[Senate Hearing 115-701]
[From the U.S. Government Publishing Office]
S. Hrg. 115-701
EARLY IMPRESSIONS OF THE NEW TAX LAW
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HEARING
BEFORE THE
COMMITTEE ON FINANCE
UNITED STATES SENATE
ONE HUNDRED FIFTEENTH CONGRESS
SECOND SESSION
__________
APRIL 24, 2018
__________
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
Printed for the use of the Committee on Finance
__________
U.S. GOVERNMENT PUBLISHING OFFICE
38-066 PDF WASHINGTON : 2019
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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 SHELDON WHITEHOUSE, Rhode Island
A. Jay Khosla, Staff Director
Joshua Sheinkman, Democratic Staff Director
(ii)
C O N T E N T S
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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...................... 5
WITNESSES
Cranston, David K., Jr., president, Cranston Material Handling
Equipment Corporation, McKees Rocks, PA........................ 9
Kamin, David, professor of law, New York University School of
Law, New York, NY.............................................. 11
Kysar, Rebecca M., professor of law, Brooklyn Law School, New
York, NY....................................................... 12
Holtz-Eakin, Douglas, Ph.D., president, American Action Forum,
Washington, DC................................................. 14
ALPHABETICAL LISTING AND APPENDIX MATERIAL
Cranston, David K., Jr.:
Testimony.................................................... 9
Prepared statement........................................... 45
Response to a question from Chairman Hatch................... 46
Grassley, Hon. Chuck:
Prepared statement........................................... 47
Hatch, Hon. Orrin G.:
Opening statement............................................ 1
Prepared statement........................................... 47
Holtz-Eakin, Douglas, Ph.D.:
Testimony.................................................... 14
Prepared statement........................................... 50
Responses to questions from committee members................ 58
Kamin, David:
Testimony.................................................... 11
Prepared statement........................................... 60
Responses to questions from committee members................ 70
Kysar, Rebecca M.:
Testimony.................................................... 12
Prepared statement........................................... 73
Responses to questions from committee members................ 84
McCaskill, Hon. Claire:
``Manufactured Crisis: How Devastating Drug Price Increases
Are Harming America's Seniors,'' minority staff report,
Homeland Security and Governmental Affairs Committee....... 87
Thune, Hon. John:
``The Wages of Tax Reform Are Going to America's Workers,''
by Kevin Hassett, The Wall Street Journal, April 17, 2018.. 97
Wyden, Hon. Ron:
Opening statement............................................ 5
Prepared statement with attachment........................... 99
Communications
AARP............................................................. 103
Ackerman, Harvey and Surie....................................... 104
American Citizens Abroad......................................... 105
Apitz, Jeff...................................................... 108
Berdahl, Ron..................................................... 109
Bond Dealers of America (BDA).................................... 110
Brodie, Heather.................................................. 113
Center for Fiscal Equity......................................... 114
Coalition to Promote Independent Entrepreneurs................... 115
Conrad, Margaret................................................. 118
Democrats Abroad................................................. 119
Goldstein, Douglas............................................... 125
Goodman, Jerry and Margaret...................................... 126
Gordon, Isaac.................................................... 127
Gouras, Marianne................................................. 127
Herman, S.T...................................................... 128
Herman, Suzanne.................................................. 129
Hess, Herbert Michael............................................ 131
Huber, Aaron..................................................... 132
Huber, Yosefa Julie R., CPA...................................... 133
Klein, Charles................................................... 135
Kogod School of Business......................................... 135
National Multifamily Housing Council and National Apartment
Association.................................................... 137
Policy and Taxation Group........................................ 140
Power, Mike...................................................... 141
Precious Metals Association of North America (PMANA)............. 142
Public Citizen................................................... 144
Rappaport, Steven................................................ 146
Richardson, John................................................. 148
Silver, Monte.................................................... 152
Solby, Marc...................................................... 153
Waxman, Isaac D.................................................. 154
Webster, Jenny................................................... 155
EARLY IMPRESSIONS OF THE NEW TAX LAW
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TUESDAY, APRIL 24, 2018
U.S. Senate,
Committee on Finance,
Washington, DC.
The hearing was convened, pursuant to notice, at 2:33 p.m.,
in room SD-215, Dirksen Senate Office Building, Hon. Orrin G.
Hatch (chairman of the committee) presiding.
Present: Senators Grassley, Thune, Portman, Toomey, Scott,
Wyden, Cantwell, Nelson, Menendez, Cardin, Brown, Bennet,
McCaskill, and Whitehouse.
Also present: Republican staff: Jay Khosla, Staff Director;
Jennifer Acuna, Tax Counsel; Chris Allen, Senior Advisor for
Benefits and Exempt Organizations; Chris Armstrong, Chief
Oversight Counsel; Tony Coughlan, Tax Counsel; Alex Monie,
Professional Staff Member; Eric Oman, Senior Policy Advisor for
Tax and Accounting; and Jeff Wrase, Chief Economist. Democratic
staff: Joshua Sheinkman, Staff Director; Ryan Abraham, Senior
Tax and Energy Counsel; Adam Carasso, Senior Tax and Economic
Advisor; Michael Evans, General Counsel; Sarah Schaefer, Tax
Policy Advisor for Small Business and Pass-throughs; and
Tiffany Smith, Chief Tax 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.
Good afternoon and welcome to today's hearing. Before we
get into the meat of today's hearing, I would like to thank
Senator Wyden and Senator Scott for suggesting this meeting. I
look forward to having a conversation about the important
changes we made in our tax reform bill and what kinds of
technical corrections we might make to ensure the law is
implemented as Congress intended.
As we gather to discuss ways to make tax reform even
better, let us remind ourselves every member who actively
participated in drafting the bill should be proud of this new
tax law. We were proud when we passed it, and we are even
prouder now as, all across the Nation, evidence affirms that
the new law is tangibly benefiting millions of Americans.
More than 500 companies have announced wage hikes,
increased benefits, more jobs, and increased investment or
expansion in the United States thanks to the new law. For
example, in the past month, Kroger announced it will spend $500
million on employee compensation. Verizon is doubling its
commitment to STEM education, helping hundreds of schools and
millions of students. And a new study by the National
Association of Manufacturers shows that 93 percent of
manufacturers are enthusiastic and optimistic about the future
in large part thanks to a tax code that works for American
innovators and manufacturers. Numerous other studies show
increasing optimism among American business leaders rising
right along with wages and employment numbers.
American individuals too are becoming more supportive of
the law as they witness the benefits it brings to businesses
and households. Though only 37 percent approved of the law when
it was passed in December, more than 50 percent expressed
support in February, according to a New York Times poll. Among
Democrats, support rose by more than 10 percent in the same
time period. It is hard to deny a truth that expands your
pocketbook.
Now I will be the first to admit that, good as it is, there
are things we could have done to make the bill even better.
Unfortunately, that is largely because Democrats refused to
positively participate in writing the bill. In fact, the only
efforts I saw coming from the other side were to undercut our
efforts, put on political theater, and prevent us from even
adopting their own ideas from the very beginning. For anyone
out of touch enough to think that I would just throw my good
friends under the bus for no reason, let me give you a quick
history.
Last July, 45 of our Democratic colleagues wrote us what
can only be called a legislative ransom note. That letter
included a list of, quote, ``prerequisites,'' unquote,
including a requirement that we agree up front to never use the
reconciliation process used to pass numerous bipartisan tax
bills over the last few decades.
Now, I tend to think that while such bellicose political
tactics certainly do not help getting good bipartisan
legislation, they should not preclude both sides from at least
talking to each other afterward. Unfortunately, it seems that
my expectations after more than 40 years of senatorial service
were proven wrong once again.
As we continued to work on our draft bill, I was saddened
and rather stunned at the lack of meaningful interaction from
the Democrats on this committee. In fact, I did not hear
anything of substance until we had already spent months writing
a draft bill that we introduced in committee. Once we got
there, we were glad to finally hear some of the thoughts my
Democratic colleagues had. In the end, we happily included six
amendments supported by eight different Democrats on this
committee.
Now, if you are listening to this and thinking that this is
just a bit of political theater, I would understand. Truly, I
think you had to be there to believe it. And the craziest part
is, it did not end there. Just as we began to negotiate the
final bill before we got to the floor, I was stunned by the
base partisanship that had grabbed hold of my longtime friends
on the other side.
In fact, as just one example of this, Democrats slashed
their own provision to fund the Volunteer Income Tax Assistance
program which helps low-income, disabled, and non-English-
speaking taxpayers with their filings for free. No one on
principle disliked this provision; Democrats just did not want
a good thing in the tax law, so they used a parliamentary
procedure to gut their own amendment from the bill behind
closed doors. And their partisan charade did not end there. In
fact, they used the Byrd Rule to excise the title and the table
of contents.
If someone thinks that tax reform is too complicated, that
is in large part because there is not a table of contents,
something most readers like when thumbing through more than 100
pages of legislative text. But that is what the other side
insisted upon. Honestly, I cannot recall ever seeing something
like that in my more than 40 years here in the United States
Senate. And all of that was just a sign of how desperate the
other side was. They did not care what they cut, nor did they
care about any sense of earnest review.
Now, I am not a Senator with a flare for the dramatic. That
is why I did not bring this up at the time, nor did any of my
colleagues that I know of, because, frankly, we were too busy
trying to help get this thing done, trying to help the rest of
America get a tax code that actually works.
That is why when the bill did pass, it came with plenty of
provisions so good that all Americans can be pleased with them,
no matter what their political party. For example, Opportunity
Zones, established in a measure proposed by Senator Scott, draw
investment to Americans in impoverished regions of the country.
Additionally, across the board, tax rates have tumbled
down. Individuals of all income levels will see tax cuts, with
a typical family of four making the median family income of
$75,000 a year seeing their taxes cut by more than half. And
the corporate tax rate has been cut from 35 percent to 21
percent, which will keep America competitive in the global
economy. Not only is this a big boon for American businesses,
but it helps their employees too, in the form of higher wages,
more jobs, and increased retirement savings and benefits.
These are real dollars that give middle-class Americans
more money in their pockets every month, money they work for
and deserve more than the bloated and overgrown government
does.
We made sure the law creates proper incentives. We made our
international tax system a territorial one, ensuring that
American companies are more competitive overseas and
encouraging them to bring earnings and investments back home.
Again, that was a bipartisan proposal that we have discussed
for years, and I am glad we were finally able to enact it into
law.
We doubled the Child Tax Credit and expanded its
refundability--again, another bipartisan proposal my colleagues
could never seem to get passed into law. We also doubled the
standard deduction. Taken altogether, provisions like these are
the reason the Joint Committee on Taxation found that the
overall distribution of the new tax bill is directed toward the
middle class.*
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* For more information, see also, ``Overview of the Federal Tax
System as in Effect for 2018,'' Joint Committee on Taxation staff
report, February 7, 2018 (JCX-3-18), https://www.jct.gov/
publications.html?func=startdown&id=5060; and ``Tables Related to the
Federal Tax System as in Effect 2017 Through 2026,'' Joint Committee on
Taxation staff report, April 23, 2018 (JCX-32R-18), https://
www.jct.gov/publications.html?func=startdown&id=5093.
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And since I am on that topic, I would like to mention
briefly a response to some concerns I have heard about section
199A. It is true that many small-business owners are going to
have their taxes cut. We did that very much intentionally. And
even CBO has explicitly stated that these cuts will help grow
small businesses. In fact, they recently said because small
businesses ``will increase after-tax returns on investment,
they are also anticipated to boost investment by pass-through
businesses.'' That increased investment means that their
businesses grow, hiring new employees, growing the communities
around them, and generally benefiting the American economy, all
worthy goals none of us would be ashamed of. And these
businesses are a major part of our economy, I might add.
According to the Small Business Administration, our most
recent numbers indicate there are 29.6 million small businesses
in the United States. They make up 99.9 percent of firms with
paid employees. From 1993 to 2016, small businesses accounted
for 61.8 percent of new jobs. And the majority of these small-
employer businesses are pass-through businesses.
So let me pose a question back to my colleagues: why would
we not want to get more money back to these business owners so
that they can grow their businesses, hire more employees, and
improve our economy? I honestly cannot think of a reason.
As much as we have done, though, the work is not over. And
that is reason for optimism. As we make technical corrections
to the bill--par for the course for any major tax bill--we will
be able to enhance what the law already does well, ensuring
that Americans get tax relief, more jobs, and better wages. We
will also look ahead to implementation. After all, Americans
are just starting to see some of the many benefits of this law.
Besides the wage boosts, bonuses, and other benefits they
have started to receive, Americans will see yet more benefits
next year when they file their taxes at lower rates and with
larger credits and deductions.
In order to continue seeing all of those benefits, though,
we need to ensure that the law is implemented as intended by
Congress. That means having the proper people at Treasury and
the IRS who can ensure a fulsome and thoughtful process.
Confirming our nominees in short order will be a critical part
of ensuring all of the right people are on duty for this
critical endeavor. That includes Mr. Charles Rettig, who has
been nominated to serve as IRS Commissioner. I look forward to
processing his nomination in short order, though with the
thoroughness this committee is known for. And I also look
forward to getting Mr. David Kautter back to Treasury, where he
can start implementing the new law.
For all of these reasons, I truly believe there is reason
for optimism. And now that our political theater is moot, I am
anxious to get back to our bipartisan tradition in this
committee. Surely, we can work on all this in a bipartisan
manner, reaching across the aisle to ensure fairness in our tax
code and in its implememtation.
Before I finish, I want to point out that the tax law is,
in one sense, already a bipartisan bill. True, one party
refused to participate and did everything it could to make the
bill too poor to pass, but many Democratic priorities were
included in the bill, such as Senator Menendez's sexual
harassment proposal, and lowering the bottom tax brackets.
Senator Wyden himself has long supported lowering of the
corporate tax rate, as did President Obama, and we were finally
able to do so.
Now, I am pleased with my history of bipartisanship in the
Senate. And now, perhaps more than we have had for years, we
have a chance to move forward together. So I look forward to
working across the aisle to enhance the new tax law to be the
best it can be. And I am very grateful for my colleagues on the
other side.
And with that, I will turn it over to 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 very much, Mr. Chairman.
Mr. Chairman, respectfully, I have to disagree strongly
with your characterization that, on this side of the aisle, our
work was a charade, theater--I think you may have had some
stronger words with respect to taxes.
On this side of the aisle, we repeatedly called for this
committee to use the process that we used for the CHIP bill,
where we extended it for 10 years. Family First, our historic
transformation of the foster care system, the CHRONIC Care
bill--those were major pieces of legislation. And at every step
along the way, there was bipartisanship.
The Chairman. There was.
Senator Wyden. There was not, respectfully, Mr. Chairman,
an ounce of that on this tax bill.
And I see my friend Senator McCaskill here. Time after time
after time Senator McCaskill said, ``The tax code is broken,
folks; we have to have a bipartisan change.'' She and a number
of our colleagues led an effort where at least 15 Senate
Democrats--and I was proud to join them--came together and
said, ``Let us do this like we did when Democrats and
Republicans got together with President Reagan.'' There was not
any effort like that.
And, Mr. Chairman, as you know, I wrote two full bipartisan
tax reform bills--they are the only bipartisan tax reform bills
to this day--with a member of the President's Cabinet, former
Senator Dan Coats, who sat down at the end of the dais.
So you know of my fondness for you, Mr. Chairman.
The Chairman. I do.
Senator Wyden. I just have to respectfully say that the
idea that on this side of the aisle there was nobody interested
in bipartisanship--my two colleagues--Senator Whitehouse was
not on the committee at the time--but my two colleagues who are
here repeatedly said, ``Let us try to find a way to come
together.''
And I cannot put it any more specifically than this, Mr.
Chairman: the process used for tax reform was light years away
from what we did for CHIP, from what we did for CHRONIC Care,
from what we did for Family First. And I think our country will
regret it.
My view is that this tax law is shaping up to be one of
history's most expensive broken promises. It will probably go
right up there with the quote, ``We will be greeted as
liberators.''
The ink on the new law is barely dry, but there are already
calls for a second round of tax cuts. Colleagues, in my view,
lawmakers ought to think twice about big, new promises if they
have not delivered on the ones they have already made.
So let us take stock of the early returns on the new tax
law. One of the biggest selling points, maybe the biggest, was
the promise from the administration that workers would get, on
average, a $4,000 wage increase. The reality is the new law has
done little for folks who work so hard to earn a wage and cover
the bills. That is the overwhelming majority of individual
taxpayers. It has barely registered with them at all. If the
law really was delivering huge benefits to working families,
you would never hear the end of it on the airwaves.
When you are talking about legislation that is going to
cost nearly $2 trillion when it is all said and done, it is not
easy to fail at your stated goal so spectacularly. And that is
why it is not exactly surprising this has not cranked up a
whole lot of excitement among working families. It has not gone
unnoticed by everybody.
Just yesterday, the nonpartisan scorekeepers at the Joint
Committee on Taxation released a new analysis of the pass-
through tax break. Back when I was coming up, the pass-throughs
were for small businesses. They were for the corner
neighborhood shop. For those who do not spend their days poring
over all the finer points of the tax debate, that is what
everybody thought was a small business. In fact, in some ways
some people talked about it, you would think it only applied to
corner-store owners whose names were literally ``Mom and Pop.''
Well, according to the new figures from the Joint Committee
on Taxation, nearly half of the benefit of the new pass-through
break is going to go to taxpayers with incomes of a million
dollars or more. That is not the kind of garage and diner and
community pharmacy the phrase ``small business'' brings to
mind.
Once again, the fortunate few are reaping the benefits.
New data out last week showed that in just the first 3
months of this year, the biggest Wall Street banks pocketed
$3.6 billion as a result of the new tax law, more than a
billion dollars going to the banks each month. But millions of
families are looking around and wondering when they are going
to see those wage hikes that they were promised.
Finally, a few weeks ago, the committee held our annual
hearing on tax filing season. There was a lot of discussion
about what the new tax law means for small business, which is a
topic we are going to focus on again today.
I understand one of our witnesses will testify to one of
the challenges a whole lot of small businesses are facing: they
owe estimated tax payments. But they are in the dark about what
they are going to owe this year under the new rules. In our
witness's case, I am told there was some back-of-the-envelope
math used to figure this out.
What I hear at home is that there are a whole lot of
businesses that cannot make an estimate of their estimated
payments. For them, the new rules pertaining to pass-through
status are the definition of complexity.
So here is what this all means. The facts do not resemble
the promises when it comes to this tax law. Bottom line for
most Americans, particularly hardworking people who do not have
accountants and lawyers scouring the code to exploit loopholes:
the new tax law has turned out to be an awfully expensive dud.
The big promises they heard about wage increases and a new era
of simpler tax rules have not come to pass.
So in my view, lawmakers ought to keep their promises when
it comes to tax cuts before rushing ahead with a second bill.
So let me close where I began, Mr. Chairman.
Mr. Chairman and colleagues, I do not think the tax debate
had to end the way it did. I have noted what my colleagues here
have done. I have noted my involvement, years and years of
involvement, Mr. Chairman, of bipartisanship, real
bipartisanship like we saw when Democrats and President Reagan
got together.
And certainly, this process turned into a one-sided
exercise which does not resemble the way the committee worked
on those break-through bills this year, and it certainly is
light years away from the great tradition of bipartisanship
that this committee has always been all about.
So I close by saying, Mr. Chairman, I hope this committee
reverts to tradition on taxes. I hope we revert to our
tradition of spending the time in meetings together--we did not
have a single such meeting in this instance--to try to deal
with the complexity of tax reform and to ensure that it is
built around what the American people were promised, which is
helping the middle class and giving everybody in America the
opportunity to get ahead.
Thank you, Mr. Chairman.
The Chairman. Thank you, Senator.
[The prepared statement of Senator Wyden appears in the
appendix.]
The Chairman. I just wanted the bipartisanship myself. But
in July, 45 Democratic Senators sent us a letter effectively
saying that they would not participate in tax reform, which is
pretty amazing to me. All I can say is that we have differing
viewpoints here, but I am glad we got tax reform done, and the
economy is much better off because of it.
Senator Wyden. Mr. Chairman, can I just respond to that?
The Chairman. Sure.
Senator Wyden. And I will be very brief.
The Chairman. Sure.
Senator Wyden. The first sentence of the letter that you
are citing, and I would like to read it, is, ``We are writing
to express our interest in working with you on bipartisan tax
reform.'' That was the first sentence of the letter, and it was
repeated by these Senators again and again and again. And it
happens to be what we believe now. And that is why I hope we
revert to tradition.
The Chairman. Well, I hope we can resolve these problems
and work together in the future, that is for sure.
I would like to extend a warm welcome to each of our four
witnesses today. I want to thank you all for coming. I will
briefly introduce each of you in the order you are set to
testify.
First, we will hear from Mr. David Cranston, Jr., a
business owner in western Pennsylvania. Because he is from his
home State, Senator Toomey has asked that he be able to
introduce Mr. Cranston.
Senator Toomey, please proceed.
Senator Toomey. Thank you very much, Mr. Chairman.
It is my pleasure to be able to welcome one of my
constituents, David Cranston, to the committee.
David Cranston is the president of Cranston Material
Handling Equipment Corp. This is a third-generation small
business in Robinson Township, PA, in western Pennsylvania,
founded in 1957 by Mr. Cranston's grandfather. Mr. Cranston has
worked at the company since 1983, and he now leads a team of
seven full-time and two part-time employees.
Cranston Material sells and installs material handling and
storage equipment to manufacturing companies to help them store
and lift the products that they make.
So thank you, Mr. Cranston, for coming today to share how
tax reform is helping your business and workers. This is
consistent with the story I have heard from small businesses
across the commonwealth over the last 4 months, that tax reform
is working. And, Mr. Cranston, the fact is, businesses like
yours are really the backbone of our economy, but they are also
the backbone of our community.
So I look forward to hearing your testimony. And thank you
for joining us today. Thank you, Mr. Chairman.
The Chairman. Thank you, Senator.
We are happy to welcome you here.
The second witness on our panel is Mr. David Kamin, a
professor of law at New York University School of Law.
Professor Kamin has written on a range of areas, including
retirement security, taxation of capital, tax planning, and
budget sustainability. Prior to joining NYU, Professor Kamin
worked in President Obama's administration as Special Assistant
to the President for Economic Policy. Before that, Professor
Kamin served as Special Assistant and later Adviser to the
Director of the U.S. Office of Management and Budget.
Professor Kamin earned a B.A. in economics and political
science from Swarthmore College and later his J.D. from the NYU
School of Law.
Next to speak will be Ms. Rebecca Kysar, a professor of
law. She is at the Brooklyn Law School, where she teaches and
researches in the areas of Federal income tax, international
tax, and the Federal budget and legislative process. Professor
Kysar's articles have appeared in the Cornell Law Review, the
Iowa Law Review, the Notre Dame Law Review, and several others.
Prior to joining Brooklyn Law School, Professor Kysar practiced
at Cravath, Swaine, and Moore, one of our more prestigious law
firms.
Professor Kysar received her B.A. from Indiana University
and graduated from law at Yale University, where she was a
senior editor of the Yale Law Journal and a Coker teaching
fellow.
Finally, we have Dr. Douglas Holtz-Eakin, the current
president of the American Action Forum. We are really happy to
see you again and to have you here.
During 2001 and 2002, Dr. Holtz-Eakin served as the Chief
Economist of the President's Council of Economic Advisers,
where he helped craft policies addressing the recession and
aftermath of the terrorist attacks of September 11, 2001. From
2003 to 2005, he acted as the sixth Director of the nonpartisan
Congressional Budget Office, where he addressed numerous
policies, including the 2003 tax cuts, the Medicare
prescription drug bill, and Social Security reform. Dr. Holtz-
Eakin has built an international reputation as a scholar of
applied economic policy, econometric methods, and
entrepreneurship.
He began his career at Columbia University in 1985 and
moved to Syracuse University from 1990 to 2001. At Syracuse, he
became Trustee Professor of Economics at the Maxwell School,
chairman of the Department of Economics, and associate director
of the Center for Policy Research.
Dr. Holtz-Eakin received his B.A. from Denison University
and his Ph.D. from Princeton University.
I want to thank you all for coming and testifying today.
Mr. Cranston, we will begin with your opening remarks.
STATEMENT OF DAVID K. CRANSTON, JR., PRESIDENT, CRANSTON
MATERIAL HANDLING EQUIPMENT CORPORATION, McKEES ROCKS, PA
Mr. Cranston. Good afternoon, Chairman Hatch, Ranking
Member Wyden, and members of the Senate Finance Committee.
My name is David Cranston, and I am the president of
Cranston Material Handling Equipment Corporation, a small
business located in western Pennsylvania just outside of
Pittsburgh. And I appreciate the opportunity to represent my
company and the National Federation of Independent Business at
this hearing today.
NFIB is the Nation's leading small-business advocacy
organization. Founded in 1943, its mission is to promote and
protect the rights of members to own and operate and grow their
businesses. NFIB represents roughly 300,000 independent
business owners located throughout the United States, including
over 13,000 in my home State of Pennsylvania.
My company is truly a small business, with seven full-time
and two part-time employees. We are an S corp that sells
equipment to manufacturing companies to help them store and
lift the products that they are making. I am here today to
share with you how the Tax Cuts and Jobs Act is having a
positive impact on businesses as small as mine.
One of the biggest challenges facing small business is
growing the amount of capital that is needed to operate and
expand. To a small-business owner, capital, the cash that we
have available to us, is the lifeblood of the business. We use
it to purchase equipment, buy inventory, meet loan obligations,
buy new products, hire and train employees, finance
receivables, and simply create enough liquidity for the
business to operate day to day.
When you think of all the purposes it is used for, you
would not think it should be so hard to come by. But I can tell
you it is unbelievably hard to accumulate. It is particularly
hard to have enough excess capital available in your business
to take advantage of new growth opportunities. The good news is
that, for many small pass-through businesses like mine, the Tax
Cuts and Jobs Act provides us with substantial help in
accumulating capital in order to grow.
Like many business owners, I pay estimated taxes quarterly.
In order to pay those taxes, I take cash out of my company each
quarter. Those payments suck my working capital right out of my
business quarter after quarter.
Under the Tax Cuts and Jobs Act's new section 199A, I now
qualify for a 20-percent deduction on my pass-through income.
In real terms, this means I will be able to keep between $1,200
and $2,500 a quarter in my business that I otherwise would have
to have paid in taxes. The ability to keep $5,000 to $10,000 a
year in my company is a big deal to a small-business owner like
myself.
Moreover, and probably more importantly, the cumulative
effect over several years will be substantial. These savings
will allow me and the millions of small businesses like mine to
be in a better position to take advantage of opportunities to
grow or improve our operations. In fact, since the first of the
year, I have decided to expand into a new product line. To
launch this new product, I need to purchase new equipment,
invest in training, and build a new website. The tax savings
put me in a better financial position to self-fund this new
product.
My experience is not unique. Recent NFIB research has
tracked record numbers of small businesses across the country
saying that now is a good time to expand.
The vast majority of businesses throughout the country are
small businesses like mine with a handful of hardworking
employees serving their customers to the best of their
abilities. Business owners are always looking at new ideas and
wanting to take advantage of new opportunities, but often we
cannot do so if we do not have the cash to reinvest in our
businesses.
Another effect the Tax Cuts and Jobs Act has had on me is
to increase my optimism for the future. We, like many small
businesses, sell our products and services primarily to larger
corporations. I can tell you that my optimism that the economy
has a real opportunity to continue improving was dramatically
increased.
In January of this year, I read numerous articles in The
Pittsburgh Post-Gazette and our local business paper about one
corporation after another announcing that they are increasing
capital spending because their taxes are being reduced.
It is often stated, and in my experience it is true, that
the products and services large businesses purchase every day
greatly impact the community or the region in which they find
themselves.
Again, my personal experience is reflected in NFIB survey
data showing some of the highest levels of small-business
optimism since NFIB began conducting a survey 45 years ago.
When business owners are optimistic, they are much more
inclined to invest in growing their businesses.
The Tax Cuts and Jobs Act has not only reduced taxes for
businesses like mine, it has created an environment where more
business owners feel confident to take cash from the tax
savings and invest it back into their businesses. For these
reasons, I believe the Tax Cuts and Jobs Act is spurring
business investment and, therefore, has set the stage for
increased economic growth for years to come.
I feel so strongly about the benefits of this law that I
was willing to take 2 days away from my own company to come
down and share with you what I am seeing and how my business is
being positively impacted. My testimony is not theoretical
presentation of data, but it is actually what I am experiencing
and hearing from other business owners who are making decisions
based on the changes brought about by this legislation.
Thank you for giving me this opportunity to testify.
The Chairman. Well, thank you; we appreciate your
testimony.
[The prepared statement of Mr. Cranston appears in the
appendix.]
The Chairman. And we will turn to you, Mr. Kamin.
STATEMENT OF DAVID KAMIN, PROFESSOR OF LAW,
NEW YORK UNIVERSITY SCHOOL OF LAW, NEW YORK, NY
Mr. Kamin. Thank you, Chairman Hatch, Ranking Member Wyden,
and members of the committee, for the opportunity to come here
to discuss the recent tax bill. My name is David Kamin, and I
am a professor of law at NYU, where my work focuses on Federal
budget and tax policy.
The 2017 tax act is a lost opportunity to overhaul the tax
code for the better. Our tax system had a number of significant
flaws before this bill, and while the legislation makes some
worthwhile targeted improvements, its overall thrust is to go
in the wrong direction along some of the most important
dimensions.
First, the legislation is expected to add $1.9 trillion to
the deficit over the next decade, according to the latest
estimate from the Congressional Budget Office, and that
includes the effects of the tax cuts on the economy. Those who
say this legislation will pay for itself or come anywhere close
to doing that are speaking contrary to all credible evidence.
This bill will not leave us with enough revenue to run a 21st-
century government and adequately care for an aging population.
As a result, it puts at risk commitments, investments, and
services that are important for low- and middle-income
Americans.
Second, the legislation provides the largest benefits to
the
highest-income Americans and seems likely to leave typical
families worse off in the end. As a share of income in 2018,
the bill gives an average tax cut to the top 5 percent that is
over twice as large as for a typical family in the middle class
and over nine times as large as for a typical low-income
family. That does not even count the negative effects of
millions of low- and middle-income Americans no longer having
health insurance as a result of the bill's repeal of the
individual mandate.
And unfortunately, the picture I just painted, where all
income groups get a tax cut but the top wins more, is too
optimistic when we look out over time. Eventually, this tax cut
will have to get paid for, and there is real risk that, when
that happens, it will be low- to middle-income Americans who
will be the ones bearing much of the burden of the tax cuts as
in the budget plans put forward by the current administration,
as well as this Congress.
Third, the legislation is a bonanza for tax planning, by
preferentially taxing certain kinds of income and drawing
complex, arbitrary, and unfair lines. In the reformed system,
corporations can be used as tax shelters to avoid the top
individual rate. Alternatively, people in the right sectors or
with good-enough tax counsel can take advantage of the new
deduction for certain kinds of pass-through businesses, but
only very certain kinds.
This pass-through deduction for people earning business
income that is taxed at the individual level represents the
very worst kind of tax policy: regressive, complex, picking
winners and losers in different sectors haphazardly, and then
generating significant incentives for people to rearrange their
businesses to try to become eligible. For those who say this is
necessary to help America's small businesses, I say there are
much better ways than a provision this flawed and this skewed
to the highest-income Americans.
These kinds of tax-planning opportunities throughout the
bill mean the legislation seems likely to lose even more
revenue and give even more benefits to the best-off than
initial estimates suggest.
Fourth, supporters of the tax legislation will often
justify the bill in terms of a rise in economic growth, but
that effect is very small, could be better achieved in other
superior ways, and does not change the core conclusions that
the legislation is fiscally unsustainable and
disproportionately helps those at the top, likely at the
expense of low- and middle-income workers.
In discussing the growth effects of this tax bill, it is
important to focus not on what theoretical tax reforms might
do, but on what this one did. And credible independent
estimators from CBO to JCT to the IMF to Penn Wharton find an
effect on annual growth that is 0.1 percentage point per year
or less over the next decade. That is well short of the 0.35
percentage point per year that the administration claimed would
result from the corporate tax reform alone to help offset the
costs of this bill.
To give one other comparison, Robert Barro and Jason Furman
recently found that simply extending bonus depreciation at one-
sixth of the cost of this bill would have had a similar growth
effect.
We can and must do better. Tax reform should raise more
revenue, not less. It should ask more, especially from the top,
not less. It should reduce arbitrariness and complexity to
create an even playing field across people and businesses,
rather than the opposite. And it should reduce unnecessary
distortions and preferences that hold back the economy.
The 2017 law made some targeted changes that went in the
right direction, such as limiting the corporate preference for
debt financing, but the plan overall fails to meet the most
important goals we should have for our tax system. This means
true tax reform should continue to be on the agenda, a reform
that undoes the damage of this bill and takes our system in the
right direction.
[The prepared statement of Mr. Kamin appears in the
appendix.]
STATEMENT OF REBECCA M. KYSAR, PROFESSOR OF LAW, BROOKLYN LAW
SCHOOL, NEW YORK, NY
Ms. Kysar. Good afternoon, Mr. Chairman, Ranking Member
Wyden, and members of the committee. My name is Rebecca Kysar,
and I thank you for the opportunity to testify on the recent
tax legislation.
My primary topic today is international tax, but before
addressing international, I would like to make a few comments
about the legislation generally.
One of the most unfortunate aspects of the legislation is
its immense cost. By adding to the deficit over the next decade
by $1.9 trillion, the legislation leaves the country with fewer
government resources just as social needs and demographic
shifts begin to demand much more of them. This figure, however,
is likely to be a low estimate of the legislation's long-term
effects. Many of the revenues are front-loaded into the 10-year
budget window. Moreover, the estimate assumes that several far-
off tax increases will go into effect, a perhaps unlikely
event.
The costs will also likely be much greater if the law's
expiring provisions or a portion of them are made permanent.
Numerous tax-planning opportunities that have been created by
the new legislation will lose vast amounts of revenue. Finally,
if the new U.S. taxing environment spurs other countries to
engage in tax competition, as one would expect, this might
reduce the anticipated growth effects of the legislation.
Additionally, the need for international tax reform was the
impetus for the legislation, but became the proverbial tail
wagging the dog. In an attempt to deal with base erosion and
profit-shifting strategies of multinationals, we have instead
created new ones on the domestic side. For instance, the new
pass-through deduction, which was aimed at creating parity with
the new lower rate available on corporate income, punishes
workers in certain industries, substituting congressional
judgment for market discipline and allowing for significant
tax-planning and revenue-losing opportunities.
Given the enormous loss of government resources and
gamesmanship the legislation will generate, I think it is fair
to ask a lot of the new international regime. Yet the
international provisions fall short, mostly due to avoidable
policy choices.
Let me say at the outset that the baseline against which I
am assessing the international provisions in the new law is not
the old, deeply flawed system, because that bar is simply too
low. Judged against possible alternative policies that could
have been enacted, however, the new international provisions
look more problematic.
In my testimony, I concentrate on four serious problems
created or left unaddressed by the regime. First, the new
international rules aimed at intangible income incentivize
offshoring. GILTI is not a sufficient deterrent to profit-
shifting, because the minimum tax rate is, at most, half that
of the 21-percent corporate rate. Also, the manner in which the
foreign tax credits are calculated under the new minimum tax
regime encourages profit-shifting.
Furthermore, the GILTI and FDII regimes together encourage
firms to move real assets and accompanying jobs offshore,
because of the unfortunate way they define intangible income.
Also, the instability of the legislation overall, due to the
partisan manner in which it was passed and the fact that it is
deficit-financed, means companies may be also unwilling to rely
on some of the law's incentives to keep investment here.
Second, the new patent box regime will likely not increase
innovation, it causes WTO problems, and can be easily gamed.
The economic evidence on even better-designed patent box
regimes than this one is mixed. Moreover, because the FDII
reduction is granted to exports, it likely qualifies as an
impermissible export subsidy under our trade treaties. Firms
may also be able to take advantage of the FDII deduction by
disguising domestic sales as tax-preferred export sales.
Third, the new inbound regime has too-generous thresholds.
This allows multinationals with significant revenues and assets
to engage in a great deal of profit-shifting. Also, firms can
avoid the regime entirely by packing intellectual property with
cost of goods sold.
Finally, and most importantly, the new regime falls short
of true international tax reform. The regime unwisely retains
the place of a corporation as the sole determinant of corporate
residency and subscribes to the fiction that the production of
income can be sourced to a specific locale. These concepts
should be updated and revisited, and new supplemental sources
of revenue, like consumption taxes, should be seriously
explored to make up for a shrinking corporate income tax base.
A longer-term objective should be to reach international
consensus on how to tax businesses selling to a customer base
from abroad. This should include serious reexamination of our
double-taxed treaty regime which reinforces ancient conceptions
of how income should be allocated among nations.
Together, these problems underscore the necessity of
continuing to improve the tax rules governing cross-border
activity. It would be a serious mistake for the United States
to become complacent in this area. With the benefit of clear-
eyed analysis, I am hopeful that the new legislation will serve
as a bridge to true reform in the international tax area,
rather than a squandered opportunity.
Thank you again. I am happy to answer any questions.
Senator Wyden [presiding]. Ms. Kysar, I know we will have
questions.
[The prepared statement of Ms. Kysar appears in the
appendix.]
Senator Wyden. At the chairman's desire, we are going to
have you, Dr. Holtz-Eakin, testify, and then the chairman would
like us to take a brief recess. And he ought to be back fairly
shortly after he votes and after the recess.
Dr. Holtz-Eakin, welcome.
STATEMENT OF DOUGLAS HOLTZ-EAKIN, Ph.D., PRESIDENT, AMERICAN
ACTION FORUM, WASHINGTON, DC
Dr. Holtz-Eakin. Ranking Member Wyden, members of the
committee, thank you for the privilege of being here today.
The United States arrived in 2017 with a serious growth
problem. The consensus forecast of 2-percent growth implied
that the standard of living would double roughly every 70
years, in sharp contrast to the experience from the post-war up
to 2007, where the standard of living doubled every 35 years on
average--one working career. And indeed, in 2016, it was not
even that good. For those households that worked full time for
the full year, they saw exactly zero increase in their real
income.
Now, taxes are not everything to do with economic growth,
but better tax policy can improve performance and be part of a
pro-growth strategy. And some of the key elements of the Tax
Cuts and Jobs Act indeed do this. Central to the reforms are
the corporate provisions which moved the U.S. from a worldwide
to a more territorial system, cut the corporate rate to an
internationally competitive 21 percent, instituted a patent box
to diminish incentives to have valuable intellectual property
offshore, and provided expensing for the first 5 years for
shorter-lived equipment investment.
These incentives stand in strong contrast to what was then
the existing law. U.S. corporate law at the time sent a very
simple message to our most successful companies. It said, if
you have valuable IP, park it offshore, maybe take your
production with it. If you make any money, by all means, keep
it offshore. And should you be involved in a cross-border
merger and acquisition, move the headquarters offshore.
The Tax Cuts and Jobs Act reversed all of that, sending the
message that you want to invest, innovate, hire, and raise real
wages in the United States. Those provisions, the ones that
will lead to capital deepening, higher productivity, and higher
compensation, are the most important distributional aspects of
this law, not the ones that are actually in the tax brackets or
rates, and offer the greatest hope to the middle class that has
suffered for so long.
If you are going to do that kind of a reform for the
corporate sector, you need to try to make comparable reforms
for pass-through entities; that is more than one-half of
business income. That requires, first of all, demonstrating
that you have some investment in your pass-through. And there
is a set of tests for whether you have enough employees, or
assets and employees, to show evidence of having made
substantial investment in that company. If so, you get a
comparable preferential treatment of a return to capital to
balance the tax scales.
And there are also important improvements made on the
individual side, most notably lower rates and a larger standard
deduction. All of these offer the prospect of improved economic
performance and a better-functioning tax code.
Now, the topic of this hearing is early assessment of the
success, and I just want to emphasize at the outset some
caveats that come with trying to do that. First and foremost,
the law is literally a work in progress with a lot of work
necessary by the U.S. Treasury to provide the rulemaking so
that firms and individuals understand how the new law will
affect them in great detail.
The second is that it comes with these huge uncertainties.
Never before and never again will the largest, most successful
market economy on the globe move from a more worldwide to a
more territorial tax system. It is quite literally uncertain
how fast those impacts will happen, how large they will be. And
anyone who forecasts with great certainty in this environment,
I think ought to take a grain of salt there.
But we can see some things, right? There are some mileposts
that one would expect, and we can look at them.
The first thing you would expect to see would be responses
in the form of confidence, and we have seen sharp increases in
household confidence, in small-business confidence, as was
mentioned by our first witness, and also in CEO confidence
surveys. So immediately in the aftermath to the tax law, we saw
improved confidence.
We should also see changes in plans. And we saw sharp
changes in the CapEx plans of U.S. corporations. For example,
the NFIB index shows more interesting CapEx. A Morgan Stanley
index of capital plans by firms is at its all-time high. And
those early signs are quite promising.
Further down the road, those early signs have to turn into
actual improvements: improvements on the household side in
their capacity to spend with higher real wages, their labor
force participation due to better incentives, and, as a result,
household spending. And on the business side, those plans have
to turn into orders for durable goods. Those durable goods have
to turn into improved investment in the U.S. economy and,
ultimately, higher productivity.
That is the task, and we shall see if it comes to fruition.
And I thank you for the chance to be here today and look
forward to your questions.
Senator Scott [presiding]. Thank you very much for being
here this afternoon.
[The prepared statement of Dr. Holtz-Eakin appears in the
appendix.]
Senator Scott. Our goals on tax reform last year were many.
One was to spur economic growth. We did that; the last couple
of quarters we were significantly higher than we saw in the
last decade. Restore American competitiveness--moving from 35
percent to 21 percent provides our companies with a greater
opportunity to succeed in a global economy. Create jobs--since
the passage of the tax reform act, we have seen over 600,000
jobs created put upward pressure on wages. We have also seen
wages increase.
However, one of the criticisms of the benefits for pass-
through businesses like yours, Mr. Cranston, is that it is hard
to quantify the tangible benefits that you are receiving.
Is it truly hard to quantify the benefits? Or is it simply
a straightforward process for an S corporation like yours?
Mr. Cranston. I found it to be a straightforward process.
Most business owners are astute individuals. We buy and sell
things. We mark them up, we discount them. And so when I
learned that section 199A was going to allow me to deduct 20
percent of the income that flows to me on my K-1, it was very
easy for me to look back at the K-1 that I had just received in
the last 60 days and say, okay, if I take off 20 percent of
that income and I know my approximate marginal tax break, I can
very quickly ascertain what my tax savings are going to be;
i.e., how much money I can retain in my business and invest in
my business this year.
Senator Scott. Excellent. One of the parts of the tax cuts
bill that everyone seemed to celebrate was the doubling of the
Child Tax Credit from $1,000 to $2,000 and making more of the
Child Tax Credit refundable, up to $1,400.
Have you, Mr. Cranston, benefited from that?
Mr. Cranston. Yes, I will benefit from that as I still have
a teenager at home, and I am looking forward to taking that
increased deduction.
Senator Scott. Excellent. Another part that came from a
bipartisan coalition of Senators--from Senator Coons to Senator
Booker to myself, all supportive of the Investing in
Opportunity Act, which was a part of the tax package--provided
Opportunity Zones to be created to attract more private-sector
capital back into some of the distressed communities.
More than 50 million Americans live in distressed
communities throughout the country.
Using the New Markets Tax Credit as the definition of
distressed communities, we were able to figure out where to
target the resources for further development in distressed
communities. In other words, we provide a deferral of your
capital gains tax up to 10 years if you will make a long-term
investment in some of these distressed communities as a way to
spur economic activity and hopefully create jobs and
opportunities in these communities.
Dr. Holtz-Eakin, would you talk about the benefits that
could happen as we bring more capital back into some of the
distressed communities throughout this country and how that
could provide more parity for folks who are desperately looking
for hope?
Dr. Holtz-Eakin. Well, Senator, I think that is a really
important provision. One of the striking features of the
recovery was not just the fact that it was so slow by historic
standards, but it was so uneven geographically.
And indeed, over longer periods, we have seen sort of
social mobility in the U.S. stay roughly the same, on average,
as it was 50 years ago, but sharp differences across geography
in access to that social mobility.
So again, when you have problems, no single policy is a
magic solution, but you need to point all the policy levers in
the direction of solving those problems, and this is an
important provision to do that.
Senator Scott. Thank you.
Senator Wyden?
Senator Wyden. Thank you.
Mr. Chairman, good to see you in that seat.
And let me, if I might, start with this new finding of the
Joint Committee on Taxation. And I want to do this because I
know that Doug Holtz-Eakin has always talked about respecting
the views of the independent scorekeepers. We have two of them:
the Congressional Budget Office and the Joint Committee on
Taxation.
I think, to your credit, you said that again this week you
need to respect the views of these independent scorekeepers.
So according to one of the independent scorekeepers, the
Joint Committee on Taxation just found that 52 percent of the
benefit from the pass-through deduction--this is the one that
is supposed to go to small businesses--accrues to Americans
earning a million dollars or more per year, the top 0.3 percent
of Americans.
Now, I am going to be spending a big part of next week
going to town hall meetings in rural Oregon, in eastern Oregon.
And I can tell you, in those small communities on Main Street
in eastern Oregon, when you think Main Street, you do not think
of millionaires.
So I would like the panelists' views on that. Maybe we
start with you, Mr. Kamin, you Ms. Kysar, bring you in, Dr.
Holtz-Eakin; all of you are welcome to do it.
But I wanted to start there because of Dr. Holtz-Eakin's
view that around here, at some point, you have to respect the
independent scorekeeper.
So why don't we go to you two first, Mr. Kamin, Ms. Kysar,
and then you, Dr. Holtz-Eakin, and, Mr. Cranston, you are
welcome to come in at any point. Because I think this is a
pretty significant finding. And in my part of the world, people
do not think that millionaires are the regular, garden-variety
small business on Main Streets in eastern Oregon.
Mr. Kamin, Ms. Kysar.
Mr. Kamin. Sure. So I think that is reflective of the lack
of wisdom in the 199A, the 20-percent deduction for pass-
through income.
So the JCT finding--which shows that a little under half of
the benefit this year will go to the .3 percent of Americans
making over a million dollars--demonstrates both the
regressivity of the provision, that the benefit is going to be
highly concentrated to the very, very top, but does not even
capture the full lack of wisdom in what this provision does. It
draws a bunch of very, very haphazard lines in the sand as to
who gets it and who does not.
So if you, for instance, are a real estate developer, an
owner of an oil and gas firm, a retailer, you probably get the
deduction. If you are a doctor, a lawyer, a consultant, you
apparently do not.
And those are the exact kinds of lines that tax lawyers and
accountants are meant to try to game, which I expect to occur,
and there are already reports that people are spending a lot of
time trying to do it. So it is both regressive and complex and
will lead to a lot of tax planning. And there are far better
ways to help America's small businesses.
Senator Wyden. Ms. Kysar, I am going to use up my first
round on my first question. We will get Ms. Kysar and then give
our other witnesses a chance.
Ms. Kysar. Yes, I think that the regressivity of the
provision is very unfortunate. You could have done a lot of
other things with that money. You could have expanded the
Earned Income Tax Credit, for instance.
The horizontal equity problems are also quite apparent, as
David mentioned. There is lots of line-drawing, punishing
certain industries over others and also punishing workers.
Workers do not get the benefit of this provision, for the most
part.
And so, therefore, I think it is overall a terrible tax
policy.
Senator Wyden. Dr. Holtz-Eakin?
Dr. Holtz-Eakin. So this is the foundation of the economics
of the bill, which improved incentives to save, invest, and
work, which the CBO credits in its writeup on the bill.
There on the corporate side, it would be incomplete to stop
with just a cut to the corporation and not follow through the
economics. It is incomplete to stop and identify just the owner
of a corporation and not look at, what are the ultimate impacts
on their investment plans and on the wages of the people they
hire and pay?
So we do not know who those people are, we do not know what
tax bracket they fall in, and we cannot ultimately judge the
regressivity in the way the Joint Committee did.
Senator Wyden. I want to let you go on, Mr. Cranston.
Dr. Holtz-Eakin, as you know, these are the people whom you
said we ought to put in charge. So you say we cannot really
judge anything, but those are the people you said last week we
ought to put in charge and we ought to respect.
So I want to let Mr. Cranston have the last word, and we
are going to move on. But that was the reason I brought it up.
Mr. Cranston, last word for you.
Mr. Cranston. Sure. As I look at this report, what I see is
17 million small-business owners who are going to be able to
see their taxes reduced because of the pass-through.
And to me, if you have 17 million business owners who have
more capital to invest, it cannot help but grow the economy.
Senator Wyden. And I will just close this round by saying
we have a tax cut here that the independent scorekeepers have
said disproportionately goes to the people at the top. It will
involve charging $415 billion to the national credit card just
to have the majority go into the pockets of the most fortunate.
Now, in the bipartisan bill that I wrote, we also targeted
a lot of relief to small-business people, but nothing
resembling giving most of it to the fortunate few.
Thank you, Mr. Chairman.
Senator Portman [presiding]. Senator Grassley?
Senator Grassley. Yes. I am going to put a statement in the
record. I wish I had time to read all the examples I have from
Iowa employees, because their employers are giving them pay
raises and increasing their benefits and things like that as a
result of the tax bill, so we know that the working men and
women of America are benefiting from it.
My first question is to Mr. Cranston.
I appreciate your being here to share your perspective on
the tax bill. I have heard many similar stories from businesses
in Iowa. In talking with small-business owners in Iowa, I get
the sense that they often grow really close to their employees.
Given the investments you are planning to make as a result
of the Tax Cuts and Jobs Act, a question: how do you see that
benefiting your employees, not just today, but over the long
term?
Mr. Cranston. Anytime you invest in your business, you are
essentially upgrading, you are creating new opportunities. And
as we know, the business world is changing very quickly. And if
you do not have the capital to invest, then you are going to
get left behind, either in new technology or outdated products.
So I see it as not only the ability to grow the business,
but to simply do the upgrades that are necessary to keep us
competitive so that our employees can continue to thrive and be
as productive as possible.
Senator Grassley. Okay.
Dr. Holtz-Eakin, an important aspect of tax reform was
fixing our broken corporate tax system. As a result of that tax
reform, at least one company, Assurant, has announced that it
will no longer invert and will remain a U.S. company.
Several recent Canadian news articles also highlight how
U.S. tax reform will make inversion transactions, such as the
2014 transaction involving Burger King and Tim Horton, less
likely. One recent article went so far as to say, quote, ``The
U.S. tax reform will end new corporation inversions in
Canada.''
Can you speak, sir, to the importance of reducing corporate
rates and a shift to a more competitive international tax
system in preventing what we consider was a terrible sin by a
lot of corporations, which was the inversion transaction?
Dr. Holtz-Eakin. I think we saw every year, you know, the
pressure over the inversion transactions. People characterized
it as a sin, but it was indeed these companies simply following
the incentives of the tax code. There was no way around it.
The New York Stock Exchange, the iconic symbol of American
capitalism, is headquartered in the Netherlands because of the
tax code. And we needed to change that.
Every other country with which we compete has a territorial
system. Every other country with which we compete has a rate
somewhere closer to 21 percent. The Tax Cuts and Jobs Act, I
believe, has put the inversion planners out of business, and
now we are going to make decisions on an economic basis, and
that is much better.
Senator Grassley. Okay. And also, a significant reform
included in this act was capping State and local tax
deductions. So would you speak to how this affected the
progressivity of the tax code?
And then before you answer that, I saw one analysis by the
Tax Policy Center that said 96 percent of the additional tax
from the SALT limitations is borne by the top 20 percent of the
taxpayers and 57 percent by the top 1 percent. Does that sound
about right?
Dr. Holtz-Eakin. It sounds about right. The States that are
more affected by this are high-income States. The people who
are affected have to be high-income individuals who are
itemizing their deductions and taking advantage of this.
And it is viewed, in narrow isolation, as a very
progressive reform.
Senator Grassley. Also to you, Doctor. Since the passage of
tax reform and all the positive news that has followed, many
who are against the tax bill have been searching for a talking
point that they can use to criticize our historic tax reform
efforts. The latest talking point has been that the recent
stock buybacks are evidence tax reform was all about corporate
fat cats.
Of course, what they fail to mention is that millions of
middle-class Americans own stocks either directly or through
401(k)s or other retirement plans. In fact, according to the
Tax Policy Center, 37 percent of the stock is held by
retirement accounts.
Moreover, I feel that critics fail to realize that when a
company repurchases stock, that money is not stuffed in the
mattress. It frees up dollars that can be reinvested. This, in
turn, promotes a type of business expansion and capital
investment necessary to help the economy, boost productivity,
et cetera, et cetera.
So what are your thoughts on the criticism leveled against
stock buybacks? Are they necessarily bad for middle-class
Americans?
Dr. Holtz-Eakin. I think the economics of this are very
poorly understood. The stock buyback tells you essentially
nothing about the impact of the tax reform. That is the first
transaction; it is the final transaction that matters. You want
those monies ultimately to be invested in valuable tangible and
intangible capital that raises productivity and real wages. And
you can tell nothing about that from a stock buyback.
Indeed, there is a good case to be made that you want a
firm that does not have good investment opportunities to
repurchase stock, get the money out of the bad investment
opportunities and out into markets where greater opportunities
exist.
So I think people should put aside the rhetoric around
stock buybacks, let the act work, and judge the final results.
Senator Grassley. Thank you very much, Mr. Chairman.
Senator Portman. Senator Cardin?
Senator Cardin. Thank you, Mr. Chairman.
Let me thank all of our witnesses.
Ms. Kysar, I noticed in your presentation you talked about
the need for real reform of particularly our business tax code
by talking about consumption taxes. If we want to harmonize
with our competitors, the easiest way is to harmonize with
other countries in regards to consumption taxes. And as the
members of this committee are aware, I have filed a progressive
consumption tax that deals also with the progressive nature
that a consumption tax can have.
And I would just point out, it would also deal with a lot
of the tax treaties and trade issues that you talked about, as
well as base erosion. So if we really were serious about reform
and harmonizing with the international community for
competition, we would have explored that option.
I want to follow up on Senator Wyden's point.
Dr. Holtz-Eakin, I understand why we have the pass-through
provisions. You are absolutely right: if you are going to lower
the C rate, then the majority of businesses, the overwhelming
majority of businesses--you said half the income--but the
overwhelming majority of businesses do not pay the C rate.
So to maintain that parity, there was a desire to do
something in regards to the pass-through entities. And I fully
understand that. What I want to concentrate on and get some
view of is how it affects small businesses in our country.
Next week is Small Business Week. I have the opportunity of
being the ranking Democrat on the Small Business and
Entrepreneurship Committee. I have talked to many accountants
who tell me that the pass-through issues and how they can be
utilized are a lot easier for companies that have some capacity
than for small companies that do not have the tax advisers, do
not have the tax planners.
There are ways of dividing your company now into separate
entities in an effort to get the pass-through. You did not have
that before. If you are truly a small company, you cannot do
that. And if you do not qualify for the 20 percent, you will
never be able to qualify for the 20 percent.
There are the additional complexities here, uncertainties,
et cetera, which small-business owners have a very difficult
time dealing with--uncertainty in dealing with the cost of
administration.
So I think my question is--in Maryland, the median income,
small business income, which is a little bit higher than small
businesses generally, according to the SBA, is $52,000.
And Senator Wyden mentioned the Joint Tax Committee report,
where 44 percent of the benefits are going to those companies
in excess of a million dollars. So it tells me that the
overwhelming majority of small businesses in Maryland are not
going to be able to take advantage of this pass-through or that
the complexities, et cetera, are going to eat up any of the
advantages and this is really just an extension of relief going
to bigger companies.
And if I can, I think I would like to start with Mr. Kamin,
if you would, and get your views on it. And then I have a
second question I want to ask.
Mr. Kamin. Sure. So I think you are entirely right,
Senator, that this provision is unduly complex and is likely to
burden those especially who have smaller operations and do not
have easy access to sophisticated tax counsel.
The very things you are describing--given the way the
provision is set up, first, if you are an employee, you do not
get it, but on the other hand, for many people, if they become
self-employed, independent contractors, they do get it. If you
are over a certain income threshold, you then need to begin
worrying about lines of business restrictions and what kinds of
business you have within your entity. And you might want to
split up your entities, you may want to combine them together
to try to get access to the provision.
All of this suggests that it is a highly complex provision
that was ill-thought through. There were other ways to do this.
First, there did not necessarily have to be a preference
for C corps over the individuals. There could have been a
better integration between the systems.
Second, you could have allowed businesses to elect to be C
corps, which they can do under the current system.
There were a whole set of options which would have been
superior to this and would have provided a simpler tax system.
Senator Cardin. I want to just ask the second question,
since the chair is one of our leaders on pension issues.
So let me ask about what I think is one of the unintended
consequences of the tax reform. When we have lower rates now,
the deferral of income being put into pensions is not quite as
great an incentive as it was before this tax bill was passed.
And we have found study after study that says for lower-income
families particularly, even tax deferral was not enough to get
low-income families to save. And that is why we have employer-
sponsored plans and we have the Savers Credit.
I am concerned about what impact this tax reform is going
to have on retirement savings. And we did not really deal with
that in this legislation. I know there are bipartisan efforts,
including the efforts of Senator Portman, to deal with this. It
seems to me that this tax bill makes it more urgent for us to
deal with retirement security, particularly for lower-income
families.
Mr. Kamin. So I agree that there is real need to reform the
way that we currently try to help people save for their
retirement. The current system is upside-down, providing large
incentives to people at the highest incomes who already save
enough.
It is far too complicated, with many different accounts
that different people can put in, that are available to people,
so that it is hard to decide between. So we need a system where
you could reform it so that more of the incentive is given to
people with lower to middle incomes and also where accounts are
simpler, universal, and transferable among employees.
I think it is a major challenge that is very, very
worthwhile of Congress taking up.
Senator Cardin. Thank you.
Thank you, Mr. Chairman.
Senator Portman. Senator Bennet?
Senator Bennet. Thank you, Mr. Chairman. I appreciate it.
You look good there. [Laughter.]
And thank you to the panel for your testimony.
Mr. Cranston observed how important it is to have capital
when you are a small business, to invest, to upgrade in a way
that is necessary to keep pace in the competitive climate that
we are in. And I have no doubt that is true for small
businesses.
It is also true for countries. And we are today investing
35 percent less, Mr. Cranston, in domestic discretionary
spending than we were in 1980. There is a reason why
everybody's kid who is going to college now is drowning in
debt, because we have not seen fit to make the investment in
their education that our parents and grandparents were willing
to make for us.
So I have a few questions I want to ask. And I would love
it, if I say anything false, Doug, please tell me.
When Bill Clinton was President, I think that was the last
time we ran a surplus. Is that correct? And when he left
office, it was about $5 trillion over the decade. That was the
projected surplus that he had.
I have never lied to you before; I am not today.
Dr. Holtz-Eakin. It was actually projected to be larger. I
had to live with----
Senator Bennet. Larger, thank you. Thank you for your
candor. It was larger than that when Bill Clinton was in
office.
Then George Bush passed two tax cuts in 2001 and 2003, both
of which he said would pay for themselves. One of those--he
went to fight two wars, one in Afghanistan, one in Iraq, did
not ask anybody to pay for those wars. The second tax cut was
actually passed after we had invaded Iraq. Is that not correct?
So not only did we not ask people to pay for it, we sent 1
percent of America's kids to fight it and we put it on our
credit card. And then just before he left, President Bush, a
Republican, passed Medicare Part D through the Congress and did
not pay for it. Is that not correct?
Dr. Holtz-Eakin. It was earlier than that, but he did it.
Senator Bennet. All of which adds up to the fact that when
you combine that with the economy that tanked during the Bush
administration, Barack Obama inherited a $1.2-trillion deficit.
He did not inherit a surplus.
In fact, in January before he was sworn in as President,
the deficit was $1.2 trillion, was it not? And at its worst, in
the worst recession since the Great Depression, when we had 10-
percent unemployment, the deficit got to $1.5 trillion, right?
That is where we were. Surplus with Clinton, Obama inherited a
deficit----
Senator McCaskill. Be sure the witness says his answer
aloud.
Senator Bennet. Okay.
Senator McCaskill. The record cannot read a nod.
Senator Bennet. Okay. That is correct?
Dr. Holtz-Eakin. I nodded ``yes.''
Senator Bennet. Thank you. So a surplus under Clinton, a
$1.2-trillion deficit handed to President Obama. Before he was
sworn in, that went to $1.5 trillion in the worst recession
since the Great Depression.
These guys did not lift a finger. They called the President
a Bolshevik and a socialist, and they said his plan was to take
over America. The Tea Party was saying things like $1 trillion
and climbing, now, that is a lot of change; DC, find another
country to pillage and plunder; save the children, stop
spending their money; give us liberty, not debt. This is what
they were saying, and that is what these guys were responding
to.
And then when Barack Obama left, he left with about a $540-
billion deficit. Is that not correct?
Dr. Holtz-Eakin. Yes.
Senator Bennet. Yes. Thank you. And now the projected
deficit for next year is what?
Dr. Holtz-Eakin. Eight hundred forty billion dollars for
2018.
Senator Bennet. About a trillion dollars.
Dr. Holtz-Eakin. Two years from now, it will reach a
trillion.
Senator Bennet. It will be a trillion dollars at full
employment. That is what a Republican President has delivered
to the Tea Party. That is what a Republican Senate has
delivered to the Tea Party. And that is what a Republican House
of Representatives has delivered to America: a trillion-dollar
debt.
None of these tax cuts was paid for; virtually none of them
was paid for. It is all debt that is put on the shoulders of
the next generation. They will go home and claim to be fiscally
responsible. I do not know how. I do not know how that
narrative continues to be made. But the facts are very clear
here.
And I wonder whether the panel, Mr. Kamin or Ms. Kysar,
whether you have any reaction to anything I just said, in
particular, what sense there is in our being the only
industrialized country in the world that is actually projected
to have its deficit go up next year rather than down.
Ms. Kysar. I think it is unfortunate we passed these tax
cuts right when the economy was at full or near full
employment. We have the tax cuts being deficit-financed. We
have all of these distortions and games that we have been
talking about that taxpayers can play to take advantage of
them.
And so all of these factors I think are going to reduce the
growth from the tax cuts, not to mention the fact that the
legislation itself will be unstable because of the partisan
manner in which it was passed.
So I think it is a big concern. I think that the deficit
effects are going to impact how we can expect the tax cuts to
perform as an economic matter.
Senator Bennet. Mr. Kamin?
Senator Portman. You can answer this one more time.
Mr. Kamin. Okay; sure.
Senator Bennet. No, that is okay. I will wait for a second
round.
Senator Portman. Senator Menendez?
Senator Menendez. Thank you. Thank you all.
Look, the rising costs of health care, prescription drugs
in particular, have squeezed middle-class families, forcing
many to choose between their mortgage and their medicine. But
despite seeing their corporate tax rate drop nearly 40 percent
and getting an even lower rate on their foreign earnings, the
drug companies have done nothing to lower the costs of
prescription drugs. In fact, many have actually gone about
increasing prices for some of their most profitable drugs, with
one study identifying 1,300 drug price hikes this January.
Pharmaceutical giant AbbVie announced it would increase the
price of Humira by nearly 10 percent. Celgene hiked up the
price of two of its cancer drugs by 9 percent each.
Indeed, rather than investing their multi-billion-dollar
windfall back to their customers and workers, the top five
pharmaceutical companies have announced $45 billion in stock
buybacks that disproportionately benefit corporate CEOs and
very wealthy shareholders. Pfizer announced a $10-billion stock
buyback late last year. Celgene gave their CEO and shareholders
a $5-billion Valentine's Day gift this February 14th. And
AbbVie doubled that amount a day later.
So, Professor Kamin, do you see any indication that this
trend will change? Do you believe that the $1.5-trillion
corporate tax break will considerably reduce prescription drug
prices?
Mr. Kamin. Given what was in this bill, I do not see any
reason to think that this would have an effect on prescription
drug prices to try to reduce them. I think there are other
reforms that might, but that was not in this bill.
Senator Menendez. But they could have used some of the
benefits that they have received to do exactly that, could they
not?
Mr. Kamin. I suppose a corporation could. Given the
incentives created by this bill, I do not know any reason to
expect that they would.
Senator Menendez. Yes. And the incentives were basically to
go to the bottom line.
Mr. Kamin. So I think the immediate effect--and I think
most economists would agree--the immediate effect of a
corporate rate reduction is to most benefit the owners of the
company. And that seems to be what we are seeing here.
Senator Menendez. So I want to follow up on my colleague,
who is normally very mild-mannered in the way in which he
approaches things. But if there is one thing that gets him
really upset with young children is the future of what it means
in terms of the debt we are having hanging over the next
generation. So I appreciate his passion in this regard.
You know, the nonpartisan Congressional Budget Office came
out with an updated projection showing that the Trump tax bill
will add nearly $2 trillion to the national debt over 10 years.
This is contrary to what our Republican colleagues promised the
American people, that the corporate tax cuts would pay for
themselves.
Now, Dr. Holtz-Eakin, I appreciated your brutal honesty on
this topic when you acknowledged that it would add to the debt.
And the debt, as a general issue, is a big problem we have to
tackle. And I appreciated the remarks you made.
But when you were asked about how we should address our
deficits, you did not suggest closing tax loopholes or asking
the very wealthy to pay their fair share. Instead, you called
for cuts to Medicare and Social Security. You said, quote, ``If
you want to solve the budget problem, and you must, you have to
look at those programs: Medicare and Social Security.''
So could you give us an estimate of how much we would have
to cut benefits for Medicare and Social Security to get out of
this fiscal mess?
Dr. Holtz-Eakin. I would be happy to get back to you. I
will not do it off the top of my head. I mean, the----
Senator Menendez. But it would be significant.
Dr. Holtz-Eakin. We are in a significant hole. The baseline
budget outlook at the start of 2017 had $10 trillion of
deficits over the next 10 years prior to the Tax Cuts and Jobs
Act. It is now larger; it is $12 trillion.
The ones that were there to begin with were entirely
driven, not by tax policy, but by the spending side. And that
is why it has to be under consideration.
Senator Menendez. Now finally, Mr. Kamin, your testimony
notes that the costs the Trump tax bill made permanent are
equal to the Social Security Trust Fund's entire shortfall for
the next 75 years. Put another way: if Republicans had simply
taken the trillions of dollars this tax bill costs and, instead
of giving it away to corporations, used it to fix Social
Security, the Social Security Trust Fund would be fully solvent
for the next 75 years.
Can you connect the dots and paint a picture of what the
bill means for millions of middle-class families who rely on
Social Security and Medicare to live out their retirement in
dignity?
Mr. Kamin. So I think it is important to emphasize that our
key commitments to programs like Social Security and Medicare
can be financed. Social Security is expected to rise in terms
of its costs from about 4 percent of the economy a few years
ago to about 6 percent and there stabilize.
Assuming we get health-cost growth under control, which is
essential, Medicare would actually be expected to do something
similar. The question is whether we are willing to raise the
revenue enough to pay for those kinds of key commitments.
If we do not and we end up cutting revenues by about 1
percent of GDP, which is about the size of this tax cut--and
the 75-year shortfall in Social Security is about 1 percent of
GDP over the next 75 years--then we will not be able to keep
those kinds of commitments and also provide the services and
investments that are so important for low- and middle-income
Americans.
So I really think there is a key tradeoff here: how much
revenue are we willing to raise, especially from the top, in
order to try to preserve these kinds of commitments?
Senator Menendez. Thank you, Mr. Chairman.
Senator Portman. Thank you.
Senator Thune?
Senator Thune. Thank you, Mr. Chairman. And thank all of
you for appearing today before the committee. We appreciate
your testimony on the initial impressions of the Tax Cuts and
Jobs Act.
I think, from my perspective--and I think any objective
perspective--the results are already impressive for a law that
has only been in effect now for just over 4 months. We have
already seen more than 500 companies that have announced
investments in their employees through increased wages and
benefits, bonuses, and retirement plan contributions. And those
benefits affect more than 5.5 million American workers.
And while much of the media attention has been on the
response from the Nation's largest companies, we are seeing the
positive outcomes in our local businesses, even in places like
my State of South Dakota: AaLadin Industries in Elk Point, SD,
Great Western Bank Corp in Sioux Falls, SD, which are
increasing their base wages for their employees; Black Hills
Energy, Rapid City, SD, which is passing benefits from tax
reform along to its utility customers. This is welcome news for
the hardworking, middle-class families that we set out to
benefit through tax reform.
And we are also seeing companies across the country respond
to the new tax law with announcements of investments in new
project facilities and other ventures. And I suspect this is
only the beginning, especially for smaller and medium-sized
businesses.
And I am sure that many of these companies are still
incorporating the new rules and tax relief into their business
plans for this year and beyond. This is particularly true for
the new pass-through deduction for small businesses, farmers,
and ranchers, which I believe holds enormous potential for
growth that we are just starting to see. And I am particularly
pleased that we have Mr. Cranston here today to give us the
perspective of his small business and that of NFIB's members
generally.
Mr. Chairman, last week, the Chairman of the President's
Council of Economic Advisers had an opinion piece in The Wall
Street Journal that reviewed the initial benefits of the Tax
Cuts and Jobs Act for American workers and businesses. And I
would ask unanimous consent to insert a copy of that article
into the record.
Senator Portman. Without objection.
[The article appears in the appendix on p. 97.]
Senator Thune. Thank you.
Let me, if I might, just turn to a couple of quick
questions here. We do not have a lot of time.
But if you listen to our colleagues on the other side and
some of the media stories, you would think that every provision
in the new tax law is so fundamentally flawed that nobody is
going to benefit. And conveniently, they ignore all the initial
reactions that demonstrate that American businesses are already
factoring the new law into their business plans.
They also ignore the fact that major tax legislation,
including the 1986 tax act, had subsequent issues that needed
to be addressed and required guidance from the Treasury
Department and from the IRS.
Mr. Cranston, are you able to factor into your business
plans the effects of the lower individual tax rates and the
immediate expensing of property and equipment that you invest
for your business?
Mr. Cranston. Thank you, Senator. As I had shared earlier
in my testimony, yes. At the beginning of the year, as soon as
I had an opportunity to understand what the tax law encompassed
with section 199A, it was a fairly simple, straightforward
calculation for me to understand that, depending upon what my
net income this year is, I am going to be able to save $5,000
or $10,000.
And for me, that money is going right back into our
business.
Senator Thune. Okay. And also, the family provisions--
increased standard deduction, double Child Tax Credit, relief
from the alternative minimum tax--are you also seeing some
benefit from those?
Mr. Cranston. Absolutely.
Senator Thune. Okay; good.
One of the key objectives in tax reform was to make sure
that we provided tax relief for American businesses, from the
largest to the smallest. And for corporations, that was
accomplished, of course, by reducing what was the highest tax
rate in the world to 21 percent. For pass-through businesses,
sole proprietorships, partnerships, LLCs, and S corps, it was
more challenging.
The new pass-through deduction was the best approach to
provide that relief while maintaining the flexibility of a
pass-through business and recognizing that they are not taxed
at the entity level and that their taxable income is determined
at the owner level.
Dr. Holtz-Eakin, despite the criticism of the delivery
mechanism, do you agree that providing tax relief for pass-
through businesses to correspond to the corporate tax rate
reduction was a good thing, or was it a mistake, as has been
alleged by some of our colleagues on the other side?
Dr. Holtz-Eakin. I think it was an absolutely necessary
part of the tax reform. You want to have a level tax playing
field between the different kinds of entities. And if you are
going to have a preferential treatment of a kind of income,
whether it is domestic income versus international or capital
income versus labor income in a pass-through entity, you are
going to have to write rules to do that.
Rules are always complex and people always complain about
them, but they are a reality of the tax code.
Senator Thune. And how many businesses would you say fall
under that $157,500 and $315,000 that anybody basically
qualifies for?
Dr. Holtz-Eakin. This is going to be the simplest for the
vast majority of pass-throughs. They are small; they
automatically get it. There are many large pass-throughs, and
they have the capability of dealing with the complexities of
the tax law.
Senator Thune. Right. And they have to, though, meet the
wage test or the capital test, one or the other, which suggests
that they are making investments, which is entirely what we
wanted them to do.
Dr. Holtz-Eakin. You do not want to have a reduced tax and
savings investment unless you actually have some investment.
And these tests are meant to demonstrate that.
Senator Thune. The numbers I have are that 91 percent of
single taxpayers and 85\1/2\ percent of married couples filing
jointly will fall below the deduction's income thresholds, that
$157,500 and $315,000. That is an awful lot of small businesses
that are going to benefit from that deduction.
Dr. Holtz-Eakin. Right.
Senator Thune. Thank you, Mr. Chairman.
Senator Portman. Senator Whitehouse?
Senator Whitehouse. Thank you, Mr. Chairman.
You have to look a little bit to the side to find me here.
Let me ask first Ms. Kysar and Mr. Kamin to respond to, if
you wish, Dr. Holtz-Eakin's comments about the stock buybacks.
The information that we have right now is that the tax bill
has produced $260 billion in stock buybacks and $6.5 billion in
bonuses and raises, which, if my rough math is correct, is
about $40 in stock buybacks for every single dollar in bonuses
and raises.
Dr. Holtz-Eakin seemed to view that with some equanimity. I
wonder what your view is of that ratio and of the value of
these stock buybacks.
Ms. Kysar. I do not think we can judge too much from
bonuses or buybacks. I think it is too early to tell what is
happening.
I think that the indirect effects of the tax bill on the
longer-term horizon, that is how we can judge growth. I think
that----
Senator Whitehouse. From a stock buyback point of view,
which sector of the economy does best in stock buybacks in
terms of income level?
Ms. Kysar. I think you are giving money to shareholders who
then----
Senator Whitehouse. Who tend to be higher-income, kind of
higher-wealth folks.
Ms. Kysar. Right. That may mean, however----
Senator Whitehouse. And how does it roll through to CEO
salaries, for instance, and executive compensation?
Ms. Kysar. Certainly, it might go back to the executives.
It is hard to say exactly where the dollars will go.
I will say that right when you are talking about lowering
the corporate rate, most mainstream studies put 75 percent of
the benefits of that to shareholders.
Senator Whitehouse. Mr. Kamin?
Mr. Kamin. So I would first agree with both Professor Kysar
and also Dr. Holtz-Eakin that we are early on, and right now
the best evidence that we have about the likely effects of this
bill are the comprehensive analyses that have been done.
Senator Whitehouse. So just focus on who is likely to
benefit, where that benefit goes.
Mr. Kamin. Right. And I think that the evidence from those
comprehensive analyses says that the disproportionate benefits
from this tax bill will go to the top.
In terms of the buybacks specifically, it is----
Senator Whitehouse. Let me jump in then, because my time is
short here.
There is also a table in the Senate Committee on Finance
JCT April 24th report, Table 3, that shows that the tax benefit
of the pass-through deduction under section 199A in the year
2018 goes across all taxpayers in the amount of $40.2 billion,
but to people earning over a million dollars, $17.8 billion.
And, if you go out to 2024, the total benefit is $60.3
billion--or the total cost, depending on how you look at it--
and more than half of that, $31.6 billion, goes to people
earning a million dollars and over. Do you have any dispute
with those numbers that JCT has put together for us that are in
this Table 3?
Anyone? Okay. So that looks like about at least a two-to-
one benefit for people earning over a million dollars a year.
We also have a recent letter from the Congressional Budget
Office that says that the share, I am quoting it here, ``The
share of the additional real income accruing to foreigners from
this tax bill averages 43 percent from 2018 to 2028.'' And it
has a table here that shows that it varies between 31 percent
and 71 percent in those individual years, averaging to 43
percent.
The conclusion here is that in 2028, of the additional real
income that year resulting from the increased economic activity
engendered by the tax act, 71 percent will accrue to foreign
investors.
How much of what we borrowed--let me pause on that.
Some people have said we have borrowed $1.5 trillion to
fund this tax cut. Some people have said we borrowed $2
trillion to fund the tax cut.
Mr. Kamin, what is the difference between those numbers?
Mr. Kamin. The $1.9 trillion or $2 trillion is the most
recent estimate from the Congressional Budget Office.
Senator Whitehouse. And it adds interest?
Mr. Kamin. It adds interest as well as economic effects.
Senator Whitehouse. Okay. Does that mean that a significant
portion of what we have borrowed is actually going to the
benefit of foreign investors, if you read the CBO letter?
Mr. Kamin. I think the CBO letter reflects the fact that a
significant portion of income over the next 10 years will be
paid back to people whom we borrowed from.
Senator Whitehouse. Should we be thrilled that we borrowed
this much money and put that all on our credit card so that
this much money could go to foreign investors?
Mr. Kamin. I think that it reflects the fact that some of
the gains from this bill are a lot less than advertised, and
even those gains were small.
Senator Whitehouse. Well, not if you are a foreign
investor. That is way bigger than advertised.
Thank you.
Senator Portman. Senator McCaskill?
Senator McCaskill. I think Senator Brown is on the list
before me.
Senator Brown. I can go after Senator McCaskill.
Senator Portman. Thank you, Sherrod.
Senator McCaskill. I want to follow up on Senator
Menendez's line of questioning. I want to ask the chairman to
put in the record a report that my staff on the Homeland
Security and Governmental Affairs Committee did on the
manufactured crisis, which is the devastating drug price
increases that have occurred in this country.
Could this report go into the record, Mr. Chairman?
Senator Portman. Without objection.
[The report appears in the appendix on p. 87.]
Senator McCaskill. And the results of this report are
pretty stunning. Price increases for the 20 most-prescribed
brand-name drugs in Medicare Part D have gone up 12 percent
every year for the last 5 years, approximately 10 times higher
than the average rate of inflation, which is really
unbelievable if you think about it, that those kinds of price
increases are going on in the Medicare Part D program, where
this body has not even had the guts to stand up to the
pharmaceutical industry and say we are going to negotiate for
volume discounts.
I mean, you talk about a vise grip; pharma has a vise grip
on Congress--the notion that we cannot negotiate for volume
discounts. That is pretty all-American. I think even you would
agree with that, the businessman from Pennsylvania, that volume
discount is very important in terms of good business decisions.
So $45 billion, it is estimated, that they have gotten in
terms of a windfall just since this tax bill was put into
place--$45 billion--that all went to the owners of their
companies. And guess what? There has not been one announcement
that the price of any of those highly prescribed drugs--by the
way, this tax bill continues to allow them to deduct the cost
of advertising prescription drugs. I think we are the only
country in the world besides New Zealand that allows the
pharmaceutical industry to advertise prescription drugs and
deduct the cost of it. We kept that in place for them.
But there is absolutely no relief for Missourians in terms
of drug prices. That is why I think this tax bill ultimately
will not be a popular thing, because I think people are going
to see the kind of windfalls that are going to occur in places
like health insurance and pharmaceutical drugs, with no relief
to the consumers, absolutely none. Whatever extra they are
getting in their paychecks is going to be eaten up by the extra
they are paying for Nexium and Nitrostat and Restasis and
Spiriva, all of those drugs that we looked at in the report.
And the other thing is that I was lectured a lot during the
Obama years by the Republicans about fiscal conservatism and
being careful about the deficit and the debt. In the last 6
months, this country, led by a Republican President, Republican
majorities in the House and the Senate, has added over $2
trillion to our debt--in 6 months, between the tax bill and the
omnibus bill. That was another $300 billion in the omnibus
bill.
It is stunning. It is truly stunning, this kind of fiscal
irresponsibility.
And now we get to pass-throughs. My colleagues have already
talked about the pass-throughs. Fifty percent of them are going
to go to people over a million dollars.
And I would like to put in the record this cartoon, which
it is hard to believe is true, but it is from Bloomberg
Business Week. I would ask for this to go in the record, the
cartoon about explaining the pass-through tax break.
Senator Portman. I cannot see it, but without objection.
[The cartoon appears in the appendix on p. 97.]
Senator McCaskill. Well, I will explain it to you. This is
how confusing this is.
No tax break, doctors. Maybe tax break, massage therapists.
Maybe tax break, veterinarians. Tax break, health club owners.
No tax breaks, management consultants. Maybe tax break for
tattoo artists. Maybe tax break for interior designers? No, but
if you are an architect, you get the tax break. Celebrity
chefs? Celebrity chefs, no tax break. Cafe owners, maybe, maybe
you will get a tax break. Contractors, maybe. But landscapers?
You get the tax break.
And I have been lectured that certainty is so important in
business. I would not be surprised if I heard you testify to
that, Dr. Holtz-Eakin, that certainty is so important for
businesses in terms of business planning. Every business plans
around the tax code.
Ninety-five percent of the businesses in this country have
no idea what the rules are going to be on pass-throughs. This
is the most complicated thing that has been added to the tax
code, I would say in generations.
And let me ask the two professors about that, the two
academicians. Would you say that the complexity around this
pass-through is maybe in the top five most complex areas of the
tax code, in the tax bill that was supposed to simplify
everything?
Remember the hearings when I had the seven books lined up
and everybody admitted this was going to add another book? Is
there anything that has been added to the tax code that is more
complex than the rules around this pass-through?
Senator Portman. We are over time, guys, so you will have
to submit it for the record unless you are really quick.
Senator McCaskill. I bet they will say ``yes.''
Mr. Kamin. Well, what I would say is, it is one of the
worst provisions that has been added into the tax code in the
last several decades.
Ms. Kysar. I would agree with that.
Senator McCaskill. That is what I wanted to hear.
Senator Portman. Senator Brown?
Senator Brown. Thank you, Mr. Chairman.
My question is for Mr. Kamin.
This law allows, as you know, for immediate and full
expensing of capital investments over the next 5 years. I have
a couple of ```yes'' or ``no'' questions. It supports the whole
idea, obviously, of investing. It supports investment in
capital-intensive sectors of the economy like manufacturing.
A couple, a handful of ``yes'' or ``no'' questions. Is it
your understanding the capital expensing provision within this
law was designed to encourage companies to invest in new
factories and equipment as well as retooling existing
facilities?
Mr. Kamin. Yes.
Senator Brown. And is there anything in the law that would
prevent auto manufacturers from taking advantage of this
provision?
Mr. Kamin. Not that I know of.
Senator Brown. That is interesting, considering that less
than 2 weeks ago General Motors in Senator Portman's and my
State announced its plan to lay off 1,500 workers at the Chevy
Cruze plant in Lordstown, OH near Youngstown.
Last week, I wrote to GM outlining the devastating
consequences of this decision for families and communities in
the northeast corner of the State. This is a company that is
doing well by all metrics. Last year, GM claimed all-time
``record,'' quote, unquote, revenues of $160 billion and an
``all-time record,'' again their words, free cash flow of $6.9
billion. In addition, this year, as you may know, they will
bring back almost $7 billion in overseas cash at a major
discount, yet they are laying off these 1,500 workers.
I sat in the White House with the President and a handful
of Senators from this committee as the President promised us
this bill would create more jobs, it would mean a $4,500 raise
for every worker.
So today, we hear a lot about the impact of the law. We
will hear it is bringing back jobs or helping businesses invest
in their workers. The Lordstown layoffs are a good example of
how this just is not true. In fact, some companies are moving
forward with layoffs. Millions of households are going to see
their taxes increased as a result of this new law.
This law simply was not middle-class tax reform. It was a
major giveaway, as Senator McCaskill said, Senator Whitehouse
has said; it is a major giveaway to corporations and
executives. We need to make sure we hold them accountable to
the middle-class workers.
As GM is showered with cash in this tax-cut giveaway, they
simply are not investing in their workers, and they are sure
not investing in communities.
Now, to further illustrate, Dr. Holtz-Eakin, a supporter of
the law, wrote at the American Action Forum about the ongoing
strategy for additional tax reform. He called it tax reform
2.0. He wrote these words, and, Dr. Holtz-Eakin, I am going to
ask you about these: ``The Congressional Budget Office projects
$12 trillion in deficits over the next decade and dangerously
high accumulation of debt. If left untouched, this will
inevitably produce pressures for much more revenue, a reversal
of tax reform 1.0.'' He continues, ``In the end, the most
important part of tax reform 2.0 will be entitlement reform
1.0.''
Those are correct; those are your words?
Dr. Holtz-Eakin. Yes.
Senator Brown. Okay. Here is what is just amazing about
that. Some of you remember when Gary Cohn and the Secretary of
the Treasury issued their one- or two-page tax reform proposal,
about exactly a year ago. And the day they did that, there was
an op-ed in The Wall Street Journal by Martin Feldstein, who
was sort of the intellectual guru for the Laffer Curve and for
the early Reagan years on tax reform.
He said in his op-ed, he said, do not really believe that
this tax reform that we are proposing--we as right-wing
Republicans--do not believe the tax reform will entirely pay
for itself, not by a long shot. That is why we need to go after
Social Security and Medicare. So they warned us 8 months before
the tax reform passed.
Now, in case we did not get the message, Dr. Holtz-Eakin is
saying the next round is entitlement reform.
So how do you justify--if each of you would just speak to
this--how do you justify cutting taxes on the wealthiest people
in this country, giving major tax breaks to corporations, and
then coming back and paying for the tax reform by raising the
retirement age or raising the eligibility age for Medicare and
Social Security?
Start on the left. How do you square that with the great
majority of Americans whom you have claimed that the tax reform
benefits?
Mr. Cranston. Again, I am here to speak on behalf of small
business. And I believe that one of America's strengths is its
small-business community. And so if you unleash the small-
business community by giving us tax breaks, you will see growth
occur. And growth, though, has to be tempered on the Federal
side, just as on the business side, with spending.
Senator Brown. So apparently it is okay to take it--okay.
Mr. Kamin, your comments?
Mr. Kamin. So, Senator, I think you are right: this tax
bill is going to lead to a 70-percent larger rise in the debt-
to-GDP ratio through 2025 than would have otherwise occurred.
And I think the fact that we have put this onto the national
debt and the fact that it will eventually have to be paid for
means that for low- and
middle-income Americans, they are likely to end up losing,
since this tax cut was disproportionately focused at the very
top.
And it is the very programs you are talking about--Social
Security, Medicare, and key investments--that are likely to be
vulnerable going forward because of it.
Senator Brown. Professor Kysar?
Ms. Kysar. Especially those in the low- and middle-income
classes. And I would just also say that I think that $2-
trillion figure is likely to be greater once all is said and
done, once we look at some of the other effects of the bill and
also take into account the fact that perhaps some of these
provisions are going to be made permanent.
Senator Brown. Dr. Holtz-Eakin, they were your words.
Dr. Holtz-Eakin. Yes. The observation is simply that if you
go back to 2017, prior to the bill, there was a $10-trillion
deficit over the next 10 years, and it was driven by the
entitlement programs. It was going to be inevitable that we
took a look at them independently of tax reform.
Had we done a revenue-neutral tax reform, my first choice,
my fear is, that would have been unwound due to the pressures
on the deficit that come from that. And my experience is, the
tax reform of 1986 unwound remarkably quickly because we ran
what we thought at the time were large deficits. We had Gramm-
Rudman-Hollings. We went to Andrews Air Force Base in 1990 and
raised taxes. The integrity of the reform fell apart quite
quickly.
And so my view has always been that it is hard to do good
tax reform, and it is harder to keep it. And if you do not
control the spending side of the budget, you will not keep it.
Senator Brown. Well, as Senator Bennet pointed out in his
comments a few minutes ago----
Senator Portman. We are way over.
Senator Brown. Okay, okay, okay, Mr. Chairman.
Senator Portman. I gave you the Ohio 1 minute beyond
everybody else, but I cannot go beyond that.
Listen, I have been here this afternoon and listened to my
colleagues, and I appreciate all their input.
And it is concerning to me that this is such a partisan
exercise of tax reform, because everybody knows we had to
reform our tax code. In fact, every witness here has said, on
the international side, it was absolutely essential that we
became competitive again.
And even for small businesses, I have to tell you, my
experience is very different than what I have been hearing from
my friends on the other side of the aisle, which is that all
over Ohio, small businesses are benefiting from this. Mr.
Cranston talked about it.
But you know, PNC Bank does this survey every year. They
have done one for 9 years in Ohio. They have never seen the
levels of optimism as high among small and medium-sized
businesses.
NFIB, which represents the smaller businesses we talked
about earlier, they have never seen more interest in investing
in the history of their survey than they see now. In terms of
this issue of optimism, again, they are seeing it off the
charts. Now, that is because small businesses are taking
advantage of this.
And to the comments earlier about how complicated this is,
I think Senator Cardin got it right. You had to do something.
We knew the corporate rate had to come down to be competitive--
highest in the world, in the international system. And you
would have had this huge disparity between the C corporation
rate, which employs about half of American workers but is only
about 10 percent of the companies, and the pass-through rate,
which is the subchapter S, the pass-throughs and sole
proprietors and all of them, which is the vast majority of
businesses. So you had to do something.
And it is tough to make these decisions. But 1202 is what
they used, to Senator McCaskill's point, which was part of the
law for a long time, the Internal Revenue Code. And 1202 says
that, yes, if you are providing a professional service, then
you are not going to get the same benefit under section 199,
which is really what the 20 percent was meant to deal with.
Also, for smaller businesses--we talked about this
earlier--people said, well, these businesses average in my
State, they only make 50,000 bucks a year. Well, if you are
under $315,000 a year, you are not subject to any of that
complexity.
So I would just tell the small businesses out there that
are truly small, you know, you are not subject to a lot of what
we heard about here today in terms of the complexity.
Finally, this notion that if you make a million bucks a
year, that means you must be really rich--if you are a small
business, you may not be, because it is a pass-through. In
other words, if your business is making a million bucks a year
and you are the sole shareholder, you are making a million
bucks a year.
Even though I would say, Mr. Cranston, in your case--I am
not a good lawyer, because I should not be asking a question I
do not know the answer to. But I would guess that you used your
dividend from your company to pay your taxes, and the rest of
it got reinvested in the business. Is that right?
Mr. Cranston. That is correct.
Senator Portman. Did you hear what he said? I did not know
what his answer was going to be. In other words, I do not know
what your earnings were. Maybe they were a million dollars last
year on your business. So you are a millionaire,
congratulations. What did you get out of it? Whatever your
salary was. You got nothing else out of it, because you used it
to pay your taxes; the rest you reinvest in the business.
And you know, I grew up in a small business like that. It
was also a material handling business like yours. My dad
started with five people. My mom was the bookkeeper. We lost
money the first few years; we struggled. But you know what? We
finally found our niche. But that is what we did: we put the
money back in the business. So my dad might look like a
millionaire to some, but he surely did not feel like it,
because the million dollars was just a reflection of what the
business made that year, not what he was making.
And that is the way our tax system works. So I just hope
that, as we look at this, we try to be fair and look at what is
really happening out there.
I have done 15 visits now with small businesses around
Ohio. We have had another half-dozen roundtables with small
businesses. I cannot find a one who is not saying this is good
for them. I cannot find one.
So I guess I would ask a question to Dr. Holtz-Eakin,
because he has been on the spot here today about, you know, how
does this pay for itself or not. If you have better economic
growth because of these tax cuts and the tax reforms--and the
reforms are, I think, equally important, not more important for
investment--how much new growth would you have to have to be
able to pay for, in essence, the trillion dollars that was in
this tax cut? How much more growth over 10 years?
Dr. Holtz-Eakin. If you were to get a half a percentage
point, probably four-tenths, you could----
Senator Portman. Four-tenths or a half percentage point.
What did we just learn for this year? What did CBO just say for
this year?
Dr. Holtz-Eakin. They marked it up by a full 1.3 percent.
Senator Portman. One-point-three percent, from 2 percent to
3.3 percent.
Dr. Holtz-Eakin. Yes, 1.3 percent.
Senator Portman. Not .4, not .5. Now, I am not saying it is
going to continue for the next 10 years for sure. Nobody can
tell you that, even though CBO has projections--they have to
make them.
But I really do believe in my heart that if this thing
works the way it was intended to, which I see happening over in
my State, the .4 percent or .5 percent even is absolutely
within the realm of possibilities. In fact, I think it is much
more likely to happen. I know there is a difference in the
economic growth; there is going to be at least that much.
So you know, I have just got to tell you, if you look at
the CBO report recently--a lot of people have talked about it
today--you did not hear that full expensing, they said, will
increase tangible investment in the United States. They said
tax reform alone is going to result in 1.1 million new jobs
over the next 10 years. And they also said the growth rate for
the last 2 quarters last year went up, I think largely because
of expectation of some of these pro-growth policies, including,
I think, reg reform too. But .4 percent to 2.6 percent, and
this year they just increased it from 2 percent to 3.3 percent.
All right. I am getting close to ending my time, so I am
going to follow the edict that I am asking other people to do
and come back for the second round.
But I do think we need to be sure that we are looking at
this in terms of the real-world impact and what is happening,
certainly in my State, among small businesses.
Senator Nelson?
Senator Nelson. I would say to my friend from Ohio that I
think that the pass-through, getting the rate down to an
effective rate of 29 percent, is a very good thing. What I
would have liked to have seen is a more balanced approach to
the rest of the tax code, especially cutting the corporate
rate, as large as it was, giving certain goodies of tax breaks
to folks, particularly on Wall Street, all of which added up to
where, over 10 years, this tax bill is costing us a trillion
dollars and that is added to the national debt.
So as we look at modifying this, it seems to me that, as we
desperately need infrastructure investment--and I am saying
this out of my heart, I say to the Senator from Ohio--in
infrastructure, obviously, we have extraordinary needs.
How about investment in affordable housing? Or how about
job loss because of automation, and education in order to deal
with the changes of globalization? Now, all of that is going to
cost money, and we just added a trillion dollars to the
national debt.
So I want to ask the two witnesses, Mr. Kamin and Ms.
Kysar, do you think that it would have been worth the effort to
make progress on some of these issues that I just mentioned--
infrastructure, investment in affordable housing, and so
forth--by moderating the influence of the drastic corporate tax
cuts and those others, such as carried interest, going into
Wall Street? Give me your opinion on that.
I take no issue with the gentleman representing small
business. Please.
Mr. Kamin. So I think the answer is ``yes.'' We have to
make progress in this country along a number of dimensions to
help low- and middle-income Americans get ahead. That includes
some of the key investments that you are talking about that,
unfortunately, we have not been putting enough money into,
whether it is infrastructure and research that helps innovation
and helps growth, as well as making sure that we keep our
commitments in programs like Social Security and Medicare.
A bill that cuts revenue and leads to higher deficits to
the tune of $2 trillion over the next decade--according to the
CBO--and that ends up giving a benefit to the top 5 percent,
that as a share of their income is double that for a middle-
class family and around nine times that relative to a low-
income family, is not the right priority and will end up
meaning that we will not have enough resources to put into
those kinds of key investments and commitments that can really
help growth and also low- and middle-income families.
Senator Nelson. That is what I am worried about. And we
have such desperate needs. In my State, a growth State--Mr.
Chairman, I want you to hear this--in my State, it is a growth
State. We are growing at a thousand people a week. You can
imagine the strain on the roads, the bridges, the structurally
deficient bridges. You can imagine the sewer plants, the water
plants, the airports, the seaports, not even to speak of
broadband expansion into the rural areas.
And where in the world are we going to get the money if we
did not do it in a balanced approach with the tax bill instead
of adding another trillion dollars to the national debt?
Ms. Kysar, I would like to hear from you.
Ms. Kysar. Yes. I mean, I think those priorities--
infrastructure, transition to automation, education--those all
have to be at the forefront going forward, and they should have
been in the last bill.
Bringing the rate all the way down to 21 percent, you know,
without sufficient revenue offsets, that is going to
shortchange those priorities.
Yes, the rate needed to come down. Did it need to come down
that far, especially without being paid for? That is another
story.
Senator Nelson. I might say in closing that I--as you, the
Senator from Ohio, my friend--talked to a lot of CEOs before
the tax bill. Now, we were cut out of the process and were not
allowed in on the drafting of the bill. But leading up to that
point, I had talked to a lot of CEOs, and a lot of CEOs of big
corporations would have been extremely happy to go from a 35-
percent corporate tax rate to 25 percent. And that would have
moderated this effect of a huge--even to a rate of 28 percent.
That is a substantial tax cut.
And then if we had balanced it, we would have been able to
start doing some of these other things. And I thank the
gentleman from Ohio.
Senator Portman. I thank my colleague.
We are now officially in the second round.
And I will call on Senator Wyden first.
Senator Wyden. Thank you, Mr. Chairman.
Ms. Kysar, let me start with you. One of the lines that is
popular in every town hall in America is you are going to take
away the tax breaks for doing business overseas and you are
going to keep American jobs at home. We all heard President
Trump say it again and again, but it surely looks to me that,
despite the President's claims to put America first, he
squarely put American factory jobs second.
And you stated in your prepared testimony, and I will quote
here, that the international tax provisions, which are
certainly complicated, in your words, quote, ``encouraged firms
to move real assets and accompanying jobs offshore.''
Do you think you could describe briefly and in English what
you are talking about there so that people can really
understand what is going on? And again, in our bipartisan bill,
we sought again to make us competitive in tough global markets
with a focus on American companies and American jobs.
So, what did you mean by that comment?
Ms. Kysar. Sure. So first, the law shifts to a territorial
system, right? You have a 21-percent rate in the U.S. and a
rate of half of that outside the U.S. on what is so-called
GILTI type of income that is subject to a minimum tax of 10.5
percent. So that is a wide differential that is going to retain
some motivation, right, to profit-shift abroad.
Second, the rules that are designed to impose a minimum tax
on foreign earnings and to encourage investment have the
opposite effect, in some respects, so they encourage foreign
investment, particularly in real estate, like factories. That
is because low-margin companies in low-tax countries can
potentially avoid any U.S. tax because of the design of the
qualified business asset provision, which essentially exempts a
10-percent rate of return on tangible, depreciable investments
abroad.
And so, if you have tangible factories and assets abroad,
then this allows some of your income to be exempt from that
minimum tax. So your incentive is to put assets abroad.
Also, when you are talking about the preferred FDII rate,
which is a rate that is supposed to be incentivizing keeping
intangibles here, you get that preferred FDII rate by keeping
investment assets out of the United States. And that is just
because of the way that those provisions define intangible
income.
Senator Wyden. Okay.
Ms. Kysar. There are also problems with foreign tax
credits, where a company can blend high-tax earnings, to reduce
U.S. tax owed, in a tax haven or low-tax jurisdiction, and that
is because the foreign minimum is a global instead of a
country-by-country tax.
Senator Wyden. Thank you. Certainly, for everybody in
English, it sure does not sound like putting America first.
So I am just going to close with this. I do want to put
into the record a comment made by Dr. Holtz-Eakin about the
pass-through deduction, which raises the question again of
another broken promise to small businesses who were told the
bill would simplify their taxes.
He stated with respect to the pass-through deduction,
quote, ``Republicans did not do nearly as good of a job. This
is a place where there is unfinished business.''
I would like that to go into the record at this point.
Senator Portman. Without objection.
Senator Wyden. Let me close with this. Over 2 hours ago, I
started by saying the President's top economic adviser said
their tax bill would, on average, give workers a $4,000 pay
raise. And I said that I looked at this promise from the
administration, and I said workers are not seeing it. That
promise to the middle-class worker that, on average, they were
going to get a $4,000 pay raise, has not been kept.
And I just want to wrap up by way of saying, over the last
2 hours, no Republican has come in here and said that that
$4,000 wage increase promise has been kept.
So my hope is--and hope springs eternal here on the Senate
Finance Committee, because we have a rich tradition of finding
common ground--that we can go back, as former Senator Bill
Bradley has talked to me about, working together, find common
ground in an area that is so complicated. If you want to make
it sustainable, folks, you have to work together.
The only thing that has been guaranteed about this tax bill
is that there is going to be a lack of certainty, because it
was not bipartisan.
Thank you, Mr. Chairman.
Senator Portman. Senator Bennet?
Senator Bennet. Thank you, Mr. Chairman. I appreciate it.
And thank you to the panel again for sitting through this.
Is there anybody on the panel who is willing to testify
that this tax bill did not exacerbate the income inequality
that we have in this country when it was passed?
Dr. Holtz-Eakin. That would be me.
Senator Bennet. Great. Go ahead.
Dr. Holtz-Eakin. So, I mean, what has been discussed is the
Joint Committee's calculations of taxes. But what has not been
discussed is the $6 trillion in additional GDP that CBO has in
its baseline this year versus last year.
People benefit from that. And the people whom I believe
this tax bill was most designed to benefit are the American
middle class, who have experienced the consequences of zero
productivity growth for 5 years, zero growth in real wages, and
that is intolerable.
Senator Bennet. And, Mr. Kamin, do you have a view?
Mr. Kamin. Yes. I think that the distributional analysis
done by independent and credible sources has shown again and
again that this bill disproportionately benefits the very, very
best-off.
And when it comes to additional economic growth, CBO
indicates that across the decade, on average, it would increase
GDP by about .06 of a percentage point per year in terms of the
annual growth rate. Its actual effect on people's living
standards, especially once you look towards national income and
the amounts that are being paid to foreigners, is even less
than that.
So I think, fundamentally, the fundamental conclusions of
those distributional analyses, which do distribute, by the way,
the corporate tax cuts down to both owners and workers, is that
this disproportionately benefits the very, very best-off in
this country.
Senator Bennet. Anybody else?
We will know, which is the good news. And I do think my
view is that we have seen in the past how trickle-down
economics worked out for most people in this country. And we
should be attacking that problem somehow, it seems to me.
There certainly was the basis for bipartisan tax policy in
this committee. And tragically, we did not take that
opportunity.
Mr. Kamin, I wanted to give you the rest of my time
actually, because I was trying to get to you in the last round.
I mentioned that I had seen a chart recently from the IMF
that said that we are going to be the only country in the
industrialized world to add to our deficit next year.
By the way, what was the size of the recovery package under
President Obama in the depths of the worst recession since the
Great Depression, when we had 10-percent unemployment?
Mr. Kamin. As I remember, it was around $700 billion.
Senator Bennet. That is about right. And what was that in
relation to the fiscal effect of this on the Federal
Government, this tax bill?
Mr. Kamin. Well, especially since most of that was intended
to be temporary and focused during a period of economic
weakness, this bill has the potential to have a considerably
larger effect on the long-term fiscal situation.
Senator Bennet. Does it make any sense to you that you
would, on the one hand, take the position that you should not
invest at a zero-percent interest rate at the depths of a
recession, but that you should deficit-spend when the economy
is essentially at full employment?
Mr. Kamin. No. And in fact, I mean, I think that we have
now committed potentially two errors in fiscal policy. The
first error was austerity that was forced, that was too soon,
in a period of time where increased spending and deficits would
potentially have led to lower unemployment and a lot less pain
in the economy. We had austerity that was too soon.
And right now, we have a bill that is going to add $1.9
trillion in deficits over the coming decade, assuming the
economy continues to grow, and at a point in time in which the
Federal Reserve is raising interest rates.
And so I think both of those indicate that we have moved in
the wrong direction at the wrong time.
Senator Bennet. Again, I will ask the whole panel, just for
fairness, does anybody want to make the case that it is better
to do a larger expenditure at this unemployment rate than at a
10-
percent unemployment rate? That is, you were going to make a
decision, all things being equal, that you would do it now
instead of at the depths of a recession?
That is what we have just done.
Do you think, Professor Kamin, reducing child poverty in
this country would have any effect on economic growth in the
United States?
Mr. Kamin. I think it would have a significant effect on
people's lives and also the future living standards of those
children. I think there is a lot of evidence that providing
additional support to very-low-income families leads to much
better outcomes for the children.
Senator Bennet. And less expense for the government.
Mr. Kamin. Sure, over the long term, that would be the case
that you would expect.
Senator Bennet. And do you think that investments in
infrastructure could generate economic growth?
Mr. Kamin. Yes. And I think there are many high-return
investments in infrastructure that this country could be
making.
Senator Bennet. And as I mentioned earlier, Mr. Chairman--I
will finish. We are now investing our domestic discretionary
spending, which is the stuff that is the money we invest in the
next generation, we are investing 35 percent less today than we
were in 1980. And I think that is going to affect our
competitiveness. I think it is going to affect where kids are
going to be.
And I would argue this. You know, when I was in my town
halls during the depths of the recession and there were people
who came to some of them and said, ``You know, you are a
socialist and you are a Bolshevik and the President was not
born in the United States,'' I would say, ``I do not know about
any of that. You might be right about some of that; I do not
know.''
But here is what I do know. Because of something that has
gone wrong with our politics in Washington, DC, we do not have
the decency to maintain, to even maintain the assets and
infrastructure, the roads and bridges that our parents and
grandparents had the decency to build for us, much less build
the infrastructure our kids are going to need to compete in the
21st century.
We are spending the money on ourselves, and we are stealing
it from our children. And what we have seen over the last 15
years punctuated by this terrible bill is a fiscal strategy
that, frankly, I would expect only from a Bolshevik country,
not from the United States of America.
I yield back.
Senator Portman. Thank you.
And I have one last speaker for the second round, and that
is me, unless the chairman or Senator Wyden would like to go.
Senator Wyden. Mr. Chairman, I certainly am not going to
say anything else.
Senator Portman. Is there something you want to put in the
record?
Senator Wyden. I just do have to put something into the
record regarding some of our process concerns on this side.
Senator Portman. Yes.
[The information appears in the appendix on p. 100.]
Senator Portman. So I am, again, feeling like I am looking
at an entirely different tax bill than we talked about here.
Let me just be clear. The Congressional Budget Office says
we are going to have 1.9-percent growth over the next 10 years.
That is the number we have to deal with.
Under that scenario, there is about a trillion dollars when
you take out the current policy base numbers, which I think is
fair to do. So that is why Senator McCaskill and others were
talking about the importance of economic growth. And I get
that.
If you have 1-percent increase in GDP economic growth, you
have $2.7 trillion more in revenue coming in over the next 10
years. Is that correct, Dr. Holtz-Eakin?
Dr. Holtz-Eakin. Yes.
Senator Portman. Yes, $2.7 trillion. So that is why, if you
have only .4 or .5 percent more economic growth over that time
period compared to what you would have had, then this thing
actually does not add to the deficit. And that is what I think
is going to happen, I really do. I may be wrong, because nobody
knows, because there could be a recession coming up, you know,
in the next couple of years or there could not be. But relative
to what would have happened, I think that is very, very likely.
And again, I look at what has happened right now, this
year. CBO just 2 weeks ago said, no, it is not going to be 2-
percent growth this year, it is going to be 3.3 percent. We
have lived with 1.5- to 2-percent growth for the past 10 years,
with wages being flat.
And what is exciting is, we are not only seeing growth, we
are seeing wages going up. We should be celebrating that in
this committee. I mean, for the first time really in a decade
and a half, we are seeing real wages increase. And that is
incredibly important to getting people out of the shadows and
into the workforce.
I will say, this notion of full employment, I just do not
agree with it. I do not think we are at full employment right
now. And you know, some of my Republican colleagues may
disagree with me, but we are not at 4.1 percent.
We have the highest rates probably in history of men being
outside of the labor force participation. Among women and men
together, it has to go back to the 1970s. In other words, there
are millions of Americans who are not even showing up on these
data points because they are not even looking for work: 9
million men, they say, between the ages of 25 and 55, able-
bodied men, who are not working and not looking for work.
So we do need these higher wages and we do need this
stronger economy to bring them into the workforce. There are
other things we need to do as well to give them the skills they
need and to deal with some of the issues that keep them out of
the workforce, like the opioid crisis.
But this is why the economic growth is so important and
higher wages are so important. And it is happening. I mean, as
we sit here, it is happening.
And I really believe that our tax code was so broken,
particularly on the international side, but even for the small
businesses, that this increased investment that is happening,
these numbers I am talking about, the PNC thing from Ohio, that
is real; that is a survey that says small and midsized
businesses are more optimistic than ever.
NFIB--people are planning to invest more than ever because
they see this tax cut and the tax reforms, which I think are
equally important, and I think also the regulatory relief is
part of this, that they can take a risk and get a benefit out
of it. And we should all be for that, because that will help
grow the economy.
So we just have a fundamental disagreement here, I guess,
in terms of how this is going to come out. But to the point
that this only helps the wealthy, I would just ask you to look
at the Joint Committee on Taxation tables. You know, they told
us that at least 3 million Americans who currently pay Federal
income tax who are at the lower end of the economic scale are
not going to pay income tax at all under this new code; 3
million people were knocked off the rolls.
Why? Because it does benefit those at the low end. You
doubled the standard deduction. You doubled the child credit.
You lowered the rate.
The top 1 percent and top 10 percent are both going to pay
a higher percentage of the tax burden based on the Joint Tax
numbers. So yes, I mean, it is tax cuts for everybody for sure,
but it is still a progressive tax code, as it should be, in my
view, and in fact it has been made more progressive through
these changes as you look at these numbers that the Joint
Committee on Taxation is giving us.
So I appreciate everybody being here. We will see what
happens. As Senator Bennet said rightly, we will know the
answer to this over time.
I am sure rooting for another 3.3-percent growth year, if
that is what it is going to be this year. I am sure rooting for
higher wages. And I think we had to do something to get this
economy moving. And now we have to bring some of these people
out of the shadows, back into the workforce.
So I thank you all for being here today.
Thanks to my colleagues for their coming and talking about
this. A lot of this is, again, difficult to project. But I am
optimistic from what we have seen so far. And I am optimistic
that that investment in the end is going to be the single-
biggest thing, both small businesses, international companies--
yes, foreign investment. We want all that investment here,
because that is going to stimulate more productivity, which all
the economists say leads to higher economic growth, which leads
to higher wages.
Thank you all. And with that, this hearing is adjourned.
Thanks for your attendance and participation.
I ask that any member who wishes to submit questions for
the record do so by the close of business on Thursday, May 3rd.
With that, this hearing is adjourned.
[Whereupon, at 4:48 p.m., the hearing was concluded.]
A P P E N D I X
Additional Material Submitted for the Record
----------
Prepared Statement of David K. Cranston, Jr., President,
Cranston Material Handling Equipment Corporation
Good afternoon, Chairman Hatch, Ranking Member Wyden, and members
of the Senate Finance Committee.
My name is David Cranston, and I am the president of Cranston
Material Handling Equipment Corporation, a small business located in
western Pennsylvania just outside of Pittsburgh. I appreciate the
opportunity to represent my company and the National Federation of
Independent Business (NFIB) at this hearing.
NFIB is the Nation's leading small business advocacy organization.
Founded in 1943, its mission is to promote and protect the right of its
members to own, operate, and grow their businesses. NFIB represents
roughly 300,000 independent business owners located throughout the
United States, including over 13,000 in my home State.
My company is truly a small business with seven full-time and two
part-time employees. We are an ``S corp'' that sells equipment to
manufacturing companies to help them store and lift the products they
are making. I am here today to share with you how the Tax Cuts and Jobs
Act is having a positive impact on businesses as small as mine.
One of the biggest challenges facing small business is growing the
amount of capital that is needed to operate and expand. To a small
business owner, capital, the cash that we have available to us, is the
lifeblood of the business. We use it to purchase equipment, buy
inventory, meet loan obligations, develop new products, hire or train
employees, finance receivables, and simply create enough liquidity for
the business to operate day to day. You would think with all the
purposes it is used for it would not be so hard to come by, but I can
tell you, it is unbelievably hard to accumulate. It is particularly
hard to have enough ``excess'' cash available in your business to take
advantage of new growth opportunities. The good news is that for many
small pass-through businesses like mine, the Tax Cuts and Jobs Act
provides us with substantial help in accumulating capital in order to
grow.
Like many business owners, I pay quarterly estimated taxes. In
order to pay those taxes, I take cash from my company each quarter.
Those payments suck my working capital right out of my business quarter
after quarter. Under the Tax Cuts and Jobs Act's new section 199A, I
now qualify for a 20-percent deduction on my pass-through income. In
real terms, this means I will be able to keep between $1,200 and $2,500
a quarter in my business that I would otherwise have paid in taxes. The
ability to keep $5,000 to $10,000 a year in my company is a big deal to
a small business owner like me.
Moreover, the cumulative effect over several years will be
substantial. These savings will allow me, and the millions of other
American small businesses like mine, to be in a better position to take
advantage of opportunities to grow or improve our operations. In fact,
since the first of the year, I have decided to expand into a new
product line. To launch this product line, I need to purchase new
equipment, invest in training, and build a new website. The tax savings
has put me in a better financial position to self-fund this new
product.
My experience is not unique. Recent NFIB research has tracked
record numbers of small businesses across the country saying that ``now
is a good time to expand.'' The vast majority of businesses throughout
the country are small businesses like mine with a handful of
hardworking employees serving their customers to the best of their
abilities. Business owners are always looking at new ideas and wanting
to take advantage of new opportunities. But often we cannot do so if we
don't have the cash to reinvest into our businesses.
Another effect the Tax Cuts and Job Act has had on me is to
increase my optimism for the future. We, like many small businesses,
sell our products and services primarily to larger corporations. I can
tell you that my optimism that the economy has a real opportunity to
continue improving has dramatically increased. In January of this year,
I read numerous articles in the Pittsburgh Post-Gazette and our local
business paper about one corporation after another announcing that they
are increasing capital spending because their taxes are being reduced.
It is often stated--and in my experience, it is true--that the
products and services large businesses purchase every day greatly
impact the community or region in which they find themselves. Again, my
personal experience is reflected in NFIB survey data showing some of
the highest levels of small business optimism since NFIB began
conducting the survey 45 years ago. When business owners are
optimistic, they are then much more inclined to invest in growing their
businesses.
The Tax Cuts and Job Act has not only reduced taxes for businesses
like mine; it has created an environment where more business owners
feel confident to take the cash from the tax savings and invest it back
into their businesses. For these reasons, I believe the Tax Cuts and
Job Act is spurring business investment and therefore has set the stage
for increased economic growth for years to come.
I feel so strongly about the benefits of this law that I was
willing to take 2 days away from my own company to come down and share
with you what I am seeing and how my business has been positively
impacted.
Thank you for giving me this opportunity to testify.
______
Question Submitted for the Record to David K. Cranston, Jr.
Question Submitted by Hon. Orrin G. Hatch
Question. Some of my Democratic colleagues have resorted to calling
the tax benefits that will accrue to many Americans as a result of the
tax reform bill we passed last year as ``crumbs.'' They point to share
buybacks as an example of significant corporate giveaways that won't
benefit working Americans at all. They also point to bonuses, hourly
wage increases, increased 401(k) matching contributions, increased
training and education, and the like for working Americans, as
inconsequential results of this tax reform bill.
Would you describe how the tax benefits that you are receiving
under the tax reform bill are anything but ``crumbs?''
Answer. I do not think that is representative of the value working
families place on the money the tax cuts allow them to keep. I will
share a personal story as an example. In March, my 7th grade son's
school announced that his class was going on a trip to Washington, DC.
When he shared the good news with us, he also shared that the cost was
more than $400 per student. While his mother and I were both happy for
him, we wondered where the money for this unexpected expense would come
from. Fortunately, the school also said there would be some fundraising
events to help fund the trip. One of those events was a fundraiser
where the students could earn $3 for every hoagie they sold. After
completion of this fundraiser, it was announced that about a quarter of
the trip's expenses had been raised by the sale of hoagies. However, to
me the interesting fact was that every 7th grade family had
participated in the fundraiser. That said to me that every family
valued the $3 that they could use per hoagie to offset the cost of the
trip. If families are willing to work to receive a benefit of $3 by
selling a hoagie, I would hardly call the additional $1,000 per child
they will be receiving from the increased tax credit ``crumbs.'' Then,
add to this the hundreds or thousands of additional dollars many will
be keeping due to the lower tax rates, higher bracket thresholds, and
the doubling of the standard deduction. I believe it is fair to say the
average family is receiving a substantial benefit by the lowering of
their federal income taxes. For small businesses like mine that are
organized as pass-through's, the new section 199A deduction delivers on
the Tax Cuts and Jobs Act's promise of bringing real relief to Main
Street. This provision will save my company between $5,000 and $10,000
per year. That's real money I intend to reinvest in the form of a new
product offering.
______
Prepared Statement of Hon. Chuck Grassley,
a U.S. Senator From Iowa
Mr. Chairman, positive economic news continues to mount in the
months since the passage of the Tax Cuts and Jobs Act. More than 500
employers and counting throughout the country have announced they are
reinvesting their tax cut savings into employees through increased
wages, benefits and bonuses.
In addition to lower tax rates and increased wages in paychecks
every month for the vast majority of Americans, millions of American
workers are benefiting from the recent tax cuts. Many of them are in my
home State of Iowa.
Media reports have detailed stories of Iowa-based companies
investing resources back in their businesses and employees after the
passage of the Tax Cuts and Jobs Act. Dyersville Die Cast, which
dedicated a total of $150,000 in bonuses for its employees, is one such
company, as is Anfinson Farm Store in Cushing, which gave $1,000
bonuses and raised wages by 5 percent for all of its full-time
employees. Ohnward Bancshares in Maquoketa gave $1,000 bonuses for all
of its 260 employees, and Pattison Sand Company in Clayton gave its
employees $600 cash bonuses and raised their base pays.
Several Iowa utility companies are delivering millions of dollars
in customer savings as well. Alliant Energy estimated its customer
savings to be between $18.6 million to $19.6 million for electric and
$500,000 to $3.7 million for gas. MidAmerican Energy estimated between
$90.8 million and $112.3 million in customer savings and Iowa American
Water Co. estimates customer savings of between $1.5 and $1.8 million.
From big cities to small towns, workers are receiving higher wages
and better benefits, and families are once again able to save and
invest in their futures. The Tax Cuts and Jobs Act has spurred economic
growth and optimism in Iowa and throughout the country. I'm encouraged
by the progress made, and I'm confident that the benefits of this
commonsense law will continue to grow and improve the lives of Iowans
and all Americans.
______
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 Senate Finance
Committee hearing to discuss the status and implementation of the new
tax law.
Before we get into the meat of today's hearing, I'd like to thank
Senator Wyden and Senator Scott for suggesting this meeting.
I look forward to having a conversation about the important changes
we made in our tax reform bill and what kinds of technical corrections
we might make to ensure the law is implemented as Congress intended.
As we gather to discuss ways to make tax reform even better, let's
remind ourselves: every member who actively participated in drafting
the bill should be proud of the new tax law. We were proud when we
passed it, and we are even prouder now as all across the Nation,
evidence affirms that the new law is tangibly benefiting millions of
Americans.
More than 500 companies have announced wage hikes, increased
benefits, more jobs, and increased investment or expansion in the
United States thanks to the new law.
For example, in the past month, Kroger announced it will spend $500
million on employee compensation; Verizon is doubling its commitment to
STEM education--helping hundreds of schools and millions of students;
and a new study by the National Association of Manufacturers shows that
93 percent of manufacturers are optimistic about the future--in large
part thanks to a tax code that works for American innovators and
manufacturers.
Numerous other studies show increasing optimism among American
business leaders--rising right along with wages and employment numbers.
American individuals, too, are becoming more supportive of the law as
they witness the benefits it brings to businesses and households.
Though only 37 percent approved of the law when it was passed in
December, more than 50 percent expressed support in February, according
to a New York Times poll. Among Democrats, support rose by more than 10
percent in the same time period. It's hard to deny a truth that expands
your pocketbook.
Now I'll be the first to admit that, good as it is, there are
things we could have done to make the bill even better.
Unfortunately, that's largely because Democrats refused to
positively participate in writing the bill.
In fact, the only efforts I saw coming from the other side were to
undercut our efforts, put on political theater, and prevent us from
even adopting their own ideas from the very beginning. For anyone out
of touch enough to think that I would just throw my good friends under
the bus for no reason, let me give you a quick history.
Last July, 45 of our Democratic colleagues wrote us what can only
be called a legislative ransom note. That letter included a list of
``prerequisites''--including a requirement that we agree, up-front, to
never use the reconciliation process used to pass numerous bipartisan
tax bills over the last few decades.
Now, I tend to think that while such bellicose political tactics
certainly don't help getting good bipartisan legislation, they should
not preclude both sides from at least talking to each other afterward.
Unfortunately, it seems that my expectations after more than 40
years of senatorial service were proven wrong, once again.
As we continued to work on our draft bill, I was saddened, and
rather stunned, at the lack of meaningful interaction from the
Democrats on this committee.
In fact, I did not hear anything of substance until we had already
spent months writing a draft bill that we introduced in committee. Once
we got there, we were glad to finally hear some of the thoughts my
Democratic colleagues had. In the end, we happily included six
amendments supported by eight different Democrats on this committee.
Now, if you're listening to this and thinking that this is just a
bit of political theater, I would understand. Truly, I think you had to
be there to believe it, and the craziest part is, it didn't end there.
Just as we began to negotiate the final bill before we got to the
floor, I was stunned by the base partisanship that had grabbed hold of
my long-time friends on the other side.
In fact, as just one example of this, Democrats slashed their own
provision to fund the Volunteer Income Tax Assistance program, which
helps low-income, disabled, and non-English speaking taxpayers with
their filings for free. No one, on principle, disliked this provision.
Democrats just didn't want a good thing in the tax law. So they used a
parliamentary procedure to gut their own amendment from the bill behind
closed doors.
And their partisan charade didn't end there. In fact, they used the
Byrd Rule to excise the title and the table of contents. If someone
thinks the tax reform is too complicated, that's in large part because
there is not a table of contents--something most readers like when
thumbing through more than 100 pages of legislative text--but that's
what the other side insisted upon. Honestly, I cannot recall ever
seeing something like that in my more than 40 years here in the Senate.
And all of that was just a sign of how desperate the other side
was. They didn't care what they cut nor did they care about any sense
of earnest review.
Now, I'm not a Senator with a flare for the dramatic. That's why I
didn't bring this up at the time. Nor did any of my colleagues that I
know of. Because, frankly, we were too busy trying to help the rest of
America get a tax code that actually works.
That's why, when the bill did pass, it came with plenty of
provisions so good that all Americans can be pleased with them, no
matter their political party.
For example, Opportunity Zones, established in a measure proposed
by Senator Scott, draw investment to Americans in impoverished regions
of the country.
Additionally, across the board, tax rates have tumbled down.
Individuals of all income levels will see tax cuts, with the typical
family of four making the median family income of $75,000 a year seeing
their taxes cut by more than half. And the corporate tax rate has been
cut from 35 percent to 21 percent, which will keep America competitive
in the global economy.
Not only is this a big boon for American businesses, but it helps
their employees too, in the form of higher wages, more jobs, and
increased retirement savings and benefits. These are real dollars that
give middle-class Americans more money in their pockets every month.
Money they worked for and deserve more than the bloated and overgrown
government does.
We made sure the law creates proper incentives. We made our
international tax system a territorial one, ensuring that American
companies are more competitive overseas and encouraging them to bring
earnings and investment back home. Again, that was a bipartisan
proposal that we've discussed for years, and I'm glad we were finally
able to enact it into law.
We doubled the Child Tax Credit and expanded its refundability.
Again, another bipartisan proposal my colleagues could never seem to
get passed into law. We also doubled the standard deduction. Taken all
together, provisions like these are the reason JCT found that the
overall distribution of the new tax bill is directed toward the middle
class. Since I'm on that topic, I'd like to mention briefly a response
to some concerns I've heard about section 199A. It is true that many
small business owners are going to have their taxes cut. We did that
very much intentionally. And even CBO has explicitly stated that these
cuts will help grow small businesses.
In fact, they recently said that tax reductions for small
businesses will increase after-tax returns on investment and boost
investment by pass-through businesses. That increased investment means
that their businesses grow--hiring new employees, growing the
communities around them, and generally benefitting the American
economy. All worthy goals none of us should be ashamed of.
And these businesses are a major part of our economy, I might add.
According to the Small Business Administration, our most recent numbers
indicate there are 29.6 million small businesses in the United States.
They make up 99.9 percent of all firms and 99.7 percent of firms with
paid employees. From 1993 to 2016, small businesses accounted for 61.8
percent of net new jobs. And the majority of those small employer
businesses are pass-through businesses.
So let me pose a question back to my colleagues, why would we not
want to get more money back to these business owners so that they can
grow their businesses, hire more employees, and improve our economy? I
honestly can't think of a reason.
As much as we've done, though, the work isn't over. And that's
reason for optimism. As we make technical corrections to the bill--par
for the course for any major tax bill--we'll be able to enhance what
the law already does well, ensuring that Americans get tax relief, more
jobs, and better wages.
We'll also look ahead to implementation. After all, Americans are
just starting to see some of the many benefits of this law. Besides the
wage boosts, bonuses, and other benefits they've started to receive,
Americans will see yet more benefits next year when they file their
taxes at lower rates and with larger credits and deductions.
In order to continue seeing all of those benefits, though, we need
to ensure that the law is implemented as intended by Congress. That
means having the proper people at Treasury and the IRS who can ensure a
fulsome and thoughtful process.
Confirming our nominees in short order will be a critical part of
ensuring all of the right people are on duty for this critical
endeavor. That includes Mr. Charles Rettig, who has been nominated to
serve as IRS commissioner. I look forward to processing his nomination
in short order, though with the thoroughness this committee is known
for, and I also look forward to getting Mr. David Kautter back to
Treasury, where he can start implementing the new law.
For all of these reasons, I truly believe there is reason for
optimism. And now that our political theater is moot, I am anxious to
get back to our bipartisan tradition in this committee. Surely we can
work on all this in a bipartisan manner--reaching across the aisle to
ensure fairness in our tax code and in its implementation.
Before I finish, I want to point out that the tax law is, in one
sense, already a bipartisan bill. True, one party refused to
participate and did everything it could to make the bill too poor to
pass. But many Democratic priorities were included in the bill, such as
Senator Menendez's sexual harassment proposal, and lowering the bottom
tax brackets. Senator Wyden himself has long supported lowering of the
corporate tax rate, as did President Obama, and we were finally able to
do so.
I'm proud of my history of bipartisanship in the Senate. And now,
perhaps more than we have had for years, we have a chance to move
forward together. I look forward to working across the aisle to enhance
the new tax law to be the best it can be.
______
Prepared Statement of Douglas Holtz-Eakin, Ph.D.,
President, American Action Forum*
---------------------------------------------------------------------------
* The views expressed here are my own and not those of the American
Action Forum. I thank Gordon Gray for his assistance.
Chairman Hatch, Ranking Member Wyden, and members of the committee,
thank you for the opportunity to offer my early perspective on the Tax
Cuts and Jobs Act (TCJA) now that it has been law for just over 4
months. To assess the immediate and prospective effects of the TCJA, it
is important to frame the evaluation relative to the reason for tax
reform in the first place: the weak U.S. economic outlook. Having
identified the ``problem,'' we should consider whether the major
provision of the TCJA addressed the deficiencies of the tax code that
weighed on economic growth. Last, we can discuss how best to evaluate
the TCJA going forward as well as what evidence there may be of the
effects of the TCJA on U.S. economic activity. As part of this
---------------------------------------------------------------------------
assessment, I would like to make three points:
The overriding rationale for the TCJA was the need for
better incentives for long-term economic growth, improving
disappointing wage growth, and raising the growth of the
standard of living for American families.
The TCJA, while imperfect, addressed many of the most anti-
growth elements of the old tax code.
It is much too early to judge the degree to which the TCJA
is improving investment, productivity, and ultimately economic
growth as intended. It is also essential to measure this effect
properly going forward.
Let me discuss these in turn.
recent economic performance and the growth challenge
Supporting more rapid-trend economic growth is the preeminent
policy challenge. The Nation has experienced a disappointing recovery
from the most recent recession and confronts a projected future defined
by weak long-term economic growth. Left unaddressed, this trajectory
will consign to the next generation a less secure and less prosperous
Nation.
Figure 1 shows quarterly, year-over-year growth rates for real
gross domestic product (GDP) since the official end of the Great
Recession in June of 2009. As displayed, real GDP growth has been
stubbornly weak, averaging 1.9 percent annually (the dotted line).
While recoveries from recessions precipitated by financial crises tend
to be weaker, the persistence of the Nation's weak economy should not
be considered inevitable, but rather as an encouragement to implement
better economic policy.
Household income, a metric that more working Americans can
appreciate, underscores the tepid economic recovery. According to the
most recent comprehensive income survey conducted by the U.S. Census
Bureau, earnings growth of men and women who worked full-time and year-
round was essentially zero in 2016.\1\ Stagnant earnings growth
reflects poor productivity growth that lags behind the rate seen in
other recoveries or the prevailing historical trends (see Figure 2).\2\
---------------------------------------------------------------------------
\1\ https://www.census.gov/library/publications/2017/demo/p60-
259.html.
\2\ https://www.americanactionforum.org/research/does-compensation-
lag-behind-productivity/; also see https://www.bls.gov/opub/btn/volume-
6/below-trend-the-us-productivity-slowdown-since-the-great-
recession.htm, on which Figure 2 is based.
---------------------------------------------------------------------------
Figure 1: Disappointing Economic Growth
[GRAPHIC] [TIFF OMITTED] T2418.001
Figure 2: Productivity Growth Is Lagging Past Performance
[GRAPHIC] [TIFF OMITTED] T2418.002
Figure 3: Labor Force Participation
[GRAPHIC] [TIFF OMITTED] T2418.003
The other essential building block for stronger trend economic
growth is growth in the labor force--the population willing and able to
work. As a share of the population, the labor force has declined from
historical highs in 2000, but this decline has accelerated since the
Great Recession (Figure 3).
Figure 4: CBO April 2018 Baseline
[GRAPHIC] [TIFF OMITTED] T2418.004
Even more troubling than the recent economic past is the economic
outlook. The Congressional Budget Office (CBO) projected in its April
Budget and Economic Outlook that U.S. economic growth will average 1.9
percent over the period 2018-2028. While it reflects near-term
improvement in the pace of growth, and credits the TCJA for improved
incentives for work, saving, investment, and growth, CBO projects that
these improvements will dissipate over the budget window.
The rate of growth projected in the current economic baseline is
certainly below that needed to improve the standard of living at the
pace typically enjoyed in post-war America. During the early postwar
period, from 1947 to 1969, trend economic growth rates were quite
rapid. GDP and GDP per capita grew at rates of 4.0 percent and 2.4
percent, respectively. Over the subsequent 25 years, however, these
rates fell to 2.9 percent and 1.9 percent, respectively. During the
years 1986 to 2007, trend growth in GDP recovered to 3.2 percent, while
trend GDP per capita growth rose to 2.0 percent.
These rates were quite close to the overall historic performance
for the period. The lesson of these distinct periods is that the trend
growth rate is far from a fixed, immutable economic law that dictates
the pace of expansion, but rather is subject to outside influences--
including public policy.
Table 1: The Importance of Trend Growth to Advancing the Standard of
Living
Trend Growth Rate Per Capita (%) Years for Income to Double
------------------------------------------------------------------------
------------------------------------------------------------------------
0.50 139
0.75 93
1.00 70
1.25 56
1.50 47
1.75 40
2.00 35
2.25 31
2.50 28
2.75 26
3.00 23
------------------------------------------------------------------------
The trend growth rate of postwar GDP per capita (a rough measure of
the standard of living) has been about 2.1 percent. As Table 1
indicates, at this pace of expansion an individual could expect the
standard of living to double in 30 to 35 years. Put differently, during
the course of one's working career, the overall ability to support a
family and pursue retirement would become twice as large.
In contrast, the long-term growth rate of GDP in the most recent
CBO projection is 1.9 percent. When combined with population growth of
0.8 percent, this implies the trend growth in GDP per capita will
average about 1.0 percent. At that pace of expansion, it will take 70
years to double income per person. The American Dream is disappearing
over the horizon.
More rapid growth is not an abstract goal; faster growth is
essential to the well-being of American families.
the need for tax reform
Prior to the enactment of the TCJA, the U.S. tax code was broadly
viewed as broken and in need of repair, and for good reason. Whereas
the previous administration and past Congresses made the tax system
worse--adding higher rates and new taxes, including on the middle
class--the Trump administration and Congress embarked on an effort to
overhaul the fundamentals of the Nation's tax system. A sound reform of
the U.S. tax code was an essential element of a pro-growth strategy,
and this reform promises to support increased long-run economic
growth.\3\
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\3\ http://americanactionforum.org/research/economic-and-budgetary-
consequences-of-pro-growth-tax-modernization.
The deficiencies in the tax system prior to the enactment of the
TCJA have been well documented but are worth reviewing and will fix
this discussion in the proper context--the counterfactual to the TCJA
is of profound importance for evaluating its efficacy in improving the
growth outlook.
International Competitiveness and Headquarter Decisions \4\
---------------------------------------------------------------------------
\4\ See https://waysandmeans.house.gov/wp-content/uploads/2016/05/
20160525TP-Testimony
-Holtz-Eakin.pdf.
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Prior to the enactment of the TCJA, the U.S. corporate tax code
remained largely unchanged for decades, with the last major rate
reduction passed by Congress in 1986.\5\ During the interim, competitor
nations made significant changes to their business tax systems by
reducing tax rates and moving away from the taxation of worldwide
income. Relative to other major economies, the United States went from
being roughly on par with major trading partners to imposing the
highest statutory rate of tax on corporation income. While less stark
than the U.S.'s high statutory rate, the United States also imposed
large effective rates. According to a study by PricewaterhouseCoopers,
``companies headquartered in the United States faced an average
effective tax rate of 27.7 percent compared to a rate of 19.5 percent
for their foreign-headquartered counterparts. By country, U.S.-
headquartered companies faced a higher worldwide effective tax rate
than their counterparts headquartered in 53 of the 58 foreign
countries.'' \6\
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\5\ http://americanactionforum.org/research/economic-and-budgetary-
consequences-of-pro-growth-tax-modernization.
\6\ PricewaterhouseCoopers (2011), Global Effective Tax Rates,
Washington, DC.
The United States failed another competitiveness test in the design
of its international tax system. The U.S. corporation income tax
applied to the worldwide earnings of U.S. headquartered firms. U.S.
companies paid U.S. income taxes on income earned both domestically and
abroad, although the United States allow a foreign tax credit up to the
U.S. tax liability for taxes paid to foreign governments. Active income
earned in foreign countries was generally only subject to U.S. income
tax once it was repatriated, giving an incentive for companies to
reinvest earnings anywhere but in the United States. This system
distorted the international behavior of U.S. firms and essentially
trapped foreign earnings that might otherwise be repatriated back to
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the United States.
While the United States maintained an international tax system that
disadvantaged U.S. firms competing abroad, many U.S. trading partners
shifted toward territorial systems that exempt entirely, or to a large
degree, foreign source income. Of the 34 economies in the Organisation
for Economic Co-operation and Development (OECD), for example, 29 have
adopted systems with some form of exemption or deduction for dividend
income.\7\
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\7\ https://taxfoundation.org/territorial-tax-system-oecd-review/.
One manifestation of the competitive disadvantage faced by U.S.
corporations was decisions on the location of headquarters. The issue
of so-called ``inversions'' remained at the forefront of tax policy and
politics. Originally, tax inversions involved a single company flipping
the roles of U.S. headquarters and a foreign subsidiary--i.e.,
``inverting.'' Tax changes in the early 2000s largely ended this
practice. Next, whenever a U.S. firm sought to acquire or merge with a
foreign firm, the tax advantages of being subjected to a lower rate and
a territorial base made it inevitable that the combined firm would be
headquartered outside the United States. In these cases, inversions
took place in the context of these otherwise strategic and valued
business opportunities. Most recently, foreign firms have recognized
that freeing U.S. companies of their tax disadvantage allows foreign
acquirers to use the same capital, technologies, and workers more
effectively. Inversions were occurring because foreign firms were
---------------------------------------------------------------------------
acquiring U.S. firms.
A macroeconomic analysis of former House Ways and Means Chairman
Camp's tax reform proposal is instructive on the incentives inherent in
the old tax code for capital flight. John Diamond and George Zodrow
examined how reform similar to that proposed by former Chairman Camp
would affect capital flows compared to pre-TCJA law.\8\ In the long-
run, the authors estimated that a reform that lowered corporate rates
and moved to an internationally competitive divided-exemption system
would increase U.S. holdings of firm-specific capital by 23.5 percent,
while the net change in domestic ordinary capital would be a 5 percent
increase. It is important to note that these are relative
measurements--they were relative to current law at the time. If the
spate of announcements of inversions in the years leading up to the
enactment of the TCJA is any indication, the old tax code was inducing
capital flight. Accordingly, the 23.5-percent and 5-percent increases
in firm-specific and ordinary stock, respectively, may be interpreted
in part as the effect of precluding future tax inversions.
---------------------------------------------------------------------------
\8\ http://businessroundtable.org/sites/default/files/reports/
Diamond-Zodrow%20Analysis%20
for%20Business%20Roundtable_Final%20for%20Release.pdf.
Placing a value of this potential equity flight is uncertain, but
based on these estimates, roughly 15 percent, or $876 billion in U.S.-
based capital was estimated to be at risk of moving overseas under the
old code.\9\
---------------------------------------------------------------------------
\9\ http://www.americanactionforum.org/research/economic-risks-
proposed-anti-inversion-policy-update/.
Finally, it is an important reminder that the burden of the
corporate tax is borne by everyone. Corporations are not walled off
from the broader economy, and neither are the taxes imposed on
corporate income. Taxes on corporations fall on stockholders,
employees, and consumers alike. The incidence of the corporate tax
continues to be debated, but it is clear that the burden on labor must
be acknowledged. A recent survey compiled by the President's Council of
Economic Advisers aptly summarizes the economics literature, and finds
that while differing greatly, empirical estimates have been trending
upwards over time, reflecting the dynamism of global capital flows that
characterize the modern economy.\10\ One study by economists at the
American Enterprise Institute, for example, concluded that for every 1-
percent increase in corporate tax rates, wages decrease by 1
percent.\11\
---------------------------------------------------------------------------
\10\ https://www.whitehouse.gov/sites/whitehouse.gov/files/
documents/Tax%20Reform%20and
%20Wages.pdf.
\11\ Kevin A. Hassett and Aparna Mathur, ``Taxes and Wages,''
American Enterprise Institute Working Paper No. 128, June 2006.
---------------------------------------------------------------------------
Flaws in the Individual Tax Code
As taxpayers rediscover every April, the U.S. code has been
complex, confusing, costly to operate and comply with, and leaves
taxpayers distrustful that everyone is paying the share Congress
intended. In 2016, over 150 million individual tax returns were filed,
covering over $10.2 trillion in income.\12\ These returns also include
millions of businesses that do not file as C corporations. As of 2012,
there were 31.1 million non-farm businesses filing tax returns: 23.6
million sole-proprietors, 4.2 million S corporations, and 3.4 million
partnerships (including limited liability companies). The Internal
Revenue Service (IRS) also recognized 1.6 million C corporations.\13\
The tax system is often the most direct interface between individuals
and businesses and the Federal Government.
---------------------------------------------------------------------------
\12\ https://www.irs.gov/statistics/soi-tax-stats-individual-
income-tax-returns-publication-1304-complete-report#_ptl.
\13\ https://www.jct.gov/publications.html?func=startdown&id=4903.
Unfortunately, that experience is often deeply unsatisfactory. The
IRS has 1,186 forms with which taxpayers must contend and requires an
average of 11.8 hours per paperwork submission. The overall burden on
taxpayers is 8.1 billion hours in paperwork burden imposed by the tax
collection system on taxpayers.\14\
---------------------------------------------------------------------------
\14\ https://www.americanactionforum.org/research/tax-day-2018-
compliance-costs-approach-200-billion/.
As many Americans have experienced, the tax filing process is
extremely time intensive and often requires the help of outside
expertise. Tax compliance is so onerous for individual taxpayers, over
90 percent of individual taxpayers used a preparer or tax software to
prepare their returns. The Taxpayer Advocate Service (TAS), the
watchdog office within the IRS, has stated that complexity is the
single most serious problem with the tax code. Fichtner and Feldman
assessed the costs that the U.S. tax code extracts taxpayers through
complexity and inefficiency. The study finds that, in addition to time
and money expended in compliance, foregone economic growth, and
lobbying expenditures amount to hidden costs are estimated to range
from $215 billion to $987 billion.\15\
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\15\ Fichtner, Jason J., and Feldman, Jacob M., ``The Hidden Costs
of Tax Compliance,'' Mercatus Center, 2015 http://mercatus.org/sites/
default/files/Fichtner-Hidden-Cost-ch1-web.pdf.
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evaluating the tcja
Prior to the enactment of the TCJA, the last time the United States
undertook a fundamental tax reform was with the Tax Reform Act of 1986
(TRA). A robust literature demonstrates negative relationships between
higher marginal rates and taxable income, hours worked, and overall
economic growth.\16\ Highly respected economists David Altig, Alan
Auerbach, Laurence Kotlikoff, Kent A. Smetters, and Jan Walliser
simulated multiple tax reforms and found GDP could increase by as much
as 9.4 percent because of tax reform.\17\ The highest growth rate was
associated with a consumption-based tax system that avoided double-
taxing the return to saving and investment. The study also simulated a
``clean,'' revenue-neutral income tax that would eliminate all
deductions, loopholes, etc., and lower the rate to a single low rate.
According to their study, this reform raised GDP by 4.4 percent over 10
years--a growth effect that roughly translates into about 0.4 percent
higher-trend growth, resulting in faster employment and income growth.
This theoretical work essentially staked out the upper bound for the
growth potential from tax reform.
---------------------------------------------------------------------------
\16\ See Feldstein, Martin, ``The Effect of Marginal Tax Rates on
Taxable Income: A Panel Study of the 1986 Tax Reform Act,'' Journal of
Political Economy, June 1995, (103:3), pp. 551-72; Carroll, Robert,
Holtz-Eakin, Douglas, Rider, Mark, and Rosen, Harvey S., ``Income taxes
and entrepreneurs' use of labor,'' Journal of Labor Economics 18(2)
(2000):324-351; Prescott, Edward C., ``Why Do Americans Work So Much
More Than Europeans?'', Federal Reserve Bank of Minneapolis, July 2004;
Skinner, Jonathan, and Engen, Eric, ``Taxation and Economic Growth,''
National Tax Journal 49.4 (1996): 617-42; Romer, Christina D., and
Romer, David H., ``The Macroeconomic Effects of Tax Changes: Estimates
Based on a New Measure of Fiscal Shocks,'' National Bureau of Economic
Research, NBER Working Paper No. 13264, July 2007, http://www.nber.org/
papers/w13264.
\17\ Altig, David, Auerbach, Alan J., Kotlikoff, Laurence J.,
Smetters, Kent A., and Walliser, Jan, ``Simulating Fundamental Tax
Reform in the United States,'' American Economic Review, Vol. 91, No. 3
(2001), pp. 574-595.
The TCJA addressed some of the most glaring flaws in the business
tax code: It lowered the corporation income tax rate to a more globally
competitive 21 percent, enhanced incentives to investment in equipment,
addressed some of the disparate tax treatment between debt and equity,
and refashioned the Nation's international tax regime. Primarily for
these reasons, the TCJA will enhance the Nation's growth prospects. The
likely growth effects over the long-term will fall short of the
theoretical ideal but will ultimately be positive. The long-run
contribution to GDP from the TCJA could be as much as 3 percent, though
there are a range of credible estimates and myriad factors that could
alter the ultimate impact of the TCJA on the economy.\18\
---------------------------------------------------------------------------
\18\ https://www.wsj.com/article_email/how-tax-reform-will-lift-
the-economy-1511729894-IMyQj
AxMTl3Mjl1NzlyMTc4Wj/.
---------------------------------------------------------------------------
The primary channel by which the TCJA will contribute to more rapid
economic growth will be through investment. A simple way to measure
this effect is shown in the chart below. The red line shows the
contribution (in percentage points) of business investment to growth in
GDP, as measured by a 4-quarter moving average. The clear need is for
investment to surge and push up both the growth rate of the economy and
investment's contribution to that growth.
How can we see if that is coming? The blue line shows a 4-quarter
moving average of new orders for capital goods, which fairly closely
tracks the investment. During 2018 it will be interesting to watch the
growth rate of new orders for an upturn in response to the policy
change.
[GRAPHIC] [TIFF OMITTED] T2418.005
It remains too early to evaluate the degree to which the TCJA is
boosting investment, but there are some promising indicators.
According to a research report compiled by Morgan Stanley and Co.,
plans for future capital expenditures reached ``an all-time high'' in
March 2018.\19\ This index was ticking up prior to the TCJA enactment,
so its implications should not be overstated, but this is an indicator
to monitor for trends in investment behavior subsequent to the TCJA's
enactment.
---------------------------------------------------------------------------
\19\ http://www.taxanalysts.org/content/economic-report-gives-
white-house-support-tax-cut-prediction.
What is not a meaningful indicator for the TCJA's effect on
investment are stock buybacks. The news is filled with reports that the
TCJA has spawned ``share buybacks''--corporations purchasing their own
stock--and opponents of the law have characterized this as evidence of
failed policy. A little reflection, however, indicates that share
---------------------------------------------------------------------------
buybacks tell you essentially nothing about the success of the TCJA.
As noted above, investment is the channel through which the TCJA
will most meaningfully improve the U.S. economic growth outlook and
standards of living. Critics argue that share buybacks are not
investment in new inventions, new business models, or new equipment.
Similarly, they are not higher wages for workers. Taken to its
logical conclusion, this view regards share buybacks as a reflection of
policy failure.
This reasoning is incomplete. When firms repurchase their stock,
the dollars they pay do not disappear into a black hole. The sellers
could easily turn around and invest themselves. Indeed, only about a
fifth of corporate-source earnings are distributed to taxable entities,
which means the vast majority of those earnings are going to things
like pension funds, whose incentive is to channel the dollars to the
place with the highest return--those firms doing the best investment in
inventions, business models, and equipment. This is precisely how
markets should channel capital for productive investment.
In fact, there could be many more intermediaries and many, many
links in the investment chain. The bottom line is that success or
failure is measured by the final transaction in that chain, not the
first. As long as investment in the economy as a whole rises, the TCJA
will have done its job.
As an aside, it is probably a good thing when there are share
buybacks. They suggest that the firm has little in the way of high-
return investments to make. It is far better to avoid having the
dollars trapped in a low-return firm and instead have them flow through
financial markets to the best investment opportunities.
conclusion
Prior to the enactment of the TCJA, the U.S. tax code hadn't been
overhauled in over 30 years. The tax code was widely viewed as broken--
a conspicuous drag on the economy that chased U.S. firms overseas while
suppressing investment here at home. Major elements of the TCJA,
particularly the lower corporate tax rate, expensing of qualified
equipment, and the broad architecture of the international reforms,
should improve the investment climate in the United States. While it
remains too early to assert with any degree of certainty what the
TCJA's contribution to the economy will be, some indicators suggest a
salutary response in investment, consistent with the economic theory
underpinning the design of the business reforms.
______
Questions Submitted for the Record to Douglas Holtz-Eakin, Ph.D.
Questions Submitted by Hon. Orrin G. Hatch
Question. Some of my Democratic colleagues have resorted to calling
the tax benefits that will accrue to many Americans as a result of the
tax reform bill we passed last year as ``crumbs.'' They point to share
buybacks as an example of significant corporate giveaways that won't
benefit working Americans at all. They also point to bonuses, hourly
wage increases, increased 401(k) matching contributions, increased
training and education, and the like for working Americans, as
inconsequential results of this tax reform bill.
Would you explain how out of touch with mainstream America those
views are and the extent to which tax benefits actually are accruing to
low- and middle-
income Americans under this tax reform bill?
Answer. It is important to put magnitudes in perspective. In the
first quarter of 2018 the Bureau of Labor Statistics reports that 50th
percentile (or median) weekly earnings was $881, while the 75th
percentile was $1,399. So a $1,000 bonus represents a free week's pay
for between half and three-quarters of all workers. I don't believe
workers will sneer at getting a free week of pay.
More generally, the distribution tables prepared by the Joint
Committee on Taxation (JCT) show $17.3 billion in reduced 2019 taxes
for those making under $50,000. But the greatest promise of the TCJA
for workers are the business tax reforms and their incentives to
innovate, invest, raise productivity, and pay better in the United
States. Those impacts will not happen overnight, but they are far more
important good news than the specific provisions in the bill.
Question. In your testimony, you state that AEI economists
concluded that for every 1-percent increase in corporate tax rates,
wages decrease by 1 percent. That's a remarkable statistic. All other
things equal, is it reasonable to think that decreasing the corporate
tax rate from 35 percent to 21 percent, as the tax reform did, can lead
to increased wages for our fellow Americans, including those in the
lower and middle classes?
Answer. The research findings by Hassett and Mathur document a
statistical regularity between lower taxes and higher wages. The
examination of historical data is perhaps the best guide to the future
impact of tax policy, so it is sensible to expect wages to rise.
However, the empirical work is silent on the specific mechanisms
producing the higher wages and the pace at which they will materialize.
Thus, I anticipate wages to rise, but am simply monitoring the data to
see the pace of improvement.
Question. There's a lot of rhetoric around the issue of stock
buybacks. That supposedly the proof that the tax reform is bad is that
there are more stock buybacks. Can you please tell the committee, are
stock buybacks bad? How should we think about that?
Answer. The repurchase of shares, more commonly known as stock
buybacks, are poorly understood. In particular, they do not represent
``enriching'' the already affluent. Consider three points:
1. Stock buybacks do not enrich shareholders. The TCJA impacts the
value of corporate equity investments in complicated ways. The rate cut
increases the value of equity. The move to a territorial system with a
tax on deemed repatriation modestly cuts this increase in value for
those with large accumulated overseas earnings (other things being
equal). The imposition of expensing increases the value of growing
firms with new investments (again, other things equal). But stock
buybacks do not make shareholders richer. A stock buyback is simply the
exchange of valuable stock for the same value in cash. It has no impact
per se on anyone's wealth.
2. Relatively few shareholders are rich people. According to
authors from the Tax Policy Center, less than one quarter of corporate
stocks are held by taxable accounts (and people are not the only
taxable accounts, so the number of individuals is even smaller). The
largest share (37 percent) is held by retirement plans, as well as
insurance companies and non-profits. Stock buybacks do not create
riches and are not targeted at the affluent.
3. The economic impact depends on the final transaction; the
buyback is the first. When the shareholder receives the cash, he or she
can plow it back into the financial system in the form of another
stock, bond, or the like. Those funds become available to
entrepreneurs, small businesses, and companies to make investments. As
they do, the quality and quantity of tangible and intangible capital
rises and new business models are formed. These are the foundation of
higher productivity, which will translate to higher wages. I will be
the first to acknowledge that it is too early to judge the ultimate
success of the TCJA in this regard. But I am dead sure that one learns
nothing about this success or failure from stock buybacks.
Stock buybacks are an empty critique of the tax reform. It is a
critique devoid of understanding of what creates value, who directly
benefits from wealth creation, and how the pursuit of better value
generates widespread prosperity.
Question. You wrote in your testimony about how disparities between
a high rate domestically, and a low rate overseas, can lead to
pressures to offshore investments. It seems like something you were
suggesting in your written testimony is that just simply reducing the
corporate tax rate could reduce this pressure. Is that right? That
reducing the corporate rate, all other things being equal, would lead
to increased on-shoring of investment in the United States?
Answer. The TCJA unambiguously improves the incentives to locate
investments in the United States. The reduced corporate tax rate is the
most obvious improvement in the investment climate, but the reduced tax
on worldwide earnings from intellectual property located in the United
States should be considered as well.
The most misunderstood impact is the move to a more territorial tax
system and its associated base erosion regime. Professor Kysar, for
example, notes that the GILTI and FDII regimes encourage firms to move
real assets offshore. This misses the point that under the previous tax
code any firm that was sensitive to such tax incentives would have
already located the assets offshore and not repatriated the earnings--
essentially ``self-help'' territoriality. The incentives to offshore
were already present; the only change to incentives is to make the
United States more attractive.
Question. Professor Kamin talks about the problem of increased
government debt in his written testimony. That's a concern to me too.
Could you please help us think about that?
Answer. This is an important issue as the Federal Government faces
a daunting, unsustainable budgetary future. This has been true for many
years now, as successive editions of the Congressional Budget Office's
(CBO's) Long-Term Budget Outlook has documented. As a matter of the
facts, this problem pre-dates the Tax Cuts and Jobs Act (TCJA). The
TCJA does contribute to higher deficits in the CBO baseline in the near
term. Other things equal, this is not desirable. But other things are
not equal--revenues rise back to the previous baseline levels within
the 10-year budget window, growth is improved, and wage earnings rise.
The core problem is the one that produced $10 trillion in deficits
over the 10-year budget window prior to the TCJA in January 2017: rapid
growth in mandatory spending. Social Security, Medicare, Medicaid, and
the Affordable Care Act are projected to grow at rates from 5.5 percent
to 8.0 percent--faster than any plausible revenue growth--and are the
source of the red ink. Reform of these mandatory spending programs is
an imperative.
Question. Professor Kysar, in his written testimony, advocates
eliminating the exempt return on foreign tangible assets. As another
point, he suggests increasing the tax rate on GILTI income, if the FDII
special rate is repealed, which he seems to think it should be. So, I
infer from this that he thinks a pure worldwide regime, with no
deferral, would be a very good reform.
I invite you to briefly answer as to the wisdom of enacting a pure
worldwide regime, with no deferral.
Answer. I think this would be unwise in the extreme, exacerbating
the offshoring of production, intellectual property, and headquarters.
The past decade and a half have seen a steady switch from worldwide to
territorial regimes among OECD countries; the United States should
learn something from the empirical record.
______
Prepared Statement of David Kamin, Professor of Law,
New York University School of Law
Chairman Hatch, Ranking Member Wyden, and members of the committee,
I thank you the opportunity to come here to discuss the recent tax
bill.
The 2017 tax act is a lost opportunity to overhaul the tax code for
the better. A flawed framework and rushed process produced a law that
is likely to leave typical Americans worse off in the end. Our tax
system had a number of significant flaws before this bill, but, while
the legislation makes some worthwhile targeted improvements, its
overall thrust is to go in the wrong direction along some of the most
important dimensions.
The legislation is expected to add $1.9 trillion to the
deficit over the next decade. With the Federal budget already
on an unsustainable fiscal course, this legislation makes the
situation significantly worse. The law adds $1.9 trillion to
the deficit through 2028 according to the latest Congressional
Budget Office (CBO) estimate--and at a time when the economy
does not need such fiscal stimulus.\1\ To put this in
perspective, these tax cuts are expected to result in a 70-
percent larger rise in Federal debt as a share of the economy
than we would have otherwise had through 2025 (the point at
which the individual income tax cuts in the bill expire). We
simply cannot run a 21st-century government and care for an
aging population when revenue in the next few years is expected
to be below the historical average of the last several decades,
as is the case because of this bill.
---------------------------------------------------------------------------
\1\ Congressional Budget Office, The Budget and Economic Outlook:
2018 to 2028, at 129 tbl.B-3 (2018).
The legislation provides the largest benefits to the
highest-income Americans and likely leaves typical families
worse off in the end. The tax cuts concentrate their benefits
among those who are doing the very best in this economy. As a
share of income in 2018, this bill gives an average tax cut to
the top 5 percent that is over twice as large as for a typical
middle-class family and over nine times as large as for a
typical low-income family.\2\ That doesn't even count the
negative effects of millions of low- and middle-income
Americans no longer having health insurance as a result of the
bill's repeal of the individual mandate--which is used to help
partially finance these tax cuts disproportionately for the
top. Further, the legislation is likely to look even worse once
it is fully paid for, as it eventually must be. As a result,
this bill is likely to leave a typical American family worse
off in the end, as key programs and investments are threatened
to pay for tax cuts which we know give outsized benefits to
those with high incomes.
---------------------------------------------------------------------------
\2\ Author's calculations based on Tax Policy Center, Table T18-
0025 (2018), available at http://www.taxpolicycenter.org/model-
estimates/individual-income-tax-provisions-tax-cuts-and-jobs-act-tcja-
february-2018/t18-0025.
The legislation is a bonanza for tax planning by
preferentially taxing certain kinds of income and drawing
complex, arbitrary, and unfair lines. The new reform
fundamentally undermines the integrity of the income tax by
expanding preferential taxation of income earned in certain
ways but not others.\3\ Corporations can now be used as tax
shelters to avoid the top individual rate. Alternatively,
people in the right sectors or with good enough tax counsel can
take advantage of the new deduction for certain kinds of
``pass-through'' businesses--but only very certain kinds. This
pass-through deduction represents the very worst kind of tax
policy, picking winners and losers haphazardly in a complex tax
provision, and then generating significant incentives for
people to rearrange their businesses to try to get on the right
side of the line. And these kinds of tax-planning opportunities
throughout the bill mean the legislation seems likely to lose
even more revenue--and give even more benefits to the best
off--than initial estimates suggest.
---------------------------------------------------------------------------
\3\ For a more complete discussion of the kinds of tax planning
opportunities created by the act, see a report released by 13 tax
scholars, including me, in the immediate lead-up to passage of the
bill. See Avi-Yonah et al., ``The Games They Will Play: An Update on
the Conference Committee Bill'' (draft, December 2017), available at
https://papers.ssrn.com/sol3/papers.cfm?
abstract_id=3089423.
We can and must do better. Tax reform should raise more
revenue, not less; ask more especially from the top, not less;
reduce arbitrariness and complexity to create an even playing
field across people and businesses, rather than adding a maze
of rules that haphazardly pick winners and losers; and reduce
unnecessary distortions and preferences that hold back the
economy. The 2017 law made some targeted changes that went in
the right direction, such as limiting the corporate preference
for debt financing, limiting business deductions for
entertainment expenses, and attacking ways that certain U.S.
and foreign corporations strip profits out of the United States
that should be taxable here. But, the plan overall fails to
meet the most important goals we should have for our tax
system. It means true tax reform should continue be on the
agenda--a reform that undoes the damage of this bill and takes
our tax system in the right direction.
revenue to finance our country's commitments,
investments, and public services
The Federal Government needs more revenue to meet the country's
commitments, make worthwhile investments, and provide needed services.
We have long known that, with the retirement of the baby boomers,
spending would rise in Social Security and Medicare, and that is
happening now. Containing health care cost growth, building on the
accomplishments of recent years, is of key importance. If that is done,
then the costs for Social Security and Medicare are eventually expected
to level out as a share of the economy--at a new, somewhat higher
level.\4\ We can successfully finance the increase in costs from the
aging of the population, and also the many other investments and
services that our government should provide. But, we need more revenue
to do that, and certainly cannot do it when tax cuts are driving
revenue below the historical average of the last several decades--as
will be the case in the next few years.\5\
---------------------------------------------------------------------------
\4\ For instance, the Social Security Trustees project Social
Security costs rising from about 4 percent of GDP as of the early 2000s
to around 6 percent of GDP as of 2030--with costs then stabilizing at
that level. See Social Security Trustees, 2017 OASDI Trustees Report,
Table VI.G4 Single Year Table, available at https://www.ssa.gov/oact/
tr/2017/lr6g4.html. For a projection following a broadly similar
pattern, see Congressional Budget Office, The 2017 Long-Term Budget
Outlook, Supplemental Information, tbl.1 (2017), available at https://
www.cbo.gov/sites/default/files/recurringdata/51119-2017-03-
ltbo_1.xlsx. For Medicare, the trajectory depends on health-care costs
and whether we can build on the reforms in recent years that have
helped to contain cost growth. If there is zero ``excess cost growth''
(spending per capita in Medicare rises with GDP), then Medicare
spending, like Social Security spending, would increase as the baby
boomers retire but then stabilize as a share of the economy. If excess
cost growth is positive, then the program would continue to grow as a
share of income--a trend that would eventually have to end. Id. at
tbl.4.
\5\ Through 2025 (when the individual income tax cuts expire),
revenues are projected to average 16.9 percent of GDP assuming
continued growth. Congressional Budget Office, supra note 1, at 67
tbl.3-1. That's as compared to an average of 17.4 percent over the last
40 years (including recessions) and a high in that period of 20.0
percent in 2000.
An unsustainable fiscal trajectory has been made significantly
worse by these tax cuts. In dollar terms, these tax cuts will add $1.9
trillion to the deficit through 2028, according to CBO's latest
projections.\6\ This is a significant blow to the country's fiscal
trajectory. To give a sense for the magnitude:
---------------------------------------------------------------------------
\6\ Id. at 129 tbl.B-3.
A 70-percent larger rise in debt through 2025 as a share of
the economy. The debt-to-GDP ratio should generally be stable or
falling when the economy is strong. Even absent these tax cuts, the
Federal Government's debt-to-GDP ratio would have been on an
unsustainable upward trajectory, expected to rise by 9 percentage
points from the end of 2017 through 2025--going from about 76 percent
of GDP to 85 percent based on the latest data from CBO. But, as shown
in Figure 1, with the tax cuts in place and fully taking into account
potential macroeconomic feedback, that increase is now expected to be
about 70 percent larger through 2025 according to CBO (at which point
all of the individual income tax cuts are scheduled expire). In other
words, as a result of the tax cuts as enacted, the debt-to-GDP ratio is
projected to rise around 15 percentage points rather than 8 percentage
points, and reach 92 percent of GDP as of 2025.\7\
---------------------------------------------------------------------------
\7\ Author's calculations based on CBO data.
[GRAPHIC] [TIFF OMITTED] T2418.006
When fully in effect, a deficit of roughly similar magnitude
as the long-term shortfall in the entire Social Security
system. People often cite to the long-term shortfall in Social
Security as a key fiscal challenge, and it is--though one that
can be addressed readily if there were political will,
especially to raise revenue. Notably, these tax cuts are of
about the same magnitude as the entire shortfall in the Social
Security system. In the years that they are fully in effect,
the tax cuts amount to about 1 percent of GDP. The Social
Security Trustees estimate that the Social Security shortfall
is also about 1 percent of GDP over the next 75 years.\8\ CBO
puts the Social Security gap as somewhat larger than that,
about 1.5 percent of GDP.\9\ So, these tax cuts alone, when
fully in effect, are between two-thirds and 100-percent as
large as the 75-year Social Security shortfall, depending on
which estimates are used. Of course, if many of the tax cuts
expire as scheduled as of 2025, then they would not have a
long-term deficit effect; this illustrates how big they are if
they remain in place.
---------------------------------------------------------------------------
\8\ Social Security Trustees, supra note 4, at Table VI.G4, https:/
/www.ssa.gov/oact/tr/2017/VI_G2_OASDHI_GDP.html#200732.
\9\ Congressional Budget Office, Changes to CBO's Long-Term Social
Security Projections Since 2016, at 2 tbl.1 (2017), available at
https://www.cbo.gov/system/files/115th-congress-2017-2018/reports/
53209-ltbossprojections.pdf.
Put simply, this tax bill fails a very basic test. Does it give us
a tax system that generates enough revenue? The answer is ``no.''
Either the tax cuts must be reversed and then some, or key commitments,
---------------------------------------------------------------------------
investments, and services will have to give.
To be sure, there are times that deficit financing can be wise--in
fact, urgently needed. That is particularly the case when the economy
is weak, with high unemployment, and especially if the Federal Reserve
has cut interest rates to the ``zero bound'' and so has limited ability
to stimulate the economy. In those times, deficits can save jobs and
raise living standards. We are not now in that environment, since the
Federal Reserve is in fact moving to raise interest rates. There were
serious mistakes made in fiscal policy several years ago, when Congress
insisted on austerity that was premature. Congress is now engaged in a
mistake of the opposite kind--deficit-financing unsustainably and
without the justification of serious economic weakness.
concentrating the benefits at the top,
with typical families likely left worse off
Who wins from these tax cuts? Disproportionately, it is those who
have done best in this economy, aggravating the already wide gap
between the living standards of those at the top and everyone else. In
2018 and based on Tax Policy Center data: \10\
---------------------------------------------------------------------------
\10\ Author's calculations based on Tax Policy Center, supra note
2.
Top 5 percent: An average family in the top 5 percent gets a
tax cut of about 3.7 percent of after-tax income (or $20,890).
Middle quintile: An average family in the middle quintile gets
a tax cut of 1.6 percent of after-tax income (or $930).
Bottom quintile: An average family in the bottom quintile gets
a tax cut of 0.4 percent of after-tax income (or $60).
[GRAPHIC] [TIFF OMITTED] T2418.007
In other words, the average tax cut for the top 5 percent is more
than double that for a typical middle-income family as a share of
income and nine times that for a low-income family. This distribution
comes as a result of a series of policy choices. That includes
expanding the Child Tax Credit but then failing to enhance it in such a
way that the tax cut would give anything but a symbolic benefit to
millions of low-income working families and not expanding the Earned
Income Tax Credit at all. It also includes a series of large tax cuts
disproportionately benefiting the top and which are significantly
larger than the base-broadening measures that the bill enacts. That
includes the large corporate rate cut, the new deduction for pass-
through businesses, the cuts to the top individual income tax rates,
further reductions in the estate tax, and so on.
In fact, this distributional estimate is misleadingly optimistic.
First, that's because it doesn't include the losses to low- and middle-
income Americans coming from health insurance increasing and millions
dropping health insurance as a result of the repeal of the individual
mandate. Second, because these tax cuts are deficit financed, there
will come a day when they do get paid for, as services are cut (or
taxes increased) to finance them.
Who will be the winners and losers then? Well, of course, we don't
know until it happens. That is part of the problem with deficit-
financing a tax cut like this. It hides who actually pays for the tax
cuts.
If one were to perhaps optimistically assume that the eventual
financing for these tax cuts is distributed in proportion to income
(that is, households across the income distribution see spending cuts
and/or tax increases that reduce their income by the same percent), the
picture becomes one of tax cuts that leave the top ahead and everyone
else worse off. In short, these tax cuts come with the very real risk,
and I'd argue likelihood, that a typical family will be left worse off
as a result. This is shown in Figure 3.
[GRAPHIC] [TIFF OMITTED] T2418.008
And, that distribution of financing may well be too optimistic,
certainly if the budget choices advocated by many tax cut supporters
were pursued. Some indication can perhaps be taken from budgets like
those from the Trump administration and congressional Republicans.
These budgets aim to slash the kinds of benefits, investments, and
services that are especially important for many lower- to middle-income
families in order to help finance tax cuts like these. For instance,
the Center on Budget and Policy Priorities has found that about 50
percent of the non-defense cuts in last year's congressional budget
framework would come from programs particularly benefiting low-income
Americans.\11\
---------------------------------------------------------------------------
\11\ Isaac Shapiro et al., Center on Budget and Policy Priorities,
``House GOP Budget Cuts Programs Aiding Low- and Moderate-Income People
by $2.9 Trillion Over Decade'' (2017), available at https://
www.cbpp.org/research/federal-budget/house-gop-budget-cuts-programs-
aiding-low-and-moderate-income-people-by-29.
Another indication of what the future might hold can be taken from
what Congress chose to make permanent and what it did not in this very
legislation. In order to meet the constraints set by the budget rules,
the writers of this legislation chose to allow all of the individual
tax cuts expire after 2025. The corporate rate reduction continues but
in significant part financed through provisions affecting low- and
middle-income Americans--a slowdown in inflation adjustments that
gradually increases taxes over time and, also, the repeal of the
individual mandate likely leading to millions more uninsured. Thus,
after 2025 and even putting to the side the effects of getting rid of
the mandate, this tax bill would, if nothing changes, produce modest
tax cuts for the top and tax increases for the rest.\12\
---------------------------------------------------------------------------
\12\ See Tax Policy Center, Table 17-0136 (2017), available at
http://www.taxpolicycenter.org/model-estimates/conference-agreement-
tax-cuts-and-jobs-act-dec-2017/t17-0316-conference-agreement.
Those expirations may or may not happen as scheduled. But, we do
live in a world of constraints. Choices will have to be made, and these
expirations apparently reflect the priorities of the writers of this
legislation when faced with constraints, even if the constraints now
---------------------------------------------------------------------------
might be the budget rules.
The trade-offs they made show the danger that this tax bill poses
to low- to middle- income Americans when it is eventually paid for.
a tax-planning bonanza and complexity galore
Unfortunately, this tax bill's flaws are not fully captured by
these revenue and distributional estimates. These measures do not show
the harm that comes from the wasteful and unfair tax planning that this
bill will prompt. Moreover, these tax-planning games could well lead to
even more revenue loss and bigger wins for the top than official
estimates suggest; I believe that is in fact the likelihood.
Tax planning, complexity, and unfairness often go hand-in-hand.
This bill increases all of those by allowing certain kinds of income--
if earned in the right forms or in the right sectors--to be
preferentially taxed in ways they hadn't been before. These
preferential rates are given for income earned through corporations and
for certain kinds of pass-through businesses. The result is a system in
which many of the most sophisticated and highest income Americans will
be able to avoid the new (reduced) top individual income tax rate on
substantial shares of their income if they do enough planning, even as
those in some lines of business will win more than others for no
particularly good reason.
To the degree there is a logic behind this mess, it might be that
``business income'' deserves a special break as compared to income
earned from ``work.'' \13\ I would question that choice from the start.
Why should someone working as an independent contractor or business
owner get a tax break that someone doing the same work as an employee
does not? That is apparently the position of the writers of this
legislation. And, the administrative mess that this bill creates in
trying to draw such a distinction helps demonstrate the profound lack
of wisdom in this policy approach.
---------------------------------------------------------------------------
\13\ There is greater logic to applying different tax rates to
normal returns to capital versus other returns (such as returns to
labor). For instance, consumption tax approaches, which can be
progressive depending how they're structured, involve not taxing normal
returns to capital but then taxing all other returns (including
extraordinary returns to capital and returns to labor). I tend to
support taxing all of these returns (including the normal return to
capital), but there are reasonable disagreements among tax policy
experts on that score. The new tax rates on business income, however,
do not represent any kind of defensible quasi-consumption tax style
model. Under this new system, top income earners can now manage to
characterize all kinds of returns--including returns to their own
labor--as ``business income'' and effectively get special, low tax
rates.
A number of tax scholars and practitioners pointed out some of the
deep flaws in the legislation in the lead up to its enactment, but the
flaws still remained and they are already being exploited according to
news reports.\14\
---------------------------------------------------------------------------
\14\ See, e.g., Ruth Simon and Richard Rubin, ``Crack and Pack: How
Companies Are Mastering the New Tax Code,'' Wall Street Journal, April
3, 2018, available at https://www.wsj.com/articles/crack-and-pack-how-
companies-are-mastering-the-new-tax-code-1522768287; Ben Steverman and
Patrick Clark, ``Here's the Trump Tax Loophole Your Accountant Can Blow
Right Open,'' Bloomberg, February 5, 2018, available at https://
www.bloomberg.com/news/articles/2018-02-05/here-s-the-trump-tax-
loophole-your-accountant-can-blow-wide-open.
---------------------------------------------------------------------------
Corporations as Tax Shelters
One of the central elements of the 2017 reform is a large cut in
the corporate tax rate. The corporate rate falls from 35 percent to 21
percent. However, the legislation does nothing effective to address the
problem that this creates for the individual income tax system and the
kind of avoidance this will generate.
In particular, with this large cut in the corporate rate, high-
income individuals can avoid the progressive individual income tax.
They can do so by stuffing income into the corporation. Taking into
account self-employment and surtaxes, the top individual rate is around
40 percent--now, a far cry from the top corporate rate of 21 percent.
That generates a potentially powerful incentive to earn income through
the corporation rather than any form that would be subject to the 40-
percent rate. (Also, for corporations, State and local income taxes
remain fully deductible whereas, for individuals, the deduction is
subject to a low cap, adding to the preference for earning income
through a corporation.)
Corporate income is potentially subject to a second layer of tax,
which can reduce this incentive. Qualified dividends and capital gains
are taxed at up to a rate of 23.8 percent. However, the second level of
tax can be deferred and potentially even eliminated. Owners of
corporations can choose not to distribute funds from the corporations,
and, while there are existing provisions meant to limit such build ups,
those limits are widely understood to have been ineffective in decades
past when the tax code created similar incentives--and are unlikely to
be effective now.\15\ The deferral of the second level of tax
effectively reduces its value, and, if deferred until the corporate
shares are given to heirs at death, the second level of tax can be
entirely eliminated via step-up-in-basis at death.
---------------------------------------------------------------------------
\15\ On some of the history of corporations serving as tax
shelters, the restrictions that apply, and those restrictions'
ineffectiveness, see generally Steven A. Bank, ``From Sword to Shield:
The Transformation of the Corporate Income Tax, 1861 to Present''
(2010); Edward Kleinbard, ``Corporate Capital and Labor Stuffing in the
New Tax Rate Environment'' (March 21, 2013), https://ssrn.com/
abstract=2239360. A number of other tax experts have also described how
corporations will now act as tax shelters with the new, much lower
corporate rate. See, e.g., Shawn Bayern, ``An Unintended Consequence of
Reducing the Corporate Tax Rate,'' 157 Tax Notes 1137 (November 20,
2017); Michael L. Schler, ``Reflections on the Pending Tax Cut and Jobs
Act,'' 157 Tax Notes 1731 (December 18, 2017); Adam Looney, Brookings
Institution, ``The Next Tax Shelter for Wealthy Americans: C-
Corporations,'' Up Front Blog, (November 30, 2017), available at
https://www.brookings.edu/blog/up-front/2017/11/30/the-next-tax-
shelter-for-wealthy-americans-c-corporations/.
Further, there are ways for owners of such corporations to
essentially use the income in the corporation for other means and
without triggering the second layer of tax. They can do so by borrowing
and even potentially using the corporate stock to secure such loans,
---------------------------------------------------------------------------
and, again, without triggering that tax.
Prior to the 1986 tax reform, there were somewhat similar
incentives to stuff income into corporations. However, one notable
difference between that environment and the current one is that, unlike
anytime before this in the post World War II-era, someone can now earn
income in the corporation, have it subject to the top corporate rate,
distribute the income and immediately subject it to the second layer of
tax, and still come out ahead as compared to earning that income as an
individual. Thus, if the current rate structure holds, using a
corporation to earn income as opposed to earning it as an individual
subject to the top rate will, for many types of income, be superior
irrespective of whether the second level of tax is deferred--with the
question only being how much better.
A Deduction for Certain Pass-Throughs That Is Tax Policy at Its Worst
Perhaps in response to this preference for income earned through
corporations, the designers of the legislation decided to also create a
special deduction for certain kinds of pass-through income. This
applies to income earned through non-corporate businesses that are
taxed at the individual level (``passed through'' to the individual).
The 20-percent deduction essentially reduces the individual income tax
rates applied to this income by 20 percent.
However, in trying to avoid a substantial shift into corporations,
the designers of this tax legislation set up something even worse than
simply allowing that shift to happen--or, better yet, not allowing
corporations to be used so easily as tax shelters. The deduction is a
provision of substantial complexity, real unfairness, and subject to
significant gaming.\16\ Further, it will tend to most benefit those
with the higher incomes--since such pass-through income is concentrated
at the top and a deduction like this most benefits those being taxed at
the highest rates. For those who say the provision is needed to help
true small businesses, I say there are much better ways.
---------------------------------------------------------------------------
\16\ Daniel Shaviro has a particularly incisive discussion of how
the pass-through deduction came to be and its deep flaws. In his words,
``[It] function[s] as incoherent and unrationalised industrial policy,
directing economic activity away from some market sectors and towards
others, for no good reason and scarcely even an articulated bad one.''
See generally Daniel Shaviro, ``Evaluating the New U.S. Pass-Through
Rules,'' British Tax Review (2018).
---------------------------------------------------------------------------
To briefly summarize the bevy of rules that apply here:
Not to employees. The one group that cannot get the
deduction at all are employees. Irrespective of income level,
employees are barred from enjoying the deduction's benefits.
Yes, to independent contractors and other business owners,
sometimes. For those who aren't employees, such as independent
contractors and other business owners, much turns on whether
other restrictions--on those with higher incomes--apply. For
those with taxable income below $315,000 for a married couple
(and half that for a single individual), what matters is
whether one is an employee or not. If someone is an independent
contractor, for instance, that person apparently gets the
deduction, based on guidance so far.\17\ This is true even if
the person were doing similar work as an employee--just without
employee benefits and somewhat less supervision, for instance
(some of the criteria that differentiate employees from
independent contractors). There is no good reason to preference
independent contractor status--but that is the result of this
provision. And it sets up a complicated trade-off for workers
to assess: weighing the now larger tax savings from being an
independent contractor to the detriments of leaving behind
employee benefits.
---------------------------------------------------------------------------
\17\ Section 199A--the provision creating the 20-percent
deduction--does impose a potential restriction on independent
contractors and others irrespective of income level. Specifically,
three types of payments in exchange for services are not eligible for
the 20-percent deduction: (1) reasonable compensation, (2) guaranteed
payments, and (3) payments to partners not acting in their capacity as
partners. The last two restrictions are specific to partnerships (and,
as it happens, are easy for partners working at a partnership to
avoid). The first--the restriction making ``reasonable compensation''
ineligible for the deduction--is potentially broader and could apply
across the board. However, the concept of ``reasonable compensation''
has, up until now, only been used to attack tax avoidance among S
corporation owners, and statements from then-
Deputy Assistant Secretary Dana Trier suggest that Treasury does not
plan to use the ``reasonable compensation'' standard to restrict
deductibility for other forms of businesses, including independent
contractors. See Matthew R. Madara, ``ABA Section of Taxation Meeting:
No Plans to Apply Reasonable Compensation Beyond S Corps,'' Tax Notes,
February 19, 2018, available at https://www.taxnotes.com/tax-notes/
partnerships/aba-section-taxation-meeting-no-plans-apply-reasonable-
compensation-beyond-s-corps/2018/02/19/26wcl. In that case, an
independent contractor--below the income threshold--would be able to
take full advantage of the deduction, even as an employee doing very
similar work could not.
Cracking, packing, and the many games to be played. Above
that $315,000 threshold, a set of other restrictions are meant
to apply (phasing in over a $100,000 income range above the
threshold), but they are haphazard and create the kinds of
lines that tax lawyers and accountants get paid to manipulate.
Certain lines of work--such as providing legal, medical, or
consulting services, or any business in which the employer's or
employees' reputation or services is the principal asset--are
not supposed to get the deduction. (And, architects and
engineers got a last-minute reprieve removing them from the
list of barred service providers, further illustrating the
haphazard nature of this line drawing exercise. Why architects
but not doctors and so on?) Also, a business owner must either
pay enough in wages to employees or have enough tangible
property (or some combination) in order to fully qualify. So,
some business owners--such as real estate developers, owners of
oil and gas firms, and retailers--seem to squarely fall within
the benefits of the provision. For everyone else, it is a
question of trying to squeeze within the lines and to identify
themselves as a ``winner'' (under the provision) to the extent
---------------------------------------------------------------------------
they can.
For some businesses trying to take advantage of the
deduction, it might mean ``cracking'' apart lines of business
to try to remove as much activity from the prohibited service
businesses as possible and maximize what would be eligible. A
law office might, for instance, try to crack apart its real
estate and some support staff into a separate entity--
potentially eligible for the 20-
percent deduction--and then rent it back to the ``law office''
at the maximum possible amount that they can get away with.
For other businesses, it might mean ``packing'' businesses
together to achieve eligibility. That is the case if a business
would otherwise not have enough tangible property or employee
wages to fully take advantage of the deduction. It might also
be a way to avoid the restriction on businesses in which the
owners' or employees' services or reputation would otherwise be
the principal asset; they should try to pack in some other big
asset, such as intellectual property or real estate or anything
else.\18\
---------------------------------------------------------------------------
\18\ Writing before the 2017 law was even passed by Congress, a
number of us borrowed the ``cracking'' and ``packing'' terminology from
gerrymandering jurisprudence to describe the kinds of games that would
be played under this provision. See Avi-Yonah et al., supra note 3.
Unfortunately, reports suggest our theories are becoming reality, and
the ``crack'' and ``pack'' terminology has now entered the lexicon of
tax planning maneuvers. Simon and Rubin, supra note 14.
This is not to mention that the IRS will surely find itself
challenged defining what exactly it means to provide a legal,
medical, consulting, or other prohibited service--and fighting
off aggressive maneuvers by taxpayers to avoid those
---------------------------------------------------------------------------
categories.
I'd urge the IRS to try to reduce such gaming to the degree
it can by, among other things, limiting ways businesses can
choose what is counted as part of the business and what isn't
for purposes of this provision, whether via an economic
substance test or some other approach. But, this will be an
uphill battle for the IRS, and make no mistake--this provision
is fundamentally flawed from the start.
Pick Your Own Adventure--With Lots of Advice From Tax Lawyers and
Accountants
The point is that, for some, it will make sense to stuff income
into a corporation. For others, it will make sense to be a pass-through
business with planning to fit into the complex lines of the 20-percent
deduction. Which route is better and how to achieve it will be the
province of tax lawyers and accountants. And, using either route, the
top individual income tax rate can be avoided.
That planning is in itself wasteful, and the disparate effects are
unfair. I also strongly suspect that the official estimates of the 2017
legislation under-estimated the amount of such planning and, thus, both
the cost and regressivity of these tax cuts. I believe that is also the
case when it comes to other forms of planning as well that I and others
have discussed. To take one other example: one of the largest revenue
raisers in the legislation is the limitation on the deductibility of
State and local income taxes. However, as was clear even before the
legislation was signed into law, States could potentially make changes
that would effectively preserve deductibility and limit the revenue
raised by this provision,\19\ and a number of States are now enacting
or considering just such steps.\20\ This should have been more
seriously considered as the law was designed, but it wasn't--and
official estimates do not seem to reflect this likely outcome.
---------------------------------------------------------------------------
\19\ See Avi-Yonah et al., supra note 3.
\20\ New York State, for instance, enacted two measures in its
recent budget deal that are aimed at reducing the effects of the 2017
tax bill's limitation on deductibility of income taxes.
---------------------------------------------------------------------------
small, additional economic growth does not justify this legislation
Supporters of the tax legislation will often justify the bill in
terms of a rise in economic growth. But, that effect is very small,
could be better achieved other ways, and does not change the core
conclusions: that the legislation is fiscally unsustainable and
disproportionately helps those at the top, likely at the expense of
low- and middle-income workers.
Credible estimators find only very modest growth effects from this
legislation:
0.1 percentage points per year or under. Credible estimators
find an annualized increase in GDP growth across the decade of
0.1 percentage point per year or under--with most estimates
well under that.\21\ See Figure 4. The growth effect as
estimated by CBO is in fact already taken into account in the
deficit figures cited earlier, with the tax legislation
projected to add $1.9 trillion to the deficit in the coming
decade including the macroeconomic feedback. This overview of
estimates leaves aside the Tax Foundation, whose model has
serious shortcomings including not incorporating any negative
effects from deficit-financing.\22\
---------------------------------------------------------------------------
\21\ The Congressional Budget Office helpfully compiled estimates
of the macroeconomic effects of the tax legislation. See Congressional
Budget Office, supra note 1, at 117 tbl.B-2. For the figures here, I
have used the annualized growth rate based on how much higher (or
lower) GDP is as a result of the tax changes in the tenth year. An
alternative is to look at the average level effect of the tax
legislation across the period (figures CBO also provides). The benefit
of the latter is that it captures gains in GDP in the interim years,
some of which dissipate over time; on the other hand, looking at
average level effects--as opposed to annualized growth--doesn't convey
the degree to which those effects are temporary. Looking at it either
way, effects are small, and I have chosen to focus on the annualized
growth rates since those have frequently been used in the debate over
the tax bill including by the administration to which I compare.
\22\ See, e.g., Matt O'Brien, ``Republicans Are Looking for Proof
Their Tax Cuts Will Pay for Themselves. They Won't Find It,''
Washington Post Wonkblog, December 1, 2017, available at https://
www.washingtonpost.com/news/wonk/wp/2017/12/01/republicans-are-looking-
for-proof-their-tax-cuts-will-pay-for-themselves-they-wont-find-it/
?utm--term=.6065fa73ff12. Greg Leiserson, Center for Equitable Growth,
``Measuring the Cost of Capital and Estate Tax in the Taxes and Growth
Model,'' November 21, 2017, available at https://taxfoundation.org/
measuring-the-cost-of-capital-and-estate-tax-in-the-taxes-and-growth-
model/.
Trump administration's out-sized claims. All of these
estimates can be contrasted with the Trump administration's claim of a
0.7 percentage point annual increase in the growth rate from the
totality of its policies in the coming decade and its claim of a 0.35
percentage point increase from corporate tax reform alone and which it
said would generate $1 trillion of additional revenue to offset the
cost of the tax cuts \23\--which all credible estimators agree is
highly unlikely to happen.
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\23\ Department of the Treasury, ``Analysis of Growth and Revenue
Estimates Based on the U.S. Senate Committee on Finance Tax Reform
Plan, December 11, 2017,'' available at https://www.treasury.gov/press-
center/press-releases/Documents/TreasuryGrowthMemo12-11-17.pdf.
[GRAPHIC] [TIFF OMITTED] T2418.009
Further, there are other, far less costly ways to achieve this kind
of increase in growth via tax reform. For instance, an analysis by
Robert Barro and Jason Furman suggests that simply making ``bonus
depreciation'' permanent, at one-sixth the cost of this tax bill, would
have had the roughly same growth effect as the 2017 tax
legislation.\24\
---------------------------------------------------------------------------
\24\ Barrow and Furman find that, under the assumption that all tax
cuts are paid for via cuts elsewhere, the enacted bill has a slightly
larger growth effect than simply making bonus depreciation permanent;
however, if they are not paid for and instead deficit-financed, the
opposite is the case. See Robert J. Barro and Jason Furman, ``The
Macroeconomic Effects of the 2017 Tax Reform,'' Brookings Papers on
Economic Activity 41 tbl.11, 42 tbl.12, 48 (2018), available at https:/
/www.brookings.edu/wp-content/uploads/2018/03/4_barrofurman.pdf. Barro
and Furman also find overall growth effects for the legislation as
enacted that is in the range of other credible, independent estimates--
they find between 0.02 percentage points and 0.04 percentage points
higher annualized growth across the decade as a result. Id. at 41 tbl.
11 and 49 tbl.14.
Finally, these growth rates are not only modest; they are often
misunderstood as implying that the legislation is significantly better
for Americans than shown in the traditional distributional tables cited
earlier. That's wrong for several reasons. First, these GDP estimates
measure the effects on ``domestic'' product rather than ``national''
product. It is ``national'' product that matters more for the living
standards of Americans since that subtracts payments to foreigners like
interest payments on debt (from which Americans don't benefit). CBO has
found the effect on ``national product'' to be 40 percent smaller than
that on ``domestic product,'' on average, across the coming decade.\25\
Second, both GDP and GNP measure increases in production rather than
people's actual welfare--as in how much better people's lives really
are--and effects on welfare are likely even smaller. Put simply, the
modest, estimated growth effects don't change the fundamental
conclusions described earlier--this is a bill that does little for low-
and middle-income Americans now and seems likely to leave them worse
off in the long-run.\26\
---------------------------------------------------------------------------
\25\ Congressional Budget Office, letter to the Honorable Chris Van
Hollen, April 18, 2018, available at https://www.cbo.gov/system/files/
115th-congress-2017-2018/reports/53772-2017
taxacteffectsonincome.pdf.
\26\ I am grateful to Greg Leiserson for sharing his views on the
issue of the relationship between growth effects, distributional
tables, and welfare.
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reform to fix a newly broken system
To be sure, the 2017 tax bill took some discrete steps in the right
direction. The tax system has long generated a preference for debt over
equity in the corporate sector that misaligned incentives and caused
corporations to leverage more than they would otherwise; that has been
ameliorated to some degree in the new legislation. The legislation
cracks down on business deductions for entertainment and food in ways
that I think are wise. It tries to take on problems with stripping of
the U.S. tax base by both U.S. and foreign corporations, and this is an
area very much deserving of attention and reform.
But in terms of overall thrust, the tax system has ended up more
broken than it was before because of this tax bill. Tax reform should
remain on the agenda. But it should now be tax reform that addresses
the key problems created by this bill and beyond. That means generating
significantly more revenue and in a progressive way; eliminating
provisions like the 20-percent deduction that are complicated, unfair,
and arbitrary; taking steps to prevent, or at least reduce, people
using corporate form to avoid individual income taxation, for instance,
by ending step-up in basis at death or taxing using a mark-to-market
system; working toward a system that doesn't pick winners and losers in
the economy like this latest legislation does too often; and building
on the reforms in this bill while working with other countries to more
effectively tax capital income that has too often escaped to tax
havens.
There is much work to be done in overhauling the U.S. tax system,
and this recent bill made the project much greater and more urgent.
______
Questions Submitted for the Record to David Kamin
Questions Submitted by Hon. Orrin G. Hatch
Question. On page 8 of your testimony, you wrote: ``Someone can now
earn income in the corporation, have it subject to the top corporate
rate, distribute the income and immediately subject it to the second
layer of tax, and still come out ahead as compared to earning that
income as an individual.''
Could you please work through a specific example of that?
Answer. Yes. Here is an example.
Assume there is $1,000 of interest income that could either be
earned through a corporation or directly as an individual, with the
individual subject to the top rate of tax.
the corporation
If earned through the corporation and then distributed to the
individual, the $1,000 of interest income would first be subject to the
21-percent corporate tax rate. That would generate a tax liability of
$210 at the corporate level and leave $790 remaining for distribution.
The $790 distributed (and assuming it is a qualifying dividend)
would then be subject to a top tax rate of 23.8%--combining the top
dividends tax rate of 20 percent and the net investment income tax of
3.8 percent. That would generate a liability of $188 and leave $602
after Federal taxes.
The effective tax rate on that income is 39.8 percent, which could
also be calculated using the following equation: 1 - ((1 - 0.21) (1 -
0.238)).
the individual
Alternatively, let's assume that the interest income is earned
directly by the individual and that section 199A (the 20-percent
deduction for certain pass throughs) doesn't apply. In that case, the
income is subject to the top individual income tax rate of 37 percent
plus the 3.8-percent net investment income tax. As a result, the tax
liability is $408 leaving $592 after tax, which is less than the $602
that would be left after tax if it had been earned via the corporation.
The effective tax rate in this case is 40.8 percent--which is 1
percentage point more than the 39.8-percent effective tax rate applying
to the income earned via the corporation.
The advantage of earning via the corporation would grow if this
calculation took into account State income taxes. That's because such
taxes remain deductible without limit by corporations but are now
limited when it comes to individuals.
A similar set of calculations would apply to income earned from
labor services, although the Medicare self-employment taxes and surtax
work a bit differently than the Net Investment Income Tax.
Importantly, the advantage of earning via the corporation would be
greater if there weren't an immediate distribution and the second level
of tax were deferred. In fact, it is possible to entirely eliminate the
second layer of tax if the earnings are retained at the corporate level
until the stock is passed on to heirs--at which point, there would be
basis ``step up.''
Question. You state on page 9 of your testimony that the one group
that is barred from getting the pass-through deduction are employees.
However, in footnote 13 of your testimony, you state that there is a
good argument for taxing normal returns to capital at lower rates. So,
once that is taken into account, would that justify not giving this new
deduction to labor, but only to capital?
Answer. That argument does not justify the structure of section
199A and the denial of the deduction to employees but not others.
The section 199A deduction can apply to either income capital or
labor income if earned in certain ways. Below the $315,000 income
limitation (for a married couple and half that for a single
individual), section 199A apparently applies for someone who is simply
working as an independent contractor rather than an employee. There is
no good justification for giving a 20-percent deduction to the
independent contractor but not to the employee, who can be providing
very similar services--just with less supervision and without the same
level of employee benefits.
Above the $315,000 threshold, service providers again can get the
deduction so long as they're owners, working in certain kinds of
businesses. An owner of a firm working in a real estate firm or a
retailer or anything not in the prohibited list of service categories
(and meeting the other requirements under section 199A such as having
enough tangible property or paying enough in wages) can get the
deduction on income coming from their services. But, again, employees
working in companies--as opposed to the owners working in those very
same companies--cannot get the deduction. That distinction is again
unjustified.
Section 199A is not akin to a consumption tax. A consumption tax
exempts from taxation the ordinary return to investment and then
consistently taxes above market rates of return on investments
(sometimes called rents) and returns to labor. I prefer an income tax--
a tax that also applies to the ordinary returns to investment--but, as
I mention in that footnote, there can be good arguments made for a
reduced tax rate on the normal returns to investment, especially if
there were offsetting changes to the tax system to maintain
progressivity. By contrast, section 199A gives tax cuts to both returns
to labor and above market rates of return, if earned in certain ways.
In fact, the normal rate of return on investment should already be
eliminated on many investments under the 2017 law (and before section
199A applies) given the allowance of expensing, which accomplishes
that. Thus, section 199A is often giving a tax cut to these other
returns, and on a haphazard basis picking winners and losers.
In sum, section 199A represents an incoherent policy that
arbitrarily favors certain forms and lines of business over others. The
best way forward is to eliminate it.
______
Questions Submitted by Hon. Maria Cantwell
Question. The final score for the tax bill was $1.46 trillion
according to the Joint Committee on Taxation (JCT).\1\ But in March
2018, the Congressional Budget Office (CBO) estimated that this bill
will shrink revenues by $1.9 trillion over the next decade.\2\ And
deficits will return to levels not seen since the Great Recession. When
Bush took office in 2001, he was handed a surplus of $128.2 billion.\3\
But after two tax cut bills and two unpaid-for wars, we ended up with a
deficit of $1.4 trillion.\4\ But when Obama left, he made significant
progress cleaning up after the Bush years. We cut the deficit by over
half to $665.4 billion.\5\ But that wasn't easy. And now the CBO
estimates that we will return to trillion-dollar deficits starting
2020.\6\
---------------------------------------------------------------------------
\1\ Joint Committee on Taxation, ``Estimated Budget Effects of the
Conference Agreement for H.R. 1, `The Tax Cuts and Jobs Act,' '' JCX-
67-17, December 18, 2017.
\2\ ``The Budget and Economic Outlook: 2018 to 2028,'' p. 106,
Congressional Budget Office, April 2018.
\3\ CBO, op. cit., p. 144.
\4\ Ibid.
\5\ Ibid.
\6\ CBO, op. cit., p. 4.
Increasing deficits leave little room to handle any economic crisis
in the future and fewer government resources as the baby boom retires.
Discuss how this increase in the deficit will overheat the economy in
the short run, create significant headwinds for economic growth in the
long run, and weaken the tools available for policymakers in the next
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economic downturn?
Answer. The United States is on an unsustainable fiscal course over
the long term, and the tax cuts--if they are continued--would add
considerably to that gap. The law adds $1.9 trillion to the deficit
through 2028 according to the latest Congressional Budget Office (CBO)
estimate--and at a time when the economy does not need such fiscal
stimulus. To put this in perspective, these tax cuts are expected to
result in a 70-percent larger rise in Federal debt as a share of the
economy than we would have otherwise had through 2025 (the point at
which the individual income tax cuts in the bill expire).
The result will likely be a combination of somewhat higher interest
rates due to the deficit financing and greater indebtedness to rest of
the world--both of which will serve as a drag on future living
standards. Perhaps more importantly, these tax cuts also place at risk
programs that are key to the living standards of many Americans. We
need more revenue to meet our commitments in programs like Social
Security and Medicare, and to also make important investments and
provide key services. And, we certainly cannot do that when tax cuts
are driving revenue below the historical average of the last several
decades--as will be the case in the next few years.
To be sure, there are times that deficit-financing can be wise--in
fact, urgently needed. That is particularly the case when the economy
is weak, with high unemployment, and especially if the Federal Reserve
has cut interest rates to the ``zero bound'' and so has limited ability
to stimulate the economy. In those times, deficits can save jobs and
raise living standards, and that is likely to still be the case going
forward, irrespective of our debt levels.\7\ We are not now in that
environment, since the Federal Reserve is in fact moving to raise
interest rates. There were serious mistakes made in fiscal policy
several years ago, when Congress insisted on austerity that was
premature. Congress is now engaged in a mistake of the opposite kind--
deficit financing unsustainably and without the justification of
serious economic weakness.
---------------------------------------------------------------------------
\7\ See generally Alan J. Auerbach and Yuriy Gorodnichenko,
``Fiscal Stimulus and Fiscal Sustainability'' (NBER Working Paper No.
23789, September 2017).
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impact on the low-income housing tax credit
The Tax Cuts and Jobs Act of 2017 reduced the top marginal
corporate rate on C-Corps in the United States to 21 percent from 35
percent.\8\ While the top effective rate was 35 percent, the actual
average rate paid by companies was 22 percent according to a 2016 U.S.
Treasury report.\9\
---------------------------------------------------------------------------
\8\ Public Law 115-97, section 13001.
\9\ ``Average Effective Federal Corporate Tax Rates,'' prepared by
the Office of Tax Analysis, U.S. Department of the Treasury, April 1,
2016.
The effectiveness of Low-Income Housing Tax Credit and the
renewable energy tax credits were negatively impacted by the corporate
rate reduction. The value of the Low-Income Housing Tax Credit has
fallen from $1.05 to about $0.89--a 14-
percent drop--because of the changes in the tax law. As a result, less
---------------------------------------------------------------------------
equity capital will be raised to invest in affordable housing.
The combination of lower rates and the ``chained CPI'' are
estimated to reduce the number of affordable rental units built in the
U.S. from 1.5 million over the next years to 1.3 million--or a loss of
about 232,000 affordable housing units.\10\
---------------------------------------------------------------------------
\10\ Novogradac and Company Tax Blog, ``Final Tax Reform Bill Would
Reduce Affordable Rental Housing Production by Nearly 235,000 Homes,''
https://www.novoco.com/notes-from-novogradac/final-tax-reform-bill-
would-reduce-affordable-rental-housing-production-nearly-235000-homes.
What steps do you recommend that we take to address this gap in
affordable housing production? How can tax policy help address this
---------------------------------------------------------------------------
crisis?
Answer. The 2017 tax legislation likely reduced the value of the
Low-Income Housing Tax Credit. Although provisions in the 2018 omnibus
spending bill reversed some of this effect, the value of the credit has
not been restored to pre-2017 legislation levels. Options to restore
the value of the credit could include permanent expansion of the
credit, such as has been proposed in the Affordable Housing Tax Credit
Improvement Act.
______
Prepared Statement of Rebecca M. Kysar,\1\ Professor of Law,
Brooklyn Law School
---------------------------------------------------------------------------
\1\ Professor of Law, Fordham University School of Law (starting
Fall 2018); Professor of Law, Brooklyn Law School. I am grateful to
Cliff Fleming, Chye-Ching Huang, David Kamin, Ed Kleinbard, Mike
Schler, and Steve Shay for helpful comments and suggestions. Thanks to
Molly Klinghoffer for excellent research assistance. Much of my
testimony here comes from analysis I developed in serving as the
primary drafter of the international tax sections of papers discussing
the recent tax legislation. See Kamin et al., ``The Games They Will
Play: Tax Games, Roadblocks, and Glitches Under the 2017 Tax
Overhaul,'' 103 Minn. L. Rev. (forthcoming 2019); Avi-Yonah et al.,
``The Games They Will Play: An Update on the Conference Committee
Bill'' (December 28, 2017) (unpublished manuscript), https://
papers.ssrn.com/sol3/papers.cfm?ab
stract_id=3089423; Avi-Yonah et al., ``The Games They Will Play: Tax
Games, Roadblocks, and Glitches Under the New Legislation'' (December
13, 2017) (unpublished manuscript), https://papers.ssrn.com/sol3/
papers.cfm?abstract_id=3084187.
---------------------------------------------------------------------------
judging the new international tax regime
Good morning, Mr. Chairman, Ranking Member Wyden, and members of
the committee. My name is Rebecca Kysar, and I am a professor of law at
Brooklyn Law School and will be joining the full-time faculty of
Fordham University School of Law later this year. Before joining
Brooklyn Law School, I practiced tax law at Cravath, Swaine, and Moore
in New York, which included advising on cross-border mergers,
acquisitions, and restructurings. Thank you for the opportunity to
testify on the recent tax legislation.
My primary topic today is the new international tax regime. The
recent tax law made significant changes to the way the United States
taxes multinational corporations on their cross-border income. The new
legislation has, however, fundamentally botched general business
taxation in order to ``fix'' the international system. In fact, the new
legislation failed to solve old problems of that system and also opened
the door to new perversities. Furthermore, the legislation will deplete
government resources and exacerbate growing inequality. To be sure, the
title of this hearing is ``Early Impressions of the New Tax Law,'' and,
it would be brazen to describe my views as anything but preliminary. My
genuine concern, however, is that, with the benefit of hindsight, we
will look back at this legislation as a series of tragic policy
missteps, which hold the United States back in the 20th century rather
than propelling it to be a competitive force and source of general
well-being for its citizens in the current one.
Before addressing international taxation, I would like to make a
few comments about the legislation generally. One of the most
unfortunate aspects of the legislation is its immense cost. By
shrinking revenues over the next decade by $1.9 trillion,\2\ the tax
legislation leaves the country with fewer government resources just as
social needs and demographic shifts begin to demand much more of them.
This figure, however, is likely to be a low estimate of the
legislation's long-term effects. Many of the revenues from the
international provisions are front-loaded into the 10-year budget
window as a result of the transition tax on the deemed repatriation of
old earnings. This is a one-time event that will not be generating
revenues going forward, and arguably significantly undertaxed those
earnings at windfall rates of 8 percent and 15.5 percent given that
they were earned in a rate environment of 35 percent. Moreover, the
estimate assumes that several far-off tax increases in the
international rules will go into effect, a perhaps unlikely event. The
$1.9-trillion estimate will also likely be much greater if the law's
expiring provisions, or a portion of them, are made permanent.\3\
Numerous tax planning opportunities that have been created by the new
legislation will lose vast amounts of revenue. Finally, if the new U.S.
taxing environment spurs other countries to engage in tax competition,
as one would expect, this might reduce the anticipated growth effects
of the legislation by decreasing the amount of investment flowing into
the United States.
---------------------------------------------------------------------------
\2\ Congressional Budget Office, The Budget and Economic Outlook:
2018-2028, p. 106 (April 2018), at https://www.cbo.gov/publication/
53651.
\3\ CBO estimates that the permanent extension of all expiring tax
provisions would reduce revenues by $1.2 trillion over the next decade.
Id. at 90. Moreover, Congress tends to contort the budget process so
that temporary legislation is not subject to its usual rules and may
attempt to make such tax cuts permanent without paying for them. See,
e.g., Consolidated Appropriations Act, Sec. 601 (exempting the costs of
making the tax ``extenders'' permanent from PAYGO); David Kamin and
Rebecca Kysar, ``Temporary Tax Laws and the Budget Baseline,'' 157 Tax
Notes 125 (2017) (discussing this phenomenon in the Bush tax cuts
context); Rebecca Kysar, ``Lasting Legislation,'' 159 U. PA. L. Rev.
1007, 1030-41 (2011) (critiquing the sunsets of the Bush tax cuts along
this axis).
As a result of these deliberate choices, the new tax legislation
does not engage our most important fiscal and social problems. On this
fiscal side, it fails to provide a stable base on which the economy can
grow. On the social side, it will not provide funding for resources to
address important public needs, like infrastructure, education, social
insurance, the opioid epidemic, health care, and military funding.
Because of the threat to these programs, low- and middle-income
Americans will likely be negatively impacted. Given that the highest
income Americans also receive the lion's share of the tax cuts, the
legislation not only fails to address the growing inequality in the
---------------------------------------------------------------------------
country, but likely worsens it.
I also believe many features of the new legislation have created a
great deal of unnecessary uncertainty. The instability of the new tax
landscape comes from the law being enacted through a partisan process,
deficit-financing of the cuts, the law's numerous sunset provisions,
new gaming opportunities, the privileging of certain industries over
others, and the offshoring incentives and other flaws presented by the
international rules that I will discuss here.\4\ The wobbliness of the
new regime will make tax planning challenging. It may also dampen some
of the economic growth anticipated by the law's architects.
---------------------------------------------------------------------------
\4\ See Rebecca M. Kysar and Linda Sugin, ``The Built-In
Instability of the GOP's Tax Bill,'' N.Y. Times (December 19, 2017),
https://www.nytimes.com/2017/12/19/opinion/republican-tax-bill-
unstable.html. I have elsewhere critiqued the use of the reconciliation
process for complex tax reform. Rebecca M. Kysar, ``Reconciling
Congress to Tax Reform,'' 88 Notre Dame L. Rev. 2121 (2013).
Finally, the need for international tax reform was the impetus for
the legislation but become the proverbial tail wagging the dog. In an
attempt to deal with base erosion and profit shifting strategies of
multinationals, we have instead created a true mess of business
taxation generally. The new ``pass-through'' deduction, which was aimed
at creating parity with the new lower rate available on corporate
income, punishes workers and certain industries, substituting
congressional judgment for market discipline and allowing for
significant tax planning (and revenue-losing) opportunities.
Individuals can now also use corporations as tax shelters to avoid the
---------------------------------------------------------------------------
top rate, thereby undermining the individual income tax system.
Given the enormous loss of government resources and gamesmanship
the legislation will generate, it is fair to ask a lot of the new
international regime. Yet the international provisions fall short,
mostly due to avoidable policy choices. Let me say at the outset that
the baseline against which I am assessing the international provisions
in the new law is not the old, deeply flawed, system because that bar
is simply too low.\5\ Judged against possible alternative policies that
could have been enacted, however, the new international provisions look
more problematic. With the benefit of clear-eyed analysis, I am hopeful
that the new legislation will serve as a bridge to true reform in the
international tax area, rather than a squandered opportunity.
---------------------------------------------------------------------------
\5\ See, e.g., Ed Kleinbard, ``Stateless Income,'' 11 Fla. Tax Rev.
699, 700-01 (2011) (discussing the insufficiency of U.S. tax rules in
combating aggressive profit shifting by multinationals).
The serious problems created, or left unaddressed, by the new
regime, include the following, which I will discuss in more detail
---------------------------------------------------------------------------
along with possible solutions:
The new international rules aimed at intangible income
incentivize offshoring. GILTI is not a sufficient deterrent to
profit-shifting because the minimum tax rate is, at most, half
that of the 21-percent corporate rate. Also, the manner in
which foreign tax credits are calculated under the GILTI regime
encourages profit shifting. Moreover, the GILTI and FDII
regimes encourage firms to move real assets, and accompanying
jobs, offshore because of the way they define intangible
income.
The new patent box regime will likely not increase
innovation, causes WTO problems, and can be easily gamed.
Patent box regimes have not been shown to increase R&D or
employment. Because the FDII deduction is granted to exports,
it likely qualifies as an impermissible export subsidy under
our trade treaties. Firms may also be able to take advantage of
the FDII deduction by ``round-tripping'' transactions,
disguising domestic sales as tax-preferred export sales.
The new inbound regime has too generous thresholds and can
be readily circumvented. Although strengthening taxation at
source is a worthy goal, the new BEAT regime has too high
thresholds, allowing multinationals with significant revenues
and assets to engage in a great deal of profit shifting. Also,
firms can avoid the regime entirely by packaging intellectual
property with cost of goods sold, which is exempt from BEAT.
The new regime falls short of true international tax reform.
Rather than aligning taxation with U.S. economic needs and
social objectives, the new regime doubles down on archaic
concepts that have become malleable and disconnected from
economic reality. The regime unwisely retains the place of
incorporation as the sole determinant of corporate residency
and subscribes to the fiction that the production of income can
be sourced to a specific locale. These concepts should be
updated, and new supplemental sources of revenue should be
seriously explored. A longer-term objective should be to reach
international consensus on how to tax businesses selling into a
customer base from abroad.
Together, these problems underscore the necessity of continuing to
improve the tax rules governing cross-border activity. It would be a
grave mistake for the United States to become complacent in this area;
in addition to the issues I discuss here, the challenges of the modern
global economy will continue to demand dramatic revisions to the
system.
Background
By way of background, the former U.S. international tax system has
been described as a worldwide system of taxation because it subjected
foreign earnings to U.S. taxation (whereas a territorial system of
taxation exempts such earnings altogether). In reality, active earnings
of foreign subsidiaries could be deferred, even indefinitely. The
disparate treatment between foreign and domestic earnings meant that
the old system was somewhere between worldwide and territorial.
The new regime has been described as a territorial system because a
basic feature is that a broad swath of foreign profits are effectively
exempt from U.S. corporate tax since 10 percent corporate shareholders
can deduct the foreign-source portion of dividends from foreign
subsidiaries.\6\ Here again, however, we see the difficulty of
deploying such labels since smaller corporate shareholders and
individuals are still subject to taxation on their foreign income.
Furthermore, the new minimum tax regime, along with the older subpart F
rules, also means that the foreign income of 10 percent shareholders in
certain foreign corporations (controlled foreign corporations or CFCs)
is possibly subject to some U.S. taxation, depending on foreign
responses.\7\
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\6\ 26 U.S.C. Sec. 245A.
\7\ See Mark P. Keightley and Jeffrey M. Stupak, Congressional
Research Service, R44013, ``Corporate Tax Base Erosion and Profit
Shifting (BEPS): An Examination of the Data,'' 17 (2015) (discussing
the futility of the worldwide and territorial labels); Daniel Shaviro,
``The New Non-Territorial U.S. International Tax System'' (March 7,
2018) (draft on file with author) (same).
The new system retained worldwide-type features because Republicans
recognized that a move to a pure territorial system would worsen profit
shifting incentives by exempting foreign-source income altogether
(rather than just allowing it to be deferred, as under the old system).
The hybrid nature of both the old and new systems represents an attempt
to balance investment location concerns, on the one hand, with concerns
over the protection of the revenue base, on the other.\8\
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\8\ Michael Graetz has described the new system as follows:
``Congress confronted daunting challenges when deciding what rules
would replace our failed foreign-tax-credit-with-deferral regime. There
were essentially two options: (1) strengthen the source-based taxation
of U.S. business activities and allow foreign business earnings of U.S.
multinationals to go untaxed, or (2) tax the worldwide business income
of U.S. multinationals on a current basis when earned with a credit for
all or part of the foreign income taxes imposed on that income. . . .
Faced with the choice between these two very different regimes for
taxing the foreign income of the U.S. multinationals, Congress chose
both.'' Michael J. Graetz, ``The 2017 Tax Cuts: How Polarized Politics
Produced Precarious Policy,'' Yale L.J. Forum (forthcoming 2018), draft
available at https://papers.ssrn.com/sol3/
Data_Integrity_Notice.cfm?abid=3157638.
As a general overview, the basic plan of the new tax legislation's
international reforms is to: (1) exempt foreign income of certain U.S.
corporations from taxation in the United States (the quasi-territorial
or participation exemption system); (2) backstop this new participation
exemption system with a 10.5-percent ``minimum tax'' on certain
foreign-source income (the GILTI regime); (3) provide a special low
rate on export income (the FDII regime); and (4) target profit-
stripping by foreign firms operating in the United States (the BEAT
regime). In the remainder of my testimony, I will discuss problems
presented by the latter three of these new regimes.
GILTI: New Offshoring and Shifting Incentives
1. New Offshoring and Shifting Incentives
Generally speaking, the existence of a partial territorial system
coupled with a minimum tax could be an improvement over the prior
system, which often resulted in a zero rate of taxation on foreign
earnings because of deferral and other tax planning maneuvers. It is
also preferable to a pure territorial system because of the protections
it places on the revenue base. Nonetheless, although a minimum tax can
work conceptually, its current GILTI incarnation problematically
incentivizes firms to offshore assets and profit shift, as I pointed
out early in the legislative process.\9\
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\9\ Rebecca M. Kysar, ``The GOP's 20th-Century Tax Plan,'' N.Y.
Times (November 15, 2017), https://www.nytimes.com/2017/11/15/opinion/
republican-tax-plan-economy.html. Others have discussed the offshoring
incentives created by the legislation. See Gene B. Sperling, ``How the
Tax Plan will Send Jobs Overseas,'' The Atlantic (December 8, 2017),
https://www.the
atlantic.com/business/archive/2017/12/tax-jobs-overseas/547916/; Steven
M. Rosenthal, ``Current Tax Reform Bills Could Encourage U.S. Jobs,
Factories, and Profits to Shift Overseas,'' TaxVox (November 28, 2017),
http://www.taxpolicycenter.org/taxvox/current-tax-reform-bills-could-
encourage-us-jobs-factories-and-profits-shift-overseas; Kimberly
Clausing, ``How the GOP's Tax Plan Puts Other Countries Before
America,'' Fortune (November 20, 2017), http://fortune.com/2017/11/20/
gop-tax-plan-donald-trump-america-first/.
First, the minimum tax regime allows a 50-percent deduction of
GILTI. At the 21-percent corporate rate, this amounts to a 10.5-percent
rate on GILTI.\10\ Given the wide differential between the domestic
rate and the minimum tax rate,\11\ there remains substantial motivation
to shift profits. Moreover, expenses that support the production of
GILTI, like research and development, general and administrative, and
some interest, will be deductible at the 21-percent rate even though
the income inclusion occurs at a 10.5-percent rate.\12\ This amounts to
a type of tax arbitrage and further incentivizes shifting income
abroad.
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\10\ 26 U.S.C. Sec. 250(a)(1). For tax years beginning after 2025,
the 50-percent deduction is reduced to 37.5 percent, and thus the
effective rate on GILTI goes up to 13.125 percent in those years, 26
U.S.C. Sec. 250(a)(3).
\11\ The rate gap with regard to exports is smaller since export
income gets the benefit of a 37.5-percent deduction (producing a tax
rate of 13.125 percent), as I discuss with regard to the FDII regime
below.
\12\ Thanks to Steve Shay for this point.
The new tax legislation also presents more subtle incentives to
locate investment and assets abroad. There is an exemption from the
GILTI tax in the form of a deemed 10-percent return on tangible assets
held by the CFC, as measured by tax basis. If U.S. firms have or locate
tangible assets overseas,\13\ then they can reduce their GILTI tax
commensurately. This is because the more a U.S. shareholder increases
tangible assets held by the CFC, the smaller the income subject to the
GILTI regime.\14\
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\13\ The CFC could in theory invest in tangible assets in the
United States and have these count for the deemed return, but this
investment would be subject to current U.S. tax under 26 U.S.C.
Sec. 956.
\14\ Note that I am not claiming that the offshoring incentives of
the new tax law are worse overall than under the prior regime, which
due to the high corporate tax rate created a large disparity between
investing here versus abroad. This disparity has been minimized through
the lowering of the corporate rate to 21 percent. See Martin A.
Sullivan, ``Economic Analysis: Where Will the Factories Go? A
Preliminary Assessment,'' 158 Tax Notes 570 (2018). Instead, I am
pointing out the unfortunate offshoring incentives created by GILTI
that could have been avoided through alternative policies, which I
discuss below.
Take for instance, a firm that invests $100 million in a plant
abroad through a CFC that will generate $10 million of income. None of
that $10 million of income will be subject to U.S. tax because the firm
gets to reduce its GILTI by the deemed 10-percent return on the CFC's
assets.\15\ In effect, the $10 million of income is reduced by 10
percent of 100 million, or $10 million, so that it is all tax-free. To
compare, consider the tax consequences of the same firm investing in a
$100-million plant in the United States that will generate $10 million
of income. It would pay U.S. tax of $2,100,000 (21 percent of $10
million).\16\
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\15\ In addition to the GILTI exemption, the firm will get
depreciation deductions on the assets under Sec. 168(g).
\16\ Note that the rate on the income from the U.S. plant would be
lower if such income exceeded a hurdle of a 10-percent return on the
tangible assets and was export income, which is effectively taxed at a
13.125-percent rate in the new tax legislation. This is the FDII
regime, which I discuss below, 26 U.S.C. Sec. 250.
Where there happens to be non-exempt return to tangible assets
(return in excess of 10 percent), this is taxed by the minimum tax
regime but at a lower rate than the rate on domestic income.\17\ To
build on the above example, assume that the $100 million foreign plant
generates not $10 million, but $20 million of income. The firm will
still get to exempt $10 million of the income through the deemed 10-
percent return, but the other $10 million will be subject to the GILTI
regime and given a 50-percent deduction (i.e., taxed at a 10.5-percent
effective rate). This would produce U.S. tax of $1,050,000 (10.5
percent of $10 million), as compared to U.S. tax of $4,200,000 (21
percent of $20 million) on a similar U.S.-based investment.\18\
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\17\ Note that the non-exempt return amount will vary depending on
tangible asset intensity. We can thus expect certain industries, like
services and technology, to be harmed from this aspect of the formula,
whereas other sectors, like non-U.S. manufacturing, to benefit.
\18\ If this was export income, the U.S. tax on the U.S.-based
investment would be $3,412,500 ($1,312,500 on the $10 million exceeding
the exempt return, and $2,100,000 on the other $10 million). Again, I
discuss the FDII regime in more detail below.
Investors will, of course, take into account local foreign taxes,
and higher taxes abroad will likely sway the decision of where to
locate investment. The offshoring incentives of GILTI might then
primarily be a problem when low-tax countries are a viable alternative.
Although many tax havens have limitations regarding labor supply,
legal, and other factors, some low-tax countries, like Ireland and
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Singapore, are hospitable options for investment.
The structure of GILTI is even more problematic when considering
foreign tax credits. The new legislation allows foreign taxes to be
blended between low-tax and high-tax countries before offsetting GILTI
from those countries (thus constituting a ``global'' minimum tax),
rather than allowing foreign taxes to offset only the GILTI from the
country in which they are paid (a ``per-country'' minimum tax). This
structure encourages firms to locate investment in low-tax countries
and combine them with income and taxes from high-tax countries,
possibly to avoid GILTI liability altogether.\19\
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\19\ This example does not take into account the possible
allocation of expenses under the preexisting regulations for Sec. 961,
which could reduce allowable foreign tax credits, perhaps contrary to
congressional intent. Martin A. Sullivan, ``More GILTI Than You
Thought,'' 158 Tax Notes 845 (2018). The expense allocation could have
a large effect on the amount of tax owed under GILTI. A host of other
taxpayer-unfriendly problems exist in the GILTI regime, which others
have explored. For no apparent policy reason, assets in CFCs that
generate losses are disregarded for purposes of calculating the deemed
return on tangible property. Id. Additionally, non-C corporation
shareholders may be unable to take foreign tax credits against
liability for GILTI (unless they make an election under Sec. 962). See
Sandra P. McGill et al., ``GILTI Rules Particularly Onerous for Non-C
Corporation CFC Shareholders,'' McDermott, Will, and Emery (January 30,
2018), https://www.mwe.com/en/thought-leadership/publications/2018/01/
gilti-rules-particularly-onerous-nonc-corporation. Under current law,
GILTI deductions in excess of income are permanently disallowed and
cannot create NOLs. Similarly, multinationals cannot carry over excess
credits within the GILTI basket to future years. Both of these
provisions burden businesses with volatile earnings, and may, like
other loss limitations in the code, distort investment away from risky
assets. These limitations are undesirable as a policy matter, separate
and apart from the appropriate level of minimum taxation of foreign
source income; Shaviro, supra note 7. Accordingly, they should be
eliminated, or, at least, relaxed. These, together with other issues,
such as the uncertainty over whether the foreign tax credit gross-up
goes into the GILTI basket and questions over whether GILTI should be a
separate basket from branch income, will continue to challenge tax
planners.
For instance, say a corporation earns $1,000,000 of income in
Country A, which imposes a 21-percent rate of taxation. For
simplicity's sake, let's ignore the deemed return by assuming there are
no assets abroad. And now let's say the corporation is choosing where
to locate an additional $2,000,000 in profits (and any associated
activity), with the choice being between the United States and a tax
---------------------------------------------------------------------------
haven.
There would be a $210,000 Country A tax and a tentative U.S. GILTI
tax on this Country A income of $105,000 ($1,000,000 10.5 percent).
But the 80-percent U.S. credit for the $210,000 Country A tax would
reduce the U.S. tax to zero and $63,000 of excess credit would remain
($105,000 - [$210,000 .8] = -$63,000).
If an additional $2,000,000 were earned in the United States, the
21-percent U.S. tax thereon would be $420,000 and the $63,000 of excess
credit for Country A tax could not be used to reduce this liability.
Thus, the corporation's total tax liability (both U.S. and foreign)
would be $630,000 ($210,000 Country A tax + zero post-
credit U.S. tax on the first $1,000,000 of Country A income + $420,000
U.S. tax on the additional $2,000,000 of U.S. income).
Suppose instead that the corporation earned the additional
$2,000,000 in a tax haven, Country B, which imposes no local taxes. In
that case, the total foreign taxes imposed would be $210,000 (those
from Country A), 80 percent of which ($168,000) are creditable against
the 10.5-percent tax on GILTI. The GILTI regime produces a U.S. tax
liability of $147,000 [(10.5 percent $3,000,000) - 168,000)] (in
contrast to $630,000 if the additional investment was located in the
United States). This brings down the total tax liability (both U.S. and
foreign) to $357,000 (as opposed to $630,000 if the investment was made
in the United States).
Note that, through this blending technique, a firm can also shield
profits in tax havens by choosing to invest in high-tax countries.\20\
A firm may even prefer to invest in countries with higher tax rates
than the United States since income and taxes from such countries can
be used to blend down the U.S. minimum tax to zero. If a firm has
profits in tax havens, then the effective tax rate of investing in a
high-tax country, say Sweden, which has a 22-percent statutory
corporate rate, might only be 4.4 percent (20 percent of 22 percent)
since 80 percent of those taxes can be used to blend down GILTI
completely. This puts the United States at a competitive disadvantage,
making it more likely that jobs and investment go to countries like
Sweden.
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\20\ In front of this committee, Kim Clausing explained this
dynamic in the following manner: ``If you earn income in Bermuda, say,
where the tax rate is zero, that per-country minimum tax would tax the
Bermuda income right away. . . . If you have a global minimum tax, you
could use taxes paid in Germany to offset the Bermuda income'' and then
you have an incentive to move income to both Bermuda and Germany,''
International Tax Reform, before the Senate Committee on Finance, 115th
Cong. (2017) (testimony of Kim Clausing); ``Senate Convenes
International Tax Hearing,'' Deloitte (October 6, 2017), https://
www.taxathand.com/article/7596/United-States/2017/Senate-convenes-
international-tax-reform-hearing. Ed Kleinbard has similarly warned,
``[c]ompanies will double down on tax-planning technologies to create a
stream of zero-tax income that brings their average down to that
minimum rate.'' Lynnley Browning, ``One Sentence in the GOP Tax Plan
Has Multibillion-Dollar Implications,'' Bloomberg (October 2, 2018),
https://www.bloomberg.com/news/articles/2017-10-02/trump-plan-aims-new-
foreign-tax-at-apple-other-multinationals.
Finally, as a general matter, the structure of the minimum tax
allows multinationals to blend their high profits from intangibles with
their low profits from tangibles, thereby falling below the deemed 10-
percent rate of return on tangible investments, and escaping the GILTI
regime. This ability to blend high return with low return income will
further encourage offshoring and profit shifting.\21\
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\21\ Sperling, supra note 9.
In summary, the deemed rate of return and global minimum features
of the GILTI regime run contrary to Congress's pronounced intention to
keep investment in the United States.
2. Reform Possibilities
There are several options to remove or reduce GILTI's offshoring
incentives, all of which would require legislation. First, the
deduction for GILTI income should be reduced so that the gap between
the domestic corporate rate and the minimum tax rate is not so large.
Decreasing the rate differential will lessen the motivation to earn
income abroad. It is true that too high of a tax burden on foreign
income will cause corporations to simply locate their residence abroad,
thereby escaping outbound base erosion rules. With the new lower 21-
percent corporate rate and inbound base erosion regime, however, this
is now much less of a concern. Additionally, the inbound rules can be
strengthened, as I discuss below. Congress should also explore the
haircutting of deductions that are allocable to GILTI to equalize the
treatment between foreign and domestic income further.
Congress should also eliminate the exempt return on foreign
tangible assets, and instead apply the minimum tax to all foreign
source (non-subpart F) income. This would seek to address one of the
GILTI regime's conceptual flaws: only seeking to reduce the incentive
to offshore intangible assets while doing nothing to reduce the
incentive to offshore operations.
If policymakers are wedded to the idea that a minimum tax should
only target multinationals' intangible assets, an option would be to
rethink the deemed rate of return. The 10-percent rate is arbitrary,
does not necessarily correlate to the market return on tangibles, and
seems quite high, given that the average rate of return on low-risk or
risk-free assets has been much lower, especially in recent years.\22\
Instead, the rate could be pegged to a dynamically adjusting market
interest rate \23\ or something closer to the risk-free return on
Treasury yields.\24\ Finally, another way to close the gap between
foreign income and domestic income would be to keep the 10-percent
exempt return but subject the excess to the normal corporate rate of 21
percent (rather than the 10.5-percent rate).\25\
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\22\ Center on Budget and Policy Priorities, ``New Tax Law Is
Fundamentally Flawed and Will Require Basic Restructuring,'' 17 (April
9, 2018), at https://www.cbpp.org/research/federal-tax/new-tax-law-is-
fundamentally-flawed-and-will-require-basic-restructuring. In April
2018, a 10-year Treasury bond yielded about 2.8 percent interest. The
average yield on 10-year Treasury bonds over the past 20 years is
approximately 3.69 percent. Over 30 years, the average is approximately
4.87 percent, and over 10 years it is approximately 2.57 percent. I
constructed these averages from data on the Fred Economic Data site.
See Federal Reserve Bank of St. Louis, ``10-Year Treasury Constant
Maturity Rate,'' at https://fred.stlouisfed.org/series/WGS10YR.
\23\ Shaviro, supra note 7; see also Rebecca M. Kysar, ``Dynamic
Legislation,'' 167 U. Penn. L. Rev.--(forthcoming 2019) (discussing
dynamically adjusting fiscal legislation).
\24\ Kamin et al., supra note 1. Conceptually, the exempt return
should be the ``normal'' return on investment, but that is firm-
specific and nearly impossible to design as a matter of tax policy.
\25\ Reuven S. Avi-Yonah, ``How Terrible Is the New Tax Law?
Reflections on TRA17,'' 5 n. 4 (February 12, 2018 draft), https://
papers.ssrn.com/sol3/papers.cfm?abstract_id=3095830; see also J.
Clifton Fleming et al., ``Incorporating a Minimum Tax in a Territorial
System,'' 157 Tax Notes 76, 78 (2017).
The problem of blending foreign tax credits could be addressed by
moving to a per-country minimum tax rather than one done on a global
basis.\26\ Critics of a per-country approach argue that it would be too
complex administratively, but that is disputed. The primary targets of
GILTI are sophisticated multinational corporations that can effectively
deal with the challenge of computational complexity. Moreover, the
blending technique itself requires significant resources and complex
tax planning, and a global minimum tax would eliminate the need for
such inefficient maneuvering. Additionally, a per-country approach is
even more necessary if the other offshoring incentives in the GILTI
regime are maintained.\27\
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\26\ Id. at 77; Keightly and Stupak, supra note 7, at 17-18. In the
above example on blending, for instance, under a per-country GILTI tax,
if the corporation made the additional investment in Country B, this
investment would be subject to the full U.S. minimum tax of $210,000
[(10.5 percent 2,000,000)], with no offset for the local taxes paid
in Country A. Those taxes would only be able to offset Country A
income, which would result in a U.S. tax liability of zero on that
investment [(10.5 percent 1,000,000) - 168,000]. The per-country
approach thus yields U.S. taxes of $210,000, as opposed to only
$147,000 under the current global minimum tax.
\27\ Proponents of the global approach might argue that the per-
country approach punishes multinationals that naturally conduct
integrated production in high- and low-tax countries for non-tax
reasons. I believe that the national welfare objective implicated in
cross-crediting for non-tax purposes likely outweighs this concern. An
alternative to the per-country approach, however, would be to raise the
rate on GILTI.
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FDII: New Offshoring Incentives, WTO Issues, and Gaming Opportunities
1. New Offshoring and Shifting Incentives
If GILTI is the stick for earning income from intangibles abroad,
then FDII is the carrot for earning such income here. To this end, FDII
provides a 37.5-percent deduction on so-called foreign-derived
intangible income, which amounts to a 13.125-percent effective tax.\28\
A domestic corporation's FDII represents its intangible income that is
derived from foreign markets. Although this income slice is defined as
``intangible income,'' as is the case with the GILTI regime, the
intangible aspect, as is also the case with GILTI, comes only from the
excess over the deemed return on tangible investment, rather than from
intellectual property in the traditional sense of the word. This also
distinguishes FDII from other patent box regimes, which apply to
patents and copyright software, because it instead includes branding
and other market-based intangibles.\29\
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\28\ For tax years beginning after 2025, the 37.5-percent deduction
is reduced to 21.875 percent, and thus the effective rate on FDII goes
up to 16.406 percent in those years, 26 U.S.C. Sec. 250(a)(3).
\29\ Stephanie Soong Johnson, ``EU Finance Minister Fires Warning
Shot on U.S. Tax Reform,'' Tax Analysis (December 12, 2017), http://
www.taxanalysts.org/content/eu-finance-ministers-fire-warning-shot-us-
tax-reform.
Like GILTI, the intangible slice of income is calculated by deeming
a 10-percent return on tangible assets (but those of the domestic
corporation as opposed to the CFC). Unlike GILTI, a taxpayer wants to
reduce this deemed return amount because doing so increases the amount
available for the FDII reduction. In contrast, in the GILTI regime, the
taxpayer wants to increase their deemed return amount because this
reduces the amount of income subject to the minimum tax. Unfortunately,
this again creates perverse incentives. Because we are dealing with
domestic assets, the FDII regime pushes taxpayers towards minimizing
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their investment in such assets.
For instance, assume a U.S. corporation has income of $3,000,000,
$2,500,000 of which is derived from sales abroad. Further assume the
corporation has a basis in tangible assets of $30,000,000. To calculate
FDII, the taxpayer would calculate the ratio that the corporation's
exports bears to its income ($2,500,000/$3,000,000), or 83.33 percent.
FDII is that percentage times the income after the deemed 10-percent
return. Here since 10-percent return on $30,000,000 is $3,000,000, the
taxpayer would take 83.33 percent of 0 ($3,000,000 - $3,000,000). In
this case, none of the income gets the benefit of the FDII reduction.
If the corporation instead had zero basis in tangible assets in the
United States, it would have a higher FDII deduction. The taxpayer
would calculate the above export ratio (83.33 percent). FDII is that
percentage times the $3,000,0000 income less the deemed 10-percent
return ($0 since there are no assets), or $2,500,000 (83.33 percent of
$3,000,000). The taxpayer then gets to deduct 37.5 percent of FDII
($937,500), which, with the 21-percent corporate rate, amounts to a tax
savings of $196,875 over our base case with U.S. tangible assets. As
always, add as many zeroes as you would like.
Also note that the FDII regime essentially applies effective rates
between 21 percent if there is no income above the exempt return, and
13.125 percent if there is. The GILTI regime applies effective rates
between 0 percent if there is no income above the exempt return, and
10.5 percent if there is. These rate disparities privilege GILTI in
comparison to FDII and incentivize U.S. corporations to produce abroad
for foreign markets instead of producing exports in the United
States.\30\
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\30\ The conference report states the lower minimum tax rate under
GILTI is justified because only 80 percent of the foreign tax credits
are allowed to offset the minimum tax rate (13.125 percent equals the
effective GILTI rate of 10.5 percent divided by 80 percent.) This
justification, however, does not hold if no or low foreign taxes are
paid.
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2. WTO Issues
One significant problem with the FDII regime is that it threatens
to reignite a 3-decades long trade controversy between the United
States and the European Union that was thought to have been resolved in
2004.\31\ As I pointed out immediately after the release of the Senate
bill, which originated FDII, the regime likely violates WTO obligations
because it is an export subsidy.\32\ This is because the more the U.S.
taxpayer's income comes from exports, the more of its income gets taxed
at the FDII 13.125-percent effective rate (after taking into account
the 37.5-percent deduction), which is a subsidy in comparison to the
normal 21-percent corporate rate.
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\31\ It is worthwhile to note that the history of the export
subsidy controversy is tortured, beginning in 1971 with the Domestic
Sales Corporation or ``DISC'' provisions. After a GATT panel ruled
against DISC, the United States replaced that system with the Foreign
Sales Corporation (``FSC'') rules in 1984. The WTO would later rule
against the FSC system. In 2000, Congress enacted the Extraterritorial
Income (``ETI'') exclusion, which was also held to be an illegal export
subsidy by the WTO. Congress finally repealed the last of the export
subsidy measures--the ETI--in the American Job Creation Act of 2004.
David L. Brumbaugh, Cong. Research Serv., RL31660, ``A History of the
Extraterritorial Income (ETI) and Foreign Sales Corporation (FSC)
Export Tax-Benefit Controversy'' (2004).
\32\ Rebecca Kysar, ``The Senate Tax Plan Has a WTO Problem,''
Medium (November 12, 2017), https://medium.com/whatever-source-derived/
the-senate-tax-plan-has-a-wto-problem-guest-post-by-rebecca-kysar-
31deee86eb99.
Because the FDII regime benefits exports, it likely violates
Article 3 of the Agreement on Subsidies and Countervailing Measures
(SCM), which prohibits (a) subsidies that are contingent, in law or
fact, upon export performance and (b) subsidies that are contingent
upon the use of domestic over imported goods.\33\ Article 1 of the
Agreement on Subsidies and Countervailing Measures defines a subsidy as
a financial contribution by a government, including the non-collection
or forgiveness of taxes otherwise due.\34\
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\33\ Agreement on Subsidies and Countervailing Measures, Art. 3.1.
\34\ Id. at Art. 1.1(a)(1)(ii).
Although the United States may contend that intangible income lies
outside the scope of the WTO agreements,\35\ the intangible income in
the legislation is simply an arbitrary slice (determined through the
10-percent deemed return) of the income from the sale of tangible
goods. Exports of tangible goods fall within the scope of the
agreements, and likely so will the FDII regime since it amounts to the
non-
collection or forgiveness of taxes otherwise due on an export.
Accordingly, our trading partners may seek to impose sanctions, either
unilaterally or after consent from the WTO's Dispute Resolution
Body.\36\ The U.S. will then have to choose between abandoning the FDII
regime or continuing it and paying the sanctions.
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\35\ This argument was briefly raised by GOP Senators in markup.
\36\ Reuven S. Avi-Yonah, ``The Elephant Always Forgets: Tax Reform
and the WTO'' (Univ. of Mich. Law and Econs. Working Paper No. 151,
2018), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3095349.
To summarize, the low rate on FDII is intended to encourage firms
to keep and develop intangible property in the United States. Given its
serious legal uncertainty, however, firms may be unwilling to rely upon
it in making their decisions of where to place IP. It is therefore
doubtful that the FDII regime will accomplish its stated purpose.
3. Gaming Opportunities
The FDII regime also presents new gaming opportunities. Under some
interpretations of the statute, the taxpayer may be able to get the
FDII deduction by ``round-tripping'' transactions--that is, selling to
independent foreign distributors, who then resell back into the United
States. In this manner, domestic sales can masquerade as tax-advantaged
export sales. The new legislation requires that taxpayers must
establish to the satisfaction of the Treasury Secretary that the goods
are sold for use abroad. Some taxpayers, however, will likely take the
position that the intent of an initial sale to a foreign business is
sufficient (like in a VAT regime). Ultimately, it will be difficult for
the IRS to meaningfully patrol round-tripping transactions given the
legal and factual ambiguity inherent in determining the meaning of
``foreign use.''
4. Reform Possibilities
In light of the troubling incentives for offshoring, the likely
incompatibility with WTO rules, and the potential for round-tripping
strategies, the best course of action is to repeal FDII entirely. This
is more emphatically the case considering the mixed evidence as to
whether even better designed patent boxes increase R&D or employment
and the inefficiencies resulting from privileging exports.\37\ Note
however, that with the repeal of FDII, there would be a wider
differential between the domestic rate on exports (which would then be
21 percent) and GILTI (10.5 percent), which could increase incentives
for profit shifting. If FDII is repealed, Congress should strongly
consider raising the rate on GILTI, which I am in favor of for other
reasons previously discussed.
---------------------------------------------------------------------------
\37\ Michael J. Graetz and Rachael Doud, ``Technological
Innovation, International Competition, and the Challenges of
International Income Taxation,'' 113 113 Colum. L. Rev. 347, 375 (2013)
(reviewing the literature to conclude that the effectiveness of patent
boxes is mixed, only affecting the location of IP ownership and income
rather than R&D in some countries); Shay, Fleming, and Peroni, ``R&D
Tax Incentives--Growth Panacea or Budget Trojan Horse?'', 69 Tax Law
Rev. 501 (2016) (critiquing patent boxes). See also Pierre Mohnen et
al., ``Evaluating the Innovation Box Tax Policy Instrument in the
Netherlands, 2007-13,'' 33 Oxford Rev. of Econ. Pol'y 141 (2017)
(finding that the patent box in the Netherlands has a positive effect
on R&D but that the average firm only uses a portion of the tax
advantage for extra R&D investment); Annette Alstadsaeter et al.,
``Patent Boxes Design, Patents Location, and Local R&D'' (IPTS Working
Papers on Corp. R&D and Innovation, No 6/2015, 2015), https://
ec.europa.eu/jrc/sites/jrcsh/files/JRC96080_Patent_boxes.pdf (finding
that patent boxes tend to deter local innovation activities unless such
regimes impose local R&D conditions). Note also that, as an export
subsidy, FDII provides an inefficient incentive to sell to foreign
rather than domestic customers. Moreover, if it succeeds, the U.S.
dollar will appreciate and undermine its purported benefits.
If FDII is maintained, new legislation or regulation should tighten
limitations on round-tripping. Treasury could turn to the foreign base
company sales rules that determine the destination of a sale. Problems
with those rules, however, illustrate just how difficult it is to
police the line between foreign and domestic use.\38\
---------------------------------------------------------------------------
\38\ These regulations allow the corporation to determine the
country of use ``if at the time of a sale of personal property to an
unrelated person the controlled foreign corporation knew, or should
have known from the facts and circumstances surrounding the
transaction, that the property probably would not be used, consumed, or
disposed of in the country of destination.'' See Treas. Reg. 1.954-
3(a)(3)(ii). This leaves firms with flexibility to make this
determination. Treasury should use its authority to impose an
interpretation of the FDII statute that requires U.S. taxpayers to do a
true inquiry into whether the foreign recipient will sell the product
back into the United States. The adequacy of any such approach,
however, is uncertain given the fact-intensive nature of the inquiry.
---------------------------------------------------------------------------
BEAT: Matters of Threshold and Gaming Opportunities
1. Matters of Threshold
One of the more interesting provisions in the new legislation is
the base erosion and anti-abuse tax (BEAT), which significantly
strengthens U.S. source-based taxation. The BEAT applies to certain
U.S. corporations that excessively reduce their U.S. tax liability by
making deductible payments, such as interest or royalties, to a 25-
percent owned foreign affiliate (``base erosion payments'').
Importantly, the BEAT applies to all multinationals with U.S.
affiliates, whether a U.S. or foreign parent owns them. Accordingly, it
is a step towards equalizing the treatment between U.S. and foreign
multinationals, the latter of which could reduce their U.S. tax
liability through earnings stripping in a way that was unavailable to
U.S. multinationals.
Problematically, the scope of BEAT allows many multinationals with
significant base shifting activity to avoid it. This is because the
regime only applies to corporations that have average annual gross
receipts in excess of $500 million over 3 years. BEAT is also not
triggered until there are base erosion payments over a specified
threshold, where deductions related to base erosion payments exceed 3
percent (2 percent for financial groups) of the overall deductions
taken by the corporation (with some enumerated exceptions).\39\
---------------------------------------------------------------------------
\39\ 26 U.S.C. Sec. 59A(c)(4). In other respects, BEAT is arguably
over-inclusive. For instance, BEAT captures routine transactions such
as repurchase agreements and posted collateral, as well as certain debt
instruments required by regulators. Davis Polk, ``The New `Not Quite
Territorial' International Tax Regime,'' 13 (December 20, 2017),
https://www.davispolk.com/files/2017-12-
20_gop_tax_cuts_jobs_act_preview_new_tax_regime.pdf. As a result, non-
abusive transactions may fall within BEAT's ambit. There is also the
question as to whether Congress intended that GILTI be included in the
BEAT tax base but without regard for foreign tax credits. There are
numerous other technical problems and unanswered questions left open by
BEAT, particularly with regard to services, as others have explored.
See, e.g., Laura Davison, ``Most Wanted: Tax Pros' Technical
Corrections Wish List,'' Bloomberg (April 13, 2018) (discussing
ambiguity regarding which payments are included and how to aggregate
income); Martin A. Sullivan, ``Marked-Up Services and the BEAT, Part
II,'' 158 Tax Notes 1169 (2018); Manal Corwin et al., ``A Response to
an Off-BEAT Analysis,'' 158 Tax Notes 933 (2018); Martin A. Sullivan,
``Can Marked-Up Services Skip the BEAT?'', 158 Tax Notes 705 (2018).
More generally, as Ed Kleinbard has noted, ``[BEAT's] application to
services . . . is just plain perverse. Example: SAP America lands a
contract on behalf of the SAP group with Ford to manage some global IT
databases. Ford wants one SAP contact, pays SAP America, which `hires'
local SAP affiliates around the world to perform services in their
jurisdictions. Big BEAT problem. If, instead, SAP Germany enters into
the [worldwide] contract and hires SAP America to do the U.S. part,
then no BEAT issue at all.'' Email from Ed Kleinbard, Robert C. Packard
trustee chair in law, USC Gould School of Law, to the author (April 16,
2018) (draft on file with author).
Assume for instance, a U.S. corporation makes base erosion payments
to its foreign affiliate producing deductions in the amount of
$300,000. Further assume other deductions amount to $9,700,000 (so
total deductions are $10,000,000). In this case, the corporation would
be subject to the BEAT since it meets the 3-percent threshold. But if
it were to reduce its base erosion deductions by just $1, or increase
---------------------------------------------------------------------------
its other deductions by the same amount, it would entirely escape BEAT.
Both of these features have the unfortunate consequence of creating
a cliff effect. Multinationals with $499 million in average annual
gross receipts avoid BEAT altogether, as do such companies with a base
erosion percentage of 2.99 percent. This has implications for
horizontal equity, since two similarly situated taxpayers will be taxed
very differently.\40\ It also produces efficiency losses since cliff
effects push the marginal tax rate on the activity in question very
high.\41\
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\40\ See Manoj Viswanathan, ``The Hidden Costs of Cliff Effects in
the Internal Revenue Code,'' 164 U. PA. L. Rev. 931, 955-56 (2016)
(discussing equity concerns of income-based cliff effects). See also
Lily L. Batchelder et al., ``Efficiency and Tax Incentives: The Case
for Refundable Tax Credits,'' 59 Stan. L. Rev. 23, 30-31, 50 (2006)
(discussing cliff effects in the context of non-refundable credits and
other tax incentives).
\41\ See Viswanathan, supra note 35, at 958-59.
Another problem with cliff effects is that they reward taxpayers
who are resourceful enough to create structures so that they fall just
on the right side of the line. For instance, taxpayers may check the
box with regard to foreign affiliates so that they become disregarded
entities and payments to them are disregarded. Although the taxpayer
would lose out on deductibility for purposes of their regular tax
liability, the cliff effect in the BEAT may mean such a tax increase is
outweighed by the avoidance of BEAT liability.\42\
---------------------------------------------------------------------------
\42\ Shaviro, supra note 7.
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2. Gaming Opportunities With Cost of Goods Sold
Importantly, base erosion payments generally do not include
payments for costs of goods sold (unless the company inverted). If a
foreign affiliate incorporates the foreign intellectual property into a
product and then sells the product back to a U.S. affiliate, the cost
of the goods sold does not fall within BEAT. Even if the U.S.
subsidiary pays a royalty to the foreign parent for the right to use a
trademark on goods purchased by the subsidiary from the parent, the
royalty must be capitalized into the costs of goods sold under pre-
existing regulations, and therefore the royalty payments skip the BEAT
entirely.\43\ This gap in the law creates significant planning
opportunities, allowing a large amount of base shifting to escape BEAT
liability.\44\
---------------------------------------------------------------------------
\43\ 26 CFR 1.263A-1(e)(3)(ii)(u). There is a question as to
whether Congress intended such royalties to escape BEAT. One government
official has indicated that this was not the intent of Congress and
that the outcome may be changed through a technical correction. Jasper
L. Cummings, ``Selective Analysis: The BEAT,'' Tax Notes Today 69-10
(April 10, 2018).
\44\ Kamin et al., supra note 1.
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3. Reform Possibilities
The BEAT thresholds established by the legislation should be
revisited. It may be reasonable to exempt some smaller corporations
from its scope since such companies may not be able to profit shift as
effectively and BEAT poses a greater challenge for them as an
administrative matter. Instead of a cliff effect, however, the BEAT
could be phased in at different income levels. This would reduce the
loss in social welfare by lowering the marginal tax rate below 100
percent.\45\
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\45\ Cliff effects based on income impose a marginal tax rate
exceeding 100 percent. This will induce taxpayers to reduce their
income so that they fall under the cliff, thereby discouraging socially
desirable work. Viswanathan, supra note 40, at 959-60.
Separate and apart from the cliff effect, however, a separate
criticism of the $500 million threshold is that it is simply too high.
In the section 385 regulations, which also focus on base erosion, large
multinationals are defined as having either $50 million in annual
revenues or assets exceeding $100 million. These levels are much more
appropriate for identifying multinationals with sufficient base
shifting activity, and the BEAT threshold should be lowered to similar
amounts.\46\
---------------------------------------------------------------------------
\46\ See Bret Wells, ``Get With the BEAT,'' 158 Tax Notes 1023
(2018).
The 3-percent threshold for the base erosion percentage should
simply be eliminated since it is unclear why a certain degree of base
erosion is tolerated. If administrative concerns are the motivation,
then the efficiency and equity costs of the cliff effect likely
---------------------------------------------------------------------------
outweigh them.
Even if the 3-percent base erosion percentage is maintained for
administrative reasons, it should be restructured to use a threshold of
base erosion payments as a percentage of taxable income rather than
total deductions. A small percentage of total deductions could be a
large percentage of taxable income, thereby representing a significant
degree of base erosion in relation to the company's overall operations.
Solving the cost of goods sold issue is not so easy. This is
because there is no proven method of separating out the intangible
component of a tangible sale.\47\ Additionally, the inclusion of cross-
border sales of inventory would present trade and tax treaty issues,
similar to those presented by the originally proposed House excise
tax.\48\ Indeed, the inherent difficulties in designing an inbound
regime like BEAT raises the argument about whether more fundamental
changes to business taxation may be necessary. I discuss this in the
following section.
---------------------------------------------------------------------------
\47\ Itai Grinberg, ``The BEAT is a Pragmatic and Geopolitically
Savvy Inbound Base Erosion Rule,'' 7 (draft December 6, 2017), at
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=
3069770.
\48\ See Reuven Avi-Yonah and Nir Fishbien, ``Once More, With
Feeling: The `Tax Cuts and Jobs Act' and the Original Intent of Subpart
F,'' 12 n. 32 (Univ. of Mich. Law & Econs., Working Paper No. 143,
2017), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3074647
(discussing the WTO problems presented by the House excise tax).
---------------------------------------------------------------------------
Going Forward: True International Tax Reform
Going forward, it is not only necessary to deal with the flaws in
the recent tax legislation that I have raised, but also to manage
larger challenges. Taxing corporate income will continue to be
formidable given the global nature of today's economy, the mobility of
capital and intellectual property, and strategic responses from other
nations. Because of these pressures, corporate income tax revenues are
likely to shrink. In fact, if one ignores the one time repatriation
tax, the new international tax provisions lose revenue going
forward.\49\
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\49\ Joint Committee on Taxation, supra note 2.
A badly needed reform is to strengthen rules governing corporate
residence. Rather than follow the place of incorporation as the sole
determinant of corporate residency, a notoriously artificial and
gameable definition, corporate residency could account for factors such
as the location of a company's headquarters or be linked to the
residency of its shareholders.\50\ Our source rules also fall far short
in reflecting modern economic reality, and should be thoroughly
reexamined. For instance, the rules might be revised to reflect a more
destination-based approach, perhaps assigning income to the
jurisdiction of the customer base.\51\
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\50\ For discussion of a shareholder-based approach, see J. Clifton
Fleming et al., ``Defending Worldwide Taxation With a Shareholder-Based
Definition of Corporate Residence,'' 1016 BYU L. rev. 1681, 1702-09
(2017).
\51\ Paul Oosterhuis and Amanda Parsons, ``Destination-Based Income
Taxation: Neither Principled Nor Practical?'' (October 27, 2017)
(unpublished manuscript) (draft on file with author).
Given the Nation's bleak fiscal outlook and tax competition from
other countries,\52\ it may also be necessary to explore other sources
of revenue. Destination-based taxes, which tax where goods are consumed
are of particular interest given the relative immobility of the
customer base. Origin-based taxes, like our current corporate income
tax, instead levy taxes based on where income is produced or earned, an
artificial, manipulable, and mobile construct.
---------------------------------------------------------------------------
\52\ There is already evidence that other countries are considering
lowering their tax rates in response to recent tax legislation. Laura
Davison, ``U.S. Tax Overhaul Spurs Others to Re-Evaluate Rates: Tax
Counsel,'' Bloomberg (February 22, 2018) (quoting a key drafter of the
tax legislation, who has met with representatives from other countries
who are pursuing such changes).
Other developed nations have increasingly relied on consumption
taxes, like value-added taxes (VATs), as supplements to traditional
business income taxes. A VAT would not only raise badly needed
revenues, but it could apply to the sale of inventory without causing
trade or tax treaty issues, therefore helping with inbound base
erosion.\53\ We typically dismiss a VAT as a political non-starter in
the United States, but the destination-based cash flow tax proposal of
the House, which operates very similarly to a VAT, went surprisingly
far in the reform process.
---------------------------------------------------------------------------
\53\ See Michael J. Graetz, ``100 Million Unnecessary Returns: A
Simple, Fair, and Competitive Tax Plan for the United States'' (2011)
for a compelling justification of the VAT.
Finally, the international system of taxation is predicated on
divisions of taxing jurisdiction that have no bearing in the modern
global economy. A longer-term objective should be to work with other
nations, developing a consensus as to how to tax remote businesses
selling into markets from abroad. This should include serious re-
examination of our double tax treaty regime, which reinforces archaic
conceptions of how income should be allocated among nations.
Conclusion
Although there are reasons to like some aspects of the new
international tax regime, it also has several serious flaws, as I have
discussed. Moreover, the international tax regime will continue to be
challenged by base erosion and tax competition. If the U.S. rules on
international tax remain stagnant, then the recent legislation will
have been a wasted chance to tackle serious problems posed by the
modern global economy. If instead the new provisions are an incremental
step on the path to true reform, the international provisions in the
act can be judged more leniently. Only time will tell.
I welcome any questions from the committee.
______
Questions Submitted for the Record to Rebecca M. Kysar
Questions Submitted by Hon. Orrin G. Hatch
Question. You wrote in your testimony about how disparities between
a high rate domestically, and a low rate overseas, can lead to
pressures to offshore investments. It seems like something you were
suggesting in your written testimony is that just simply reducing the
corporate tax rate could reduce this pressure. Is that right? That
reducing the corporate rate, all other things being equal, would lead
to increased on-shoring of investment in the United States?
Answer. Reducing the disparity between the minimum tax and the
regular domestic rate could reduce the offshoring and profit shifting
incentives in the bill. Given the enormous cost of reducing the
corporate tax rate further, it would be more prudent to raise the
minimum tax instead.
Proponents of the bill have emphasized that other developed
countries have territorial systems and low corporate rates. What is
less mentioned is that these countries predominantly have VATs to fund
their governments. Until the United States adopts a VAT or other
significant sources of revenue, I would recommend against dropping the
corporate rate further.
Question. In your written testimony, you advocate eliminating the
exempt return on foreign tangible assets. As another point, you suggest
increasing the tax-rate on GILTI income, if the FDII special rate is
repealed, which you seem to think it should be.
So, can I infer from this that you think a pure worldwide regime,
with no deferral, would be a very good reform?
Answer. Theoretically, the existence of a partial territorial
system coupled with a minimum tax could be an improvement over the
prior system. It is also preferable to a pure territorial system
because of the protections it places on the revenue base. Nonetheless,
although a minimum tax can work in concept, its current incarnation
problematically incentivizes firms to offshore assets and profit shift.
I think it is possible to design a minimum tax that, in many ways,
would be preferable to a pure worldwide system without deferral. This
would, however, first include lowering (closer to the risk-free rate)
or eliminating the exempt return on foreign tangible assets. Second, it
would also include raising the minimum tax rate somewhat so there is
not as much discrepancy with the domestic rate. Third, and most
importantly, the minimum tax would be applied on a per-country basis.
At minimum, Congress should implement this last option, which would
reduce the profit shifting and offshoring incentives addressed by the
prior two. Finally, if the United States enacted a VAT, it could afford
to lean more towards territoriality in its corporate income tax regime.
Question. In arguing for a per-country limitation on claiming
credits against the GILTI, you note that there will be certain cross-
crediting capabilities under the GILTI regime.
Please tell me--were there cross-crediting opportunities under the
old pre-Tax Cuts and Jobs Act international regime?
Answer. Although there were cross-crediting opportunities under the
old regime, these involved the circumvention of the 904 limitation in
the foreign tax credit regime. The minimum tax is the primary mechanism
that prevents profit shifting under a territorial regime. Therefore,
the revenue implications of cross-crediting are likely much greater.
Question. In your written testimony, you stated that, ``For no
apparent policy reason, assets in CFCs that generate losses are
disregarded for purposes of calculating the deemed return on tangible
property.''
So, would you think it better to include assets of CFCs with tested
losses for purposes of calculating the deemed return on tangible
property?
Answer. In general, many of the GILTI rules treat businesses with
volatile earnings too harshly, distorting investment away from risky
assets. The treatment of CFCs with tested losses fits into this
category and should be revisited. In the meantime, taxpayers will
engage in a variety of tax-motivated transactions ``to distribute
tested income among CFCs in a manner so as to minimize the likelihood
that CFCs with meaningful QBAI and/or FTCs will have tested losses.''
Question. In footnote 39, you quote Professor Kleinbard in saying
that BEAT's application to services is not ideal. But in the Ford/SAP
example, could you have these sort of BEAT problems in other contexts,
other than just services?
Answer. BEAT will cause many companies to rethink their supply
chains, although I would expect services to be a large problem in this
regard since the restructuring of services can easily be accomplished
through contracting. Additionally, there is a question as to what
portion of marked-up services fall within BEAT, and, as my testimony
indicates, firms can avoid BEAT liability on otherwise-deductible
royalty payments by incorporating them into costs of goods sold. These
dynamics will likely put significant pressure on firms to reduce their
BEAT liability on services through mechanisms like those suggested by
Professor Kleinbard.
______
Questions Submitted by Hon. Maria Cantwell
debt and deficits
Question. The final score for the tax bill was $1.46 trillion
according to the Joint Committee on Taxation (JCT).\1\ But in March
2018, the Congressional Budget Office (CBO) estimated that this bill
will shrink revenues by $1.9 trillion over the next decade.\2\ And
deficits will return to levels not seen since the Great Recession. When
Bush took office in 2001, he was handed a surplus of $128.2 billion.\3\
But after two tax cut bills and two unpaid-for wars, we ended up with a
deficit of $1.4 trillion.\4\ But when Obama left, he made significant
progress cleaning up after the Bush years. We cut the deficit by over
half to $665.4 billion.\5\ But that wasn't easy. And now the CBO
estimates that we will return to trillion-dollar deficits starting
2020.\6\
---------------------------------------------------------------------------
\1\ Joint Committee on Taxation, ``Estimated Budget Effects of the
Conference Agreement for H.R. 1, `The Tax Cuts and Jobs Act,' '' JCX-
67-17, December 18, 2017.
\2\ ``The Budget and Economic Outlook: 2018 to 2028,'' p. 106,
Congressional Budget Office, April 2018.
\3\ CBO, op. cit., p. 144.
\4\ Ibid.
\5\ Ibid.
\6\ CBO, op. cit., p. 4.
In order to be more competitive and to prepare for the future, what
steps would you recommend to pull our international tax system into the
21st century? What impact will deficit financing have on the United
---------------------------------------------------------------------------
States in the long run?
Answer. In order to modernize our international tax system, I would
recommend removing the offshoring and profit shifting incentives in the
GILTI and FDII rules. First and foremost, GILTI should be applied on a
per-country basis, rather than globally. This will limit profit
shifting. To remove offshoring incentives, the deemed return on
tangible assets, in both regimes, should be eliminated or lowered to a
figure closer to the risk-free rate. The GILTI rate could also be
raised so as to reduce the disparity between the domestic and foreign
rates.
Other reforms should be pursued. Rather than follow the place of
incorporation as the sole determinant of corporate residency, corporate
residency could account for factors such as the residency of the
shareholders. The source rules also should be thoroughly reexamined.
For instance, the rules might be revised to reflect a more destination-
based approach, perhaps assigning income to the jurisdiction of the
customer base.
Finally, the United States should seriously consider implementing a
VAT to supplement the income tax, which would raise badly needed
revenues and would apply taxation to a less mobile tax base-consumers.
Without significant new sources of revenue, the fiscal outlook of
the United States will continue to be bleak. Eventually, the government
will be forced to reverse, likely dramatically, its commitments to
investment and services. Spreading deficit reduction over time, as
opposed to dealing with it only when prompted by a crisis, is likely
more efficient and would be less disruptive to the lives of Americans.
renewable energy tax credits
Question. The Tax Cuts and Jobs Act of 2017 reduced the top
marginal corporate rate on C corps in the United States to 21 percent
from 35 percent.\7\ While the top effective was 35 percent, the actual
average rate paid by companies was 22 percent according to a 2016 U.S.
Treasury report.\8\ The tax cut bill created the Base Erosion and Anti-
abuse Tax (BEAT) which lowers the value of the renewable energy tax
credits.\9\
---------------------------------------------------------------------------
\7\ Public Law 115-97, section 13001.
\8\ ``Average Effective Federal Corporate Tax Rates,'' prepared by
the Office of Tax Analysis, U.S. Department of the Treasury, April 1,
2016.
\9\ Public Law 115-97, Chapter 3.
Under current law, the renewable energy tax credits are not fully
eligible for offsets under the Base Erosion and Anti-abuse Tax or
``BEAT.'' Senator Grassley and I and many others on this committee have
been working to provide a real, forward-looking extension of these
credits and hope to make sure these credits can be used in the tax
---------------------------------------------------------------------------
equity market.
Has the expiration of the investment tax credit for certain
renewable technologies and not others had an impact on renewable energy
investment? Do you believe the renewable energy industry needs
certainty to plan for the future and not lurch from one expiration date
to the next?
Answer. Businesses cherish predictability, and I have previously
supported the view that the temporary nature of certain tax incentives
can dampen their economic incentives.\10\
---------------------------------------------------------------------------
\10\ See Rebecca M. Kysar, ``Lasting Legislation,'' 159 U. Penn. L.
Rev. 1007 (2011).
Question. Given that research and development (R&D) is exempted
from the BEAT because we prioritize R&D, if renewable energy and
reducing our Nation's dependence on foreign oil are priorities, what
steps do you recommend that we take to reflect these priorities in our
---------------------------------------------------------------------------
tax code?
Answer. Although renewable energy policy is outside our areas of
expertise, a congressional priority could be to carve out 100 percent
of the renewable energy tax credits from the BEAT regime and to make
this change permanent.
Question. The new international tax regime was intended to prevent
shipping U.S. income overseas, yet it is in many cases acting like a
tax on investments in the United States, especially for renewable
energy and Low-Income Housing Tax Credits. How can this be addressed?
Answer. If Congress wishes to prioritize renewable energy and low-
income housing, then permanent expansion of the applicable tax credits
and carve-outs from the BEAT rules will further this goal.
______
Submitted by Hon. Claire McCaskill, A U.S. Senator From Missouri
U.S. Senate
Homeland Security and Governmental Affairs Committee
Minority Staff Report
Manufactured Crisis: How Devastating Drug Price Increases
Are Harming America's Seniors
Executive Summary
This report examines the history of rising drug prices for the
brand-name drugs most commonly prescribed for seniors. Each year,
Americans pay more for prescription drugs, and rising drug prices have
a disproportionate impact on older Americans.\1\, \2\ Older
individuals, for example, are far more likely to have used at least one
prescription drug, as well as a greater number of prescription drugs,
in the past 30 days than other Americans.\3\ According to the Centers
for Disease Control and Prevention, 91% of individuals over the age of
65 reported taking at least one prescription drug, with 67% of all
seniors taking at least three prescription drugs, and 41% taking five
or more.\4\ In 2015 alone, the average retail prices for 768
prescription drugs widely used by older Americans--including 268 brand-
name drugs, 399 generic drugs, and 101 specialty drugs--increased 6.4%
compared with a general inflation rate of 0.1%.\5\ Increases on brand-
name drugs were even higher, with retail prices for brand-name drugs
widely used by older Americans increasing by an average of 15.5% in
2015--marking the fourth year in a row with a double-digit increase.\6\
---------------------------------------------------------------------------
\1\ Modern Healthcare, ``Price Hikes Doubled Average Drug Price
Over 7 Years: AARP'' (February 28, 2016) (www.modernhealthcare.com/
article/20160228/NEWS/302219999).
\2\ Center for Retirement Research at Boston College, ``Seniors
Vulnerable to Drug Price Spikes'' (January 21, 2016) (https://
squaredawayblog.bc.edu/squared-away/seniors-vulnerable-to-drug-price-
spikes/).
\3\ Department of Health and Human Services, Centers for Disease
Control and Prevention, National Center for Health Statistics,
``Health, United States, 2016'' (DHHS Publication No. 2017-1232) (May
2017) (www.cdc.gov/nchs/data/hus/hus16.pdf#079).
\4\ Id.
\5\ AARP, ``Rx Price Watch Report: Trends in Retail Prices of
Prescription Drugs Widely Used by Older Americans: 2006 to 2015''
(December 2017) (www.aarp.org/content/dam/aarp/ppi/2017/11/trends-in-
retail-prices-of-prescription-drugs-widely-used-by-older-americans-
december.pdf).
\6\ AARP, ``Rx Price Watch: Trends in Retail Prices of Brand Name
Prescription Drugs Widely Used by Older Americans, 2006 to 2015''
(December 2016) (www.aarp.org/content/dam/aarp/ppi/2016-12/trends-in-
retail-prices-dec-2016.pdf).
At the request of Ranking Member Claire McCaskill, the minority
staff of the Committee on Homeland Security and Governmental Affairs
reviewed price increases in the last 5 years across the top 20 most-
prescribed brand-name drugs for seniors.
Key Findings
As a way to approximate the brand-name drugs most commonly
prescribed for seniors, the minority staff identified the 20
most-prescribed brand-name drugs in the Medicare Part D
program. In 2015, the top 20 most-prescribed brand-name drugs
in Medicare Part D were Advair Diskus, Crestor, Januvia,
Lantus/Lantus Solostar,\7\ Lyrica, Nexium, Nitrostat, Novolog,
Premarin, Proair HFA, Restasis, Spiriva Handihaler, Symbicort,
Synthroid, Tamiflu, Ventolin HFA, Voltaren Gel, Xarelto, Zetia,
and Zostavax.\8\
---------------------------------------------------------------------------
\7\ Lantus/Lantus Solostar are both insulin glargine drugs used to
treat diabetes. Lantus is an injectable drug that is sold as a vial and
syringe set. Lantus Solostar is an injectable pen.
\8\ Centers for Medicare and Medicaid Services, ``Part D Prescriber
Data CY 2015: National Summary Table'' (May 25, 2017) (www.cms.gov/
Research-Statistics-Data-and-Systems/Statistics-Trends-and-Reports/
Medicare-Provider-Charge-Data/PartD2015.html).
Prices increased for each of these drugs in the last 5
years. On average, prices for these drugs increased 12% every
year for the last 5 years--approximately 10 times higher than
the average annual rate of inflation.\9\, \10\
---------------------------------------------------------------------------
\9\ The information cited above was calculated by minority staff of
the committee based on data selected from the following IQVIA
information services: IQVIA National Prescription Audit (NPA) for the
period from January 1, 2012, through December 31, 2017, and IQVIA
National Sales Perspectives (NSP) for the period from January 1, 2012,
through December 31, 2017. The IQVIA National Prescription Audit
reports estimated national prescription activity for all
biopharmaceutical products dispensed by retail, mail, and long-term
care outlets in the United States. The IQVIA National Sales
Perspectives reports estimated national sales activities for all
biopharmaceutical products sold to retail and non-retail outlets in the
United States. NSP includes pricing information for both average
wholesale acquisition cost and average trade sales to retail and non-
retail outlets, but does not reflect off-invoice price concessions that
reduce the net amount. (IQVIA data reflect proprietary estimates of
market activity and are available for use under license from IQVIA.
IQVIA expressly reserves all rights, including rights of copying,
distribution, and republication.)
\10\ Federal Reserve Bank of Minneapolis, ``Consumer Price Index,
1913-'' (www.minneapolisfed.
org/community/financial-and-economic-education/cpi-calculator-
information/consumer-price-index-and-inflation-rates-1913) (accessed
February 28, 2018).
Twelve of these drugs (60%) had their prices increased by
over 50% in the 5-year period. Thirty-five percent--or 6 of the
20--had prices increases of over 100%. In one case, the average
wholesale acquisition cost for a single drug increased by 477%
over a 5-year period.\11\
---------------------------------------------------------------------------
\11\ The information cited above was calculated by minority staff
of the committee based on data selected from the following IQVIA
information services: IQVIA National Prescription Audit (NPA) for the
period from January 1, 2012, through December 31, 2017, and IQVIA
National Sales Perspectives (NSP) for the period from January 1, 2012,
through December 31, 2017.
Although 48 million fewer prescriptions were written for the
brand-name drugs most commonly prescribed for seniors between
2012 and 2017, total sales revenue resulting from these
prescriptions increased by almost $8.5 billion during the same
period.\12\
---------------------------------------------------------------------------
\12\ Id. These figures include prescriptions and sales figures
nationwide, not just in Medicare Part D.
---------------------------------------------------------------------------
Background and Methodology
Soaring drug prices are driving up health-care costs each year. In
2016, prescription drug spending totaled $328.6 billion.\13\ According
to the most recent National Heath Expenditure (NHE) data published by
the Centers for Medicare and Medicaid Services (CMS), retail
prescription drug spending grew at an average pace of 4.8% between 2006
and 2015, with two of the highest-growth years occurring in 2014 and
2015 at 12.4% and 9.0%, respectively.\14\
---------------------------------------------------------------------------
\13\ Centers for Medicare and Medicaid Services, ``NHE Fact Sheet''
(December 6, 2017) (www.cms.gov/research-statistics-data-and-systems/
statistics-trends-and-reports/nationalhealth
expenddata/nhe-fact-sheet.html).
\14\ Quintiles IMS Institute, ``Understanding the Drivers of Drug
Expenditure in the U.S.'' (September 2017) (www.iqvia.com/institute/
reports/understanding-the-drivers-of-drug-expenditure-in-the-us).
Even with Medicare coverage, many older individuals also face
substantial out-of-pocket costs, particularly for specialty and brand-
name drugs.\15\ In 2013, the latest year for which CMS cost and use
data is available, $1 out of every $5 that Medicare beneficiaries spent
in out-of-pocket health-care costs (excluding premiums) went towards
prescription drugs.\16\
---------------------------------------------------------------------------
\15\ Kaiser Family Foundation, ``10 Essential Facts About Medicare
and Prescription Drug Spending'' (November 10, 2017) (www.kff.org/
infographic/10-essential-facts-about-medicare-and-prescription-drug-
spending/).
\16\ Id.
Medicare beneficiaries' average out-of-pocket health-care spending
is projected to continue to increase. According to one study, this
spending is expected to rise from 41% of beneficiaries' per capita
Social Security income in 2013 to 50% in 2030.\17\ In 2030, Medicare
beneficiaries ages 85 and over are projected to spend a full 87% of
their Social Security income--$4,400 more out of pocket for health care
on average--while beneficiaries ages 65 to 74 are projected to spend an
additional $2,000 on out-of-pocket spending on average.\18\
---------------------------------------------------------------------------
\17\ Kaiser Family Foundation, ``Medicare Beneficiaries' Out-of-
Pocket Health Care Spending as a Share of Income Now and Projections
for the Future'' (January 26, 2018) (www.kff.org/report-section/
medicare-beneficiaries-out-of-pocket-health-care-spending-as-a-share-
of-income-now-and-projections-for-the-future-report/).
\18\ Id.
At the request of Ranking Member Claire McCaskill, the minority
staff of the Committee on Homeland Security and Governmental Affairs
reviewed the history of price increases across the most-prescribed
brand-name drugs for seniors over the last 5 years to better understand
the role brand-name drug price increases play in driving health-care
costs. As a way to approximate the brand-name drugs most commonly
prescribed to seniors, the minority staff collected CMS data for the
top 20 most commonly prescribed brand-name drugs to Medicare Part D
beneficiaries in 2015, the most recent year for which prescriber data
is available. Using data from the IQVIA National Sales Perspectives
information service, the minority staff evaluated the annual
prescription numbers, sales numbers, and weighted prices for the
average wholesale acquisition cost for those 20 brand-name drugs.\19\
The annual weighted average wholesale acquisition cost is calculated
based on the total number of prescriptions for each particular brand-
name drug over the course of the year.\20\ Using the annual weighted
average price for wholesaler acquisition cost, the minority staff
determined the approximate increase in drug prices for the top 20
brands.\21\ All references to price increases below refer to the
wholesale acquisition cost for each product.
---------------------------------------------------------------------------
\19\ NHE data published by CMS reflects an estimation of net
spending for payers (including patients) on prescription drugs using
total spending amounts reported by retail and mail order pharmacies.
The IQVIA data reflecting the total number of annual prescriptions and
annual sales for the brand-name prescription drugs referenced in this
report are calculated based on average trade sales to retail and non-
retail outlets, including invoiced sales by wholesalers and direct
sales by manufacturers to customers. IQVIA data incorporates known
discounts and rebates available for sales to pharmacies. However,
discount and rebate information is not widely available and the data
typically do not capture off-invoice discounts, coupons, or rebates
offered by manufacturers to non-pharmacy customers. However, limited
research on net prices available from IQVIA shows that net prices of
brand-name drugs are also increasing, but at a slower rate than
wholesale acquisition costs. The information cited above was calculated
by minority staff of the committee based on data selected from the
following IQVIA information services: IQVIA National Prescription Audit
(NPA) for the period from January 1, 2012, through December 31, 2017,
and IQVIA National Sales Perspectives (NSP) for the period from January
1, 2012, through December 31, 2017.
\20\ The information cited above was calculated by minority staff
of the committee based on data selected from the following IQVIA
information services: IQVIA National Prescription Audit (NPA) for the
period from January 1, 2012, through December 31, 2017, and IQVIA
National Sales Perspectives (NSP) for the period from January 1, 2012,
through December 31, 2017.
\21\ Typically, the wholesaler acquisition cost (WAC) price
reflects the list price. WAC price generally does not account for any
coupons or discounts that manufacturers provide insurers, medical
providers, and pharmacy benefit managers (PBMs). The annual weighted
average WAC price is based on the total number of prescriptions for
each particular brand-name drug over the course of the year. However,
because of periodic price changes throughout the year, or changes in
supply or form of the prescription, drug pricing trends associated with
the weighted average WAC price may not accurately reflect the drug
pricing trends for the most popular type of prescription for each
brand-name drug (i.e., the most popular dosage, form, or length of
supply).
---------------------------------------------------------------------------
Investigation of Prices for Drugs for Seniors
In 2015, the top 20 most commonly prescribed brand-name drugs for
seniors were Advair Diskus, Crestor, Januvia, Lantus/Lantus Solostar,
Lyrica, Nexium, Nitrostat, Novolog, Premarin, Proair HFA, Restasis,
Spiriva Handihaler, Symbicort, Synthroid, Tamiflu, Ventolin HFA,
Voltaren Gel, Xarelto, Zetia, and Zostavax.\22\ On average, prices for
these drugs increased 12% every year for the last 5 years--
approximately 10 times higher than the average annual rate of
inflation.\23\, \24\, \25\ See Figure 1.
---------------------------------------------------------------------------
\22\ Centers for Medicare and Medicaid Services, ``Part D
Prescriber Data CY 2015: National Summary Table'' (May 25, 2017)
(www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-
and-Reports/Medicare-Provider-Charge-Data/PartD2015.html). The
manufacturers of the top 20 drugs are GlaxoSmithKline (Advair Diskus,
Ventolin HFA); AstraZeneca (Crestor, Nexium, Symbicort); Merck and Co.,
Inc. (Januvia, Zetia, Zostavax); Sanofi-Aventis (Lantus/Lantus
Solostar); Pfizer (Lyrica, Nitrostat, Premarin); Novo Nordisk
(Novolog); Teva Pharmaceutical Industries (Proair HFA); Allergan
(Restasis); Boehringer Ingelheim Pharmaceuticals, Inc. (Spiriva
Handihaler); AbbVie Inc. (Synthroid); Hoffmann-La Roche (Tamiflu); Endo
Pharmaceuticals, Inc. (Voltaren Gel); and Janssen Pharmaceutica
(Xarelto).
\23\ Centers for Medicare and Medicaid Services, ``Part D
Prescriber Data CY 2015: National Summary Table'' (May 25, 2017)
(www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-
and-Reports/Medicare-Provider-Charge-Data/PartD2015.html).
\24\ The information cited above was calculated by minority staff
of the committee based on data selected from the following IQVIA
information services: IQVIA National Prescription Audit (NPA) for the
period from January 1, 2012, through December 31, 2017, and IQVIA
National Sales Perspectives (NSP) for the period from January 1, 2012
through December 31, 2017.
\25\ Federal Reserve Bank of Minneapolis, ``Consumer Price Index,
1913-'' (www.minneapolisfed.
org/community/financial-and-economic-education/cpi-calculator-
information/consumer-price-index-and-inflation-rates-1913) (accessed
February 28, 2018).
Figure 1: Popular Drug Price Change vs. Inflation \26\,
\27\, \28\
---------------------------------------------------------------------------
\26\ Centers for Medicare and Medicaid Services, ``Part D
Prescriber Data CY 2015: National Summary Table'' (May 25, 2017)
(www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-
and-Reports/Medicare-Provider-Charge-Data/PartD2015.html).
\27\ The information cited above was calculated by minority staff
of the committee based on data selected from the following IQVIA
information services: IQVIA National Prescription Audit (NPA) for the
period from January 1, 2012, through December 31, 2017, and IQVIA
National Sales Perspectives (NSP) for the period from January 1, 2012,
through December 31, 2017.
\28\ Federal Reserve Bank of Minneapolis, ``Consumer Price Index,
1913-'' (www.minneapolisfed.
org/community/financial-and-economic-education/cpi-calculator-
information/consumer-price-index-and-inflation-rates-1913) (accessed
Feb. 28, 2018).
[GRAPHIC] [TIFF OMITTED] T2418.010
All 20 of these drugs experienced consistent price increases over
the last 5 years, with total percentage increases ranging from 31% to
477%. See Figure 2.
Figure 2: Annual Price Increases of Most Commonly Prescribed Brand-Name
Drugs \29\
------------------------------------------------------------------------
Average
2012 Annual 2017 Annual Annual Percent
Product Weighted Weighted Percent Change
Average WAC Average WAC Change (2012-2017)
Price Price (2012-2017)
------------------------------------------------------------------------
Advair Diskus $227.60 $360.86 10% 59%
------------------------------------------------------------------------
Crestor $349.31 $615.65 12% 76%
------------------------------------------------------------------------
Januvia $306.58 $517.91 11% 69%
------------------------------------------------------------------------
Lantus $121.88 $250.24 15% 105%
------------------------------------------------------------------------
Lantus Solostar $144.15 $354.12 20% 146%
------------------------------------------------------------------------
Lyrica $264.43 $600.35 18% 127%
------------------------------------------------------------------------
Nexium $256.99 $368.85 7% 44%
------------------------------------------------------------------------
Nitrostat $15.91 $91.76 42% 477%
------------------------------------------------------------------------
Novolog Flexpen $131.95 $313.05 19% 137%
------------------------------------------------------------------------
Premarin $255.94 $554.60 17% 117%
------------------------------------------------------------------------
Proair Hfa $39.96 $54.05 6% 35%
------------------------------------------------------------------------
Restasis $167.62 $321.26 14% 92%
------------------------------------------------------------------------
Spiriva $244.77 $348.30 7% 42%
------------------------------------------------------------------------
Symbicort $206.05 $293.46 7% 42%
------------------------------------------------------------------------
Synthroid $96.35 $153.82 10% 60%
------------------------------------------------------------------------
Tamiflu $97.94 $143.18 8% 46%
------------------------------------------------------------------------
Ventolin $34.67 $50.68 8% 46%
------------------------------------------------------------------------
Voltaren Gel $35.86 $50.96 7% 42%
------------------------------------------------------------------------
Xarelto $258.82 $449.51 12% 74%
------------------------------------------------------------------------
Zetia $225.63 $483.71 16% 114%
------------------------------------------------------------------------
Zostavax $1,044.36 $1,363.08 5% 31%
------------------------------------------------------------------------
Manufacturers increased prices by over 50% for 12 out of these 20
drugs--or 60% of the drugs--during the 5-year period. Manufacturers
increased prices by 100% for 6 of the 20 drugs--or 35%--during this
same period. See Figure 2. Nitrostat \30\ had the most significant
price increase of all 20 drugs. According to IQVIA data, the weighted
average wholesale acquisition cost for Nitrostat increased 477% between
2012 and 2017.\31\ See Figures 2 and 3.
---------------------------------------------------------------------------
\29\ The information cited above was calculated by minority staff
of the committee based on data selected from the following IQVIA
information services: IQVIA National Prescription Audit (NPA) for the
period from January 1, 2012, through December 31, 2017, and IQVIA
National Sales Perspectives (NSP) for the period from January 1, 2012
through December 31, 2017.
\30\ Nitrostat (Nitroglycerin) is used to treat and prevent chest
pain. GoodRx, Nitrostat (www.goodrx.com/nitrostat/what-is) (accessed
February 16, 2017).
\31\ The information cited above was calculated by minority staff
of the committee based on data selected from the following IQVIA
information services: IQVIA National Prescription Audit (NPA) for the
period from January 1, 2012, through December 31, 2017, and IQVIA
National Sales Perspectives (NSP) for the period from January 1, 2012,
through December 31, 2017.
---------------------------------------------------------------------------
Figure 3: Price Increase for Nitrostat \32\
[GRAPHIC] [TIFF OMITTED] T2418.011
Even smaller percentage increases can result in significantly
higher prices for expensive and commonly prescribed prescription drugs.
For example, the third most commonly prescribed drug, Crestor,
experienced what appears to be a common price increase of 12% in
weighted average wholesale acquisition cost each year for the past 5
years.\33\, \34\ These annual price increases resulted in a
76% price increase for Crestor over 5 years, taking the price from
$349.31 in 2012 to $615.65 in 2017.\35\ See Figure 4.
---------------------------------------------------------------------------
\32\ Id.
\33\ Centers for Medicare and Medicaid Services, ``Part D
Prescriber Data CY 2015: National Summary Table'' (May 25, 2017)
(www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-
and-Reports/Medicare-Provider-Charge-Data/PartD2015.html).
\34\ The information cited above was calculated by minority staff
of the committee based on data selected from the following IQVIA
information services: IQVIA National Prescription Audit (NPA) for the
period from January 1, 2012, through December 31, 2017, and IQVIA
National Sales Perspectives (NSP) for the period from January 1, 2012
through December 31, 2017.
\35\ Id.
Figure 4: Price Increase for Crestor \36\
---------------------------------------------------------------------------
\36\ Id.
[GRAPHIC] [TIFF OMITTED] T2418.012
Price increases for the top 20 most commonly prescribed brand-name
drugs for seniors have driven an astonishing increase in sales revenue
for their manufacturers. Despite the fact that total prescriptions
written for these drugs decreased by more than 48 million between 2012
and 2017, total sales revenue resulting from these prescriptions
increased by almost $8.5 billion.\37\ See Figure 5.
---------------------------------------------------------------------------
\37\ Id.
\38\ Id.
Figure 5: Total U.S. Prescriptions of Most Commonly Prescribed Brand-
Name Drugs \38\
------------------------------------------------------------------------
2012 2017 Prescription
Product Prescriptions Prescriptions Difference Percent Change
(U.S. total) (U.S. total) (2012-2017) (2012-2017)
------------------------------------------------------------------------
Ventolin 17,414,376 27,069,765 9,655,389 55%
HFA
------------------------------------------------------------------------
Proair 24,873,170 25,977,546 1,104,376 4%
HFA
------------------------------------------------------------------------
Synthroi 23,073,988 18,411,640 -4,662,348 -20%
d
------------------------------------------------------------------------
Lantus 18,558,937 17,004,123 -1,554,814 -8%
Lantus (combined (combined (combined (combined
Solosta figure) figure) figure) figure)
r
------------------------------------------------------------------------
Advair 17,018,219 10,700,788 -6,317,431 -37%
Diskus
------------------------------------------------------------------------
Lyrica 9,114,028 10,373,276 1,259,248 14%
------------------------------------------------------------------------
Januvia 8,893,922 9,913,198 1,019,276 11%
------------------------------------------------------------------------
Symbicor 5,246,325 9,888,532 4,642,207 88%
t
------------------------------------------------------------------------
Xarelto 1,078,207 9,593,823 8,515,616 790%
------------------------------------------------------------------------
Spiriva 9,625,240 5,759,976 -3,865,264 -40%
Handiha
ler
------------------------------------------------------------------------
Novolog 3,385,303 5,045,237 1,659,934 49%
------------------------------------------------------------------------
Restasis 2,818,474 3,037,271 218,797 8%
------------------------------------------------------------------------
Nexium 22,021,459 2,246,968 19,774,491 -90%
------------------------------------------------------------------------
Tamiflu 3,316,707 2,143,796 -1,172,911 -35%
------------------------------------------------------------------------
Premarin 5,223,690 2,046,125 -3,177,565 -61%
------------------------------------------------------------------------
Voltaren 2,954,278 1,964,665 -989,613 -33%
Gel
------------------------------------------------------------------------
Zetia 7,915,532 1,730,633 -6,184,899 -78%
------------------------------------------------------------------------
Crestor 25,337,566 1,604,070 -23,733,496 -94%
------------------------------------------------------------------------
Zostavax 2,291,538 1,344,617 -946,921 -41%
------------------------------------------------------------------------
Nitrosta 4,273,413 309,442 -3,963,971 -93%
t
------------------------------------------------------------------------
TOTA 214,434,372 166,165,491 -48,268,881 -33%
L
------------------------------------------------------------------------
Conclusion
Soaring pharmaceutical drug prices remain a critical concern for
patients and policymakers alike. Over the last decade, these
significant price increases have emerged as a dominant driver of U.S.
health-care costs--a trend experts anticipate will continue at a rapid
pace. Even as the total number of prescriptions for the brand-name
drugs most commonly prescribed to seniors has decreased over the past 5
years, total annual revenue for these drugs continues to increase each
year following significant and consistent price increases. These
findings underscore the need for further investigation by the committee
and other policymakers into dramatic price spikes and their impact on
health-care system costs and financial burdens for the growing U.S.
senior population.
APPENDIX
Figure 6: List of 20 Drugs and Price Increases (Weighted Average WAC) \39\
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
2012 2017
2012 WAC Percent 2013 WAC Percent 2014 WAC Percent 2015 WAC Percent 2016 WAC Percent 2017 WAC CAGR % Percent Prescriptions Prescriptions
Product Price Change Price Change Price Change Price Change Price Change Price 2012-2017 Change (U.S. total) (U.S. total)
2012-2013 2013-2014 2014-2015 2015-2016 2016-2017 2012-2017 \40\ \41\
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
ADVAIR DISKUS $227.60 12% $254.79 8% $276.03 8% $297.59 11% $330.97 9% $360.86 10% 59% 17,018,219 10,700,788
03/2001 GSK
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
CRESTOR 08/ $349.31 12% $390.49 10% $427.79 13% $484.96 18% $569.84 8% $615.65 12% 76% 25,337,566 1,604,070
2003 AZN
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
JANUVIA 10/ $306.58 8% $331.93 16% $385.18 17% $450.88 8% $487.94 6% $517.91 11% 69% 8,893,922 9,913,198
2006 MSD
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
LANTUS 05/ $121.88 24% $151.63 41% $213.71 16% $248.51 0% $248.51 1% $250.24 15% 105% 18,558,937 17,004,123
2001 S.A.
LANTUS $144.15 27% $182.88 40% $255.53 31% $333.81 1% $336.48 5% $354.12 20% 146% (combined (combined
SOLOSTAR 07/ figure) \42\ figure) \43\
2007 S.A.
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
LYRICA 08/ $264.43 20% $316.36 21% $382.22 20% $457.72 13% $519.00 16% $600.35 18% 127% 9,114,028 10,373,276
2005 PFZ
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
NEXIUM 03/ $256.99 19% $305.46 20% $367.59 12% $411.61 -4% $393.39 -6% $368.85 7% 44% 22,021,459 2,246,968
2001 AZN
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
NITROSTAT 05/ $15.91 64% $26.16 20% $31.31 29% $40.44 76% $71.03 29% $91.76 42% 477% 4,273,413 309,442
1975 PFZ
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
NOVOLOG $131.95 23% $162.31 27% $206.84 30% $267.94 6% $283.42 10% $313.05 19% 137% 3,385,303 5,045,237
FLEXPEN 02/
2003 N-N
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
PREMARIN 01/ $255.94 16% $297.64 17% $347.98 18% $408.99 19% $486.13 14% $554.60 17% 117% 5,223,690 2,046,125
1942 PFZ
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
PROAIR HFA 12/ $39.96 10% $44.11 7% $46.99 5% $49.29 4% $51.35 5% $54.05 6% 35% 24,873,170 25,977,546
2004 T9V
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
RESTASIS 03/ $167.62 11% $185.24 12% $207.00 18% $244.50 17% $285.72 12% $321.26 14% 92% 2,818,474 3,037,271
2003 ALL
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
SPIRIVA $244.77 9% $265.89 6% $283.13 7% $303.38 6% $322.09 8% $348.30 7% 42% 9,625,240 5,759,976
HANDIHALER
05/2004 B.I.
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
SYMBICORT 06/ $206.05 8% $222.85 8% $241.42 8% $260.93 6% $276.88 6% $293.46 7% 42% 5,246,325 9,888,532
2007 AZN
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
SYNTHROID 12/ $96.35 6% $101.71 16% $118.35 13% $133.82 7% $142.89 8% $153.82 10% 60% 23,073,988 18,411,640
1963 AV1
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
TAMIFLU 11/ $97.94 6% $104.08 6% $110.28 3% $113.73 15% $131.27 9% $143.18 8% 46% 3,316,707 2,143,796
1999 ROC
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
VENTOLIN HFA $34.67 7% $37.01 6% $39.35 7% $42.26 16% $48.94 4% $50.68 8% 46% 17,414,376 27,069,765
02/2002 GSK
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
VOLTAREN GEL $35.86 2% $36.59 11% $40.74 11% $45.36 6% $48.08 6% $50.96 7% 42% 2,954,278 1,964,665
04/2008 END
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
XARELTO 07/ $258.82 11% $287.61 10% $317.27 14% $362.56 11% $401.63 12% $449.51 12% 74% 1,078,207 9,593,823
2011 JAN
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
ZETIA 11/2002 $225.63 12% $253.34 15% $292.21 15% $336.60 23% $414.33 17% $483.71 16% 114% 7,915,532 1,730,633
MSD
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
ZOSTAVAX 06/ $1,044.36 11% $1,157.74 -10% $1,045.09 18% $1,234.98 9% $1,343.74 1% $1,363.08 5% 31% 2,291,538 1,344,617
2006 MSD
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
\39\ Id.
\40\ These numbers reflect IQVIA's estimate of all prescriptions dispensed by retail, mail, and long-term care outlets in the United States, including those not covered under Medicare Part D.
\41\ These numbers reflect IQVIA's estimate of all prescriptions dispensed by retail, mail, and long term care outlets in the United States, including those not covered under Medicare Part D.
\42\ Lantus/Lantus Solostar are both insulin glargine drugs used to treat diabetes. Lantus is an injectable drug that is sold as a vial and syringe set. The Lantus Solostar is an injectable
pen. This chart reflects the prescriptions written for both forms of the single Lantus drug.
\43\ Lantus/Lantus Solostar are both insulin glargine drugs used to treat diabetes. Lantus is an injectable drug that is sold as a vial and syringe set. The Lantus Solostar is an injectable
pen. This chart reflects the prescriptions written for both forms of the single Lantus drug.
[GRAPHIC] [TIFF OMITTED] T2418.013
______
Submitted by Hon. John Thune, a U.S. Senator From South Dakota
From The Wall Street Journal, April 17, 2018
The Wages of Tax Reform Are Going to America's Workers
By Kevin Hassett
In a dynamic, competitive economy, what's good for companies is good
for their employees.
The Tax Cuts and Jobs Act reduces the Federal corporate tax rate from
35 percent to 21 percent and allows full expensing for business
investment in equipment. Opponents, echoing leftists from Marx to
Piketty, describe those provisions as giveaways to the wealthy at the
expense of the working class. They're wrong.
In a dynamic, competitive economy, the relationship between companies
and their employees is symbiotic, not antagonistic. Research by
economists Alan Krueger and Lawrence Summers, both of whom served in
the Obama administration, shows that more-profitable employers pay
higher wages. Any company that attempts to pay a worker less than he is
worth will quickly lose that worker to a competitor. Thus, firms that
want to thrive must invest in their plants and workers.
When profits go up, capital investment goes up, and wages follow.
That's the reason we estimated, based on what has happened around the
world, that households will get an average $4,000 wage increase from
corporate tax reform, once its changes are fully implemented and swoosh
through the Nation's economic engine.
Naysayers have been invested in the law's failure from day one. But the
data are already proving them wrong. An increase in the return to
investment should drive investment and profits up, increase
productivity and wages, and ultimately boost economic growth. Here's
what we've seen so far this year:
More investment. The President's promise to lower corporate
taxes and reduce red tape has led to a surge in American business
investment. Real private nonresidential fixed investment increased 6.3
percent in 2017, according to data from the Bureau of Economic
Analysis. Equipment investment rose 8.9 percent, thanks largely to the
tax law's allowance for full expensing of equipment investment
retroactively to September 2017. In March 2018, the Morgan Stanley
Composite Capital Expenditure Plans Index reached its highest level
since it began tracking in 2006.
Greater productivity. Capital investment raises capital per
worker and thus labor productivity. Here again, the early signs are
positive. For perspective, real private nonresidential fixed investment
was anemic at the end of the Obama administration: On a year-over-year
basis, it fell 0.6 percent in 2016. As a result, during the post-
recession expansion under President Obama (2010-2016), the moving 4-
year average contribution that capital made to labor productivity
growth in the private sector turned negative for the first time in
history. But boosted by a strong finish to the year, capital added 0.3
percentage point to productivity growth in 2017--and will add more in
2018 if the Morgan Stanley index is correct.
Pay raises. The average increase in wages from the year-earlier
period for January through March 2018 is the highest for any 3-month
period since mid-2009. A flurry of corporate announcements provide
further evidence of tax reform's positive impact on wages.
As of April 8, nearly 500 American employers have announced
bonuses or pay increases, affecting more than 5.5 million American
workers, as a result of the TCJA. Walmart, the largest private employer
in the country, has announced a $2-an-hour increase in the starting
wage of new workers and $1-an-hour rise in its base wage for employees
of more than 6 months. For someone working 40 hours a week, that is up
to $3,040 per year in additional pay.
Other employers have done the same, including BB&T Bank, where
full-time workers earning the bank's minimum wage will see a $6,000
increase in their annual income. Companies that have announced new
bonus plans have lifted compensation by an average of $1,150. Ten firms
have also announced minimum-wage hikes that imply annual income gains
of at least $4,000 for full-time workers.
Faster growth. Forecasters around the world are now predicting
this growth can be sustained. The Organisation for Economic Co-
operation and Development has boosted its forecasts for real U.S.
economic growth in 2018 and 2019 to nearly 3 percent to reflect the
impact of the TCJA. The Congressional Budget Office also increased its
growth projection for this year and next by an average of one
percentage point relative to its last forecast before the tax bill was
passed.
With the political battle over passage behind us, economists are again
focusing on the data. All indications are that the tax bill delivered a
much-needed boost to
capital-starved American workers, and wages are doing what economics
says they should when companies invest aggressively in more and better
machines and share profits with workers. Perhaps it is a time to put
aside the archaic notion that the conflict between capital and labor is
the central story of our society. In a modern competitive economy,
workers do well when their employers do.
Mr. Hassett is chairman of the White House Council of Economic
Advisers.
______
Prepared Statement of Hon. Ron Wyden,
a U.S. Senator From Oregon
The new Republican tax law is shaping up to be one of history's
most expensive broken promises, right up there with ``we will be
greeted as liberators.'' The ink on the new tax law is barely dry, but
already there are calls for a second round of tax cuts.
Colleagues, in my view, lawmakers ought to think twice about big
new promises if they can't deliver on the ones they've already made.
Let's take stock of the early returns on the new tax law. Maybe the
biggest selling point of the tax law was a promise from the
administration that workers would get, on average, a $4,000 wage
increase. But the reality is, the new law has done so little for people
who work hard to earn a wage and cover the bills--the overwhelming
majority of individual taxpayers--it's barely registered with them at
all. If the law was delivering huge benefits to working families, you'd
never hear the end of it on the airwaves. And when you're talking about
legislation that's going to cost nearly $2 trillion when it's all said
and done, it's not easy to fail at your stated goals this
spectacularly.
So it's not exactly surprising that the law isn't ginning up a
whole lot of excitement among working families. But it hasn't gone
unnoticed by everybody. Just yesterday, the nonpartisan scorekeepers at
the JCT released a new analysis of the pass-through tax break. For
those who don't spend their days pouring over the finer points of the
tax debate, this part of the law was supposedly all about small
businesses. In fact, the way some people talked about it, you'd think
it only applied to corner store owners whose names were literally Mom
and Pop. Well, according to the new JCT figures, nearly half of the
benefit of the new pass-through rate is going to taxpayers with incomes
of $1 million or more. That's not the kind of garages and diners and
community pharmacies the phrase ``small business'' brings to mind for
most people. Once again, it's the fortunate few reaping the benefits.
New data out late last week also showed that in just the first 3
months of this year, the biggest Wall Street banks pocketed $3.6
billion as a result of the new tax law. More than a billion dollars
going to the banks each month, but millions of families are looking
around and wondering when they're going to see those raises they were
promised.
Finally, a few weeks ago, this committee held our annual hearing at
tax filing season. There was a lot of discussion about what the new tax
law means for small businesses, which is a topic we'll focus on again
today. I understand one of our witnesses here today will testify to one
of the challenges a whole lot of small businesses are facing--they owe
estimated tax payments, but they are in the dark about what they're
going to owe this year under the new rules. In our witnesses' case, I'm
told there was some back-of-the-envelope math to figure it out. What I
hear at home is that there are a whole lot of businesses that can't
even make an estimate of their estimated payments. For them, those new
rules pertaining to passthrough status are the definition of
complexity.
So folks, let's get real about what this means. The facts do not
resemble the promises when it comes to this tax law.
Bottom line, for most Americans, particularly hard-working people
who don't have accountants and lawyers scouring the tax code for ways
to exploit loopholes, the new tax law has turned out to be an awfully
expensive dud. The big promises they heard about big raises and a new
era of simpler tax rules has not come to pass.
So, in my view, lawmakers ought to keep their promises when it
comes to tax cuts before rushing ahead with a second bill.
I want to close on one last point. The tax debate did not have to
end this way. I've written two bipartisan, comprehensive tax reform
bills. Before this process turned into a one-sided exercise, I know
there was bipartisan interest on this committee in fixing our tax code
in a way that brought the two sides together. Unfortunately that's not
how it played out. I hope that in the future, this committee is able to
approach these big economic debates in a bipartisan way.
Thank you to our witnesses for being here today. I look forward to
asking questions.
______
The Reckless and Irresponsible Consideration of the 2017 Tax Bill
The partisan process of writing the 2017 tax bill was reckless
and irresponsible from the very beginning.
As a starting point, Senator Hatch said it best himself, a few
years earlier, when he said that using the hyper-partisan
reconciliation process would ``poison the well'' for bipartisan tax
reform. Republicans never sought Democratic votes, and they did not
receive a single Democratic vote in either the House or Senate.
There were no hearings on the legislative proposal that makes
$10 trillion of changes to the tax code (1986 Tax Reform Act: 33
hearings on the President's 489-page proposal).
There were no bipartisan negotiations (ACA: 31 meetings of the
bipartisan ``Gang of Six,'' lasting more than 60 hours). Finance
Committee Democrats were never invited to participate in any
negotiations or drafting sessions.
Finance Committee Democrats received the Chairman's Mark the
Thursday night before the Veteran's Day holiday weekend, and they had
to file their amendments by Sunday at 5 p.m.
The chairman took the unprecedented step of introducing an
entirely new, major, issue--repeal of the individual mandate--in the
middle of the markup. No amendment had been filed on this issue and the
change was made more than two days after the deadline for filing
amendments.
The chairman refused to allow members to file additional
amendments in response to his individual mandate repeal provision, and
he declared that any health-care amendments would be non-germane, even
if they were within the committee's jurisdiction (he ruled three
amendments non-germane on this basis).
The chairman refused to allow the Congressional Budget Office to
attend the markup to answer questions about how the individual mandate
repeal amendment would affect coverage and premiums.
No Democratic amendments were accepted during the markup
session. Of the 842 votes cast by Republican Senators, not a single
vote was cast in favor of an amendment offered by a Democratic Senator.
Late the last night of the markup, without any input from
Democrats, Chairman Hatch released a ``Managers' Amendment,'' which was
put to a vote about an hour after it was released. The Managers'
Amendment consisted of 19 provisions, most of which modified provisions
of the Chairman's Mark/Modification or were drawn from amendments filed
by Republican Senators (e.g., special relief for Mississippi Delta
floods); at least one was a new proposal. No provisions proposed by
Democratic Senators were included in the Managers' Amendment, which was
approved by a party-line vote.
Immediately after the committee voted to report the bill, when
Chairman Hatch asked that staff be given drafting authority, including
authority ``to assure compliance with reconciliation instructions,''
Senator Wyden objected, arguing that such authority was too broad.
Chairman Hatch then purported to put the unanimous consent request to a
rollcall vote, without any motion having been made.
During the drafting process, several provisions were included
that did not reflect decisions that had been made by the committee.
Senator Wyden sent Senator Hatch a letter describing 17 provisions in
the legislative text that, in the view of the Democratic staff, did not
reflect the decisions made by committee members based on the materials
available to them during our markup session. In his response, Senator
Hatch implicitly acknowledged that the Democratic staff criticism was
correct in some cases (by indicating that an amendment would be
appropriate), and provided insufficient explanations in several other
cases (e.g., justifying a substantive change made in the legislative
text because it would be within the Treasury Secretary's regulatory
discretion).
On the Senate floor, the final text was not produced until 6
p.m. on Friday night, and it was filled with new provisions, some
scrawled in illegibly, providing breaks for special interests,
including a special break for a large conservative university and
additional relief for large oil and gas partnerships.
After the House and Senate called for a conference committee,
the committee was convened only once. The conference meeting was
convened a few hours after press reports indicated that the Republican
conferees, meeting privately, had reached an agreement. The apparent
agreement was not described at the conference meeting. Instead, members
were allowed only to make opening statements and ask questions of the
Chief of Staff of the Joint Tax Committee about the contents of the
House and Senate bills. Further, the purported conference committee
chairman, Mr. Brady, denied Democratic members the opportunity to make
motions or even parliamentary inquiries.
When the conference agreement was made available for conference
committee members to sign, Democratic staff were not allowed to read
the conference report or monitor the process (e.g., to assure that the
version that was signed was the same as the version that eventually was
filed).
______
Communications
----------
AARP
601 E Street, NW
Washington, DC 20049
202-434-2277 | 1-888-OUR-AARP | 1-888-687-2277 | TTY: 1-877-434-7598
www.aarp.org | twitter: @aarp | facebook.com/aarp | youtube.com/aarp
May 3, 2018
The Honorable Orrin G. Hatch The Honorable Ron Wyden
U.S. Senate U.S. Senate
104 Hart Senate Office Building 221 Dirksen Senate Office Building
Washington DC 20510 Washington DC 20510
Re: Senate Finance Hearing on April 24, 2018, ``Early Impressions of
the New Tax Law''
Dear Senators Hatch and Wyden:
On behalf of our members and all Americans age 50 and older, AARP is
writing to express our support for the medical expense deduction and
urge the extension of its current income threshold of 7.5 percent
beyond its sunset date at the end of 2018. We believe that every effort
should be made to keep the threshold for the deduction as low as
possible to help protect people with high medical costs. AARP, with its
more than 38 million members in all 50 states, the District of
Columbia, and the U.S. territories, represents individuals seeking
financial stability while managing their medical expenses.
AARP appreciates that the Tax Cuts and Jobs Act retained the medical
expense deduction and restored the 7.5 percent income threshold for all
tax filers for 2 years. The medical expense deduction is an important
policy tool to make health care more affordable for middle-income
Americans. Nearly three-quarters of tax filers who claimed the medical
expense deduction are age 50 or older and live with a chronic condition
or illness, and 70 percent of filers who claimed this deduction have
income below $75,000. For the approximately 8.8 million Americans who
annually take this deduction, it provides important tax relief which
helps offset the costs of acute and chronic medical conditions for
older Americans, children, and individuals with disabilities, as well
as the costs associated with long-term care. Medical expenses that
qualify for this deduction can include amounts paid for prevention,
diagnosis, treatment, equipment, and qualified long-term care services
costs and long-term care insurance premiums.
For older Americans and Americans with disabilities, the medical
expense deduction can help offset high out-of-pocket expenses. Even
with Medicare, a significant share of beneficiaries spend a
considerable amount on out-of-pocket expenses each year.\1\ The average
Medicare beneficiary spends about $5,680 out-of-pocket on medical care
and the medical expense deduction makes health care more affordable for
people with significant out-of-pocket expenses. In 2013, roughly 25.8
million beneficiaries in traditional Medicare spent at least 10 percent
of their income on out-of-pocket health-care expenses.\2\
---------------------------------------------------------------------------
\1\ Claire Noel-Miller, ``Medicare Beneficiaries Out-of-Pocket
Spending for Health Care,'' Washington, DC, AARP Public Policy
Institute Insight on the Issues 108, October 2015, accessed at https://
www.aarp.org/content/dam/aarp/ppi/2015/meidcare-beneficiaries-out-of-
pocket-spending-for-health-care.pdf.
\2\ AARP Public Policy Institute analysis of data from the Medicare
Current Beneficiary Survey, 2013 Cost and Use File. In 2013, 72 percent
of all Medicare beneficiaries were in traditional Medicare. Spending
data for the remaining 28 percent who had a Medicare Advantage (MA)
plan were not reliable. See, Kaiser Family Foundation (October 2017),
``Medicare Advantage,'' Kaiser Family Foundation Fact Sheet, available
at https://www.kff.org/medicare/factsheet/medicare-advantage/.
Furthermore, older Americans often face high costs for long-term
services and support--which are generally not covered by Medicare--as
well as hospitalizations and prescription drugs. The median cost for a
private room in a nursing home is over $97,000 annually, while the
median cost for even more cost-effective home-based care is still over
$30,000 per year for 20 hours of care a week. Tax relief in this area
can provide needed resources, especially important to middle-income
---------------------------------------------------------------------------
seniors with high long-term care and medical costs.
Maintenance of this important deduction at the 7.5 percent income
threshold is critical financial protection for seniors with high heath-
care costs. We urge Congress to work in a bipartisan manner to maintain
the medical expense deduction at its current threshold level. If you
have any questions or need additional information, please feel free to
contact me or contact Jasmine Vasquez at 202-434-3711 or at
[email protected].
Sincerely,
Joyce A. Rogers
Senior Vice President
Government Affairs
______
Letter Submitted by Harvey and Surie Ackerman
April 22, 2018
U.S. Senate
Committee on Finance
Dirksen Senate Office Bldg.
Washington, DC 20510-6200
Regarding: Senate Finance Committee hearing to examine ``Early
Impressions of the New Tax Law,'' Tuesday, April 24, 2018.
Topic of statement: The devastating impact that the 17.45% Repatriation
and GILTI Taxes have on Americans living overseas.
Dear Chairman Hatch, Ranking Member Wyden, and all Members of the
Committee, as you are probably aware, the Repatriation Tax and GILTI
Tax regimes which were intended for corporate multinationals like
Google and Apple have and will continue to have a devastating impact on
a large and unintended group: Americans living abroad who are
individual U.S. Shareholders of CFCs (herein ``Americans Abroad'').
On a conceptual level, it seems pretty clear to me that Americans
Abroad were an unintended target of these new laws. Otherwise, how
could it be explained that: (i) I pay a Repatriation tax higher than
Google and Apple; or (ii) these multinationals pay GILTI tax of 21%
while I pay tax of 37%; or (iii) these corporate giants enjoy tax
credits and deductions under the GILTI regime which I do not; or (iv)
my small-business counterpart based in the United States would never
ever be subject to such draconian taxes or complicated compliance?
On a practical level, while Google and Apple had and continue to have
access to dedicated teams of expert tax specialists working to minimize
their taxes, the small firm I retain to do my U.S. taxes is having a
hard time assisting me in complying with these sophisticated laws.
But it is on the personal level that these laws are the most harmful to
me. After being fired from my salaried position at the age of 54 (I was
told ``we can hire three younger people for what we pay you''), over
the past 4 years I have used my skills to build a small business in
Israel (which is not a low-tax location; personal taxes are high, and
corporate tax here is 24%).
Now, out of the clear blue sky, the U.S. government is demanding that I
pay taxes on the retained earnings of my small corporation. There has
been no ``tax event'' to justify this tax. Please note that since we
moved abroad we have always filed timely U.S. tax returns and FBARs and
have always fulfilled our tax obligations.
We have tried to make a calculation of how much this transition tax
would be (although we aren't certain it's correct), and it comes out to
$27,000, which is a huge sum for us. We haven't even tried to wrap our
heads around the GILTI regime--no matter how much we read about it, we
still can't understand it--but it seems as if the U.S. government is
going to try to take its ``cut'' out of future earnings as well.
Not only will all this be a terrible burden personally, but it may
violate the U.S.-Israel tax treaty. There are accountants and lawyers
in Israel working with Israeli finance officials to formulate such a
claim.
On behalf of myself and many other Americans Abroad, I ask you to
exempt us from these draconian taxes. I was presumably not the target
of these taxes and they will be financially disastrous to me.
There is a simple balanced solution to solve this problem: an American
living abroad should be exempt from the Repatriation and GILTI tax
regimes for any given year so long as:
The American meets the conditions set forth under IRC Section
911; and
That person is an individual U.S. Shareholder.
I strongly request that the Congress act to correct this most painful
problem. I thank you for considering my statement.
My name is Harvey Ackerman. I am an American living in Israel, and I
vote in New York State.
______
American Citizens Abroad
11140 Rockville Pike, Suite 100-162
Rockville, MD 20852
Phone + 1 (540) 628-2426
Email: [email protected]
Website: www.americansabroad.org
Comments on TCJA
ACA is grateful to the Senate Finance Committee for holding this
hearing on early impressions of the recently-enacted Tax Cuts and Jobs
Act, which in many important ways rewrote the Internal Revenue Code.
What was done and not done in this Act is especially impactful on
Americans abroad.
What Was Done
Since Americans abroad are taxed the same as Americans residing in the
United States, just about all of the dozens of individual tax reform
changes affect them. These include the changes in individuals' tax
rates, deductions, credits, estate, gift, and generation-skipping
transfers taxes, changes in corporations' tax rates, small business
rules, and many other provisions.
What Was Not Done
The big thing that did not change is the taxation of Americans
residing--truly residing--in another country. They remain taxable based
on their citizenship or citizenship-based taxation (CBT), meaning that
regardless of the fact that they reside outside the United States, may
have done so all their lives, may seldom if ever be present in the
United States, may have little or no U.S. income, in other words have
very little connection with the United States, they are fully taxable
under U.S. tax principles. They have to file all the returns and
related forms. They may actually owe U.S. tax. We say ``may'' because,
as is well-recognized, many of these individuals end up owing no U.S.
tax because of the workings of the foreign earned income exclusion and/
or the foreign tax credit rules. Many file returns only because they
have to in order to claim the exclusion and credits.
Americans abroad had hoped that provisions replacing citizenship-based
taxation with residency-based taxation--RBT (sometimes called
territoriality for individuals) would have been included in the Act.
RBT simply treats Americans abroad, in general, like non-resident
individuals and thus does not tax their foreign income. U.S. income
remains taxable. RBT is the simplest form of territoriality for
individuals. It is the approach followed by all other countries with
the exception of Eritrea.
Other Things That Were Not Done
A couple of other things were not done. First, the 3.8% net investment
income tax to fund Medicare and The Affordable Care Act, was not
changed continues to apply in a way that, for Americans abroad, exposes
them to double taxation because they (and others) are not allowed to
credit foreign taxes against it. Secondly, a same country exemption
from the FATCA rules was not added to the statute. This exemption would
give relief for the ``lockout'' problem causing Americans abroad to be
denied financial services by foreign banks who are scared silly by the
FATCA due diligence and reporting rules. (This exemption can easily be
provided by the Treasury Department dropping it into the FATCA tax
regulations, should it decide to do so.)
The Most Serious Problem Areas
For Americans abroad, there are several serious problems with TCJA, and
ACA respectfully requests that these be carefully analyzed and steps
taken to correct them.
(a) The new participation exemption system adversely affects Americans
abroad by not providing the dividends received deduction and yet taxing
an individual on the deemed distribution. The Act moves the United
States from a worldwide tax system to a participation exemption system
by giving U.S. (that is, domestic) corporations a 100% dividend
received deduction for dividends distributed by a controlled foreign
corporation (CFC). (New section 245A of the Internal Revenue Code.) To
transition to that new system, the Act imposes a one-time deemed
repatriation tax, payable, if elected, over 8 years, on unremitted
earnings and profits at a rate of 8 percent for illiquid assets and
15.5 percent for cash and cash equivalents. (New sections 78, 904, 907
and 965 of the IRC.) The dividends received deduction, which obviously
is a major benefit, is available only to U.S. corporations that are
shareholders in the CFC. The deduction is not available to individuals,
nor is it available to foreign corporations, which, for example, are
owned by U.S. individuals, including individuals living abroad. On the
other hand, the repatriation tax would apply to everyone, not merely
U.S. corporations. Accordingly, an individual, for example, a U.S.
citizen residing abroad, who is a shareholder in a CFC, while not able
to benefit from the 100% dividends received deduction, might be subject
to the repatriation tax. Note, this individual might not have in hand
the actual monies needed to pay this tax.
This change is likely to come as a surprise to many Americans abroad
who own foreign companies with accumulated earnings and profits. It is
very common for American individuals living and working in a foreign
country to own a foreign company. He or she might have a small business
that is owned and operated through an entity created under local
foreign law but characterized as a corporation for U.S. tax purposes.
This might be done to comply with local rules that influence the
decision to incorporate. It might be done to protect against all kinds
of different liabilities under local rules. Most Americans abroad who
are ``hit'' by these new rules will not have ``incorporated'' with U.S.
taxes in mind. In fact, they will not have thought about all of the
detailed rules and nuances governing characterization of entities for
U.S. tax purposes.
Lastly, on this point, in TCJA is a new ``downward attribution'' rule.
(New section 958(b) of the IRC.) This is a hypertechnical change to
hypertechnical existing provisions. But for some Americans abroad it is
a disaster. Without wading into the mind-numbing details, an American
residing, say, in Norway, owning and operating a restaurant, through a
local company, together with a foreign family trust or estate, might
suddenly find himself treated as a shareholder in a controlled foreign
corporation and subject to the new rules. It will take months to figure
out how these rules apply and to calculate the amount of tax owed.
There is no de minimis rule to save small taxpayers from having to deal
with this change. The cost of complying--making the calculations and
preparing and submitting the returns--could easily exceed the actual
tax liability.
(b) Special reduced rates for so-called ``passthroughs'' inexplicably,
ACA thinks, do not benefit Americans abroad that earn foreign income
through a passthrough entity.
The TCJA allows a deduction of up to 20% of passthrough income for
specified service business owners with income under $157,500 (twice
that for married filing jointly). (New section 199A of the IRC.) The
rationale is because corporate rates were dropped from a graduated rate
structure with the top rate of 35% to a flat 21% rate, unless something
was done for unincorporated, so-called passthrough arrangements, such
as partnerships and limited liability companies, as the owners of these
are taxed at individual rates which rapidly proceed well above 21% to
as high as 37%, these businesses would bear a significantly higher
burden. Many unincorporated businesses would be driven to incorporate
themselves--a step that, setting aside tax considerations, should be
completely unnecessary. The passthrough tax break, however, will not be
useful for Americans abroad because it only applies with respect to
domestic business income, that is, items of income, gain, etc. that are
effectively connected with the conduct of the trade or business within
the United States.
Ironically, this is a prime example of ``upside down'' territoriality
so far as individuals are concerned. Under a territorial approach, such
as, residency-based taxation, the taxpayer is expressly not taxed on
foreign income. Here, the taxpayer--say, an American abroad--for sure
will be fully taxed on foreign income, whereas his or her cousin in the
States who earns domestic business income will enjoy the 20% deduction.
(c) Foreign real property taxes can no longer be deducted under the
Act. This change came up in the context of proposals to eliminate all
State, local, and foreign property taxes and State and local sales
taxes, except when paid or accrued in carrying on a trade or business
or an activity relating to the production of income. An exception
allows a taxpayer to claim an itemized deduction of up to $10,000
($5,000 for married taxpayers filing a separate return) for the
aggregate of State and local property taxes not paid or accrued in
carrying on a trade or business or an activity relating to the
production of income and State and local income, war profits, and
excess profits taxes. However, expressly cut out from this exception
are foreign real property taxes. Political considerations attaching to
individuals' real property taxes in high-tax States, such as,
California and New York, did not come into play with individuals'
foreign property taxes. These rules apply to taxable years beginning
with 2018 and ending with 2026. Many Americans abroad are hit by this
change.
These new rules enacted as part of TCJA generally are effective in
2018.
Taken as a whole, these changes to the Internal Revenue Code, made by
TCJA, appear to be a mishmash of actions taken without thinking about
their effects on Americans abroad. In the minds of Americans living--
truly residing, many of them for all of their lives--outside the United
States they are like a forgotten relative, poor uncle Jube, who is
always overlooked when it came time to make out the guest list for
Thanksgiving or a christening. They don't think Congress acted
deliberately out of meanness. It's just that it really didn't pause to
think about it.
ACA respectfully ask that Congress now think about all of this
carefully.
When the numbers are analyzed, a baseline constructed, which touches
upon all the data, and revenue estimates are run, the taxation of
Americans abroad is not a big thing so far as the federal fisc is
concerned. The time has come, in fact long since passed, when we should
switch from citizenship-based taxation to residency-based taxation.
This would solve all the problems--hypertechnical and other--created by
TCJA. It would solve the problems, including the ``lockout problem,''
created by FATCA. Importantly, and everyone should pay close attention
here, this can be done without a loss of revenue. To be done so as to
be revenue neutral, tight against abuse and in a fashion that leaves no
one worse off than they were before the switch, smart decisions need to
be made and close attention must be paid to the details.
In order to advance the ball, ACA and its sister organization, American
Citizens Abroad Global Foundation, since late 2016 has developed a set
of options, referred to as a ``vanilla approach,'' to changing from CBT
to RBT. A side-by-side comparison of current law to ``vanilla
approach,'' revised five times and now reflecting the recent TCJA
changes, can be found at https://www.americansabroad.org/files/649/.
ACA, together with District Economics Group, has also worked to develop
a highest-
quality baseline set of data. As a result, we believe that RBT can be
made revenue-
neutral if careful choices are made as to its details (https://
www.americans
abroad.org/media/files/files/dc1e1c4e/
DEG_short_memo_on_RBT_proposal_11.06.
2017.pdf).
ACA urges Congress to revisit these subjects and enact residency-based
taxation.
Respectfully submitted,
American Citizens Abroad, Inc.
For additional information about ACA, go to https://
www.americansabroad.org/ or contact Marylouise Serrato at
[email protected] (202)-322-8441.
______
Letter Submitted by Jeff Apitz
April 22, 2018
U.S. Senate
Committee on Finance
Dirksen Senate Office Bldg.
Washington, DC 20510-6200
Regarding: Senate Finance Committee hearing to examine ``Early
Impressions of the New Tax Law,'' Tuesday, April 24, 2018.
Topic of statement: The devastating impact that the 17.45% Repatriation
and GILTI Taxes have on Americans living overseas.
Dear Chairman Hatch, Ranking Member Wyden, and all Members of the
Committee, as you are probably aware, the Repatriation Tax and GILTI
Tax regimes which were intended for corporate multinationals like
Google and Apple have and will continue to have a devastating impact on
a large and unintended group: Americans living abroad who are
individual U.S. Shareholders of CFCs (herein ``Americans Abroad'').
On a conceptual level, it seems pretty clear to me that Americans
abroad were an unintended target of these new laws. Otherwise, how
could it be explained that: (i) I pay a Repatriation tax higher than
Google and Apple; or (ii) these multinationals pay GILTI tax of 21%
while I pay tax of 37%; or (iii) these corporate giants enjoy tax
credits and deductions under the GILTI regime which I do not; or (iv)
my small-business counterpart based in the United States would never
ever be subject to such draconian taxes or complicated compliance?
On a practical level, while Google and Apple had and continue to have
access to dedicated teams of expert tax specialists working to minimize
their taxes, the small expat firm I retain to do my U.S. taxes is
simply unable to grasp, let alone assist me in complying with these
sophisticated laws.
But it is on the personal level that these laws are the most harmful to
me. . . .
I feel that my wife and my life as now burdened by compliance in both
an American and Australian context, with the constant threat of large
fines, is very unfair. My wife and I receive a modest income, and all
we are trying to do is save for our retirement. Our compliance costs us
in excess of $2,000 USD per annum, and a significant amount of our
time.
The COMPULSORY Superannuation System in Australia is not considered as
retirement savings by the IRS, and the fact that retirement savings
interest IS NOT treated by the IRS with the current Australia tax
concessions is extremely unfair.
Also now to be forced to contemplate relinquishing our American
citizenship, as a consequence of this unfair tax situation, in order
for my wife and I to maximize our retirement savings, I'm sure was
never an intended outcome of this current U.S. tax regime.
We are proud Americans, but strongly feel this unfair tax situation is
impacting our lives directly. This situation CANNOT continue, as our
old age is going to suffer.
On behalf of myself and many other Americans Abroad, I ask you to
exempt us from these draconian taxes. While I may not have been the
target of these taxes, they are financially disastrous to me.
There is a simple balanced solution to solve this problem: an American
living abroad should be exempt from the Repatriation and GILTI Tax
regimes for any given year so long as:
The American meets the conditions set forth under IRC Section
911; and
That person is an individual U.S. Shareholder.
I strongly request that the Congress act to correct this most painful
problem. I thank you for considering my statement.
My name is Jeff Apitz. I am an American living in Australia.
______
Letter Submitted by Ron Berdahl
U.S. Senate
Committee on Finance
Dirksen Senate Office Bldg.
Washington, DC 20510-6200
Re: Senate Finance Committee hearing to examine ``Early Impressions of
the New Tax Law,'' Tuesday April 24, 2018.
Topic of statement: The devastating impact that the 17.45% Repatriation
and GILTI Taxes have on Americans living overseas.
Dear Chairman Hatch, Ranking Member Wyden, and all Members of the
Committee, Senator Enzi, as you are aware the Repatriation Tax and
GILTI Tax regime which were intended for corporate multinationals like
Google and Apple have and will continue to have a devastating impact on
a large and unintended group. Americans living abroad who are
individual U.S. Shareholders of CFCs (herein Americans Abroad).
On a conceptual level, it may seem pretty clear to me the Americans
Abroad were an unintended target of these new laws. Otherwise how could
it be explained that: (i) I pay a Repatriation tax higher than Google
and Apple; or (ii) these multinationals pay a GILTI tax of 21% while I
pay a tax of 37%; or (iii) these corporate giants enjoy tax credits and
deductions under the GILTI regime I do not; or (iv) my small business
counterparts in the USA would never ever be subjected to such draconian
taxes or compliance?
On a practical level, while Google and Apple had a continue to have
access to dedicated teams of expert tax specialists working to minimize
their taxes, the small expat firm I retain to do my taxes (in Chicago)
is simply unable to grasp, let alone assist me in complying with these
sophisticated laws.
But it is on a personal level that these laws are the most harmful to
me. Imagine as a small independent prospector (yes, there are still
folks out looking for mines) that I AM SUDDENLY CONFRONTED WITH A TAX
BILL OF OVER 400,000 DOLLARS! Guys, there are years I do not make $4,
seriously. I have spent over 30 years putting everything I have ever
made back into my business, all the while paying my U.S. Taxes! I have
a small, old, nonproducing goldmine that a lawyer said I should create
a corporation for, to mitigate liability, so I did. Since then I have
prospected in the Yukon and rolled claims into that corporation. I
built a couple shops, small be any standard, I decided to diversify
(accountants advice) so bought an abandoned gas station I have been
cleaning up, removing buried tanks, contaminated soils, etc. to the
tune of $750,000 dollars with the hopes of getting it going to serve
U.S. tourists and Armed Service personal on their way to and from
Alaska. Like any good American, I am following my ancestors tradition
of homesteading, clearing a farm from the wilderness, and like them I
am ``land rich, but dirt poor'' with all this and my claims (which are
liabilities until (if ever) sold. I do not have two nickels to rub
together. Not because I am poor, but because I am trying to grow an
economy, and pat taxes. Eventually this would all be sold and brought
back to the USA, Wyoming where I have had a place since I bought it in
High School there. My two sons, a Ph.D. professor at the University of
Washington and a professor geologist (despite my recommendations)
working in Nevada, all pay taxes here and would pay taxes on any
inheritance in the states, should I ever make money.
Now I am looking to fire sale anything and everything I have to comply
with the unintended consequences of this new law. This will kill me
financially, and the stress might kill me personally. Please consider
the millions of expats out there who fly the USA flag on a daily basis,
without costing the USA State Department a penny.
On behalf of myself, my family and other Americans Abroad, I plead with
you to exempt us from these draconian taxes. They will kill me.
There is a simple balanced solution to solve this problem: an American
living abroad should be exempt from Repatriation and GILTI tax regimes
for any given year so long as:
The American meets the conditions set forth under IRC sec 911;
and
The person is an individual U.S. shareholder.
I strongly request, beg even, that Congress act to correct this most
painful problem. Thank you for your consideration.
My name is Ron Berdahl. I am an American living in the Yukon Territory
(settled by Americans in 1898) Canada, and vote, regularly, in WYOMING.
______
Bond Dealers of America (BDA)
1909 K Street, NW, #510
Washington, DC 20006
Statement for the Record by Michael Nicholas,
Chief Executive Officer
Introduction:
The Bond Dealers of America (BDA) appreciates the opportunity to
comment on its early impressions of the new tax law. The BDA is the
only Washington, DC-based trade association representing the interests
of ``main-street'' investment firms and banks active predominately in
the U.S. fixed income markets.
The BDA applauds the Committee and Congress for passing sweeping tax
reform legislation, the Tax Cuts and Jobs Act, which will further
stimulate the United States economy, while increasing opportunities for
growth in areas such as corporate investment. Specifically, we
appreciate that the final bill maintained the tax-exempt status for
governmental municipal bonds and private activity bonds (``PABs''),
including all bonds for 501(c)(3) organizations, health care, multi and
single-family housing, and higher education. We strongly urge the
Committee and Congress to expand the eligibility of private activity
bonds to provide state and local governments the flexibility needed to
provide infrastructure efficiently and effectively, and at low cost for
the taxpayer.
However, the BDA and a wide-array of stakeholders were deeply alarmed
that the Tax Cuts and Job Act fully repealed tax-exempt advance
refunding bonds upon enactment of the legislation into law. The repeal
of this provision is working against the stated goal of the Tax Cuts
and Jobs Act, to energize the economy and lower the tax burden of
middle-class Americans. Moreover, the significant change would restrict
the primary tool that is widely and frequently used as part of
financing America's infrastructure.
As a result of the quick enactment of the Tax Cuts and Job Act, several
critical provisions, including advance refundings, were prohibited by
the law without critical public policy considerations. The BDA also
recognizes that the Committee and Congress acted to eliminate various
tax provisions to minimize the fiscal pressure the federal government
is facing. The BDA believes that the projected federal savings from the
repeal of advance refundings in the tax bill is lower than the JCT
score of $17 billion, in part due to the rush of issuers into the
market in the latter part of 2017 and slowly rising interest rates. In
addition, the modest increase in federal tax revenue does not outweigh
the public benefit of this provision.
A bipartisan bill, To Reinstate Tax-Exempt Advance Refunding Bonds
(H.R. 5003), has been recently introduced in the House. According to
the bill sponsors, ``the legislation would restore advance refundings
so that states and local governments can take advantage of favorable
interest rates and more efficiently manage their financial
obligations.'' The BDA strongly urges the Senate to introduce a
companion bill to H.R. 5003.
Advance Refundings:
State and local governments routinely refinance their outstanding debt
obligations, just as corporations and homeowners do. The advance
refunding technique allows state and local government issuers to
benefit from lower interest rates when the outstanding bonds are not
currently callable. It is important to note, that under previous law,
tax-exempt bonds could be issued to advance refund an outstanding
issuance only once, a significant restriction on these transactions.
According to recent Government Finance Officers Association (GFOA)
data, between 2012 and 2017, there were over 9,000 advance refunding
issuances nationwide, saving taxpayers over $14 billion in the 5-year
period. We note that this represents the ``present value'' measurement
of the savings and the actual savings are substantially greater. The
data also works to disprove a myth that only large municipalities
benefit from the cost savings. For example, in Montgomery County, TX,
there were 6 instances of advance refunding for Conroe primary and
secondary education that resulted in a cost savings of over $20
million. In Barrington, IL, the city issued $300,000 in advance
refunding bonds for parks and in Eden Prairie, MN a $250,000 issuance
of general purpose bonds were advance refunded.
Tax-exempt municipal bonds play an integral role in financing our
nation's infrastructure. This safe investment benefits every aspect of
American life, from roads and bridges, to public safety and health
care. In an age of declining direct federal funding, the municipal bond
market drives new construction and maintenance of current
infrastructure.
In addition, federal analyses of such tax-exempt bond proposals focus
solely on federal tax revenues to be raised by such proposals, ignoring
the effect on state and local governments and, thus, state and local
residents. Private sector analyses, however, confirm that taxing
municipal bonds, in whole or in part, or replacing municipal bonds with
some other financing tool will increase state and local financing
costs.
Consequences of the Repeal of Advance Refundings:
The repeal of any portion of the tax code has major consequences,
intended and unintended, short-term into long-term. The immediate
impact of this policy decision to eliminate advance refundings was to
provide a portion of the pay-for for a massive tax-code overhaul. While
there are a plethora of policies included in the overall bill that are
beneficial to the U.S. economy as a whole, the elimination of municipal
advance refundings increases the cost and burden on state and local
governments nationwide.
An example of this cost savings occurred in the Village of North
Barrington, IL. The town advance refunded a debt issuance for sanitary
sewer improvements. The refinancing saved residents $310,000 over a 10-
year period. The savings was realized in annual property tax collected
by Lake County.
The loss of municipal advance refundings will severely impact the
financing of core public services and infrastructure in the State of
Texas. More than 50 issuers including cities, schools hospitals, and
water and public transportation boards in the five largest counties in
Texas (Bexar, Dallas, Harris, Tarrant, and Travis) will lose the
ability to advance refund an estimated $6.6 billion dollars in bonds
over the next 2 years. The repeal of this vital financing tool
translates into a loss of millions of dollars that would have been
reinvested back into these communities.
Another specific example in Texas is the Port of Galveston, TX, which
was planning to advance refund a $11.3 million issuance in bonds that
would produce a cost savings of $450,000. As a major transportation and
trade hub for the central United States, additional capital was not
leveraged to compete and continue to be an economic driver in the
western Gulf of Mexico.
The Macomb County Michigan Drainage District is missing an opportunity
to advance refund over $20 million in bonds and realize upwards of $1.3
million in savings. As the State of Michigan continues to deal with an
ongoing water crisis and an overall budget shortfall, the State and its
local governments are feeling the negative effects. The inability to
advance refund this issuance makes local officials' jobs more
difficult.
It is worth noting that the full impact of the repeal of the ability to
advance refund tax-exempt bonds will be somewhat delayed. Due to the
low interest rates at the end of 2017 and the pending repeal of the
ability to advance refund bonds, many state and local governments
refinanced their bonds prior to year-end. As a result, there will be a
relatively short period during 2018 before state and local governments
feel the real impact of this change in law. However, this delay should
not be interpreted to indicate that the repeal will not have
significant, long-lasting impacts on state and local governments.
On a long-term basis, State and local governments will be significantly
disadvantaged by the loss of the ability to issue tax-exempt advance
refunding bonds. Most importantly, they will have lost the most
efficient mechanism to take advantage of low interest rates to
refinance higher rate debt in advance of when such debt can be called.
The inability to lock in lower interest rates when they are available
will, simply stated, result in increased costs to these governmental
entities. Moreover, both at times of relatively low rates and
otherwise, state and local governments have lost an important means of
restructuring their outstanding debt to respond to short or long term
fiscal issues (which can include both paying off their debt more
quickly or restructuring debt to deal with short term financial
difficulties).
Given the number of advance refundings completed at year-end, the use
of alternatives to advance refundings has been slow to develop in 2018.
While there are some alternatives, none are as effective in terms of
cost or risk as advance refundings. For example, ``forward starting''
interest rate swaps can be used to effectively lock in current interest
rates, but state and local governments are hesitant to use interest
rate swaps. Other alternatives are more costly than advance refundings
and, for that reason, were not used to a significant degree in the
past. While these structures may mitigate some negative impacts of the
recent change in policy, their long-term impact and viability will not
be to provide an effective replacement for advance refunding bonds.
Expansion of the Use of Private Activity Bonds:
The BDA strongly supports the expansion of the types of infrastructure
facilities that are eligible to use tax-exempt PABs beyond the existing
types, lifting the volume caps, and eliminate other restrictions such
as the governmental ownership requirement for certain eligible
facilities that apply under current law. Tax-exempt PABs permit a
greater degree of private-sector involvement in infrastructure projects
and programs that provide important public benefits that should be
preserved and enhanced. By expanding the use of current infrastructure
tools like PABs, rather than creating new financing methods such as a
federal infrastructure bank (and the associated bureaucracy), these
changes would help propel local communities forward, facilitate the
ability of state and local governments to partner with private entities
in a variety of projects, finance new infrastructure, and help maintain
local control of much needed projects in their communities.
The BDA urges you to oppose federal legislative proposals that would
restrict the tax exemption of municipal bonds. Past proposals released
or discussed in the last two Congresses have sent tremors through the
municipal markets and have increased interest rates on tax-exempt
bonds. The perceived risk to the tax exemption led some investors to
seek higher yields on municipal bonds and to pull much-
needed capital and liquidity out of the municipal markets. This, in
turn, forces municipal governments to pay significantly higher
borrowing costs--and the continuing domino effect forces some
governments to reduce or abandon infrastructure projects they can no
longer afford.
Conclusion:
For over 100 years, municipal bonds have served as the primary
financing mechanism for public infrastructure. Nearly three-quarters of
the nation's core infrastructure is built by state and local
governments, and imposing an unprecedented federal tax on municipal
bonds, including advance refundings, will make these critical
investments more expensive while shifting federal costs onto state and
local governments, and the people they serve.
In the Trump Administration's ``Legislative Outline for Rebuilding
Infrastructure in America,'' municipal bonds were featured as a central
pillar, and the outline included strengthening PABs. While this is a
move in the right direction, the BDA recommends the reinstatement of
advance refundings to further spur growth. Reinstating advance
refundings would be one of the wisest and most cost-effective
investments that Congress can make to finance ongoing infrastructure
needs for state and local governments and ultimately, the constituents
of all Congressional representatives.
The ability to advance refund bond issuances benefits all Americans and
creates infrastructure investments that provide high-quality jobs and
spurs economic growth nationwide.
As the debate on infrastructure and the financing mechanisms behind the
desired increase of funding continues, it should be remembered and
recognized that state and local governments are currently under a time
of fiscal strain due to the elimination of the state and local tax
deduction (SALT). This change in federal tax policy will put downward
pressure on state and local governments to lower taxes due to the
direct increase in tax burden that their constituencies will face. In
addition, a vast number of state and local governments must work under
a balanced budget system. The elimination of advance refunding removes
a vital cost-savings financing tool and in consequence, state and local
governments are forced to raise state and local taxes or reduce public
service programs.
In conclusion, the BDA urges the Committee to reincorporate the cost-
saving mechanisms of municipal advance refundings back into the U.S.
tax code and consider a Senate companion bill to H.R. 5003.
In addition, as the Committee continues its examination of the Tax Cuts
and Jobs Act, we strongly urge you to consider the positive issuer,
investor, market, and economic implications of expanding the
eligibility of private activity bonds to provide state and local
governments the flexibility needed to provide services efficiently and
effectively, and at low cost for the taxpayer.
______
Letter Submitted by Heather Brodie
April 23, 2018
U.S. Senate
Committee on Finance
Dirksen Senate Office Bldg.
Washington, DC 20510-6200
Regarding: Senate Finance Committee hearing to examine ``Early
Impressions of the New Tax Law,'' Tuesday, April 24, 2018.
Topic of statement: The devastating impact that the 17.45% Repatriation
and GILTI Taxes have on Americans living overseas.
Dear Chairman Hatch, Ranking Member Wyden, and all Members of the
Committee, as you are probably aware, the Repatriation Tax and GILTI
Tax regimes which were intended for corporate multinationals like
Google and Apple have and will continue to have a devastating impact on
a large and unintended group: Americans living abroad who are
individual U.S. Shareholders of CFCs (herein ``Americans Abroad'').
On a conceptual level, it seems pretty clear to me that Americans
Abroad were an unintended target of these new laws. Otherwise, how
could it be explained that: (i) I pay a Repatriation tax higher than
Google and Apple; or (ii) these multinationals pay GILTI tax of 21%
while I pay tax of 37%; or (iii) these corporate giants enjoy tax
credits and deductions under the GILTI regime which I do not; or (iv)
my small-business counterpart based in the United States would never
ever be subject to such draconian taxes or complicated compliance?
On a practical level, while Google and Apple had and continue to have
access to dedicated teams of expert tax specialists working to minimize
their taxes, the small expat firm I retain to do my taxes is simply
unable to grasp, let alone assist me in complying with these
sophisticated laws.
But it is on the personal level that these laws are the most harmful to
me. I have worked very hard over the last 9 years to start and build my
consulting practice in Toronto, where I lived most of my life and
returned to after my divorce and when my father became ill. Working
very long hours, working out of town, sometimes to the detriment of my
family--I am an only parent of a small child, and as such have sole
responsibility to care and provide for my daughter. The retained
earnings in this corporation are used not only to fund ongoing
operations/overheads and meet obligations as they arise, but also to
plan for my and my daughter's future.
I pay a significant amount of tax in Canada, both on a corporate and
personal level, and meet all of my tax obligations in the United States
as well. I am not now, nor have I ever, sought to avoid any of my
financial obligations. I have a strong connection to the United States,
notwithstanding I now live in Canada. I am simply seeking a solution
that is fair to people like me.
On behalf of myself and many other Americans Abroad, I ask you to
exempt us from these draconian taxes. While I may not have been the
target of these taxes, they are financially disastrous to me.
There is a simple balanced solution to solve this problem: an American
living abroad should be exempt from the Repatriation and GILTI Tax
regimes for any given year so long as:
The American meets the conditions set forth under IRC Section
911; and
That person is an individual U.S. Shareholder.
I strongly request that the Congress act to correct this most painful
problem. I thank you for considering my statement.
My name is Heather Brodie. I am an American living in Toronto, Canada,
and I vote in Washington State.
______
Center for Fiscal Equity
Comments for the Record by Michael G. Bindner
Chairman Hatch and Ranking Member Wyden, thank you for the opportunity
to comment on the new tax law.
This is not the tax reform bill we had hoped for. Frankly, the path
negotiated during the Obama Administration enacted under the American
Tax Relief Act and The Budget Control Act were adequate to give us our
current economy, which is improving, albeit too slowly for workers.
We are on record predicting that enactment of the Fiscal and Job Cuts
Act (not a typo) will restrict wages and cause other labor cost savings
so that executives can cash in on the lower tax rates by earning higher
bonuses, so that any economic gains (and growth could come faster)
would be from deficit spending. While some companies gave very visible
bonuses for the holidays, they did not also increase salary levels
noticeably. Productivity has made huge gains but wages have not, mostly
because employers have a market advantage in the down economy, which is
good for CEOs and donors, but bad for the nation.
The tax law was a classic piece of Austrian Economics, where booms are
encouraged, busts happen with no bailouts and the strong companies and
best workers keep jobs and devil take the hindmost. It is economic
Darwinism at its most obvious, but there is a safety valve. When tax
cuts pass, Congress loses all fiscal discipline, the Budget Control Act
is suspended and deficits grow. Taxpayers don't mind because bond
purchasers are sure to pick up the slack, which they will as long as we
run trade deficits, unless the President's economic naivete ruins that
for us.
The 2-year Omnibus will eat up most of the effect of the tax cut on the
economy, which will now have a negative relationship between deficits
(net of net interest, which controls for matching injection to the
financial markets from federal borrowing) and economic growth, meaning
deficits are good. The closest available curve showing that model are
the Bush years, so given the current deficit size, the predicted growth
rate in about a year (it takes time to obligate money and pay bills)
should be around 3.3% or higher.
If you cut entitlements, growth will be reduced, although wealthier
Americans will have more money, which will lead to asset inflation and
another sizeable recession, akin to 2008. We had been worried about
entitlement cuts, we no longer are. The votes are simply not available
in the Senate to enact them.
Of course, we still have a tax reform plan and it does alter how we
deal with entitlement spending, including Social Security, by shifting
payroll and a good bit of income taxation (including pass-throughs) to
a subtraction value added tax/net business receipts tax (NBRT), where
certain entitlements can be shifted to employers in lieu of paying a
portion of the tax, with this encouraging both employment and
participation in training programs in order to have access to social
services.
These deduction and credits could include everything from the last 2
years of undergraduate and graduate education to a more robust child
tax credit to health-care reform that encourages hiring medical staff
directly (thus matching the incentive to cut cost to the ability to do
so) to retirement savings in lieu of Social Security, although the
savings should be in the form of employer voting stock rather than
unaccountable index funds run from Wall Street. These reforms can be
hammered out next year or in the next Congress, but the right tax to
hold them is clearly the NBRT.
We remind the Committee that in the future we face a crisis, not in
entitlements, but in net interest on the debt, both from increased
rates and growing principal. This growth will only feasible until
either China or the European Union develop tradeable debt instruments
backed by income taxation, which is the secret to the ability of the
United States to be the world's bond issuer. While it is good to run a
deficit to balance out tax cuts for the wealthy, both are a sugar high
for the economy. At some point we need incentives to pay down the debt.
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 (although
this will increase). 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. Your
children and grandchildren and those of your donors are the ones on the
hook unless their parents step up and pay more. How's that for
incentive?
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.
______
Coalition to Promote Independent Entrepreneurs
1025 Connecticut Avenue, NW, Suite 1000
Washington, DC 20036
(202) 659-0878
www.iecoalition.org
[email protected]
Russell A. Hollrah, Executive Director
The Coalition to Promote Independent Entrepreneurs (the
``Coalition'') respectfully submits this Statement for the Record
concerning an April 24, 2018, hearing before the U.S. Senate Committee
on Finance on ``Early Impressions of the New Tax Law.''
The Coalition consists of organizations, companies, and individuals
dedicated to informing the public and elected representatives about the
importance of an individual's right to work as a self-employed
individual, and to defending the right of self-employed individuals and
their respective clients to do business with each other. We appreciate
the opportunity to submit this statement setting forth our views on how
we believe the Tax Cuts and Jobs Act (Pub. L. 115-97) will have a
positive impact on individual entrepreneurship and the overall economy.
The Coalition's Statement focuses on only one aspect of the Tax
Cuts and Jobs Act, namely the newly enacted section 199A of the
Internal Revenue Code of 1986, as amended (the ``Code''). We believe
this provision encourages independent entrepreneurship, which will lead
to increased economic growth and efficiency and a more engaged and
satisfied workforce. We applaud the Congress and President Trump for
enacting this new provision.
I. New Code Section 199A Will Encourage Independent Entrepreneurship
New Code section 199A creates a new tax deduction--of up to 20
percent--for pass-through entities, which include certain independent
contractors. This new tax deduction offers an important new financial
incentive for individuals who pursue their entrepreneurial aspirations.
The new tax deduction is available to an individual taxpayer for
``qualifying business income'' from certain pass-through business
activities, including business income from a sole proprietorship.
Because independent contractors operate sole proprietorships they are
eligible to claim the deduction. The new deduction could provide
qualifying independent contractors with significant tax savings.\1\
---------------------------------------------------------------------------
\1\ For a typical independent contractor whose taxable income for
the tax year does not exceed the threshold amount, currently defined as
$157,500 per year or $315,000 if filing a joint tax return, the Code
section 199A deduction, subject to certain exceptions, would be the
lesser of: (i) 20 percent of the taxpayer's qualified business income
amount or (ii) 20 percent of the taxpayer's taxable income. For an
analysis of the Code section 199A deduction as it applies to
independent contractors see Russell A. Hollrah and Patrick A. Hollrah,
``New Passthrough Deduction Creates Tax Benefit for Self-Employed,''
Tax Notes, February 2018, at 1051-55.
The deduction, among other things, helps mitigate the financial
consequences of the disparate treatment of independent contractors
relative to employees for purposes of Social Security and Medicare
contributions. Independent contractors are required to pay 100 percent
of their Social Security and Medicare contributions, in the form of
Self Employment Contributions Act (``SECA'') \2\ contributions, while
employees pay 50 percent, in the form of Federal Insurance
Contributions Act (``FICA'') contributions \3\ (through employer
withholding) \4\ with the remaining 50 percent being paid by their
employer.\5\ Since the new Code section 199A deduction is available to
independent contractors, but not employees, the deduction can help
mitigate the financial consequences of this difference.
---------------------------------------------------------------------------
\2\ Code section 1401.
\3\ Code section 3101.
\4\ Code section 3102.
\5\ Code section 3111.
Even when considered without regard to any other tax provision, the
new Code section 199A deduction could provide a powerful incentive for
individuals to pursue self-employment, as it will encourage individuals
to take the risk associated with individual entrepreneurship by
permitting self-employed individuals to retain a greater portion of the
income they earn.
II. Independent Entrepreneurship Should Be Encouraged Because it
Increases Economic Growth and Efficiency
Independent entrepreneurship represents financial self-sufficiency
and promotes market flexibility and business efficiency. The Coalition
submits that these are ideals that a government should encourage and
support, as they lead to a strong and resilient economy.
A. Independent Entrepreneurship Increases Economic Growth
By encouraging independent entrepreneurism, new Code section 199A
could lead to increased economic growth by expanding the formation of
new businesses and creating new job opportunities, while increasing
labor-force participation and reducing unemployment.
A 2010 study on independent contractors found that independent
entrepreneurship increases economic growth and efficiency.\6\ The study
identified a strong correlation between independent contracting,
entrepreneurship, and small business formation.\7\ To be sure, it found
that ``of the 10.3 million independent contractors identified in the
2005 CAWA survey, nearly 2.4 million had one or more paid employees.''
\8\ Furthermore, the study concluded that independent contracting
``provides a first-step on the ladder to starting a small business, and
creating jobs for others.'' \9\
---------------------------------------------------------------------------
\6\ See generally, Jeffrey A. Eisenach, ``The Role of Independent
Contractors in the U.S. Economy,'' at 30-40 (December 2010) (``Eisenach
Study''), https://iccoalition.org/wp-content/uploads/2014/07/Role-of-
Independent-Contractors-December-2010-Final.pdf.
\7\ Id. at 36.
\8\ Id. at 36.
\9\ Id. at 42.
Individual entrepreneurship also offers a gateway out of
unemployment or underemployment. A McKinsey Global Institute study
concluded that independent work \10\ may help the unemployed by
providing ``a critical bridge to keep earning income while they search
for new jobs.'' \11\
---------------------------------------------------------------------------
\10\ The independent workforce includes: self-employed, independent
contractors, freelancers, some small business owners, and many
temporary workers, including those who get short-term assignments
through staffing agencies. ``Independent Work: Choice, Necessity, and
the Gig Economy,'' McKinsey Global Institute, 20 (October 2016)
(``McKinsey Study'').
\11\ Id. at 14.
Several recent studies analyzing independent-contractor
relationships quantified their economic impact. A January 2017 study
found that ``independent contractors played a large role in the
economic recovery. Between 2010 and 2104, independent contractors grew
11.1 percent (2.1 million workers) and represented 29.2 percent of all
jobs added during that time period.'' \12\ The new establishments
created by these 2.1 million workers generated nearly $192 billion in
revenue from 2009 to 2014.\13\ In the ridesharing industry, alone, the
study found that the independent-contractor opportunities provided by
ridesharing companies (e.g., Uber and Lyft) generated an additional
$573 million in revenue during 2014.\14\
---------------------------------------------------------------------------
\12\ Ben Gitis et al., ``The Gig Economy: Research and Policy
Implications of Regional Economic, and Demographic Trends,'' American
Action Forum 7, Aspen Institute's Future of Work Initiative, 8 (January
10, 2017).
\13\ Id. at 18.
\14\ Id. at 20.
Similarly, economists Lawrence Katz and Alan Krueger conducted an
extensive study of alternative work arrangements--which is a broader
category that includes independent contractors--and found that ``all of
the net employment growth in the U.S. economy from 2005 to 2015 appears
to have occurred in alternative work arrangements.'' \15\
---------------------------------------------------------------------------
\15\ Lawrence F. Katz and Alan B. Krueger, ``The Rise and Nature of
Alternative Work Arrangements in the United States, 1995-2015,''
National Bureau of Economic Research Working Paper No. 22667, 7
(September 2016). The term ``alternative work arrangements'' includes
independent contractors, on-call workers, temporary help agency
workers, and workers provided by contract firms.
Additional studies have found that independent entrepreneurship is
often as lucrative, if not more lucrative, than full-time
employment.\16\ A recent study of freelancer workers--a group that
includes independent contractors and other contingent workers--
estimated that 57.3 million entrepreneurs earned $1.4 trillion in
income from freelancing during 2017.\17\
---------------------------------------------------------------------------
\16\ See ``Freelancing in America: 2017,'' Edelman Intelligence
(Commissioned by Upwork and Freelancers Union) 43 (September 2017);
John Husjng, ``Owner-Operator Driver Compensation'' 8, 14 (The
California Trucking Association and Inland Empire Economic Partnership
2015) available at http://web.caltrux.org/external/wcpages/
wcwebcontent/webcontentpage.aspx?
contentid=309.
\17\ ``Freelancing in America: 2017,'' Edelman Intelligence
(Commissioned by Upwork and Freelancers Union) 15, 41 (September 2017).
The many documented positive effects of independent entrepreneurs
on the nation's economy demonstrate the wisdom of government policies,
such as new Code section 199A, that incentivize independent
entrepreneurship.
B. Independent Entrepreneurship Increases Economic
Efficiency
The above-referenced 2010 independent contractor study \18\ also
found that independent-contractor relationships increase economic
efficiency. These relationships promote workforce flexibility and
efficient contracting by permitting contracting companies to engage
independent contractors as needed instead of being forced to hire full-
time employees who may be over or underutilized depending on business
demand.\19\ This, in turn, provides contracting companies with
increased cash flow to invest in hiring or expansion, which can
generate additional economic activity.
---------------------------------------------------------------------------
\18\ See above note 6.
\19\ Eisenach Study at 31-31.
Another positive attribute of independent entrepreneurs is that
they are liberated to work for a variety of different clients,\20\ and
can ``enter, exit, or participate partially in the labor force as they
choose.'' \21\ The 2010 study found that labor force flexibility is
correlated with economic growth and job creation, while less
flexibility leads to slower growth and higher unemployment.\22\
Similarly, the McKinsey Global Institute study found that independent
work ``enables people to specialize in doing what they do best and what
makes them feel engaged. Engagement typically has the effect of
increasing productivity. . . .'' \23\
---------------------------------------------------------------------------
\20\ Id. at 31.
\21\ Id. at 39.
\22\ Id. at 39.
\23\ McKinsey Study at 14.
Many studies have found that most independent entrepreneurs prefer
independent work relative to traditional employment. One recent study
found that in 2017, 63 percent of freelancers started freelancing by
choice, an increase of 10 percent since 2014.\24\ Moreover, 50 percent
of respondents said there is no amount of money which would incentivize
them to stop freelancing and instead work at a traditional job.\25\
And, what might be surprising to some, the McKinsey Global Institute
study found that one in six people in a traditional job would like to
become an independent earner. For every one independent worker who
would prefer traditional employment, two traditional employees would
prefer to move in the opposite direction.\26\
---------------------------------------------------------------------------
\24\ ``Freelancing in America: 2017,'' Edelman Intelligence
(Commissioned by Upwork and Freelancers Union) 25 (September 2017).
\25\ Id. at 29.
\26\ McKinsey Study at 7.
The foregoing data suggest that the incentive toward independent
entrepreneurship that Code section 199A provides can be expected to
increase economic efficiency and worker productivity.
III. Independent Entrepreneurs Are a More Engaged and Satisfied
Workforce
In addition to the positive impact individual entrepreneurship can
have on the nation's economy, this type of work also offers profound
benefits to the individuals themselves.
A recent study drawn from psychology and sociology and based on
data collected on nearly 5,000 individuals in the United Kingdom, the
United States, Australia and New Zealand who work in a wide variety of
vocations including heath, finance and education, found that self-
employed individuals reported significantly higher levels of ``job
engagement'' than organization employees.\27\ The term ``job
engagement'' measures a higher energy level associated with task
involvement.\28\ The authors suggest that their finding that self-
employed individuals tend to be significantly more ``engaged'' in their
work could arise from greater energy inherent in feelings of
engagement.\29\
---------------------------------------------------------------------------
\27\ Peter Warr and Ilke Inceoglu, ``Work orientations, well-being
and job content of self-
employed and employed professionals,'' Work, Employment and Society, 8
(August 2017) (``Work Orientation Study'').
\28\ Id. at 4.
\29\ Id. at 17.
Self-employed respondents were also found to value ``challenging''
aspects of work more than organizational employees, which contributes
to their higher levels of job engagement.\30\ In this context, the
authors explain that job features that ``challenge'' an individual
include financial and organizational responsibility, competition with
others, demanding tasks, difficult decision making, and the requirement
for innovation, personal independence, and autonomy.\31\
---------------------------------------------------------------------------
\30\ Id. at 12.
\31\ Id. at 5.
Studies have consistently found self-employed individuals to report
higher levels of ``job satisfaction'' relative to organizational
employees,\32\ especially among nonmanagerial employees.\33\
---------------------------------------------------------------------------
\32\ See e.g., Eisenach Study at 33-35; U.S. Government
Accountability Office, ``Size, Characteristics, Earnings, and
Benefits,'' GA0-15-168R 24 (2015) available at http://gao.gov/products/
GAO-15-168R; ``Freelancing in America: A National Survey of the New
Workforce'' 7 (Elance-oDesk and Freelancers Union, 2014) available at
http://fu-web-storage-prod.s3.amazonaws.com/content/filer_public/c2/06/
c2065a8a-7f00-46db-915a-2122965df7d9/fu_freelancinginamerica
report_v3-rgb.pdf.
\33\ Work Orientation Study at 12.
The characteristics the studies found to be associated with the
self-employed, such as working at a high energy level, valuing
challenging aspects of work, and feeling satisfied with the work, are
all characteristics the Coalition submits that government policy should
encourage. The Tax Cuts and Jobs Act does this through its creation of
new Code section 199A.
IV. Conclusion
The Coalition is supportive of Congressional actions that support
and encourage independent entrepreneurship, such as new Code section
199A. Such actions promote economic opportunity and growth and create
an incentive for individuals to pursue a path that can empower them to
become more engaged and satisfied with their work. For these reasons,
our early impression of this provision of the new tax law is strongly
positive. The Committee's leadership in this important area is
commendable.
______
Letter Submitted by Margaret Conrad
April 24, 2018
U.S. Senate
Committee on Finance
Dirksen Senate Office Bldg.
Washington, DC 20510-6200
Regarding: Senate Finance Committee hearing to examine ``Early
Impressions of the New Tax Law,'' Tuesday, April 24, 2018.
Topic of statement: The devastating impact that the 17.45% Repatriation
and GILTI Taxes have on Americans living overseas.
Dear Chairman Hatch, Ranking Member Wyden, and all Members of the
Committee, as you are probably aware, the Repatriation Tax and GILTI
Tax regimes which were intended for corporate multinationals like
Google and Apple have and will continue to have a devastating impact on
a large and unintended group: Americans living abroad who are
individual U.S. Shareholders of CFCs (herein ``Americans Abroad'').
On a conceptual level, it seems pretty clear to me that Americans
Abroad were an unintended target of these new laws. Otherwise, how
could it be explained that: (i) I pay a Repatriation tax higher than
Google and Apple; or (ii) these multinationals pay GILTI tax of 21%
while I pay tax of 37%; or (iii) these corporate giants enjoy tax
credits and deductions under the GILTI regime which I do not; or (iv)
my small-business counterpart based in the United States would never
ever be subject to such draconian taxes or complicated compliance?
On a practical level, while Google and Apple had and continue to have
access to dedicated teams of expert tax specialists working to minimize
their taxes, the small expat firm I retain to do my U.S. taxes is
simply unable to grasp, let alone assist me in complying with these
sophisticated laws.
But it is on the personal level that these laws are the most harmful to
me. I set up my business many years ago. The business promotes and
makes furniture with small artisanal workshops in France, United
Kingdom, and Italy. The business is not terribly lucrative (in fact it
made a loss last year and I have not taken a salary for 2 years).
However, my business is important to so many small workshops and so I
have continued. The imposition of the Transition Tax, however, would
render it totally impossible to do so. If small businesses are not
exempted I would have to close and possibly be forced into bankruptcy.
This would be catastrophic for me and the people I work with. They
totally depend on me for keeping their workshops solvent.
I am passionate about supporting craft and small businesses. I hope you
will understand how important it is not to implement a tax which will
destroy the livelihoods of so many people.
On behalf of myself and many other Americans Abroad, I ask you to
exempt us from these draconian taxes. While I may not have been the
target of these taxes, they are financially disastrous to me.
There is a simple balanced solution to solve this problem: an American
living abroad should be exempt from the Repatriation and GILTI Tax
regimes for any given year so long as:
The American meets the conditions set forth under IRC Section
911; and
That person is an individual U.S. Shareholder.
I strongly request that the Congress act to correct this most painful
problem. I thank you for considering my statement.
My name is Margaret Conrad. I am an American living in the United
Kingdom, and I vote in New Jersey.
______
Democrats Abroad
P.O. Box 15130
Washington, DC 20003
https://www.democratsabroad.org/
Hon. Orrin Hatch, Chairman
Hon. Ron Wyden, Ranking Member
U.S. Senate
Committee on Finance
Dirksen Senate Office Building
Washington, DC 20510-6200
April 20, 2018
Re: Senate Finance Committee hearing to examine ``Early Impressions of
the New Tax Law''_Tuesday, April 24, 2018.
Dear Chairman Hatch, Ranking Member Wyden, and all Members of the
Committee, Democrats Abroad greatly appreciates this important hearing
on the early impressions of the Tax Cuts and Jobs Act (Pub. L. 115-97)
and we respectfully request that you accept this report for inclusion
in the hearing record. We join other organizations representing
Americans living abroad in our serious concern about the impact that
new taxes in the Tax Cuts and Jobs Act will have on non-resident
Americans who own businesses abroad.
In 2017 the U.S. Congress included Territorial Taxation for
Corporations (TTC) in the group of reforms built into the Tax Cuts and
Jobs Act (TCJA). We understand that TIC was implemented in order to
help level the international tax playing field for U.S. multinational
corporations. Congress also included in the TCJA two new ``transition
tax'' provisions to capture tax on corporate profits long kept out of
reach of the U.S. Treasury. These new ``transition taxes'' are our key
concern because they materially threaten the viability of businesses
owned by Americans living abroad.
The TCJA ``Transition Taxes''
Repatriation Tax 15.5%--Imposed on undistributed (and therefore untaxed
by the U.S.) business profits from 1986 through 2017. Overseas resident
American business owners declare those undistributed business profits
on their 2017 personal tax filing. This is a retroactive imposition of
tax that is unrelated to the realization of revenue that might be used
to pay the tax.
GILTI Tax regime--Starting in 2018, mandatory declaration of
undistributed business profits on the personal tax filings of business
owners abroad, taxed at the highest personal marginal tax rate and
without access to two critical offsets afforded corporate owners of
businesses abroad: (1) a 50% deduction and (2) credits for taxes
already paid on the profits to the business's jurisdiction of
incorporation. Further, as with the Repatriation Tax, the GILTI tax is
imposed on profits where there may be no realization of revenue to use
to pay the tax.
Clearly, TTC was enacted to strengthen U.S. multinational corporations.
We believe TTC's ``transition tax'' provisions were never meant to
beleaguer ordinary, hard-working Americans living and owning companies
abroad. In truth, the Repatriation Tax and the GILTI Tax regime will
have an enormously harmful financial impact on the estimated 1 million
non-resident Americans who own businesses abroad.\1\
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\1\ In 2014 research published by Democrats Abroad, approximately
20% of respondents identified themselves as ``Self-employed/Business
Owner.'' Given Department of State estimates that 6.5 million voting
age Americans live abroad, we estimate that perhaps a million American
citizens are impacted by the ``transition taxes'' in the Tax Cuts and
Jobs Act.
Transaction Tax Impacts on Non-Resident Americans Who Own Businesses
Abroad
Americans living abroad owning and operating businesses are an
exceedingly diverse group; they are architects, yoga studio owners,
retailers, recruiters, beekeepers, IT professionals, film and
television producers, music distributors, advertising agency owners,
financial service providers and more.\2\ When asked in early 2018 about
the impact of the TCJA ``transition taxes'' on their enterprises, expat
American owners of businesses in their countries of residence provided
the following comments:
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\2\ See Appendix 1--Sampling of Businesses Run by Americans Abroad.
My family and I own a small private property development
company based in the UK and operating since 2001. The profits
of this company are fully taxed in the UK and none of the
proceeds have been repatriated to the U.S. as they are used for
---------------------------------------------------------------------------
the continuing financing of the business.
Massachusetts voter living in the UK
I am a widow, mother of 2 children (ages 16 and 22). My husband
was a Canadian glass artist. He did not have a pension. I am
and have been a self-
employed graphic designer for many years. I have no pension. My
corporation is just me. It holds my savings which are now being
taken away by this tax.
Wisconsin voter living in Canada
I operate my company with just myself and my spouse and make
minimal profit ($20,000 PA at the most after all UK taxes have
been paid) and most recently a loss, none the less I file my
U.S. taxes at a cost of $1,000 each time and now I find I might
be hit with an extra U.S. tax making my company potentially
nonviable.
American living in the UK
I run a technology company from Hong Kong with offices in three
territories (China, HK, and Taiwan). We have 10 employees and
are an exceedingly small company who struggle every day to meet
bills and grow our company. But we have big dreams and want to
succeed. Don't snuff out small business owners like myself. We
are the past, present, and future of American business both at
home and abroad.
New Jersey voter living in Hong Kong
As an architect, I established my small office of 6 employees
as a Professional Corporation. This means that the U.S.
government is attempting to take a percentage of my savings,
which will be needed to weather downturns in the market, which
greatly affects my ability to retain employees and keep my
business open. I have no home office in the U.S., nor is there
any way for me to benefit from the large corporation tax
breaks. This is simply the U.S. siphoning away the funds I need
to keep my business up and running.
Massachusetts voter living in Canada
I have been in Canada for several decades, except for 1997-2001
when my wife and I lived and worked in the U.S. For the past 11
years I have been doing IT consulting for the Canadian
government, which required having a corporation. I have built
up savings within the corporation which are meant for my
retirement, and it operates solely within Canada, i.e. not a
branch operation of any U.S. company. It was a shock to learn
from my accountant that I am facing a tax of about $12,000 on
my retained earnings, as a result of the subject legislation.
North Carolina voter living in Canada
My family business is a simple IT training and consulting
corporation that employs me and my husband only. We file and
pay taxes in Australia and the U.S. as required. This new tax
can ruin us, and if we were simply living in the U.S., it would
not apply to us. This is unfair.
California voter living in Australia
I have a little landscaping business with 5 employees. I am
very proud of the work we do, but keeping on top of all of the
paperwork is a struggle for me. I am happy to pay my fair share
of taxes, but this law is not fair.
California voter living in Canada
My business is a one person marketing consulting corporation in
which I maintain a simple portfolio to save for my retirement.
This is a travesty.
Vermont voter living in Canada
I am a VERY small business owner, running a private counseling
practice out of my home. I am very worried that the new laws
will be punitive. I already have to pay a tax accountant more
than $600 CDN each year for preparing my U.S. tax returns
yearly. My fear is that the increased complexity will not only
raise the amount I need to pay them, but will result in my
needing to pay taxes twice on the same money.
Massachusetts voter living in Canada
My business is a values based business with a focus on
sustainability. We make the best (REDACTED) in Vancouver, BC
and strive to be the best employer in our industry. The
livelihood of my family and the 100 staff that our business
employs is in danger from this policy mistake.
Washington state voter living in Canada
I am a small business person with a trading company and some
small service businesses. I declare my businesses and income
and pay the taxes due both locally and to the U.S. Treasury.
Although I have lived overseas for over 40 years, I am proud to
be an American and to support the government with my tax
dollars. But this latest abomination of a regime is putting an
unbearable burden on me and countless other Americans for
little tangible benefit. We're the small worthless fish being
swooped up by a giant drift net meant to catch the larger
valuable prey, and we're being left to suffocate and die for
lack of interest. Please help us.
Wisconsin voter living in Taiwan
I am a practicing physician. I am shareholder in our small
incorporated family owned medical business. This Canadian only
corporation serves only local people, and the income from this
stays in Canada and is effectively our only pension. The
Repatriation/GILT is unfair taxation! We have diligently and
without fail filed our U.S. Tax returns all the years that we
have been required to do so in addition the Treasury Department
forms at excess cost to us.
California voter living in Canada
I run a one-person incorporated consulting business. I have
worked part-time for the past 9 years, with the specific
purpose of putting money aside to send my two daughters to
college in the U.S. Any additional penalizing taxes paid out of
my corporation will be a direct hit to the tuition funds I have
worked hard to save, and result in a higher need for federal
financial aid.
Illinois voter living in Canada
I am the owner of a small software development business that
has never done any business in the U.S., yet still reports to
the U.S. IRS, and will continue to do so as long as deemed that
the cost is within reason. My options are simply to shut it
down or expatriate.
California voter living in Sweden
All of these comments, and several more not listed here, demonstrate
that many Americans business owners living abroad fear that this
additional tax burden will force them to close their businesses.\3\ In
addition to the new transition tax burden American business owners
abroad will bear, they are also being subjected to even greater tax
filing/compliance costs. The new rules for calculating the ``transition
taxes'' are exceedingly technical and organizing accurate filings is
proving very time-consuming and complex. U.S. expat tax professionals
hired to prepare these filings are passing on to American business
owners abroad the additional cost of their time and labor, enlarging
the financial burden the new TCJA taxes places on the taxpayer.
---------------------------------------------------------------------------
\3\ Appendix 2 contains comments from Americans living abroad who
had planned to start businesses in their countries of residence but who
may cancel those plans because of the Transition Taxes.
Further, while U.S. corporations establish subsidiary businesses abroad
in order to expand the operations and profitability of their U.S.-based
parent company, U.S. citizens abroad establish businesses in their
---------------------------------------------------------------------------
countries of residence in order to build a life and future abroad.
These are desperate cries from your constituents for help.
I set up my business only in June last year (2017) as a stop-
gap to enable me to earn consulting fees during a period of
unemployment following involuntary redundancy. I am earning a
fraction of what I earned when employed (about 75% less), yet I
am now faced with the cost of employing a tax preparer to deal
with the complexity of earning my small income through a UK
limited company that I own rather than through a UK company
owned by someone else. On 2017 income of about US$15,000, I
expect a bill from a tax preparer in excess of US$2,000, more
than 10% of my total income, only to comply with the filing
burden placed on me as UK business owner who happens to possess
a U.S. passport. I can't even estimate what the cost will be if
any U.S. taxes are owed.
I have lived outside the United States for nearly 25 years and
have filed my tax returns and FinCen and FATCA forms without
the assistance of a tax preparer for the last 15 years. Now, at
a time when I am on significantly reduced income, I am being
penalized for being a U.S. citizen earning money the wrong way.
Virginia voter living in the UK
As a simple freelance consultant to the life sciences industry,
I only established a British limited company on the request of
my corporate clients to ensure compliance with local employment
regulations and law. I have no employees and no teams of
accountants and finance advisors. Between the transition tax
and the small fortune I will spend on tax accountants, my
financial position will suffer detrimental damage--not only
will I suffer a significant income loss, the reduced income
will severely impact my likelihood of being able to re-
mortgage my home and potentially force me and my wife to sell
our home at a loss. I have been fully compliant with U.S. tax
and reporting laws for the 10 years of living overseas--this
law however has the potential to financially destroy millions
of Americans like myself in a matter of months.
I beg you, PLEASE, PLEASE, PLEASE, PLEASE, PLEASE, PLEASE,
remove innocent overseas U.S. business owners from this broad
net of unintended taxation. I believe it was not intended to
financially destroy people like me, but it is has the potential
to do exactly that.
Arizona voter living in the UK
We believe strongly that a remedy is needed to exempt these taxpayers
from a potentially crushing new tax liability--one that Congress never
intended.
Transaction Tax Remedy
We believe Americans overseas with interests in foreign corporations
should be exempt from the Repatriation Tax and from the GILTI Tax
regime for any given year so long as:
(1) They meet the conditions required for exemption under IRC Section
911; and
(2) they are individual U.S. Shareholders.
This solution both achieves the U.S. Congress's goal of capturing
corporate tax it has been long denied, and recognizes that the profits
of businesses owned by Americans living abroad were never meant to be
repatriated to the U.S. because they are needed to sustain the
underlying business entities and the American expatriate families who
rely upon them.
We strongly urge Congress to correct this unintended tax burden which
harms Americans and their opportunities for personal savings and
economic growth. American business owners abroad should be exempted
from these transition taxes so they can remain positioned to manage and
grow their businesses and take care of their families.
We thank you for considering our views. If you have any questions
regarding this letter or would like to discuss the matter further,
please do not hesitate to contact either me or Democrats Abroad's
Carmelan Polce who can be reached at [email protected].
Sincerely,
Julia Bryan
International Chair
Democrats Abroad
[email protected]
Democrats Abroad is the branch of the U.S. Democratic Party for
Americans living outside the U.S. Democrats Abroad has members in over
190 countries and official country committees in 53 nations on 6
continents. Democrats Abroad's main activity is helping overseas
Americans register to vote in U.S. elections. We host our own voter
assistance website to aid Americans in that process--
www.votefromabroad.org. We often cooperate with U.S. Embassies and
Consulates in our countries to encourage voter participation on a non-
partisan basis. You can find out more information about us at
www.democratsabroad.org or on our Democrats Abroad and Democrats Abroad
country committee Facebook pages.
Appendix 1--Sampling of Businesses Run by Americans Abroad
I am an architect running a small home based practice with my Canadian
spouse.
New Jersey voter living in Canada
I co-own a small yoga studio. We offer yoga and meditation classes and
struggle to maintain a business in Toronto, Canada's most expensive
city.
Ohio voter living in Canada
I simply own some souvenir stores in Quebec City.
Ohio voter living in Canada
I am a small business, just a one woman Recruitment firm--and a single
mother.
California voter living in Canada
I am a beekeeper in Canada partnering with my Canadian husband.
Ohio voter living in Canada
I work as a producer and director of film and television. I am merely
an individual artist and creator bringing content to the U.S. and
international markets.
California voter living in Canada
My business . . . was established in 1992 and provides distribution
services for small, independent music labels. I have lived in London
since 1986.
New York voter living in the UK
I run a small advertising agency working locally.
New York voter living in Switzerland
Psychological assessment and therapy for clients in Calgary, Alberta
area. I am the sole owner of my business and sole provider of
therapeutic services.
Oregon voter living in Canada
The business that my wife and I run is a company dedicated to helping
social enterprises to grow and to increase their positive impact on
society and the environment. We employ 15 people, including a number of
Americans, in Singapore, where we have lived for the past 14 years.
New York voter living in Singapore
I and my siblings own a very small corporation incorporated in Canada
created solely for the purpose of splitting a small oil royalty between
the eight children. Without the corporation, we would have had to sell
the mineral interests because they don't generate enough money, and
would have foregone our inheritance.
Utah voter living in Canada
Appendix 2--Americans Abroad Must Reconsider Plans to Start Businesses
Given the New Tax Burden Imposed by the Tax Cuts and Jobs Act
I am a stay at home mom, and earn a little money for our family
freelancing (writing, editing, and translating) from home. I am hoping
to start a small market farm business this year also in Chilliwack, BC,
Canada where I live with my husband and two boys.
Colorado voter living in Canada
I am currently a student, but planning to go into private practice as a
therapist. So I am not a current business owner and the U.S. Tax law
may prevent me from operating in private practice as I hope to do.
California voter living in Canada
I am an American married to a Dutch national, my ``business'' is that I
am registered as a single-person company: a freelance graphic designer.
I have freelanced on and off for several years, whenever I was in-
between full time jobs. Currently I am unemployed and do not have any
freelance income; these laws have the power to destroy me and my family
financially. They limit my prospects for the future . . . I don't dare
try to grow a business in any way because it will end up hurting my
family in the end. I can't save for my retirement, my child's education
. . . the American tax laws are devastating to well-meaning citizens
overseas that are caught in the unintentional crossfire.
New York voter living in The Netherlands
I am a software engineer who works on embedded electronics. I have
aspirations to start a small, consulting side company where I may be
able to work on my own devices and electronics. Taxes in Denmark are
quite high, and I have a large burden on any amount that I may be able
to use on my start-up, but adding another tax burden on top of this
completely destroys all incentive for me to even start. I am forced to
remain a hobbyist that cannot use my engineering expertise outside of
my current primary income, with little hope of driving my future
career.
Montana voter living in Denmark
______
Letter Submitted by Douglas Goldstein
April 22, 2018
U.S. Senate
Committee on Finance
Dirksen Senate Office Bldg.
Washington, DC 20510-6200
Regarding: Senate Finance Committee hearing to examine ``Early
Impressions of the New Tax Law,'' Tuesday, April 24, 2018.
Topic of statement: The devastating impact that the 17.45% Repatriation
and GILTI Taxes have on Americans living overseas.
Dear Chairman Hatch, Ranking Member Wyden, and all Members of the
Committee, as you are probably aware, the Repatriation Tax and GILTI
Tax regimes which were intended for corporate multinationals like
Google and Apple have and will continue to have a devastating impact on
a large and unintended group: Americans living abroad who are
individual U.S. Shareholders of CFCs (herein ``Americans Abroad'').
On a conceptual level, it seems pretty clear to me that Americans
Abroad were an unintended target of these new laws. Otherwise, how
could it be explained that: (i) I pay a Repatriation tax higher than
Google and Apple; or (ii) these multinationals pay GILTI tax of 21%
while I pay tax of 37%; or (iii) these corporate giants enjoy tax
credits and deductions under the GILTI regime which I do not; or (iv)
my small business counterpart based in the United States would never
ever be subject to such draconian taxes or complicated compliance?
On a practical level, while Google and Apple had and continue to have
access to dedicated teams of expert tax specialists working to minimize
their taxes, the small expat firm I retain to do my U.S. taxes is
simply unable to grasp, let alone assist me in complying with these
sophisticated laws.
But it is on the personal level that these laws are the most harmful to
me.
I am a proud American who moved with my wife and children to Israel,
the land of our ancestors, over 20 years ago. Nonetheless, I still
effectively work on Wall Street as a cross-border investment advisor.
Through my work, I have helped to keep and/or send hundreds of millions
of dollars of investment money into the United States. Moreover, I
directly employ (and hire for contract work) six American citizens in
my company. In many ways, I see myself as a goodwill ambassador for
America, spreading the word of how good our financial markets are and
encouraging people to invest there. In fact, in one of my books, I
devoted a whole chapter to explain why the American markets are the
best in the world. (See: ``The Expatriate's Guide to Handling Money and
Taxes;'' 2013, Southern Hills Press.)
I always pay my taxes to the United States and in my professional
capacity I encourage others to do so as well. I believe that over the
years I have directed people to be in full compliance with their
reporting requirements.
Unfortunately, because I am a business owner who has always kept some
money in my company (retained earnings) for business and cash flow
purposes, I have just been hit with an overwhelming 17.45% tax, which I
cannot offset based on the U.S./Israel tax treaty. For a small
businessman, this is a devastating blow.
It seems clear that the hundreds of thousands, and perhaps millions, of
Americans like me were not the target of the new tax rule which was
supposed to target large multinationals that were squirreling funds in
offshore jurisdictions like Ireland.
On behalf of myself and many other Americans Abroad, I ask you to
exempt us from these draconian taxes. While I may not have been the
target of these taxes, they are financially disastrous to me.
There is a simple balanced solution to solve this problem: an American
living abroad should be exempt from the Repatriation and GILTI Tax
regimes for any given year so long as:
The American meets the conditions set forth under IRC Section
911; and
That person is an individual U.S. Shareholder.
I strongly request that the Congress act to correct this most painful
problem. I thank you for considering my statement.
My name is Douglas Goldstein. I am an American living in Israel, and I
vote in national elections via my last State of residence, New York.
______
Letter Submitted by Jerry and Margaret Goodman
April 21, 2018
U.S. Senate
Committee on Finance
Dirksen Senate Office Bldg.
Washington, DC 20510-6200
Regarding: Senate Finance Committee hearing to examine ``Early
Impressions of the New Tax Law,'' Tuesday, April 24, 2018.
Topic of statement: The devastating impact that the 17.45% Repatriation
and GILTI Taxes have on Americans living overseas.
Dear Chairman Hatch, Ranking Member Wyden, and all Members of the
Committee, as you are probably aware, the Repatriation Tax and GILTI
Tax regimes which were intended for corporate multinationals like
Google and Apple have and will continue to have a devastating impact on
a large and unintended group: Americans living abroad who are
individual U.S. Shareholders of CFCs (herein ``Americans Abroad'').
On a conceptual level, it seems pretty clear to me that Americans
Abroad were an unintended target of these new laws. Otherwise, how
could it be explained that: (i) I pay a Repatriation tax higher than
Google and Apple; or (ii) these multinationals pay GILTI tax of 21%
while I pay tax of 37%; or (iii) these corporate giants enjoy tax
credits and deductions under the GILTI regime which I do not; or (iv)
my small-business counterpart based in the United States would never
ever be subject to such draconian taxes or complicated compliance?
On a practical level, while Google and Apple had and continue to have
access to dedicated teams of expert tax specialists working to minimize
their taxes, the small expat firm I retain to do my U.S. taxes is
simply unable to grasp, let alone assist me in complying with these
sophisticated laws.
But it is on the personal level that these laws are the most harmful to
me.
My wife and I have been living in Israel continuously since July of
1970.
We built our family here, paid all of our taxes, and have faithfully
filed our USA Tax Returns, paid US taxes where applicable. We have been
working for 48 years in Israel. I elected to keep retained earnings in
my company because the funds are needed for the cash flow of my cash
intensive business. This repatriation tax not only will limit my income
if I keep working, but certainly takes away 17.45% these retained
earning that are earmarked for our retirement. As we have lived in
worked here for so long we do not get any Social Security or other
retirement benefits from the USA. Therefore we feel that this tax in
unfair and a double and crippling tax at our age of 71.
On behalf of myself and many other Americans Abroad, I ask you to
exempt us from these draconian taxes. While I may not have been the
target of these taxes, they are financially disastrous to me.
There is a simple balanced solution to solve this problem: an American
living abroad should be exempt from the Repatriation and GILTI Tax
regimes for any given year so long as:
The American meets the conditions set forth under IRC Section
911; and
That person is an individual U.S. Shareholder.
I strongly request that the Congress act to correct this most painful
problem. I thank you for considering my statement.
My name is Jerry Goodman. I am an American living in Jerusalem, Israel,
and I vote in Massachusetts.
______
Letter Submitted by Isaac Gordon
April 29, 2018
U.S. Senate
Committee on Finance
Dirksen Senate Office Bldg.
Washington, DC 20510-6200
Regarding: Senate Finance Committee hearing to examine ``Early
Impressions of the New Tax Law,'' Tuesday, April 24, 2018.
Topic of statement: The devastating impact that the 17.45% Repatriation
and GILTI Taxes have on Americans living overseas.
Dear Chairman Hatch, Ranking Member Wyden, and all Members of the
Committee, as you are probably aware, the Repatriation Tax and GILTI
Tax regimes which were intended for corporate multinationals like
Google and Apple have and will continue to have a devastating impact on
a large and unintended group: Americans living abroad who are
individual U.S. Shareholders of CFCs (herein ``Americans Abroad'').
On a conceptual level, it seems pretty clear to me that Americans
Abroad were an unintended target of these new laws. Otherwise, how
could it be explained that: (i) I pay a Repatriation tax higher than
Google and Apple; or (ii) these multinationals pay GILTI tax of 21%
while I pay tax of 37%; or (iii) these corporate giants enjoy tax
credits and deductions under the GILTI regime which I do not; or (iv)
my small-business counterpart based in the United States would never
ever be subject to such draconian taxes or complicated compliance.
On a practical level, while Google and Apple had and continue to have
access to dedicated teams of expert tax specialists working to minimize
their taxes, the small expat firm I retain to do my U.S. taxes is
simply unable to; grasp, let alone assist me in complying with these
sophisticated laws.
But it is on the personal level that these laws are the most harmful to
me.
On behalf of myself and many other Americans Abroad, I ask you to
exempt us from these draconian taxes. While I may not have been the
target of these taxes, they are financially disastrous to me.
There is a simple balanced solution to solve this problem: an American
living abroad should be exempt from the Repatriation and GILTI Tax
regimes for any given year so long as:
The American meets the conditions set forth under IRC Section
911; and
That person is an individual U.S. Shareholder.
I strongly request that the Congress act to correct this most painful
problem. I thank you for considering my statement.
My name is Isaac Gordon. I am an American living in Israel, and I vote
in New York.
______
Letter Submitted by Marianne Gouras
April 24, 2018
U.S. Senate
Committee on Finance
Dirksen Senate Office Bldg.
Washington, DC 20510-6200
Regarding: Senate Finance Committee hearing to examine ``Early
Impressions of the New Tax Law,'' Tuesday, April 24, 2018.
Topic of statement: The devastating impact that the 17.45% Repatriation
and GILTI Taxes have on Americans living overseas.
Dear Chairman Hatch, Ranking Member Wyden, and all Members of the
Committee, as you are probably aware, the Repatriation Tax and GILTI
Tax regimes which were intended for corporate multinationals like
Google and Apple have and will continue to have a devastating impact on
a large and unintended group: Americans living abroad who are
individual U.S. Shareholders of CFCs (herein ``Americans Abroad'').
On a conceptual level, it seems pretty clear to me that Americans
Abroad were an unintended target of these new laws. Otherwise, how
could it be explained that: (i) I pay a Repatriation tax higher than
Google and Apple; or (ii) these multinationals pay GILTI tax of 21%
while I pay tax of 37%; or (iii) these corporate giants enjoy tax
credits and deductions under the GILTI regime which I do not; or (iv)
my small-business counterpart based in the United States would never
ever be subject to such draconian taxes or complicated compliance?
On a practical level, while Google and Apple had and continue to have
access to dedicated teams of expert tax specialists working to minimize
their taxes, the small expat firm I retain to do my U.S. taxes is
simply unable to grasp, let alone assist me in complying with these
sophisticated laws. In addition, filing fees in two countries are
already very high, even without these new laws.
It is on the personal level that these laws are the most harmful to me.
My small company has been active in a very specialized research
consulting area, namely servicing clients seeking a portfolio of
investments in hedge funds. Since 1994 I have managed to attract
several clients who needed my assistance in researching hedge funds,
complicated investment vehicles, on their behalf. In the last 3-4 years
my client base has opted out of hedge fund investments and in favor of
private equity and real estate, areas in which I am not specialized. As
a result I am looking for an alternate business activity for my
remaining employable years. Therefore this unexpected, egregious and
unfair tax will decrease my ability to plow back much needed assets
into my business so that I may re-educate myself in another type of
profitable activity in my 60s. Please do not allow this to happen. I am
a very productive person and want to continue to work for as long as I
can find consulting work and can afford to do so.
On behalf of myself and many other Americans abroad who are legally
paying taxes, I ask you to exempt us from these draconian taxes. While
I may not have been the target of these taxes they are financially
disastrous to me as explained above.
There is a simple balanced solution to solve this problem: an American
living abroad should be exempt from the Repatriation and GILTI Tax
regimes for any given year so long as:
The American meets the conditions set forth under IRC Section
911; and
That person is an individual U.S. Shareholder.
I strongly request that the Congress act to correct this most painful
problem. I thank you for considering my statement.
My name is Marianne Gouras. I am an American living in Toronto, and I
vote in New York.
______
Letter Submitted by S.T. Herman
April 26, 2018
U.S. Senate
Committee on Finance
Dirksen Senate Office Bldg.
Washington, DC 20510-6200
Regarding: Senate Finance Committee hearing to examine ``Early
Impressions of the New Tax Law,'' Tuesday, April 24, 2018.
Topic of statement: The devastating impact that the 17.45% Repatriation
and GILTI Taxes have on Americans living overseas.
Dear Chairman Hatch, Ranking Member Wyden, and all Members of the
Committee, as you are probably aware, the Repatriation Tax and GILTI
Tax regimes which were intended for corporate multinationals like
Google and Apple have and will continue to have a devastating impact on
a large and unintended group: Americans living abroad who are
individual U.S. Shareholders of CFCs (herein ``Americans Abroad'').
On a conceptual level, it seems pretty clear to me that Americans
Abroad were an unintended target of these new laws. Otherwise, how
could it be explained that (1) I pay a Repatriation tax higher than
Google and Apple; or (ii) these multinationals pay GILTI tax of 21%
while I pay tax of 37%; or (iii) these corporate giants enjoy tax
credits and deductions under the GILTI regime which I do not; or (iv)
my small-business counterpart based in the United States would never
ever be subject to such draconian taxes or complicated compliance?
On a practical level, while Google and Apple had and continue to have
access to dedicated teams of expert tax specialists working to minimize
their taxes, the small expat firm I retain to do my U.S. taxes is
simply unable to grasp, let alone assist me in complying with these
sophisticated laws.
However it is on the personal level that these laws are the most
harmful to me. I am a 65 year old film producer born in Canada, raised
my family in Canada, never resided in the U.S., never had a business
permanent establishment in the U.S. I cannot repatriate a business that
never was in the U.S. nor will ever expand there as I am at the end of
a 35 year career, with plans for retirement. My small business is my
pension plan, and both the ``transition tax'' and ``GILTI'' will
eliminate my ability to retire with dignity.
On behalf of myself and many other Americans Abroad, I ask you to
exempt us from these draconian taxes. While I may not have been the
target of these taxes, they are financially disastrous to me.
There is a simple balanced solution to solve this problem: an American
living abroad should be exempt from the Repatriation and GILTI Tax
regimes for any given year so long as:
The American meets the conditions set forth under IRC Section
911; and
That person is an individual U.S. Shareholder.
I strongly request that the Congress act to correct this most painful
problem. I thank you for considering my statement.
My name is Spencer Herman. I am an American living in Canada, and I
vote in Florida.
______
Letter Submitted by Suzanne Herman
U.S. Senate
Committee on Finance
Dirksen Senate Office Bldg.
Washington, DC 20510-6200
April 26, 2018
Regarding: Senate Finance Committee hearing to examine ``Early
Impressions of the New Tax Law,'' Tuesday, April 24, 2018.
Topic of statement: The devastating impact that the 17.54% Repatriation
and GILTI Taxes have on Americans living overseas.
Dear Chairman Hatch, Ranking Member Wyden, and all Members of the
Committee, as you are probably aware, the Repatriation Tax and GILTI
Tax regimes which were intended for corporate multinationals like
google and Apple have and will Continue to have a devastating impact on
a large and unintended group: Americans living abroad who are
individual U.S. Shareholders of CFCs (herein ``Americans Abroad'').
On a conceptual level, it seems pretty clear to me that Americans
Abroad were an unintended target of these new laws. Otherwise, how
could it be explained that: (i) I pay a Repatriation tax higher than
Google and Apple; or (ii) these multinationals pay GILTI tax of 21%
while I pay tax of 37%; or (iii) these corporate giants enjoy tax
credits and deductions under the GILTI regime which I do not; or (iv)
my small-business counterpart based in the United States would never,
ever, be subject to such draconian taxes or complicated compliance?
On a practical level, while Google and Apple had and continue to have
access to dedicated teams of expert tax specialists working to minimize
their taxes, the small expat firm I retain to do my U.S. taxes is
simply unable to grasp, let alone assist me in complying with these
sophisticated laws.
However, it is on the personal level that these laws are the most
harmful to me.
My husband and I are U.S. citizens living in Canada. I was born in the
United States and left Florida in 1968 at age 12 when my Canadian
mother decided to move back to Canada. My husband, Spencer, was born in
Canada and is a U.S. citizen through his American born father. Due to
our respective parents, we are both Canadian and American citizens at
birth, and Spencer has never lived in the U.S. Although we have lived
in Canada almost the entirety of our lives, we only became aware in
2011 through the Canadian media of the U.S.'s unique laws that impose
full U.S. taxation on the ``tax residents'' of other countries who are
U.S. citizens. Due to our personal circumstances we felt it necessary
to become up to date in our U.S. tax filings, and did so. Our decision
to comply with U.S. taxes for the necessary 8 years under the only
available amnesty program at the time (OVDI) resulted in the payment of
approximately $100,000 in tax, penalties and accountant's fees on the
2008 sale of our home in Canada--that which we had unfortunately sold
before we knew we had any tax obligations to the U.S. (Note that the
sale of the home in Canada--because it was a principal residence--was
not subject to any taxation in Canada). As it was, it took several
years to be processed through not one, but eventually two IRS amnesty
programs to get our tax affairs in order. By then, there was much talk
and promise among residents of other countries that U.S. tax reform
would address the hardships of ``Citizenship Taxation.'' The
expectation was that the United States would adopt tax policies aligned
with those of the rest of the world, and would cease imposing
``worldwide taxation'' on tax residents of other countries. These
reforms were anticipated to put an end to the record number of
Americans renouncing citizenship. Unfortunately this did not happen.
Instead, what tax reform has delivered promises to be more financially
crippling and unfair than we'd ever imagined.
In 2001 my husband and I incorporated a small film production business
here in Canada.
From a Canadian perspective: Canadian tax and financial planning for
family businesses will often involve use of a Canadian Controlled
Private Corporation, and in a purely Canadian context these structures
can provide asset protection, estate or succession planning, and tax-
efficient allocation of income. Furthermore, for many Canadians, their
Canadian Controlled Private Corporation operates as a private pension
plan.
From a U.S. perspective: A small, closely held Canadian corporation
like ours will be treated as a U.S. Controlled Foreign Corporation
(CFC) if U.S. taxpayers who individually own at least 10% of the
shares, own in aggregate more than 50% of the shares. We report this
business interest on IRS form 5471 with our annual U.S. income tax
return, and pay a specialized tax accountant $2,000 to $3,000 annually
in professional fees to make proper filings for us. In order to not
incur U.S. tax, we must avoid many Canadian investments, including some
that would help us prepare for retirement. We have no assets, business
or otherwise, in the U.S. and U.S. law prohibits either of us from
opening a bank account in the U.S. or investing in U.S. sourced mutual
funds. Unfortunately for individuals like us, the recently enacted Tax
Cuts and Jobs Act has several provisions that could increase both U.S.
tax and compliance costs for Canadian Controlled Private corporations
that are U.S. CFCs under new Sec. 965. There are two aspects. The first
involves a retroactive tax on income that was not previously subject to
U.S. taxation. The second involves a prospective income attribution
from the corporation to the shareholder that destroys the value of
using the Canadian Controlled Private Corporation in Canada.
Retroactive tax on income that was not previously subject to U.S.
taxation: One aspect of the bill is a proposal to stop taxing U.S.
multinational companies on much of the non-U.S. source income that they
earn through non-U.S. (Canadian) subsidiaries. As an anti-avoidance
measure, the legislation includes a provision for a one-off tax of
15.5% for cash and cash equivalents, or an 8% for illiquid assets, as
of December 31, 2017. (In the case of individual shareholders the top
rate is actually 17.5%). To the injury, individual shareholders DO NOT
BENEFIT (as do corporations) from the transition to territorial
taxation. While it is clear that the intention is for this tax on
accumulated earnings to apply only to corporate shareholders of
``Controlled Foreign Corporations,'' the actual legislative language
applies this to all shareholders of CFCs, even individual shareholders
who do not reside in the USA (who are not eligible to exclude foreign
income from U.S. taxation). If the literal interpretation is allowed,
this means that the IRS could collect up to 17.5% of the retail
earnings of small Canadian corporations controlled by Canadian-U.S.
dual citizens, and although U.S. individuals are also subject to the
forced repatriation provisions, they are not eligible for the ``going-
forward'' participation exemption regime.
In summary: What this means is the U.S. government, devoid of any
taxable event, aims to ``repatriate'' a share of the retained earnings
of a solely Canadian operated corporation, one which is not a
subsidiary of a U.S. company and one which will never have a presence
in the U.S.--simply because one or more of its shareholders are United
States citizens. The IRS notice about the Transition/Repatriation Tax
talks only about subsidiaries of U.S. domestic corporations. I do not
believe that taxing the retained earnings of solely Canadian operated
corporations was Congress's intention and ask that you fix the language
of the bills to reflect that. Surely U.S. lawmakers would agree that
Congress's true intention of repatriating American businesses that have
left the U.S. because of high corporate tax rates would not apply to
businesses that have never or will never have a presence in the United
States!
Prospective income attribution from the corporation to the shareholder:
Canada does not impose taxation on the income of a Canadian controlled
private corporation until the income is distributed from the company.
The Tax Cuts and Jobs Act (new section 951A) attributes virtually all
the active income of the corporation to the shareholder even if the
income has not been distributed.
I urge your prompt attention to this matter as the time remaining to
make costly major decisions necessary to move forward is quickly
dwindling as specific deadlines associated with the Tax Cuts and Jobs
Act draw nearer.
On behalf of myself and many other Americans Abroad, I ask you to
exempt us from these draconian taxes. While I may not have been the
target of these taxes, they are financially disastrous to me.
There is a simple balanced solution to solve this problem: an American
living abroad should be exempt from the Repatriation and GILTI Tax
regimes tor any given year so long as:
The American meets the conditions set forth under IRC Section
911; and
That person is an individual U.S. Shareholder.
I strongly request that the Congress act to correct this most painful
problem. I thank you for considering my statement.
My name is Suzanne Herman. I am an American living in Canada, and I
vote in Florida.
______
Letter Submitted by Herbert Michael Hess
April 23, 2018
U.S. Senate
Committee on Finance
Dirksen Senate Office Bldg.
Washington, DC 20510-6200
Regarding: Senate Finance Committee hearing to examine ``Early
Impressions of the New Tax Law,'' Tuesday, April 24, 2018.
Topic of statement: The devastating impact that the 17.45% Repatriation
and GILTI Taxes have on Americans living overseas.
Dear Chairman Hatch, Ranking Member Wyden, and all Members of the
Committee, as you are probably aware, the Repatriation Tax and GILTI
Tax regimes which were intended for corporate multinationals like
Google and Apple have and will continue to have a devastating impact on
a large and unintended group: Americans living abroad who are
individual U.S. Shareholders of CFCs (herein ``Americans Abroad'').
On a conceptual level, it seems pretty clear to me that Americans
Abroad were an unintended target of these new laws. Otherwise, how
could it be explained that: (i) I pay a Repatriation tax higher than
Google and Apple; or (ii) these multinationals pay GILTI tax of 21%
while I pay tax of 37%; or (iii) these corporate giants enjoy tax
credits and deductions under the GILTI regime which I do not, or (iv)
my small-business counterpart based in the United States would never
ever be subject to such draconian taxes or complicated compliance?
On a practical level, while Google and Apple had and continue to have
access to dedicated teams of expert tax specialists working to minimize
their taxes, the small expat firm I retain to do my U.S. taxes is
simply unable to grasp, let alone assist me in complying with these
sophisticated laws. I have been told to retain a U.S. tax attorney,
etc. This is unbelievable to me as I would have to spend whatever is
left of my savings to find a way to minimize tax.
But it is on the personal level that these laws are the most harmful to
me. . . . Here is my personal story.
I came to Canada in 1969, so I am in my 50th year living outside the
USA. I have worked as a sales specialist for several computer
companies, and in 1976, I started a small recruiting company, which I
had incorporated to limit my personal liability. Most of the time, it
has been just myself, trying to make an acceptable living, in the past
with an occasional secretary, staff recruiter/researcher, or an
outsourced specialist. I am now 80 years old, still working due to the
high cost of living, and having an unmarried daughter and step-daughter
requiring the occasional financial boost. My wife helps out, to make
ends meet. I live in a townhouse and drive an 11 year old Pontiac
Montana (2007).
In Canada, small corporations like mine keep funds in the business to
serve as a retirement fund as I have no company pension or benefits but
took the risk of self-employment in Canada. If I am not exempt from
this frightening specter of the loss of a huge portion of this
extremely hard-earned money, on which I have duly paid Canadian tax,
according to local law, I will have to work until I die, to be able to
support myself and will not be able to afford proper long term care if
the usual end of life health disaster strikes.
Surely you cannot equate my feeble and small company with giants like
Apple and Google, who run the world. Is there no world in which you can
leave an 80 year old person, close to the end of life--four score
years, as the Bible says--who has been out of the U.S. for 50 years, in
peace?
If you have to go after ex-pat corporations, put some limits on this--
eliminate this for companies with less than X million dollars, as with
estate tax, put some age limit on this--e.g., retirement age of 65 or
70, excuse those outside the country for more than a quarter of a
century (for me, half a century--how could this be?), and consider the
size of the company--I work alone to try to make ends meet--how about
companies with more than 25 employees?
The word Company can be misleading and evoke a huge operation like GM.
My company is me, working from home, trying to stay afloat.
I trust that the American spirit, which saved my parents during World
War II, and which continues to do good around the world, will prevail,
understand, and apply this as it should be applied, in a sensible and
just fashion.
On behalf of myself and many other Americans abroad, I ask you to
exempt us from these draconian taxes. While I may not have been the
target of these taxes, they are financially disastrous to me.
There is a simple balanced solution to solve this problem: an American
living abroad should be exempt from the Repatriation and GILTI Tax
regimes for any given year so long as:
The American meets the conditions set forth under IRC Section
911; and
That person is an individual U.S. Shareholder.
I strongly request that the Congress act to correct this most painful
problem.
My name is Herbert Michael Hess. I am an American living in Canada, and
I vote in Minnesota.
______
Letter Submitted by Aaron Huber
April 24, 2018
U.S. Senate
Committee on Finance
Dirksen Senate Office Bldg.
Washington, DC 20510-6200
Regarding: Senate Finance Committee hearing to examine ``Early
Impressions of the New Tax Law,'' Tuesday, April 24, 2018.
Topic of statement: The devastating impact that the 1.7.45%
Repatriation and GILTI Taxes have on Americans living overseas.
Dear Chairman Hatch, Ranking Member Wyden, and Members of the
Committee, as you are probably aware, the Repatriation Tax and GILTI
Tax regimes which were intended for corporate multinationals like
Google and Apple have and will continue to have a devastating impact on
a large and unintended group: Americans living abroad who are
individual U.S. Shareholders of CFCs (herein ``Americans Abroad'').
On a conceptual level, it seems pretty clear to me that Americans
Abroad were an unintended target of these new laws. Otherwise, how
could it be explained that: (i) I pay a Repatriation tax higher than
Google and Apple; or (ii) these multinationals pay GILTI tax of 21%
while I pay tax of 37%; or (iii) these corporate giants enjoy tax
credits and deductions under the GILTI regime which I do not; or (iv)
my small-business counterpart based in the United States would never
ever be subject to such draconian taxes or complicated compliance?
On a practical level, while Google and Apple had and continue to have
access to dedicated teams of expert tax specialists working to minimize
their taxes, the small expat firm I retain to do my U.S. taxes is
simply unable to grasp, let alone assist me in complying with these
sophisticated laws.
But it is on the personal level that these laws are the most harmful to
me. I incorporated a business in Israel in 2016 which has been my
permanent home for the past 8 years. I did so to start a small
consulting business which also employs two other American citizens
living here in Israel. Because I had a large cash balance near the end
of 2017 in order to pay employee salaries, and to manage my business in
a responsible way.
I have been punished by the new tax law which will apply a hefty
``deemed repatriation'' tax of 15.5% on the entire savings of my
company. These savings were not being hid away in offshore accounts to
minimize U.S. taxation, they were simply meant to pay local suppliers
and our U.S. citizen employees who reside in Israel.
On behalf of myself and many other Americans Abroad, I ask you to
exempt us from these draconian taxes. While I may not have been the
target of these taxes, they are financially disastrous to me.
There is a simple balanced solution to solve this problem: an American
living abroad should be exempt from the Repatriation and GILTI Tax
regimes for any given year so long as:
The American meets the conditions set forth under IRC Section
911; and
That person is an individual U.S. Shareholder.
I strongly request that the Congress act to correct this most painful
problem. I thank you for considering my statement.
My name is Aaron Huber. I am an American living in Israel, and I vote
in Florida.
______
Letter Submitted by Yosefa Julie R. Huber, CPA
April 27, 2018
U.S. Senate
Committee on Finance
Dirksen Senate Office Bldg.
Washington, DC 20510-6200
Regarding: Senate Finance Committee hearing to examine ``Early
Impressions of the New Tax Law,'' Tuesday, April 24, 2018.
Topic of statement: Severe Impact of Repatriation and GILTI Taxes on
Americans Living Overseas.
I am a U.S. citizen and Certified Public Accountant preparing tax
returns for other U.S. citizens living in Israel. My husband (also a
U.S. citizen) and I also own a small family business incorporated in
Israel. A big part of my job involves educating U.S. citizens living in
Israel, many of whom have never lived or worked in the U.S. and may not
even speak English, their responsibilities to file a U.S. tax return
and report foreign accounts.
I am writing to you today to express my deep concern that the new
Section 965 Deemed Repatriation tax and GILTI tax feels like punishment
for being an American abroad.
The one-time Deemed Repatriation Tax, A.K.A. Transition Tax, and annual
Global Intangible Low Tax Income (GILTI) inclusions require U.S. owners
of foreign companies to pay U.S. tax on accumulated earning of their
foreign corporation in addition to the corporate tax paid to the
foreign country and the tax the owner pays to both the foreign company
and the U.S. on their wages and dividends. While corporate owners like
Apple and Google have some relief through a credit on foreign taxes
paid, individuals are excluded from using foreign tax credit to offset
this tax. The GILTI tax, as the name implies, is a tax against income
theoretically based on intangible assets. It effectively is a double
tax on the corporate earning of companies, with an exemption based on
the percent of long-term tangible assets held by the corporation.
Again, this benefits owners of factories, land, and machinery, while
disproportionately taxing service providers such as myself.
In addition to the increased cost of taxes under the new law, the cost
of compliance for the average dentist or therapist living abroad is
unconscionable and makes correct U.S. reporting unbearably costly.
Small business owners living overseas don't have resources and
sophisticated accountants and attorneys to handle the additional
reporting.
Most of my clients impacted by the new tax law are sole proprietors in
service industries--attorneys, mental health professionals,
accountants, and consultants. The transition tax and GILTI tax hits us
especially hard because (1) we are individuals, and under the new law,
we are subject to higher tax rates and fewer exemptions than big
corporations holding foreign companies and (2) our companies don't hold
long-term tangible assets, so we can't benefit from the exemption on
income from tangible assets. We are opening accounts and businesses in
Israel because we LIVE in Israel. Americans living in Israel establish
Israeli corporations for the same reasons Americans living in the U.S.
do. We want legal protections, tax benefits, and the satisfaction that
comes with owning a company and building equity in a family business.
Why should we pay more taxes on our income than Apple or Google? These
multinationals pay GILTI tax of 21%--letting them bring income back
into the U.S. at a lower tax rate than regular corporate rates, while
we as individuals pay tax of 37% on income we don't have any intention
to ``repatriate'' and need to keep our local businesses operating
smoothly.
We already report our corporation's income on Form 5471 and pay taxes
on our wages and dividends. We pay corporate tax in our country of
residence, and yet individuals can't get credit for foreign taxes,
while corporations can. Why must we be punished for living abroad and
incorporating? Why are we punished for keeping income in the company?
Why are companies which had an excess of retained earnings on November
2nd (one of the measurement dates for the transition tax) in
anticipation of giving holiday bonuses, being punished excessively?
Every week I speak with people who thought they were being responsible
by registering their business in Israel, contributing to an investment
account, and even hiring a U.S. accountant in the U.S. I must
sensitively explain that their family's accountant has been reporting
incorrectly. Their mutual fund is a ``PFIC'' and will require costly
reporting, tax, and interest; they need to order their bank records for
the past 6 years so we can file ``FBARs,'' which the accountant in the
U.S. didn't know about, and not reporting their company on a Form 5471
could cost them $10,000 a year or more. It's not intuitive, and most
U.S. accountants can't even begin to comprehend the requirements for
individuals living overseas.
Banks, international investment firms, and public companies already
avoid accepting investments from U.S. individuals and corporations due
to FATCA requirements. This will only get worse with Section 965
requiring reporting from any foreign company that has even a 1%
corporate shareholder. These requirements stymie both U.S. businesses
and responsible saving by Americans individuals abroad.
There is a simple practical solution to solve this problems of excess
taxation and costly reporting.
An American living abroad should be exempt from the Section 965 Deemed
Repatriation and GILTI tax for any given year so long as:
The American meets the conditions set forth under IRC Section
911; and
That person is an individual U.S. Shareholder.
I strongly request that the Congress act to correct this most painful
problem. I thank you for considering my statement.
My name is Yosefa Julie R. Huber. I am an American living in Israeli,
and I vote in Florida.
______
Letter Submitted by Charles Klein
April 22, 2018
U.S. Senate
Committee on Finance
Dirksen Senate Office Bldg.
Washington, DC 20510-6200
Regarding: Senate Finance Committee hearing to examine ``Early
Impressions of the New Tax Law,'' Tuesday, April 24, 2018.
Topic of statement: The devastating impact that the 17.45% Repatriation
and GILTI Taxes have on Americans living overseas.
Dear Chairman Hatch, Ranking Member Wyden, and all Members of the
Committee, as you are probably aware, the Repatriation Tax and GILTI
Tax regimes which were intended for corporate multinationals like
Google and Apple have and will continue to have a devastating impact on
a large and unintended group: Americans living abroad who are
individual U.S. Shareholders of CFCs (herein ``Americans Abroad'').
On a conceptual level, it seems pretty clear to me that Americans
Abroad were an unintended target of these new laws. Otherwise, how
could it be explained that: (i) I pay a Repatriation tax higher than
Google and Apple; or (ii) these multinationals pay GILTI tax of 21%
while I pay tax of 37%; or (iii) these corporate giants enjoy tax
credits and deductions under the GILTI regime which I do not; or (iv)
my small-business counterpart based in the United States would never
ever be subject to such draconian taxes or complicated compliance?
On a practical level, while Google and Apple had and continue to have
access to dedicated teams of expert tax specialists working to minimize
their taxes, the small expat firm I retain to do my U.S. taxes is
simply unable to grasp these sophisticated laws.
On behalf of myself and many other Americans Abroad, I ask you to
exempt us from these draconian taxes. While I may not have been the
target of these taxes, they are financially disastrous to me.
There is a simple balanced solution to solve this problem: an American
living abroad should be exempt from the Repatriation and GILTI Tax
regimes for any given year so long as:
The American meets the conditions set forth under IRC Section
911; and
That person is an individual U.S. Shareholder.
I strongly request that the Congress act to correct this most painful
problem. I thank you for considering my statement.
My name is Charles Klein. I am an American living in Israel, and I vote
in the State of Illinois. Thank you for your consideration of this
urgent matter.
______
Kogod School of Business
American University, Washington, DC
twitter: @carobruckner [email protected] (202) 885-3258
Statement of Professor Caroline Bruckner, Executive-in-Residence,
Accounting and Taxation, and Managing Director, Kogod Tax Policy
Center, Kogod School of Business, American University
Chairman Hatch, Ranking Member Wyden, Members of the U.S. Senate
Committee on Finance (the ``Committee'') and staff, as Managing
Director of American University's Kogod Tax Policy Center (KTPC), which
conducts nonpartisan policy research on tax and compliance issues
specific to small businesses and entrepreneurs, I submit the following
Statement for the Record in connection with the Committee's April 24th
hearing titled, ``Early Impressions of the New Tax Law.''
The Committee's efforts to conduct oversight on the initial impact of
the Tax Cuts and Jobs Act of 2017 (Pub. L. 115-97) (TCJA) should be
applauded, and the Committee should expand its oversight of the
implementation of the TCJA to consider whether and how women business
owners have been underserved by tax reform. Although most U.S.
taxpayers will see some tax savings from the marginal rate cuts
included in the legislation, KTPC's research suggests that the
additional investments targeted to individuals with business income
(IRC Sec. 199A) and small business owners (IRC Sec. 179) could give
rise to an effective ``doubling down'' on a billion dollar blind spot
Congress has when it comes to women business owners and the U.S. tax
code.
In June 2017, the KTPC published Billion Dollar Blind Spot--How the
U.S. Tax Code's Small Business Tax Expenditures Impact Women Business
Owners, ground-breaking research on how the U.S. tax code's small
business tax expenditures targeted to help small businesses grow and
access capital impact women-owned firms.\1\ Our findings with respect
to four specific tax expenditures targeted to small businesses (i.e.,
IRC Sec. Sec. 1202, 1244, 179 and 195) raised questions as to (i)
whether the U.S. tax code's small business tax expenditures were
operating as Congress intended; and (ii) whether the cost of these
expenditures had been accounted for in terms of their uptake by women
owned firms.
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\1\ Bruckner, C.L. (2017). Billion Dollar Blind Spot: How the U.S.
Tax Code's Small Business Expenditures Impact Women Business Owners.
Kogod Tax Policy Center Report, available at https://www.american.edu/
kogod/research/upload/blind_spot_accessible.pdf.
Ultimately, we concluded that tax incentives targeted to small
businesses that exclude service firms by design (e.g., IRC Sec. 1202)
or favor firms that are incorporated (e.g., IRC Sec. 1244) or in
capital intensive industries (e.g., IRC Sec. 179), operatively exclude
the majority of women-owned firms or bypass them altogether. This
research is particularly relevant in today's economy because although
women business owners account for more than 11 million (or 38% of all
U.S. firms), they remain small businesses primarily operating as
service firms and continue to have challenges growing receipts and
accessing capital. In addition, we found that the existing lack of tax
research and effective congressional oversight on how tax expenditures
impact women business owners constrains policymakers from developing
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evidenced-based policymaking.
As a result, our initial assessment of two of the key tax investments
of the TCJA confirms that questions raised in Billion Dollar Blind Spot
were neither considered nor answered in connection with the Committee's
efforts on tax reform. Instead, Congress made additional investments in
tax expenditures that our research suggests are less favorable to women
business owners in terms of distribution of tax benefits, which the
Joint Committee on Taxation's (JCT) April 2018 distributional analysis
seems to confirm.
For example, according to Table 3 of JCT's distributional analysis of
the TCJA, more than 90% of the revenue loss generated from new pass
through deduction under IRC Sec. 199A will flow to firms with income of
more than $100,000 in 2018 and 2024.\2\ However, the most recent data
available from the U.S. Census Bureau on business ownership finds that
less than 12% of women-owned firms have annual receipts in excess of
$100,000.\3\
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\2\ Joint Committee on Taxation, ``Tables Related to the Federal
System as in Effect 2017 through 2026'' (JCX-32R-18), April 24, 2018.
This document can be found on the Joint Committee on Taxation website
at www.jct.gov.
\3\ Billion Dollar Blind Spot, supra n. 1 at 11.
This inequitable distribution is even more pronounced when considered
at higher income levels: only 1.7% of women-business owners have
receipts of $1,000,000 or more, but JCT found in 2018, 44% of the IRC
Sec. 199A revenue loss will flow to pass-through businesses with
$1,000,000 of income. Moreover, JCT projects that the 44% revenue loss
distribution will increase to 52% by 2024.\4\ While many women business
owners will no doubt see some benefit from IRC Sec. 199A, JCT's
distributional analysis raises serious questions as to the equity of
the distribution of the tax expenditure with respect to women-owned
firms. These questions will only become more pressing as Congress is
forced to reckon with the budget consequences of the TCJA. The JCT
estimate of the initial revenue loss generated from IRC Sec. 199A alone
is more than $414 billion from 2018-2027.\5\
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\4\ JCT, supra n. 2 at Table 3.
\5\ JCT, ``Estimated Budget Effects of the Conference Agreement for
H.R. 1, the `Tax Cuts and Jobs Act' '' (JCX-67-17), December 18, 2017.
Under current law, IRC Sec. 199A will sunset on December 31, 2025.
In addition to concerns regarding the distribution of the revenue loss
generated by IRC Sec. 199A, our research suggests additional oversight
and tax research is warranted with respect to the TCJA's investments
into expanding IRC Sec. 179. In 2017, we conducted a survey of 515
women business owners to test their familiarity with specific small
business tax expenditures, including IRC Sec. 179. Our research found
that women business owners use IRC Sec. 179 at significantly lower
rates than existing government research finds for businesses generally.
Specifically, our research found that only 47% of our survey
respondents benefited from IRC Sec. 179, whereas Treasury's own
analysis had concluded that take-up rates for IRC Sec. 179 to range as
high as 80% (for corporations and S corps) and as low as 60% (for
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partnerships and individuals).
Even before Congress made an additional $25 billion investment in IRC
Sec. 179 as part of the TCJA, this tax expenditure was one of the most
expensive targeted to small businesses. However, our research suggests
women business owners benefit less from IRC Sec. 179 than Treasury's
research finds for businesses generally. Consequently, this provision
is a prime candidate for additional oversight to account for the more
than $250 billion in revenue loss IRC Sec. 179 will likely generate in
the coming years.\6\
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\6\ The ``more than $250 billion revenue loss'' estimate reflects
the IRC Sec. 179 revenue loss derived from JCT's prior 5-year estimate
set forth in JCT, ``Estimates for Tax Expenditures for Fiscal Years
2016-2020'' (JCX-18-10), January 30, 2017 (noting that Section 179
would generate a revenue loss of $248.2 billion from 2016-2020),
together with the additional TCJA investment of $25 billion to IRC
Sec. 179.
In the wake of tax reform and its now-estimated $1.9 trillion cost to
American taxpayers,\7\ the time is now for Congress to consider the tax
challenges of women business owners who are now more than one-third of
all U.S. businesses, but who continue to struggle getting access to
capital. As such, we recommend the following strategies for this
Committee to employ as part of its oversight of the TCJA:
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\7\ Congressional Budget Office, ``The Budget and Economic Outlook:
2018 to 2028'' (Table 8-3), April 9, 2018. This document can be found
on the Congressional Budget Office website at www.cbo.gov.
1. Holding joint hearings together with the U.S. Senate Committee
on Small Business and Entrepreneurship on the small business tax issues
---------------------------------------------------------------------------
identified in this statement and in Billion Dollar Blind Spot; and
2. Requesting the Joint Committee on Taxation develop estimates on
how TCJA's tax benefits in IRC Sec. Sec. 199A and 179 are distributed
to women-owned firms specifically.
The TCJA stands as evidence of Congress's commitment to investing in
individuals with business income and small businesses. And yet there
has been no formal accounting as to whether and how these expenditures
impact or are distributed to or among women-owned firms--99% of which
are small businesses, according to SBA's Office of Advocacy's latest
report on women-owned firms.\8\
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\8\ Michael J. McManus, ``Issue Brief Number 13: Women's Business
Ownership: Data From the 2012 Survey of Business Owners,'' Office of
Advocacy, U.S. Small Business Administration (May 31, 2017), available
at https://www.sba.gov/sites/default/files/advocacy/Womens-Business-
Ownership-in-the-US.pdf.
The sheer number of women business owners and the challenges they face
accessing capital should be a priority of Congress and this Committee.
Women-owned firms have increased to now total more than 11 million (or
38% of all U.S. firms), and the fact that the majority of women
business owners are small businesses operating in service industries
raises important TCJA questions we can and should answer. Moreover,
they continue to have challenges growing their receipts and accessing
capital, and it's time the Committee see through its billion dollar
blind spot when it comes to women business owners and U.S. tax
incentives. We stand ready to aid the Committee in this important work
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on behalf of the millions of small businesses impacted by these issues.
______
National Multifamily Housing Council and National Apartment Association
1775 Eye Street, NW, Suite 1100
Washington, DC 20006
202-974-2300
https://weareapartments.org/
The National Multifamily Housing Council (NMHC) and the National
Apartment Association (NAA) respectfully submit this statement for the
record for the Senate Finance Committee's April 24, 2018, hearing
titled ``Early Impressions of the New Tax Law.''
For more than 20 years, NMHC and NAA have partnered to provide a single
voice for America's apartment industry. Our combined memberships are
engaged in all aspects of the apartment industry, including ownership,
development, management and finance. NMHC represents the principal
officers of the apartment industry's largest and most prominent firms.
As a federation of 160 state and local affiliates, NAA encompasses over
75,000 members representing 9.25 million rental housing units globally.
At the outset, we would like to take this opportunity to congratulate
Congress for enacting landmark tax reform legislation that we believe
holds great promise for generating economic growth and fostering job
creation. As multifamily housing firms begin to implement the new tax
law, we want to draw your attention to several provisions that we
request Congress and the Treasury Department work together to clarify
so that our industry can build the 4.6 million new apartment units our
nation needs by 2030. Without tax certainty, we are concerned that
capital could sit on the sidelines and not be fully deployed.
Depreciation Period of Existing Multifamily Buildings
Our first request is that Congress either enact a technical correction
or work with the Treasury Department to issue guidance to clarify that
multifamily buildings in existence prior to 2018 be depreciated over 30
years for firms that elect out of limits on interest deductibility.
By way of background, Section 13204 of the tax reform law (``Applicable
Recovery Period for Real Property'') reduces the recovery period for
residential rental property from 40 to 30 years for purposes of the
alternative depreciation system (ADS) and requires real estate firms
electing out of the limits on interest deductibility of Section 163(j)
to use ADS to depreciate multifamily buildings. While we believe that
Congress's intent was to apply this 30-year period to multifamily
buildings in existence before enactment of the tax law and those yet to
be placed in service, we are extremely concerned that without
clarification, the statute requires that multifamily properties in
existence prior to 2018 be depreciated over 40 years with regard to
their remaining life.
The confusion arises because the interest deduction limitation rules
are based on taxable year concepts and have an effective date of
taxable years beginning after 2017, while the effective date for the
ADS recovery period change is based on a placed-in-service concept (as
depreciation changes generally are). It is the combination of two
different types of effective dates in section 13204(b) of the statute
that gives rise to the confusion.
We believe that Congress did not intend for existing multifamily
buildings to be depreciated over 40 years for real estate firms
electing out of interest deductibility limits. Reading the statute to
require existing buildings to be depreciated over 40 years is unlikely
to reflect Congress's intent from a policy perspective. There are few
policy arguments for requiring real estate firms electing out of
interest deductibility limits to depreciate buildings in existence
prior to 2018 over 40 years instead of the previously applicable 27.5
years while allowing only new buildings to be depreciated over 30
years. Congress seems unlikely to have consciously wished to make such
a drastic change.
Congress can be a key player in enabling existing multifamily
properties to be depreciated over 30 years by enacting a technical
correction or encouraging the Treasury Department to issue guidance. We
believe Treasury can address this issue through the regulatory process
either using the broad authority provided in IRC Section 163(j)(7) that
addresses how real property trades or businesses elect out of limits on
interest deductibility or under the ``change of use authority'' of IRC
Section 168(i)(5).
Section 163(j) as amended by the tax reform law generally limits a
taxpayer's allowable deduction for business interest. The legislation,
however, enables real property trades or businesses to elect out of the
limitation and requires that ``Any such election shall be made at such
time and in such manner as the Secretary shall prescribe, and, once
made, shall be irrevocable.'' One consequence of making the election is
that real property trades or businesses must depreciate real property
using ADS.
We believe that the ``in such manner'' language provides the Treasury
Department with sufficient authority to allow electing real property
trades or businesses to use post-enactment ADS (i.e., the 30-year life)
for purposes of depreciating multifamily property. In other words,
Treasury can allow real estate firms to make the option of interest
deductibility limitation in such manner that requires a 30-year ADS
life.
In addition, the legislative history makes it clear that Congress
intended that the election out of the interest limitation and the
required use of ADS be treated as a change in use of the property.
(Footnote 455 of the Senate Finance Committee report). Treasury has
broad authority under Section 168(i)(5) to provide rules to implement
changes in use of depreciable property, including rules to provide when
such property is deemed placed in service.
In sum, we ask that Congress either enact a technical correction or
encourage the Treasury Department to issue guidance that would enable
real estate firms that elect out of the interest limitation to
depreciate multifamily property in existence prior to 2018 over a 30-
year ADS schedule. A failure to swiftly take action will unnecessarily
disrupt cash flows and increase the tax liability of multifamily firms,
reducing their ability to invest in their assets or develop new
properties. That result would be contrary to the goal of the tax reform
bill, and we ask that it be avoided.
Pass-Through Tax Deduction for Qualified Business Income
The multifamily industry is also eagerly awaiting guidance regarding
the 20 percent deduction for pass through income under new IRC Section
199A. We believe that if properly implemented, this provision has the
potential to unleash significant investment and job creation in the
multifamily industry.
As the Treasury Department drafts implementing guidance, we would
encourage Congress to request the Treasury Department to address three
aspects of the pass-through tax deduction.
First, the new law requires that the pass-through deduction be
determined for each qualified trade or business, but it does not
provide a definition of trade or business. We request that the Treasury
Department issue guidance enabling individuals to aggregate or group
all qualified business activities at the partner level in a manner
consistent with IRC Section 469. This would help ensure entities can
focus on their business activities rather than engaging in costly
restructuring efforts. Additionally, we would ask that Treasury
specifically allow income earned from the development, operation and
management of real estate assets to qualify for the deduction.
Second, the Treasury Department should provide rules regarding the
unadjusted basis of property acquired pursuant to a like-kind exchange.
Such basis should be no less than the unadjusted basis of the property
relinquished in the exchange plus any cash or other consideration
provided in the exchange. Taxpayers engaging in like-kind exchanges
remain fully invested in real estate and should not be negatively
impacted when they reallocate a portfolio. Indeed, providing onerous
rules regarding the unadjusted basis for exchange property would reduce
the velocity of real estate transactions and amount of aggregate
investment in the sector.
Third, the new law allows REIT dividends to fully qualify for the 20
percent deduction. Treasury, however, should clarify that shareholders
who invest in a REIT through a mutual fund are eligible as well.
Approximately half of REIT shares are held in mutual fund portfolios.
Finally, the new and novel pass-through deduction is likely to lead to
further questions and concerns being raised. We look forward to working
with Congress and the Treasury Department on additional matters related
to the provision as the regulatory process moves forward to ensure this
deduction is as effective as possible.
Deductibility of Business Interest
NMHC/NAA were most grateful that lawmakers enabled real estate firms to
elect to fully deduct business interest. Given that a typical
multifamily deal can be 65 percent debt financed and that the Federal
Reserve reports that as of the end of 2017, there was $ 1.31 trillion
in outstanding multifamily mortgage debt, implementation of this
provision will be critical. We ask that Congress encourage the Treasury
Department to quickly clarify that a taxpayer may use any reasonable
allocation method to deduct business interest attributable to a real
property trade or business and that debt to capitalize such enterprises
is fully deductible. Our goal is to avoid any disruption to the
multifamily industry that relies so heavily on debt-financed capital.
Opportunity Zones
NMHC/NAA commend lawmakers for establishing Opportunity Zones as part
of the new tax law. By providing for the deferral of capital gains
invested in Opportunity Funds and eliminating tax on certain gains
realized from Opportunity Fund investments, there is a strong potential
to drive considerable investment in multifamily housing and workforce
housing, in particular, in Opportunity Zones.
We ask that Congress work with the Treasury Department to make the
Opportunity Zones program as effective as possible and that lawmakers
encourage the Treasury Department to ensure:
Multifamily housing is a qualified investment for Opportunity
Funds;
Multifamily properties receiving other tax benefits, including
Low-Income Housing Tax Credits, Historic Tax Credits and New Markets
Tax Credits, that are necessary to make a development viable are
qualified investments for Opportunity Funds. It is often only a
combination of incentives that make the difference between a project
being able to move forward as opposed to never breaking ground; and
Properties of all sizes be able to receive Opportunity Fund
financing.
NMHC/NAA thank you for considering our views. We again congratulate you
on this landmark achievement and hope to work with the Finance
Committee to make the new tax law as successful as possible.
______
Policy and Taxation Group
P.O. Box 17693
Anaheim Hills, CA 92817
(714) 357-3140
[email protected]
The Honorable Orrin G. Hatch
Chairman
U.S. Senate
Committee on Finance
219 Dirksen Senate Office Building
Washington, DC 20510
Dear Chairman Hatch,
I write to you on behalf of the Policy and Taxation Group, which is an
organization comprised of family-held businesses from throughout the
country that are dedicated to reform of the estate tax. The Senate
Finance Committee on April 24, 2018, held a hearing titled ``Early
Impressions of the New Tax Law.'' While the Committee focused on
various aspects of tax reform, one key issue has received little
attention: the temporary nature of all of the individual tax policies
included in tax reform--including the doubling of the estate tax
exemption.
While we are appreciative that tax reform included a doubling of the
estate tax exemption, we believe that this should be a permanent
change--not one which expires at the end of 2025. As you mentioned in
your opening statement, the Committee's goal is to ``make tax reform
even better.'' To achieve that goal, we believe that it is critical
that Congress make all of the temporary tax provisions in our tax code
permanent. While we believe that eliminating the estate tax is
ultimately the best approach, we also believe that permanently doubling
the exemption is good policy that will indeed make tax reform even
better.
That said, to maximize the benefits that come with reforming the estate
tax, we believe that more than just a doubling of the exemption is
needed. For example, based on the 2016 Internal Revenue Service estate
tax tables, 88-percent of those who filed an estate tax return fall
within the current exemption; however, of those who actually paid the
tax, 66-percent remain subject to the tax--despite the increased
exemption. This means that many of the family-held businesses that
employ millions of Americans will be at risk when their estate tax
bills come due--as will the jobs that they provide.
While we understand that Congress faced political and logistical
constraints that prevented more expansive reforms of the estate tax
last year, we urge you to use this as an opportunity to take bold
action that will protect family-held business, spur additional job
creation, and help the economy continue to grow. One idea that will
help all family-held businesses subject to the estate tax: reduce the
rate--which is arbitrarily the highest rate in the tax code--to the
capital gains tax rate, while maintaining step-up in basis.
In addition to a reduction in the estate tax rate, there are various
other policy changes that could be implemented to protect family-held
businesses from the unfair and disastrous consequences of the estate
tax. As the committee continues to examine such policies in a post-tax
reform world, we stand ready to serve as a resource to you, your fellow
Committee members, and staff and are happy to provide additional
information or answer any questions that you may have.
Thank you for your consideration of these important tax policies and
your continued efforts to improve our nation's tax code.
Sincerely,
Pat Soldano
Founder, Policy and Taxation Group
______
Letter Submitted by Mike Power
April 23, 2018
U.S. Senate
Committee on Finance
Dirksen Senate Office Bldg.
Washington, DC 20510-6200
Regarding: Senate Finance Committee hearing to examine ``Early
Impressions of the New Tax Law,'' Tuesday, April 24, 2018.
Topic of statement: The devastating impact that the 17.45% Repatriation
and GILTI Taxes have on Americans living overseas.
Dear Chairman Hatch, Ranking Member Wyden, and all Members of the
Committee, as you are probably aware, the Repatriation Tax and GILTI
Tax regimes which were intended for corporate multinationals like
Google and Apple have and will continue to have a devastating impact on
a large and unintended group: Americans living abroad who are
individual U.S. Shareholders of CFCs (herein ``Americans Abroad'').
On a conceptual level, it seems pretty clear to me that Americans
Abroad were an unintended target of these new laws. Otherwise, how
could it be explained that: (i) I pay a Repatriation tax higher than
Google and Apple; or (ii) these multinationals pay GILTI tax of 21%
while I pay tax of 37%; or (iii) these corporate giants enjoy tax
credits and deductions under the GILTI regime which I do not; or (iv)
my small-business counterpart based in the United States would never
ever be subject to such draconian taxes or complicated compliance?
On a practical level, while Google and Apple had and continue to have
access to dedicated teams of expert tax specialists working to minimize
their taxes, the small expat firm I used to retain to do my U.S. taxes
is simply unable to grasp, let alone assist me in complying with these
sophisticated laws.
But it is on the personal level that these laws are the most harmful to
me. I work in the mining industry as a prospector. The nature of the
work requires that any business venture be in the form of an
incorporated company. I have numerous partners in different ventures,
each with their own company--in each case a CFC. My partners are not
American citizens and do not consider themselves subject to U.S. tax
laws; in fact they resent having to provide information to me to file
with the IRS and it is only through their good will that I have been
able to do so.
The cost and complexity of these filings as an American living abroad
is horrendous. A simple income tax filing with all of the corporate
reporting costs about $3,000. To comply with the new requirements this
year, I have been quoted $17,000 by a reputable Colorado-based
accountancy to ensure that I am in compliance. There was a time not
long ago when I could live on that. Secondly, I am 61 years old and my
best years are behind me. Whatever I have managed to save for
retirement is locked up in these companies. The recent tax changes have
imposed hardship on me by first requiring me to quickly come up with
cash to taxes on 28 years of retained earnings--something that I can
only do by immediately liquidating assets at fire sale prices thereby
destroying residual value. Secondly, this payment has imposed
additional taxes on both the corporations (capital gains where
applicable to raise cash requiring payment of Canadian taxes) and on me
through payment of Canadian dividend taxes when the money is paid to me
in order to finally pay the U.S. taxes. My advisors are not sure if I
will also be double taxed by the U.S. when taking the money out of the
companies as this must first come out as a U.S.-taxable dividend and
then be remitted as a tax payment on the retained earnings in the CFC's
in which I am a shareholder.
Please keep in mind that I am self-employed and have no pension.
Whatever I might have to retire on is locked up in these corporations.
For the past 38 years I had worked within the laws, accumulating assets
in these ventures which in turn would be used to fund a retirement.
Taxes would have been paid to the U.S. when the money was withdrawn
from the companies and paid to me as dividends. Changing the rules at
this point amount to a forfeiture of my retirement savings, forcing me
to face the prospect of working years past normal retirement age to
make up the difference.
On behalf of myself and many other Americans Abroad, I ask you to
exempt us from these draconian taxes. While I may not have been the
target of these taxes, they are financially disastrous to me.
There is a simple balanced solution to solve this problem: an American
living abroad should be exempt from the Repatriation and GILTI Tax
regimes for any given year so long as:
The American meets the conditions set forth under IRC Section
911; and
That person is an individual U.S. Shareholder.
I strongly request that the Congress act to correct this most painful
problem. I thank you for considering my statement.
My name is Michael Power. I am an American living in Yukon Territory,
Canada, and I vote in Alaska.
______
Precious Metals Association of North America (PMANA)
10340 Democracy Lane, Suite 204
Fairfax, VA 22030
P: (703) 383-1330
F: (703) 383-1332
E: [email protected]
Written Testimony of Scott Smith, President
April 24, 2018
Chairman Hatch and Members of the Committee,
My name is Scott Smith, and I am the CEO of Pyromet, which is a
privately owned precious metals manufacturer and refiner of silver,
gold, and platinum group metals. Since 1969, Pyromet has been a
reputable name in the precious metals industry. I also serve as
President of the Precious Metals Association of North America (PMANA)
and am submitting this written testimony on behalf of our members.
The PMANA represents businesses and workers all along the precious
metals supply chain--including manufacturers, recyclers, and refiners.
The industry has a keen interest in a tax code that creates certainty
for businesses and sustains jobs for hard-working Americans. However,
the two most recent overhauls of the tax code, including the passage of
the Tax Cuts and Jobs Act (TCJA), continue to discourage investments in
precious metals, limit consumer freedom over their investments, and
hinder production opportunities all along the supply chain.
Background
Since 1982, gains made on precious metals bullion have been taxed at
the ordinary income rate due to language defining such bullion as a
collectible. Congress has made numerous attempts to mitigate the
effects of this capital gains treatment on precious metals. The Tax
Reform Act of 1986 granted the American Eagle family of coins an
exemption from the ``collectible'' definition and allowed them to be
included as equity investments in Individual Retirement Accounts. Over
a decade later, the Taxpayer Relief Act of 1997 created purity and
custody standards that, if met, would exempt bullion coins and bars
from the definition while also allowing them in IRAs.
However, the ``collectible'' definition remains for non-IRA investments
in precious metals, and these investments are taxed at the ordinary
income rate for collectibles with a maximum rate of 28%--a rate 40%
greater than the capital gains rate for equity investments.
Unlike rare coins that are sought after by collectors, bullion coins
are fungible, highly refined precious metals products, round in shape,
and produced to exacting specifications in large numbers by numerous
countries throughout the world specifically as precious metal
investment vehicles. They are widely traded, highly liquid, and their
market values are globally publicized. Although they typically are
ascribed legal tender status by the governments that mint them, bullion
coins trade in the marketplace at or near the market price of the
commodity they contain, which typically has no relationship whatsoever
to the coin's legal tender, or ``face'' value. For example, this week,
a one-ounce American Eagle gold bullion coin having a U.S. legal tender
value of $50, traded in the market place at $1,319. These are not coins
sought by collectors, but rather responsible taxpayers who want to
diversify their portfolios.
Similarly, we are concerned that the TCJA's repeal of Section 1031
like-kind exchanges for personal property and investments will
discourage future investments in precious metals and decrease
production opportunities along the supply chain.
Many taxpayers with precious metals holdings secure their investments
at a depository or refiner. At some point, they are likely to want to
take possession of their investments. Prior to the TCJA, this would be
accomplished by exchanging their gold bullion holdings for a product of
``like-kind'' such as American Gold Eagle bullion coins sold by the
U.S. Mint.
Not only did these exchanges give taxpayers more freedom over their
investments, but they generated activity along the supply chain for
recyclers, refiners, and manufacturers. Since precious metals are a
limited resource, our industry relies heavily on the continuous cycle
of recycling and refining precious metals scrap--often found in
electronics, auto parts, and home appliances--into new product whether
it be bars, coins, jewelry, etc. Like-kind exchanges created new
production opportunities for precious metals workers because it allowed
them to take recycled scrap and transform it into a product that met
the taxpayer's investment preferences.
Although we are concerned with the TCJA's limitation of Section 1031
exchanges to real property, we do not believe in any way that this was
intentional. Members of the committee, and their counterparts in the
House, worked thoughtfully to mitigate the effects of these changes. By
expanding opportunities for the full expensing and bonus depreciation
of qualified property, many businesses and investors do not have to
worry about the changes to Section 1031.
Unfortunately, precious metals are not considered qualified property in
the tax code. Furthermore, the temporary nature for full expensing and
bonus depreciation are destined to create more uncertainty for
businesses, whereas Section 1031 exchanges were a fixture in the tax
code for nearly a century.
Policy Proposal
As Congress looks ahead to making corrections to the TCJA and
considering additional changes to capital gains, the PMANA recommends
the following policy changes.
First, amending Section 1(h)(5) of the Internal Revenue of 1986 to
treat gold, silver, platinum, and palladium, in either coin or bar
form, in the same manner as investments for the purposes of the maximum
capital gains rate for individuals. This would eliminate the burden of
paying 40 percent more in taxes on precious metals investments. Since
precious metals are already considered investments in Section 408(m),
this would also create parity and certainty for the treatment of
precious metals throughout the tax code.
Second, we recommend corrections to the TCJA that reinstate like-kind
exchanges for precious metals. Since precious metals are not qualified
property for full expensing or bonus depreciation, this change would
reduce investment ``lock-in'' by taxpayers and continue to generate
production opportunities along the precious metals supply chain.
While there are beneficial provisions of the TCJA, there are many
changes that could be made to maximize investment potential for
taxpayers and create certainty within the precious metals industry.
Thank you and I look forward to continuing working with the committee.
______
Public Citizen
215 Pennsylvania Avenue, SE
Washington, DC 20003
(202) 546-4996
www.citizen.org
May 4, 2018
U.S. Senate
Committee on Finance
Dirksen Senate Office Bldg.
Washington, DC 20510-6200
Re: Full committee hearing on ``Early Impressions of the New Tax Law.''
Dear Honorable Committee Members,
On behalf of Public Citizen's more than 400,000 members and supporters,
we write to provide our perspective on the ``Tax Cuts and Jobs Act''
(Public Law No. 115-97). This legislation has done much to enrich
wealthy shareholders; corporate CEOs and Wall Street bankers and has
done little to assist average Americans. We urge you to reevaluate the
legislation and go back to the drawing board in a bipartisan fashion to
have a real discussion about what would be best for Americans--
including which glaring loopholes in our tax code to close, and how to
grow revenues to provide real investment in our communities.
The Tax Cuts and Jobs Act would be better named the ``Benefits Cuts and
Lost Jobs Act'' since it will lead to declining services for families
that are suffering and fewer health-care dollars for seniors and other
vulnerable populations who need care. And instead of creating jobs, the
new tax law will kill jobs by opening the door to further outsourcing
of investments by multinational corporations. In short, the legislation
is unfair, cruel, and disliked.
The tax legislation is unfair in several ways--first, we abhor the
unequal footing created by the bill for domestic companies as compared
to multinational corporations. Unlike Main Street U.S. companies,
multinational corporations are able to make use of accounting
gymnastics to book their profits to offshore subsidiaries housed in low
tax countries--tax havens--as a way to reduce or eliminate their U.S.
tax bill. Instead of fixing this problem, the Tax Cuts and Jobs Act
worsens the offshoring of investments by allowing deductions that zero
out, or at most halve, the tax rate applied to profits said to be made
by offshore branches, keeping the incentive in place to book profits to
foreign subsidiaries. The provisions included meant to minimize tax
avoidance will actually mean outsourcing of investments will be Worse
since companies are more likely to make physical investments offshore,
like building plants, in order to lower their taxes. According to the
Congressional Budget Office (CBO), ``By locating more tangible assets
abroad, a corporation is able to reduce the amount of foreign income
that is categorized as GILTI [global intangible low-tax income].
Similarly, by locating fewer tangible assets in the United States, a
corporation can increase the amount of U.S. income that can be deducted
as FDII [foreign-derived intangible income]. Together, the provisions
may increase corporations' incentive to locate tangible assets
abroad.'' \1\
---------------------------------------------------------------------------
\1\ U.S. Congressional Budget Office, The Budget and Economic
Outlook: 2018-2028, at 109-110 (April 9, 2018), https://bit.ly/2Jt8P1b.
The tax legislation was also unfair for the way that it rewarded tax
dodgers with a windfall for utilizing past avoidance schemes. Under the
previous system of deferral, corporations had an estimated $2.6
trillion in profits ``booked offshore'' on which they owed an estimated
$7.52 billion in taxes. Instead of making these companies pay what they
owe, the tax bill gave a windfall to those tax dodgers by allowing
deferred profits to be taxed at the bargain basement rate of either 8
or 15.5 percent. This gave around $400 billion payout for companies
that had gambled on using profit shifting to defer paying their taxes
in hopes such a handout would eventually come their way. We are bound
to see the same failure as when a similar tax holiday was tried in
---------------------------------------------------------------------------
2004.
Already we're seeing companies using the money they have received from
their discounted tax rate to pay shareholders dividends and buy back
stock to increase the value of the existing shares, all the while
cutting existing jobs. This clearly breaks promises about this bill
made by the Republicans to American workers, who were sold the lie that
these cuts are going to ``trickle down'' to everyday wage earners,
instead of further lining the pockets of Wall Street investors.
According to estimates of the results so far from the Tax Cuts and Jobs
Act, corporations are spending more than 40 times as much on stock
buybacks than they are shelling out for increased wages or one-time
bonuses.\2\
---------------------------------------------------------------------------
\2\ ``Key Facts: How Corporations Are Spending Their Trump Tax
Cuts,'' Americans for Tax Fairness, https://
americansfortaxfairness.org/trumptaxcuttruths (viewed on May 1, 2018).
The tax bill also further rigs our economy to benefit the wealthy in
numerous ways. Study after study has shown just how much the tax breaks
were tilted toward the rich. It's estimated that 83 percent of the
benefits of the tax cuts will go to the top 1 percent.\3\ And, late
last month, the Joint Committee on Taxation estimated that millionaires
stand to gain handsomely from the changes, including the provision
related to ``pass-through'' companies where almost a full half of the
benefit will go to persons making $1 million or more, with that figure
surpassing the halfway point by 2024.\4\ This when millionaires are
only .3 percent of tax filers.
---------------------------------------------------------------------------
\3\ ``Distributional Analysis of the Conference Agreement for the
Tax Cuts and Jobs Act,'' Tax Policy Center (December 18, 2017), https:/
/tpc.io/2Bv5yLd.
\4\ Joint Committee on Taxation, JCX-32R-18: ``Tables Related to
the Federal Tax System as in Effect 2017 Through 2026'' (April 24,
2018), https://bit.ly/2I0JDyX.
And, as Americans continue to struggle to regain their economic footing
after the Wall Street crash and Great Recession, it was unfair for the
legislation to lower taxes on the top earners in our society, down from
39.6 percent to 37 percent. The Tax Cuts and Jobs Act also benefitted
the wealthy by further weakening the estate tax by doubling the
exemption limits, meaning far fewer estates will be subject to the tax.
The previous thresholds were far too generous, and by increasing the
exemption to more than $11 million (or $22 million-plus for married
couples), we further entrench the ability of the ``haves'' in our
society to hoard their wealth, and leave the rest of us to pick up the
---------------------------------------------------------------------------
tab for government services that everyone depends on.
Not only was this legislation unfair, it was also cruel. The tax
changes were unkind because senior citizens and working families will
be made worse off through the passage of the legislation since
decreasing government revenues will mean that funding for services like
Medicare, Medicaid, nutrition services, and public education will be
shortchanged. The newest estimates from CBO project that the tax cut
legislation will increase the U.S. deficit by $1.9 trillion over the
years.\5\ And, lawmakers have already brazenly called for cutting of
social safety net programs that seniors and families depend on in order
to fill the hole caused by these tax cuts that mainly benefit their
wealthy corporate donors. Moreover, the tax legislation is cruel
because it ended the Affordable Care Act's insurance mandate, which
will harshly push 13 million Americans out of the markets and will
raise premiums for the rest of us,\6\ leaving our nation that much
further away from reaching the goal of universal health care, a right
enjoyed by citizens of other industrialized nations.
---------------------------------------------------------------------------
\5\ U.S. Congressional Budget Office, The Budget and Economic
Outlook: 2018-2028 (April 9, 2018), https://bit.ly/2Jt8P1b.
\6\ U.S. Congressional Budget Office, Repealing the Individual
Health Insurance Mandate: An Updated Estimate (November 8, 2017),
https://bit.ly/2AugUyh.
In addition to being unfair and cruel--or likely because of it--the tax
cut legislation is disliked. Despite a momentary uptick, public opinion
remains squarely against the law and approval of the bill continues to
decline.\7\ Even prominent Senators are speaking unfavorably about the
law. Most recently Senator Marco Rubio is quoted as saying,
``[corporations] bought back shares, a few gave out bonuses; there's no
evidence whatsoever that the money's been massively poured back into
the American worker.'' \8\ And, Senator Corker reportedly remarked,
``If it ends up costing what has been laid out here, it could well be
one of the worst votes I've made.'' \9\
---------------------------------------------------------------------------
\7\ See e.g., Ryan Rainey, ``Fewer Voters Report Seeing Paycheck
Bump From 2017 Tax Law, Opposition to the Tax Code Rewrite Climbs to
39%,'' Morning Consult (April 25, 2018), https://bit.ly/2JryhDy; Lydia
Saad, ``Less Than Half in the U.S. Now Say Their Taxes Are Too High,''
Gallup (April 16, 2018), https://news.gallup.com/poll/232361/less-half-
say-taxes-high.aspx; John Hardwood, ``GOP Tax Cuts Have Gotten Less
Popular With Voters, New NBC/WSJ Poll Says,'' CNBC (April 16, 2018),
https://cnb.cx/2qEpVRb.
\8\ ``Marco Rubio Offers His Trump-Crazed Party a Glint of Hope,''
The Economist (April 26, 2018), https://econ.st/2vYOkqv.
\9\ Niv Elis, ``Corker: Tax Cuts Could Be `One of the Worst Votes
I've Made,' '' The Hill (April 11, 2018), https://bit.ly/2I2ygc3.
In addition to the cuts that will come down the line to services
hardworking Americans depend on like health and education programs,
much of the reason the tax cuts are so disliked is because they are a
clear example of self-dealing because the people who passed this law
stand to benefit richly from the changes.\10\ For example, many
lawmakers have significant income from partnerships or limited
liability companies where taxes ``pass-through'' and are filed by the
owners on an individual basis, and a large number of President Trump's
own web of companies are formed as LLCs. These business owners now get
a 20 percent deduction, subject to some complicated rules and
thresholds that are ripe for gamesmanship and that have proven
difficult for true small business owners to navigate.\11\ While, as
noted previously, the majority of the benefit from this provision will
go to millionaires.
---------------------------------------------------------------------------
\10\ Brian Beutler, ``New Memo Shows How Republicans Used Tax Bill
to Enrich Themselves,'' Crooked (April 9, 2018), https://bit.ly/
2H8twRJ.
\11\ Ruth Simon and Richard Rubin, ``Crack and Pack: How Companies
Are Mastering the New Tax Code,'' The Wall Street Journal (April 3,
2018), https://on.wsj.com/2HKzoO2.
This unfair, cruel, and disliked bill was clearly the output of a
corporate patronage system where campaign contributions go in one end
and tax cuts come out of the other. Republican lawmaker Representative
Chris Collins shockingly admitted that his campaign donors were
pressuring him to vote for the legislation.\12\ The ``debate'' around
the bill was also heavily mired in the swamp that Trump's base so
clearly dislikes--Public Citizen research revealed the shocking
statistic that more than 60 percent of all DC lobbyists weighed in on
the bill--more than 7,000 individual lobbyists.\13\
---------------------------------------------------------------------------
\12\ Dylan Scott, ``House Republican: My Donors Told Me to Pass the
Tax Bill `Or Don't Ever Call Me Again,' '' Vox (November 7, 2017),
https://bit.ly/2zmmQeO.
\13\ Taylor Lincoln, Public Citizen, ``Swamped'' (revised edition),
(January 30, 2018), https://bit.ly/2FyuTV1.
If Congress and the President had truly cared about helping everyday
Americans through the tax code changes, they would have actually closed
unpopular tax loopholes instead of opening up new ones. For example,
the carried interest loophole, which allows investment fund managers to
pay a lower tax rate than teachers or construction workers was barely
touched. The same is true for the loophole that allows performance-
based bonuses of more than $1 million dollars to be deducted for most
employees receiving such exorbitant pay packages from financial firms
---------------------------------------------------------------------------
or other hugely profitable companies.
Americans have come together as a society and agreed to invest in
services like health care, education, nutrition assistance, roads,
first responders, courts, and other essential government programs. But
the fact remains that we need tax revenues to fund these services that
we depend on and expect. To address that, the tax debate should have
also looked at creating new sources of revenue such as by taxing Wall
Street trades, among other things. A tax of only 3 cents for every $100
traded would create more than $417 billion in revenue over 10 years.
Money that could easily be channeled toward greater investments in our
communities that will improve the lives of everyone, not just wealthy
shareholders or corporate CEOs.
In America, equal opportunity should mean using taxes to pay for a hand
up when you need it, not a handout to the rich who already have so much
in comparison. We urge you to repeal the Tax Cuts and Jobs Act and come
up with a real tax plan that will benefit all Americans, not just the
few who need it the least.
Sincerely,
Lisa Gilbert Susan Harley
Vice President of Legislative
Affairs Deputy Director
Public Citizen's Congress Watch
division Public Citizen's Congress Watch
division
______
Letter Submitted by Steven Rappaport
May 3, 2018
U.S. Senate
Committee on Finance
Dirksen Senate Office Bldg.
Washington, DC 20510-6200
Regarding: Senate Finance Committee hearing to examine ``Early
Impressions of the New Tax Law,'' May 3, 2018.
Topic of statement: The devastating impact that the 17.45% Repatriation
and GILTI Taxes have on Americans living overseas.
Dear Chairman Hatch, Ranking Member Wyden, and all Members of the
Committee, as you are probably aware, the Repatriation Tax and GILTI
Tax regimes which were intended for corporate multinationals like
Google and Apple have and will continue to have a devastating impact on
a large and unintended group: Americans living abroad who are
individual U.S. Shareholders of CFCs (herein ``Americans Abroad'').
On a conceptual level, it seems pretty clear to me that Americans
Abroad were an unintended target of these new laws. Otherwise, how
could it be explained that: (i) I pay a Repatriation tax higher than
Google and Apple; or (ii) these multinationals pay GILTI tax of 21%
while I pay tax of 37%; or (iii) these corporate giants enjoy tax
credits and deductions under the GILTI regime which I do not; or (iv)
my small-business counterpart based in the United States would never
ever be subject to such draconian taxes or complicated compliance?
On a practical level, while Google and Apple had and continue to have
access to dedicated teams of expert tax specialists working to minimize
their taxes, the small expat firm I retain to do my U.S. taxes is
simply unable to grasp, let alone assist me in complying with these
sophisticated laws.
But it is on the personal level that these laws are the most harmful to
me. I came to the Czech Republic in 1992 to start a company importing
American products called LinkAmerika II, s.r.o. (a Czech limited
liability company). We received no support from any U.S. export program
(nor did our US export partners) and practically no assistance from our
Embassy or Chambers of Commerce. As Czech banks in those days did not
finance foreign-owned companies, we had to only self-finance by using
family loans and brokering imports. As a result, we sacrificed a lot of
growth in the first decade here while we saved to build capital. Still,
we managed to launch American vitamin products, pet foods and peanut
butter, grocery products and over 1,000 different references of food
and health and beauty care. We work with many major FMCG brands
including Smucker's, General Mills, CocaCola, Pepsi, Quaker, Church and
Dwight, Procter & Gamble, Colgate, ConAgra, Blue Diamond and many more,
exporting millions of dollars of products from the USA to Europe and
creating a lot of jobs back at home in the process.
Over the last 26 years we built our capital base by hard work and
savings, reinvesting our profits after paying Czech corporate taxes
which ranged from 19%-24% and then personal taxes on wages, local
social security and dividends. For years, I was left with the choice of
building my business or taking more than a modest salary, I chose
primarily to reinvest.
This repatriation tax means that after investing in my business for 25
years, we have to pay taxes twice on the same corporate earnings going
back to the foundation of my company, plus my personal taxes. More than
that, we have an absolutely enormous reporting requirement that costs
over $8,000 per year for my U.S. return and is a major source of stress
each year.
I feel I and others are being seriously abused by our government and
this is another example of heavy-handedness. Other than Eritreans, none
of my fellow expats have any of these difficulties.
There are 9 million Americans living abroad. We would be the 13th
largest state if combined. We are great unofficial ambassadors for
Americans: introducing products, culture and lifestyles to the varied
communities we inhabit around the world. We use practically no
government services nor have any benefits. Instead of our government
shunning us, it should be embracing us as part of the global potential
of America.
America is pushing away some of the best and brightest ambassadors with
this type of legislation. I do not see any ``American values'' present
in the double taxation of expatriate owned businesses and I think the
result will be antipathy toward our home country that will erode
America over time. This bill is harmful to American expatriates,
American families abroad, and American businesses in America.
On behalf of myself and many other Americans Abroad, I ask you to
exempt us from these draconian taxes. While I may not have been the
target of these taxes, they are financially disastrous to me.
There is a simple balanced solution to solve this problem: an American
living abroad should be exempt from the Repatriation and GILTI Tax
regimes for any given year so long as:
The American meets the conditions set forth under IRC Section
911; and
That person is an individual U.S. Shareholder.
I strongly request that the Congress act to correct this most painful
problem. I thank you for considering my statement.
My name is Steven Rappaport. I am an American living in Prague, and I
vote in Florida.
______
Letter Submitted by John Richardson, Barrister and Solicitor
May 3, 2018
U.S. Senate
Committee on Finance
Dirksen Senate Office Bldg.
Washington, DC 20510-6200
Regarding: Senate Finance Committee hearing to examine ``Early
Impressions of the New Tax Law,'' Tuesday, April 24, 2018.
Topic of statement: The devastating impact that the 17.54% Repatriation
and GILTI Taxes have on Americans living overseas.
Re: Internal Revenue Code Section 965--``Transition Tax''
Part A--Introduction
Dear Chairman Hatch, Ranking Member Wyden, and all Members of the
Committee:
I am based in Toronto, Canada and work with U.S. citizens living
outside the United States who are required to comply with the tax laws
of both the United States and their country of residence. U.S. citizens
living in Canada (the majority of whom are dual Canada/U.S. citizens)
are required to comply with the tax laws of both Canada and the United
States. Dual citizens in general and ``U.S./Canada dual citizens in
particular,'' live in a world where compliance with U.S. tax laws is
somewhere ``between difficult and impossible.'' The difficulty is first
because of the potential for double taxation and second because the
U.S. Internal Revenue Code imposes far more punitive taxation on U.S.
citizens living outside the United States than it does on U.S. citizens
living inside the United States.
Part B--Re: The 2015 Senate Finance Committee Report on Tax Reform
In 2015 large numbers of Americans abroad made submissions to the
Senate Finance Committee regarding U.S. ``citizenship-based taxation''
and FATCA. You will find the submissions collected here: https://
app.box.com/v/CitizenshipTaxation/folder/3414083388.
The largest number of submissions from individuals were from Americans
abroad. The Senate Finance Committee Report was released in July of
2015. The report is here: https://www.finance.senate.gov/imo/media/doc/
The%20International%20Tax
%20Bipartisan%20Tax%20Working%20Group%20Report.pdf.
There was only one reference to the concerns of Americans abroad. This
reference was on pages 80-81. Specifically the report included:
F. Overseas Americans--According to working group submissions, there
are currently 7.6 million American citizens living outside of the
United States. Of the 347 submissions made to the international working
group, nearly three quarters dealt with the international taxation of
individuals, mainly focusing on citizenship-based taxation, the Foreign
Account Tax Compliance Act (FATCA), and the Report of Foreign Bank and
Financial Accounts (FBAR). While the co-chairs were not able to produce
a comprehensive plan to overhaul the taxation of individual Americans
living overseas within the time-constraints placed on the working
group, the co-chairs urge the Chairman and Ranking Member to carefully
consider the concerns articulated in the submissions moving forward.
I am sorry to observe that the ``concerns articulated in the
submissions'' of Americans abroad have been neither heard nor
considered. At the risk of stating the obvious, most Americans abroad
are ``tax residents'' of other countries and are therefore subject to
taxation in those other countries. In addition, many of these Americans
abroad are in fact citizens of the countries where they reside. They
cannot: (1) live in other countries; (2) be subject to taxation in
those other countries; and (3) be expected to be compliant with the
Internal Revenue Code of the United States. Double taxation is only one
part of the problem. The larger problem is that their non-U.S.
retirement assets and pension plans are subject to punitive taxation by
the United States. These problems cannot be alleviated by the use of
the Foreign Earned Income Exclusion, foreign tax credits, or a
combination of the two. See for example:
The biggest cost of being a ``dual Canada/U.S. tax filer'' is
the ``lost opportunity'' available to pure Canadians.
http://www.citizenshipsolutions.ca/2017/08/04/the-biggest-cost-
of-being-a-dual-canadau-s-tax-filer-is-the-lost-apportunity-
avaiIable-to-pure-canadians/
Part C--Senate Finance Committee Hearings About the ``Tax Cuts and Jobs
Act''--April 24, 2018
On April 24, 2018, the Senate Finance Committee held hearings which
were designed to explore preliminary experiences with the new ``Tax
Cuts and Jobs Act.''
These hearings featured no discussion of how the Tax Cuts and Jobs Act
impacts Americans Abroad. Furthermore, the hearings included no
discussion of the Section 965 ``Repatriation/Transition'' tax which (1)
when applied to Homeland Americans is a ``sweet deal'' but (2) when
applied to Americans abroad has the potential to effectively confiscate
their ``retirement savings.''
Part D--Defining the Problem--The ``Transition Tax'' Found in Internal
Revenue Code Section 965 Will Destroy Many Americans Abroad
The purpose of this letter is to alert you to the disastrous impact
that Section 965 of the Internal Revenue Code has on U.S. citizens with
small business corporations (which qualify as ``Controlled Foreign
Corporations'' under the Internal Revenue Code). It is common for many
residents of non-U.S. countries to use local corporations to carry on
their small businesses. In Canada, small business corporations are used
both as (1) a way to carry on business and (2) a vehicle to create
private pension plans. Note that these ``corporations'' are not foreign
to the individual. On the contrary, they are ``local'' to the
individual, but ``foreign'' to the United States. Unfortunately, the
tax compliance industry is interpreting Internal Revenue Code 965 to
apply to--Canadian Controlled Private Corporations--which are really
the equivalent of ``S'' corporations or LLC corporations in the United
States. As a result, Many Canadian/U.S. dual citizens must now choose
between compliance with U.S. tax laws (which will erode a large part of
the undistributed earnings in their corporations) and retaining their
retirement savings.
Part E--The Contextual Background--Why a ``Transition Tax'' at All?
It's perfectly clear that the purpose of the tax was to force U.S.
multinationals to ``repatriate earnings'' which have not been subject
to U.S. taxation in the past. To a large extent, it was a ``trade off''
for reducing the U.S. corporate tax rate from 35% to 21%.
To understand the context, see the following testimony of Apple CEO Tim
Cook before a Levin Subcommittee, https://www.youtube.com/
watch?v=Lx6YINOfjaQ.
It's clear that the target of the law was U.S. multi-nationals and not
individual Canadian residents with dual Canada/U.S. citizenship.
Part F--What Internal Revenue Code Section 965 Requires
Section 965 prescribes what I will refer to as the ``transition tax.''
In general, the ``transition tax'' imposes a ``one time'' tax on the
``undistributed earnings'' of certain Canadian (and other foreign)
corporations.
Part G--Re: The 2017 Tax Cuts and Jobs Act and the ``Taxation of
Americans Abroad''
On December 22, 2017 President Trump signed the ``Tax Cuts and Jobs
Act'' into law. The ``Tax Cuts and Jobs Act'' included a massive
overhaul of the U.S. International Tax system as it affects U.S.
corporations. There were no corresponding changes for individual
Americans abroad. In fact, the ``Tax Cuts and Jobs Act'' has made
things considerably worse. Specifically the ``Transition/Repatriation
tax'' found in IRC Section 965 and the GILTI regime found in IRC
Section 951A have made the situation for many Americans abroad
impossible to continue.
The ``Transition/Repatriation Tax'' and ``GILTI'' were enacted without
any awareness of how they might impact individuals who were (1) United
States shareholders living outside the United States and (2) were also
subject to the tax systems of other countries.
As you are probably aware, the Repatriation Tax and GILTI Tax regimes
which were intended for corporate multinationals like Google and Apple
have and will continue to have a devastating impact on a large and
unintended group: Americans living abroad who are individual U.S.
Shareholders of CFCs (herein ``Americans Abroad'').
The following 7 points, which are based on a comment to an article
published by the Financial Times of London, describe the impact of the
``transition tax'' on Canada/U.S. dual citizens who have Canadian
Controlled Private Corporations.
Interesting article that demonstrates the impact of the U.S. tax policy
of (1) exporting the Internal Revenue Code to other countries and (2)
using the Internal Revenue Code to impose direct taxation on the ``tax
residents'' of those other countries.
Some thoughts on this:
1. Different countries have different ``cultures'' of financial
planning and carrying on businesses. The U.S. tax culture is such that
an individual carrying on a business through a corporation is
considered to be a ``presumptive tax cheat.'' This is not so in other
countries. For example, in Canada (and other countries), it is normal
for people to use small business corporations to both carry on business
and create private pension plans. So, the first point that must be
understood is that (if this tax applies) it is in effect a ``tax''
(actually its confiscation) of private pension plans! That's what it
actually is. The suggestion in one of the comments that these
corporations were created to somehow avoid ``self-employment'' tax
(although possibly true in countries that don't have totalization
agreements) is generally incorrect. I suspect that the largest number
of people affected by this are in Canada and the U.K. which are
countries which do have ``totalization agreements.''
2. None of the people interviewed, made the point (or at least it was
not reported) that this ``tax'' as applied to individuals is actually
higher than the ``tax'' as applied to corporations. In the case of
individuals the tax would be about 17.5% and not the 15.5% for
corporations. (And individuals do not get the benefit of a transition
to ``territorial taxation.'')
3. As Mr. Bruce notes, people will not easily be able to pay this.
There is no realization event whatsoever. (It's just: ``Hey, we see
there is some money there, let's take it.'') Because there is no
realization event, this should be viewed as an ``asset confiscation''
and not as a ``tax.''
4. Understand that this is a pool of capital that was NEVER subject to
U.S. taxation in the past. Therefore, if this is a tax at all, it
should be viewed as a ``retroactive tax.''
5. Under general principles of law, common sense and morality (does any
of this matter?) the retained earnings of non-U.S. corporations are
first subject to taxation by the country of incorporation. The U.S.
``transition tax'' is the creation of a ``fictitious taxable event''
which results in a pre-emptive ``tax strike'' against the tax base of
other countries. If this is allowed under tax treaties, it's only
because when the treaties were signed, nobody could have imagined
anything this outrageous.
6. It is obvious that this was never intended to apply to Americans
abroad. Furthermore, no individual would even imagine that this could
apply to them without ``education provided by the tax compliance
industry.'' Those in the industry should figure out how to argue that
this was never intended to apply to Americans abroad, that there is no
suggestion from the IRS that this applies to Americans abroad, that
there is no legislative history suggesting that this applies to
Americans abroad, and that this should not be applied to Americans
abroad.
7. Finally, the title of this article refers to ``Americans abroad.''
This is a gross misstatement of the reality. The problem is that these
(so called) ``Americans abroad'' are primarily the citizens and ``tax
residents'' of other countries--that just happen to have been born in
the United States. They have no connection to the USA. Are these
citizen/residents of other countries (many who don't even identify as
Americans) expected to simply ``turn over'' their retirement plans to
the IRS? Come on!
Some of these thoughts are explored in an earlier post: ``U.S. Tax
Reform and the nonresident corporation owner: Does the Section 965
`transition tax' apply''?
From:
http://citizenshiptaxation.ca/part-2-the-transition-tax-is-resistance-
futile-the-possible
-use-of-the-canada-u-s-tax-treaty-to-defeat-the-transition-tax/
Part H--About the Problem of ``Double Taxation''
To this I would add that, because Canadian residents are also subject
to taxation in Canada, the Section 965 Transition Tax will certainly
result in double taxation. The reason is that:
First, the transition tax is paid by the individual to the United
States out of the undistributed earnings of the corporation.
Second, when the undistributed income is distributed Canada will impose
a second tax on that same income.
Third, because of timing mismatches, there is no possibility of
offsetting the Canadian tax owed by the U.S. tax paid.
Bottom Line: This is clear double taxation.
Part I--The Canada U.S. Tax Treaty and (1) Double Taxation and (2) U.S.
Taxation of the ``Undistributed Earnings'' of Canadian Corporations
U.S. taxation of the ``undistributed earnings'' of Canadian
Corporations:
Paragraph 5 of Article X of the Canada U.S. Tax treaty reads as
follows:
5. Where a company is a resident of a Contracting State, the other
Contracting State may not impose any tax on the dividends paid by the
company, except insofar as such dividends are paid to a resident of
that other State or insofar as the holding in respect of which the
dividends are paid is effectively connected with a permanent
establishment or a fixed base situated in that other State, nor subject
the company's undistributed profits to a tax, even if the dividends
paid or the undistributed profits consist wholly or partly of profits
or income arising in such other State.
By its plain terms the treaty appears to prohibit the United States
imposing a tax on the undistributed earnings of a Canadian company.
Article XIV--Double Taxation
Article XIV makes it clear that the spirit of the treaty is to avoid
``double taxation.'' By creating a ``fictitious taxable event,'' the
United States is creating an event to impose taxation before the
Government of Canada imposes taxation according to their rules (which
are based on an actual distribution and not a deemed distribution).
It seems reasonable to conclude that the Section 965 Transition Tax
violates at least the spirit of the tax treaty, https://www.fin.gc.ca/
Treaties-Conventions/usa_-eng.asp.
Part J--U.S. Tax Treaties and the Tax Cuts and Jobs Act
The Section 965 transition tax is arguably only one part of the Tax
Cuts and Jobs Act that may not respect U.S. tax treaties. As argued by
H. David Rosenbloom:
``If the policies at work are clear, it must also be said that the
international provisions have a distinctly isolationist flavour. They
take no account of the larger world, where countries other than the
U.S. exist and have their own ideas about taxation. They make no
accommodation to the U.S. network of tax treaties, which the
international provisions appear to violate in several respects. In
fact, the word ``treaties'' cannot be found in these provisions at all.
. . .
``The underlying problem is that the international provisions have been
crafted on the unstated assumption that the U.S. is the only country
whose tax policies matter. That is unfortunate not simply because it is
untrue but because it holds the potential for serious harm to U.S.
interests. It is a shame to see the country fritter away a position of
world leadership in a field as important as international taxation--a
field that has gained immeasurably in international recognition as a
result of BEPS and other developments in the OECD, the European Union,
and at the UN. The fact that the U.S. Congress pretended for years that
the BEPS project did not exist is emblematic of the attitude that is
now manifest in the new international provisions. Our companies are
likely to pay a price for the decline in U.S. leadership but, make no
mistake, it will ultimately have negative influence in many corners of
our national life.''
http://www.capdale.com/international-aspects-of-us-tax-reform-is-this-
really-where-we-want-to-go
Part K--How Could This Unintended Consequence Have Occurred?
On a conceptual level, it seems pretty clear to me that Americans
abroad were an unintended target of these new laws. Otherwise, how
could it be explained that: (i) an individual American abroad pays a
Repatriation tax higher than Google and Apple; or (ii) these
multinationals pay GILTI tax of 21% while an individual pays tax of
37%; or (iii) these corporate giants enjoy tax credits and deductions
under the GILTI regime which an individual does not; or (iv) an
individual's small-business counterpart based in the United States,
carrying on business through a U.S. corporation, would never ever be
subject to such draconian taxes or complicated compliance; or (v) those
individuals living inside the United States carrying on business
through a CFC would not be impacted by the ``Transition/Repatriation''
in the same devastating way that an individual living outside the
United States would be?
On a practical level, while Google and Apple had and continue to have
access to dedicated teams of expert tax specialists working to minimize
their taxes, individual Canadian residents do not have access to the
kind of sophisticated accounting and legal advice that is necessary for
complying with these sophisticated laws.
Part L--Unintended Consequences, Real People With Real Lives and Real
Suffering
But enough of the theory, the lives and retirements of individuals are
being destroyed by the unintended consequences of the Section 965
``transition tax.''
For example, meet Suzanne and Ted Herman of Vancouver, British
Columbia:
Begin with the video here:
http://www.cbc.ca/player/play/1223560259697
and then read:
http://www.cbc.ca/.../transition-tax-trump-corporations-1.463...
http://www.cbc.ca/listen/shows/cbc-news-the-world-at-six @14:30
http://www.cbc.ca/player/play/1222849091745
http://www.cbc.ca/.../poli.../trump-trudeau-tax-reform-1.4644074
The Hermans are only the ``tip of the iceberg.''
Part M--It's All a Mistake--Please Fix It!
On behalf of many other Americans Abroad, I ask you to exempt them from
these draconian taxes. While I may not have been the target of these
taxes, they are financially disastrous to them.
Part N--A Proposed Solution
There is a simple balanced solution to solve this problem: an American
living abroad should be exempt from the Repatriation and GILTI Tax
regimes for any given year so long as: (1) the American meets the
conditions set forth under IRC Section 911; and (2) that person is an
individual U.S. Shareholder.
I strongly request that the Congress act to correct this most painful
problem. I thank you for considering my statement.
John Richardson --Toronto, Canada
______
Letter Submitted by Monte Silver
April 21, 2018
U.S. Senate
Committee on Finance
Dirksen Senate Office Bldg.
Washington, DC 20510-6200
Regarding: Senate Finance Committee hearing to examine ``Early
Impressions of the New Tax Law,'' Tuesday, April 24, 2018.
Topic of statement: The devastating impact that the 17.45% Repatriation
and GILTI Taxes have on Americans living overseas.
Dear Chairman Hatch, Ranking Member Wyden, and all Members of the
Committee, as you are probably aware, the Repatriation Tax and GILTI
Tax regimes which were intended for corporate multinationals like
Google and Apple have and will continue to have a devastating impact on
a large and unintended group: Americans living abroad who are
individual U.S. Shareholders of CFCs (herein ``Americans Abroad'').
On a conceptual level, it seems pretty clear to me that Americans
Abroad were an unintended target of these new laws. Otherwise, how
could it be explained that: (i) I pay a Repatriation tax higher than
Google and Apple; or (ii) these multinationals pay GILTI tax of 21%
while I pay tax of 37%; or (iii) these corporate giants enjoy tax
credits and deductions under the GILTI regime which I do not; or (iv)
my small-business counterpart based in the United States would never
ever be subject to such draconian taxes or complicated compliance?
On a practical level, while Google and Apple had and continue to have
access to dedicated teams of expert tax specialists working to minimize
their taxes, the small expat firm I retain to do my U.S. taxes is
simply unable to grasp, let alone assist me in complying with these
sophisticated laws.
But it is on the personal level that these laws are the most harmful to
me. I am a service provider. I am the only person employed in my small
one-person local company. For years I have worked very hard to support
my wife and two children. My local company pays very high local
corporate income taxes. I personally pay high local personal income and
social security taxes. If I continue to work hard, I hope to be able to
save a modest amount in my CFC for my retirement and maybe even help my
children a bit with their higher education. But these two taxes will
rob me of my ability of achieving these humble goals. How can this be?
On behalf of myself and many other Americans Abroad, I ask you to
exempt us from these draconian taxes. While I may not have been the
target of these taxes, they are financially disastrous to me.
There is a simple balanced solution to solve this problem: an American
living abroad should be exempt from the Repatriation and GILTI Tax
regimes for any given year so long as: (1) the American meets the
conditions set forth under IRC Section 911; and (2) that person is an
individual U.S. Shareholder.
I strongly request that the Congress act to correct this most painful
problem. I thank you for considering my statement.
My name is Monte Silver. I am an American living in Israel, and I vote
in California.
______
Letter Submitted by Marc Solby
April 23, 2018
U.S. Senate
Committee on Finance
Dirksen Senate Office Bldg.
Washington, DC 20510-6200
Regarding: Senate Finance Committee hearing to examine ``Early
Impressions of the New Tax Law,'' Tuesday, April 24, 2018.
Topic of statement: The devastating impact that the 17.45% Repatriation
and GILTI Taxes have on Americans living overseas.
Dear Chairman Hatch, Ranking Member Wyden, and all Members of the
Committee, as you are probably aware, the Repatriation Tax and GILTI
Tax regimes which were intended for corporate multinationals such as
Google and Apple have a devastating impact on a large and unintended
group: Americans living abroad who are individual U.S. Shareholders of
CFCs (herein ``Americans Abroad.'')
On a conceptual level, it seems pretty clear to me that Americans
Abroad were an unintended target of these new laws. Otherwise, how
could it be explained that: (i) I pay a Repatriation tax higher than
Google and Apple; or (ii) these multinationals pay GILTI tax of 21%
while I pay tax of 37%; or (iii) these corporate giants enjoy tax
credits and deductions under the GILTI regime which I do not; or (iv)
my small-business counterpart based in the United States would never
ever be subject to such draconian taxes or complicated compliance?
On a practical level, while Google and Apple had and continue to have
access to dedicated teams of expert tax specialists working to minimize
their taxes, the small firm I retain in Buffalo, NY to do my U.S. taxes
is basically unable to assist me in complying with these sophisticated
laws.
But it is on the personal level that these laws are the most harmful to
me. I am a 54-year-old marketing consultant with two kids in college. I
came to Canada as a child and made a life in Montreal and then Toronto.
Despite living all my adult life in Canada, I chose not to renounce my
American Citizenship and set about complying with the many tax filing
complications required of Americans Abroad. I have incurred the time
and expense of ensuring compliance, as required.
In 2001 I left my corporate job to start a one-person consultancy
called Lighthouse Consulting and formed a corporation. During the good
years I would take an adequate salary and leave the remainder of
earnings in my company as savings for my retirement in 2020. Of course,
I paid Canadian corporate tax on those earnings in the year they were
made and will pay personal tax when those funds are withdrawn from the
corporation. Several weeks ago, I was advised that I owe 17.5% of my
total ``nest egg + cash on hand + receivables'' in U.S. tax. I am still
unsure what the total amount will be, but it will likely be around
$USD150,000. Needless to say this is devastating to my financial plan.
Prior to this moment these funds were never subject to this kind of
double taxation. There is no way I could have arranged my affairs
appropriately for this kind of ``retroactive'' taxation. I am a
``sitting duck'' to what is basically a confiscation. Sadly, if
enacted, my choice now is to work an additional 5 years or stiff my
kids on their college bills.
On behalf of myself and many other Americans Abroad, I ask you to
exempt us from these draconian taxes. While I may not have been the
target of these taxes, they are financially disastrous to me.
There is a simple balanced solution to solve this problem: an American
living abroad should be exempt from the Repatriation and GILTI Tax
regimes for any given year so long as:
The American meets the conditions set forth under IRC Section
911; and
That person is an individual U.S. Shareholder.
I strongly request that the Congress act to correct this most painful
problem. I thank you for considering my statement.
My name is Marc Solby. I am an American living in Canada, and I vote in
Vermont.
______
Letter Submitted by Isaac D. Waxman
April 25, 2018
U.S. Senate
Committee on Finance
Dirksen Senate Office Bldg.
Washington, DC 20510-6200
Regarding: Senate Finance Committee hearing to examine ``Early
Impressions of the New Tax Law,'' Tuesday, April 24, 2018.
Topic of statement: The devastating impact that the 17.45% Repatriation
and GILTI Taxes have on Americans living overseas.
Dear Chairman Hatch, Ranking Member Wyden, and all Members of the
Committee, as you are probably aware, the Repatriation Tax and GILTI
Tax regimes were intended for corporate multinationals such as Google
and Apple. Nonetheless, these taxes have and will continue to have a
devastating impact on a large and unintended group: Americans living
abroad who are individual U.S. Shareholders of CFCs (herein ``Americans
Abroad'').
On a conceptual level, it seems clear to me that Americans Abroad were
an unintended target of these new laws. Otherwise, how could it be
explained that: (i) I pay a Repatriation tax higher than Google and
Apple; or (ii) these multinationals pay GILTI tax of 21% while I pay
tax of 37%; or (iii) these corporate giants enjoy tax credits and
deductions under the GILTI regime which I do not; or (iv) my small-
business counterpart based in the United States would never ever be
subject to such draconian taxes or complicated compliance?
On a practical level, while Google and Apple had and continue to have
access to dedicated teams of expert tax specialists working to minimize
their taxes, our firm does not have such resources available. We have
our modest firm in Israel. We provide services to our clients, collect
fees, and then pay our salaries and other expenses. In the normal
course of operating our business we retain a modest amount of earnings
as appropriate to service our cash flow needs from year to year. The
new laws impose a significant burden on our firm both in terms of
additional taxation and compliance.
On behalf of myself and many other Americans Abroad, I ask you to
exempt us from these draconian taxes and demands for reporting. While I
may not have been the target of these taxes, they are financially
disastrous to me.
There is a simple balanced solution to solve this problem: an American
living abroad should be exempt from the Repatriation and GILTI Tax
regimes for any given year so long as:
The American meets the conditions set forth under IRC Section
911; and
That person is an individual U.S. Shareholder.
I strongly request that the Congress act to correct this most painful
problem. I thank you for considering my statement.
My name is Isaac D. Waxman. I am an American living in Israel, and I
vote in Pennsylvania.
______
Letter Submitted by Jenny Webster
April 28, 2018
U.S. Senate
Committee on Finance
Dirksen Senate Office Bldg.
Washington, DC 20510-6200
Statement for the Record--``Early Impressions of the New Tax Law,''
April 24, 2018
Dear Senators, at the Full Committee Hearing entitled ``Early
Impressions of the New Tax Law,'' held on Tuesday, April 24, 2018, no
mention was made of Territorial Taxation for Individuals (TTFI). This
was disappointing, because the need to abolish the archaic and wasteful
system of citizenship-based taxation (CBT) is urgent given the record-
breaking numbers of Americans who have been tragically forced to
renounce their citizenship since the implementation of the Foreign
Account Tax Compliance Act, and the thousands of others who are sadly
considering such a decision, like myself. Renunciation used to be
absolutely unthinkable, but is now a necessity for many, simply to be
able to live a normal life. The cost of lifelong complex
extraterritorial compliance (e.g., hundreds of pounds every year to
prove that I owe no taxes to the USA, as I pay in full where I live),
and severely reduced or non-existent banking and saving facilities,
make U.S. citizenship into a hazard. The damage wrought by CBT has
worsened with the new Transition Tax and GILTI introduced in the TCJA,
which will force many middle-class Americans overseas into bankruptcy.
Changing to TTFI will solve these problems immediately, not to mention
bringing policy for individuals in line with the TCJA's Territorial
Taxation for Corporations, increasing America's competitiveness, and
protecting the outreach of its diaspora, a valuable asset.
Representatives Holding and Brady stated the pressing need for TTFI on
the House floor. Millions of Americans like me around the world are
living in hope that Congress will make this important change so that we
can go on being mini-ambassadors, proud and blessed to be American.
Thank you for your attention and I hope that the implementation of TTFI
is a top priority in the Committee's further actions.
Yours sincerely,
Jenny Webster
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