expired 
at the end of 2016:

    1.  Strengthening and Modernizing Section 179D,\1\ which would 
increase the value of the deduction to $3.00 per square foot from 
$1.80, increase the applicable energy efficiency standards, make it 
available to support improvements to existing as well as new buildings, 
and extend the deduction.
---------------------------------------------------------------------------
    \1\ Proposals along these lines include Title I of S. 2189, 
sponsored by Senator Cardin (D-MD) in the 113th Congress and the 
President's FY 2017 Budget Proposal. See ``Description of Certain 
Revenue Provisions Contained in the President's Fiscal Year 2017 Budget 
Proposal,'' Joint Committee on Taxation, July 2016, JCS-2-16.

    2.  Extension of Current Law Section 179D Plus Expansion to Non-
Profits and Tribal Governments,\2\ modeled on 2015 legislation 
developed by the Senate Finance Committee under Chairman Orrin Hatch 
(R-UT), which would extend the deduction, expand availability of the 
deduction to nonprofit organizations and tribal governments and 
increase the applicable energy efficiency standards.
---------------------------------------------------------------------------
    \2\ See ``Description of the Chairman's Mark of a Bill to Extend 
Certain Expired Tax Provisions,'' July 17, 2015, JCX-101-15, and 
``Description of the Chairman's Modification to the Chairman's Mark of 
a Bill to Extend Certain Expired Tax Provisions,'' July 21, 2015, JCX-
103-15. In addition to the Senate Finance Committee extenders bill, 
other proposals along these lines include H.R. 6376, sponsored by 
Congressman Reichert (R-WA) in the 114th Congress.

    3.  Extension of Current Law Section 179D,\3\ modeled on the two-
year extension of current law enacted as part of the Protecting 
Americans from Tax Hikes (``PATH'') Act of 2015.
---------------------------------------------------------------------------
    \3\ ``General Explanation of Tax Legislation Enacted in 2015,'' 
Joint Committee on Taxation, March 2016, JCS-1-16.

The results of this analysis show that in addition to advancing the 
goal of energy independence, Section 179D is an engine of economic and 
employment growth. As captured in the table below, this study 
---------------------------------------------------------------------------
quantifies these impacts, finding that:

      Strengthening and extending the Section 179D Energy-Efficiency 
Commercial Buildings Deduction will create jobs and expand the nation's 
economy. These benefits would be compounded by increasing the dollar 
value of the deduction in accordance with several Congressional and 
administration proposals.

      These enhancements to Section 179D would support up to 76,529 
jobs annually and contribute annually almost $7.4 billion to national 
gross domestic product (``GDP''), as well as over $5.7 billion towards 
national personal income.

      Expanding the availability of the deduction to nonprofit 
organizations and tribal governments, while increasing the applicable 
energy efficiency standards, also provide clear positive impacts to the 
economy.


       Table 1. Average Annual Economic Impacts for First 10 Years
------------------------------------------------------------------------
                                    Strengthen   Extension    Extension
                                       and          Plus      of Current
                                    Modernize    Expansion       Law
------------------------------------------------------------------------
Jobs                                    76,529       39,388       40,749
------------------------------------------------------------------------
GDP (millions of dollars)                7,398        3,730        3,860
------------------------------------------------------------------------
Personal income (millions of             5,729        3,017        3,128
 dollars)
------------------------------------------------------------------------


                                 ______
                                 
                  American Citizens Abroad, Inc. and 
               American Citizens Abroad Global Foundation

                  11140 Rockville Pike, Suite 100-162

                          Rockville, MD 20852

                         Phone +1 540-628-2426

                    Email: [email protected]

               Website: https://www.americansabroad.org/

This Statement is submitted by American Citizens Abroad, Inc. and 
American Citizens Abroad Global Foundation.

Congress should reform the Internal Revenue Code and it should do so as 
soon as possible. In the area of international tax provisions, at the 
same time it modernizes the rules applicable to U.S. corporations with 
foreign earnings and foreign subsidiaries and other operations, among 
other things adopting ``territorial'' tax principles, similarly it 
should apply ``territorial'' tax principles broadly to individuals.

``Territoriality'' for corporations, as this Committee knows well, 
means that U.S. corporations, which are currently taxed, in general, on 
their worldwide income regardless where the income is earned, would be 
taxed only on income earned in the U.S. Under current rules, 
corporations benefit from partial territoriality in the sense that 
foreign subsidiaries organized and operated in highly circumscribed 
ways can defer U.S. tax. As for individuals, at present, they are taxed 
on their worldwide income regardless where they reside. Taxpayers 
meeting stringent residency-abroad tests, that is, they truly reside 
outside the U.S. and do so not just for short periods of time, are 
entitled to a form of partial territoriality in that they can exclude a 
portion of their foreign earned income, but not other types of income, 
and perhaps deduct some foreign housing costs.

Territorial tax treatment of individuals equates to taxation on a 
residency basis, according to where you reside, as opposed to taxation 
on a citizenship basis, that is, due solely to the fact that you are a 
U.S. citizen.

Congress should amend the tax rules applicable to individuals residing 
abroad, making them taxable only on U.S. source income and income 
connected with the U.S. business or otherwise connected with the U.S. 
These rules would only apply to Americans truly residing abroad, not to 
Americans residing in the U.S.\1\
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    \1\ Americans residing in the U.S. who are shareholders in foreign 
corporations may benefit from changes in the rules for taxing these and 
similar foreign entities.

There are an estimated 9 million Americans living overseas. Many have 
lived there all their lives. They may have moved abroad after meeting 
their foreign spouse or partner or attending school or finding a job. 
They may have been born to non-U.S. citizens only temporarily in the 
U.S., for example, studying--well obviously not just studying--at a 
U.S. university. Based on 2014 census figures, if grouped like a state, 
Americans abroad would be the 11th largest state, just ahead of New 
Jersey and Virginia. Due to voting rules, however, they do not vote as 
a block. Rather their votes are mostly disbursed among the 50 states 
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where they last lived or where their parents last lived.

American citizens, since the Civil War and without interruption since 
1913, like corporations, have been taxed on their worldwide income, 
regardless where they reside or where the income arises. This rule was 
initially intended to catch individuals who dodged the draft or 
otherwise shirked their duties to the Union. Since 1926, however, a 
version of partial ``territoriality'' for individuals has permitted 
Americans residing abroad to not pay tax on limited amounts of foreign 
earned income and foreign housing costs. These rules are tortured and 
have been amended many times--17 times just since 1962.

As things stand, the U.S. is wildly out of sync with the rest of the 
world in the way it taxes individuals residing outside the country. It 
is the only country other than war-torn and impoverished Eritrea that 
taxes individuals based on their citizenship. An American citizen who, 
for example, has resided outside the U.S. all her life, who owns no 
property in the U.S. and who earns no U.S. source income, is required 
to file returns and pay U.S. taxes the same as someone living in St. 
Louis. The fact that she also pays tax to the country where she resides 
makes no difference. And because the U.S. does not have tax treaties 
with most countries, and many existing tax treaties are outdated, the 
goal of avoiding double taxation of income is often not completely 
achieved. A clear example is the 3.8% Net Investment Income Tax, 
enacted in combination with the Affordable Care Act 2010, which cannot 
be offset by foreign tax credits; thus, income can be taxed once by the 
foreign country where the individual resides in a second time by the 
U.S.

The tax rules and forms confronting the American citizen living 
overseas are mind-boggling, and the penalties for incorrect reporting 
or, more likely, simply not understanding the rules, can be financially 
ruinous. It's very difficult for taxpayers to prepare their own tax 
return. The forms for claiming exclusions and foreign tax credits and 
to report foreign financial assets are extremely challenging. A typical 
tax return for a relatively simple financial situation can easily run 
75 to 100 pages and much more for self-employed individuals and small 
business owners.

Only around 450,000 taxpayers, based on most recent figures, claimed 
the foreign earned income exclusion, which is the tax provision 
designed to help them. Many more, close to 4 million, claimed foreign 
tax credits. It is estimated, based on projections for 2018 that the 
exclusion, in saved taxes, was worth about $7 billion. Savings due to 
the foreign tax credit are generally not viewed as a tax expenditure 
because the credit is simply a way of avoiding patently unfair double 
taxation.

Now's the time to correct this indefensible incongruity. With the 
concept of ``territoriality'' on the table with respect to corporate 
tax law changes, the concept and its workings are on everyone's mind. A 
change for individual scan be made easily, without major surgery on the 
Internal Revenue Code. Simply put, Americans abroad would be treated 
essentially the same as foreign individuals. It follows, they would 
remain taxable on U.S.-source income. This is the same approach used by 
all other developed countries. Moreover, it might be achieved without a 
loss of tax revenue. Loopholes can be guarded against with super strict 
drafting.

Problems associated with FATCA that today plague Americans abroad, such 
as the problem of ``lockout'' foreign financial institutions, would 
largely go away. An American citizen residing abroad would no longer be 
treated as a U.S. account holder for FATCA purposes. Foreign banks 
would no longer need to be wary of providing services to this 
individual. Also, the problems of enforcing tax and foreign account 
reporting rules against Americans overseas could be reassessed. These 
individuals would be incentivized to bring themselves into compliance. 
There would be the need to chase after them and employ complicated and 
sometimes unfair disclosure and other enforcement programs.

The amount of tax revenue involved, by any estimate, is minimal--less 
than the cost of running the Federal Government for one day. With 
thoughtful choices about the design of the new rules and transition 
provisions, the cost might be reduced to nil. In fact, taking into 
consideration reasonable assumptions concerning improved compliance and 
without ``cooking the books,'' the overall revenue effect might be 
slightly positive.

Residency-based taxation would translate into more jobs for Americans 
and more exports of American goods and services around the world. As it 
stands, the tax code encourages U.S. businesses to expand and earn 
profits globally, but to do so without hiring U.S. citizens, who due to 
citizenship-based taxation can cost 2 to 3 times the amount of hiring a 
non-American. Congress should act strategically to encourage more 
Americans to live and work overseas. An enormous ambassadorial force 
would be created, which would encourage the purchase of American goods 
and services.

Small businesses would no longer face the problem of hiring Americans 
to work and market their products abroad. Larger exporters would save 
the costs of employing Americans abroad and having to incur the costs 
of equalizing their after-tax compensation and paying for the 
accounting and return preparation costs associated with this.

There is a wide range of plans for reforming corporate taxes, but all 
of them include some form of ``territoriality.'' House Republicans have 
developed a ``blueprint'' for tax reform that adopts a territorial 
approach for corporations and quite deliberately presents the 
possibility of changes for individuals. On the Senate side, Chairman 
Hatch's 2014 corporate integration proposal called for reconsideration 
of the taxation of nonresident citizens. Treasury Department and the 
White House, in the recently proposed 2018 budget, expressed interest 
in transitioning to a territorial system.

Residency-based taxation for American citizens residing abroad fits 
comfortably alongside all the international tax reform proposals being 
developed, and importantly it can attract bipartisan support at a time 
when many would like to see more of this sort of thing. While differing 
on some details, Democrats Abroad, Republicans Overseas, Americans for 
Tax Reform, the Heritage Foundation, American Citizens Abroad, a number 
of American Chambers of Commerce overseas, and other business groups, 
all support changing from citizenship-based taxation to a residency-
based taxation approach.

ACA submits the time is now for the Congress to take a strategic 
approach to its tax policy for its citizens residing abroad. Well-
crafted legislation will result in increased employment of Americans, 
decreased costs to the government, simplification of the tax code, and 
a re-invigorated American diaspora to promote America's goods and 
services around the world. Whoever champions this cause not only will 
become the patron saint of Americans abroad but will help expand 
America's workforce and economy.

                                 ______
                                 
           American Institute of Certified Public Accountants

                      1455 Pennsylvania Avenue, NW

                       Washington, DC 20004-1081

                           T: +1 202-737-6600

                           F: +1 202-638-4512

                      https://www.aicpaglobal.com/

INTRODUCTION

The American Institute of CPAs (AICPA) applauds the leadership taken by 
the Senate Committee on Finance for considering comprehensive tax 
reform that examines all aspects of the Internal Revenue Code (IRC or 
``Tax Code'') to simplify the tax system and make tax rules more 
understandable and accountable.

The proliferation of new income tax provisions since the Tax Reform Act 
of 1986 has led to compliance hurdles for taxpayers, enforcement 
challenges for the Internal Revenue Service (IRS or ``Service'') and 
administrative complexity for taxpayers and practitioners. The 
consequence of noncompliance, resulting in the tax gap, is estimated at 
$458 billion per year.\1\ Additionally, trust in the tax administration 
system and a sense of fairness is lost by taxpayers trying to keep up 
with the changing tax landscape. To help alleviate these challenges and 
promote principles of good tax policy, we offer suggestions on how to 
address the prospects and challenges of comprehensive tax reform.
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    \1\ IRS, ``The Tax Gap,'' April 4, 2017.

The AICPA is the world's largest member association representing the 
accounting profession with more than 418,000 members in 143 countries 
and a history of serving the public interest since 1887. Our members 
advise clients on federal, state, local and international tax matters 
and prepare income and other tax returns for millions of Americans. Our 
members provide services to individuals, not-for-profit organizations, 
small and medium-sized businesses, as well as America's largest 
businesses.

GOOD TAX POLICY

First, we should consider the features of an ideal tax system. The 
AICPA urges the Committee to consider comprehensive tax reform that 
focuses on simplification and other principles of good tax policy \2\ 
as explained in a report we recently updated and issued.\3\ Our tax 
system must be administrable, support economic growth, have minimal 
compliance costs, and allow taxpayers to understand their tax 
obligations.
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    \2\ AICPA concept statement, ``Tax Policy Concept Statement 1, 
Guiding Principles for Good Tax Policy: A Framework for Evaluating Tax 
Proposals,'' January 2017.
    \3\ For an explanation of why and how the AICPA principles of good 
tax policy were updated, see ``Tax Principles for the Digital Age,'' 
May 1, 2017.

We think these features are achievable if the following 12 principles 
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of good tax policy are considered in the design of the system:

  Equity and fairness                Certainty
  Convenience of payment             Effective tax administration
  Information security               Simplicity
  Neutrality                         Economic growth and efficiency
  Transparency and visibility        Minimum tax gap
  Accountability to taxpayers        Appropriate government revenues

Our profession has long-advocated for a transparent tax system. For 
example, we urge Congress to use a consistent definition of taxable 
income without the use of phase-outs. Provisions, such as phase-out 
rules, that limit or eliminate the use of certain deductions and 
exclusions for those taxpayers in higher tax brackets, perpetuate the 
flaws of the current system, leading to nontransparent tax results and 
increased complexity. These rules also create marginal rates in excess 
of the statutory tax rate. In addition, multiple tax regimes (such as 
the alternative minimum tax (AMT), which applies in addition to the 
regular income tax) make it almost impossible for taxpayers to easily 
know their effective and marginal tax rates. We urge Congress to use 
tax reform as an opportunity to remove phase-outs and multiple tax 
regimes, and develop the best definition of taxable income by creating 
simple, transparent, tax rules applied consistently across all rate 
brackets.

We also urge you to make tax provisions permanent. For many taxpayers, 
individuals and businesses alike, uncertainty in the Tax Code creates 
unnecessary confusion and anxiety. Complexity can also result in 
taxpayers not taking full advantage of provisions intended to help 
them, resulting in higher taxes and greater compliance costs. While our 
Tax Code has always had a tendency to change, in recent years the rate 
of change has accelerated. Statutory changes result in new regulations, 
revenue procedures, notices and new or modified tax forms which take 
time and resources to understand and address. Taxpayers need a Tax Code 
that is simple, transparent, and certain.

AICPA PROPOSALS

In the interest of good tax policy and effective tax administration, we 
appreciate the opportunity to address the following issues:

     1.  Cash method of accounting
     2.  Tax rates for pass-through entities
     3.  Distinguishing compensation income
     4.  Interest expense deduction
     5.  Definition of ``compensation''
     6.  Mobile workforce
     7.  Retirement plans
     8.  Civil tax penalties
     9.  IRS taxpayer services
    10.  IRS deadline related to disasters
    11.  Emerging issues

1. Cash Method of Accounting

The AICPA supports the expansion of the number of taxpayers who may use 
the cash method of accounting.\4\ The cash method of accounting is 
simpler in application than the accrual method, has fewer compliance 
costs, and does not require taxpayers to pay tax before receiving the 
related income. Therefore, entrepreneurs often choose this method for 
small businesses.
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    \4\ AICPA letter, ``Investment in New Ventures and Economic Success 
Today Act of 2017 (S. 1144),'' June 22, 2017.

We are concerned with, and oppose, any new limitations on the use of 
the cash method for service businesses, including those businesses 
whose income is taxed directly on their owners' individual returns, 
such as partnerships and S corporations. Requiring businesses to switch 
to the accrual method upon reaching a gross receipts threshold 
unnecessarily creates a barrier to growth.\5\
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    \5\ A required switch to the accrual method affects many small 
businesses in certain industries including accounting firms, law firms, 
medical and dental offices, engineering firms, and farming and ranching 
businesses.

The AICPA believes that limiting the use of the cash method of 
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accounting for service businesses would:

    a.  Discourage natural small business growth;
    b.  Impose an undue financial burden on their individual owners;
    c.  Increase the likelihood of borrowing;
    d.  Impose complexities and increase their compliance burden; and
    e.  Treat similarly situated taxpayers differently (because income 
is taxed directly on their owners' individual returns).

Congress should not further restrict the use of the long-standing cash 
method of accounting for the millions of United States (U.S.) 
businesses (e.g., sole proprietors, personal service corporations, and 
pass-through entities) currently utilizing this method.

2. Tax Rates for Pass-through Entities

If Congress, through tax reform, lowers the income tax rates for C 
corporations, all business entity types should receive a rate 
reduction. The majority of businesses are structured as pass through 
entities (such as, partnerships, S corporations, or limited liability 
companies).\6\ Tax reform should not disadvantage these entities or 
require businesses to engage in complex entity changes to obtain 
favored tax status.
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    \6\ See Census Bureau, ``County Business Patterns;'' Census Bureau, 
``Nonemployer Statistics.''

Congress should continue to encourage, or more accurately--not 
discourage, the formation of pass-through entities as these business 
structures provide the flexibility and control desired by many business 
owners that is not available within the more formal corporate 
structure. Entrepreneurs generally do not want to create entities that 
require extra legal obligations (such as holding annual meetings of a 
board of directors). They prefer business structures that are simple 
and provide legal and tax advantages.

3. Distinguishing Compensation Income

If Congress provides a reduced rate for active business income of sole 
proprietorships and pass-through entities, we recognize that it will 
place additional pressure on the distinction between the profits of the 
business and the compensation of owner-operators. We recommend 
determining compensation income by using traditional definitions of 
``reasonable compensation'' supplemented, if necessary, by additional 
guidance from the U.S. Department of the Treasury.

We encourage Congress to consider codifying the existing judicial 
guidance on the definition of reasonable compensation that reflects the 
type of business (for example, labor versus capital intensive), the 
time spent by owners in operating the business, owner expertise and 
experience, and the existence of income-generating assets in the 
business (such as other employees and owners, capital and intangibles).

Reasonable compensation has been the subject of controversy and 
litigation (hence, the numerous court decisions helping to define it). 
Therefore, Congress should direct the IRS to take additional steps to 
improve compliance and administration in this area. For example, a 
worksheet maintained with the taxpayer's tax records would allow 
businesses to indicate the factors considered in determining 
compensation in a reasonable and consistent manner.

Changes to payroll tax rules, such as a requirement for partnerships 
and proprietorships to charge reasonable compensation for owners' 
services and to withhold and pay the related income and other taxes, 
will also facilitate compliance for small businesses. We suggest that 
partners and proprietors are not treated as ``employees,'' but rather 
owners subject to withholding--a new category of taxpayer--similar to a 
partner with a guaranteed payment for services. Similar rules requiring 
reasonable compensation currently exist in connection with S 
corporations. The broader inclusion of partners and proprietors in more 
well-defined compensation rules should facilitate and enhance the 
development of appropriate regulations and enforcement in this area.

There are advantages to using a reasonable compensation approach for 
owners of all business types, including:

    a.  Fairness that respects the differences among business types and 
owner participation levels;
    b.  A reduced reliance by taxpayers and the IRS on quarterly 
estimated tax payments;
    c.  Diminished reliance on the self-employment tax system; and
    d.  Simplification due to uniformity of collection of employment 
tax from business entities, and an ability to rely on a deep foundation 
of case law (in the S corporation and personal service corporation 
areas) to provide regulatory and judicial guidance.

In former Ways and Means Committee Chairman Dave Camp's 2014 discussion 
draft,\7\ a proposal was included to treat 70% of pass-through income 
of an owner-operator as employment income. While this proposal presents 
a simple method, it would result in an inequitable result in many 
situations. If Congress moves forward with a 70/30 rule, or other 
percentage split, we recommend making the proposal a safe harbor 
option. For example, the proposal must make clear that the existence 
and the amount of the safe harbor is not a maximum amount permitted but 
that the reasonable compensation standard utilized for corporations 
will remain available to taxpayers. These rules will provide a uniform 
treatment among closely held business entity types. Appropriate 
recordkeeping, when the safe harbor option is not used, would also 
address the enforcement challenges currently faced by the IRS.
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    \7\ H.R. 1 (113th Congress), The Tax Reform Act of 2014, Section 
1502; also see Section-by-Section Summary, pages 32-33.
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4. Interest Expense Deduction

Another important issue for small businesses, as well as professional 
service firms, is the ability to deduct their interest expense. New 
business owners incur interest on small business loans to fund 
operations prior to revenue generation, working capital needs, 
equipment acquisition and expansion, and to build credit for future 
loans. These businesses rely on financing to survive. Equity financing 
for many start-up businesses is simply not available. A limitation in 
the deduction for interest expense (such as to the extent of interest 
income) would effectively eliminate the benefit of a valid business 
expense for many small businesses, as well as many professional service 
firms. If a limit on the interest expense deduction is paired with a 
proposal to allow for an immediate write-off of acquired depreciable 
property, it is important to recognize that this combination adversely 
affects service providers and small businesses while offering larger 
manufacturers, retailers, and other asset-intensive businesses a 
greater tax benefit.

Currently, small businesses can expense up to $510,000 of acquisitions 
per year under section 179 and deduct all associated interest expense. 
One tax reform proposal \8\ under consideration would eliminate the 
benefit of interest expense while allowing immediate expensing of the 
full cost of new equipment in the first year. However, since small 
businesses do not usually purchase large amounts of new assets, this 
proposal would generally not provide any new benefit for smaller 
businesses (relative to what is currently available via the section 179 
expensing rule). Instead, it only takes away an important deduction for 
many businesses who are forced to rely on debt financing to cover their 
operating and expansion costs.
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    \8\ House Republican's Tax Reform Task Force Blueprint, ``A Better 
Way: Our Vision for a Confident America,'' June 24, 2016.

We suggest allowing small (and perhaps ``mid-size'') businesses to 
continue to deduct net interest expense. Given the reliance on this 
deduction and the importance to the economy, we would also suggest 
allowing all businesses (except for the large manufacturers, retailers 
and other asset intensive businesses which will benefit the most from 
the immediate expensing of all equipment) to continue to deduct net 
investment interest.

5. Definition of ``Compensation''

Tax reform discussions have considered whether the tax system should 
use the same definition for taxable compensation of employees as it 
does for the compensation that employers may deduct.

We are concerned, particularly from a small business perspective, about 
any decrease of an employer's ability to deduct compensation paid to 
employees, whether in the form of wages or fringe benefits (health and 
life insurance, disability benefits, deferred compensation, etc.). We 
are similarly concerned about expansion of the definition of taxable 
income for the employees, or removal of the exclusion for fringe 
benefits. Such changes in the Tax Code would substantially impact the 
small and labor-intensive businesses' ability to build and retain a 
competitive workforce.

6. Mobile Workforce

The AICPA supports the Mobile Workforce State Income Tax Simplification 
Act of 2017, S. 540, which provides a uniform national standard for 
non-resident state income tax withholding and a de minimis exemption 
from the multi-state assessment of state non-resident income tax.\9\
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    \9\ For additional details, see AICPA written statement, AICPA 
statement for the record of the April 13, 2016 hearing on ``Keep it 
Simple: Small Business Tax Simplification and Reform, Main Street 
Speaks,'' April 7, 2016.

The current situation of having to withhold and file many state 
nonresident tax returns for just a few days of work in various states 
is too complicated for both small businesses and their employees. 
Businesses, including small and family businesses that operate 
interstate, are subject to a multitude of burdensome, unnecessary and 
often bewildering non-resident state income tax withholding rules. 
These businesses struggle to understand and keep up with the variations 
from state to state. The issue of employer tracking and complying with 
all the different state and local tax laws is quite complicated and 
costly. The documentation takes a lot of time, not to mention the loss 
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in economic productivity for small businesses.

S. 540 would provide long-overdue relief from the current web of 
inconsistent state income tax and withholding rules on nonresident 
employees. Therefore, we urge Congress to pass S. 540 that provides 
national uniform rules and a reasonable 30 day de minimis threshold 
before income tax withholding is required.

7. Retirement Plans

Small businesses are burdened by the overwhelming number of rules 
inherent in adopting and operating a qualified retirement plan. 
Currently, there are four employee contributory deferral plans: 401(k), 
403(b), 457(b), and Savings Incentive Match Plan for Employees (SIMPLE) 
plans. Having four variations of the same plan type causes confusion 
for many plan participants and small businesses. A suggested approach 
is to eliminate SIMPLE Individual Retirement Accounts (IRAs) and amend 
the rules of Simplified Employee Pensions (SEPs) to allow for salary 
reduction contributions, as previously permitted. In addition, Congress 
could eliminate the SIMPLE 401(k) plan because while the fees are 
similar to that of a 401(k) plan, the 401(k) is more flexible.

We also propose eliminating the top-heavy rules because they constrain 
the adoption of 401(k) plans and other qualified retirement plans by 
small employers. Since the top-heavy rules were enacted in 1982, there 
have been a number of statutory changes which have made the need for 
separate top-heavy rules unnecessary. The existing discrimination rules 
for retirement plans ensure that non-highly compensated employees 
receive nondiscriminatory benefits, such that the top-heavy rules often 
do not increase benefits in a meaningful way. In addition, the annual 
contribution limitations ensure that no employee's benefits are 
excessive.

8. Civil Tax Penalties

Congress should carefully draft penalty provisions and the 
Administration should fairly administer the penalties to ensure they 
deter bad conduct without deterring good conduct or punishing innocent 
taxpayers (i.e., unintentional errors, such as those who committed the 
inappropriate act without intent to commit such act). Targeted, 
proportionate penalties that clearly articulate standards of behavior 
and are administered in an even-handed and reasonable manner encourage 
voluntary compliance with the tax laws. On the other hand, overbroad, 
vaguely-defined, and disproportionate penalties create an atmosphere of 
arbitrariness and unfairness that can discourage voluntary compliance.

The AICPA has concerns about the current state of civil tax penalties 
and offers areas \10\ for improvement, including the following key 
issues:
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    \10\ See AICPA white paper, ``AICPA Tax Penalties Legislative 
Proposals,'' April 2013; and the ``AICPA Report on Civil Tax 
Penalties,'' April 2013.
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Trend Toward Strict Liability
The IRS discretion to waive and abate penalties where the taxpayer 
demonstrates reasonable cause and good faith is needed most when the 
tax laws are complex and the potential sanction is harsh. Legislation 
should avoid mandating strict liability penalties. Over the past 
several decades, the number of increasingly severe civil tax penalties 
have grown, with the Tax Code currently containing eight strict 
liability penalty provisions (for example, the accuracy penalty on non-
disclosed reportable transactions).\11\
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    \11\ Sections 6662A, 6664(d).
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An Erosion of Basic Procedural Due Process
Taxpayers should know their rights to contest penalties and have a 
timely and meaningful opportunity to voice their feedback before 
assessment of the penalty. In general, this process would include the 
right to an independent review by the IRS Appeals office or the IRS's 
FastTrack appeals process, as well as access to the courts. Pre-
assessment rights are particularly important where the underlying tax 
provision or penalty standards are complex, the amount of the penalty 
is high, or fact-specific defenses such as reasonable cause are 
available.
9100 Relief
Section 9100 relief, which is currently available with regard to some 
elections, is extremely valuable for taxpayers who inadvertently miss 
the opportunity to make certain tax elections. Congress should make 
section 9100 relief available for all tax elections, whether prescribed 
by regulation or statute. The AICPA has compiled a list \12\ of 
elections (not all-inclusive) for which section 9100 relief currently 
is not granted by the IRS as the deadline for claiming such elections 
is set by statute. Examples of these provisions include section 
174(b)(2), the election to amortize certain research and experimental 
expenditures, and section 280C(c), the election to claim a reduced 
credit for research activities.
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    \12\ AICPA letter, ``Tax Reform Administrative Relief for Various 
Statutory Elections,'' January 23, 2015.
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9. IRS Taxpayer Services

Whether addressed within or outside of tax reform, we urge Congress to 
address IRS taxpayer services, and recommend that any effort to 
modernize the IRS and its technology infrastructure should build on the 
foundation established by the Report of the National Commission on 
Restructuring the IRS (``Restructuring Commission'').

As tax professionals, we represent one of the IRS's most significant 
stakeholder groups.\13\ As such, we are both poised and committed to 
being part of the solution for improving IRS taxpayer services. In 
March, we submitted a letter \14\ to House Ways and Means Committee and 
Senate Finance Committee members in collaboration with other 
professional organizations. Our recommendations include modernizing IRS 
business practices and technology, re-establishing the annual joint 
hearing review, and enabling the IRS to utilize the full range of 
available authorities to hire and compensate qualified and experienced 
professionals from the private sector to meet its mission. The 
legislative and executive branches should work together to determine 
the appropriate level of service and compliance they want the IRS 
accountable for and then dedicate appropriate resources for the Service 
to meet those goals.
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    \13\ Sixty percent of all e-filed returns in 2016 were prepared by 
a tax professional, according to the Filing Season Statistic for Week 
Ending December 2, 2016.
    \14\ AICPA letter, ``Ensuring a Modern-Functioning IRS for the 21st 
Century,'' April 3, 2017.

To enable the IRS to achieve the improvements required for a 21st-
century tax administration system, the IRS needs a modern technological 
infrastructure. Currently, the IRS has two of the oldest information 
systems in the federal government making the information technology 
functions one of the biggest constraints overall for the IRS.\15\ 
Without modem infrastructure, the IRS is unable to timely and 
efficiently meet the needs of taxpayers and practitioners.
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    \15\ National Taxpayer Advocate, Annual Report to Congress 2016. 
Executive Summary: Preface, Special Focus and Highlights, 2016, pp. 31-
32. The report references a 2016 GAO report (GAO-16-468) which found 
that some of technology the IRS currently uses was placed in service 56 
years ago.

Additionally, we recommend the IRS create a new dedicated practitioner 
services unit to rationalize, enhance, and centrally manage the many 
current, disparate practitioner-impacting programs, processes, and 
tools. Enhancing the relationship between the IRS and practitioners 
would benefit both the IRS and the millions of taxpayers, including 
small businesses, served by the practitioner community. As part of this 
new unit, the IRS should provide practitioners with an online tax 
professional account with access to all of their clients' information. 
The IRS should also offer robust practitioner priority hotlines with 
higher-skilled employees that have the experience and training to 
address complex issues. Furthermore, the IRS should assign customer 
service representatives (a single point of contact) to geographic areas 
in order to address challenging issues that practitioners could not 
resolve through a priority hotline.

10. IRS Deadlines Related to Disasters

Similar to IRS's authority to postpone certain deadlines in the event 
of a presidentially declared disaster, Congress should extend that 
limited authority to state-declared disasters and states of emergency. 
Currently, the IRS's authority to grant deadline extensions, outlined 
in section 7508A, is limited to taxpayers affected by federal-declared 
disasters. State governors will issue official disaster declarations 
promptly but often, presidential disaster declarations in those same 
regions are not declared for days, or sometimes weeks after the state 
declaration. This process delays the IRS's ability to provide federal 
tax relief to impacted businesses and disaster victims. Taxpayers have 
the ability to request waivers of penalties on a case-by-case basis; 
however, this process causes the taxpayer, tax preparer, and the IRS to 
expend valuable time, effort, and resources which are already in 
shortage during times of a disaster. Granting the IRS specific 
authority to quickly postpone certain deadlines in response to state-
declared disasters allows the IRS to offer victims the certainty they 
need as soon as possible.

The AICPA has long supported a set of permanent disaster relief tax 
provisions \16\ and we acknowledge both Congress's and the IRS's 
willingness to help disaster victims. To provide more timely 
assistance, however, we recommend that Congress allow the IRS to 
postpone certain deadlines in response to state-declared disasters or 
states of emergency.
---------------------------------------------------------------------------
    \16\ AICPA letter, ``Request for Permanent Tax Provisions Related 
to Disaster Relief,'' November 22, 2013.
---------------------------------------------------------------------------

11. Emerging Issues

Online crowdfunding and the sharing economy are quickly expanding 
mediums through which individuals obtain funds, seek new sources of 
income, and start and grow businesses. Individuals may understand the 
steps through which they can use these new crowdfunding and sharing 
economy opportunities to their advantage. However, many small 
businesses do not have the guidance necessary to accurately comply with 
the complex, out-of-date, or incomplete tax rules in these emerging 
areas.

Lawmakers and tax administrators must regularly review existing laws, 
against new changes in the ways of living and doing business, to 
determine whether tax rules and administration procedures need 
modification and modernization. We urge Congress and the IRS to develop 
simplified tax rules and related guidance in the emerging sharing 
economy and crowdfunding areas.\17\ Some of the areas in need of 
modernization include information reporting (such as to avoid reporting 
excluded income, such as a gift as income), simplicity in reporting and 
tracking rental losses from year to year, and simplified approaches for 
recordkeeping for small businesses. Offering clarity on these issues 
will allow taxpayers to follow a fair and transparent set of guidelines 
while the IRS benefits from a more efficient voluntary tax system.
---------------------------------------------------------------------------
    \17\ AICPA written statement, ``The 2017 Filing Season: IRS 
Operations and the Taxpayer Experience,'' April 6, 2017.
---------------------------------------------------------------------------

CONCLUDING REMARKS

As Congress tackles the complex issues inherent in drafting tax 
legislation, we encourage you to consider tax reform that will provide 
simplicity, certainty and clarity for taxpayers. The AICPA has 
consistently supported tax reform simplification efforts because we are 
convinced such actions will reduce taxpayers' compliance costs and 
encourage voluntary compliance through an understanding of the rules. 
The AICPA appreciates the opportunity to submit this written testimony 
and we look forward to working with the Committee as you continue to 
address comprehensive tax reform.

                                 ______
                                 
                       Biomass Power Association

                  601 New Jersey Avenue, NW, Suite 660

                          Washington, DC 20001

July 17, 2017

Senate Committee on Finance
Dirksen Senate Office Building
Washington, DC 20510-6200

Re: July 18, 2017 Senate Finance Committee hearing on ``Comprehensive 
Tax Reform: Prospects and Challenges''

Chairman Hatch, Ranking Member Wyden, and members of the committee:

The Biomass Power Association provides the following joint statement 
for the record on how federal tax policy impacts the growth 
opportunities and project deployment in our sectors.

We recently submitted comments to you as part of a larger group of 
renewable baseload power sources, including hydropower, waste-to-energy 
and biogas. Like many of our baseload renewable energy colleagues, the 
biomass power industry is struggling in the marketplace for new 
electricity generation as a result of being placed at a significant 
competitive economic disadvantage vis-a-vis wind and solar electricity 
by the long-term tax credit extensions provided to those technologies 
in 2015, while incentives for our industries were allowed to expire at 
the end of 2016.

We represent standalone power facilities that use as fuel primarily 
organic residues and byproducts. Our 40 members operate in 21 states, 
typically where there is a thriving forestry or agriculture industry 
nearby. Biomass power facilities in the United States purchase 
``leftovers'' like forestry residues; orchard and other agricultural 
prunings; hulls from rice, nut and oat production; construction and 
demolition waste; and unusable wood from sawmills. The fuels used by 
our domestic industry usually have no higher value. If left unused by 
biomass power facilities, these fuels would be left on the forest 
floor, sent to a landfill, or openly burned for disposal.

As we stated in our previous letter to you, baseload renewables 
including biomass should be at the forefront of discussions on low-
cost, clean energy development. The fuels used by biomass power 
facilities typically come from within a 50-75 mile radius, rather than 
being imported from elsewhere, supporting the local economy. In the 
area where a biomass facility is located alongside other wood products 
manufacturers, loggers have an additional outlet for materials they 
harvest. Biomass fuel can account for up to 30% of a logger's revenue--
a significant amount that has helped keep some loggers in business 
despite the decline of paper mills.

Biomass is also an important resource for forest management. We work 
closely with the U.S. Forest Service to develop and support wood 
markets to make use of low value wood materials. With millions of dead 
and dying trees in the West--more than 100 million in the state of 
California alone--biomass is sorely needed to take on the materials the 
federal and state governments clear from the land for forest fire 
prevention.

In the absence of a national energy policy, tax incentives can be an 
important tool to ensure that the right mix of energy sources is 
deployed and supported across the country. The tax system can help 
promote energy diversity, reduce carbon emissions, eliminate wastes, 
and, in the case of biomass, they promote healthy forests. Biomass is 
one of the few renewable energy sources whose fuel must be purchased. 
Many of its benefits would not be realized without the same federal 
incentives that are available to other energy technologies. Further, 
many of our members have been unable to take advantage of Section 45 
tax credits given the time it takes to build a biomass facility can be 
years longer than the typical one-to-two year extension of the credit. 
For these reasons, we believe that renewable energy tax incentives 
should continue to play a key role in promoting a diversified mix of 
renewable energy resources.

Incentives for renewable energy sources have been skewed toward wind 
and solar over the past decade. Low market prices for natural gas and 
wind, and a history of federal and state support that has tilted away 
from biomass have resulted in a challenging market for our members. In 
many areas, biomass facilities are struggling to compete or are even 
facing closures.

Biomass can help meet the challenges facing the grid with retiring 
conventional generation as well as increasing amounts of intermittent 
generation. Our sector is undeniably carbon friendly; we issued a study 
in May 2017 demonstrating that emissions from a biomass power facility 
are 115% lower than those of a similar-sized natural gas facility.

We would very much welcome the opportunity to work with the Senate 
Finance Committee to develop tax policies that will spur growth so that 
the biomass industry's environmental and economic benefits are fully 
realized. We would be honored to work with your staff to develop 
policies that will support a long-term, sustainable domestic biomass 
power sector.

Sincerely,

Carrie Annand
Executive Director

                                 ______
                                 


Biomass Power Association           Energy Recovery Council
American Biogas Council             National Hydropower Association

July 17, 2017

Senate Committee on Finance
Dirksen Senate Office Building
Washington, DC 20510-6200

Re: July 18, 2017 Senate Finance Committee hearing on ``Comprehensive 
Tax Reform: Prospects and Challenges''

Chairman Hatch, Ranking Member Wyden, and members of the committee:

The associations representing baseload renewable industries \1\ provide 
the following joint statement for the record on how federal tax policy 
impacts the growth opportunities and project deployment in our sectors.
---------------------------------------------------------------------------
    \1\  American Biomass Council, 1211 Connecticut Avenue, NW, Suite 
650, Washington, DC 20036; Biomass Power Association, 601 New Jersey 
Avenue, NW, Suite 660, Washington, DC 20001; Energy Recovery Council, 
2200 Wilson Boulevard, Suite 310, Arlington, VA 22201; and National 
Hydropower Association, 601 New Jersey Avenue, NW, Suite 660, 
Washington, DC 20001.

All of our industries are struggling in the marketplace for new 
electricity generation as a result of being placed at a significant 
competitive economic disadvantage vis-a-vis wind and solar electricity 
by the long-term tax credit extensions provided to those technologies 
in 2015, while incentives for our industries were allowed to expire at 
---------------------------------------------------------------------------
the end of 2016.

As the Congress works to modernize and reform the tax code, we ask that 
you provide parity among renewable electricity technologies by giving 
baseload electricity generation technologies long-term extensions 
equivalent to those provided to the solar industry. The uncertainty 
that exists today is depressing investment in our industries and is 
negatively impacting our members' ability to adequately plan and 
implement their development objectives.

The production and use of firm, reliable baseload power from renewable 
energy is consistent with sound energy and environmental policy. Power 
from hydropower; biomass; biogas and waste-to-energy facilities is 
critical to the stability of the nation's electric grid, creates high-
paying jobs, and helps the country meet its environmental and energy 
policy objectives.

Hydropower. Hydropower is the nation's single largest producer of 
renewable electricity and pumped storage' projects provide 97 percent 
of America's energy storage capacity. As reported in the 2016 
Department of Energy Hydropower Vision Report. 50 GW of growth is 
possible across the sector. Project opportunities include: adding 
generation to non-powered dams; capacity additions and efficiency 
improvements at existing hydropower facilities; new pumped storage; 
conduit projects; as well as yet untapped marine energy and 
hydrokinetic projects.

In addition to the renewable generation hydropower itself provides to 
our grid, it plays an indispensable role in grid reliability and in the 
integration of intermittent generation. Hydro provides many ancillary 
grid services, such as peaking generation, load-following, voltage and 
frequency control, and more. Along with these critical services, 
hydropower projects provide many other societal benefits such as flood 
control, drought mitigation, water supply, irrigation, navigation, and 
recreation.

Biomass. Biomass power offers significant environmental and consumer 
benefits, including improving forest health, protecting air quality, 
and offering the most dependable renewable energy source. Biomass power 
facilities in the United States purchase as fuel organic ``leftovers'' 
like forestry residues; orchard and other agricultural prunings; hulls 
from rice, nut and oat production; construction and demolition waste; 
and unusable wood from sawmills. The fuels used by our domestic 
industry usually have no higher value and come from within a 50-75 mile 
radius of a biomass power facility, rather than being imported from 
elsewhere. The biomass power industry removes over 68.8 million tons of 
forest debris annually, improving forest health and dramatically 
reducing the risk of forest fires. In addition, the biomass industry 
diverts millions of tons of waste material from landfills and open 
burns.

The existence of a biomass facility in an area also greatly enhances 
its local forest products market. In the areas where a biomass facility 
is located alongside other wood products manufacturers, loggers have an 
additional outlet for materials they harvest. Biomass fuel can account 
for up to 30% of a logger's revenue--a significant amount that has 
helped keep some loggers in business despite the decline of paper 
mills.

Waste-to-Energy. There are 76 waste-to-energy (WTE) facilities located 
in 21 states, with a total economic impact of $5.6 billion and 14,000 
direct jobs. These facilities have a nameplate electric capacity of 
2,554 megawatts and generate more than 14.3 billion kilowatt hours of 
locally generated renewable energy annually. Working in public private 
partnerships with local government to provide management of their 
waste, this infrastructure significantly reduces the release of 
greenhouse gas emissions to the atmosphere, helping local governments 
and industries meet their individual sustainability goals.

Despite a levelized cost of electricity that is on par with wind and 
solar, WTE deployment has been nominal while wind and solar have seen 
robust growth. This is due in large part to the fact that wind and 
solar projects have been able to access and readily utilize federal 
renewable energy tax incentives and WTE technology, because of longer 
construction times, has not. Tax reform should address this disparity 
and provide WTE technology with the same treatment that is afforded 
solar technology under current law.

Biagas. The U.S. currently has over 2,200 operational biogas systems in 
the United States. A recent study released by USDA, EPA and DOE found 
an additional 13,500 new sites that are ripe for development. If fully 
realized, these new biogas systems could supply 7.5 million homes with 
renewable baseload power and drive $40 billion in capital development 
in construction activity which would result in approximately 335,000 
short term construction jobs and 23,000 permanent jobs to operate the 
digesters. In economic comparison to variable renewable technologies, 
it takes six times as much solar capacity to achieve the same amount of 
energy produced from anaerobic digestion. Were biogas to receive the 
same tax advantages as wind or solar by receiving a long term stable 
tax credit, these systems could be deployed throughout the country to 
provide cost effective baseload renewable energy.

To reap the significant energy security, environmental and economic 
benefits associated with the production and use of baseload renewable 
energy, we respectfully urge you to put an end to the ``winners and 
losers'' dynamic in energy tax policy and enact even-handed, durable 
extensions of tax incentives for our industries.

Thank you in advance for your consideration. We look forward to working 
constructively with you to achieve this worthwhile policy outcome, 
which is critical if our national goal is to support an all-of-the 
above energy portfolio.

Sincerely,

Robert E. Cleaves, IV               Ted Michaels
President and CEO                   President
Biomass Power Association           Energy Recovery Council

Patrick Serfass                     Linda Church Ciocci
Executive Director                  Executive Director
American Biogas Council             National Hydropower Association

                                 ______
                                 
                        Center for Fiscal Equity

                         By Michael G. Bindner

Chairman Hatch and Ranking Member Wyden, thank you for the opportunity 
to submit these comments for the record to the Committee on Finance. As 
usual, we will preface our comments with our comprehensive four-part 
approach, which will provide context for our comments.

      A Value-Added Tax (VAT) to fund domestic military spending and 
domestic discretionary spending with a rate between 10% and 13%, which 
makes sure very American pays something.
      Personal income surtaxes on joint and widowed filers with net 
annual incomes of $100,000 and single filers earning $50,000 per year 
to fund net interest payments, debt retirement, and overseas and 
strategic military spending and other international spending, with 
graduated rates between 5% and 25%.
      Employee contributions to Old Age and Survivors Insurance (OASI) 
with a lower income cap, which allows for lower payment levels to 
wealthier retirees without making bend points more progressive.
      A VAT-like Net Business Receipts Tax (NBRT), which is 
essentially a subtraction VAT with additional tax expenditures for 
family support, health care and the private delivery of governmental 
services, to fund entitlement spending and replace income tax filing 
for most people (including people who file without paying), the 
corporate income tax, business tax filing through individual income 
taxes and the employer contribution to OASI, all payroll taxes for 
hospital insurance, disability insurance, unemployment insurance and 
survivors under age 60.

First, allow us to address the current state of tax reform and the 
comments in the press release announcing this hearing and the recent 
remarks by the President about priming the pump. We will then identify 
how our four-part approach meets the goal of this hearing to create 
economic growth and more jobs. The latter should be familiar to those 
who read our comments submitted to the tax reform hearing of one year 
ago.

What the Center said in June of last year in response to the release of 
the Blueprint bears repeating. We have tried the reduce rates and 
broaden the base. In 1986, it actually happened, although second 
mortgage interest was left deductible, leading quickly to the savings 
and loan crisis and eventually the 2008 Great Recession, abetted by 
capital gains cuts which gave us the tech bubble. Efforts to call tax 
cuts a prelude to growth ring hollow and even those economists who 
backed them no longer support such theory.

In The Economist, President Trump and Secretary Mnuchin cast doubt on 
their support for the DBCFT, instead preferring to simply cut rates for 
pump priming. This would mainly benefit the wealthy, which is ill-
advised.

Lower marginal tax rates for the wealthiest taxpayers lead them to 
demand lower labor costs. The benefit went to investors and CEOs 
because the government wasn't taxing away these labor savings. In prior 
times, we had labor peace, probably to the extent of causing inflation, 
because CEOs got nothing back for their efforts to cut costs.

The tax reforms detailed here will make the nation truly competitive 
internationally while creating economic growth domestically, not by 
making job creators richer but families better off. The Center's reform 
plan will give you job creation. The current blueprint and the 
President's proposed tax cuts for the wealthy will not.

In September 2011, the Center submitted comments on Economic Models 
Available to the Joint Committee on Taxation for Analyzing Tax Reform 
Proposals. Our findings, which were presented to the JCT and the 
Congressional Budget Office (as well as the Wharton School and the Tax 
Policy Center), showed that when taxes are cut, especially on the 
wealthy, only deficit spending will lead to economic growth as we 
borrow the money we should have taxed. When taxes on the wealthy are 
increased, spending is also usually cut and growth still results. The 
study is available at http://fiscalequity.blogspot.com/2011/09/
economic-models-available-to-joint.html and it is likely in use by the 
CBO and JTC in scoring tax and budget proposals. We know this because 
their forecasts and ours on the last Obama budget matched. Advocates 
for dynamic scoring should be careful what they wish for.

The national debt is possible because of progressive income taxation. 
The liability for repayment, therefore, is a function of that tax. The 
Gross Debt (we have to pay back trust funds too) is $19 trillion. 
Income Tax revenue is roughly $1.8 trillion per year. That means that 
for every dollar you pay in taxes, you owe $10.55 in debt. People who 
pay nothing owe nothing. People who pay tens of thousands of dollars a 
year owe hundreds of thousands. The answer is not making the poor pay 
more or giving them less benefits, either only slows the economy. Rich 
people must pay more and do it faster. My child is becoming a social 
worker, although she was going to be an artist. Don't look to her to 
pay off the debt. Trump's children and grandchildren are the ones on 
the hook unless their parents step up and pay more. How's that for 
incentive?

The proposed Destination-Based Cash Flow Tax is a compromise between 
those who hate the idea of a value-added tax and those who seek a 
better deal for workers in trade. It is not a very good idea because it 
does not meet World Trade Organization standards, though a VAT would. 
It would be simpler to adopt a VAT on the international level and it 
would allow an expansion of family support through an expanded child 
tax credit. Many in the majority party oppose a VAT for just that 
reason, yet call themselves pro life, which is true hypocrisy. Indeed, 
a VAT with enhanced family support is the best solution anyone has 
found to grow the economy and increase jobs.

Value-added taxes act as instant economic growth, as they are spur to 
domestic industry and its workers, who will have more money to spend. 
The Net Business Receipts Tax as we propose it includes a child tax 
credit to be paid with income of between $500 and $1,000 per month. 
Such money will undoubtedly be spent by the families who receive it on 
everything from food to housing to consumer electronics.

The high income and inheritance surtax will take money out of the 
savings sector and put it into government spending, which eventually 
works down to the household level. Growth comes when people have money 
and spend it, which causes business to invest. Any corporate investment 
manager will tell you that he would be fired if he proposed an 
expansion or investment without customers willing and able to pay. Tax 
rates are an afterthought.

Our current expansion and the expansion under the Clinton 
Administration show that higher tax rates always spur growth, while tax 
cuts on capital gains lead to toxic investments--almost always in 
housing. Business expansion and job creation will occur with economic 
growth, not because of investment from the outside but from the 
recycling of profits and debt driven by customers rather than the price 
of funds. We won't be fooled again by the saccharin song of the supply 
siders, whose tax cuts have led to debt and economic growth more 
attributable to the theories of Keynes than Stockman.

Simplicity and burden reduction are very well served by switching from 
personal income taxation of the middle class to taxation through a 
value-added tax. For these people, April 15th simply be the day next to 
Emancipation Day for the District. The child tax credit will be 
delivered with wages as an offset to the Net Business Receipts tax 
without families having to file anything, although they will receive 
two statements comparing the amount of credits paid to make sure there 
are no underpayments by employers or overpayments to families who 
received the full credit from two employers.

Small business owners will get the same benefits as corporations by the 
replacement of both pass through taxation on income taxes and the 
corporate income tax with the net business receipts tax. As a result, 
individual income tax filing will be much simpler, with only three 
deductions: sale of stock to a qualified ESOP, charitable contributions 
and municipal bonds--although each will result in higher rates than a 
clean tax bill.

For the Center, the other key motivator is expanding employee-
ownership. We propose to do that by including an NERT deduction, to 
partially reduce income to Social Security, to purchase employer voting 
stock, with each employee receiving the same contribution, regardless 
of salary or wage level. In short order, employees will have the 
leverage to systematically insist on better terms, including forcing 
CEO candidates to bid for their salaries in open auction, with employee 
elections to settle ties.

Employee-ownership will also lead multinational corporations to include 
overseas subsidiaries in their ownership structure, while assuring that 
overseas and domestic workers have the same standard of living. This 
will lead to both the right type of international economic development 
and eventually more multinationalism.

Simultaneously, the high income and inheritance surtax will be 
dedicated to funding overseas military and naval sea deployments, net 
interest payments (rather than rolling them over), refunding the Social 
Security Trust Fund and paying down the debt.

Both employee-ownership with CEO pay reduction and paying off the debt 
will lead to two things--less pressure to deploy U.S. forces overseas 
and sunset of the income tax.

Military spending both overseas and domestic will decline under this 
plan. The VAT will make domestic military spending less attractive and 
overseas spending on deployments will be fought by income taxpayers, 
who are currently profiteering from such expenses. Instead, defense 
spending can shift to space exploration, which also increases invention 
and economic growth while keeping the defense industrial complex 
healthy, although now they can pursue profitable enterprises rather 
than lethality.

In short, our plan promises both peace and prosperity, not for the few 
but for the many. Prosperity bubbles up. It has never flowed down and 
tax reform should reflect that.

Thank you for the opportunity to address the committee. We are, of 
course, available for direct testimony or to answer questions by 
members and staff.

                                 ______
                                 
                        Christian Science Church

                             P.O. Box 15726

                          Washington DC 20003

    On behalf of the Christian Science Church (``Church''), we thank 
Chairman Hatch, Ranking Member Wyden, and the esteemed members of the 
Senate Finance Committee for holding the hearing entitled 
``Comprehensive Tax Reform: Prospects and Challenges'' on July 18, 
2017.

    We also thank so many of the Committee members for their bipartisan 
support of the Equitable Access to Care and Health (``EACH'') Act in 
the previous Congress. We deeply appreciate the Committee's leadership 
on tax reform and religious freedom, as embodied in the EACH Act (now 
H.R. 1201)--bipartisan legislation that would provide immediate tax 
relief to individuals and families of faith, including Christian 
Scientists, who have been unfairly subject to significant penalties 
under the Affordable Care Act's (``ACA'') individual mandate. The 
ongoing tax burden imposed on this group of Americans--simply for 
adhering to their religious beliefs and practices--requires Congress' 
urgent attention.

      ACA's Religious Conscience Exemption Does Not Appropriately 
                     Address All Americans of Faith

    Under the ACA, individuals must maintain minimum essential coverage 
or pay a tax penalty, unless an exemption applies. The statute includes 
a narrow religious exemption accessible to individuals who are members 
of recognized religious sects described in section 1402(g)(1) of the 
Internal Revenue Code or health care sharing ministries. The exemption 
provided in section 1402(g)(1) requires members of the religious sect 
to conscientiously oppose the benefits of any private or public 
insurance, including any benefits provided under the Social Security 
Act.

    In its current form, the exemption applies only to the Amish and 
certain Mennonites. It does not cover Christian Scientists, who 
generally participate in Social Security and in insurance programs that 
cover care provided by religious nonmedical providers, such as 
Christian Science practitioners, Christian Science nurses, and 
Christian Science nursing facilities. Several existing federal, state, 
and private employer plans provide coverage for this care, including 
Medicare, TRICARE, and two FEHB plans; however, no plans offered on the 
Exchanges provide this type of coverage.

    The unintended result of the current structure of the ACA's 
religious conscience exemption is that some Americans of faith are 
required to purchase health insurance through the Exchanges that does 
not cover the care that is consistent with their religious practice and 
individual choice, while at the same time having to pay out of pocket 
for the health care they actually use. The only alternative is to pay 
significant annual tax penalties, effectively because of their 
religious beliefs. Many Christian Scientists have found themselves in 
this untenable position since 2014.

         Swift Enactment of the EACH Act Necessary to Preserve 
                    Religious Freedom in Tax Policy

    To end this burdensome infringement of religious freedoms in tax 
policy, we urge you and your colleagues to prioritize enactment of the 
EACH Act this year, whether as a standalone bill or as part of any tax-
related legislation.

    The EACH Act, which has received broad bipartisan, bicameral 
support in the 113th and 114th Congresses, would expand the ACA's 
religious conscience exemption to include Americans who rely ``solely 
on a religious method of healing, and for whom the acceptance of 
medical health services would be inconsistent with the religious 
beliefs of the individual.'' The legislation would also make whole 
those individuals who have been wrongfully subject to penalties under 
the individual mandate since 2014.

         EACH is Necessary, Regardless of Health Reform Result

    Despite ongoing efforts to partially address the individual mandate 
through ACA reform legislation, we respectfully urge the Committee to 
consider the EACH Act without delay, comprehensively addressing the tax 
implications of the individual mandate for Americans of faith, 
including Christian Scientists. Enacting EACH into law would ensure a 
clear, statutory means for exemption from the law's requirements for 
impacted individuals and families. It would also provide appropriate 
retrospective relief and set an important precedent for addressing 
religious conscience in health and tax law going forward.

    We commend the Senate Finance Committee for its continued support 
of the EACH Act, which garnered broad, bipartisan support from 35 
cosponsors in the 114th Congress (S. 352). In light of ongoing efforts 
to reform the ACA and the tax code, the Church strongly urges lawmakers 
to take the long overdue step of enacting the EACH Act. Church members 
and their families urgently need a fair solution that ends the 
abridgement of religious freedoms and ensures full relief from the 
significant tax penalties they are being required to pay.

    Thank you for the opportunity to submit this statement for the 
record. The Church stands ready to work with Congress and the 
Administration to achieve this outcome as soon as possible.

Tessa E.B. Frost
Director of Federal Government Affairs
Federal Office of the Christian Science Committee on Publication
Washington, DC

                                 ______
                                 
                            Church Alliance

August 1, 2017

The Honorable Orrin Hatch           The Honorable Ron Wyden
Chairman                            Ranking Member
U.S. Senate                         U.S. Senate
Committee on Finance                Committee on Finance
219 Dirksen Senate Office Building  219 Dirksen Senate Office Building
Washington, DC 20510-6200           Washington, DC 20510-6200

Dear Chairman Hatch and Ranking Member Wyden:

    The Church Alliance is pleased to submit the following statement 
for the record in response to the Senate Committee on Finance's July 
18, 2017 hearing on ``Comprehensive Tax Reform: Prospects and 
Challenges.'' As you know, churches, synagogues, and other religious 
organizations are at the heart of communities across our nation. Over 
the years, a number of important tax provisions have developed that 
reflect the unique characteristics of these institutions, particularly 
in the areas of health and retirement security. We look forward to 
working with you and your staff to pursue comprehensive tax reform that 
preserves the spirit of these provisions, and helps all Americans save 
and invest for their future.

About the Church Alliance and Church Benefit Plans

    The Church Alliance is a coalition of chief executive officers of 
thirty seven (37) denominational benefit programs, covering mainline 
and evangelical Protestant denominations, two branches of Judaism, and 
Catholic schools and institutions. These benefit programs provide 
retirement and health benefits to more than 1 million clergy (including 
ministers, priests, rabbis, and other spiritual leaders), lay workers, 
and their family members.

    By way of background, denominational benefit plans are typically 
maintained by a separately incorporated church benefit organization 
(often called a pension board or benefit board) designated as the 
entity that sponsors or administers and maintains the benefit programs 
for eligible employees within the denomination. These benefit plans are 
generally multiple-employer in nature and cover thousands of church and 
synagogue employers throughout the country, many of which are located 
in rural communities. These programs often also cover foreign mission 
organizations and their missionaries. Church benefit organizations thus 
typically provide retirement and welfare benefits to thousands (or, in 
the case of the larger denominations, tens of thousands) of clergy and 
lay workers at multiple locations. Having a centralized program 
sponsored by one organization serving multiple church employers helps 
ensure continuity and consistency of employee benefits for the many 
clergy who move from one church or church-related organization to 
another to fulfill the ministry of a denomination.

    The participating employers covered under these church benefit 
plans range from synagogues and churches to church-affiliated schools, 
day cares, and nursing homes. Many are small, local churches with few 
employees. Oftentimes, the local church's pastor may be that church's 
only employee. If there are other employees, they are often part-time 
workers who assist with secretarial or bookkeeping duties or perhaps 
provide for building maintenance. In addition, many small local 
churches are staffed by bi-vocational pastors (clergy who work for a 
secular employer part-time or full-time and pastor a church or churches 
on the side). Denominational plans also provide benefits to self-
employed clergy.

    In addition to serving local churches and synagogues, 
denominational benefit plans cover other church-related organizations 
that historically have been viewed by denominations as an extension of 
the ministry and are considered to be within the bounds of the 
particular denomination with which they are affiliated. For example, 
participating employers can include church-related nursing homes, 
daycare centers, summer camps, preschools, colleges, universities, 
hospitals, and other social service organizations. All of these 
organizations typically are considered as fulfilling the ministry and 
mission of the church.

    Local churches are typically run by volunteer trustees, vestries, 
boards of directors, boards of deacons, boards of elders, parish 
councils, or the like. The individuals who hold these volunteer 
leadership roles are focused on fulfillment of their church's ministry 
and have the burden of allocating both human and monetary resources to 
direct ministry, which leaves them with little time to focus on 
employee benefit compliance issues. In the case of small to medium 
sized churches and synagogues, these individuals may, and usually do, 
lack the expertise required to understand the various employee benefit 
legal requirements that must be met. Except in the largest churches, 
the typical church budget does not support the hiring of outside 
experts required to assist the local church with employee benefits 
compliance. As a result, absent the availability of the programs 
provided through church benefit organizations and church associations, 
many of these employers would be unable to provide adequate retirement 
or welfare benefits to their employees.

    The benefits provided by church benefit organizations or church 
associations may be mandated by the denominational polity (the 
operational and governance structure of a denomination). Over the 
years, church denominations have organized themselves in a variety of 
ways reflecting their own theological beliefs. Some denominations are 
organized in a ``hierarchical'' polity, in which a ``parent'' church 
organization sets the policy for the entire denomination. Other 
denominations have organized themselves in a diocesan, synodical or 
Presbyterian structure under which policy-making is carried out on a 
local or regional level, through representatives drawn from the various 
churches within the geographic area served by a particular level of 
governance. Several other denominations, composed of autonomous 
churches and synagogues, or conventions or associations of churches, 
cooperate in a ``congregational'' form of governance in which churches 
and church ministry organizations are associated by voluntary and 
cooperative participation.

    It is these diverse sets of church polities, and the differing 
levels of control exercised over churches and church ministry 
organizations under a particular polity, that present difficulties with 
employee benefit requirements of the tax code, ERISA, and other laws, 
most of which were designed with a for-profit, corporate structure in 
mind. Together with the Constitutional proscription against excessive 
government entanglement with religion, these considerations have led to 
the development of a legal framework for church plans that reflects 
their unique characteristics.

Priorities for Tax Reform

    Central to this legal framework are several longstanding provisions 
of the tax code that have been carefully tailored to the needs of 
churches and church ministry organizations. Retaining and strengthening 
these provisions is critical to the retirement security of modestly-
paid clergy and others who have devoted their lives to ministry. In 
addition, a comprehensive federal framework is important to promote 
clarity and consistency for church plans nationwide. As you move 
forward with tax reform, we urge your attention to the following 
issues.
Clarification for Sec. 403(b)(9) Plans
    Clarification of the rules governing church retirement plans is 
urgently needed to reaffirm current law dating to 1980, and more than 
30 years of administrative practice to ensure that all church-
affiliated organizations can participate in a church Sec. 403(b)(9) 
plan. Throughout their history, the advantages of church retirement 
plans have been open to church clergy and lay workers serving 
individual churches, as well those of affiliated organizations that 
advance the mission of the denomination, such as children's homes, 
daycare centers, summer camps, nursing homes, retirement centers, 
preschools, colleges and universities, and other religious nonprofit 
entities.

    The broad availability of these plans is now under threat by a 
recent IRS and Treasury position that departs from longstanding 
precedent to restrict the retirement plan options available to 
employees of certain religiously-affiliated organizations. Under this 
interpretation, employees of these organizations will no longer be able 
to participate in Sec. 403(b)(9) plans. This has significant drawbacks 
for church retirement plans, but most importantly, for the 
beneficiaries they serve.

    The IRS and Treasury interpretation could mean that clergy and 
church lay workers lose access to important Sec. 403(b)(9) features, 
such as access to socially screened investment options that reflect a 
particular denomination's faith and beliefs, as well as to 
annuitization choices that can be provided directly by the church 
benefit program. Moreover, this approach would inevitably lead to 
higher costs with fewer Sec. 403(b)(9) plan participants over which to 
spread plan expenses.

    Recognizing these implications, bipartisan, broadly supported 
legislation has been introduced in the House and Senate (H.R. 2341/S. 
674) to clarify the appropriate and intended broad availability of 
Sec. 403(b)(9) plans. We strongly urge enactment at the earliest 
possible opportunity, either independently or as part of tax reform. 
Urgent resolution of this issue is critical to the retirement security 
of clergy and church lay workers across the nation.
Parsonage Allowance
    For nearly 100 years, exclusion from taxation of church-provided 
housing to clergy has reflected the long-held belief that a clergy 
member's home is an extension of the church. In addition, the parsonage 
allowance under Sec. 107 has been important in helping modestly paid 
clergy and retired clergy afford housing and move, sometimes 
frequently, to serve the needs of the church. This is particularly true 
in rural areas where many congregations are small, pay is low, and 
clergy are very dependent upon their churches providing or paying for 
their housing. This important tax policy is subject to commonsense 
limitations on the rental value of the home subject to the allowance, 
and applies to just a single property.

    Moreover, the parsonage allowance must be viewed m the context of 
Sec. 119, which excludes secular employer-supplied housing from 
employees' income under certain circumstances (e.g., an on-site hotel 
manager's housing). However, as applied to clergy, some Sec. 119 
criteria would produce unequal results between denominations that have 
different theological and polity based practices relating to clergy and 
housing. Sec. 107 allows clergy of all faiths to share equally in this 
important tax policy.

    Given the continuing need for the parsonage allowance, we strongly 
urge its preservation as part of tax reform.
Retirement Plan Streamlining/Consolidation
    As described above, church retirement plans have evolved, in some 
cases over hundreds of years, to reflect the unique characteristics of 
the denominations and populations they serve. The benefits provided by 
church plans are often mandated by the denominational polity (the 
operational and governance structure of a denomination), and are 
tailored to meet the needs of clergy and church lay workers who are 
often modestly paid. Over time, laws have been developed to work with a 
variety of diverse denominational structures, and to allow employees of 
religiously-affiliated institutions to have a meaningful opportunity to 
save for retirement in a manner that comports with their faith.

    In this context, proposals to streamline or consolidate the various 
retirement plan options under the tax code (401(a), 403(b), 401(k), 
457(b), etc.) threaten to eliminate provisions that church plans have 
come to rely upon in providing a secure, stable retirement for their 
beneficiaries. We caution against any streamlining or consolidation 
proposal that would undermine these provisions, which would also create 
severe compliance challenges (in some cases making the plans untenable) 
and burdensome transition costs for church plans and church affiliated 
organizations. Specifically, we urge your preservation of the following 
provisions that are instrumental to the retirement security of often 
modestly paid clergy and lay workers:

      Different nondiscrimination testing rules. 403(b) plans 
maintained by churches and qualified church-controlled organizations 
are exempt from nondiscrimination rules, based upon Congress's 
recognition of the difficulty that churches run by volunteers would 
have in assuring compliance with complex rules without directing their 
scarce resources away from mission activities; in contrast, plans 
maintained by larger, more sophisticated non-qualified church-
controlled organizations are subject to nondiscrimination testing 
rules. Similarly, in recognition of the difficulty that church plans 
have in satisfying certain nondiscrimination rules due to their unique 
structures, the IRS granted an extension to the effective date of 
certain nondiscrimination regulations as applicable to church 401(a) 
qualified plans. These policies reflect the unique workforce 
characteristics of churches and church-related organizations.

      Exemptions for church 401(a) plans. With respect to defined 
benefit plans, the tax code reflects a number of accommodations to the 
unique structure of religious denominations and the plans they have 
designed to assure retirement security of clergy and church workers 
serving as called throughout their career by their denominations. These 
tax code provisions allow missionaries, self-employed clergy and 
chaplains to participate and exempt church plans from various of the 
qualification requirements applicable to private plans.\1\ These 
exemptions are important because many of the rules that would conflict 
with the design of plans established to meet the needs of these workers 
decades ago or otherwise would be unworkable in the decentralized, 
polity-driven context of a denominational church plan.
---------------------------------------------------------------------------
    \1\  Church 401(a) plans are not subject to numerous plan 
qualification requirements including, qualified joint and survivor 
annuities under Sec. Sec. 401(a)(11) and 417; preservation of accrued 
benefits during a plan merger or transfer of plan assets under 
Sec. Sec. 401(a)(12) and 414(l); anti-
alienation rules of Sec. 401(a)(13); benefit commencement requirements 
of Sec. 401(a)(14); the prohibition on reducing retiree vested benefits 
due to Social Security increases under Code Sec. 401(a)(15); and the 
prohibition on forfeiture of accrued benefits from employer 
contributions due to withdrawal of employee contributions under Code 
Sec. 401(a)(19), if the employee is 50% vested. Church plans are 
subject to the pre-ERISA minimum participation standards, minimum 
vesting standards and minimum funding standards and exempt from the 
anti-cutback requirements of Sec. 411(d)(6). Church plans also have 
relaxed standards for defining a highly compensated employee under Code 
Sec. 414(q)(9) and domestic relations orders under Code Sec. 414(p). 
There are also specialized or relaxed rules pertaining to churches in 
computing the limits on employee contributions under Code 
Sec. Sec. 401(a)(17), 402(g)(7) and 415(c)(7).

      Flexible investment options for church plans. Church plans offer 
broad latitude for denominational benefit organizations (or their 
investment committees, which are typically composed of individuals with 
substantial investment expertise) to offer an array of investment 
alternatives beyond annuity contracts and mutual funds, such as pooled 
investments in stocks, bonds, collective investment funds and other 
prudent options that benefit from lower fees and economies of scale. 
Many church plans also further the missions of their respective 
denominations by incorporating faith-based screens and positive social 
---------------------------------------------------------------------------
purposes in their investment decisions.

      Self-annuitization feature for church 403(b)(9) plans. IRS 
regulations permit sponsors of church defined contribution 403(b)(9) 
plans to ``self-annuitize'' benefits, providing valuable flexibility 
and stability through lifetime retirement income, at a lower cost to 
participants than purchasing annuities from a commercial issuer. 
Churches practice their commitment to care for those that serve the 
church by using these provisions to support these faithful servants and 
their surviving spouses.

      Special annual addition limits for church 403(b) plans. Some 
church employees and missionaries may have little or no taxable income 
due to very low compensation. Consequently, church 403(b) plans provide 
a special annual addition limit of $10,000 per year (subject to a 
lifetime maximum of $40,000), regardless of the beneficiary's taxable 
income. This provides clergy, lay workers, and missionaries with an 
opportunity to create retirement benefits while performing vital church 
mission work, notwithstanding their low taxable income.

      Definition of compensation. The limits on contributions under 
the different types of plans are based in part on a participant's 
compensation. For this purpose, compensation is defined slightly 
differently with respect to 403(b) plans. The differences are 
attributable to special rules that should be retained, such as the 
ability to treat former employees as having compensation for 5 years 
(Sec. 403(b)(3)), and the treatment of clergy (Sec. 414(e)(5)(B)). From 
a policy perspective, there is no reason to harm either clergy or 
former church employees who may need additional retirement savings.

      Direct contributions by self-employed clergy. Certain chaplains 
and self-employed clergy are authorized to make direct contributions to 
a church plan. Contributions to a Sec. 403(b)(9) plan are deductible by 
clergy under Sec. 404(a)(10). This is a valuable retirement savings 
option for clergy who might otherwise lack the opportunity to 
participate in a church plan.
Qualified Retirement Plan Parity With IRAs
    Church retirement plans are disadvantaged relative to Individual 
Retirement Accounts (``IRAs'') in several important respects. First, 
participants are eligible to make a tax-free Qualified Charitable 
Distribution (``QCD'') directly from an IRA to a charity, but are not 
permitted to do so from a church retirement plan. Church plans should 
be allowed to facilitate tax-free QCDs for their members and 
beneficiaries, making it easier for clergy and other church workers to 
engage in charitable giving.

    In addition, IRAs and church retirement plans are treated 
dissimilarly regarding required minimum distributions (``RMDs''). The 
rules applicable to IRAs are more equitable, basing the RMD amount on 
the age of the recipient. Church retirement plans should be able to 
offer the same equitable treatment for a clergy member's surviving 
spouse.
Corporate Integration
    The Church Alliance understands and appreciates the goal of greater 
parity between the corporate and passthrough tax systems. However, the 
way in which Congress pursues this goal could have significant 
implications for churches and other tax-exempt charitable 
organizations. Specifically, we urge you to avoid any approach to 
corporate integration that would result in the imposition of new taxes 
on the earnings that these organizations receive from their investment 
portfolios. Increased taxation could limit returns to church benefit 
plan participants, eroding the stability of their retirement. We 
encourage you to be cognizant of the interaction with the tax exemption 
for non-profit organizations as you consider corporate integration 
proposals.
Roth Treatment
    Finally, we have taken note of recent discussions about potential 
limitations on the amount of pre-tax elective deferral contributions to 
certain retirement plans; contributions in excess of these limits would 
be treated as post-tax or ``Roth'' contributions. We have serious 
concerns that, in addition to not yielding any ``real'' additional 
revenue for the government (as it would merely shift the timing of 
collection, not the incidence of taxation), these proposals could 
significantly reduce the incentives to save for retirement. This could 
have severe consequences, particularly for modestly paid individuals 
who might not otherwise save for retirement absent the tax incentive 
provided by deferral.

    Like you, we strongly believe that tax reform should make it easier 
and more compelling for Americans to save and invest for their future--
not the other way around. We encourage you to pursue policy solutions 
that achieve this goal, rather than ones that could frustrate it.

    In closing, the Church Alliance greatly appreciates the opportunity 
to submit these comments. We are pleased to serve as a resource to the 
Congress and the Committee on these and related matters. We look 
forward to our continued work together on these important issues as 
comprehensive tax reform moves forward. Thank you for your 
consideration.

Sincerely,
Barbara A. Boigegrain
Chair of the Church Alliance

                                 ______
                                 
                 Coalition to Preserve Cash Accounting

                             August 1, 2017

The Honorable Orrin Hatch           The Honorable Ron Wyden
Chairman                            Ranking Member
U.S. Senate                         U.S. Senate
Committee on Finance                Committee on Finance
219 Dirksen Senate Office Building  219 Dirksen Senate Office Building
Washington, DC 20510-6200           Washington, DC 20510-6200

Dear Chairman Hatch and Ranking Member Wyden:

    On behalf of the Coalition to Preserve Cash Accounting (``the 
Coalition''), we are writing to explain why it is important to continue 
to allow farmers, ranchers, and service provider pass through 
businesses to continue to use the cash method of accounting as part of 
any tax reform plan. We appreciate the opportunity to provide these 
comments in connection with the Senate Committee on Finance's July 18, 
2017 hearing on ``Comprehensive Tax Reform: Prospects and Challenges.'' 
The Coalition applauds your efforts to improve the nation's tax code to 
make it simpler, fairer and more efficient in order to strengthen the 
U.S. economy, make American businesses more competitive, and create 
jobs.

    The Coalition is comprised of dozens of individual businesses and 
trade associations representing thousands of farmers, ranchers, and 
service provider pass-through entities across the United States that 
vary in line of business, size, and description, but have in common 
that our members rely on the use of cash accounting to simply and 
accurately report income and expenses for tax purposes. Pass-through 
entities account for more than 90 percent of all business entities in 
the United States. A substantial number of these businesses are service 
providers, farmers, and ranchers that currently qualify to use cash 
accounting. They include a variety of businesses throughout America--
farms, trucking, construction, engineers, architects, accountants, 
lawyers, dentists, doctors, and other essential service providers--on 
which communities rely for jobs, health, infrastructure, and improved 
quality of life. These are not just a few big businesses and a few 
well-to-do owners. According to IRS data, there are over 2.5 million 
partnerships using the cash method of accounting, in addition to 
hundreds of thousands of Subchapter S corporations eligible to use the 
cash method.
About the Cash Method of Accounting
    Under current law, there are two primary methods of accounting for 
tax purposes--cash and accrual. Under cash basis accounting, taxes are 
paid on cash actually collected and bills actually paid. Under accrual 
basis accounting, taxes are owed when the right to receive payment is 
fixed, even if that payment will not be received for several months or 
even several years; expenses are deductible even if they have not yet 
been paid.

    The tax code permits farmers, ranchers, and service pass-through 
entities (with individual owners paying tax at the individual level) of 
all sizes--including partnerships, Subchapter S corporations, and 
personal service corporations--to use the cash method of accounting. 
Cash accounting is the foundation upon which we have built our 
businesses, allowing us to simply and accurately report our income and 
expenses, and to manage our cash flows, for decades. It is a simple and 
basic method of accounting--we pay taxes on the cash coming in the 
door, and we deduct expenses when the cash goes out the door. No 
gimmicks, no spin, no game playing. Cash accounting is the very essence 
of the fairness and simplicity that is on everyone's wish list for tax 
reform.

    Some recent tax reform proposals would require many of our 
businesses to switch to the accrual method of accounting, not for any 
policy reason or to combat abuse, but rather for the sole purpose of 
raising revenues for tax reform. Forcing such a switch would be an 
effective tax increase on the thousands upon thousands of individual 
owners who generate local jobs and are integral to the vitality of 
local economies throughout our nation. It would also increase our 
recordkeeping and compliance costs due to the greater complexity of the 
accrual method. Because many of our businesses would have to borrow 
money to bridge the cash flow gap created by having to pay taxes on 
money we have not yet collected, we may incur an additional cost with 
interest expense, a cost that would be exacerbated if interest expense 
is no longer deductible, as proposed under the House Republicans' 
Better Way blueprint (``the blueprint''). Some businesses may not be 
able to borrow the necessary funds to bridge the gap, requiring them to 
terminate operations with a concomitant loss of jobs and a harmful 
ripple effect on the surrounding economy.
Tax Reform Proposals and Cash Accounting
    The blueprint moves toward a cash flow, destination-based 
consumption tax. The cash flow nature of the proposal suggests that the 
cash method of accounting would be integral and entirely consistent 
with the blueprint since it taxes ``cash-in'' and allows deductions for 
``cash out,'' including full expensing of capital expenditures. While 
we understand that they are different proposals, the ``ABC Act'' (H.R. 
4377), a cash flow plan introduced by Rep. Devin Nunes (R-CA) in the 
114th Congress, required all businesses to use the cash method. 
However, the blueprint does not provide details regarding the use of 
the cash method, including whether all businesses would be required to 
use it, whether businesses currently allowed to use the cash method 
would continue to be allowed to do so, whether a hybrid method of cash 
and accrual accounting would apply, or some other standard would be 
imposed.

    President Trump's tax reform plan is not a cash flow plan and takes 
a more traditional income tax-based approach, yet the principles 
articulated in the administration's plan are entirely consistent with 
the continued availability of the cash method of accounting. Growing 
the economy, simplification, and tax relief are exemplified by the cash 
method of accounting. Requiring businesses that have operated using the 
cash method since their inception to suddenly pay tax on money they 
have not yet collected, and may never collect, is an effective tax 
increase, and will have a contraction effect on the economy as funds 
are diverted from investment in the business to pay taxes on money they 
have not received or as businesses close because of insufficient cash 
flow and inability to borrow. It is important to note that cash 
accounting is not a ``tax break for special interests;'' it is a 
simple, well-established and long-authorized way of reporting income 
and expenses used by hundreds of thousands of family-owned farms, 
ranches, businesses, and Main Street service providers that are the 
backbone of any community.

    Several recent tax reform proposals, including Senator John Thune's 
(R-SD) S. 1144, the ``Investment in New Ventures and Economic Success 
Today Act of 2017,'' would expand the use of cash accounting to allow 
all businesses under a certain income threshold, including those 
businesses with inventories, to use cash accounting. Such proposals aim 
to simplify and reduce recordkeeping burdens and costs for small 
businesses, while still accurately reporting income and expenses. A few 
of these proposals (not S. 1144) would pay for this expansion by 
forcing all other businesses currently using cash accounting to switch 
to accrual accounting. We do not oppose expanding the allowable use of 
cash accounting, but it is unfair and inconsistent with the goals of 
tax reform to pay for good policy with bad policy that has no other 
justification than raising revenues. When cash accounting makes sense 
for a particular type of business, the size of the business should make 
no difference. Further, there have been no allegations that the 
businesses currently using cash accounting are abusing the method, 
inaccurately reporting income and expenses, or otherwise taking 
positions inconsistent with good tax policy.

    Tax reform discussions seem to be trending toward faster cost 
recovery than under current law. For example, the blueprint allows for 
full expensing of capital investment, Senator Thune's bill makes bonus 
depreciation permanent, and comments from administration officials 
suggest that President Trump and his team prefer faster write-offs of 
capital assets. Such policies benefit capital intensive businesses. 
However, service businesses by their very nature are not capital 
intensive, so it would be unfair to allow faster cost recovery for some 
businesses while imposing an effective tax increase and substantial new 
administrative burdens on pass-through service providers who will not 
benefit from more generous expensing or depreciation rules by taking 
away the use of cash accounting.
Other Implications of Limiting Cash Accounting
    In addition to the policy implications, there are many practical 
reasons why the cash method of accounting is the best method to 
accurately report income and expenses for farmers, ranchers, and pass-
through service providers:

        The accrual method would severely impair cash flow. Businesses 
        could be forced into debt to finance their taxes, including 
        accelerated estimated tax payments, on money we may never 
        receive. Many cash businesses operate on small profit margins, 
        so accelerating the recognition of income could be the 
        difference between being liquid and illiquid, and succeeding or 
        failing (with the resulting loss of jobs).

        Loss of cash accounting will make it harder for farmers to stay 
        in business. For farmers and ranchers, cash accounting is 
        crucial due to the number and enormity of up-front costs and 
        the uncertainty of crop yields and market prices. A heavy 
        rainfall, early freeze, or sustained drought can devastate an 
        agricultural community. Farmers and ranchers need the 
        predictability, flexibility and simplicity of cash accounting 
        to match income with expenses in order to handle their tax 
        burden that otherwise could fluctuate greatly from one year to 
        the next. Cash accounting requires no amended returns to even 
        out the fluctuations in annual revenues that are inherent in 
        farming and ranching.

        Immutable factors outside the control of businesses make it 
        difficult to determine income. Many cash businesses have 
        contracts with the government, which is known for long delays 
        in making payments that already stretch their working capital. 
        Billings to insurance companies and government agencies for 
        medical services may be subject to being disputed, discounted, 
        or denied. Service recipients, many of whom are private 
        individuals, may decide to pay only in part or not at all, or 
        force the provider into protracted collection. Structured 
        settlements and alternative fee arrangements can result in 
        substantial delays in collections, sometimes over several 
        years; therefore, taxes owed in the year a matter is resolved 
        could potentially exceed the cash actually collected.

        Recordkeeping burdens, including cost, staff time, and 
        complexity, would escalate under accrual accounting. Cash 
        accounting is simple--cash in/cash out. Accrual accounting is 
        much more complex, requiring sophisticated analyses of when the 
        right to collect income or to pay expenses is fixed and 
        determinable, as well as the amounts involved. In order to 
        comply with the more complex rules, businesses currently 
        handling their own books and records may feel they have no 
        other choice than to hire outside help or incur the additional 
        cost of buying sophisticated software.

        Accrual accounting could have a social cost. Farmers, ranchers, 
        and service providers routinely donate their products and 
        services to underserved and underprivileged individuals and 
        families. An effective tax increase and increased 
        administrative costs resulting from the use of accrual 
        accounting could impede the ability of these businesses to 
        provide such benefits to those in need in their local 
        communities.
Conclusions
    The ability of a business to use cash accounting should not be 
precluded based on the size of the business or the amount of its gross 
receipts. Whether large or small, a business can have small profit 
margins, rely on slow-paying government contracts, generate business 
through deferred fee structures or be wiped out through the vagaries of 
the weather. Cash diverted toward interest expense, taxes, and higher 
recordkeeping costs is capital unavailable for use in the actual 
business, including paying wages, buying capital assets, or investing 
in growth.

    Proposals to limit the use of cash accounting are counterproductive 
to the already agreed upon principles of tax reform, which focus on 
strengthening our economy, fostering job growth, enhancing U.S. 
competitiveness, and promoting fairness and simplicity in the tax code. 
Accrual accounting does not make the system simpler, but more complex. 
Increasing the debt load of American businesses runs contrary to the 
goal of moving toward equity financing instead of debt financing and 
will raise the cost of capital, creating a drag on economic growth and 
job creation. Putting U.S. businesses in a weaker position will further 
disadvantage them in comparison to foreign competitors. It is simply 
unfair to ask the individual owners of pass-through businesses to 
shoulder the financial burden for tax reform by forcing them to pay 
taxes on income they have not yet collected where such changes are 
likely to leave them in a substantially worse position than when they 
started.

    As discussions on tax reform continue, the undersigned respectfully 
request that you take our concerns into consideration and not limit our 
ability to use cash accounting. We would be happy to discuss our 
concerns in further detail. Please feel free to contact Mary Baker 
([email protected]) or any of the signatories for additional 
information.

    Thank you for your consideration of this important matter.

Sincerely,\1\
---------------------------------------------------------------------------
    \1\ Although not a signatory to this letter, the American Bar 
Association (ABA) is working closely with the Coalition and has 
expressed similar concerns regarding proposals to limit the ability of 
personal service businesses to use cash accounting. The ABA's most 
recent letters to the House Ways and Means and Senate Finance 
Committees are available on the ABA's website.

Americans for Tax Reform
American Council of Engineering Companies
American Farm Bureau Federation
American Institute of Certified Public Accountants
American Medical Association
The American Institute of Architects
The National Creditors Bar Association
Akin Gump Strauss Hauer and Feld LLP
Baker Donelson
Debevoise and Plimpton LLP
Dorsey and Whitney LLP
Foley and Lardner LLP
Jackson Walker LLP
K&L Gates LLP
Kilpatrick Townsend and Stockton LLP
Lewis Roca Rothgerber Christie LLP
Littler Mendelson P.C.
Miles and Stockbridge P.C.
Mitchell Silberberg and Knupp LLP
Morrison and Foerster LLP
Nelson Mullins Riley and Scarborough LLP
Ogletree, Deakins, Nash, Smoak, and Stewart, P.C.
Perkins Coie LLP
Quarles and Brady LLP
Rubin and Rudman LLP
Squire Patton Boggs (US) LLP
Steptoe and Johnson LLP
White and Case LLP

                                 ______
                                 
                       Education Finance Council

                    440 First Street, NW, Suite 560

                          Washington, DC 20001

                             (202) 955-5510

                          http://www.efc.org/?

                               @efctweets

Education Finance Council (EFC) is the national trade association 
representing nonprofit and state based higher education finance 
organizations. These organizations are public-purpose entities that 
operate with the mission of increasing postsecondary access, 
affordability, and success. Collectively, they serve as critical 
resources for students and families in their states, assisting families 
with every facet of the higher education financing experience. Many of 
these organizations use the proceeds of Qualified Student Loan Bonds to 
fund supplemental education loans as well as education refinancing 
loans.

EFC shares the Committee's vision for a simpler and fairer tax system, 
and we appreciate the opportunity to provide the following important 
recommendations:

Preserve Tax-Exempt Qualified Student Loan Bonds \1\
---------------------------------------------------------------------------

    \1\ Qualified Student Loan Bonds fall under the municipal bond tax 
exemption. Initially, student loan bonds were treated as governmental 
bonds, and were not what the 1954 Internal Revenue Code described as 
industrial development bonds (and that are now known as ``Private 
Activity Bonds,'' which are subject to many more restrictions than 
governmental bonds). In 1984, Congress changed the tax-exempt bond 
rules to make interest on what were described as ``Private Loan Bonds'' 
taxable. But ``Qualified Student Loan Bonds,'' under then-applicable 
Section 103(o), were not treated as ``Private Loan Bonds'' for this 
purpose.
    When the 1986 Tax Act put the Internal Revenue Code of 1986 in 
place, the concept of a qualified student loan was incorporated into 
Section 144(b) of the Code. Qualified Student Loan Bonds are now 
Private Activity Bonds and are subject to volume cap limitations.

As Congress works to reform the tax code, it is imperative that 
policymakers preserve tax-exempt Qualified Student Loan Bonds to 
maintain the ability of nonprofit and state-based organizations to 
offer low-cost financing options that afford middle-income families the 
---------------------------------------------------------------------------
ability to pay for their college dreams.

As college costs continue to rise, many middle-income families require 
low-cost financing options in addition to the Federal Direct Student 
Loan Program. Nonprofit and state-based student loan funding providers 
have the unique ability to utilize tax-exempt bond financing--in the 
form of Qualified Student Loan Bonds--to help families fill the gap 
with low-cost, consumer-friendly loans. Policymakers should keep in 
mind, as they work to reform the tax code that repealing the tax 
exemption would dramatically increase the cost of these loans, 
adversely affecting middle-
income families, who already bear a significant portion of the $1.4 
trillion student debt burden.

There are currently 21 state-based and nonprofit lenders who offer 
education loans with low interest rates, low or no origination fees, 
and lower monthly payments than many other education loan options, 
including the Federal Direct PLUS program. For example, families who 
work with one state-based program can save an average of $2,500 over 10 
years on a $10,000 loan, compared to if they had taken out a PLUS loan.

Most of these organizations also provide the in-depth counseling that 
borrowers need to understand and manage their loan responsibilities and 
guide borrowers through all repayment options available to them--with 
special attention paid to working with borrowers who experience 
economic hardship. In the past year, EFC Members directly worked with 
over 2.5 million families to help them successfully plan, save, and pay 
for college. And, during their 2016-2017 fiscal year, nonprofit and 
state-based organizations made more than 84,000 loans to more than 
75,000 borrowers, totaling $1.2 billion. Collectively, their 
outstanding portfolios include 1.1 million in loans totaling $9.2 
billion, representing more than 490,000 borrowers.

Additionally, 13 nonprofit and state-based organizations offer 
refinancing loans, making education debt more manageable for families 
by providing a refinancing tool that consolidates high-interest rate 
education loans into a single loan, reducing overall debt burden and, 
in many cases, reducing monthly payments by as much as $200 or $300 per 
month--saving borrowers anywhere from $3,000 to $5,000 over a 10-year 
repayment term.

Tax-exempt Qualified Student Loan Bonds also allow nonprofit and state-
based student loan organizations to serve as critical resources for the 
citizens of their states, assisting families with every facet of the 
higher education financing experience. These organizations use any 
excess revenues to help fund extensive free programs to counsel 
students to choose the best-fit school, borrow appropriately, complete 
their degree, maximize their earning potential, and successfully repay 
their loans.

In the past year, these organizations worked directly with 2.5 million 
students and families, and:

      Granted over $655 million in scholarships.
      Hosted programs at over 14,000 schools, community centers, 
libraries, and other sites.
      Assisted 1 million students with their college applications.
      Awarded $577 million in grant funds.
      Assisted in the filing of more than 76,000 FAFSAs.
      Hosted over 16,000 community presentations for students and 
parents surrounding college planning and financial aid.
      Presented programs on financial literacy, budgeting, and college 
planning to over 520,000 high school students and their families.
      Presented programs on financial literacy, budgeting, and college 
planning to over 50,000 elementary and middle school students and their 
families.
      Provided financial literacy training and programs to over 57,000 
students and families.
      Distributed over 4.5 million brochures, fact sheets, guides, 
newsletters, and webinars.
      Held over 2,300 counselor- and teacher-training workshops.

In order to retain the ability of nonprofit and state-based 
organizations to provide low-cost, consumer-friendly loans to middle-
income families, and their ability to offer extensive free outreach 
programs, it is critical to preserve tax-exempt Qualified Student Loan 
Bonds.

Eliminate the Alternative Minimum Tax

EFC supports the proposed elimination of the Alternative Minimum Tax 
(AMT), which would minimize costs to education loan borrowers. 
Congress' previous temporary elimination of the AMT on income earned 
from Private Activity Bonds resulted in lower borrowing rates for 
student loan issuers, with those savings passed directly to student 
loan borrowers.

For example, a student borrowing $20,000 could save $500 or more in 
lower interest payments on a 10-year loan with the elimination of the 
AMT. Nonprofit and state-based education finance organization are 
committed to once again passing any savings from the elimination of the 
AMT directly to borrowers in the form of lower interest rates.

Update ``Qualified Scholarship Funding Corporation'' Rules

As noted above, nonprofit and state-based education loan financing 
providers, through the issuance of Qualified Student Loan Bonds, are 
uniquely situated to make supplemental education loans with the best 
possible terms and to make education refinancing loans at low interest 
rates. However, certain nonprofit and state student loan funding 
providers--``qualified scholarship funding corporations'' under Section 
150(d) of the Internal Revenue Code--are currently ineligible to issue 
Qualified Student Loan Bonds to finance supplemental education loans 
and refinance education loans.

Section 150(d) allows only qualified scholarship funding corporations 
to issue Qualified Student Loan Bonds to acquire education loans 
incurred under the HEA, which was the Federal Family Education Loan 
Program (FFELP). An update is needed to the Internal Revenue Code to 
allow qualified scholarship funding corporations to utilize Qualified 
Student Loan Bonds to fund supplemental education loans and refinancing 
loans.

EFC endorses H.R. 480, the Student Loan Opportunity Act, introduced by 
Rep. Bill Flores (R-TX), which would allow qualified scholarship 
funding corporations to issue Qualified Student Loan Bonds to fund 
supplemental education loans for students attending school and provide 
low-cost refinancing loans to borrowers once they leave school. We 
recommend that H.R. 480 be included in tax reform efforts currently 
underway so as to extend the same opportunities to residents of all 
states. This would ensure that students and borrowers have the broadest 
access possible to low cost supplemental education and refinancing 
loans.

Stop Taxing Death and Disability

EFC strongly supports efforts to exempt from federal income tax private 
and federal education loans that are discharged due to the death or 
total and permanent disability of a student, and to allow the parent of 
a student that becomes totally and permanently disabled to have their 
federal loan discharged.

Adding federal and private student loan discharges as a result of death 
or total and permanent disability to the existing list of tax-exempt 
discharges is a common-
sense and compassionate reform, modeled on current exemptions that 
public sector employees and borrowers with a closed school discharge 
already receive.

EFC endorses the bicameral, bipartisan Stop Taxing Death and Disability 
Act and recommends it be included in the current tax reform effort.

                                 ______
                                 
                  Letter Submitted by Martha Henderson

U.S. Senate
Committee on Finance
Tuesday, July 18, 2017

Re: ``Comprehensive Tax Reform: Prospects and Challenges''

Members,

It is a relief to know that after many years of discussion from across 
the ideological spectrum about the inadequacy of our tax system the 
Senate Finance Committee is making tax reform its top priority. As 
Senator Orrin Hatch stated in his speech on the Senate floor on July 
12, 2017, ``. . . we need to go back to the drawing board and 
fundamentally rethink our entire tax system. This includes both the 
individual, as well as business side of the tax ledger.'' Tax reform 
needs to benefit the U.S. economy by providing its citizens with 
fairness and better opportunities in the global marketplace.

My comments focus on the need to fix the administrative and financial 
burdens imposed by the current tax system on individuals living and 
working abroad. The current system is complex and unfair. Tax 
compliance for us is exceedingly time consuming and expensive--
particularly in terms of savings and investment for retirement purposes 
but also with regard to annual tax preparation.

I have lived and worked in Australia since late 1973. I am one of an 
estimated 13% of American expats living abroad who submit annual U.S. 
tax returns.\1\ I am also tax-compliant in Australia. The current U.S. 
tax system has financially disadvantaged me with respect to taxation of 
my Australian retirement savings, taxation of foreign mutual funds and 
currency fluctuations as they affect capital losses for U.S. tax 
purposes.
---------------------------------------------------------------------------
    \1\ Burggraf, Helen (2015, April 1), ``On the Trail of the Illusive 
U.S. Expat Taxpayer.'' Wall Street Journal. Retrieved from http://
blogs.wsj.com/expat/2015/04/01/on-the-trail-of-the-elusive-u-s-expat-
taxpayer/.

In my view, a well-designed residency-based tax system that includes 
anti-abuse provisions and continues to tax individuals for U.S.-sourced 
income would provide very positive outcomes for the U.S. economy and 
effectively address all of the disadvantages I have experienced. It 
---------------------------------------------------------------------------
would:

      Provide incentive to U.S. companies doing business abroad to 
employ American citizens for their overseas operations.
      Provide employment opportunities and mobility for individuals 
functioning in the global economic environment.
      Provide fairness to non-resident citizens by eliminating double 
taxation.
      Reduce the impact of currency fluctuations for non-resident 
citizens.
      Reduce the complexity and financial and time burdens associated 
with compliance.

A workable system would provide for the following:

      ``Non-resident Americans''--would be treated the same as non-
resident alien individuals not living in the United States. The 
definitions of U.S. citizen and resident alien would be the same as 
those that exist under current law.
      Non-resident Americans would continue to be taxed on business 
income and capital gain from the sale of real estate in the United 
States.
      Individuals could opt in or out of a residency-based system. 
They would have to meet specific requirements to qualify for residency 
based taxation
      ``Savings clauses'' in tax treaties, which preserve the U.S.'s 
ability to tax its citizens, would be overridden in the statute, thus 
relieving individuals of the burden of double taxation on retirement 
savings.
      FATCA legislation would be amended to add a ``same country'' 
exemption for certain accounts of individuals residing in a foreign 
jurisdiction, where the account is with a foreign financial institution 
in the same country where the individual resides. Amendment would also 
alleviate the need for submission of Form 8938 if the only foreign 
financial assets that would have been reported on such form had been 
properly reported on a foreign income tax return.

Sincerely,

Martha Henderson

                                 ______
                                 
                Like-Kind Exchange Stakeholder Coalition
August 1, 2017

The Honorable Orrin Hatch           The Honorable Ron Wyden
Chairman                            Ranking Member
U.S. Senate                         U.S. Senate
Committee on Finance                Committee on Finance
219 Dirksen Senate Office Building  219 Dirksen Senate Office Building
Washington, DC 20510-6200           Washington, DC 20510-6200

Dear Chairman Hatch and Ranking Member Wyden:

We are submitting the following statement for the record in response to 
the Senate Committee on Finance's hearing on July 18, 2017 entitled 
``Comprehensive Tax Reform: Prospects and Challenges.'' As you consider 
ways to create jobs, grow the economy, and raise wages through tax 
reform, we strongly urge that current law be retained regarding like-
kind exchanges under section 1031 of the Internal Revenue Code 
(``Code''). We further encourage retention of the current unlimited 
amount of gain deferral.

Like-kind exchanges are integral to the efficient operation and ongoing 
vitality of thousands of American businesses, which in turn strengthen 
the U.S. economy and create jobs. Like-kind exchanges allow taxpayers 
to exchange their property for more productive like-kind property, to 
diversify or consolidate holdings, and to transition to meet changing 
business needs. Specifically, section 1031 provides that taxpayers do 
not immediately recognize a gain or loss when they exchange assets for 
``like-kind'' property that will be used in their trade or business. 
They do immediately recognize gain, however, to the extent that cash or 
other ``boot'' is received. Importantly, like-kind exchanges are 
similar to other non-recognition and tax deferral provisions in the 
Code because they result in no change to the economic position of the 
taxpayer.

Since 1921, like-kind exchanges have encouraged capital investment in 
the United States by allowing funds to be reinvested back into the 
enterprise, which is the very reason section 1031 was enacted in the 
first place. This continuity of investment not only benefits the 
companies making the like-kind exchanges, but also suppliers, 
manufacturers, and others facilitating them. Like-kind exchanges ensure 
both the best use of real estate and a new and used personal property 
market that significantly benefits start-ups and small businesses. 
Eliminating like-kind exchanges or restricting their use would have a 
contraction effect on our economy by increasing the cost of capital, 
slowing the rate of investment, increasing asset holding periods and 
reducing transactional activity.

A 2015 macroeconomic analysis by Ernst and Young found that either 
repeal or limitation of like-kind exchanges could lead to a decline in 
U.S. GDP of up to $13.1 billion annually.\1\ The Ernst and Young study 
quantified the benefit of like-kind exchanges to the U.S. economy by 
recognizing that the exchange transaction is a catalyst for a broad 
stream of economic activity involving businesses and service providers 
that are ancillary to the exchange transaction, such as brokers, 
appraisers, insurers, lenders, contractors, manufacturers, etc. A 2016 
report by the Tax Foundation estimated even greater economic 
contraction--a loss of 0.10% of GDP, equivalent to $18 billion 
annually.\2\
---------------------------------------------------------------------------
    \1\ ``Economic Impact of Repealing Like-Kind Exchange Rules,'' 
Ernst and Young (March 2015, revised November 2015), at (iii), 
available at http://www.1031taxreform.com/wp-content/uploads/Ling-
Petrova-Economic-Impact-of-Repealing-or-Limiting-Section-1031-in-Real-
Estate.
pdf.
    \2\ ``Options for Reforming America's Tax Code,'' Tax Foundation 
(June 2016) at p. 79, available at http://taxfoundation.org/article/
options-reforming-americas-tax-code.

Companies in a wide range of industries, business structures, and sizes 
rely on the like-kind exchange provision of the Code. These 
businesses--which include real estate, construction, agricultural, 
transportation, farm/heavy equipment/vehicle rental, leasing and 
manufacturing--provide essential products and services to U.S. 
---------------------------------------------------------------------------
consumers and are an integral part of our economy.

A microeconomic study by researchers at the University of Florida and 
Syracuse University, focused on commercial real estate, supports that 
without like-kind exchanges, businesses and entrepreneurs would have 
less incentive and ability to make real estate and other capital 
investments.\3\ The immediate recognition of a gain upon the 
disposition of property being replaced would impair cash flow and could 
make it uneconomical to replace that asset. This study further found 
that taxpayers engaged in a like-kind exchange make significantly 
greater investments in replacement property than non-exchanging buyers.
---------------------------------------------------------------------------
    \3\ David Ling and Milena Petrova, ``The Economic Impact of 
Repealing or Limiting Section 1031 Like-Kind Exchanges in Real Estate'' 
(March 2015, revised June 2015), at 5, available at http://
www.1031taxreform.com/wp-content/uploads/Ling-Petrova-Economic-Impact-
of-Repealing-or-Limiting-Section-1031-in-Real-Estate.pdf.

Both studies support that jobs are created through the greater 
investment, capital expenditures and transactional velocity that are 
associated with exchange properties. A $1 million limitation of gain 
deferral per year, as proposed by the Obama Administration,\4\ would be 
particularly harmful to the economic stream generated by like-kind 
exchanges of commercial real estate, agricultural land, and vehicle/
equipment leasing. These properties and businesses generate substantial 
gains due to the size and value of the properties or the volume of 
depreciated assets that are exchanged. A limitation on deferral would 
have the same negative impacts as repeal of section 1031 on these 
larger exchanges. Transfers of large shopping centers, office 
complexes, multifamily properties or hotel properties generate economic 
activity and taxable revenue for architects, brokers, leasing agents, 
contractors, decorators, suppliers, attorneys, accountants, title and 
property/casualty insurers, marketing agents, appraisers, surveyors, 
lenders, exchange facilitators and more. Similarly, high volume 
equipment rental and leasing provides jobs for rental and leasing 
agents, dealers, manufacturers, after-market outfitters, banks, 
servicing agents, and provides inventories of affordable used assets 
for small businesses and taxpayers of modest means. Turnover of assets 
is key to all of this economic activity.
---------------------------------------------------------------------------
    \4\ ``General Explanations of the Administration's Fiscal Year 2017 
Revenue Proposals,'' at 107, available at https://www.treasury.gov/
resource-center/tax-policy/Documents/General-Explanations-FY2017.pdf.

In summary, there is strong economic rationale, supported by recent 
analytical research, for the like-kind exchange provision's nearly 100-
year existence in the Code. Limitation or repeal of section 1031 would 
deter and, in many cases, prohibit continued and new real estate and 
capital investment. These adverse effects on the U.S. economy would 
likely not be offset by lower tax rates. Finally, like-kind exchanges 
promote uniformly agreed upon tax reform goals such as economic growth, 
---------------------------------------------------------------------------
job creation and increased competitiveness.

Thank you for your consideration of this important matter.

Sincerely,

Air Conditioning Contractors of America
American Car Rental Association
American Rental Association
American Seniors Housing Association
American Truck Dealers
American Trucking Associations
Associated Equipment Distributors
Associated General Contractors of America
Avis Budget Group, Inc.
Building Owners and Managers Association (BOMA) International
C.R. England, Inc.
Equipment Leasing and Finance Association
Federation of Exchange Accommodators
International Council of Shopping Centers
Investment Program Association
NAIOP, the Commercial Real Estate Development Association
National Apartment Association
National Association of Home Builders
National Association of Real Estate Investment Trusts
National Association of REALTORS
National Automobile Dealers Association
National Business Aviation Association
National Multifamily Housing Council
National Ready Mixed Concrete Association
National Stone, Sand, and Gravel Association
Truck Renting and Leasing Association

                                 ______
                                 
                                NRS Inc.

                        Statement of Bill Parks

Chairman Hatch, Ranking Member Wyden, and members of the committee, I 
am a retired professor of finance and the founding President of NRS, a 
100% employee-owned company, which is the largest supplier of paddle 
sports accessories in the world. I have also published numerous 
articles in respected journals including Tax Notes.

Introduction

Domestic companies pay far more tax than their multinational 
competitors. This is because more than 80 years ago, the U.S. went down 
the wrong path of taxation policy and dragged the rest of the world 
with it. Back then, the U.S. recognized that a multinational enterprise 
(MNE) could price products internally to move profits to low- or no-tax 
countries. For this reason, the United States required companies to set 
the price for the transfer of products between countries at the market 
price that would be set between unrelated companies. But it was soon 
apparent that this could only work for basic commodities, since all 
other products could be considered to be special. Coffee beans aren't 
just coffee beans if they're Starbucks beans. In other words, specialty 
products can command a premium price.

All product transactions can also be disaggregated. For example, one 
MNE's product made in Germany may be purchased by a Bermuda subsidiary, 
insured by an Isle of Man subsidiary, financed by a Cayman Islands 
subsidiary, with logistics handled by still another subsidiary. Thus 
the product is purchased at a low price from the German subsidiary, 
leaving little profit in Germany. And it is sold to the U.S. subsidiary 
at a high price, insuring little or no profit in the United States. And 
that is just the simplest example of how to minimize U.S. corporate 
taxes. Worse, with little or no corporate profit in the United States, 
states are also shortchanged.

The U.S. taxes the global earnings of companies but allows a company to 
defer foreign earnings permanently invested outside the United States. 
As a result, U.S.-based MNEs receive a perpetual interest-free loan 
from the federal government on all their foreign earnings that have 
mostly been stripped out of U.S. operations and moved to the world's 
tax havens.

Domestic companies competing with MNEs face a daunting task. How do 
they compete with an MNE that pays no tax while they are paying up to 
40% or more in state and federal tax? That this is accepted should be a 
scandal. We should be equally outraged at the corporate tax disparity 
between domestic and multinational companies.

Problems in Most Proposals

Most proposals so far considered provide a step forward and at least 
one step back as MNEs create more sophisticated ways to move profits. 
Consider these proposed ideas:

The Republican House made a giant step forward by advocating for a 
destination-based corporate tax. Unfortunately, it then proposed the 
border-adjusted tax (BAT). The BAT would deny a business deduction for 
any imported goods. At their suggested 20% tax rate, it could raise the 
price of imported goods by 15% or even more. Conversely, revenues from 
exports would not be counted. Along with the many objections voiced by 
retailers and other businesses, BAT creates the hidden problem 
associated with the U.S. annual export of $1.25 trillion in 
commodities. Any domestic company could buy and export a commodity such 
as wheat, coal or cotton, erasing its profits. Essentially BAT allows a 
dollar of export sales to erase a dollar of pretax income. This 
strategy erodes so much taxable income that it would require a much 
higher tax rate than the suggested 20% to be revenue neutral.

Many propose ending deferral as a solution, which is appealing but 
while it puts domestic and U.S.-based MNEs on a level footing, it 
doesn't affect foreign-based MNEs. This ultimately puts all U.S. 
companies at a disadvantage in both domestic and world markets.

Many suggest a simplistic change to a territorial system. Such a change 
would certainly solve the international competitiveness problem for 
U.S. MNEs. However, it would increase the disparity between domestic 
companies and their MNE competitors and it would require a rate 
increase to be revenue neutral.

Substantially lowering the 35% U.S. corporate tax rate leaves in place 
the disparity between domestic companies and their MNE competitors. It 
would also massively decrease revenue. We should likewise reject the 
assumption that lower corporate tax rates will resolve the disparity.

Any corporate tax system that includes transfer pricing can never be 
fixed because: ``By far the most persuasive objective of international 
transfer pricing is tax minimization.''

One of the problems inherent in the tax controversy is that most 
economists propose to tax ``where the economic activity occurs.'' In 
other words, where the factory or administration occurs because they 
believe that is what produces profit. But when you ask many business 
people they are likely to say it is the customer that creates the 
profits. Without a customer all those activities only produce costs. 
And there is a practical aspect as well. It is well known that taxing 
something will result in less of it. The United States certainly 
doesn't want to reduce the amount of domestic payroll or property 
because if economic activity is occurring in the United States and is 
taxed domestic manufacturing will be reduced. Thus it makes sense to 
shift from origin-based taxation to destination-based taxation. And 
while companies are known to shift their operations to avoid taxation, 
it is much harder, if not impossible to move customers.

The Better Path for Moving Forward

A destination-based corporate tax sometimes called Sales Factor 
Apportionment (SFA) would take the percentage of a company's total 
sales made in the United States and apply that percentage to the 
company's worldwide pretax profit to determine the amount of taxable 
income in the United States. This change would exempt domestic 
companies from paying tax on their exports but require all MNEs, both 
U.S. and foreign, to pay taxes on the pretax profit that is in 
proportion to their sales in the United States. SFA is estimated to 
increase revenue by at least $100 billion a year or allow a revenue 
neutral rate reduction from 35% to less than 26%.

To further counter tax avoidance, the permanent establishment 
requirement to establish a nexus for taxation should be updated for the 
digital age. Such an update could consider following in the steps of 
New York State, which deems a company to have a taxable presence if it 
had U.S. sales above a certain amount, for the United States. I'd 
suggest between $2.5 and $5 million.

An interesting side benefit of SFA is that it removes the competitive 
advantage of low rates. For instance, Ireland, with a population of 
less than 5 million, has an exceptionally low tax rate that attracts 
profits from around the world, but its low tax rate would not hurt 
other countries if these countries used SFA. For instance, Germany, 
France and the UK, all have more than 10 times Ireland's population and 
almost certainly most MNEs would have more than 10 times their Irish 
sales in each country. Therefore each country would receive more than 
10 times the taxable revenue from an MNE. Ireland's low rate would no 
longer attract MNE profits because it wouldn't change what the MNE paid 
in other countries. Basically, MNEs could no longer siphon off profits 
from operations in any country to tax havens.

If the United States led in embracing SFA, its advantages would soon be 
so obvious that many countries would consider moving to SFA. However, 
no matter what other countries do, the United States has no (good) 
excuse not to adopt SFA. Some less developed countries should consider 
adopting formulary apportionment but because they do not have robust 
consumer markets, their emphasis might be on payroll or tangible 
property.

Regardless of which tax policies other countries adopt, SFA is clearly 
the best for the Uited States. It sidesteps the race to the bottom but 
could be used to lower rates while still being revenue neutral or even 
positive.

                                 ______
                                 
                    Letter Submtted by Judith Perry
I am writing to you regarding the tax reform legislation currently 
before your committee and wish to address overseas pensions and 
territorial taxation for individuals.

Americans working overseas pay local taxes and participate in the local 
pension scheme. They do this in good faith and expect the pension to be 
there when they retire be that overseas or back in the United States. 
They usually have no idea that there could be a problem with 
recognition of this by another jurisdiction resulting in taxation of 
the pension twice, once in the country where the pension originated and 
again by the United States. This may be their only pension, 
particularly if they have spent significant portion of their career 
overseas and have not been able to contribute to a U.S. pension scheme.

Clearly this situation is serious impediment to these middle class 
Americans saving for retirement. For the individual and American 
companies this adds costs and uncertainty thereby impeding U.S. 
international economic growth, jobs for Americans overseas and 
attracting international talent to relocate to the United States.

In order to bring surety to Americans with an overseas pension I ask 
that you support updating and simplifying the approach to these 
pensions by taxing all legitimate overseas pensions only once by the 
country where the pension originated. Similarly, pensions originating 
in the United States should be taxed only once, in the United States, 
under the laws governing pensions here. Many countries already have 
this system further exacerbating our competitiveness overseas.

I also seek your support to change the current citizen-based tax to a 
territorial tax system for individuals. This has the benefit of 
simplifying the tax code, reduce regulatory costs, enable U.S. 
individuals and companies to be more efficient and compete on a level 
playing field with foreign firms in domestic and foreign markets. This 
may also remedy the overseas pension issue providing the pension is not 
double taxed along the lines discussed above.

Yours sincerely,

Judith Perry

                                 ______
                                 
                Statement Submitted by Jay Starkman, CPA
Today's hearing featuring former assistant secretaries for tax policy 
Jonathan Talisman, Pamela Olson, Eric Solomon, and Mark Mazur, showed 
that Congress is anxious to revise the Internal Revenue Code to make it 
fairer, simpler, more efficient, and foster American competitiveness. 
As a champion for tax simplification for my entire career and having 
achieved some successes, I have unique observations to share regarding 
the hearing which mostly concentrate on tax simplification.

Tax complexity erodes voluntary compliance and reduces revenues by 
making the tax laws difficult to understand and, thus, to comply with. 
Ultimately, taxpayers lose respect for the tax system itself. They 
create abusive tax shelters attempting to benefit from gray and 
incomprehensible tax provisions.

Simplification is the ability of taxpayers and their advisers to 
understand and comply with the tax laws which pertain to them, and the 
ability of IRS to administer such laws. Simplifying taxes requires 
rough justice as there will be winners and losers.

What Causes Tax Complexity?

Tax provisions may be classified as ``structural'' or as ``tax 
expenditures.'' Structural provisions are those necessary to implement 
a tax on net income. Often, underlying transactions are extraordinarily 
complex and require a complex tax law. However, a complex tax law can 
still be logical and coherently structured. Here, simplification means 
controlling complexity. Utilizing the services of the legislative 
counsel's office can significantly improve tax code language resulting 
in more readable and understandable provisions with better certainty 
how courts will interpret the statute.

Tax expenditures are tax subsidies or financial incentives. They 
constitute the single biggest cause of complexity in our income tax 
system because they are not needed to implement a tax on net income. 
Few tax expenditures help the nation as a whole.

There is no vocal and effective constituency for tax simplification. It 
requires champions in Congress and the Administration. There will be 
faint praise for promoting tax simplification, only potential risks to 
legislators for promoting some unpopular changes needed to achieve 
simplification. Lobbyists meet any efforts at simplification through 
restriction of an existing tax expenditure with a well-financed 
campaign portraying social or economic upheaval if their client's 
particular tax subsidy is curtailed. Each new tax expenditure is 
equally hailed as the solution that the country has been waiting for.

Home mortgage interest, state tax and charitable deductions, individual 
retirement accounts, the standard deduction, and child credits are 
examples of tax expenditures with broad constituencies. Accelerated 
depreciation, oil and gas depletion, parsonage exclusion, low income 
housing and energy credits have narrower but very powerful 
constituencies.

There is nothing inherently wrong with tax expenditures, provided a 
complete cost/benefit analysis determines that each one is the most 
efficient method for a necessary government intervention in the 
economy. No such analysis is being performed resulting in many 
inefficient tax expenditures.

There is a built-in bias toward tax expenditures. Non-tax writing 
committees can further their mission, (e.g., ensuring better housing or 
employment) by proposing or supporting tax expenditures. The tax 
writing committees gain a new constituency of those affected by the 
program. A Senate Finance Committee member interested in climate 
change, for example, can gain a political foothold in this area without 
being a member of the Committee on Environment and Public Works.

Complexity and the Budget Process

If a government agency cannot obtain an appropriation for a comparable 
program in its own budget, it will almost inevitably favor a tax 
expenditure--any tax expenditure--as an extension of its own direct 
programs. Unlike spending programs, they are immune from automatic 
spending cuts. They can skirt the Byrd rule by front-loading 
expenditures while back-loading revenues, and expire in 10 years. 
Everyone wins by not requiring a trade-off between tax expenditures, 
direct expenditures and realistic budgeting--except the nation as a 
whole.

In the present political climate, taxes cannot be raised explicitly. 
This has contributed to complexity as lawmakers resort to base 
broadeners, stricter compliance, and user fees--which means closing 
loopholes, restricting tax expenditures, more information reporting, 
faster tax collections, and higher penalties. These are called ``cats 
and dogs'' because they raise little revenue when considered singly, 
but in the aggregate, all of these complex provisions raise a great 
deal of revenue needed to meet the budget targets. This has resulted in 
penalties so numerous (and some draconian) that no one can count them 
all, up from just six in the original Internal Revenue Code of 1954.

Cats and dogs are popular because few are affected by penalties, excise 
taxes, and highly targeted base broadeners. Targeted taxpayers find 
them frustrating and quite hard to challenge.

Finding dozens of highly targeted cats and dogs takes time. No time 
remains to consider simpler alternatives to the complexity of the 
resulting tax bill. It becomes a tax increase that is complex but 
politically acceptable. Because of the budget deficit, decisions are 
based more on the amount of revenue to be derived than on coherent tax 
policy. Legislators believe that fine tuning provisions for revenue 
requires regulation type statutory language as if each sub-subsection 
could be costed out.

The Code contains at least 19 tax incentives to encourage college 
attendance.\1\ It also contains one disincentive that full-time 
students aged 19-23 will be taxed the same as minors under age 19--at 
their parents' marginal tax rate--included as a revenue offset in 2007. 
This is prime simplification territory.
---------------------------------------------------------------------------
    \1\ Eighteen are listed in Joint Committee on Taxation, 
``Background and Present Law Related to Tax Benefits for Education'' 
(JCX-70-14), June 2014, available at www.jct.gov. There is also a gift 
tax exclusion for tuition paid on behalf of a student by a third party.
---------------------------------------------------------------------------

The 1986 Tax Reform Act

The 1986 Tax Reform Act lowered rates and broadened the tax base. It's 
a road map on how to pass a major tax overhaul without much 
simplification. It introduced very complex baskets of portfolio, 
passive and active income, burdened foreign income reporting, and many 
other provisions that vastly complicated tax compliance. The biggest 
simplification, taxing capital gains at ordinary income rates, was soon 
repealed, and an exemption to passive losses for real estate 
professionals was added.

In the 1986 deliberations, Senate Finance Committee Chairman Bob 
Packwood explained the need to shield legislators from lobbyists, the 
press, and the public in order to make progress:

        When we're in the Sunshine, as soon as we vote, every trade 
        association in the country gets out their mailgrams and their 
        phone calls in 12 hours and complains about the members' votes. 
        But when we're in the back room, the Senators can vote their 
        conscience. They vote for what they think is good for the 
        country. Then they can go out to the lobbyists and say: ``God, 
        I fought for you. I did everything I could. But Packwood just 
        wouldn't give in.'' \2\
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    \2\ Birnbaum, Jeffrey H., and Allen S. Murray, Showdown at Gucci 
Gulch: Lawmakers, Lobbyists, and the Unlikely Triumph of Tax Reform 
(New York: Random House, 1987), page 260.
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Tax Simplification for the Majority

Except for the recordkeeping burden, the general public is shielded 
from most tax complexity. When they encounter a complex tax situation, 
they hire an adviser. Thus, tax complexity means only ``How much does 
it cost to prepare my return?'' and ``How big is my refund?''

The most recent IRS statistics reveal that in 2014, 73 percent of the 
returns filed with the IRS yielded just 11 percent of individual tax 
revenue. That's 108.3 million of the 148.6 million returns processed. 
That 73 percent includes all single persons grossing up to a little 
over $47,000 annually and all married couples earning up to a little 
over $94,000. It means that an inordinate amount of resources are 
devoted to collecting $148.4 billion of tax. The remaining 27 percent 
of tax filers yield $1.2 trillion, 89 percent of all income tax. IRS 
expends inordinate resources on lower income taxpayers because fraud 
within this group, abetted by tax complexity and efiling, exceeds the 
annual IRS budget.

Senator Hatch began the hearing by declaring, ``American families, 
individuals, and businesses collectively spend hundreds of billions of 
dollars a year--not to mention countless hours--simply trying to comply 
with the tax code.''

Senator Elizabeth Warren has introduced the ``Tax Filing Simplification 
Act of 2017'' (S. 912). It would require IRS to establish and operate 
the following programs free of charge:

      Online tax preparation and filing software;
      Allow taxpayers to download third-party provided return 
information relating to individual income tax returns; and
      Permit individuals with simple tax situations to elect to have 
the IRS prepare their returns.

    The presence of Obamacare ``excess advance premium tax credit 
repayment'' and ``individual responsibility penalty'' could make S. 912 
difficult to implement. Still, serious consideration should be given to 
Senator Warren's proposal which could dramatically simplify taxes, even 
eliminate tax return preparation costs. IRS already has all this 
information. At a minimum, it would be a great ``milker'' bill. Intuit 
spent $1.25 million on lobbyists and gave $2.12 million to 120 
California politicians from 2005 to 2010 to defeat the California pilot 
project, ReadyReturn from launching statewide.\3\
---------------------------------------------------------------------------
    \3\ ``Intuit's end-run,'' Los Angeles Times, July 21, 2010, http://
articles.latimes.com/2010/jul/21/opinion/la-oe-ventry-intuit-20100721; 
``The Stanford Professor Who Fought the Tax Lobby,'' https://
priceonomics.com/the-stanford-professor-who-fought-the-tax-lobby/.
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Consumption Taxes

I was disappointed to hear Senator Johnny Isakson discuss the 
insidiously named, FairTax. This is a discredited 2003 proposal by 
Congressman John Linder (R-GA) which claims that a 30 percent national 
sales tax could replace income, payroll, estate and gift taxes.\4\ 
Combined with up to 10 percent state sales tax, a 40 percent 
consumption tax would incentivize black markets and depress economic 
activity. The rate would be even higher once food, medicine, and other 
exclusions are applied. And there would still be state income tax, up 
to 12 percent. National sales tax proposals were resoundingly defeated 
in 1932 and 1942 to allow states exclusive dominion and because they 
are regressive.
---------------------------------------------------------------------------
    \4\ FairTax supporters argue that the 30-percent tax is really 23 
percent. Math as follows: a $100 item with 30% sales tax costs $130, 
that's 23% ``tax inclusive:'' $130-($130 x 23%) = $100. Thus $30 tax 
added to a $100 purchase is a 23% tax!

Some claim we have placed ourselves at a great disadvantage by relying 
on income taxes without a VAT. Most countries use some form of 
consumption tax denominated a VAT or goods and services tax. VAT 
countries can be divided into three groups, based on the reason that 
---------------------------------------------------------------------------
each adopted a VAT:

      European Union. VAT is a requirement for membership in the EU, 
and it has been adopted by EU candidates.
      Developing nations. Countries with immature or evasion-ridden 
tax systems have adopted a VAT because it's relatively easy to 
establish and administer. South Korea, for example, adopted a VAT in 
1976 because its existing tax system couldn't adequately police other 
forms of taxation.
      Other reasons. Some countries use a VAT to fund social programs 
(Australia), to maintain fiscal stability (Canada and Japan), or to 
incentivize relocation of foreign export businesses (China).

All who complain that our corporate income tax rate is the highest 
among all OECD nations fail to acknowledge that those countries impose 
a VAT, or worse, suggest this as a reason we need a VAT. The U.S. 
overall tax burden, absent a VAT, is lower than that of other OECD 
nations.

Former House Ways and Means Committee Chair Wilbur Mills explained that 
Europe adopted VAT as a substitute trade barrier, because it was needed 
to compensate for the revenue loss from tariff reductions caused by 
liberalized trade with the United States:

        We didn't say anything, publicly, at least, about the fact that 
        the European Common Market adopted such a system. They did it 
        to offset the concessions, which they had given, in a trade 
        agreement to us in the way of reduction of duties. We didn't 
        say anything about it, even though the Value Added Tax did make 
        it more difficult for us to export into the European Common 
        Market.\5\
---------------------------------------------------------------------------
    \5\ Wilbur D. Mills, ``Tax Legislation--A Look Into the Future,'' 
38 NYU. Tax Inst. 31 (1980).

VAT rebated by other nations as a border adjustment does place the 
United States. at a competitive disadvantage. For political reasons, 
the Supreme Court did not considered this an illegal ``bounty'' that 
requires Treasury to levy a countervailing duty equal to the amount 
that had been rebated. A U.S. border adjustment tax might alleviate 
this disadvantage and there is precedent for imposing it.\6\
---------------------------------------------------------------------------
    \6\ Downs v. United States, 187 U.S. 496 (1903), G.S. Nicholas and 
Co. v. United States, 249 U.S. 34, 39 (1919), Zenith Radio Corp. v. 
United States, 437 U.S. 443 (1978) deference to Treasury, 562 F.2d 1209 
(C.C.P.A., 1977), rev'g 430 F. Supp. 242 (Cust. Ct., 1977).

Stanley Surrey, Assistant Treasury Secretary in the 1960s who coined 
the concept ``tax expenditures,'' opposed a VAT as ``just a general 
retail sales tax collected in a different way.'' He wrote that adoption 
of a national sales tax would make the U.S. federal tax system 
``distinctly worse.'' Regarding international trade, he argued that a 
national sales tax would not bring any advantages to the United States. 
Finally, he argued, ``if a national sales tax were ever deemed 
desirable in the United States, it should take the form of a retail 
sales tax and not a value-added tax.'' \7\
---------------------------------------------------------------------------
    \7\ Stanley S. Surrey, ``Value-Added Tax: The Case Against,'' 48 
Harv. Bus. Rev. 86 (November-December 1970).

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A 1967 Joint Economic Committee study concluded:

        The European Common Market practice of rebating their own 
        indirect taxes on their exports and levying these same taxes on 
        imports--a practice sanctioned, incidentally by the rules of 
        the GATT--constitutes a conspicuous form of discrimination 
        against U.S. exports. Moreover, similar border adjustments by 
        the United States would be an ineffective weapon, neither 
        mitigating nor offsetting the discriminatory process, because 
        the tax structure of the United States places relatively small 
        emphasis on indirect taxes.\8\
---------------------------------------------------------------------------
    \8\ ``The Future of U.S. Foreign Trade Policy,'' 90th Cong. 1st 
Sess., at 5 (1967).

Our corporate income tax may be the highest among the OECD countries, 
but our zero VAT is the lowest. That's one reason foreigners flock to 
our shores, to purchase products exported from their own countries 
tariff free and VAT free, cheaper than at home. A prior generation 
called it ``dumping.'' \9\
---------------------------------------------------------------------------
    \9\ Frank Langfitt, ``Made in China Doesn't Mean Cheap in China,'' 
NPR, Morning Edition (November 23, 2011).
---------------------------------------------------------------------------

Implementing a 15-Percent Business Tax Rate

It's naive to assume that lowering tax rates will make corporations 
more amenable to paying income tax. The modern accounting profession 
got a major boost from the Revenue Act of 1909 which imposed a 1-
percent tax on corporations. A frenzy of tax planning followed to avoid 
that minor levy. Large corporations today maintain a tax department, 
not as a mere administrative center, but as a profit center. It is 
expected to find or devise methods to minimize taxes. Senator Bill 
Cassidy appreciated this when he commented, ``Some of these high-tech 
companies have very low effective tax rates. . . . How much lower can 
you get than zero?''

Citizens for Tax Justice regularly publicizes how more than a quarter 
of the Fortune 500 companies paid an effective federal income tax rate 
of less than 15 percent over an 8-year period. It claims that more than 
73 percent of Fortune 500 companies maintain subsidiaries in offshore 
tax havens. Collectively, multinationals reported keeping $2.5 trillion 
offshore (just 30 companies account for 66 percent of this total), 
awaiting the day of cheap repatriation or tax holiday. After tax breaks 
and deductions, Citizens for Tax Justice, noted that corporations pay 
an average effective rate of 18.5 percent rather than the 35 percent 
statutory rate. The Congressional Budget Office reported that in fiscal 
2011, corporations paid income tax of just 12.1 percent on profits 
earned from activities within the United States.\10\
---------------------------------------------------------------------------
    \10\ ``Offshore Shell Games 2016: The Use of Offshore Tax Havens by 
Fortune 500 Companies,'' U.S. PIRG Education Fund and Citizens for Tax 
Justice and Institute on Taxation and Economic Policy, http://ctj.org/
pdf/offshoreshellgames2016.pdf; ``With Tax Break, Corporate Rate is 
Lowest in 40 Years,'' Wall Street Journal, February 3, 2012, B1.

M. Carr Ferguson, former chair of the American Bar Association Section 
of Taxation, recommended transparency in publicizing the authorship and 
intent of tax provisions, elimination of loopholes, which might even 
justify a revenue-neutral tax rate as low as 15 to 20 percent and 
writing terser provisions of broader application. He suggested 
``corporate tax revenues might actually increase'' if only we would 
trust the commissioner and the courts to interpret and apply the 
provisions sensibly.\11\
---------------------------------------------------------------------------
    \11\ M. Carr Ferguson, ``How to Save the Corporate Income Tax,'' 
Tax Notes, August 29, 2011 p. 951, 2011 TNT 167-6.

Valid concerns were expressed at the hearing over how to implement 
President Trump's proposal to lower the business tax rate to 15 percent 
without setting off an avalanche of tax avoidance. Suggestions to 
restrict the low rate to capital and exclude service income would be 
subjective and complex. A less complex and subjective method would be 
to tax at the individual tax rate any funds distributed from a pass-
through entity. Only undistributed funds retained in the business would 
be taxed a 15 percent. That way, the 15 percent tax becomes a tax 
deferral, available as capital to expand business, without creating an 
unfair advantage over wage earners. It's not too different from the 
``previously taxed income'' category for S corporations prior to the 
Subchapter S Reform Act of 1980. It's a complexity this author does not 
like, but probably the best way to avoid abuse of a preferential rate 
while fulfilling the goal of employing capital in a business. Consider 
that professional service corporations also need capital and should not 
be subject to a higher tax rate than other entities. Elimination of 
---------------------------------------------------------------------------
this PSC exception would be a tax law simplification.

OECD implementation of Base Erosion and Profit Shifting is a desperate 
effort to prevent unintended tax avoidance on intellectual property. 
Establishing domicile for IP in a tax haven is how high tech companies 
pay such very low income tax rates. Any shift by the U.S. to a 
territorial tax will have to consider a version of BEPS.

Funding IRS

Admitting that Congress under-funds IRS, Senator Tom Carper was 
impressed by Mark Mazur's comment, ``Underfunding the IRS is like 
underfunding your accounts receivable department. No rational business 
would do that.'' So, why has Congress authorized private tax collectors 
to collect outstanding tax debts instead of collecting them in-house?

According to Commissioner Mark Everson (2002-2007), IRS could collect 
the tax for less, but increasing the IRS budget counts against the 10-
year revenue projection, while hiring outside contractors does not.\12\
---------------------------------------------------------------------------
    \12\ ``Hearing on Fiscal Year 2007 Appropriations for the Internal 
Revenue Service,'' House Committee on Appropriations: Subcommittee on 
Transportation, Treasury, Housing and Urban Development, and the 
District of Columbia, March 29, 2006, CQ Transcriptions.

Attempts at private tax collection in 1872, 1996, and 2006 were dismal 
failures. New Jersey's attempt ended in a 2005 scandal. The City of 
Richmond, Virginia also failed. A congressional investigation following 
the 1872 fiasco concluded, ``any system of farming the collection of 
any portion of the revenue of the Government is fundamentally wrong,'' 
and concluded that only the Bureau of Internal Revenue should collect 
taxes. The new 2017 private tax collectors are reportedly off to a 
scandalous start.\13\
---------------------------------------------------------------------------
    \13\ Tom Herman, ``IRS Plans to Use Private Firms to Pursue 
Taxpayers This Year,'' The Wall Street Journal, June 21, 2006; 
``Details Emerge Over IRS Contract Winner,'' WebCPA.com, May 5, 2006; 
``The Gifting of New Jersey Tax Officials,'' State of New Jersey 
Commission of Investigation, December 2005; ``Workers for N.J. enjoyed 
freebies,'' Bergen Record, December 21, 2005; ``City's debt collector 
gets hefty share,'' Richmond Times-Dispatch, April 23, 2006. A pilot 
program for private debt collection was attempted under the Clinton 
administration, but failed. Pub. L. 104-52 (1995); ``Contractors for 
IRS Are Accused of Abuses,'' New York Times, June 24, 2017.

Jon Talisman complained that administering health care reform was 
burdened on IRS without funding. One must appreciate how very 
resourceful IRS became in creative funding. The fee list that IRS 
publishes for issuing private letter rulings near the beginning of each 
year is supposed to be calculated in accordance with OMB Circular No. 
A-25. The first revenue procedure of each year lists most fees. For 
2017, fees ranged from $2,400 to $28,300 (up nearly 400 percent since 
2011). IRS simply raised user fees to pay for implementing Obamacare 
which Congress wouldn't fund. It's a violation of Circular A-25 rules 
---------------------------------------------------------------------------
on how fees are supposed to be set.

It is essential that Congress properly fund IRS.

Closing

Finally, in the entire hearing, I heard no mention of Ways and Means 
Chairman Dave Camp's 2014 Tax Reform proposal. That was the result of a 
three years study proposing to vastly simplify the income tax while 
broadening the base. It contains something for everyone to hate. Yet, 
it is a very coherent and comprehensive proposal for study and 
consideration in any income tax reform.

World War II Treasury Counsel, Randolph Paul was the architect of our 
modern income tax system, founder of the eminent law firm Paul Weiss 
Rifkind Wharton and Garrison, and a coauthor of Merten's Law of Federal 
Income Taxation. He had timeless advice regarding tax reform:

        The task of building a sound tax system will be hard and long. 
        It is not a partisan job; it is not a task that will be 
        completed by any one Congress. There will always be things left 
        to do, if we have the wisdom to benefit by the new insight 
        which experience can bring to open minds, and if our tax system 
        is to fit the changing economic and social needs of each 
        succeeding generation . . . the final compromise of all 
        conflicting forces will be a tax system intelligently designed 
        to make a continuously prosperous America.\14\
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    \14\ Randolph E. Paul, Taxation for Prosperity (Indianapolis, Bobs-
Merrill Company, 1947), 418.

                                   [all]