[Senate Hearing 117-42]
[From the U.S. Government Publishing Office]
S. Hrg. 117-42
ENDING A RIGGED TAX CODE: THE
NEED TO MAKE THE WEALTHIEST
PEOPLE AND LARGEST CORPORA-
TIONS PAY THEIR FAIR SHARE OF
TAXES
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HEARING
BEFORE THE
COMMITTEE ON THE BUDGET
UNITED STATES SENATE
ONE HUNDRED SEVENTEENTH CONGRESS
FIRST SESSION
__________
March 25, 2021
__________
Printed for the use of the Committee on the Budget
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
__________
U.S. GOVERNMENT PUBLISHING OFFICE
45-119 WASHINGTON : 2021
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COMMITTEE ON THE BUDGET
BERNARD SANDERS, Vermont, Chairman
PATTY MURRAY, Washington LINDSEY O. GRAHAM, South Carolina
RON WYDEN, Oregon CHARLES E. GRASSLEY, Iowa
DEBBIE STABENOW, Michigan MIKE CRAPO, Idaho
SHELDON WHITEHOUSE, Rhode Island PATRICK TOOMEY, Pennsylvania
MARK R. WARNER, Virginia RON JOHNSON, Wisconsin
JEFF MERKLEY, Oregon MIKE BRAUN, Indiana
TIM KAINE, Virginia RICK SCOTT, Florida
CHRIS VAN HOLLEN, Maryland BEN SASSE, Nebraska
BEN RAY LUJAN, New Mexico MITT ROMNEY, Utah
ALEX PADILLA, California JOHN KENNEDY, Louisiana
KEVIN CRAMER, North Dakota
Warren Gunnels, Majority Staff Director
Nick Myers, Republican Staff Director
C O N T E N T S
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THURSDAY, MARCH 25, 2021
Page
STATEMENTS BY COMMITTEE MEMBERS
Chairman Bernard Sanders......................................... 1
Ranking Member Lindsey Graham.................................... 4
WITNESSES
Statement of Abigail E. Disney, Chief Executive Officer (CEO) and
Co-Founder, Fork Films, Chair and Co-Founder, Level Forward.... 5
Prepared Statement of............................................ 35
Statement of Gabriel Zucman, Associate Professor of Economics,
University of California, Berkeley............................. 7
Prepared Statement of............................................ 40
Questions and Answers (Post-Hearing) from:
Senator Mike Crapo....................................... 91
Senator Chris Van Hollen................................. 92
Senator Mark R. Warner................................... 93
Statement of Amy Hanauer, Executive Director, Institute on
Taxation and Economic Policy................................... 8
Prepared Statement of............................................ 55
Questions and Answers (Post-Hearing) from:
Chairman Bernard Sanders................................. 95
Senator Chris Van Hollen................................. 97
Statement of Maya MacGuineas, President, Committee for a
Responsible Federal Budget..................................... 10
Prepared Statement of............................................ 71
Questions and Answers (Post-Hearing) from:
Senator Mike Crapo....................................... 98
Senator Mark R. Warner................................... 101
Statement of Scott A. Hodge, President, Tax Foundation........... 12
Prepared Statement of............................................ 78
Questions and Answers (Post-Hearing) from:
Chairman Bernard Sanders................................. 102
Senator Mike Crapo....................................... 103
ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD
Letter from National Retail Federation, Senior Vice President,
David French Submitted for the Record by Senator Graham........ 106
ENDING A RIGGED TAX CODE: THE NEED TO MAKE THE WEALTHIEST PEOPLE AND
LARGEST CORPORATIONS PAY THEIR FAIR SHARE OF TAXES
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THURSDAY, MARCH 25, 2021
U.S. Senate,
Committee on the Budget,
Washington, D.C.
The Committee met, pursuant to notice, at 11:00 a.m., via
Webex and in Room SH-216, Hart Senate Office Building,
Honorable Bernard Sanders, Chairman of the Committee,
presiding.
Present: Senators Sanders, Whitehouse, Warner, Kaine, Van
Hollen, Lujan, Padilla, Graham, Grassley, Crapo, Toomey,
Johnson, Braun, and Scott.
Staff Present: Warren Gunnels, Majority Staff Director;
Nick Myers, Republican Staff Director; Richard Phillips,
Majority Senior Tax Analyst; and Erich Hartman, Republican
Economist.
OPENING STATEMENT OF CHAIRMAN BERNARD SANDERS
Chairman Sanders. Let me call this hearing to order. Let me
thank the Ranking Member, Lindsey Graham, for his help, and let
me thank our colleagues on the Committee and our witnesses who
will be testifying remotely--almost all, not all--this morning.
Right now there is a vote that has been called. It will be
the first of four votes, so I think you are going to see
members moving in and out.
Last week, as some may recall, the Budget Committee held a
hearing on income and wealth inequality in America. We talked
about the economic absurdity of two people in this country--
Jeff Bezos and Elon Musk--owning more wealth than the bottom 40
percent of the American people. Two people owning more wealth
than the bottom 40 percent. We talked about the obscenity of
the 50 wealthiest Americans owning more wealth than the bottom
half of our society--165 million people--while over 90 million
Americans are uninsured or underinsured, unable to go to the
doctor when they need.
We talked about the absurdity of the top one-tenth of 1
percent owning more wealth than the bottom 90 percent, as the
same time as half a million Americans are homeless and children
in our country are going hungry.
We have talked about the fact that over 650 billionaires in
America became $1.3 trillion richer during the pandemic while
63 percent of Americans have been living paycheck to paycheck,
worried that if their cars break down or their kids get sick,
they are going to be in financial disaster.
Today, in the midst of massive wealth and income
inequality, this hearing is going to talk about the need to end
a corrupt and rigged Tax Code that has showered trillions of
dollars in tax breaks to the wealthiest people in our country
and the most profitable corporations. Warren Buffett, one of
the very wealthiest people in America, is right. Buffett is
right. We can no longer tolerate a Tax Code that allows him,
worth $95 billion, to pay a lower tax rate than his secretary.
We can no longer tolerate many large corporations making
billions of dollars a year in profits paying nothing, zero, in
Federal income taxes while at the same time half of older
Americans have no retirement savings and no idea about how they
will be able to retire with dignity.
According to recent studies, in America today the top 1
percent is responsible for 70 percent of the taxes that go
unpaid each year. In other words, the top 1 percent is evading
some $266 billion in Federal taxes each and every year. And
even in Washington, that is a tidy sum of money.
If we collected just a third--one-third--of the unpaid
taxes of the very rich, we could provide in this country and
make public colleges and universities tuition free, provide
universal school meals to every child, and guarantee clean
drinking water to every person in our country. And that is
because the people on top have underreported some 20 percent of
their income.
Despite what some of my Republican colleagues may claim,
the reality is that when you take into account Federal income
taxes, payroll taxes, gas taxes, sales taxes, and property
taxes--i.e., the entire tax system--we have as a Nation an
extremely unfair Tax Code that allows billionaires to pay a
lower effective tax rate than public school teachers, truck
drivers, and nurses. And that has got to change.
We need a progressive tax system based on the ability to
pay, not a regressive tax system that rewards the wealthy and
the well-connected.
Let us be clear. As I think all of us know, this country
faces enormous structural crises that we must address.
Everybody understands that our infrastructure is crumbling,
that is, our roads, bridges, dams, wastewater plants, sewers,
culverts, and, yes, affordable housing. And it is going to take
a lot of money to rebuild our crumbling infrastructure.
In order to combat climate change, which is an existential
threat to our planet, we need to fundamentally transform our
energy system to make it energy efficient and to build
sustainable emergency systems, also an expensive proposition.
Further, we need to do what every other major country on
Earth does, and that is to guarantee health care to every man,
woman, and child as a human right, not a privilege. We need to
make sure that all of our children, regardless of their income,
are able to get a higher education if that is what they desire.
We need to expand not cut Social Security so that 20 percent of
our seniors are no longer forced to survive on an income of
less than $13,500 a year.
Now, I think as many people know, as a result of the Trump
tax cuts for the rich, in 2018 over 90 Fortune 500 companies
not only paid nothing in Federal income taxes, they actually
received billions of dollars in tax rebates from the Internal
Revenue Service (IRS). Profitable corporations pay nothing in
Federal taxes, get a rebate from the IRS.
For example--just a few examples--in 2018 Amazon received a
$129 million refund check from the IRS after making $10.8
billion in profits. Delta received a $187 million refund check
from the IRS after making over $5 billion in profits. Chevron
received a $181 million refund check from the IRS after making
$4.5 billion in profits. And this gross unfairness never ends.
Recently, as many know, some of my Republican colleagues
introduced a bill to give a $1.7 trillion tax break to the 650
richest families in America, families who are now worth over $4
trillion. So in the midst of all of the problems facing our
country, some of my Republican colleagues have decided that
what we should do is give massive, massive tax breaks to the
very, very wealthiest families in America, the top one-tenth of
1 percent.
For example, under this effort to completely repeal the
estate tax, which some of my Republican colleagues are talking
about, the Walton family, the richest family in America and the
owners of Walmart, will get a tax break of up to $88 billion.
Got that? Richest family in America under the repeal of the
entire estate tax would get an $88 billion tax break.
The family of the wealthiest individual in the world, Jeff
Bezos, owner of Amazon, complete repeal of the estate tax would
mean that that family would receive a tax break of more than
$70 billion.
Meanwhile, under that plan to completely repeal the estate
tax, over 99.9 percent of families in America, including every
family farmer, rancher, and small business owner, would get
nothing--not a penny in tax relief. Why? Because the estate tax
repeal only applies to people who inherit over $11.7 million in
wealth.
Well, needless to say, I have a very different perspective,
and that is why I am introducing today an estate tax bill with
Senators Whitehouse, Gillibrand, Reed, and Van Hollen that
would do exactly the opposite of what my Republican colleagues
would do. It would demand that the families of the billionaire
class not only not get a tax break but start paying their fair
share of taxes.
And, by the way, interestingly enough, when we talk about
the estate tax, I hope my colleagues understand this is not an
idea invented by Bernie Sanders and some other progressives. It
was an idea developed, created by a good Republican named Teddy
Roosevelt. And as Teddy Roosevelt said--and this is an
important quote because it is as relevant today as it was back
then. Roosevelt said, ``The absence of effective State, and,
especially, national, restraint upon unfair money-getting has
tended to create a small class of enormously wealthy and
economically powerful men, whose chief object is to hold and
increase their power. The prime need is to change the
conditions which enable these men to accumulate power.
Therefore, I believe in a graduated inheritance tax on big
fortunes...properly safeguarded against evasion, and increasing
rapidly in amount with the size of the estate.''
Teddy Roosevelt, Republican. And Roosevelt was, of course,
exactly right.
Further, today I am introducing the Corporate Offshore Tax
Dodging Prevention Act, legislation that would prevent
corporations from shifting their profits offshore to avoid
paying U.S. taxes and would restore the top corporate rate to
35 percent, where it was before Trump became President. Today
corporations are avoiding hundreds of billions of dollars in
taxes by shifting their profits to offshore tax havens in the
Cayman Islands, Bermuda, and other locations.
Interestingly, in 1952, corporate income taxes amounted to
32 percent of all Federal revenue. Today that figure is down to
just 7 percent.
So here is the bottom line. We are living in a country
which has enormous needs, we have a very large deficit, and yet
we have a Tax Code which enables the very, very richest people
in America and the largest corporations to avoid paying their
fair share of taxes. That has got to change.
With that, I am happy to give the microphone over to my
colleague, the Ranking Member, Lindsey Graham.
OPENING STATEMENT OF SENATOR LINDSEY GRAHAM
Senator Graham. Thank you, Mr. Chairman. These debates are
very worth having, well worth having. In 2017, we did, in fact,
cut taxes. We cut taxes in a way to make American corporations
competitive with the worldwide rate. What happened before
COVID, you saw a rise in wealth among every segment of the
American family. Latino and Hispanic household incomes
increased. African American incomes increases. Women's income
increased. We added 5 million jobs. People benefited mightily.
What happened after that is that the top 1 percent account,
I think, for 19 percent of all income in the country. They pay
40-something percent of income taxes; 35 percent of the people
in the United States do not pay any income taxes. And so I
think a model of increasing taxes now in the name of going
after the wealthy hurts the middle class as much as it would
hurt anybody else.
The one thing that I differ with Senator Sanders is that we
live in a world that is very competitive. If you go to a 35
percent corporate tax rate, you are going to incentivize people
in the wrong way to find locations that are more friendly. Why
are we doing so well in South Carolina? Because we have a low,
business-friendly tax structure, hardworking people with a good
education system to help them acquire the skills they need to
work in a modern economy. That is why BMW, Michelin, and
Boeing--I could go on and on and on--the premier manufacturers
in the world have chosen my State because of a good workforce
and good sound tax policy.
To those who are listening out there, tax policy is job
policy. The way you structure your Tax Code is going to
determine how competitive you can be vis-a-vis the rest of the
world. And if you want to declare war on the top income earners
in this country because you think they have too much because
they do not pay their fair share, well, what is a fair share?
Reader's Digest has been doing polling on this issue for
decades, and most people say around 25 or 30 percent is a fair
share of anybody to pay.
What Senator Sanders does not get, in my view, is that most
people who are struggling to make it out there would like to be
wealthy and do not resent people who are wealthy who have done
it right and fairly. So when the Government is going to
determine how much you can make, what the ratio should be of
what a CEO can make in any company, what else are we going to
do?
So the bottom line is that free enterprise works. The model
you are proposing has been followed throughout the world, and
it crashes and burns over time. I am not advocating eliminating
the death tax, but I am advocating making it possible for
people to work all their lives to pass wealth to their
families. And when Bill Gates' time comes, I think he has done
a good job with his money. I do not want the Government to grab
all of it at the end.
This insatiable desire by my friends on the left to grab as
much money and power as they can is going to ruin the country.
There has to be some balance. I do believe in a progressive Tax
Code, but every time we meet, we are talking about another
group of people in America, to grab their money to do things
with that politicians like on the left. And we will see where
this goes. We are going to have an election in 2022, and I want
everybody in South Carolina to know that if Senator Sanders
gets his way, it is going to be hard for corporations to remain
competitive in our country.
The reason people are leaving New York and California in
droves to come to where I live is they are making it impossible
to do business there. And we are not going to do that to the
country with Republican votes. I think our tax cuts in 2017
were well designed. They have benefited everybody in the
country, and we will fight you appropriately and respectfully
as you try to rearrange America in a fashion that I think is
contrary to what we stand for as a country. A debate worth
having and a fight worth engaging in.
Chairman Sanders. Thank you, Senator Graham.
We have some wonderful witnesses today, and let me begin
with Abigail E. Disney. Ms. Disney is the CEO and co-founder of
Fork Films, chair and co-founder of Level Forward. She is a
filmmaker, philanthropist, activist, and an Emmy-winning
director. Ms. Disney is the granddaughter of Roy O. Disney, co-
founder of the Walt Disney Company, which makes her an heiress
to the Disney family fortune.
Ms. Disney, thank you very, very much for being with us.
STATEMENT OF ABIGAIL E. DISNEY, CHIEF EXECUTIVE OFFICER AND CO-
FOUNDER, FORK FILMS, CHAIR AND CO-FOUNDER, LEVEL FORWARD
Ms. Disney. Thank you, Senator Sanders, and also thank you
to Ranking Member Graham for letting me come and testify for
you here today.
I grew up with one of the most recognizable names on Earth
in a family that went from dirt poor to embarrassingly wealthy
in two generations. My grandfather managed to accumulate a
large amount of wealth in a tax environment some now call
``punitive.'' He built a series of wildly successful businesses
despite negotiating with highly empowered unions who had
support from the Federal Government. He managed to navigate a
regulatory environment many now describe as ``draconian.''
Somehow, he managed to do all of this, despite living under
conditions that many rich people now would claim would make
their lives impossible.
The commonly held image of the wealthiest being ungenerous
and elitist is, I am sorry to say, completely consistent with
my own experience. The bubble it creates can be self-affirming,
and poverty, hard work, and struggle become a distant and
exotic experience meant for other sorts of people. You can
start to believe that you are admirable because you have money
and you have money because you are admirable. And this
mythology of relative merit conveniently supports doing nothing
about the unfair structures advantaging a handful of people
that are supported in this delusion by a political system that
needs your money more than it needs to fight for constituents.
We have gone so far down this rabbit hole to hell that we
have lost touch with some common-sense notions like that those
who have benefited more from society should pay more for its
upkeep or that a profitable company is not built as much by
executives as by its workers.
One place to start to right this wrong is by changing how
we tax people like me who inherit huge sums of money and pay
less in taxes for owning things than most Americans pay on the
money that they earn by working. That is why I support the For
the 99.5 Percent Act and equalizing capital gains and earned
income tax rates.
Some Senators have recently proposed repealing what is left
of the estate tax, which would do nothing but reward people who
lucked into the American dream just by being born into wealthy
families.
As if inheriting money was not advantage enough, I am able
to use it entirely by living off of investments, and thanks to
the capital gains tax rate, I pay half the tax rate of people
who are working for a living. It is time to stop rewarding
people who make money simply by having money.
Lately, I have made myself obnoxious by pointing out that
the CEO at the company that shares my name should not earn
1,400 times what his average worker makes or more than 2,000
times what his lowest-paid worker makes.
I am not against a person making a lot of money per se, but
if you do so while people who cash paychecks with your name on
them are skipping insulin or, in one heartbreaking case, dying
while sleeping in their car, it is only common sense that a
larger share of profits would be better deployed to make sure
your employees can meet their basic needs.
Of course, Disney is not the only company overpaying its
CEO, and it is not even the worst. That is why I support a
higher minimum wage because there is such a thing as ``not
enough.'' But I also support the Tax Excessive CEO Pay Act
because there is also a thing as ``too much.''
In 1970, a CEO--and that would have included my
grandfather--got paid roughly 20 times what their typical
worker was paid. Today the average CEO makes about 320 times.
This is absurd, and our Tax Code should treat it as such. If
these CEOs are worth their astronomical salaries, these
companies are more than welcome to cover the tax or to raise
wages for their other employees.
It is also time to institute a wealth tax so that we can
deploy at least some of the hoarded and impossible-to-spend
sums of money that the wealthiest have locked up, often built
on the backs of workers, to programs that help give those same
workers a fair and decent life. It is time for the wealthy to
stop viewing taxes as a punishment instead of a responsibility.
A half-century has been spent denigrating the Government and
all it can do to protect its vulnerable and poor, but good
governance is possible, and it cannot exist without revenues
adequate to the challenges it has. The wealthy have begun to
think that society and Government should serve their interests
alone. That is why I am a proud class traitor. It is time for
the rich to ask what we can do for our country, not the other
way around.
Thank you, Chairman Sanders and Ranking Member Graham and
the Committee.
[The prepared statement of Ms. Disney appears on page 35]
Chairman Sanders. Thank you very much, Ms. Disney.
Our next panelist is Gabriel Zucman, associate professor of
economics at the University of California at Berkeley. His
research focuses on accumulation, distribution, and taxation of
global wealth, analyzes the macro distributional implications
of globalization.
Professor Zucman, thanks very much for being with us.
STATEMENT OF GABRIEL ZUCMAN, ASSOCIATE PROFESSOR OF ECONOMICS,
UNIVERSITY OF CALIFORNIA, BERKELEY
Mr. Zucman. Thank you, Chairman Sanders, Ranking Member
Graham, and members of the Committee, for inviting me to
testify today. My name is Gabriel Zucman, and I am a professor
of economics at the University of California, Berkeley.
The United States used to have one of the most progressive
tax systems in the world. Let us take a look. From 1930 to
1980, the top marginal Federal income tax rate averaged 78
percent. This top rate reached as much as 91 percent from 1951
to 1963. No other country, with the exception of the United
Kingdom, ever applied such high marginal tax rates on the
wealthy. Moreover, the U.S. tax system was progressive not only
on paper, but in actual facts. All taxes, including the average
tax rates of the top 0.1 percent highest earners, reached 50 to
60 percent in the 1950s and 1960s.
Today the situation is very different. When taking into
account all taxes paid at all levels of Government, the U.S.
tax system looks like a giant flat tax that becomes regressive
at the very top end. Americans pay an average 28 percent of
their income in taxes; this is the official tax to national
income ratio of the United States. And all groups of the
population pay more or less 28 percent of their income in
taxes. The main exception is the 400 richest Americans,
billionaires, who pay less than 25 percent, less than the
middle class.
So how is this possible? Working-class Americans pay a
significant fraction of their income in payroll and sales
taxes. Billionaires, on the other hand, enjoy two major tax
breaks.
Number one, dividends and capital gains--the two key
sources of income for billionaires--are subject to low
statutory tax rates of 20 percent.
Second, and more important, a lot of the income of
billionaires is not subject to the personal income tax. Jeff
Bezos, Elon Musk, Mark Zuckerberg, Larry Page, Sergei Brin,
Warren Buffett--I just named six of the ten wealthiest
Americans. They are all large shareholders of companies that do
not distribute dividends. Their true economic income is their
share of their companies' profit, but because the companies do
not distribute dividends, most of their economic income is tax
free.
The only sizable tax that billionaires pay is the corporate
tax they pay through the companies they own. But now a key
problem comes into view: the corporate tax has almost
disappeared. In the early 1950s, the corporate income tax
collected as much revenue as the individual income tax, in both
cases about 6 percent of national income. Today the corporate
tax raises only about 1 percent of U.S. national income. A
large part of the decline owes to the rise of tax avoidance, in
particular, the shifting of profits to tax havens. More than
half of the foreign profits of U.S. companies are booked in tax
havens today.
In 2018, according to the most recent data, U.S.
multinationals booked more profits in Bermuda and Ireland than
in the United Kingdom, Japan, France, Germany, and Mexico
combined. So how to make the tax system more progressive? With
a stronger corporate tax, a more progressive income tax, and
also with the wealth tax, why isn't the income tax enough?
Because many billionaires have little taxable income, so that
even increasing the top marginal income tax rates would not
make a significant difference to the taxes they pay. The proper
way to tax billionaires is with a wealth tax, and a wealth tax
can work. In the U.S., property rights are well defined; most
assets have clear market values; and when market values are
missing, they can be estimated. There is no technical obstacle
to making the tax system more progressive. Tax avoidance and
tax evasion are not laws of nature. They are policy choices.
Before the creation of the Federal income tax in 1913,
income taxation was decried as impractical, dangerous, a
fantasy imported by ``European professors.'' Today the Federal
income tax is widely recognized as a large success. A wealth
tax on billionaires could be a success, too.
I look forward to your questions. Thank you.
[The prepared statement of Mr. Zucman appears on page 40]
Chairman Sanders. Thank you very much, Professor Zucman.
Our next panelist is, in fact, with us today in the room,
and that is Amy Hanauer, who is the executive director of the
Institute on Taxation and Economic Policy (ITEP). She has 30
years of experience working to create economic policy that
advances social justice and, as the executive director of ITEP,
works to promote fair and equitable State and national policy.
Ms. Hanauer, thanks so much for being with us.
STATEMENT OF AMY HANAUER, EXECUTIVE DIRECTOR, INSTITUTE ON
TAXATION AND ECONOMIC POLICY
Ms. Hanauer. Thank you for having me. Chairman Sanders and
Ranking Member Graham, thank you for the opportunity to speak
to this Committee. My name is Amy Hanauer. I am the executive
director of the Institute on Taxation and Economic Policy.
In 2020, the pandemic killed hundreds of thousands of
Americans, and unemployment soared to levels not seen since we
began collecting data in the 1940s. Despite that, Amazon's
profits surged to $20 billion last year, but the company paid
just 9.4 percent of its profits in Federal corporate income
taxes after paying zero in 2018 and about 1 percent in 2019.
Their total effective Federal corporate income tax rate over 3
years was just 4.3 percent on $44.7 billion in profits. That is
a far cry from the statutory rate of 21 percent.
Netflix's 2020 profits surged to $2.8 billion because
people went out less and watched more TV at home. Yet the
company paid less than 1 percent of those profits in Federal
corporate income taxes after paying nothing in 2018 and about 1
percent in 2019. Over those 3 years, Netflix paid a total
effective rate of just 0.4 percent on $5.3 billion in profits.
Again, not at all close to the 21 percent statutory rate.
And late last week, we learned that Zoom, the
videoconferencing platform that has become ubiquitous for
meetings, saw its profits spike by a staggering 4,000 percent
last year, but the company paid zero in Federal corporate
income taxes for 2020.
Zoom, Amazon, and Netflix are not alone. The pandemic has
been hard on many businesses, large and small, and many
reported losses last year. But some with profits, indeed, even
some with record profits, still avoided paying corporate income
tax. So far my colleagues have found more than 50 Standard and
Poor's (S&P) 500 corporations that reported profits but paid no
Federal corporate income tax last year--a year when our lives
depended on public resources for testing, research, and vaccine
distribution.
Let me point out some truths about corporate tax avoidance.
First, lawmakers could address this, but have chosen not
to. We knew about the corporate tax avoidance crisis long
before Congress drafted a major tax overhaul signed into law by
former President Trump in 2017. In fact, the figures I share
with you today are the result of that law's first 3 years.
Second, the tax avoidance is not due to the current
economic crisis. The corporate income tax is a tax on corporate
profits. It does not affect companies that are not profiting.
Closing special breaks and loopholes would not hurt businesses
laid low by the pandemic.
Third, the corporate tax dodging hurts ordinary Americans
by reducing resources to pay for things we all need. Trump
administration officials claimed their corporate breaks would
boost the economy. In fact, Gross Domestic Product (GDP) growth
in the law's first 2 years was 2.9 percent and 2.2 percent,
comparable to or well below 2015 levels. Proponents of the tax
breaks also said benefits would be passed on to workers,
claiming salaries would increase by $4,000 to $9,000 annually.
This never happened, and the Congressional Research Service
found that instead $1 trillion went to share buybacks, which
mostly enrich wealthy stockholders.
This matters to the Senate Budget Committee because you
will soon be asked to decide what our Nation can afford to do
to improve our economy and health going forward. Our research
finds that corporations already have too many tax breaks, but
some lawmakers want to preserve or even expand corporate tax
cuts in the Trump law. As you know, the law includes a tax
break, the expensing provision, that is set to expire. It also
includes tax increases related to interest deductions and
research expenses that have yet to take effect. Lawmakers call
for extending the temporary break and repealing the upcoming
increases, but both of those would be a mistake. Yet some of
these same lawmakers also claim that we cannot afford to help
people directly. They argue that we cannot make permanent the
child tax credit expansion that is projected to reduce child
poverty by 45 percent, or that we cannot invest in green jobs
or we cannot invest in updating our failing infrastructure.
I ask that instead of choosing corporate tax breaks, you
choose to provide benefits directly to families in ways that
clearly reduce poverty and improve lives. In my written
testimony, I specify how we can stop corporate tax avoidance,
including by passing some of the bills introduced by members of
this Committee.
We look forward to working with you on making our Tax Code
work for all of us. Thank you so much for the opportunity to
testify.
[The prepared statement of Ms. Hanauer appears on page 55]
Senator Graham. [Presiding.] Well, thank you very much.
Our next witness is Maya MacGuineas, president of the
Committee for a Responsible Federal Budget. She is a leading
budget expert and a political independent. She has worked
closely with members of both parties.
Ms. MacGuineas, welcome.
STATEMENT OF MAYA MACGUINEAS, PRESIDENT, COMMITTEE FOR A
RESPONSIBLE FEDERAL BUDGET
Ms. MacGuineas. Thank you so much. Chairman Sanders,
Ranking Member Graham, and members of the Committee, thank you
for inviting me here today.
Let me start by saying that we have engaged in an
unprecedented amount of borrowing in the past months, which is
exactly what we should have been doing. This has been a
terrible crisis, and while the most recent package was larger
and less targeted than we thought was warranted, the overall
COVID response has been very successful in fighting the
pandemic, alleviating economic hardships, and fostering the
recovery.
The good news is that we seem to be coming out of the worst
part. The bad news is we had a mountain of debt before the
crisis, and we have a much larger mountain now.
Going forward, we are on track to borrow $15 trillion over
the next decade, assuming there is no new borrowing. And
barring fixes, we will have four major insolvent trust funds,
including both Social Security Trust Funds. This leaves people
who depend on these programs vulnerable. It leaves our economy
vulnerable to shifts in interest rates and foreign demand for
our debt, and it leaves the Nation vulnerable as the national
debt is a national security threat as well. So I appreciate the
topic of the hearing because revenues will have to be a
significant part of the solution.
The main point I would like to make today is that they
alone will not fix the imbalances we face or pay for the
expansive agendas that are being discussed. So one of the
tricky things about paying the fair share is, of course, that
``fair'' is in the eye of the beholder. I personally think that
making the Tax Code and our spending programs more progressive
is the right thing to do in light of trends in inequality,
mobility, security, and opportunity. So here are some options
to consider.
Clearly, we need to do something about the very large tax
gap and ensure that people pay what they actually owe. We
should look to reduce tax expenditures, which this year alone
will lead to $1.8 trillion in lower revenues, and while some of
these breaks are worthwhile, many are expensive, regressive,
distortive, and we should make a number of changes. We should
also consider changes to the estate tax and how we tax capital.
On the corporate side, rate reduction to 21 percent far
exceeded what most think was necessary in terms of
competitiveness, and we can bring up that rate, though I have
always thought the more sensible approach is to tax more on the
individual side rather than the corporate side because capital
is so mobile.
One thing that we most certainly should not do is tax cuts
further--we should not do further tax cuts for the well-off.
For example, by restoring the State and local tax (SALT)
deduction, which would provide an average of $40,000 in annual
tax cuts for millionaires and billionaires. So I think that
would be one of the most unwise tax policies we could consider.
How far will this get us? To stabilize the debt at today's
level of 100 percent of GDP over the next decade, which is very
high, it would take $4 trillion in savings. This could be done
by enacting all of President Biden's proposed campaign agenda:
tax increases, higher tax rates, limits on tax expenditures,
expanding the minimum tax, et cetera.
If you want to finance his spending agenda as well,
probably $11 trillion in new initiatives, you would have to go
further from what is already a pretty aggressive set of tax
increases, for example, by imposing a wealth tax, transaction
tax, boosting individual and corporate rates as high as 50 and
35 percent, respectively, and this would still leave a $6
trillion hole.
A more expansionary set of policies such as Medicare for
All, free college, student debt cancellation would cost even
more. And even if net revenues needed were able to be kept
below $30 trillion, you would need to impose either a 32
percent payroll tax, a 25 percent increase in all income tax
rates, including raising the bottom rate to 35 and the top to
62, a 42 percent Value-Added Tax (VAT), or doubling the
individual and corporate income tax rates, or some combination.
So the point is we need to look at both sides of the
ledger. Going forward, the growth in deficits is driven
primarily by growth in health, retirement, and interest, which
are responsible for 86 percent of the growth in spending over
the next decade.
The types of measures we could consider on that side:
measures to control health care costs for sure. That would have
many benefits. Changes to save Social Security, which also can
be used to make this program more progressive, same as the Tax
Code. So we could start by means-testing or changing the
benefit formula. Other changes will need to be made to save
Social Security, including lifting the payroll tax cap,
broadening the base, increasing the retirement age, and/or
fixing Cost-of-Living Adjustments (COLA). Finally, we should
reinstate reasonable discretionary spending caps at a level
that we can actually stick to.
So the fiscal hole is so deep that basically all credible
options will need to be on the table, and the longer we wait,
the longer this list will have to grow.
Fiscal responsibility is not about big government or small
government. It is about being willing to pay for the priorities
you want to spend money on. Shifting costs to the future is at
odds with the principle of serving as a good steward for the
economy, the Nation, or the next generation, even when that is
money well spent.
So thank you again for hosting this hearing today. It is so
important that we focus on these important issues.
[The prepared statement of Ms. MacGuineas appears on page 71]
Senator Graham. Thank you, Maya.
Scott Hodge is next, president of the Tax Foundation. He is
recognized as one of Washington's leading experts on tax
policy, the Federal budget, and Government spending.
Mr. Hodge.
STATEMENT OF SCOTT A. HODGE, PRESIDENT, TAX FOUNDATION
Mr. Hodge. Thank you, Ranking Member Graham, Chairman
Sanders, and members of the Committee. I appreciate the
opportunity to speak with you today.
Let me suggest that there is no objective standard for what
defines ``fair share.'' It is a purely subjective concept. But
there are facts, which are objective, and the facts suggest
that the U.S. tax and fiscal system is very progressive and
very redistributive. Let us dive into some of those facts. We
will start with individual taxes and move on to corporate
taxes.
According to the latest IRS data for 2018, the year after
the Tax Cuts and Jobs Act, the wealthy in America now bear the
heaviest share of the income tax burden than at any time in
recent history. The data shows that the top 1 percent of
taxpayers pays 40 percent of all the income taxes. By contrast,
the bottom 90 percent of taxpayers, about 130 million
taxpayers, combined pay less than 30 percent of all income
taxes.
It is hard to say that the Tax Code is rigged in favor of
the rich when more than 53 million low- and middle-income
taxpayers--that is one-third of all taxpayers--have no income
tax liability because of the numerous credits and deductions
that have been created over the last few decades.
Since the creation of the child tax credit in 1997, the
percentage of income tax filers who have no income tax
liability has increased from 23 percent to nearly 35 percent.
The doubling of the child tax credit in the Tax Cuts and Jobs
Act knocked more than 4 million taxpayers off the income tax
rolls.
Redistribution is also at record levels. According to a
recent Congressional Budget Office (CBO) report, the bottom 60
percent of households in America receive more in direct
Government benefits than they pay in all Federal taxes.
Meanwhile, the top 20 percent of households paid $1.7 trillion
more in taxes than they received in direct Government benefits.
These figures demonstrate the results that one would expect
from a highly progressive tax and fiscal system.
Now let us look at the corporate side of the tax ledger.
Now, if the Tax Code was rigged in favor of corporations, we
would have more of them. Today there are about 1.6 million
corporations, the fewest number in 50 years, and a million
fewer corporations than there were in 1986. The likely reason
for that decline is the fact that we have levied one of the
highest corporate tax rates in the developed world for the past
30 years, and the fact that, of course, corporate income is
taxed twice--once at the entity level, and again at the
shareholder level.
But because of the growth in pass-through businesses over
the last few decades, more business income is taxed today on
individual tax returns than on traditional corporate tax
returns.
That said, an Organisation for Economic Co-operation and
Development (OECD) study found that the U.S. tax system is
still one of the most business-dependent tax systems anywhere
as American businesses pay or remit 93 percent of all the taxes
in America.
More importantly, economic studies show that workers bear
at least half of the economic burden of corporate taxes through
lower wages, with women, low-skilled workers, and younger
workers impacted the most.
Another OECD study found that the corporate income tax is
the most harmful tax for economic growth because capital is the
most mobile factor in the economy. So raising the corporate tax
rate would not only slow the economy, it would hurt marginal
workers.
The Tax Foundation's General Equilibrium Tax Model
determined that raising the corporate tax rate to 28 percent
would reduce long-run GDP by nearly 1 percent and eliminate
nearly 160,000 jobs. Over the long term, we found that the
model--or the model shows that middle- and low-income taxpayers
would see their incomes fall by 1.5 percent.
Raising the corporate tax rate to 28 percent would once
again give the United States the distinction of having the
highest corporate tax rate in the industrialized world after
factoring in our State rates.
This is no time to do that when France and Sweden and other
countries are cutting their corporate tax rates to attract more
investments and jobs. In fact, China's corporate tax rate is 25
percent, and we do not want to lose ground against our biggest
economic competitor either.
Let me conclude by saying the best way to address
inequality in America is through permanent tax policies that
promote increased productivity, more jobs, higher real wages,
and real economic growth. That is the kind of inclusive growth
that all of us should be able to support.
Thank you for your time and attention. I would appreciate
any comments or questions that you may have. Thank you, Mr.
Chairman.
[The prepared statement of Mr. Hodge appears on page 78]
Chairman Sanders. [Presiding.] Thank you very much, Mr.
Hodge. And, again, I am going to apologize. There are a number
of votes taking places on the floor, so you are going to see
people disappearing for a while. Let us start the questions off
with Professor Zucman.
Professor Zucman, how does it happen that the top 1 percent
in the United States are able to underreport about 21 percent
of their true income? How do they do that? And what does that
mean for tax revenue in our country?
Mr. Zucman. Thank you very much, Senator, for your
question. Indeed, according to a recent study that was
published earlier this week, the top 1 percent underreport
about 20 percent of its true income, and by contrast, the
bottom 50 percent of taxpayers underreports about 7 percent of
their true income. So income underreporting appears to rise
quite significantly with income. And that is due to a number of
reasons, but one reason I want to emphasize is the dramatic
budget cuts that have happened from the IRS over the last
decade that severely limit the ability of the IRS to audit
high-income taxpayers extensively. And I think it is
particularly important and, in fact, this should be the number
one step towards a fairer tax system to increase the IRS budget
for enforcement. This is essential to improve the actual
progressivity of the tax system. And let me mention two areas
where enforcement could be improved and two reasons why there
is a significant tax gap at the top. One is that there is
substantial evasion in complex business structures, including
partnerships. And, second, there is continued offshore tax
evasion, concealment of assets and income in offshore tax
havens. These are two areas where there is a need for much
stronger enforcement.
Chairman Sanders. Professor, thank you very, very much.
Let me go to Ms. Hanauer. Ms. Hanauer, in 2018, Amazon, one
of the most profitable corporations in the world, paid nothing
in Federal income taxes. People are shocked to hear that. How
does that happen that a usually profitable corporation owned by
the wealthiest guy in the world paid nothing in Federal income
tax?
Ms. Hanauer. Yeah, thank you so much for that question,
Senator. I mean, I think that there are three primary ways that
you see very profitable corporations avoiding income tax. One
is the offshore corporate tax avoidance that Professor Zucman
talked about, and we could address that by equalizing rates on
domestic and foreign profits, or coming as close as possible to
doing so. I know you have had a bill to address that, and I
think that is a very good direction to go in.
A second is in the more domestic way, which is that a lot
of companies use accelerated depreciation or even expensing to
avoid taxes on their assets, and we would favor instead having
economic depreciation on those assets. And, again, I think that
is something that you have proposed.
And another way that we see a lot of domestic tax avoidance
is having this stock options book tax gap where, when companies
pay out compensation in stock options, they report one thing to
the IRS and they report something entirely different to their
investors. That does not make a lot of sense.
So we agree with Professor Zucman that better funding the
IRS is part of the solution, but so is addressing these three
major forms of avoidance.
Chairman Sanders. Thank you very much.
Let me direct a question to Ms. Disney. Your father and
uncle created one of the great iconic corporations in the
world. Did the high tax rates of the 1950s and 1960s cause your
family to work less hard and be less innovative?
Ms. Disney. Thank you, Senator Sanders. I would offer that
the proof for that is probably in the pudding. We know that the
1950s and the 1960s were some of the most creative, successful
years of the Walt Disney Company. They were never entirely
working for the money, and so what the tax environment was
really did not have an impact on how they went about their
business.
But over and above that, it is really important to remember
that so much of what they did could not have been done without
massive spending, for instance, on the highway bill in the
1950s. Without the highway bill, you get no Disneyland, no
Disney World. So, in fact, they benefited by the high-tax
environment because of the massive Federal and State
investments in infrastructure.
Chairman Sanders. Thank you very much.
Senator Graham.
Senator Graham. Mr. Hodge, for about 30 seconds, would you
like to comment on the Amazon situation?
Mr. Hodge. Senator, I have never looked at Amazon's tax
returns or their books. What I can say is that when companies
pay very low taxes, generally what they have done is followed
the rules that Congress has provided in the tax system. So in
order to take things like accelerated depreciation or bonus
expensing, they have to do the right thing. They have to buy
new trucks, new equipment for their factories, new tools for
their workers. That all increases GDP and economic growth, so
that is a good thing.
They also provide stock options for their employees, which
makes their employees wealthier. So they are sharing the wealth
of the company with their employees.
All of those are in the Tax Code, and so they are doing the
right thing, and that is all things that Congress has put in
the Tax Code for companies to do.
Senator Graham. Okay. Let us see if we can get a baseline
of understanding about whether all these numbers are accurate
or not. You say that 1 percent, the top 1 percent of the
wealthiest people in the country pay 46 percent of income
taxes. Is that right?
Mr. Hodge. Forty percent of income taxes, yes.
Senator Graham. Mr. Zucman--is that right?
Chairman Sanders. Professor Zucman.
Senator Graham. Professor?
Mr. Zucman. Yes, this is correct, I believe.
Senator Graham. Okay. That is correct. All right. That is
good. Is it true that about 30 percent-plus of Americans pay no
income tax?
Mr. Hodge. Thirty-five percent of all Americans who file an
income tax return pay zero income taxes because of largely tax
credits such as the child tax credit, earned income tax credit,
education tax credits and so forth.
Chairman Sanders. That is Federal income tax, correct?
Mr. Hodge. Federal income tax, that is correct.
Senator Graham. Yes.
Mr. Hodge. And according to CBO data, many of those are
refundable tax credits, which actually completely offset their
payroll taxes as well. Actually, according to CBO data, the
bottom two quintiles have negative effective tax rates because
of the generosity of those refundable tax credits.
Senator Graham. Professor, do you agree with that
statement?
Mr. Zucman. Senator, I think when studying the
progressivity of the tax system, it is important to take into
account all taxes at all levels of Government, and----
Senator Graham. I know. I just asked you a question. Do you
agree with what he said?
Mr. Zucman. Yeah, I agree with this.
Senator Graham. Okay. Now, I understand where you are
coming from, but I am just trying to get some data points here.
What is the average corporate tax rate in the
industrialized world, Mr. Hodge?
Mr. Hodge. It is a little over 25 percent if you adjust it
for economy size. The U.S. corporate tax rate right now, when
you add the Federal rate of 21 percent plus the State rate, is
about average in the industrialized world right now.
Senator Graham. And the proposal to go to 35 percent, how
does that affect our ability to create jobs in our economy here
at home?
Mr. Hodge. That would instantly make the U.S. having the
highest overall corporate tax rate at around 32 percent, which
would be much higher than even France right now, which is
moving to 25 percent. Sweden is reducing their rate to around
20 percent as well. That is the trend among global countries to
make themselves more attractive for investment and jobs.
Senator Graham. So, Ms. MacGuineas, are you with us? Ms.
MacGuineas?
Ms. MacGuineas. I am with you.
Senator Graham. Okay. So if you took the entire wealth of
the top 1 percent--their houses, their dogs, everything they
own--how much money would that be for the Federal Government?
Ms. MacGuineas. I am sorry, Senator. I do not know the
answer to that offhand. I am hoping one of our other panelists
does.
Senator Graham. I think it is about $30 trillion. I cannot
remember. But, you know, it is a fraction of what you would
need to get us out of debt, is my question. Do you agree with
that? If you confiscated all the wealth of the top 1 percent,
that does not get the Nation out of debt. Is that a fair
statement?
Ms. MacGuineas. Yeah, I think you could not possibly
confiscate all the wealth, and it would not be able to get us
out of debt on the debt trajectory that we are on. That is
correct.
Senator Graham. Okay. And for us to get out of debt, we are
going to have to adjust entitlement spending and maybe revenue
generation, too. Is that correct?
Ms. MacGuineas. Yeah, and I want to be sort of realistic. I
do not think we are going to be able to get out of debt. I do
not think we need to get completely out of debt. At this point,
I----
Senator Graham. No, a better--right, a better ratio.
Ms. MacGuineas. Just get us to the point where the economy
is growing faster than the debt instead of the reverse, and we
are not going to be able to do that along with this expansive
agenda without looking at all parts of the budget, so taxes on
the well-off, but also probably broad-based taxes if we are
talking about big expansions, and certainly changes on the
spending side.
Senator Graham. Yeah, the spending side is really driven by
entitlements--is that correct?--mostly.
Ms. MacGuineas. That is correct. Health care and
retirement, and growth on interest as well.
Senator Graham. So Social Security and Medicare have to be
dealt with, or they are going to run into a major shortfall. Is
that correct?
Ms. MacGuineas. I think it is such an important point
because by not having dealt with them over the past years, we
have ignored the reality that we are an aging population; that
every year we wait to deal with them, the costs become greater
and fall more on the people who depend on them. And many of the
things that could have helped to shore up those programs before
are now not going to be enough, and so it is really dangerous
how long we have waited, and we should not wait any longer. You
are going to need to make changes----
Senator Graham. Thank you.
Ms. MacGuineas. --so that we do not have across-the-board
benefit cuts.
Senator Graham. Thank you very much.
I am sorry, Mr. Chairman. I went over.
Chairman Sanders. Thank you, Senator Graham.
Senator Van Hollen will join us via video.
Senator Van Hollen. Thank you, Mr. Chairman. I want to
thank all of our witnesses here today.
Ms. Hanauer, I think Mr. Hodge just acknowledged in
response to Senator Graham's question that the figure he cited
about 1 percent, the top 1 percent paying 20 percent--having 20
percent of income but paying 40 percent of taxes did not
include State and local government taxes. I think it does not
include payroll taxes either. I know that your organization has
looked at this. Can you tell us, when you factor those in, what
the numbers are?
Ms. Hanauer. Yes, thank you so much. I think that that is a
very important point. We need to look at payroll taxes, State
and local taxes, and sales taxes, and all of the taxes that
people pay when looking at the progressivity of our Tax Code.
And when we look at all of those things combined, we find that
the Tax Code is very, very slightly progressive when we do not
consider wealth. And so we are hardly in a position where we
are taxing the rich. In fact, quite to the contrary, as Ms.
Disney so eloquently pointed out, it is the wealthy who gain
the most from our systems and our society, and we need to make
sure that we can pay for all of the things that help to grow
wealth in this country.
Senator Van Hollen. Thank you. Now, I want to talk a minute
about stepped-up basis because I am going to be introducing
legislation in the coming days to deal with the issue of
stepped-up basis and how very wealthy families can pass that
wealth on from one generation to another without facing any
taxes.
Could you, Mr. Zucman, talk briefly to the importance of
addressing this issue of stepped-up basis and what the
consequences of allowing that loophole to continue would be?
Mr. Zucman. I think this is indeed very important. Stepped-
up basis is a major loophole in the Federal Tax Code, and
closing it would not only directly improve the progressivity of
the tax system, but more importantly, it would make it much
easier to increase the tax rate on capital gains, because right
now high-income individuals can defer capital gains realization
and benefit from this loophole stepped-up basis. By closing
this loophole, it would become much simpler to increase capital
gains taxation, so this is extremely important.
Senator Van Hollen. Thank you. And, Ms. MacGuineas, first,
thank you for mentioning the tax gap, the fact that the IRS has
not received adequate funding. It has not only resulted in a
lack of good service to taxpayers, but also a large annual tax
gap. We know that about 70 percent of those unpaid taxes are
from the very wealthy, so that would be a first important
start.
But I note you mention in your testimony the issue of
looking at taxes on capital, individual capital, and what are
your views on addressing the stepped-up basis problem?
Ms. MacGuineas. I think looking at stepped-up basis is a
perfectly appropriate and smart policy. We can debate what the
appropriate tax rate would be for capital gains, but there
should not be a huge loophole where people pay zero. And so
improving this would be a way to raise revenues and make the
Tax Code fairer and more efficient. And it was in the past that
we did not have the administrative ability to do this so well,
but I believe that now we do.
Senator Van Hollen. Thank you. And, Ms. Disney, thank you
for your testimony, your active participation in all these
issues and trying to have a more fair and equitable society.
Can you talk about how families have been able to use the
stepped-up basis loophole over time?
Ms. Disney. Thank you, Senator. I am a little bit of a
poster child for the benefits of the stepped-up basis because
my basis in--well, Disney stock is pretty nearly zero, and I
can imagine this for someone like Jeff Bezos being an
incredible boon to his capacity to pass wealth on untaxed to
his children, because if I were to pass my shares off on to my
children, with a basis of almost zero, and now at however many
multiples of 190, whatever it is right now, that would be just
offering them all that wealth appreciation with no tax at any
time on its growth. So it does seem to me to be rather a big
giveaway.
Senator Van Hollen. Well, I appreciate that.
Ms. Hanauer, I know we do not have much time left. Do you
have a view on this very quickly?
Ms. Hanauer. Yeah, absolutely, I think that this is
absolutely the right way to go. It enables dynastic wealth to
be passed on, and we have families in this country that cannot
afford child care for their children. It would make much more
sense to pass on our collective wealth in ways that enable
every family to afford those necessities.
Senator Van Hollen. Well, we have a draft piece of
legislation that is almost finalized. As I said, we intend to
introduce it shortly. I would like to circulate it to all the
witnesses here for your comments in the coming days.
Thank you, Mr. Chairman.
Chairman Sanders. Thank you very much, Senator Van Hollen.
Senator Kaine, I believe--I do not know that we have any
Republicans on the line, so, Senator Kaine, your timing is
perfect.
Senator Kaine. Thank you, Mr. Chair. I wish my timing were
always as good as it just was. And I thank you for calling the
hearing. I think this is a very important one.
To the witnesses, you have probably noticed we have been
alternating between votes and other committee hearings, but I
am glad to have you with us.
I think there is a lot of big ideas about tax reform that
are out there. I think Senator Wyden has an idea about tax
reform. Senator Cardin has, I think, often introduced a
comprehensive tax reform bill that would look at a consumption
tax. Senator Johnson--and I do not know if he has been here
today--has ideas about tax reform.
I hope we might get into a big kind of theory or structural
tax reform discussion. My worry about 2017, not only did I
oppose the bill, but it was not really tax reform. I just
viewed it as a set of tax cuts benefiting people at the top.
And I am a little bit nervous. I think we will probably get a
proposal from the White House dealing with taxes potentially as
a pay-for for an infrastructure plan, and they might all be
individual items that I approve. But I am not really sure it is
going to be tax reform. I think it is just going to be a
readjustment back from what we did in 2017. And I would love to
have a significant discussion about tax reform.
Woody Guthrie has this great line in a song called ``I
Ain't Got No Home in This World Anymore.'' ``The gamblin' man
is rich an' the workin' man is poor.'' And if you look at our
Tax Code, I have always sort of felt that way about it, that if
you gave it to a Martian and said, ``Tell us what it says about
us,'' the Martian would say, ``You know, I have looked at that
Tax Code, and it says that you like investment a lot more than
you like work,'' because the tax rates applied to wages and
salary are higher than they are applied to many forms of
investment income, carried interest, capital gains, and others.
I really like investment, but I like work every bit as
much, and I just do not like the fact that we have a Tax Code
that does not tax earnings at the same level as wages and
salary, investment earnings, because it, A, skews the way we
structure transactions, skews the way people choose to get
paid; but it also has a significant disadvantageous and
inequitable effect on lower-income people because they do not
have the ability necessarily to get paid in ways that get the
lower tax rate applied.
So, really, my one question to you all is: Why not have a
Tax Code that basically kind of treats income as income and
applies the same tax rates to all kinds of income--capital
gains, interest, dividends, carried interest, wages, and
salaries. Wouldn't that be a better way to both simplify and
make a Tax Code that is more equitable?
Ms. Hanauer. Yeah, thank you----
Ms. MacGuineas. Should I just jump in?
Senator Kaine. Please.
Ms. MacGuineas. I will jump in, Senator.
Ms. Hanauer. Oh, sorry. Go ahead.
Senator Kaine. So we will go Amy and Maya and then Scott,
and I do not know, there might be a fourth person, too, but
that is my only question.
Ms. Hanauer. Thank you so much. I really appreciate that
question, and I think you are absolutely right. The disparity
in the way that we tax earnings from work as opposed to
earnings from wealth does not make any sense, because, you
know, people who get up every day and work hard deserve to have
those earnings treated as favorably as somebody who simply
watches their investment portfolio grow. And I think it leads
to great economic divides in this country. It leads to wealth
that gets passed on from generation to generation. It also
leads to deep racial divides because we know that Black and
Latino families have not had the same opportunity to build
wealth in housing and in stocks in the same way that White
families have as a whole.
So what we really need to do is to restore that equity as
you are describing, and I appreciate your interest in that
issue.
Senator Kaine. How about to Maya and then Scott? I think
Scott wanted to say a word.
Ms. MacGuineas. Yes, thank you, Senator. I was nodding
through the whole question because I think it used to be so
important that we incentivize saving and investments more so
than it is today, and we really need to focus on incentivizing
work. I think that is true both in the Tax Code and also on the
spending side of the budget.
What I really wanted to add is your point about
comprehensive tax reform is so critical because our entire
economy is changing massively, whether it is still ongoing
issues in globalization, technology, the future of work. We
have so many tax breaks that make no sense. We have to clean
this up and do a big overhaul, keeping in mind issues of
competitiveness, economic growth, changes in technology, and
income inequality. So I really welcome that approach.
Senator Kaine. Great. Mr. Hodge?
Mr. Hodge. Yes, Senator, what you have described is the
Estonian tax system, which has on the corporate side a
distributive profit tax, so it is not taxed when it is kept
within the company, but only taxed when it is distributed to
shareholders. They have a flat income tax rate of 20 percent
and then a flat corporate rate of 20 percent, and so you
basically tax the same income only once, and there is no level
of double taxation like what we have in our system.
Senator Kaine. I like that idea. I would still have
progressive rates, but I do like applying the same rate to
income wherever it comes from.
Mr. Hodge. Australia does that, and their imputation system
has a progressive system, but it applies a credit for the
corporate taxes paid to individual shareholders, so it
equalizes that. It is quite a good system.
Senator Kaine. Great. Thank you, Mr. Hodge.
Thank you, Mr. Chairman.
Ms. Disney. I would love if I could just----
Senator Kaine. Please.
Ms. Disney. Oh, thank you. I just wanted to say, as a
beneficiary of the favorable capital gains tax rate and the way
that just in general we privilege ownership over work, I get
the same amount of money at the end of every day whether I have
been sitting on my tuchus filing my fingernails or whether I
have actually been a contributing member of society. And I
think it is really important to remember that the Tax Code is
as much a message as anything else, and the message that we are
sending right now with our Tax Code only reinforces the idea
people have of themselves at the very high end of society that
they are somehow better, more worthy, more valuable to society,
when, as we know, it is quite the opposite. The people we need
most of all and called for a year now ``essential'' are the
people who do the work every day.
Senator Kaine. Ms. Disney, thank you.
Mr. Chair, I just want to say my grandfather, Leo Michael
Burns, grew up with your grandfather, Walt Disney, in
Marceline, Missouri.
Ms. Disney. Fabulous.
Chairman Sanders. Senator Johnson.
Senator Johnson. Thank you, Mr. Chairman. I could not be
more pleased to be following the comments from Senator Kaine.
There is an awful lot of area of agreement. I think I mentioned
in our wealth disparity hearing that income ought to be taxed
as income. Income is income. And as a result, I do not think it
is any secret I was not a real fan of the 2017 tax reform. I in
the end voted for it because I think we needed a more
competitive tax system, and I do not think we were. I do not
necessarily agree with Ms. MacGuineas when she said that we
overshot the corporate rate. But during that time frame, I was
talking to people like Senator King and Senator Kaine as well
as a lot of economists on all sides of the political spectrum
about what I called the ``true Warren Buffett tax.'' Close to
95 percent of American businesses have their business income
tax at the ownership level. I think, Maya, you were talking
about the fact that it is best to tax individuals.
So what I was proposing is make all business income taxable
at the individual level. Turn C-corps into pass-throughs. I
actually talked to Mr. Buffett about this because I was going
to call it the ``true Warren Buffett tax.'' He was intrigued by
it. I am not saying he supported it, but he was intrigued
enough to put me in touch with his shareholder services company
to iron out the details. We had about, I do not know, an hour-
long meeting with three experts from Joint Committee on
Taxation. I think at the end of that meeting, I think everybody
decided that, yeah, this is a change, but what those
shareholder services companies have to do for companies and
shareholders is far more complex than what I was contemplating.
So this is doable, and the advantage of it, let me just
quickly lay out--and, Mr. Hodge, you obviously were working on
this. You helped me score it. I would like for you to try and
score this again. But the simple way of talking about this is
let us say a little old lady in Oshkosh, Wisconsin, owns a
share of stock, and $100 of income is attributed to that share.
So she is going to get something like a W-2 that says you have
to report $100 of income. But the corporation who has already
deposited, like payroll withholding, $25 on your behalf.
Now, the benefit here is the tax has already been paid.
Again, Mr. Hodge, you were saying 93 percent of taxes are
collected from corporations. So we have got the tax collected.
But that little old lady, if she has only got a 10 percent tax
rate, she will be able to claim a 15 percent refund.
Now, Warren Buffett, he will have to pay more taxes, which
means there will be a little bit more pressure for corporations
to divest themselves of all this pent-up capital. They will
have to pay more dividends for more efficient allocation of
capital. This would incentivize low-income earners to become
shareholders. Again, it will force corporations--not to pay
tax, the individuals are paying tax, but to distribute income
for more efficient allocation. Now, if there are all kinds of
things for that corporation to invest, they can sell more
stock, and they will be able to get capital. They can also
borrow money.
So, Mr. Hodge, I know we spoke about this. First of all,
let me ask you, are you willing to do another round? I think I
have got some people interested in this. I just met with my
White House liaison and gave her all the information as well.
They were going to have further discussions. Can we count on
the Tax Foundation to look at this and potentially score it?
Mr. Hodge. Absolutely, we would be delighted to work with
your team on it. I think moving toward what you might call an
integrated system for corporate taxation is the right approach,
removes that double layer of taxes, and then provides some
equity there, as you suggest, with a more progressive rate on
the individual side.
Senator Johnson. And, by the way, a very small percentage
of C-corporation income is ever double taxed. So much of it is
owned by nonprofits, foundations, pensions, that type of thing.
So the double taxation of dividends just does not happen all
that much. So, again, there is a lot of income that we never
tax, and, quite honestly, some of this massive wealth has been
accumulated because of the C-corp status, because you never pay
dividends, the stock price just increases, and it is never
really subjected to tax ever. So this also would eliminate that
tax avoidance problem.
Ms. Hanauer, your organization also does scoring. Correct?
Ms. Hanauer. I do not know that we exactly do scoring, but
we do analysis of the Tax Code.
Senator Johnson. Okay. Well, I would love you to take a
look at this as well if you are interested. I would love to
meet with you if this----
Ms. Hanauer. We would absolutely love that. And I just
should say I lived many happy years in Wisconsin, had my first
child there, so it is nice to meet you.
Senator Johnson. Why did you leave?
Ms. Hanauer. For a job.
Senator Johnson. Okay. That is a good answer.
Maya, do you want to just weigh in on this a little bit?
Ms. MacGuineas. I would just add I have been a supporter of
this approach forever. I read many of the old corporate
integration approaches. There are clear problems about making
sure people do not find different loopholes, but, yes, this is
what we should be shooting for. And, you know, Senator, I am
always pleased when you are working on big, bold ideas. I am
excited to hear you are doing this.
Senator Johnson. Well, thank you all, and thank you, Mr.
Chairman.
Chairman Sanders. Thank you, Senator Johnson.
Senator Lujan.
Senator Lujan. Thank you very much, Mr. Chair. I appreciate
you calling this important hearing, and also Ranking Member
Graham.
When I talk to my constituents, many are struggling to keep
a roof over their head, food on the table, and their businesses
open. As President Biden has said, America is facing a national
emergency that requires an aggressive response from Congress.
The American Rescue Plan that I voted for puts Americans on the
right path to recovery. Under the American Rescue Plan,
families in New Mexico with two married adults and two children
receive $5,600. This is a one-time payment in helping New
Mexico families who struggle to get a car, to safely look for
work, to pay for rent, or even to get food on the table for
their children. However, as you know, some of my Republican
colleagues have suggested that we cannot afford to provide
meaningful assistance to struggling families.
Ms. MacGuineas, in my short time that I have, and if there
is anything you want to submit to the record, I would invite
you to do so, but I am looking for some numbers here. I have a
few questions for you. Do you know how much the Republican tax
bill of 2017 provides in tax cuts to a person making $200,000
this year, in 2021?
Ms. MacGuineas. Okay. I am going to make sure we submit the
proper answer, but I think it is roughly--it would be roughly
$5,000 this year.
Senator Lujan. So the number that I have is, on average,
$6,500, so I would be happy to chat with you about that, and we
will----
Ms. MacGuineas. If you include the corporate tax incidence
as well, I think.
Senator Lujan. I appreciate that.
Ms. MacGuineas. I hope that makes sense.
Senator Lujan. Ms. MacGuineas, do you know how much these
tax cuts helped those making $1 million? How much will they
receive from the Republican tax bill?
Ms. MacGuineas. And if you are counting that corporate part
as well, probably in the neighborhood of $50,000.
Senator Lujan. That is what I have, about $51,000. Is that
a one-time payment, or is it annual?
Ms. MacGuineas. That would be every year, and the past
years, every year going forward until these tax cuts expire.
Senator Lujan. So every year someone making $1 million gets
about $51,000 from that tax cut in 2017. Okay.
Ms. MacGuineas. Also, for the record, if we do SALT, a lot
of them would be getting another $40,000 tax cut as well.
Senator Lujan. Okay. Mr. Zucman, what is the average tax
rate for the median taxpayer in the United States?
Mr. Zucman. It is about 28 percent today.
Senator Lujan. And, Mr. Zucman, which income group has the
lowest tax rate in the United States?
Mr. Zucman. According to our estimates, it is billionaires,
the top 400 richest Americans who have the lowest effective tax
rate today in the U.S.
Senator Lujan. So the top 400 richest people in America
have a tax rate of 24 percent, and the average tax rate for the
median taxpayer--that is middle-income families--is 28 percent?
It is 4 percent higher?
Mr. Zucman. Correct.
Senator Lujan. Is that tax system progressive or
regressive?
Mr. Zucman. It is a tax system that is not progressive. It
is mildly progressive up to the very, very rich, and then
becomes deeply regressive at the very top end.
Senator Lujan. Can you just help middle-income families
back in New Mexico understand this a little bit more?
Mr. Zucman. Yes, absolutely, Senator. So what is really
important to understand is that all Americans pay a lot in
taxes, including working-class Americans. They pay payroll
taxes. They pay sales taxes. Very wealthy Americans pay the
income tax, but for billionaires the income tax is only a very
small fraction of their true economic income. Or to put it
differently, it is just very small compared to the profits of
the company they own and compared to their wealth. And that is
why at the end of the day you end up in a situation where
billionaires as a group have a lower effective tax rate than
the middle class.
Senator Lujan. I appreciate that response.
Mr. Chairman, it seems to me that the richest amongst us--
and I congratulate them for their wealth. They have done well
for themselves. But when the richest amongst us in America pay
the lowest rates, the richest amongst us have over $50,000 more
every year from the 2017 tax bill, the Republicans' tax plan
cost Americans $1.8 trillion and largely benefited the largest
corporations and the wealthiest 1 percent of Americans, however
our colleagues on the other side of the aisle now insist that
the United States cannot afford to provide a meaningful relief
to these middle-class families, including in New Mexico, it
just seems wrong to me. The 24, 28, those numbers just do not
add up. And I am hopeful that we can all work together to
provide relief to families back home that I represent.
Thank you, and I yield back.
Chairman Sanders. Senator Lujan, thanks very much.
Senator Toomey.
Senator Toomey. Yeah, I would just point out to my
colleague from New Mexico that he might want to take a look at
the approximately $4 trillion that Republicans voted for over
the course of last year, the large majority of which were
direct payments in one form or another to low- and middle-
income people. To suggest that Republicans are unwilling to do
anything is to simply choose to ignore the very recent history.
I could carry on about the best economy of any of our
lifetimes which occurred just before the pandemic hit and
included a narrowing of the income gap, a narrowing of the
wealth gap, accelerating wages, full employment, more job
openings than there were people looking for work; and maybe
some people would suggest that that is all a big coincidence
that that happened right after we did a profound tax reform
that made our Tax Code much more competitive. But I do not
think that was the case. I think it was related very much to
making--and I would suggest that our Democratic colleagues
might think about wanting to go back to the best economy of our
lifetime, want to go back to accelerating wage gains for low-
income workers, because that is what I would like to do. I
would like to get back to the most successful economy we had in
my lifetime, and it was very much partly a result of the tax
reform we did.
I also want to correct the wild mischaracterization that we
do not have a progressive Tax Code. In 2018, if you look at the
share of who paid Federal income taxes for starters, the top 1
percent of income earners earned about 21 percent of all the
income--21 percent. They paid 40 percent of all the taxes.
Well, gee, hard to say that people are not paying their fair
share.
But look at the bottom 50 percent. The bottom 50 percent
pay 2.9 percent. So the top 1 percent pay 40 percent of all
taxes, income taxes collected. The bottom 50 percent pay 2.9.
If you include all Federal taxes and transfer payments through
the Tax Code, the top 1 percent in 2018 paid about 30 percent;
the bottom 50 percent of taxpayers have a negative effective
tax rate because they get more back from the Tax Code than they
pay in. Those are just the facts.
Now, you could decide that you want to make sure to punish
successful and productive people more and more, and you could
make that value judgment. But, please, let us at least be
honest about this.
Mr. Hodge, do you think it is fair to say that the U.S. Tax
Code is not progressive?
Mr. Hodge. It is exceptionally progressive, Senator, and as
I outline in my testimony, there is a great deal of
redistribution that goes on through both tax and spending
policy. What CBO data shows is that between taxes and
redistribution, the top 20 percent are seeing $1.7 trillion
worth of their income being transferred from them to other
households.
Senator Toomey. Right. I appreciate that. I am going to run
out of time, so just a very quick question. In your studies, is
the American Tax Code actually even more progressive than many
of the OECD countries, for instance?
Mr. Hodge. An OECD study found that the U.S. Tax Code,
Income Tax Code, is one of the most progressive tax systems in
the industrialized world.
Senator Toomey. So we are being told that we do not have a
progressive Tax Code when, in fact, we have the most
progressive Tax Code. That is amazing.
Now, here is one of the other ironies. It is our Democratic
colleagues that are pushing for a provision that is absolutely
factually regressive, and that is the repeal of the SALT cap.
Now, as you recall, SALT is the acronym for ``State and local
taxes,'' and while I would have preferred that we not allow any
deduction for State and local taxes, the compromise we had to
settle for was a $10,000 limit.
Now, our Democratic colleagues want a bigger limit or no
limit at all, and what the ability to deduct State and local
taxes does is it simply transfers the tax burden to lower-
income people who do not have large State and local taxes to
pay, and it takes it away from wealthy people who do.
So, you know, if you live on he Upper East Side of
Manhattan and you have got a multi-million-dollar home, you
have got a lot of State and local taxes. And if you can deduct
all that, that means that the middle-income family in Dauphin
County, Pennsylvania, has to pay that much more.
Let me ask Ms. MacGuineas, am I getting this wrong, or do
you agree that increasing the SALT deduction would be
regressive?
Ms. MacGuineas. Senator, you are so, so right on that.
Getting rid of the SALT cap is really one of the more
regressive tax cuts we could think about. I do not know why it
is on the table. It would leave huge annual tax cuts for
millionaires and billionaires, and the Tax Code, like you said,
it is progressive. It is okay to want a more progressive Tax
Code, but you should not do that while pushing for progressive
tax cuts or imposing progressive changes on the spending side,
I would add.
Senator Toomey. Yeah, and if your argument is that we need
to take the world's most progressive--one of the world's most
progressive Tax Codes and make it still more progressive, okay,
we can have that discussion. But, please, let us not suggest
that we do not have a progressive Tax Code. I mean, that is
just patently ridiculous.
I would also again stress there is actually a lot to be
said for having an economy where there are more job openings
than there are people looking for work, where the income
differential is narrowing, where it is narrowing at an
accelerating pace. I have yet to hear someone tell me what is
wrong with the direction we were heading in. We had a hearing
on this Committee a few days ago where the data set that was
presented to us was cherry-picked to create a misleading
impression that the income differential was widening when, in
fact, for 10 years now it has been narrowing.
All I am saying is I think that is a good thing, and I
would like to get back to a booming economy where people are
experiencing that accelerated earning and narrowing the income
and wealth gap.
Ms. MacGuineas, you looked like you were going to say
something?
Ms. MacGuineas. Well, yes, but you are not going to like my
answer because I take that differently. As you know, we have
disagreed on the tax cuts. But I think a lot of that growth,
which was tremendous, particularly what it was doing to the
wage gap, was driven by the demand side and the huge deficits
and kind of the short-term stimulus, which cannot be sustained
over the long term. So if you are debt financing everything--
and we borrowed $4.7 trillion in taxes and spending increases
during that period--huge burst for the economy, but not
sustainable and damaging in the longer term would be the point
I would make.
Senator Toomey. Well, you are right. We disagree about
that.
Ms. MacGuineas. We disagree. I know.
Chairman Sanders. Okay.
Senator Toomey. Thank you for your indulgence, Mr.
Chairman. I ran over.
Chairman Sanders. Okay. Thank you, Senator Toomey.
Senator Warner.
Senator Warner. Well, thank you, Mr. Chairman, and let me
just say that I have great respect for my friend Senator
Toomey, but I have got to tell you, in the last presentation,
there was some cherry-picking going on, and let me agree with
him that on the SALT tax, I agree with him and my good friend
Maya MacGuineas. But the notional idea that somehow we have
this progressive tax system in our country, when you look at
income tax, you are right, many Americans do not make enough to
afford income tax. But when you look at the overall tax burden
that low- and moderate-income Americans pay, when you add in
sales tax, when you add in Federal Insurance Contributions Act
(FICA), when you add in Medicare, when you add in a gas tax,
when you add in a host of other taxes and fees, there is no
doubt at all that our tax system does not rank as a system on
the more progressive side. And the level of transfer payments--
now, I candidly probably a little bit agree with Senator
Toomey. I do not want our transfer system to kind of duplicate
the full European system, but I think, you know, let us not
cherry-pick our numbers here when we are going to have this
kind of overall discussion about Tax Code and fairness.
I do want to go to my friend Maya MacGuineas, which, again,
I agree we have spent close to $5 trillion in the last year,
borrowed money. I think in the long run history would say it
was appropriate to recover both from COVID and get the economy
reworking. But that was exacerbated by the fact that we had
spent $2 trillion of additional borrowed money on a tax cut
that disproportionately did benefit people like me and
businesses at the top. And as a matter of fact, we now have
corporate tax revenues the equivalent of 1.1 percent of our GDP
in 2019. That is the lowest of any in the G-7, and I have been
pressing my staff on this because I thought they were saying it
is also 33rd out of 35 on OECD. I actually thought that was our
overall tax revenue rate, not our corporate tax rate, since
many other countries have a nominally lower corporate tax rate,
but they then have a VAT to make up for it. But, no, they have
said, you know, even at the corporate rate, we are 33 out of 35
in OECD nations.
So, you know, Ms. MacGuineas, how are we ever going to be
sustainable with these corporate rates and revenue coming out
of industry at this size that is so small compared to all of
our competitors? And how is that ever sustainable? At what
point--now, again, we have thought that that point was going to
happen sooner than it has, that this does not just blow up in
our face?
Ms. MacGuineas. Thank you for the question, Senator, and I
agree with you on so many of those things. We did think that
the last recovery bill was more than it needed to be and not as
well targeted, but overall we did such an important job of
being able to borrow to help with this, and thankfully we were
able to borrow despite the fact that in the 3 years when the
economy was strong prior to then, we borrowed $4.7 trillion--$2
trillion from tax cuts, but also another $2 trillion from
spending cuts and another $500 billion in tax cuts. It was a
free-for-all, and this has led our debt situation to be
unsustainable and leaving us in a vulnerable situation where if
interest rates go up by 1 percentage point, the interest
payments we have will go up--they are already $300 billion a
year, $2,400 per family. They will go up by another $250
billion per year, 1 interest percentage point.
So we are going to have to get on top of this fiscal
situation, and we also, frankly, are underinvesting, so there
are going to have to be new initiatives, and we are going to
have to reform our social contract. But I do not think we
should overpromise how we can do this just on taxes for the
very rich. I think it makes sense to start there. I think we do
have to look at the corporate tax rate, which at 21 percent is
too low, though I do not think it should go back to where it
was before. But we are also going to have to look at the
spending side of the budget, fixing Social Security is a must,
and we will probably have to do broad-based taxes.
So I feel like the more things we are talking about
honestly, the closer we will be to ending the vulnerabilities
we have from this unstable fiscal situation and this weak
fiscal balance sheet.
Senator Warner. Well, I agree with you. I also think, you
know, when we have a Federal spend rate before COVID that had
research and development (R&D), infrastructure, and any kind of
training programs as less than 10 percent of our Federal spend,
that is a bad business plan that I would never invest in.
I know my time is out, Mr. Chairman, but I will submit for
the record a question of Mr. Zucman about the fact that
whatever intentions that came out of the so-called tax reform
of 2017, the guilty in many terms that most Americans do not
recognize unfortunately resulted, particularly in terms of R&D
and intangible assets, in actually companies moving more of
their operations offshore, not back to America. Senator Brown,
Senator Wyden, and I are working on proposals to try to correct
that. We appreciate the opportunity to have this issue brought
to our forefront, Mr. Chairman.
Senator Padilla. [Presiding.] Thank you.
While Senator Sanders is off to vote, I will continue this
hearing and begin with my statement. While millions of working
families in California and across the Nation are struggling to
keep up with their bills, stay in their homes, and put food on
their tables after decades of stagnant wages and the
devastating impact of the current economic crisis due to the
pandemic, the Federal Tax Code clearly works well for the
wealthy and for large corporations.
Just looking at the last couple of decades, under
Republican administrations Congress has passed tax cuts that
have largely benefited top earners and business interests. The
2017 Republican tax cut alone was particularly regressive,
providing more than $1 trillion in tax breaks to corporations
and the top 1 percent of earners. This law has allowed
billionaires to pay lower effective tax rates than many working
families. It has also--and this is equally important--failed to
deliver on the promises of a business investment boom, even
before the pandemic.
By contrast, President Biden and congressional Democrats
passed the American Rescue Plan which is delivering critical
tax relief to working families by delivering direct payments,
improving the earned income tax credit, and enhancing the child
tax credit that will cut child poverty in half this year.
As we continue our work to defeat COVID-19 and reopen our
economy safely, pursuing a progressive tax agenda is critical
to building a more equitable and prosperous future for all
Americans.
Now, I do have an area of questioning for Professor Zucman
and Ms. MacGuineas relative to the IRS. Following nearly a
decade of funding cuts, the Internal Revenue Service's capacity
to enforce our tax laws, particularly for the wealthiest
corporations and the wealthiest families, who tend to have more
complex filings, has been severely diminished. In the past 10
years, the agency has been forced to eliminate 22 percent of
its staff, and funding for enforcement activities has dropped
by about 30 percent. These cuts have primarily benefited the
wealthiest households and corporations that failed to pay their
taxes in full.
A 2019 study found that 70 percent of owed but unpaid taxes
equaling $267 billion is explained by the underpayment by the
top 1 percent. Since 2012, the number of tax returns filed by
millionaires that were audited fell by 72 percent. During that
same period, the share of companies with more than $20 billion
in assets that were audited fell 59 percent.
Investing in the IRS would not only support fairness and
the integrity of the Tax Code, but it would also help reduce
the deficit. The Congressional Budget Office estimates that
increasing IRS funding by $20 billion over the next 10 years
would actually reduce the deficit by $40 billion due to the
collection of additional unpaid taxes.
So, Professor Zucman and then Ms. MacGuineas, can you
explain how increasing funding to the IRS is critical to
instituting a fairer tax system?
Mr. Zucman. Absolutely, Senator. I fully agree with what
you said. I think that there is an urgent need to increase
audit rates and fund more thorough audits for high-income and
high-wealth taxpayers. The data that we have today suggests
that the top 1 percent highest earners in the U.S. underreport
about 20 percent of their income. So that closing tax evasion
just for that group, collecting all the taxes evaded by the top
1 percent alone would raise more than $170 billion annually,
each year, in extra Federal income tax revenues. To me, this is
the number one step to making the tax system more progressive,
and let me mention there is broad agreement among economists
that better funding the IRS more than pays for itself. So this
is really critically important.
Ms. MacGuineas. Yeah, Senator, I am strongly in this camp
in that I am very concerned that overall the sort of--that you
can have--that the ``you do not have to pay for anything''
fairy seems to be taking over thinking and lawmakers on the
idea that tax cuts pay for themselves. No, they do not, and we
are going to start hearing that about infrastructure, and as
much as we need to invest in this country, it does not pay for
itself. And we have even seen studies that if you deficit-
finance it, economic growth could be negative.
But if there is one thing that probably does pay for
itself, it is funding appropriately for the IRS to close the
tax gap and things like data analysis technology. And so I do
think looking at this, particularly when you compare it to the
other revenue options once we acknowledge we are going to have
to raise revenues, it makes really good sense to start with
making sure we kind of abide by the rule of law and collect the
taxes that we are owed.
Senator Padilla. Ms. MacGuineas, as a follow-up, are there
any specific areas of investment to the IRS to expand capacity
that you would recommend or prioritize?
Ms. MacGuineas. Absolutely. I think looking at different
kinds of technology that we can figure out where the gap is
likely to be, understand where we have had tax gap issues
before, and enforce an audit appropriately makes a lot of
sense. I also think third-party reporting will play a critical
role in all of this.
There is a huge gap there. I do not want us to overpromise.
We are not going to be able to collect it all. People evade
taxes as quickly as we can figure out how to enforce them. But
there is so much better reporting now and data tracking that it
will be much easier to do so.
Senator Padilla. A last question. I imagine there are a
number of States that have taken this philosophy and this
approach. Are there any examples, any best practices, again,
investing in more thorough and equitable enforcement of tax
laws and policies that have reaped good results that we should
consider?
Ms. MacGuineas. If you are asking me, I apologize. I do not
know which States have the best practices. I do know we need to
do a lot of updating in our States based on our unemployment
issues as well. But, in general, more auditors, more customer
service, things that are helping taxpayers so that they do not
make mistakes in the first place, all of those investments are
likely to have high returns.
Senator Padilla. Professor Zucman, is there anything you
wish to add?
Mr. Zucman. I think Scandinavian countries are particularly
good at enforcing their tax laws, thanks to a systematic
collection of third-party reporting information which allows
them to send pre-populated tax returns to taxpayers. With a
pre-populated tax return, you will reduce evasion possibilities
significantly, and so I think that is a good practice that the
U.S. should try to emulate.
Chairman Sanders. [Presiding.] Senator Whitehouse.
Senator Whitehouse. Thank you very much. I appreciate this.
Thank you, Chairman. I am sorry to come late, but we had some
partisan festivities in the Judiciary Committee this morning
that pulled us over the time.
Let me ask Professor Zucman, if I may, fair to say that
underreporting is rampant in our tax system and that there is
abundant revenue that could be collected from simple
enforcement measures?
Mr. Zucman. Thank you, Senator. I think this is fair to
say. According to the best available estimates, the top 1
percent underreport about 20 percent of its income. I am not
saying that it would be possible----
Senator Whitehouse. That was the question I was about to
get to, which is you agree that underreporting is rampant and
that there is significant revenue to be collected from simply
enforcing the existing laws. Correct?
Mr. Zucman. I do agree with this statement.
Senator Whitehouse. And then, further than that, your
evidence seems to show that underreporting is bigger and worse
higher up the income scale than it is for people who are
ordinary wage earners. Is that also true?
Mr. Zucman. This is absolutely correct, Senator.
Senator Whitehouse. And if you are one of those high
earners, what is your likelihood of being audited compared to
that of, say, a poor earned income tax credit recipient? Where
is the IRS dedicating its attention?
Mr. Zucman. Unfortunately, today the likelihood is about
the same. Due to dramatic budget cuts, the IRS has reduced its
audit rates on the wealthy very significantly over the last
decade.
Senator Whitehouse. And it is likely to be a slightly more
complicated scheme at the high-income level than from an earned
income tax credit recipient. Correct?
Mr. Zucman. Absolutely.
Senator Whitehouse. So it takes a little bit more skill on
the part of the auditor?
Mr. Zucman. This is true.
Senator Whitehouse. Okay. So let us move it up one last
step, and that is people who are not just underreporting but
are actually setting up mechanisms to avoid taxes, where there
is really deliberate planning underway, whether it is through
shell corporations or through offshore entities or through
trust devices? Is that a separate and more rampant category for
enforcement?
Mr. Zucman. There is significant danger among the wealthy
that involves such sophisticated schemes--offshore wealth and
income that is not properly reported, evasion through complex
businesses, networks of personally held businesses. And
uncovering that form of evasion requires specific resources
within the IRS to fund specialized audits.
Senator Whitehouse. Precisely. This is the hard work. This
is more complicated. Correct?
Mr. Zucman. Absolutely.
Senator Whitehouse. And with respect to shell corporations,
we just gave Treasury a tool to find who the true beneficial
owners are. What is your expectation about the IRS taking
advantage of that information to help protect against tax
evasion and avoidance?
Mr. Zucman. I think there is great potential there. It is
absolutely correct that Treasury and the IRS have access to
more information about the owners of shell companies, about the
owners of foreign bank accounts, and by putting resources and
systematically using that information, it would be possible to
reduce tax evasion among the rich quite significantly.
Senator Whitehouse. So I do not know if your expertise
extends this far--this will be my last question--but let us
just say that if we were to crack down on offshore locations
that allow people to hide their income and their assets from
not just the U.S. authorities but from any authorities, would
there be collateral benefits to that transparency, to shining
that spotlight beyond just U.S. tax collection?
Mr. Zucman. Oh, yes, absolutely there would be benefit for
other countries as well if there was an effort on the part of
the U.S. at fostering more financial transparency. There is a
lot of financial opacity today. Financial transparency would
benefit the world as a whole.
Senator Whitehouse. Thank you, Chairman, for this. I will
just flag we are working on this in other committees as well,
that the way that the dark economy enterprises support
international criminal cartels, support kleptocrats, support
enemies of our country who are planning against our country but
use the shelter of the banking system for the assets they have
stolen, this goes beyond just tax collection. It gets into a
whole variety of even national security implications. So I am
grateful for you calling this hearing, and I apologize again
for being a late arrival.
Chairman Sanders. Senator Whitehouse, thank you very, very
much.
Senator Braun.
Senator Braun. Thank you, Mr. Chairman.
I was in here earlier and heard part of the conversation
with Mr. Hodge. I have got a question for you and then one for
Maya.
Coming from the world where you have to pay your bills or
else you are out of business, I noticed here from modern
monetary theory to the fact that there are not any guardrails,
I do not disagree with what Sheldon said in terms of, you know,
getting more revenue out of what should be collected. But what
I see mostly is an intractable $1 trillion deficit that we have
kind of shrugged off, and I think we are right at the cusp of
seeing what we do about it.
Well, obviously there is one side of the aisle that thinks
we can spend a whole lot more, which will inevitably raise that
structural deficit on top of everything we have spent for
COVID, and I am not taking on where we should spend the money.
I would just like to keep the entity healthy in the long run
for as many people that look to the Federal Government for what
they want from it. It is not a good business partner in my mind
when you control your economics the way it does.
I want to focus on corporate tax rates, and this would--in
my mind, there is a difference between C-corps and sub-S's,
LLCs, partnerships, proprietorships. That is Main Street.
Corporate tax is based upon someone that is in a huge entity
that has got a lot of advantages that you would not have on
Main Street.
When it was 35 nominal rate and taken down to 21, what was
the effective tax rate? In my mind, all the research I did, it
was under 21. Is that true or not? What was the effective tax
rate when it was a nominal rate of 35?
Mr. Hodge. I believe it was around 22 percent. It varies
every year.
Senator Braun. Yes. That is close. So what that means is
that there are tons of loopholes or things that have been built
into the Tax Code that, when you have got a Main Street
business, a small one, I bemoaned every year that my marginal
tax rate was about the same as the effective tax rate, because
you do not have the deductions.
How much would we save if we eliminated every loophole or
any special preference in the Tax Code as it would apply to C-
corps, roughly?
Mr. Hodge. Well, on the business side, according to the
Joint Committee on Taxation's report on tax expenditures last
year, there are only about $200 billion worth of ``tax
expenditures'' on the corporate side of the ledger. There are
$1.3 trillion worth of tax expenditures on the individual side
of the ledger. A lot of the loopholes in the corporate code
have been eliminated over the last few----
Senator Braun. But it still would be the difference between
what was a 35 nominal and a 22 effective, and you cited $200
billion. I think it makes two points----
Mr. Hodge. But all due respect, though----
Senator Braun. There is not as much there to bridge a $1
trillion deficit?
Mr. Hodge. Not at all. And many of those ``loopholes'' are
actually things like full expensing for buying equipment and
tractors and so forth.
Senator Braun. And I know we all love that in business, but
we have got a crisis here, in my mind, that we are at probably
the worst balance sheet that we have ever had in the history of
the country. Back when we were about like this coming out of
World War II, we were savers and investors. Now we are spenders
and consumers.
Mr. Hodge. Right.
Senator Braun. Thank you for putting some light on that
particular point.
The next question is for Maya. I would love to hear whether
we have got a spending problem or a revenue problem. In a
business, you have got to take care of both, and here in the
Federal Government, when I look at the fact that revenues were
going up close to 5 percent pre-COVID but spending, due to
mandatory spending mostly, had been going up between 6 and 7
percent, there is no way we ever catch up. And, Maya, I would
like you to comment in two places. How much revenue do you
think you could get that would be valid without starting to
tank the economy? Do you think there is anything--or highlight
the spending problem this Federal Government has?
Ms. MacGuineas. Okay. Thanks so much for the question,
Senator. Sort of like fairness, there is no right or wrong in
the balance of spending and revenues, but one cannot deny,
looking at the numbers, that both spending and revenue are on
trajectories to grow faster than their historical levels,
spending by much, much more. Health care, retirement, interest
account for the vast majority, over 80 percent, of all spending
increases over the next decade.
Again, people have to figure out where they want to make
those changes, but the realistic frame--and it is what I would
like to emphasize throughout this really important hearing--is
that our fiscal problems are already too large to really deal
with this on only one side of the balance sheet, and that is
more true many multiples of time if we are talking about
expanding spending further, which seems to be a popular
discussion right now. It would take $4 trillion just to
stabilize the debt at 100 percent of GDP. That is already way
too much. It would take $9 trillion to bring the debt back down
to balance. I doubt we will be able to do that. It would take
$11 trillion to pay for the Biden agenda. Many important things
there, but we should not pretend those can just come from
taxing millionaires and billionaires.
So the point is--and I think it is what you are making--
this fiscal challenge is huge. It is really important. It
leaves us vulnerable in so many places, and we have to look at
all sides of the balance sheet. But you cannot ignore that the
growth in spending has been driving this for quite some time,
and that will become more true with the aging of the population
and health care costs and growing interest.
Senator Braun. Thank you for driving home that point.
Chairman Sanders. Thank you, Senator Braun.
I believe that Senator Braun is the last of our Senators,
so let me take this opportunity to thank all of our panelists
for their testimony. And I want to thank all of the witnesses
as well. All of their written statements will be included in
the record.
As information for all Senators, questions for the record
are due by 12 o'clock noon tomorrow with signed hard copies
delivered to the Committee clerk in Dirksen 624. Email copies
will also be accepted due to our current conditions. Under our
rules, the witnesses will have 7 days from receipt of our
questions to respond with answers.
With no further business before the Committee, this hearing
is adjourned. Thank you.
[Whereupon, at 12:52 a.m., the Committee was adjourned.]
ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD
[Prepared statements, responses to written questions, and
additional material submitted for the record follow:]
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