[Senate Hearing 115-701]
[From the U.S. Government Publishing Office]


                                                    S. Hrg. 115-701

                  EARLY IMPRESSIONS OF THE NEW TAX LAW

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

                                 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

                              ----------                              

                           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

                              ----------                              


                        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.*
---------------------------------------------------------------------------
    * 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.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \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 
---------------------------------------------------------------------------
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\
---------------------------------------------------------------------------
    \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\
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
                          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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
                  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 
---------------------------------------------------------------------------
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).
---------------------------------------------------------------------------
              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\
---------------------------------------------------------------------------
    \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\
---------------------------------------------------------------------------
    \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\
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    \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\
---------------------------------------------------------------------------
    \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\
---------------------------------------------------------------------------
    \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\
---------------------------------------------------------------------------
    \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 
---------------------------------------------------------------------------
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\
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    \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\
---------------------------------------------------------------------------
    \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\
---------------------------------------------------------------------------
    \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\
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
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\
---------------------------------------------------------------------------
    \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 
---------------------------------------------------------------------------
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\
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
            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.
---------------------------------------------------------------------------
    \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\
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    \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\
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
            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.
---------------------------------------------------------------------------
            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\
---------------------------------------------------------------------------
    \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\
---------------------------------------------------------------------------
    \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\
---------------------------------------------------------------------------
    \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\
---------------------------------------------------------------------------
    \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:
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    \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 
---------------------------------------------------------------------------
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\
---------------------------------------------------------------------------
    \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\
---------------------------------------------------------------------------
    \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 
---------------------------------------------------------------------------
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\
---------------------------------------------------------------------------
    \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:
---------------------------------------------------------------------------
    \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\
---------------------------------------------------------------------------
    \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 
---------------------------------------------------------------------------
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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