    [Senate Hearing 117-373]
    [From the U.S. Government Publishing Office]

                                                           S. Hrg. 117-373

                         CREATING OPPORTUNITY THROUGH
                              A FAIRER TAX SYSTEM

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

                                    HEARING

                                   BEFORE THE

                     SUBCOMMITTEE ON FISCAL RESPONSIBILITY
                              AND ECONOMIC GROWTH

                                     OF THE

                              COMMITTEE ON FINANCE
                              UNITED STATES SENATE

                        ONE HUNDRED SEVENTEENTH CONGRESS

                                 FIRST SESSION

                                   __________

                                 APRIL 27, 2021

                                   __________

    [GRAPHIC NOT AVAILABLE IN TIFF FORMAT]

                Printed for the use of the Committee on Finance

                                   __________

                        U.S. GOVERNMENT PUBLISHING OFFICE
    48-668-PDF                 WASHINGTON : 2022

    -----------------------------------------------------------------------------------
                             COMMITTEE ON FINANCE

                          RON WYDEN, Oregon, Chairman

    DEBBIE STABENOW, Michigan            MIKE CRAPO, Idaho
    MARIA CANTWELL, Washington           CHUCK GRASSLEY, Iowa
    ROBERT MENENDEZ, New Jersey          JOHN CORNYN, Texas
    THOMAS R. CARPER, Delaware           JOHN THUNE, South Dakota
    BENJAMIN L. CARDIN, Maryland         RICHARD BURR, North Carolina
    SHERROD BROWN, Ohio                  ROB PORTMAN, Ohio
    MICHAEL F. BENNET, Colorado          PATRICK J. TOOMEY, Pennsylvania
    ROBERT P. CASEY, Jr., Pennsylvania   TIM SCOTT, South Carolina
    MARK R. WARNER, Virginia             BILL CASSIDY, Louisiana
    SHELDON WHITEHOUSE, Rhode Island     JAMES LANKFORD, Oklahoma
    MAGGIE HASSAN, New Hampshire         STEVE DAINES, Montana
    CATHERINE CORTEZ MASTO, Nevada       TODD YOUNG, Indiana
    ELIZABETH WARREN, Massachusetts      BEN SASSE, Nebraska
                                         JOHN BARRASSO, Wyoming

                        Joshua Sheinkman, Staff Director

                    Gregg Richard, Republican Staff Director

                                     ______

           Subcommittee on Fiscal Responsibility and Economic Growth

                     ELIZABETH WARREN, Massachusetts, Chair

    RON WYDEN, Oregon                    BILL CASSIDY, Louisiana
                                         RICHARD BURR, North Carolina

                                      (ii)

                                C O N T E N T S

                                  ----------

                               OPENING STATEMENTS

                                                                       Page
    Warren, Hon. Elizabeth, a U.S. Senator from Massachusetts, chair,
      Subcommittee on Fiscal Responsibility and Economic Growth,
      Committee on Finance...........................................     1
    Cassidy, Hon. Bill, a U.S. Senator from Louisiana................     4

                                   WITNESSES

    Disney, Abigail E., Ph.D., CEO and co-founder, Fork Films, New
      York, NY.......................................................     3
    Straughter, Cheryl, owner, Soleil Restaurant, Boston, MA.........     7
    Gamage, David, professor of law, Maurer School of Law, Indiana
      University, Bloomington, IN....................................     9
    Hodge, Scott A., president, Tax Foundation, Washington, DC.......    11
    Hoopes, Jeffrey L., Ph.D., associate professor, Kenan Flagler
      Business School, University of North Carolina, Chapel Hill, NC.    12
    Pomerleau, Kyle, resident fellow, American Enterprise Institute,
      Washington, DC.................................................    14

                   ALPHABETICAL LISTING AND APPENDIX MATERIAL

    Cassidy, Hon. Bill:
        Opening statement............................................     4
        Prepared statement...........................................    39
    Disney, Abigail E., Ph.D.:
        Testimony....................................................     3
        Prepared statement...........................................    40
        Responses to questions from subcommittee members.............    43
    Gamage, David:
        Testimony....................................................     9
        Prepared statement...........................................    46
        Responses to questions from subcommittee members.............    56
    Hodge, Scott A.:
        Testimony....................................................    11
        Prepared statement...........................................    57
        Responses to questions from subcommittee members.............    68
    Hoopes, Jeffrey L., Ph.D.:
        Testimony....................................................    12
        Prepared statement...........................................    70
        Responses to questions from subcommittee members.............    79
    Pomerleau, Kyle:
        Testimony....................................................    14
        Prepared statement...........................................    82
        Responses to questions from subcommittee members.............    89
    Straughter, Cheryl:
        Testimony....................................................     7
        Prepared statement...........................................    90
        Responses to questions from subcommittee members.............    91
    Warren, Hon. Elizabeth:
        Opening statement............................................     1
        Prepared statement...........................................    92

                                 Communications

    Association of Americans Resident Overseas.......................    95
    Baker, Vania K...................................................    97
    Barrow, Cody Gentry..............................................    98
    Beauregard, Claude...............................................   101
    Butler, Janeen, CPA..............................................   102
    Buzatu, Anne-Marie Yarbrough.....................................   103
    Center for Fiscal Equity.........................................   108
    Dac, Jak.........................................................   114
    Dale, Paul.......................................................   115
    de Bruin, Sylvia Jeanet..........................................   116
    Democrats Abroad.................................................   120
    De Paul, Susan...................................................   128
    Dymkowski, Christine.............................................   130
    Ellis, Ashley Lynn...............................................   130
    Engen, Mark......................................................   131
    Fernandez, Andrea................................................   131
    Fishbone, Aaron..................................................   133
    Gordon, Leland...................................................   133
    Gunsch, Jeffrey..................................................   134
    Lee, Nicholas Matthew............................................   136
    Miller, Pamela...................................................   140
    National Taxpayers Union.........................................   141
    Steinke, Karl....................................................   146
    Stop Extraterritorial American Taxation (SEAT)...................   147
    Valdez, Juan.....................................................   152
    Van Opdenbosch, Dominik..........................................   153
    Windsor, Genelle.................................................   154
    Zhang, Libin.....................................................   155

                         CREATING OPPORTUNITY THROUGH
                              A FAIRER TAX SYSTEM

                                  ----------

                            TUESDAY, APRIL 27, 2021

                               U.S. Senate,
             Subcommittee on Fiscal Responsibility
                                   and Economic Growth,
                                          Committee on Finance,
                                                        Washington, DC.
        The hearing was convened, pursuant to notice, at 12:30
    p.m., via Webex, in Room SD-215, Dirksen Senate Office
    Building, Hon. Elizabeth Warren (chair of the subcommittee)
    presiding.
        Present: Senators Cassidy, Wyden, and Carper.
        Also present: Democratic staff: Gabrielle Elul, Economic
    Policy Advisor for Senator Warren; Michael Evans, Deputy Staff
    Director and Chief Counsel; and Laura Gerrard, Scheduler for
    Senator Warren. Republican staff: Katie Hadji, Tax Counsel for
    Senator Cassidy; Owen Morgan, Policy Advisor for Senator
    Cassidy; and Jeffrey Wrase, Deputy Staff Director and Chief
    Economist.

    OPENING STATEMENT OF HON. ELIZABETH WARREN, A U.S. SENATOR FROM
    MASSACHUSETTS, CHAIR, SUBCOMMITTEE ON FISCAL RESPONSIBILITY AND
                 ECONOMIC GROWTH, COMMITTEE ON FINANCE

        Senator Warren. This hearing will come to order. Good
    afternoon. Welcome to this year's first hearing of the Finance
    Committee's Subcommittee on Fiscal Responsibility and Economic
    Growth.
        I want to thank our ranking member, Senator Cassidy, for
    working with me and my team to make this hearing successful. We
    have a vote today at 2:30, so Senator Cassidy is voting at the
    top of the hour. He will come back, and he'll take the gavel so
    I can vote.
        This is a subcommittee that will focus on how we can create
    opportunities for every American, how we can build a more
    equitable economy, and how we can invest in future prosperity.
    President Biden has proposed a $2-trillion infrastructure
    package, outlining the benefits of investing in roads and
    bridges and broadband and housing, the things people need to
    get to work. He's also about to unveil a plan for the care-
    giving economy, including child care, universal pre-K, and free
    community college. Current estimates put the price tag of that
    package at about $1.5 trillion.
        All these investments would make the lives of millions of
    people better, but they carry a total price tag of about $3.5
    trillion. So how do you pay for it? Today we will address that
    question by talking about revenues--where the money comes from
    to build a stronger future. There are a variety of proposals
    that would help us move toward that stronger future, and I am
    going to highlight just three that I have put forward.
        First, a wealth tax would impose an annual 2-cent tax on
    fortunes bigger than $50 million. It would not raise taxes on
    99.9 percent of Americans by a single penny. That one tax would
    bring in $3 trillion.
        Second, the Real Corporate Profits Tax would force
    companies like Amazon, FedEx, and Nike that make billions of
    dollars in profits and pay little or nothing in Federal income
    taxes, to pay more. The Real Corporate Profits Tax would apply
    only to corporations that report profits to their shareholders
    and the public of more than $100 million. These companies would
    pay 7 percent of those reported profits, which they use to
    justify the big salaries and bonuses that they pay their CEOs,
    and they would pay that no matter how many tax loopholes they
    find or how many scams they run. President Biden has a similar
    approach. My approach would raise about $1.3 trillion.
        And then finally, I have proposed increasing tax
    enforcement for wealthy individuals and giant corporations.
    This plan provides mandatory funding for the IRS that is
    focused on making sure that the rich and powerful get caught
    when they break the law. Estimates from the Commissioner of the
    IRS indicated that we lose about a trillion dollars a year from
    tax cheating. If we stepped up enforcement to cut the cheating
    by only 20 percent, we could raise as much as $1.8 trillion
    over the next decade.
        These three big ideas alone would raise more than $6
    trillion, enough to pay every single penny of President Biden's
    American Jobs Plan, and pay for every single penny of his
    American Families Plan, and still have more than $2 trillion
    left over.
        As these numbers show, our Nation can do both--invest in
    American families, and pay for it without raising taxes on
    those same families. We can build a country that creates
    opportunity, not just for those at the top, but creates
    opportunities for everyone.
        Now these big ideas have their critics. In fact, I invited
    one of the loudest critics, billionaire Leon Cooperman, here
    today to discuss these proposals with the members of the
    committee and the American public. After all, that is how
    democracy is supposed to work: citizens and stakeholders
    discuss ideas, and then our elected representative's vote.
        I am disappointed that Mr. Cooperman decided that he was
    more comfortable taking softball questions on cable news than
    subjecting his views to debate in the United States Senate. Now
    Mr. Cooperman may have been too frightened to come here today,
    but others were not.
        Today we are joined by a panel of distinguished witnesses,
    including several academics and tax policy experts, by
    millionaire Abigail Disney, and by small business owner Cheryl
    Straughter, who have a variety of views on these proposals and
    are willing to discuss and debate them in public. A fairer tax
    system is about making our country better and stronger. It is
    about allowing us to make investments in our economy by asking
    the wealthiest Americans and biggest corporations to pay their
    fair share.
        So I am looking forward to this discussion today, and I
    thank our witnesses and my colleagues for joining us. I would
    at this point ordinarily turn to Ranking Member Senator Cassidy
    for his opening remarks, but I think he is still voting. As
    soon as he rejoins us, he can give us those remarks.
        [The prepared statement of Senator Warren appears in the
    appendix.]
        In the meantime, I am going to go ahead and introduce our
    witnesses. First, I am very pleased to introduce Dr. Abigail
    Disney, who is the CEO and the owner of Fork Films. Next is Ms.
    Cheryl Straughter, who is the chef and the owner of Soleil
    Restaurant in Boston, MA. Next, Mr. David Gamage, professor of
    law at Indiana University Bloomington's Maurer School of Law.
    Then, Mr. Scott Hodge, president of the Tax Foundation. Dr.
    Jeff Hoopes, associate professor at the University of North
    Carolina Chapel Hill's Kenan Flagler School of Business. And
    finally, Mr. Kyle Pomerleau, a resident fellow at the American
    Enterprise Institute.
        I want to thank every one of our witnesses for joining us
    today. And, Dr. Disney, I would like to recognize you for 5
    minutes, please.

                STATEMENT OF ABIGAIL E. DISNEY, Ph.D.,
              CEO AND CO-FOUNDER, FORK FILMS, NEW YORK, NY

        Dr. Disney. Thank you, Chair Warren and Ranking Member
    Cassidy, for the opportunity to speak today.
        When a person is born in this country, it pretty much goes
    the same way every time. When a baby comes out, it gets a
    little slap on the tushy till it cries, and gets handed over to
    the parent.
        But in a family like mine, it goes a little bit
    differently. The baby comes out. It gets slapped on the tushy a
    little bit. And then the doctor looks deep in that baby's eyes
    and says, ``Never spend capital.'' It is as close to a religion
    among people who inherit wealth as anything else.
        So why is capital so sacred? Well, it is the goose that
    lays the golden eggs. The more capital you have, the more
    income and growth you can count on, the more stuff you can buy,
    and so forth.
        The subtext of ``never spend capital'' is of course that
    jobs are for chumps. If you ever find yourself reduced to
    earning your living by labor, well then, you have surely lost
    the lottery that you were given when you were born. That is how
    rich people stay rich.
        I was born very lucky, and continue to be very lucky today.
    But a lot of things have changed since I was born in 1960, and
    a lot of it has been very good for me financially. For one
    thing, Disney stock has soared, in part because of good
    management, and in part because the stock market has soared.
        So I have owned my way to the top. But there is another
    thing that is more pertinent for our purposes today, and that
    is that a lot of what the government has done for the last 40
    years has been to shape policies that fight against the natural
    forces that would normally pull an inheritor like me back down
    to earth. Things like low corporate taxes and a high tolerance
    of tax avoidance--those savings go to executives and to
    shareholders like me. Companies plowing their skyrocketing
    profits and tax savings into share buy-backs help only, yes,
    shareholders like me and executives.
        A tax avoidance industry has been growing up that has been
    advising individuals and families like mine about how to
    minimize their tax obligation in ways that are both quasi-legal
    and even potentially criminal, an assault on public spending
    that included the evisceration of the IRS, the SEC, and all the
    other regulators that might be more able, if better supported,
    to restrain some of the trickery.
        And finally, corporate and individual spending on lobbying
    and on political campaigns has warped and changed the political
    processes, rendering some representatives opaque, corrupt, and
    downright uninterested in the well-being of regular people.
        When I was born in 1960, the U.S. had a tax system that
    privileged income from labor over income from wealth. But
    somewhere along the line, that turned upside down. Now, the
    more likely a person is to come home with an aching back and
    sweat on their brow, the more likely I am to be paying a lower
    effective tax rate than they are.
        If a tax system is a statement of a country's values, then
    I really do question ours. The levels of inequality that now
    characterize American life are historic. And the pandemic has
    only exacerbated the problems. Wealth among U.S. billionaires
    has grown by over $1.3 trillion just over the past year.
        That kind of money would cover a $3,900 stimulus check for
    every American citizen. The rich may have run amok. They have
    run amok for the last 50 years of American history, and our
    government's complicity in their antics has permitted a handful
    of egregiously wealthy human beings to accumulate massive,
    budget-warping, mind-blowing amounts of money, all at the
    continuing expense of all the other Americans.
        We need to address this inequality by restoring to the
    working class the benefits that used to come with just being a
    regular American citizen. But working people will never, by
    salary alone, be able to catch up with the folks who have
    succeeded in putting so much distance between themselves and
    everyone else. Only a wealth tax will get us there.
        I will go to bat for the wealth tax against any and all
    businessmen who want to tell you that it impinges on the
    American Dream. If you have $50 million and you cannot invest
    it for more than 2-percent growth, well then, you have a bigger
    problem than the wealth tax.
        And if you have a billion dollars, and you do not know how
    to live on $999 million, then you do not need a better tax
    system; you need a psychiatrist. A tax is not a penalty. A tax
    is not a theft. A tax is a responsibility. It represents what
    you owe to society. A tax is the least you can do. It is your
    patriotic duty.
        Thank you, very much.
        [The prepared statement of Dr. Disney appears in the
    appendix.]
        Senator Warren. Thank you, Dr. Disney. And now I call on
    Ranking Member Cassidy, who's going to give his opening
    statement. I am also turning the gavel over to him while I go
    to vote.

                OPENING STATEMENT OF HON. BILL CASSIDY,
                     A U.S. SENATOR FROM LOUISIANA

        Senator Cassidy [presiding]. Thank you, Madam Chair. Thank
    you, Chairman Wyden, again Subcommittee Chair Warren, and
    Ranking Member Crapo. And I thank my witnesses, whom we will be
    hearing from.
        First, let's acknowledge that conservatives and liberals
    both want what is best for our country. Sometimes we have this
    spirit of division that suggests that is not true, one for the
    other. We all wish to have prosperity for those who are doing
    less well, but as this hearing will show, we have different
    visions on how to achieve that goal.
        Conservatives believe in allowing the American people to
    keep their resources as much as possible, to make decisions
    best for them. Allowing markets to dictate--with safeguards
    from Federal and State governments--as to where money should be
    best allocated, that is what has given us prosperity to date,
    and I feel, and conservatives feel, more likely to give us
    prosperity in the future.
        Now it is not just we who have seen that, however. We have
    seen countries which are socialist or communist acknowledge
    this and evolve toward that path. Whether it is the Czech
    Republic, or China, or countries that have tried wealth taxes
    like that which we discuss today--Sweden, Austria, Denmark,
    Germany, the Netherlands, Finland, Iceland, Luxembourg--they
    all have abandoned it.
        I think it is fair to say, and this hearing will show, that
    the left has a different view. The view is that it is better to
    take resources from the American people, filter them through
    the government bureaucracy, allow that bureaucracy to make
    decisions as to where to spend, and then the American people
    will more greatly benefit from these government decisions, as
    opposed to those made by private investors.
        That is really not what has given us prosperity to date.
    And again, that is what many countries have abandoned. Now
    there are those on the left who will object, quote, ``Hold on a
    second. We're not talking about taxes on anybody but the most
    wealthy.'' But this is disingenuous, a disregard that even the
    revenue from taxing every billionaire in the country at 100
    percent would not come close to funding the programs that have
    been proposed so far.
        It is also disingenuous because it presupposes that those
    whom the left wishes to tax are sitting on a pile of gold, like
    the dragon in ``Lord of the Rings,'' not using it in order to
    invest, in order to create wealth for others, but no, just
    sitting there.
        As Dr. Disney said, if you have got a billion dollars, if
    you cannot live on $999 million, then maybe you need to see
    somebody. But they are not living on $999 million. They are
    reinvesting it. And I would argue that that wealth is typically
    not liquid; that it is invested and reinvested, creating jobs
    and wealth. And the people who do this successfully create more
    jobs than will the government bureaucrats who would just not,
    frankly, feel as invested. It is not his money or her money, as
    opposed to the entrepreneur--it is their money, and they are
    going to do what brings the best return and, along the way,
    bring return for others.
        Our first Supreme Court Justice John Marshall said, ``The
    power to tax involves the power to destroy.'' We are not
    reinventing the wheel here. When you decrease taxes, you
    encourage investment, and jobs follow. When you increase taxes
    and you increase government control, you destroy investment,
    and job numbers suffer.
        Now again, we have some case studies here. Before COVID,
    Republican-led tax cuts spurred the greatest economy of our
    lifetime; record low unemployment for every demographic--the
    disabled, the high school dropouts, for African Americans, for
    women, for veterans, you name it--record low unemployment,
    record high employment driven by investments in the private
    sector.
        We have wage growth disproportionately in the lower-income
    strata. Now this may be an inconvenient truth for some on the
    other side of the aisle, but it is truth nonetheless. We know
    what works.
        In fact, let's have a thought experiment. Let's contrast
    the logical outcome of the two visions of the two sides. Those
    who like to raise taxes on the wealthy--it is kind of a
    principle--would like us think that the disinterested
    bureaucrat is able to make a wiser decision as to where to
    deploy capital than the person whose livelihood depends upon
    it.
        In the private sector, if an organization providing these
    services fails, it is on the dime of the company. Someone else
    steps up, takes the position to increase productivity, to
    increase jobs and wages. That is what happens in the private
    sector, and this is what this hearing is about.
        But we have a contrasting vision. Think school teachers'
    unions in Chicago. Children not allowed to be in a class
    because a teacher's union, against recommendations of the CDC,
    against science, against their Mayor's wishes, still would not
    reopen. What did they get for that failure of service? They
    demanded and received billions and billions for union
    priorities, paid for by U.S. tax dollars which, I guess from
    this tax, have come from the wealthy who would otherwise use
    the money to invest in the private sector to increase jobs.
        I would argue that the vision of creating jobs for all, as
    opposed to rewarding the inactivity of some who are politically
    connected, is part of what underlies this conversation.
        Now, by the way, rather than talking about whether new
    taxes are actually needed, we actually will hear how they are
    justified: successful individuals used as strawmen pitting
    Americans against each other to build support for a political
    agenda. Success will be vilified. Undefined goals like
    ``fairness'' will be used as blank checks to justify a tax and
    spend agenda.
        But what do you tell a family who loses their job because
    new taxes on the rich corporations make their employer's
    business model no longer viable? ``It is okay to lose your job
    beause we really stuck it to the rich.''
        The rich will do fine. The rich are going to do fine.
    Again, as I said earlier, they will find some way to live on
    quite a comfortable lifestyle. My fear is for the everyday
    working person caught in the crossfire of taxing priority which
    destroys the private investment capital and incentive that made
    their job possible in the first place.
        By the way, some will say, ``Don't worry, we are going to
    expand transfer payments and take care of this fallout. We will
    have expanded transfer payments.'' I would argue that this
    obviously creates government dependency, but I would argue that
    Americans want independence not dependence.
        So I will just say, I think we are going to hear a
    fundamental difference between our two parties. The Republicans
    believe that the best stimulus is a paycheck. And a job is
    better than a transfer payment to support your family. By the
    way, statistics bear that out as well.
        I will come close to finishing by saying that a wealth tax
    is opposed by John Cochrane of the Hoover Institute, I guess on
    the right; the former Treasury Secretary Larry Summers on the
    left. It is also opposed by the AEI, the Tax Foundation,
    Brookings, and the Manhattan Institute, which have all reported
    on the negative aspects.
        So I hope the Biden administration will work with
    Republicans to get small businesses back on their feet so they
    can get Americans back to work earning better wages to keep the
    economy moving in the right direction. We will not tax our way
    to prosperity. Small businesses and other employers wish to
    operate under a fair, predictable tax code. They will do the
    rest.
        There are some good things we could be discussing here. Tax
    relief afforded to the middle class and small businesses
    through the Tax Cuts and Jobs Act expires in just 4 short
    years. My Republican colleagues and I propose providing
    predictability to taxpayers by locking in the current
    individual tax policies on a permanent basis, including the
    expanded Child Tax Credit and lower tax rates on the middle
    class. This will help everyday Americans.
        I look forward to the testimony, and now I call upon Mr.
    Straughter. You are recognized for 5 minutes.
        [The prepared statement of Senator Cassidy appears in the
    appendix.]

                STATEMENT OF CHERYL STRAUGHTER, OWNER,
                     SOLEIL RESTAURANT, BOSTON, MA

        Ms. Straughter. Hi. Are you referencing Ms. Cheryl
    Straughter?
        Senator Cassidy. Yes; if I mispronounced something, I
    apologize. I did not have my glasses on [laughing].
        Ms. Straughter. Here we go. To our distinguished chair and
    Ranking Member Cassidy, I want to say ``thank you'' for this
    opportunity. To members of the committee, I want to thank you
    all for allowing me to testify.
        I am not a billionaire, or an ultra-millionaire; I am not
    even close. During my life, there have been times when I
    worried about my status as a thousandaire. I am a chef and
    owner of Soleil Restaurant, a small business located in Boston,
    MA. I am also a social worker and a member of the Boston Black
    Hospitality Coalition.
        I opened my restaurant in 2018 in an area of Boston called
    Nubian Square. This was a thriving commercial district when I
    was younger, and I fondly remember shopping with my mother,
    Shirley, and boarding the elevated train that once operated all
    the way downtown.
        Over the years, disinvestment in the community led
    businesses and families to leave. But when an opportunity arose
    to take over a vacant space in the neighborhood, I knew that I
    wanted to be a part of the future of Nubian Square. I am proud
    to run this small business. Along the way to my current role, I
    have been an employee, I have been a student, and a care giver.
    I work hard for myself, my family, and my employees in my
    community, and I care deeply about all of their well-being.
        That is why it is important that we have a fair tax system.
    I can't say that I enjoy paying taxes, but I am proud to pay
    them. The revenue collected from our taxes is what we use to
    pay for government services. We care about schools, health
    care, Social Security. I value those services, and I know they
    make my community and our Nation better.
        But the unfairness of the current tax system is what drives
    people crazy. At Soleil, I have eight employees who work for
    me. Their income is reported to the IRS, and they pay their
    taxes based on that income, including paying a percentage of
    their income for Social Security and Medicare. But I know the
    ultra-rich are different.
        Their income does not usually come from a paycheck. It
    comes from investment and other holdings. That means they often
    pay less in taxes than my own employees. And I know the ultra-
    rich have a bunch of ways to hide their income or avoid paying
    taxes at all. That is unfair.
        Asking ultra-millionaires and billionaires to pay a small
    percentage of their massive wealth is a no-brainier. If you
    have a huge fortune and you benefit from all that this country
    has provided, you ought to be paying your fair share. It is
    more than fair that they be asked to pay a small percentage of
    their wealth, and I just cannot understand why the wealthiest
    and luckiest people in the world would be complaining about it
    being such a hardship.
        It is the same with big businesses that I compete with.
    They are able to use their resources to lower the amount of
    taxes that they pay, like hiring expensive lawyers and
    accountants, or shifting some of their profits overseas. Many
    Fortune 500 companies do not pay any taxes at all. It is hard
    enough to compete and run a business during a pandemic; it is
    nearly impossible to do that when the tax system is rigged
    against you.
        Our country has many needs right now. A fairer tax system
    would give us the opportunity to provide affordable child care,
    create a better education system, and repair our roads. We
    could provide more support to small businesses--especially
    those owned by African Americans and other groups that do not
    have easy access to financing--and make housing more
    affordable.
        These are important national priorities, and they are also
    things that I want for my family. I know these investments will
    make our communities better and stronger, and help our economy
    grow. That would be good for me and for my employees, be good
    for my customers, and good for my business and businesses all
    over the country.
        I am happy to answer any of your questions. Thank you for
    inviting me to today's hearing, and thank you for all of the
    work to make our tax system fairer and our Nation stronger.
        [The prepared statement of Ms. Straughter appears in the
    appendix.]
        Senator Warren. Thank you so much, Ms. Straughter. I
    appreciate it.
        Mr. Gamage, you are recognized for 5 minutes.

     STATEMENT OF DAVID GAMAGE, PROFESSOR OF LAW, MAURER SCHOOL OF
                LAW, INDIANA UNIVERSITY, BLOOMINGTON, IN

        Mr. Gamage. Thank you, Chair Warren. Thank you, Ranking
    Member Cassidy, members of the committee, for your invitation
    to speak with you today.
        I have been asked to speak on three sets of proposals for
    reforming ways in which our tax system is currently written.
    Each of these proposals has the potential for reforming ways in
    which our tax system is broken by limiting abusive tax gaming
    by billionaires and mega-millionaires and by large
    corporations.
        Each of these proposals would help create opportunities for
    ordinary Americans and small businesses by leveling the playing
    field. Each of these proposals could help promote shared
    economic growth by limiting abusive forms of tax gaming that
    are harmful to the economy and by funding needed public
    investment.
        First, the IRS has been starved of funding and resources
    for over a decade now, which has caused incredible harm to our
    tax system. The ultra-wealthy and largest businesses now
    readily hire tax lawyers who often charge up to $1,000 an hour
    to set up complicated structures for avoiding tax.
        The IRS is simply outgunned in trying to police these
    abuses. It is common today for the ultra-wealthy and the
    largest businesses to wastefully spend millions on tax planning
    because this saves them tens or hundreds of millions of dollars
    in taxes.
        Prior Congresses have created this disgrace by hobbling the
    IRS. I urge this Congress to act quickly to restore adequate
    funding to the IRS and to the other tax police, to protect that
    funding from the winds of the annual appropriations process,
    and to enact accompanying reforms for promoting tax compliance,
    like expanding information reporting and by extending the False
    Claims Act to very large tax claims.
        Second, current law allows large corporations to keep two
    sets of accounting books: one for reporting to the SEC and
    investors, the other for reporting to the IRS for tax. It is
    well known that corporations generally inflate the earnings
    reported on this first set of books to appear more profitable
    to investors, and in particular to increase managers' stock
    options. It is also well known that corporations generally
    under-report earnings on the second set of books through tax
    gaming to appear less profitable to the IRS so they can pay
    less taxes.
        Both of these sets of shenanigans are harmful to the
    economy and to creating a level playing field. To address these
    problems, the best academic analysis of this issue recommends
    50-percent conformity between tax and accounting books. We
    currently have zero percent. The Real Corporate Profits Tax
    proposal would be an important step in improving this,
    effectively creating 25-percent tax conformity, deterring both
    tax and accounting shenanigans and raising funds needed for
    public investment.
        This would be a meaningful step toward fixing our broken
    corporate tax system so as to help level the playing field,
    deter economically harmful tax and accounting shenanigans, all
    while raising funds to use for public investment.
        Third, and most importantly, I cannot emphasize enough how
    our existing income tax is broken, as applied to mega-
    millionaires and billionaires, and urgently in need of reform.
    The ordinary rich, like the well-compensated doctor, typically
    pay quite a lot of income tax. But the progressivity of the
    income tax falls apart when it comes to billionaires and mega-
    millionaires. The economic literature finds that, on average,
    billionaires and mega-millionaires only ever report less than a
    quarter of their true income to the IRS, ever. And what is
    eventually reported then qualifies for tax preferences and
    preferred rates. Estimates of some billionaires often find that
    these billionaires only report around 2 percent of their true
    income to the IRS.
        The income tax is generally progressive with respect to the
    ordinary rich, but not the ultra-wealthy. If anyone tells you
    otherwise, based on IRS data, remember that the ultra-wealthy
    never report most of their true income to the IRS. Most of the
    ultra-wealthy tax scheming is legal, but very harmful. This tax
    scheming damages the economy and prevents ordinary Americans
    and small businesses, especially members of historically
    disadvantaged groups, from being able to catch up.
        Fixing the income tax system is hard, but urgently needed.
    One of the best ways to fix the income tax is by taxing extreme
    wealth holdings of billionaires and mega-millionaires directly
    as the proposed ultra-millionaire wealth tax would do.
        When it comes to taxing heirs of giant fortunes, it is much
    easier to identify and measure the approximate size of those
    fortunes than just the income produced by those fortunes.
    Enacting a tax on extreme wealth holdings would take pressure
    off the income tax, while providing the IRS with the
    information on giant fortunes needed to make the income tax and
    the overall tax assessments work with respect to the ultra-
    wealthy.
        A wealth tax has been a pillar of the Swiss tax system for
    over 100 years, and provides substantial revenues for
    Switzerland. The Swiss model shows how we can design an
    effective and administrable tax on extreme wealth. Plus, recent
    innovations in information technology and financial reporting
    make it much easier to design an administrable and effective
    wealth tax than it was in the past.
        Giant fortunes benefit from the protection and services
    provided by the States, including the military and police and
    the legal system. Billionaires and mega-millionaires should not
    be permitted to pay a lower share of tax on their true incomes
    than do ordinary working-class Americans, as is currently
    generally the case.
        All three sets of reforms I have spoken on today would help
    fix broken parts of our tax system; would help level the
    playing field for ordinary Americans, small businesses, and
    members of historically disadvantaged groups; and would promote
    shared economic growth by deterring economically harmful tax
    scheming and providing the funds to use for public investment.
        I strongly support all three sets of proposals, and I look
    forward to your questions.
        [The prepared statement of Mr. Gamage appears in the
    appendix.]
        Senator Warren. Thank you very much, Mr. Gamage.
        Mr. Hodge, you are now recognized for 5 minutes.

                STATEMENT OF SCOTT A. HODGE, PRESIDENT,
                     TAX FOUNDATION, WASHINGTON, DC

        Mr. Hodge. Thank you, Chair Warren, Ranking Member Cassidy,
    and members of the committee. I appreciate the opportunity to
    be with you today.
        A famous economist once said, ``There are no solutions,
    there are only trade-offs.'' And that lesson is especially true
    in tax policies, and in the choices that lawmakers must make in
    funding public investments.
        The scales of justice may have two trays, but tax policy
    has three trays: revenues, equity, and economic growth. But
    those factors cannot be balanced equally, so lawmakers must
    decide which is most important.
        Empirical evidence tells us that there is a clear tradeoff
    between progressivity and economic growth. And this is
    especially true with so-called ``success taxes'' like taxes on
    capital and business income.
        Understanding these dynamics matters in how you fund
    government investment. Research by the Congressional Budget
    Office tells us that government investments deliver only half
    of the economic returns of private-sector investments. Private-
    sector investments, according to CBO, return 10 percent on the
    dollar, whereas government investments return just 5 percent.
        So, considering the opportunity costs that come with
    government spending, lawmakers must be careful in choosing
    offsets that do not do more harm to the economy than the modest
    benefits generated by those public investments.
        Indeed, the U.S. tax system is already one of the most
    progressive tax and redistributive systems in any
    industrialized country. So making the tax code even more
    progressive through proposals such as the wealth tax, a minimum
    tax on book income, or an increase in the corporate tax rate,
    are among the most economically damaging options that can be
    used to fund government programs.
        For example, the Tax Foundation in our General Equilibrium
    Model, found that Senator Warren's wealth tax could raise over
    $2 trillion over a decade, but at a pretty high economic cost.
    The model found that the wealth tax's hit to GDP was greater
    than the effects of raising the corporate tax rate to 28
    percent, and 4 times greater than the economic effect of a $25
    per ton carbon tax. More importantly, the model determined that
    the taxes would result in a shift in the ownership of U.S.
    assets, as wealthy taxpayers sold off their assets to pay the
    tax.
        But because the U.S. is an open economy, the model shows
    that foreign investors would come in and buy up those assets at
    a discount. So what the wealth tax would do is lead to a
    transfer of wealth from rich Americans to rich foreigners,
    which would put those assets out of reach of the wealth tax.
        Similarly, our modeling of the minimum book tax found that
    it would reduce the size of the economy by 1.9 percent, lower
    the capital stock by over 3 percent, trim wages by 1\1/2\
    percent, and cost the economy over 450,000 jobs. And while
    those at the top of the income scale would see the largest
    declines in after-tax income, taxpayers in every income group
    would see their income fall as a result. The economic effects
    of the President's book tax proposal are not quite as severe as
    Senator Warren's, but the biggest effect of both is the
    complexity they add to the tax code, and the fact that they
    out-source key aspects of the tax system to the unelected
    decision-makers of the Financial Accounting Standards Board.
        Turning now to the issue of raising the corporate income
    tax, economists at the OECD determined that the corporate
    income tax is the most harmful tax for economic growth, because
    capital is the most mobile factor in the economy and thus the
    most sensitive to this high tax rate.
        But an even more important factor to consider is that
    academic research is finding that workers are bearing a greater
    share of the economic burden of the corporate tax through lower
    wages, because capital is mobile, and workers are not. A recent
    study found that workers bear 51 percent of the economic burden
    of the corporate tax through lower wages, with women, low-
    skilled workers, and younger workers impacted the most. These
    are the workers who have been most hurt by the COVID recession,
    and the ones whose incomes were rising most before COVID hit.
        Well, in closing, you know, it may be kind of a bit of
    cliche, but there is no such thing as a free lunch in
    government spending, or in tax policy. Inevitably, progressive
    tax policies will slow the economy and reduce the living
    standards of the very people that the new government
    investments are intended to help, leaving taxpayers and the
    economy worse off.
        Thank you very much, Chair, and I am happy to answer any
    questions that you might have.
        [The prepared statement of Mr. Hodge appears in the
    appendix.]
        Senator Warren. Thank you very much, Mr. Hodge.
        Dr. Hoopes, you are now recognized for 5 minutes.

      STATEMENT OF JEFFREY L. HOOPES, Ph.D., ASSOCIATE PROFESSOR,
     KENAN FLAGLER BUSINESS SCHOOL, UNIVERSITY OF NORTH CAROLINA,
                            CHAPEL HILL, NC

        Dr. Hoopes. Thank you, Chair Warren. Chair Warren, Ranking
    Member Cassidy, distinguished members, I appreciate the
    opportunity to participate in this hearing today.
        My testimony today will focus on perceptions of fairness in
    the tax code and proposals to fix them, specifically, a tax on
    book income and the wealth tax. My main message is that
    corporations and individuals often remit the taxes they do,
    including in situations some perceive as unfair, generally
    because of explicit allowances in the tax code. We wish to
    revise the tax code in ways that make it simpler, rather than
    layer on other provisions that will make it more complicated,
    costlier to administer, and have negative consequences. Taxing
    the book income and a wealth tax are two examples of such
    inadvisable taxes.
        Perceptions of unfairness in corporate tax payments
    sometimes occur when corporations are seen as reporting
    different incomes to their shareholders than with the IRS.
    These perceptions ignore the purpose of the different
    accounting systems corporations are subject to. In general,
    when tax and book numbers are not aligned, it is because
    Congress has made the law such that the two numbers are
    different. We provide three examples based on public IRS data
    from 2017.
        In 2017, the difference between book income and taxable
    income as a result of depreciation, the allowance for net
    operating losses, and the general business tax credit which
    includes the R&D tax credit, accounted for $138 billion in lost
    tax revenue. Considering the total corporate tax receipts of
    $388 billion, the $138 billion is economically very large.
        This lost revenue is the result of explicit allowances in
    the Internal Revenue Code made by Congress, and not aggressive
    tax planning by firms. All three of these items are generally
    accepted by tax experts as acceptable, are tax provisions
    shared by many other countries, and research suggests they are
    useful in accomplishing the goals for which Congress enacted
    them. Let's compare those three items to estimates of the cost
    of corporate income shifting, one of the more common forms of
    tax planning.
        One estimate of income shifting suggests that between 4 and
    8 percent of tax revenues are lost through profit shifting,
    which in 2017 would amount to between $16 billion and $31
    billion. The most extreme estimate is that $100 billion was
    lost in 2017.
        Similarly, the most recent estimates of the losses due to
    illegal income tax evasion by all corporations from the IRS
    suggests losses of about $32 billion. There is reason to
    believe that in a post-tax-reform world, these estimates are
    over-stated. Even so, they are still only a fraction of the
    cost of just the three tax provisions I mentioned above.
        Owing to the perception that corporations do not pay a fair
    amount of tax, there are proposals to tax financial accounting
    or book income. We should not tax book income. First, including
    book income in the tax base would distort book income and make
    stock markets less efficient as companies would manage their
    earnings to pay less in tax.
        Evidence from a 1986 tax change suggests this previously
    happened. And we have reason to believe it would happen again
    if we again tax book income.
        Second, taxing book income would politicize the Financial
    Accounting Standards Board, the creators of U.S. GAAP, making
    earnings less reliable. Taxing book income is a Band-Aid
    solution that would create more problems than it solves.
        There is also a common perception that wealthy people do
    not pay a sufficient amount in tax. One proposed solution for
    this problem is a wealth tax. Wealth taxes rely on the wealthy
    disclosing and valuing their assets annually. Recent research
    by Guyton et al., 2021, finds that some of the wealthy are very
    adept at hiding their assets from even the most thorough IRS
    audit, suggesting uncovering these assets would be costly.
        I would expect much more of this type of asset concealment
    if a wealth tax were implemented. Further, once uncovered,
    valuing these assets would also be very costly. Private
    companies can be very difficult to value. The cost of
    administration and enforcement of a wealth tax would not
    justify the revenue a wealth tax could raise.
        These costs are one reason a dozen EU countries have tried
    the wealth tax, and few of these taxes persist. My main message
    is that many of the ways in which large corporations and
    wealthy taxpayers remit taxes at a level the general public may
    perceive as unfair are frequently legal methods, intentionally
    legislated by Congress. Certainly some illegal tax evasion
    occurs. Congress should take action to stem these evasions,
    including by increasing funding to the IRS.
        But the best estimates of this evasion suggest that the
    dollars at stake are much less than the explicitly legal means
    taxpayers take to reduce their tax liabilities. Members of
    Congress perceive the tax system as unfair and seek to raise
    additional revenues in order to expand the size and scope of
    government. They should fix whatever provisions they deem
    unfair and not implement additional taxes that are difficult
    and costly to administer and would have adverse consequences.
        I look forward to answering your questions. Thank you.
        [The prepared statement of Dr. Hoopes appears in the
    appendix.]
        Senator Warren. Thank you, Doctor Hoopes.
        And finally, Mr. Pomerleau, you are recognized for 5
    minutes.

        STATEMENT OF KYLE POMERLEAU, RESIDENT FELLOW, AMERICAN
                  ENTERPRISE INSTITUTE, WASHINGTON, DC

        Mr. Pomerleau. Thank you, Chair Warren, Ranking Member
    Cassidy; thank you for the opportunity to speak today.
        In my testimony, I will briefly discuss two policies under
    consideration: the first, taxing the book income of
    corporations; and the second, an annual tax on wealth. I will
    then conclude by discussing alternative sources of revenue that
    I think lawmakers should at least consider.
        There are currently two proposals to tax book income of
    corporations, and I think that they are distinct. First is
    President Biden's proposal for a 15-percent minimum tax on book
    income. And the second is Senator Warren's proposal for a 7-
    percent add-on book income tax that would be paid each year.
        Both of these proposals are driven by a perception that
    profitable corporations that report low or no tax liability are
    engaged in aggressive tax avoidance. There is no doubt
    corporations try to minimize their tax liability, but as has
    been argued already, taxing book income would not necessarily
    address tax avoidance.
        Low effective tax rates relative to book income are often
    driven by differences in how book and taxable income are
    calculated. And what are called these ``book tax gaps'' arise
    from differences in how book and taxable income deals with
    things like capital expenses, executive compensation, the
    treatment of losses, and the treatment of foreign income earned
    by U.S. multinational corporations.
        And rather than addressing tax avoidance, taxing book
    income may result in corporations adjusting book income to
    avoid taxation, which could reduce the informational quality of
    book income. And at the same time, taxing book income may
    undermine Congress's own policy goals in other places.
        Congress frequently uses the Federal income tax to
    encourage or discourage certain behaviors. For example,
    Congress has limited the deductibility of executive
    compensation since the 1990s. However, for book tax purposes,
    executive compensation would be fully deductible, which would
    reverse some of that policy change that Congress deemed
    appropriate.
        And lastly, for the book tax, it would also likely
    influence investment incentives. Now these incentives will
    depend greatly on the structure of the tax, whether it is a
    minimum tax or a parallel tax, but one of the biggest changes
    it would make is with the treatment of accelerated depreciation
    and expensing, which are important parts of the corporate tax
    base that limit the distortion of corporate tax on the domestic
    economy.
        In addition to the book tax, some lawmakers are also
    proposing an annual tax on the wealth of very high net worth
    households. While some argue an annual wealth tax is a modest
    tax, it actually would place a significant burden on savings.
    For an example here, an annual wealth tax, even what seems to
    be a low rate, say 2 percent, would reduce an asset that earns
    a return of 3 percent by 67 percent. In other words, it would
    be equivalent to a 67-percent income tax.
        As Mr. Hodge mentioned, this would have an impact on the
    broader economy, reducing the after-tax return on savings;
    would reduce the stock of national savings; could lead to a
    smaller capital stock, lower wages for workers, and lower
    economic output; and due to the openness of the U.S. economy,
    would result in an inflow of foreign capital from abroad, an
    increase in the trade deficit in the short term, and a
    reduction in national income.
        In addition, the revenue potential of the wealth tax is
    somewhat uncertain and often over-stated. For example, there is
    little agreement over how much wealth is even held by the very
    top. Research has estimated that the share of wealth held by
    the top one-tenth of 1 percent could be anywhere between 10
    percent of all wealth, or 20 percent of all wealth.
        And one thing that concerns me about the wealth tax is that
    it risks not raising any revenue whatsoever. And this is
    because a wealth tax, if enacted, would likely face a
    constitutional challenge. And while some have argued that the
    wealth tax is constitutional, it is worth emphasizing that
    other taxes would not even face this question at all.
        Now, given the challenges with taxing wealth and book
    income, I think lawmakers should consider other sources of
    revenue that would be simpler to administer and more
    economically efficient. Raising the gas tax, or enacting the
    vehicle miles traveled tax, would be a reasonable way to pay
    for infrastructure. A carbon tax would help address climate
    change while raising revenue. And a value-added tax would be a
    broad-based tax that could raise a lot of revenue with limited
    negative impact upon the economy.
        In addition to funding more spending, these taxes could
    also be used to offset more distortionary taxes.
        Thank you, and I am happy to answer any questions.
        [The prepared statement of Mr. Pomerleau appears in the
    appendix.]
        Senator Warren. Thank you, Mr. Pomerleau.
        I now recognize myself for 5 minutes of questioning.
        Our tax system is broken. Everywhere you look, there is one
    set of rules for most Americans, and a different set of rules
    for the richest people. One of the most glaring examples of
    this is how the tax code treats wealth. The typical white
    family has about $188,000 in wealth. For black and brown
    Americans, that number is far lower, just $36,000 for Latino
    families, and $24,000 for black families.
        So let's just focus for a minute on what wealth looks like
    at the top. Let me start here. Dr. Disney, if you don't mind my
    asking, how much wealth do you have, and how much did it grow
    last year?
        Dr. Disney. I have about $120 million, maybe more depending
    on how the stock market is on any given day. It grows at about
    4 to 8 percent annually.
        Senator Warren. Okay; thank you. And so let's just say--you
    said 4 to 8 percent--let's just say an average growth of about
    6 percent. That would mean that your wealth grew by about $7
    million last year. That is almost 60 times the total wealth of
    the typical American family.
        So let's just for a minute talk about that increase. Do you
    know how much in taxes you will pay on your $7 million increase
    in wealth this year, Dr. Disney?
        Dr. Disney. Not that much. It comes not from wages, but
    from things like dividends and capital gains and interest and
    so forth. So all of that qualifies for a lower tax rate than
    income.
        Senator Warren. All right. And what about your total $120
    million fortune? How much do you think you will pay in taxes on
    that this year?
        Dr. Disney. Nothing. There is no wealth tax, so there won't
    be any taxes.
        Senator Warren. So, thank you. As I am sure you know, your
    situation is not unique. In fact, 99 percent of Americans pay
    about 7.2 percent of their wealth in total taxes every year.
    But the top one-tenth of 1 percent, they only pay about 3.2
    percent. The unfairness runs deep.
        Home ownership is the number one way that most middle-class
    Americans build wealth. And those Americans pay property taxes
    every single year on that wealth. But if you are an ultra-
    millionaire, or a billionaire, you have a million different
    kinds of assets--stock, paintings, diamonds, gold, cash--and
    you get to hang onto all of those assets as they appreciate,
    without paying taxes. And if you decide to sell, you'll have an
    army of lawyers, and an endless supply of carefully crafted tax
    loopholes, to help you avoid paying taxes.
        Now I've proposed a tax on the wealth of the very richest
    Americans. This is a 2-cent tax on every dollar of wealth above
    $50 million, and a few cents on every dollar above a billion.
    It would raise $3 trillion in revenue that we could use to
    build economic opportunities for every person in America, from
    universal child care to investments in education to fixing our
    roads and bridges.
        The tax would be paid by the wealthiest 100,000 families,
    including yours, Dr. Disney. Poll after poll shows that
    Republicans, Democrats, and independents support this idea.
    Now, not everybody likes it. Leon Cooperman, a hedge fund
    billionaire who was hauled up before the SEC for boosting his
    fortune by using illegal insider trading, is one critic. He has
    described my 2-cent wealth tax as ``dumping on the American
    Dream.''
        I invited him here to make his case to Congress today, but
    I guess he prefers to stay in the safe space of financial news
    networks, where he can say whatever he wants and nobody pushes
    back.
        Dr. Disney, you agreed to appear today, so let me ask you.
    If my wealth tax was the law, you'd owe nearly $1\1/2\ million
    on your fortune. Of course, you would still be fabulously
    wealthy, and your wealth, which you said grew by about $7
    million last year, would still have grown, but only by about
    $5\1/2\ million.
        So let me ask. Do you agree with Mr. Cooperman that this
    increase in your taxes would be--and I am paraphrasing the word
    he used--dumping on the American Dream?
        Dr. Disney. Well, my American Dream would be alive and
    well, because the only effect a wealth tax would have on me
    would be to slow the growth of my wealth. It won't be taking
    anything from me that I need.
        And my American Dream also includes a lot of the people who
    are not currently having the benefit of things like roads, and
    schools, and parks, and good health care, and so forth. So to
    me, it is part of the American Dream to step up and pay my fair
    share.
        Senator Warren. Thank you.
        And, Ms. Straughter, if I can, let me ask you: a wealth tax
    would allow us to invest in the health and well-being of your
    workers. It would help us repair roads so it is easier to get
    to work. It would help level the playing field for small
    businesses like yours.
        How would that affect your ability to pursue the American
    Dream?
        Ms. Straughter. Yes. Using the voice of small business, it
    would allow me to increase my staff. It would allow me to grow
    from a small-sized business to a medium-sized business. It
    would allow me to pivot. So right now, I am in the headquarters
    of the Boston School Department, and right now many of the
    employees are working from home. So I am trying to increase my
    capacity as a caterer.
        So what would help is the ability to have my business
    positioned to go after more contract work.
        Senator Warren. Thank you. That is very helpful.
        President Biden has called for raising taxes on the wealthy
    and on giant corporations to fund his Build Back Better agenda,
    and I agree. A wealth tax raises more revenue from those most
    able to afford it than just about any other plan on the table.
    It would allow us to build back better, and to make the
    American Dream a reality for millions of families.
        I now recognize Senator Cassidy for his questions. And once
    again, I am going to hand him the gavel while I go vote, and
    I'll be back.
        Senator Cassidy [presiding]. Thank you, Madam Chair.
        Mr. Hodge, again I do not have my glasses on, so now I
    cannot read my own writing. Was it you who said----
        Mr. Hodge. You could use mine.
        Senator Cassidy. What's that? Thank you, yes. 1.75? Anyway,
    was it you who said that private investment will give you about
    a 10-percent return, and government investment about 5 percent,
    and that is the opportunity cost of having it filtered through
    the government?
        Mr. Hodge. Exactly. Actually, that is the Congressional
    Budget Office. In a very in-depth report and analysis of the
    returns to infrastructure spending they found in that data that
    government investments return about half the returns of
    private-sector investments, for a variety of reasons----
        Senator Cassidy. Okay, just hold that. Just hold that. So,
    Ms. Straughter mentioned how she feels as if the investment
    that may come through what is being called the infrastructure
    package, or something such as that, may help her business grow.
    But what I am hearing is that if that is an economically viable
    project, and if you were to do the same thing through the
    private sector, you would have more bang for your buck, less
    friction cost, and that you may either have more investment, or
    investment not just there but someplace else. Is that the
    logical conclusion from the CBO study?
        Mr. Hodge. That is exactly right. And what they did not
    take into account is the harm to the economy of taxing those
    dollars in the first place in order to pay for the investment.
    So there are really two hits to the economy. One is the
    opportunity cost of a lower investment for government. The
    other is through the economic harm through the taxes that are
    raised in order to pay for it.
        Senator Cassidy. Yes, I do find that government tends to
    take care of itself. I note Ms. Straughter is in a building
    where all the teachers have been teaching remotely. I suspect
    if you went to a private or a parochial school--well, maybe
    not; maybe Boston has locked down everybody. But if we go to
    Chicago, we know that some schools have been open, some have
    not, and the government employees are the ones who have lost. I
    say that as a government employee. There is a certain
    investment that you make.
        So, Mr. Gamage, let me find my question here. I have been
    told that since 1990, at least nine European countries with a
    wealth tax have abandoned it, leaving only three that retain a
    wealth tax. What are your thoughts about that? And why should
    that inspire confidence in the ability to administer such?
        Mr. Gamage. Thank you, Mr. Cassidy. With respect, it's
    ``Gammaj'' not ``Gamahj.''
        Senator Cassidy. ``Gammaj''?
        Mr. Gamage. Yes, ``Gammaj,'' thank you.
        Senator Cassidy. I am from Louisiana, so I am going to put
    a little bit of a French inflection upon it. I am sorry.
        Mr. Gamage. Totally understood. So the countries that so-
    called ``abandoned'' wealth taxes, mostly that was during the
    Reagan-Thatcher era where countries across the world were
    abandoning all sorts of progressive taxes based on flawed
    economic analysis that has not held up.
        Countries have not abandoned the wealth tax, for the most
    part, recently. It is very effective, and has been for over 100
    years----
        Senator Cassidy. But I know that in France, they abandoned
    it. That was after--I mean, I do not think of France as being
    under the sway of Reagan and Thatcher, but it was after the
    Reagan-Thatcher movement that they first attempted to place and
    then they abandoned it.
        Mr. Gamage. Yes. There are two issues with that. One, the
    French wealth tax was poorly designed. Some other wealth taxes
    were poorly designed and should have been abandoned because of
    poor designs.
        Two, it used to be quite easy for very wealthy individuals
    and families to hide wealth and income abroad. Since 2010, with
    the implementation of FATCA, it increased information
    technology and other financial reporting innovations. This is
    now very difficult. And both income taxes, with respect to
    wealth supposedly moved abroad, but also wealth taxes, have
    worked much, much better than they did----
        Senator Cassidy. So let me ask you about that, because we
    have been recently told from various people, from the IRS
    Director, that there is a tax gap, that there are dollars out
    there that need to be taxed, but they are being hidden.
        I think in your testimony I heard that you recommend--or
    maybe it is this bill--$70 billion that would go towards
    improving IRS enforcement, data collection, et cetera. So that
    suggests to me that maybe the ability to gather the data is not
    as robust as your last statement seems to suggest. Am I just
    not connecting the dots correctly?
        Mr. Gamage. With respect, I'd say you are not. It is true
    that there is a tax gap which measures tax evasion. The tax gap
    is much larger for the ultra-wealthy than it is for ordinary
    Americans. But the tax gap is tiny compared to legal tax
    avoidance.
        Senator Cassidy. Well, that is my point. My point is that,
    if these figures are so readily ascertained--oh, we can figure
    them out, don't worry about it--and these collection systems
    are so efficient that the wealth tax would now work where
    formerly it could not, then how are people able to evade? And
    why do we need to give the IRS so much more money?
        Mr. Gamage. People have limited, although significant,
    ability to evade. They have substantial ability to avoid
    legally the income tax because the income tax by law only
    collects tax if salaries are paid, stock or financial assets
    are sold----
        Senator Cassidy. But it seems like you are talking about
    two different things. One is the legal avoidance, and the other
    is the evasion. And when you told me that the wealth tax in
    France did not work because people could too easily hide
    income, and now they can't, but nonetheless I am hearing other
    testimony that suggests that there is still substantial
    evasion, and therefore we have to invest this money in the IRS,
    there actually seems to be a disconnect between these two
    statements.
        Maybe I should just move on, because I am not sure that we
    are not just talking past each other, but I do think my
    question is a valid one.
        Mr. Hodge, what is your perspective? Going to the other
    side, why did European nations abandon the wealth tax?
        Mr. Hodge. Well, there are three primary reasons. One is
    the complexity that has already been discussed, and the very
    difficult administrable aspects of it. The other one is, it
    raised very little revenue. In fact, Switzerland is often held
    up as the paragon of the successful wealth tax that has been
    there for more than a century, but it raises less than 4
    percent of all tax revenues in Switzerland. So it has,
    basically, a trivial impact on their fisc.
        And then lastly is the avoidance issue and the fact that
    people can move. And this is what drove France to eliminate
    their wealth tax, because the wealthy in France were fleeing.
    They decided that they could live quite nicely elsewhere and
    not pay the tax.
        Senator Cassidy. Mr. Gamage, then with that statement do
    you favor a world-wide wealth tax? Because that does not seem
    practical to me, but that seems to be, if people can move, and
    they do, and if capital can move and it does, it seems as if
    the one example, for instance, I understand that China has an
    incredible capital flight. And if there is any country that has
    done its best to surveil everything about every one of its
    citizens, it's China, and yet they have significant capital
    flight.
        So, would you recommend a global wealth tax?
        Mr. Gamage. The United States' tax system, the current
    income tax, is citizenship-based and taxes all world-wide
    income for citizens, and always has. This is the key difference
    between the U.S. tax system and the French tax system. You
    cannot escape the U.S. tax system without revoking your
    citizenship and paying a substantial exit tax. That is current
    law, and it works quite well.
        Senator Cassidy. And so the idea that somebody would give
    up their citizenship--I think one of the partners who made a
    lot of money from selling, or some big Silicon Valley company
    going public, renounced his citizenship and moved to Singapore,
    if I remember correctly.
        I am gathering from you, you feel as if that problem would
    be minimal.
        Mr. Gamage. It historically has been minimal. And you----
        Senator Cassidy. Unfortunately, we haven't had a wealth
    tax, and so I am not sure we can use past history to predict
    future actions, to kind of paraphrase the financial commercial.
        Mr. Gamage. Again, you pay a substantial exit tax under
    current law by revoking citizenship. Not many people do it.
    Some do. If they do not value the protections and services
    provided to citizens of the United States, then fine. But the
    protections and services provided to extreme wealth are huge,
    and most ultra-wealthy benefit tremendously from being United
    States citizens and having those protections and services. And
    it is fair to have them pay a reasonable amount of tax on that,
    which they currently are not.
        Senator Cassidy. Mr. Pomerleau, just to kind of spread out
    the questions, there seems to be a lot of, if you will, verbal
    slight-of-hand in that people are conflating wealth and income.
        Now we know people get that confused. Warren Buffett used
    to say that he paid more in taxes than his secretary, but I
    think at that time he was the richest, or second richest person
    in the world--excuse me. I have to take a quick recess. They
    just passed me a note I have to go vote very quickly, but
    Senator Warren will be right back, and then we will resume. A
    quick recess, probably just minutes.
        [Brief recess.]
        Senator Warren. We are back in session. I apologize for the
    delay, but that's what happens when you have to vote.
        So our rigged tax code allows big corporations to report
    enormous profits to their shareholders, and at the same moment
    report little or no profits to the IRS. Of course, when giant
    corporations don't pay taxes on their profits, somebody has to
    pay. And the tax burden falls mostly on working families.
        That is why I proposed a Real Corporate Profits Tax to
    force the biggest and the most profitable corporations to pay
    their taxes. For every dollar in profits over $100 million that
    a corporation reports to their investors, they have to pay 7
    cents to the IRS. No tricks. No deductions. No loopholes.
    Nothing fancy.
        President Biden has proposed something similar. One of our
    witnesses today is Abigail Disney, a shareholder in the Disney
    Company. So let's talk about how companies like Disney use the
    current tax system.
        Dr. Disney, one scheme that Disney uses to pay less in
    taxes is to write off stock options that it awards its
    executives at a higher value than they report on their
    financial statements. So how much has Disney benefited from
    deducting stock options?
        Dr. Disney. Disney has been able to save about a billion
    dollars from 2008 to 2015, just by this one bit of trickery
    alone.
        Senator Warren. Wow! A billion-dollar loophole that does
    not require the company to do anything differently, just file
    some paperwork. So, thank you.
        Dr. Disney. Right.
        Senator Warren. Ms. Straughter, you own a business. What
    about you? How much in stock options have you deducted on your
    tax returns in recent years?
        Ms. Straughter. Pardon the smile. Zero. Now, we have talked
    about a few things here today, and I have not been able to do
    that.
        Senator Warren. Okay. So let's do another example.
    Multinational corporations are able to use accounting maneuvers
    that shift money they have earned in the United States to
    lower-tax countries, which artificially lowers their U.S.
    profits.
        Dr. Disney, how much has Disney benefited from these
    profit-shifting schemes?
        Dr. Disney. Well, I do know that, in the year 2013, they
    were able to save about $315 million, 3-1-5 million dollars, on
    their tax bill.
        Senator Warren. Okay; and Ms. Straughter, how much of your
    business's income did you shift to a subsidiary in a lower-tax
    country?
        Mr. Straughter. I did not do that at all.
        Senator Warren. Yes.
        Now many companies also lobby Congress for specific tax
    breaks. In other words, these companies write the tax rules
    that apply to them.
        Dr. Disney, has Disney been lobbying members of Congress
    for any special tax credits?
        Dr. Disney. Disney spends a lot of time lobbying Congress,
    as well as local governments, and anyone else who has a say in
    what they pay in taxes.
        Senator Warren. Okay. And, Ms. Straughter, how many high-
    paid lobbyists are walking the halls of Congress to find tax
    breaks that will benefit you personally?
        Ms. Straughter. I have not met one yet.
        Senator Warren. You know, this is the problem. Our tax code
    is rigged in favor of giant corporations like Disney, and
    everyone else, people like Ms. Straughter, are paying for it.
    Disney isn't alone. In recent years, dozens of profitable
    companies have gotten away without paying 1 cent in Federal
    income taxes for the entire tax year--companies like Amazon,
    Nike, FedEx, Chevron, Netflix, Eli Lilly, Starbucks, IBM, HP,
    Halliburton.
        So, Professor Gamage, we have gone through a couple of
    ways--just a couple--that big corporations use their massive
    resources to rig the tax system. Would a tax on book income,
    like my Real Corporate Profits Tax, ensure that these giant
    companies can't get away with paying nothing in taxes?
        Mr. Gamage. Yes; absolutely, Chair Warren. Because, since
    corporations can keep two books, they can currently report high
    earnings to investors and to increase stock options for
    management, while reporting low earnings or no earnings to the
    IRS through tax shenanigans.
        The Real Corporate Profits Tax would limit both of these
    sets of accounting games. To briefly give just one more
    example, as I believe all three of the Republican-invited
    witnesses noted, the tax books allow accelerated appreciation
    and full expensing, which could in theory be part of a good
    corporate tax system. The problem is, it only works if you
    combine it with very strict limits on interest expense
    deductions, which we currently don't have.
        When you have generous interest expense deduction limits
    and these other provisions, as we currently do, it is not all
    that difficult for high-priced tax lawyers, like my friends and
    former students, to design wasteful, complicated transactions,
    earning enormous fees to reduce tax payments on the corporate
    side without affecting reported earnings.
        The Real Corporate Profits Tax would deter all of these
    financial tax accounting shenanigans to the benefit of the real
    economy and creating a level playing field.
        Senator Warren. Well, thank you, Professor Gamage. You
    know, this is why the President's Made in America plan is so
    important. It includes no-brainier policies like raising the
    corporate tax rate and cracking down on overseas profit
    shifting. But it also contains a backstop similar to my Real
    Corporate Profits Tax.
        As President Biden has said, we have firemen and teachers
    paying 22 percent, while these giant companies pay nothing.
    That is wrong. Yes, that is wrong, and Congress can change it.
        With that, I recognize Senator Carper for 5 minutes.
        Senator Carper. Thank you for inviting me to join you all
    today. And to our witnesses, there are a number of hearings
    that are going on and important votes on the floor, so do not
    take the fact that we are not all here at once the wrong way.
        We are delighted that you have joined us today, virtually
    and in reality, and we are grateful to the chair for bringing
    us together.
        Madam Chair, long before I was a Senator or Governor, I was
    a House member, and I used to hold town hall meetings, lots of
    them, hundreds of them. I loved town hall meetings. And one of
    the things I would do every year was do sort of like a budget
    workshop in a town hall meeting, and we would invite people to
    spend a couple of hours, just ordinary citizens, helping us
    balance the budget.
        And at the time the balance or the deficit was closer to
    $100 billion than $2 trillion, but I remember this one--and
    usually we were actually able to make progress and find common
    ground and balance the budget in a 2-hour episode. And I used
    to say, ``We ought to elect you guys and bring you down to
    Washington.'' But I remember this one particular meeting we
    were having with all these citizens at this workshop. I
    remember saying to the group that was there that part of
    balancing budgets is making sure we have an ample revenue side,
    and I quoted Oliver Wendell Holmes, who said that taxes are
    what we pay for a civilized society.
        But anyway, I remember this one lady in the room, she said,
    ``You know, I don't mind paying taxes. I just want to make sure
    that other people are paying their fair share of taxes.'' I
    have never forgotten that. I have never forgotten that. And,
    Madam Chair, you know that about a week or so ago we had the
    Commissioner of the IRS here, Chuck Rettig, and in past years
    previous Commissioners like John Koskinen, who is a terrific
    public servant. And among the things we have talked about are
    what could we do as an oversight committee of the IRS, what
    could we do to better ensure that the IRS has the resources.
    One is providing guidance and advice to taxpayers to know how
    to complete their taxes. And two--going back to the lady's
    comments years ago in a budget workshop--is to make sure that
    everybody is paying taxes.
        And for the almost I think 10 years that John Koskinen was
    the Commissioner of the IRS, he would come before this
    committee in this room and ask for additional revenues for the
    IRS so that he could hire some additional people, and to hire
    the kind of people with the skills that they needed, and to buy
    the technology that would enable them to better ensure that
    everybody is paying their fair share. And his testimony, very
    sadly, fell on deaf ears year after year after year. And over
    in the House of Representatives, the Republicans in the House
    sought to impeach him--impeach him. Not just rake him over the
    coals, but to literally throw the book at him.
        And that did not succeed. He finished up his tour, and he
    is now, I think, still gainfully, maybe not employed, but he is
    still working and contributing. But I remember he used to tell
    us that for every dollar we would provide for the IRS, they
    could collect anywhere between $5 to $10. That is a pretty good
    return on investment. And he would say the same thing about
    hiring people and providing the technology that was needed.
    Subsequently, he retired, and our new Commissioner, Mr. Rettig,
    has testified just in the last month in this same room. And he
    said very much the same thing that Commissioner Koskinen said:
    we need resources, we need people, we need technology to help
    us better advise people, to help people to complete their
    returns and file their taxes, pay their taxes. But we also
    need, for some of the folks whose businesses have very, very
    complex finances, we just need to have the wherewithal to drill
    down on those and make sure that they are paying their fair
    share as well.
        So we have reformed the estate tax and step-up in basis. I
    like to treat other people the way I would want to be treated,
    and I am sure that all of us feel that way. But when I was a
    House member years ago, I believe that there was an exclusion
    for the estate tax. I want to say it was about a million
    dollars for a couple. And today, if I am not mistaken, it is
    about 20 times that. And I thought, maybe arguably, a million
    dollars was too low. I think, just as arguably, given the size
    of the deficit we face, $20 million is too high.
        A reporter asked me today how I felt about reforming the
    estate tax, and I said I think there is probably a number
    between 1 and 20 that actually would probably help us on the
    budget side, but also I just try to be fair to folks who are
    filing their taxes.
        So, it is something that I am interested in, and I am
    delighted that you are holding this hearing. I have maybe--this
    is to the Professor, and I am going to butcher this name, but
    it's spelled G-A-M-A-G-E. How does he pronounce it?
        Mr. Gamage. Gamage, please.
        Senator Carper. Gamage, like damage? It rhymes with damage?
        Mr. Gamage. Absolutely.
        Senator Carper. All right, Professor Gamage, not Damage,
    where are you joining us from today, sir?
        Mr. Gamage. Indiana University, our School of Law,
    currently at my home in Bloomington.
        Senator Carper. Okay. We have just confirmed an Indianan to
    be Deputy Administrator for the EPA. Her name is Janet McCabe,
    and she was confirmed on a bipartisan vote, and we are
    delighted with that. A good woman.
        Mr. Gamage, thanks to--again, our thanks to Senator Warren
    for pulling this together. I mentioned the earlier testimony of
    John Koskinen and Chuck Rettig, the current Commissioner, and I
    have--I am not going to repeat that again, but I would ask this
    question. Can you share your thoughts on how we can best equip
    the IRS to close the tax gap? And this is a question I have
    asked repeatedly of the previous Commissioner and the current
    Commissioner. But your thoughts on how we can best equip the
    IRS to close the tax gap, and what will greater enforcement
    mean for broader fairness in the tax code. Mr. Gamage, please.
        Mr. Gamage. Thank you, Senator. The tax gap from illegal
    tax evasion is a real problem and should be policed better, as
    I will explain. Looking back to Senator Cassidy's question to
    me earlier, it is important to understand that illegal tax
    evasion is small compared to legal tax avoidance enabled by
    loopholes in the current system. But illegal tax evasion is, if
    anything, especially harmful, both because of the small but
    significant direct revenue loss, but also to tax firms, to tax
    morale, compliance norms, and faith in the overall economic and
    political system.
        The academic literature is clear that, first, the most
    important thing to do is fund the IRS adequately, and protect
    that funding from the winds of the appropriations process. The
    committee is considering some important measures to do that.
        On top of that, improving information reporting would be
    the next most critical step. On top of that, I would strongly
    recommend extending the Federal False Claims Act to large tax
    claims of ultra-wealthy families and individuals in the largest
    businesses, like New York State does, as an important backstop
    to the IRS's tax enforcement.
        Again, tax evasion is not the biggest portion of the
    problem. It is small in revenues compared to fully legal tax
    avoidance. But it is important, both on its own for the
    revenues, and perhaps even more importantly for the impact on
    faith in the tax system and overall tax morale.
        We need to fund the tax police and give them better tools
    to do their job. Thank you.
        Senator Carper. Thanks very much. I have a couple of other
    questions for the record, including ones for Dr. Disney
    regarding taxation and generational inheritance and helping to
    create a fairer, more fiscally responsible tax system with
    respect to the estate tax. Thank you so much.
        Senator Warren. Thank you, Senator Carper.
        The chair now recognizes Senator Wyden.
        Senator Wyden. Thank you very much, Chair Warren. And I
    think it is extraordinarily important that you are addressing
    income inequality through the tax code. And I want to pick up
    on some of the issues that have been discussed today, apropos
    of this question of the IRS and tax enforcement.
        We were told of course in the committee that the tax gap
    was much bigger than anyone had anticipated. And today we got
    additional information that drives this particular assessment.
        I asked the Justice Department to get us information about
    whether Credit Suisse continued to help wealthy Americans
    defraud the Internal Revenue Service even after it signed a
    settlement agreement to stop the practice.
        So every time you turn around, we do see issues relating to
    whether or not affluent Americans, the fortunate few, can take
    advantage of an under-manned, out-gunned Internal Revenue
    Service--their words, not mine.
        And, Professor Gamage, your points here are well-taken, and
    we expect the Justice Department to give us that information
    promptly, because there are some issues with respect to Credit
    Suisse that are very timely.
        So, I think what I would like to do is turn to two other
    issues that drive income inequality in the tax code and,
    Professor Gamage, get your assessment on this.
        The first is the effect that the loopholes in the tax code
    have. I mean, it seems to me that wealthy taxpayers have found
    ways to largely avoid the estate and gift taxes through complex
    shelters and trusts and the like. And large corporations have
    found ways to shrink their tax liabilities also through
    complicated schemes.
        Tell us, if you would, how that contributes to this issue
    of driving income inequality in the tax code.
        Mr. Gamage. Yes; thank you, Senator. And I would be remiss
    if I did not note that the work you and your staff are doing on
    mark-to-market reforms is, I think, one of the most exciting
    developments in tax reform since I have been a tax professor,
    and maybe in our Nation's history.
        Senator Wyden. Thank you.
        Mr. Gamage. To answer the question, most Americans have
    wage and salary income which is taxed at relatively high rates.
    That means, if you are not born into inherited wealth and you
    have to work or earn the money to invest, you get much less
    after tax. By contrast, if you are born into inherited wealth,
    or you have the social capital, or you are part of a big enough
    business operation to borrow at very cheap rates--borrowing is
    currently not included in the tax base, and there are a variety
    of deductions to make borrowed investment financing tax-
    favorable, often making wasteful investments profitable to the
    taxpayers, ones that are harmful to the economy, profitable
    after tax in the form of tax shelters. All this makes it quite
    easy to pay comparatively little tax if you already have the
    wealth or capital, or the social capital to borrow from
    parents, friends, or others.
        This makes it hard to catch up for anyone who was not born
    into those privileges, for small businesses that want to expand
    to compete with larger businesses. It is an uneven playing
    field partially created by our tax system, and it should be
    addressed. Thank you.
        Senator Wyden. It seems to me what you are telling Chair
    Warren and the committee is--and I asked about loopholes, but I
    think you have gone even further now to describe what I really
    call the fundamental flaws that underpin the two tax codes in
    America.
        If you are a nurse in Medford, OR this afternoon and you
    treat COVID patients, you pay taxes with every single paycheck.
    If you are a billionaire in an affluent suburb somewhere, to a
    great extent, if you have good accountants and good lawyers,
    you can pay what you want when you want to, and often hardly
    anything at all.
        So it seems to me what you have helped us do, Professor,
    and we appreciate it, is describe not just the loopholes, but
    the inherent inequity baked into this notion that there are two
    tax codes in America.
        And I would be interested in your assessment of that as
    well. So if you add it up, you have given the chair testimony
    about how part of the problem is that the IRS is out-gunned and
    out-resourced, and that is why I asked about this problem with
    respect to Credit Suisse and what happened with respect to
    whether they told the truth to the Justice Department. That is
    part of it. Then loopholes are part of it.
        Then there is the question of whether basically the
    underpinnings of the system are fundamentally unfair. And I
    would be interested in your last assessment, because your other
    two were very good on enforcement and loopholes. What is your
    assessment of the fact that this inequity is just baked into
    this two-tiered system?
        Mr. Gamage. That's absolutely correct, Senator. What do
    high-priced tax lawyers do? What do my friends in practice do,
    and what do I train my students to do? Find one way of saying
    this--or one of the things they do is to find what might seem
    like a small loophole and figure out how to drive a giant truck
    through it. Those are complicated, wasteful, excessive
    structures designed for tax planning.
        There is not a clear division between what you might call a
    loophole and a fundamental flaw of the tax system that
    generates these massive inequities. And for all the reasons you
    said, Senator, both our business-level corporate tax system and
    our personal tax system, with respect to the ultra-wealthy, are
    fundamentally broken and in dire need of reform. It matters in
    so many different ways, so many different harms to the social
    fabric of our country, and to the functioning of our economy.
        Senator Wyden. I want to apologize to the committee's other
    guests. This has been, I think, a very good panel, and I looked
    at the testimony. You have arrived at a particularly hectic
    time in the Senate, and I want to apologize to our guests and
    thank Chair Warren again for putting together a very important
    hearing. And I look forward to following up on what you tell
    us. Thank you all.
        Senator Warren. Thank you, Senator Wyden.
        Senator Cassidy?
        Senator Cassidy. Professor Hoopes? Am I getting that
    correct, Professor?
        Dr. Hoopes. Correct. Hoopes.
        Senator Cassidy. Hoopes; gotcha. Thank you. What a name for
    a guy from North Carolina. I just would expect it; I just would
    expect it. I liked your testimony. You point out that a lot of
    the problems that, say, Senator Wyden is referring to, or
    Professor Gamage is referring to, are holes punched in the
    bucket by Congress.
        I think I remember--and if I am wrong, I apologize in
    advance--that Senator Wyden is a really big advocate for tax
    credits for EVs. So I am a billionaire and a millionaire and a
    multi-billionaire, and I go buy a Tesla, at least when they had
    credits, and I got a big tax credit to buy the EV. I always
    found it ironic that the working people in my State are
    subsidizing the billionaire buying the Tesla. But that is their
    issue, not mine.
        But to your point, if a corporation or an individual buys
    tax credits related to the production of renewable energy, we
    are being told that because their tax burden decreases, that
    somehow it is a little immoral and we should be going after it.
    On the other hand, this is the sort of social behavior we are
    trying to incent: people investing in such things. It seems
    like we are talking out of both sides.
        Any thoughts on that, sir?
        Dr. Hoopes. Well, I think this applies much more to these
    tax credits, and the loophole, for example, that Senator Warren
    was talking about using----
        Senator Cassidy. The so-called loophole, right?
        Dr. Hoopes. The so-called loophole. I mean, the stock
    options, you are literally just compensating your employees.
    That is perfectly legal to deduct on your tax return. So you
    use the term ``loophole'' in ways that, if you actually talked
    about the issues, nobody would have any issue with that at all,
    giving your employees compensation, and you should rightfully
    be able to deduct that.
        Likewise, if Congress wants to incent more EV vehicles, if
    they want to incent clean energy, they are going to give a tax
    credit. So when you use this language, you do not actually talk
    about the specific tax issue, because there is broad agreement
    on most of these tax issues. Instead, we call everything a
    loophole and completely do not discuss the real issue, and as a
    result, we do not really make any progress.
        I completely agree, we need to actually talk about, issue
    by issue, what these things actually are, whether they are
    justified, and eliminate them or not. And instead, we say
    everything is a loophole; it is all bad. We are just going to
    layer on this other layer of complicated taxes that are going
    to have their sets of issues.
        Senator Cassidy. So in your testimony, it is not just your
    opinion--because you have an opinion, you are a learned
    person--but if I remember correctly, your testimony in one of
    the footnotes quotes academic literature that political
    rhetoric actually--and now I cannot find the doggone footnote--
    but that political rhetoric actually drives tax policy, and if
    somebody wishes to kind of stick it to another person, they
    just use the rhetoric. They heat it up. They use pejorative
    terms. And that which just might be the internal buildup not
    being taxed in that nurse in Medford, Oregon's 401(k), suddenly
    becomes a loophole.
        Do I remember it was you who had that reference?
        Dr. Hoopes. Yes. I think often the way we talk about taxes,
    we have to generate a demand for either tax increases or tax
    cuts. Certainly, both sides of the aisle are not innocent of
    this.
        Senator Cassidy. And what did--you also refer to Amazon.
    Somehow there was political pressure to change the way that
    Amazon reported. I tell you, I am sensitive to that. We have
    incredible power in Congress to pressure people, to really put
    the screws on them. If you don't comply, by golly, you are not
    going to get whatever you are seeking. And that is just a
    little bit too authoritarian for me. Because, frankly, I have
    seen how government can make incredibly bad decisions, keeping
    people in dependency when they themselves would prefer to live
    independently.
        So I am very sensitive to that. And again I apologize--I
    should have said it better. But I gather that their accounting
    rules changed as a result of political pressure, and it put
    such political pressure on the FASB as would likely intensify
    if we were to tax book income.
        Would you like to comment further on that, besides that
    which I just said?
        Dr. Hoopes. That's correct. I mean, it's not that the
    accounting rules changed because of pressure, it is that they
    have not been allowed to change. So this difference that Chair
    Warren mentioned between Amazon expensing stock options for tax
    purposes but not for financial accounting purposes, that
    actually should not be the case. The treatment should be
    similar in both cases, and the tax code actually gets it right.
        The reason why financial accounting, in the opinion of most
    experts, is actually incorrect on this issue is because, every
    time the FASB has said we need to correct this, to recognize
    the compensation as an actual expense, the Congress has not
    allowed it, and has basically threatened to put the FASB out of
    business. That to me is just exactly what would happen if we
    had a tax on book income. When the stakes get high and we are
    actually taxing that number, taxing book income as part of the
    tax base, if the FASB wanted to make consequential decisions to
    try to actually reflect the economic value on the firm, as is
    their role, Congress would step in just as they have in the
    past and not allow that to happen.
        The very poster child for the Real Corporate Profits Tax is
    a result of Congress having essentially messed up the work of
    the FASB, and that would continue to happen, or even worse, if
    we were to have a Real Corporate Profits Tax.
        Senator Cassidy. Got it. Political control of the economy.
        Senator Warren?
        Senator Warren. Thank you very much, Senator Cassidy.
        So I think a big part of making the tax system fair is
    about how the IRS enforces the tax laws that are already on the
    books. When a teacher gets ready to do her taxes, the school
    sends her a W-2 form, and they send the same thing to the IRS.
    She knows how much income to report, and the IRS knows how much
    income she is supposed to report. It is called third-party
    reporting. It keeps people honest, because the IRS can spot it
    if somebody fudges the numbers on their return.
        But not so for the top 1 percent. Most of their income
    comes from business interests and capital gains that they
    receive when selling assets. There is no third-party reporting
    for these types of income, so the IRS counts on the richest
    taxpayers to follow the honor system.
        Professor Gamage, it sounds like we have two sets of rules
    here: wages for teachers and bank tellers and construction
    workers are all automatically reported to the IRS. But for the
    wealthiest Americans, it is the honor system.
        So tell me, is the honor system working?
        Mr. Gamage. No, it is not working, Senator, and it should
    be fixed. The academic literature is clear that compliance is
    very high for income subject to information reporting, and
    especially when there is both information reporting and
    withholding, as there is for the vast majority of the income
    earners, like ordinary Americans.
        By contrast, tax compliance is quite a bit lower, much
    lower, when there is not information reporting or withholding,
    as is the case for much of the income earned by the ultra-
    wealthy. It is past time to fix this.
        Senator Warren. So this kind of under-reporting by high-
    income taxpayers creates what we call a tax gap: taxes owed but
    not paid. As some folks referred to earlier, IRS Commissioner
    Rettig was here last week, and he estimated that the tax gap
    may now be as high as a trillion dollars a year. That is about
    the same as the amount of all of the Social Security checks
    that were sent out last year.
        Now the IRS tries to catch tax cheats by auditing tax
    returns. But the wealthy enjoy a different set of rules here
    too. After a decade of politically motivated Republican budget
    cuts, the IRS enforcement budget is now nearly 25 percent
    smaller than it was in 2010. And the agency employs 30 percent
    fewer enforcement personnel.
        Professor Gamage, the Republican budget cuts hollowed out
    the IRS. So what has that meant for the IRS's ability to
    conduct audits and catch tax cheats?
        Mr. Gamage. Thank you, Senator. The IRS is simply out-
    gunned when it comes to trying to catch and police the tax
    shenanigans of the ultra-wealthy and the largest businesses,
    whether these be clearly illegal--what the tax gap is mostly
    measuring--or whether these be legal but very aggressive with
    layers on top, but the more important category may be the
    borderline category.
        It is well known, for instance, among the highest-priced
    tax lawyers, that if you set up a complicated enough flow-
    through/
    pass-through structure through which income is earned, the IRS
    won't have the resources to be able to audit and challenge and
    look through what happens in that flow-through structure. The
    idea is to try to make--you know, many of the higher-priced tax
    lawyers do this by staying just on the side of what is legal,
    but maybe crossing over it. Although a fair amount of what goes
    on crosses that line into clearly illegal tax evasion,
    regardless, the IRS just does not have the resources and
    competence to look through these excessively complicated
    structures.
        And I will repeat again, this is economically wasteful.
    Lots of money and resources are being tied up in these
    excessively complicated structures for tax abuse reasons, tax
    planning reasons, whether legal or illegal. We can and should
    prevent this, both through tax reform and, importantly, through
    giving the IRS the resources it needs to operate as tax police.
        Senator Warren. And looking at the numbers on this, audit
    rates for people reporting more than a million dollars in
    income have fallen by 70 percent. And for people reporting more
    than $10 million, it has fallen by nearly 80 percent. Audits of
    big corporations, those with more than a billion dollars in
    assets, have fallen by more than half.
        It is just as you say, Professor Gamage: these are
    complicated audits to do. And when the budget gets cut, that is
    where the IRS has been cutting.
        You know, while the IRS has turned its eyes away from the
    wealthy and from giant corporations, it has come down hardest
    on the people who are cheapest to audit: very low-income
    taxpayers who qualify for the Earned Income Tax Credit, or the
    EITC.
        In fact, if you are earning $25,000 in a rural community in
    the South, you are more likely to be audited than if you were a
    millionaire living in New York City. The most-audited counties
    in the country are poor, rural, and predominantly African
    American.
        Ms. Straughter, does it seem fair to you that the IRS has
    all the information it would need to double-check your
    employees' income right there at the IRS's fingertips, but that
    the wealthy get to hide income and would not likely face any
    consequences from that?
        Ms. Straughter. Senator Warren, it is absolutely unfair on
    so many levels to not have documentation to make sure that the
    wealthiest Americans are paying their fair taxes. It is a
    disgrace.
        The IRS knows what I should pay. You know, it was
    referenced that they receive the W-2. They know how much income
    I have. They know what I should pay. And to sit in this hearing
    today and understand that the same rules do not apply to the
    wealthiest of Americans--one thing that Mr. Cassidy said that
    is correct is that the rich will do fine.
        Senator Warren. Yes. Thank you very much.
        You know, I am working with my colleagues, including Chair
    Wyden, on a bill that strengthens IRS enforcement. One of the
    features of this bill is the requirement to strengthen
    reporting so that the IRS can verify information on wealthy
    individuals' income. Another is to give the IRS more funding to
    audit millionaires, billionaires, and giant corporations.
    Stepped-up enforcement against these big tax cheaters would
    give us as much as $1.8 trillion in new revenue over the next
    decade.
        The only people who stand to benefit from a weaker IRS are
    wealthy tax cheats. Fixing the IRS is about making sure that
    the government is fair, and that we have the revenue we need to
    invest in a stronger future for all Americans.
        Senator Cassidy?
        Senator Cassidy. Senator Warren, in all due respect, using
    terms like ``tax cheaters'' seems to prove what Professor
    Hoopes said, that we use rhetoric in order to shade the
    argument.
        I would also like to do a little bit of fact-checking. The
    cuts to the IRS began under President Obama in 2012. I suppose
    Republicans would be blamed for a lot of things, wanting the
    American people to be independent and that sort of thing, but
    the cuts to the IRS began under President Obama, just to say
    that.
        Mr. Pomerleau--did I get that name right, Mr. Pomerleau?
        Mr. Pomerleau. Pomer-low, yes.
        Senator Cassidy. Pomerleau, I'm sorry. I am having a tough
    time today.
        There does seem to be a little bit of a verbal sleight of
    hand taking place here. We speak about--we are conflating
    wealth and income. And so as a percent of their wealth, people
    are paying so little. Now, reasonably speaking, if we go to a
    nurse not in Medford, OR, but say in Shreveport, LA, and she
    has a 401(k) with internal buildup, year by year she is not
    paying taxes on that internal buildup. Indeed, the taxes are
    deferred.
        And so--now granted, those with great wealth have more of
    an advantage from this in absolute dollars because they have
    greater wealth, but I do not think we would conflate the fact
    that she is saving for her retirement with her income when it
    comes to taxes. Are there any issues with how I am analyzing
    that?
        Mr. Pomerleau. I think it somewhat comes down to different
    definitions of income, and philosophically what the tax base
    should be at the end of the day. I think many proponents of the
    wealth tax feel that the income tax, which they define as the
    tax that should apply to people's consumption plus their change
    in net worth, does not do a sufficient enough job in raising
    revenue. So the wealth tax is there to fill that gap.
        But yes, you mention another important point here, that the
    current tax code actually--on purpose in many ways--has been
    shifted more from an income tax to a consumption tax. So there
    are provisions such as 401(k)s that have been put in place to
    reduce the tax burden on the return to wealth for middle-income
    earners that are saving for retirement. And the idea there is
    that, if you reduce that tax burden, people will be able to
    save for retirement and have enough to care for themselves in
    the future.
        But I think you are right that a lot of this, at the end of
    the day is, well, we really want to tax income, and we are
    upset that people are earning income that may not get taxed for
    a number of reasons, and that the wealth tax is really a
    backstop to that, rather than really just being upset that
    wealth itself is not being taxed.
        Senator Cassidy. Mr. Hodge, there seems to be a lot of
    unfavorable contrasting of us with countries like Switzerland,
    et cetera. It is my understanding, though, that our tax code is
    far more progressive than theirs. The value-added tax is
    inherently regressive. If you have a 21-percent VAT, every step
    of the value being added, you are getting another 21 percent.
    And if I am spending most of my disposable income upon
    consumables, like furniture, et cetera, that ends up being
    quite regressive. And indeed the U.S. has a far more
    progressive tax code than such countries like, well, pick your
    European country. Any thoughts on that?
        Mr. Hodge. The OECD has looked at this and found that the
    United States has one of the most progressive and
    redistributive income taxes of any industrialized country. In
    fact, they found that only Israel taxes their wealthy more and
    redistributes more through the tax system.
        We actually do more than any other country to try to help
    low-income people through the tax code through things like the
    EITC and the refundable tax credits. And so the poor in
    America, according to the OECD, have the lowest income tax
    burden compared to the poor in any other country because of
    that.
        Senator Cassidy. Okay. I will--I have 30 seconds left. I
    know you have another set, and I will save my last round for my
    next 5-minute block.
        Senator Warren. Thank you.
        And I love being fact-checked. So let's do a little fact-
    checking on this. You say that the IRS budget cuts started in
    2012, and President Obama was in the White House, and you are
    right. But I think you might want to go back and look at who
    actually led the charge to cut the IRS's budget. And I think it
    was the Republicans, but I will do this for you. Either way,
    can we agree that those cuts to the IRS budget were a terrible
    idea, and that the IRS needs enough money to close this tax gap
    so that they are actually able to enforce the tax laws that are
    currently on the books? I am not even talking about putting
    more laws on the books, just enforce the dang stuff that is out
    there.
        Senator Cassidy. I am totally for the IRS being able to
    enforce the laws given to it. Of course, in any budget,
    tradeoffs have to be made, and so if folks decide to spend
    money here, as opposed to the IRS, then that is something which
    is a priority that Congress made.
        I am not sure I would blame Congress, though, for a budget
    which the President signed.
        Senator Warren. Well, fair enough, but let's just stick
    with what we want to do now. Because the one thing that is very
    different about spending money with the IRS is that it actually
    brings in more revenue. And so the question is, how much more
    revenue?
        And I understand that you object to my calling people who
    do not pay the taxes that are legally owed ``tax cheats,'' but
    I do not know what else to call them.
        Senator Cassidy. Can I reply to that, because----
        Senator Warren. You sure can.
        Senator Cassidy [continuing]. Because Mr. Gamage tells us
    that indeed most folks are not paying taxes because of laws
    that Congress passed.
        Senator Warren. But that is not what the IRS Commissioner
    was talking about----
        Senator Cassidy. Well, that is different from what Mr.
    Gamage is saying.
        Senator Warren. What Mr. Gamage was saying is that $1
    trillion in taxes that were owed were not paid. People who owe
    taxes and do not pay them, to me that is the definition of----
        Senator Cassidy. Maybe we need Mr. Gamage to clear up my
    misimpression, or your misimpression, because I had the sense
    that, as Professor Hoopes said, Congress has punched a hole in
    the bottom of the bucket. And whether it is EV tax credits, et
    cetera, the people with wealth are not paying taxes because of
    provisions that we have passed.
        And I think I heard from Mr. Gamage that the amount that is
    legally avoided is far greater than the amount that is
    illegally avoided, but if I am wrong, please correct me, Mr.
    Gamage.
        Senator Warren. So I think that is what Professor Gamage
    said. The point is, let's just stop at least the part that is
    already legally owed and make sure that people are actually
    audited, especially wealthy people, and that they are audited
    more often than poor people--and that we collect the taxes that
    are owed. That is all I am doing here.
        Senator Cassidy. What I don't know is if the poor people or
    any people are audited because they just have a computer
    program that kind of runs through and says, here's a guy with a
    W-2 and not much else, so therefore--I do have some stocks, et
    cetera--but, you know, somehow it is relatively easy, versus
    that which requires going out and looking at people's books.
        If you are saying turn off the computers so that we are not
    going to look at that which we can easily look at, that does
    not seem very wise. On the other hand, we certainly should
    treat all Americans fairly no matter what the socioeconomic
    class.
        Senator Warren. Good. And I think that is the point. We
    want to make sure they have enough money to be able to go after
    the complicated tax schemes that the wealthy are able to use,
    and the big corporations.
        So I just have a couple of questions I want to clean up. As
    we do this, we have heard a lot today about my wealth tax,
    including about how it would help close revenue gaps and grow
    the middle class. We also heard some criticisms, so I want to
    take the opportunity to get a few more things on the record.
        Let's get some clarity about how a wealth tax could be
    implemented. Professor Gamage, a few of your fellow panelists
    have argued that it would be too hard to implement a wealth tax
    because we are unable to value the assets of wealthy
    individuals. Do you agree with that?
        Mr. Gamage. Absolutely not. Now any tax system is going to
    be imperfect. A wealth tax would not be perfect. But it would
    not be hard at all to design a wealth tax that would be
    dramatically better than the existing income tax, much better
    as targeted to the ultra-wealthy mega-millionaires and
    billionaires, as the proposed wealth tax would be.
        The vast--not the vast majority--the majority of wealth is
    held in the form of stock and publicly traded assets that are
    easy to value. And along with tax professors Darien Shanske and
    Brian Galle and economist Emmanuel Saez, and assistance from
    the Roosevelt Institute, I have been working on a model set of
    valuation and enforcement rules for wealth tax reforms based in
    part on the successful Swiss wealth tax experience.
        The proposed ultra-millionaire wealth tax would give
    Treasury the authority to adopt our proposed rules, or perhaps
    to come up with something better. I am extremely confident that
    the proposed ultra-millionaire tax, as implemented by Treasury,
    would do much, much better than our existing income tax at
    measuring and valuing and enforcing wealth, or the true
    economic resources of mega-millionaires and billionaires.
        Senator Warren. So thank you, Professor Gamage. Let me just
    look at an example of that.
        Dr. Disney, how much of your wealth is in stock and other
    property like that?
        Dr. Disney. Most of it.
        Senator Warren. Okay, and how much is in one-of-a-kind,
    hard-to-value Disney collectables, or other things that are
    hard to value?
        Dr. Disney. Very little. It has been my experience it's
    very rare for a wealthy person not to know exactly where all
    their money is and how much everything is worth.
        Senator Warren. You know, there are plenty of tools
    available to value the assets of the wealthy. They are
    constantly being valued in the private markets, and for
    insurance purposes. The IRS values these assets when the
    wealthy die. And if it is really true that there are some
    billionaires whose wealth is so immense that we do not even
    know how to start counting it, then that is the best argument I
    have heard all day for a wealth tax.
        I have another question I want to ask about. A few of the
    witnesses suggested that taxing book income like my Real
    Corporate Profits Tax, or President Biden's tax plan, would
    cause corporations to manipulate their financial statements to
    try to find the same kind of loopholes they now use in the tax
    code.
        So, Professor Gamage, do you think that giant corporations
    would be willing to report lower book income so they could
    avoid paying a 7-percent Real Corporate Profits Tax?
        Mr. Gamage. You have to start by remembering that profits
    reported for financial accounting purposes, as I think every
    tax analyst agrees, are currently inflated. They are inflated
    because inflating them gives managers higher compensation in
    stock options, among other reasons, and drives up share prices.
    So the Real Corporate Profits Tax Act would deter these
    financial shenanigans, and that would be good. And a reminder:
    the best research in the academic literature suggests 50-
    percent book tax conformity. We currently have zero percent.
    The Real Corporate Profits Tax would move us to 25 percent, a
    significant step in the right direction.
        Senator Warren. Okay. So would it be a fair
    characterization to say that by applying a tax to a number that
    corporate executives want to have as high as possible, that a
    book income tax would serve as a backstop to the existing
    loopholes in the tax code?
        Mr. Gamage. Absolutely, yes.
        Senator Warren. Okay. Now, one last area I just want to
    hit, and then I will give this back to Senator Cassidy. Some of
    our witnesses have suggested today that a wealth tax and a Real
    Corporate Profits Tax would reduce economic growth.
        Professor Gamage, we are back to you again. What kind of
    impact would these taxes have on our economy, in your judgment?
        Mr. Gamage. I think they would help the economy, and
    especially help shared economic growth and prosperity and level
    the playing field. The big problem in our economy today, as our
    economic research finds, is not on the supply side, lack of
    resources seeking investment; interest rates are historically
    low. There are massive funds seeking investment. It is on the
    actual investment happening in a variety of ways.
        These tax reforms would help with this, on the public side,
    through greater public investment, but also by deterring some
    of the tax planning shenanigans which make it so that, instead
    of productive investment, what we see happening is excessively
    convoluted structures designed to minimize tax, some legal,
    most legal, but some illegal, but regardless, wasteful and
    economically harmful. And the overall tax reduction that the
    ultra-wealthy get away with, and large businesses, through
    these structures, stands in the way of real economic growth and
    prosperity.
        Senator Warren. Well, these taxes would raise as much as $6
    trillion that we can pour right back into communities and
    families all around this country. We can make serious
    investments in good jobs, in strong infrastructure, and quality
    child care for every family.
        Those are investments that help families get ahead. And
    when families have the support they need and the jobs that pay
    fair wages, they can spend a little more at their local
    businesses, and maybe start a small business themselves.
        Senator Cassidy, why don't you ask whatever last questions
    you want to ask and make a closing statement. Then I will ask
    my last question and do a closing statement, and we will wrap
    this up.
        Senator Cassidy. Mr. Gamage--Professor Gamage, Mr. Hodge
    made the statement that when the private sector invests, you
    get about a 10-percent return. And when the public sector
    invests, you get about a 5-percent return. But it seems as if
    you are favoring so-called public investments.
        I am sure you would argue that, no, I want both, but I was
    just told 2 days ago that when the New York school system
    builds a building, it costs 50 percent more than when a private
    company would build the same building. And I have here an
    article, ``Why New York will never build another subway.'' And
    they just talk about the incredible expense and delay of
    building their last few miles of subway in New York. Let's see,
    at 1.5 miles--a 1.5-mile subway cost $4.6 billion.
        I am not sure I am as confident as you that that private-
    sector investment will be as fruitful. Now are you speaking not
    of construction projects, but of, you know, paying for child
    care workers? And if that is the case, I did not think that
    economists were quite as positive about such consumables, as
    one economist called it, leading to long-term economic growth
    as infrastructure.
        There is a lot there, and I apologize, and I have to ask
    you to go quickly, because I have a couple more questions and
    just a little bit of time.
        Mr. Gamage. Okay, I will try to be quick. I would say two
    things. One is, the public and private sectors are better at
    different things. Each are important for a society with shared
    prosperity.
        Second, these tax measures being considered do not create
    this choice between public or private investments. That may
    have been the case in the 1950s and 1960s that a big problem
    with our economy was lack of capital stock. That has not been
    true for decades, and it does not appear that it will be true
    for some decades to come.
        What the problem in the economy right now is, is lack of
    overall investment. And these tax measures, I do not believe
    would significantly or at all reduce private-sector investment.
    In fact, I think they might switch currently wasteful tax
    stratagems and excessively convoluted structures into real
    investment as another way of helping the overall real economy.
        Senator Cassidy. So, Professor Hoopes, you had mentioned in
    your testimony that you think it is far more difficult to
    estimate overall wealth than Professor Gamage seems to think.
    And I also--so please give your perspective on how easily that
    that can be done. And secondly, do you also agree that these
    tax stratagems are diverting so much investment that could
    otherwise go well that our society would be far better off?
        Dr. Hoopes. Valuation is difficult. So it is difficult to
    value things, and that is actually the underlying root of
    another big tax planning problem we have in the United States.
        Several times people have mentioned profit shifting. The
    heart of the issue of profit shifting is not being able to
    value intangible assets and the return on those intangible
    assets back into the United States. If it was so easy to value
    these assets, then we would essentially not have this profit
    shifting issue.
        Because we have the profit shifting case where the system
    does not depend on realization, we would have the exact same
    issue with the wealth tax. And so that valuation really is an
    issue you cannot just simply wave off, because there are
    already pieces of our tax code that seem broken because of
    valuation.
        Now to get to the private investment piece, I do not think
    that corporations are spending such massive amounts on tax
    lawyers and accountants. As a producer of tax accountants,
    maybe I wish that were the case, but I do not think that they
    are actually hiring so many of them that they are unable to
    invest in profitable investments because----
        Senator Cassidy. It seems like that would be a very
    marginal cost relative to the overall operations on, pick a
    corporation, Boeing or Google.
        Dr. Hoopes. I do not have the numbers, but this is a
    knowable fact, and we have statistics on how much corporations
    actually spend on tax planning, and it is simply not that much
    money. To assert that it is, is simply not the case
        Senator Cassidy. I kind of agreed with you when you said
    wave off the complexity of it. I will finish, before my closing
    statement, with an anecdote, because sometimes the anecdote
    proves the rule.
        A gentleman back home grew up poor in north Louisiana,
    started a construction firm, and now it is, I'm sure--I do not
    know how much the guy is worth, but he is worth a lot. Along
    the way, he has made a lot of people very wealthy with profit
    sharing for his employees so that if he did well, they did
    well. And not just his chief lieutenants, but the people all
    the way down the line.
        Now as I thought about--as this was going on, I thought
    about valuing his business year by year. One year, they may get
    a billion-dollar contract to do a massive public works
    contract, and then the next year they may not. They are just
    doing this, and the value of it is depreciating. And then the
    next year, they may or may not. But then they may do really
    well, and then they may do really poorly.
        And a family-owned business would have to then really spend
    money on valuation, with the potential for audit, because the
    value of the company presumably is fluctuating every year,
    depending upon their book of business.
        And I can see doing it one time. You know, I am selling off
    the business. I am turning it over to my kids, whatever you
    want to do. But on a year-by-year basis, that would be a degree
    of complexity that would require a higher marginal cost for tax
    planning.
        Dr. Hoopes, I think your analysis, just in the real world,
    sounds better than Professor Gamage's--more accurate.
        One more thing I will say is, obviously Dr. Disney's income
    is passive, and in the case of this gentleman, his is active.
    And along the way, I have found multiple people in whom he has
    invested--in their business. He never told me; they told me.
    And then they end up doing very well.
        So when you actually have to work your wealth, you create
    wealth for others. That is different, I suppose, from passive
    wealth.
        Let me finish with my closing remarks. I thank all the
    witnesses for a very informative meeting. We had a great deal
    of promise about the benefits of new taxes, but I think our
    discussion highlights that there is no such thing, no such
    thing as a tax that does not hit workers, consumers, and
    investment. Mr. Hodge, in his comments, said there is a balance
    there between equity, between revenue for the government, and
    between investment.
        As we recover from the pandemic, businesses seek certainty
    and predictability so they can get back to normal. Congress
    should work to get the economy back to normal, back to the
    economy we enjoyed prior to COVID, which was done by lowering
    taxes, not by threatening to have higher taxes.
        Thanks again to Chair Warren, and to all the witnesses
    today. I yield my time.
        Senator Warren. Thank you, Senator Cassidy.
        You know, we've talked a lot about tax reform today. Tax
    reform is just about choices. We can let our roads and bridges
    crumble, not upgrade broadband, make no investments in child
    care or getting lead out of drinking water, and let rich people
    keep paying taxes at about half the rate as everyone else.
        Or, we could ask those at the very top to pay a wealth tax.
    We can require giant corporations to pay a tax on book profits.
    We can get serious about tax enforcement for the rich and
    powerful.
        Those three changes in the tax code would give us trillions
    more than we need in order to pay for President Biden's
    infrastructure plan, and his care economy plan. It is all about
    choices.
        So let me ask you, Ms. Straughter, what kind of difference
    would it make to close these multimillion-dollar tax loopholes,
    and instead invest that money in communities like yours?
        Ms. Straughter. I think if more members of Congress walked
    the streets as I do, as ordinary--and not to say that Congress
    is not ordinary--but as the lay people who are out here working
    day by day, paying taxes, this would make a tremendous
    difference in our communities. Whether they are communities of
    color, communities that are rural that might not be of color,
    when we think about the division between the haves and the
    have-nots, it is huge. To not pay taxes is something that
    should not occur. To hide your tax money should not occur. To
    have multiple levels of ways of paying and not paying taxes
    should not occur.
        So we need this in our communities. We need the taxes to be
    equitable and equal among everyone.
        Senator Warren. So let me ask you, Ms. Straughter, what
    does it mean to you to pay taxes?
        Ms. Straughter. It means I am doing my fair share. I went
    to school. My grandchildren go to school. So taxes are
    necessary. They are necessary for services. I do not want to
    say I enjoy paying taxes, but I understand why I pay taxes. It
    is a requirement of civilized society to take care of
    themselves and take care of others.
        So I pay my taxes, you know? If not on time, I get an
    extension, but I pay my taxes.
        Senator Warren. Good for you. You know, the tax system has
    been tilted towards the wealthy and powerful for far too long.
    And America's families have paid the price. So let's unlock a
    brighter future for our Nation by finally making this tax
    system work for working families.
        I want to say a very special ``thank you'' to Ranking
    Member Cassidy for his help on this committee hearing today.
    Thank you to our witnesses, every one of you, for being here
    today and for providing testimony. For Senators who wish to
    submit questions for the record, those questions are due 1 week
    from today, on Tuesday, May 4th.
        For our witnesses, you have 45 days to respond to any
    questions, and thank you again for volunteering your time, for
    being here.
        And with that, this hearing is adjourned.
        [Whereupon, at 4:38 p.m., the hearing was concluded.]

                                A P P E N D I X

                  Additional Material Submitted for the Record

                                  ----------

                   Prepared Statement of Hon. Bill Cassidy,
                         a U.S. Senator From Louisiana
        Thank you, Chairman Wyden, Subcommittee Chair Warren, and Ranking
    Member Crapo.

        First, let's acknowledge that conservatives and liberals both want
    what's best for our country. We wish to have prosperity for those who
    are doing less well. But we have different visions of how to achieve
    that goal.

        Conservatives believe in allowing the American people to keep their
    own resources and to make the decisions that are best for them; that
    allowing markets to dictate--with safeguards from Federal and State
    government--where money should best be allocated is what gave us
    prosperity to date and which is most likely to give us prosperity in
    the future.

        It's not just we who have seen that, however. We can even see
    countries which are frankly more socialist or communist evolve towards
    this path, whether it is the Czech Republic or China, or countries that
    have tried wealth taxes like what we will discuss today--Sweden,
    Austria, Denmark, Germany, Netherlands, Finland, Iceland, and
    Luxembourg--but have abandoned them.

        The left has a different view: that it is better to take the
    resources of the American people and filter them through government
    bureaucracy that will make decisions as to where to spend, and the
    American people will thereby benefit from the government's decisions
    more than if they were allowed to spend as they see fit.

        Now those on the left will object. ``Hold on a second. We are not
    talking about taxes on those who are less well-off; we are just talking
    about the very wealthy.'' But this is disingenuous. Disregard that even
    the revenue from taxing every billionaire in the country at 100 percent
    would not come close to what's needed to fund their trillions of
    dollars in proposed new spending.

        It is also disingenuous because it presupposes that those whom the
    left wants to tax are sitting on a pile of gold, like the dragon in
    ``Lord of the Rings,'' not using it for purposes that create jobs and
    otherwise bring prosperity, but rather just sitting on a pile of gold.
    Nothing could be further from the truth. That wealth is typically not
    liquid; it is invested and reinvested, creating jobs and wealth for
    others along the way.

        Our first Supreme Court Justice John Marshall said, ``The power to
    tax involves the power to destroy.''

        We are not reinventing the wheel here. When you decrease taxes, you
    encourage investment, and jobs follow. When you increase taxes--sure
    you increase government control--but you discourage investment, and job
    numbers suffer.

        Before COVID, Republican-led tax cuts spurred the greatest economy
    of our lifetime. We had record low unemployment for every demographic:
    black, Hispanic, non-Hispanic, high school drop outs, disabled, you
    name it. We had wage growth disproportionately in the lower incomes.

        These may be inconvenient truths for some on the other side of the
    aisle, but truths none the less. We know what works.

        Now let's have a thought experiment. Let's contrast the logical
    outcome of the two visions of the two parties. The left would like us
    to think that the disinterested bureaucrat is able to make a wiser
    decision as to where to deploy capital than the person whose livelihood
    is dependent upon it.

        In the private sector, if an organization providing a service
    fails, it's on the dime of the company, and someone else steps up,
    takes the position to once more increase productivity, increase the
    number of jobs, and increase wages. That is what this hearing is about.

        Now, think school teachers in Chicago. Those children were not
    allowed to be in class because the teachers' union, against science,
    against the CDC, still would not reopen. And what did they get for that
    failure of service? They still demanded and received billions and
    billions for union priorities paid for by U.S. tax dollars. The
    bureaucracy condones and even promotes it.

        Rather than talking about whether these new taxes are actually
    needed, we will hear about how they are justified. Successful
    individuals will be used as strawmen, pitting Americans against each
    other to build support for a political agenda. Success will be
    vilified. Undefined goals like ``fairness'' will be used as blank
    checks to justify their tax and spend agenda.

        But what do you tell a family who loses their jobs because new
    taxes on the ``rich and corporations'' make their employer's business
    model no longer viable? ``It's okay that you lost your job, because we
    really stuck it to the rich.''

        The rich will do fine. They always do fine. But it is the everyday
    working folk who get caught in the crossfire of tax and spend policies.

        And by the way, the left's promise to expand transfer payments just
    creates more government dependency. Americans want independence, not
    dependence.

        And this is the fundamental difference between our two parties.
    Republicans believe the best stimulus is a paycheck. A job is better
    support for your family than a government program.

        The wealth tax is opposed by John Cochrane of the Hoover
    Institution to former Treasury Secretary Larry Summers--conservative to
    liberal. AEI, Tax Foundation, Brookings, and the Manhattan Institute
    have all reported on the negative aspects.

        I hope the Biden administration will work with Republicans to get
    small businesses back on their feet so they can get Americans back to
    work and keep the economy moving in the right direction.

        We will not tax our way to prosperity. Small businesses and other
    employers want to operate under a fair, predictable tax code, and they
    will do the rest.

        There are some substantive things we should be discussing here.
    Some tax relief afforded to the middle class and small businesses
    through the Tax Cuts and Jobs Act expires in just 4 short years. My
    Republican colleagues and I have proposed providing predictability to
    taxpayers by locking in the current individual tax policies on a
    permanent basis, including the expanded Child Tax Credit and lower tax
    rates on the middle class. This will help everyday Americans.

        I look forward to hearing the testimony.

                                     ______

                Prepared Statement of Abigail E. Disney, Ph.D.,
                         CEO and Co-Founder, Fork Films
        Thank you, Chair Warren, Ranking Member Cassidy, and members of the
    committee.

        When a person is born in this country it pretty much goes the same
    way every time. You come out, you get a little slap on your tushy until
    you cry, and then you get handed over to your parent. But when a baby
    is born into a family like mine, there is a little twist. You come out,
    you get a little slap on your tushy until you cry, and then before they
    hand you over to your parent, the doctor looks deep into your eyes and
    says, ``never spend capital.''

        Okay, so maybe I am exaggerating a bit, but not spending capital is
    as close to a religion among people who inherit wealth as you can get.

        Why is capital so sacred? Because it is the goose that lays the
    golden egg. The more capital you have, the more income and growth you
    can count on, the more stuff you can buy, and so on. As long as you can
    invest for a return that outpaces inflation, your capital will grow and
    your buying power will grow with it, and you can leave this life with
    money to spare.

        The subtext of the ``never spend capital'' mantra is, of course,
    that jobs are for chumps. If you ever find yourself reduced to earning
    your living by your labor, you've surely lost the big lottery you were
    born to win.

        But back in 1960, when I was born, there was another point of faith
    among the industry of people who advise inheritors like me, and that
    was summed up in the phrase ``shirt sleeves to shirt sleeves in three
    generations.'' Put another way, this means that if you procreate at a
    normal rate, you'll be unlikely to keep this whole scam going for very
    many generations. Because if you have four children, as my parents did,
    you are going to have to at least quadruple the amount you were left to
    leave them where you were when you started. That's why dynasties are
    unnatural and hard to cultivate.

        But I'm third generation. Why am I still flying so high?

        Things have changed since I was born 61 years ago. For one thing,
    my father had the good sense to see that the goose laying his golden
    eggs was dying in the early 80s and was able to bring about changes in
    management that unleashed an enormous amount of pent-up value at the
    Walt Disney company, and that caused the stock to rise dramatically.
    Disney's share price was also bolstered by a stock market that was
    known occasionally to suffer from, in Alan Greenspan's words, an
    irrational exuberance.

        So in other words, I'm flying high because of dumb luck. I did
    nothing to earn my massive windfall except have the good sense not to
    sell my particular golden ticket. I've owned my way to the top.

        But there is a second reason, more pertinent for our purposes
    today. I'm in great shape today because a lot of what the government
    did in the last 40 years was designed to ensure that a person like me
    can stay flying high, in spite of all the natural forces of gravity
    that used to pull inheritors down to earth.

        Those government actions include:

        One. Corporate taxes are at an all-time low, and shameless
    corporate tax avoidance at an all-time high. Trillions of dollars are
    currently being stashed overseas in tax havens by Fortune 500 companies
    in ways both quasi-legal and potentially criminal. All of this value
    accrues once again to managers and to shareholders like me. And let's
    be clear: there is nothing democratic about owning stock. Eighty-four
    percent of shares, in fact, are owned by the wealthiest 10 percent of
    the population.

        Two. Profitability has skyrocketed at America's corporations. For
    one thing, while worker productivity is up 250 percent since the end of
    WWII, mean wages have increased by only 60 percent of that amount. Much
    of the rest of that value is accruing to managers and to shareholders
    like me.

        Three. Corporations buying back their own shares, a practice that
    was illegal until the early 1980s, has turned into business as usual
    among American companies. Rather than reinvest in the growth of their
    business or rethink salaries of their employees, companies are plowing
    profits and tax savings into buybacks that enrich only--you guessed
    it--mangers and stockholders like me.

        Four. An entire tax avoidance industry has grown up in the meantime
    advising individuals and families about how to minimize their tax
    obligations, in ways that skirt right around the edges of the law.

        Five. A no-holds-barred assault on public spending has included the
    evisceration of the IRS, the SEC, and other regulators that might be
    more able to restrain some of this trickery if they had adequate
    funding and support.

        Six. The finance industry, once populated by bow-tie-wearing
    poindexters bent on ensuring that grandpa's pension was well taken care
    of has transformed into Godzilla himself, devouring and warping every
    industry and motivation it lays its claws on. Relying on ever more
    arcane investment rules and vehicles, the industry counts on the
    widespread inability of the general population to understand what they
    are up to in order to carry on lining their pockets with relative
    impunity.

        And by the way, if you're pretty smart and still have trouble
    understanding most of it--don't blame yourself, that's by design.

        Seven. Corporate and individual spending on lobbying and on
    political campaigns have warped and changed our political processes,
    making some representatives opaque, corrupt, and downright uninterested
    in the well-being of the regular folks paying the price of their
    machinations.

        When I was born in 1960, the U.S. had a tax system that privileged
    income from labor over income from wealth. But somewhere along the
    line, things turned upside down.

        Now a person like me pays less in taxes on the money I make simply
    from owning stuff than almost anyone who is making their money by
    working. The more likely a person is to come home from work with an
    aching back, the more likely I am to be paying less in taxes. You don't
    have to be a Marxist to see that something is really wrong with these
    priorities.

        If a tax system is a statement of a country's values, then I wonder
    about ours.

        In 1960, a middle-class worker could count on an income that
    enabled them to buy a home, a pension that would take care of them in
    retirement, and adequate health care.

        In 1960, before massive disinvestment in public welfare, that
    person could send a child to a decent public school, spend weekends at
    safe and pleasant public parks, and drive to work on roads that were
    neither crumbling nor overcrowded.

        For the last 50 years the wealthy in this country have continued to
    press their advantages. Their aggressive lobbying on their own behalf
    has resulted in a raft of changes both formal and informal that have
    resulted in an accumulation of wealth in the hands of an ever-narrowing
    segment of the population. And wealth has a self-reinforcing quality,
    especially given the unholy relationship our political culture has with
    money.

        Some inequality is, of course, inevitable. But the levels of
    inequality that now characterize American life are historic. In 1960
    the top 0.1 percent of owners controlled about 10 percent of the wealth
    in this country. Today the top 0.1 percent control over 23 percent.

        And the pandemic has only exacerbated this problem. Wealth among
    U.S. billionaires has grown by over $1.3 trillion just over the past
    year, an amount that would cover a $3,900 stimulus check for every
    American citizen.

        There are those who argue that the massive inequality we now face
    is fine, no problem, nothing to see here. But history tells us that
    such massive inequality is invariably correlated to corruption, unrest,
    and failed governance. And every indication is that the U.S. will be no
    exception should we allow these trends to continue.

        And I can tell you from personal experience that too much money is
    a morally corrosive thing--it gnaws away at your character, it narrows
    your focus down onto your own well-being, it warps your idea of how
    much you matter, and rather than make you free, it turns you fearful of
    losing what you have.

        The truth is, the rich have run amok over the last 50 years of
    American history, and our government's willing complicity in their
    antics has permitted a handful of egregiously wealthy human beings to
    accumulate massive, budget-warping, mind-blowing amounts of money--all
    at the continuing expense of the vast majority of the American people.

        We need to address inequality first by restoring to the working
    class the benefits that used to come with being any old American
    citizen: decent, high-functioning governments, good health care, a
    public school system that prepares all kids well for their futures, an
    infrastructure not in a perpetual state of decay, and a suite of public
    services that privileges the interests of those not already privileged
    in every other way.

        Given how far we have let this inequality grow, I do not see how we
    can address this problem other than with a wealth tax. Working people
    will never, by wages or salary alone, be able to catch up with the
    folks who have succeeded in putting so much distance between themselves
    and everyone else. The public needs revenues to restore the commons to
    its former health, and the wealthy have too much money, plain and
    simple. That adds up to a pretty obvious solution.

        I will go to bat for the wealth tax with any and all businessmen
    who want to tell you that it impinges on the American dream. If you
    have $50 million and do not know how to invest it for more than 2-
    percent growth, you have bigger problems than a wealth tax.

        If you have a billion dollars and don't know how to live on $999
    million, you don't need a better tax system, you need a psychiatrist.

                                     ______

         Questions Submitted for the Record to Abigail E. Disney, Ph.D.
                    Questions Submitted by Hon. Bill Cassidy
                                  estate taxes
        Question. Senate Majority Leader Schumer has stated, with regard to
    the estate tax ``. . . any organic business--a farm, a small business,
    and frankly a large business--that would have to be broken up because
    of the extent of the tax should not be. A business is an ongoing
    organism. It employs sometimes 10 people and sometimes 10,000 people.
    To have to break that business up to pay any tax, to me, is
    counterproductive.''

        Do you agree that the tax code should not inhibit owners of any
    size business from being able to pass along that business, in full, to
    future generations?

        Answer. In fact, you are asking two unrelated questions. On the one
    hand, you are asking whether businesses should be broken up to pay
    estate taxes when inheritors have no access to other cash or assets
    with which to do so. If that is the question, then my answer is ``no.''
    That would be a terrible thing, as a business is an ongoing, important
    organism that creates jobs and opportunities for more than just
    inheritors.

        That phenomenon, widely repeated in stories about the estate tax,
    is, in fact, rare. Since the estate tax only applies to estates with
    assets worth more than $11.7 million, and since only fewer than two out
    of every 1,000 estates in 2019 qualified to pay the tax at all, this is
    not a widespread or common problem by any definition. In the rare case
    when such a large estate includes a growing concern and yet has no
    access to any liquidity, I would suggest that the inheritor has bigger
    problems than just a looming tax bill.

        Liquidity is, I am sure you know, often a question of timing.
    Estates get up to 9 months to pay their taxes, estates that include
    farms and small businesses that make up more than 35 percent of the
    corpus get up to 35 years to pay the tax. In fact, when this provision
    was added to the tax code in 2017, Susan Collins told The Wall Street
    Journal \1\ that ``We've taken care of the problem for the vast
    majority of family-owned businesses or ranchers in the country.''
    ---------------------------------------------------------------------------
        \1\ https://www.wsj.com/articles/senate-gop-hits-resistance-on-
    estate-tax-repealfrom-republicans-1507220889.

        The second question you seem to be asking is implied in the words
    ``in full,'' and that question is whether or not businesses should be
    taxed at all if they are part of an estate. And my answer to that is an
    ---------------------------------------------------------------------------
    emphatic ``yes.''

        Some clarification is needed here. To start, the business would not
    be paying a tax--the estate would, and those are two entirely different
    things since most estates include businesses as only one part of the
    assets that make up their total value. And my answer to the question of
    whether or not an estate worth far more than the assets the vast
    majority of Americans own at their death should be taxed is an emphatic
    ``yes.''

        As I've said before, this tax only applies to people who are by
    definition more than able to pay it. People who have amassed this much
    wealth in their lifetimes have done so by availing themselves of all
    the public goods and services this country has to offer--often a higher
    proportion of those resources. Transportation, education, high
    functioning court systems, and government subsidies are far more
    heavily used by the fortunate and wealthy than by low-income and
    working-class people.

        More importantly, I answer with an emphatic ``yes'' because of the
    kind of country I thought I was a part of--the kind of country I was
    taught America aspired to be. That kind of country is a meritocracy.
    The America I grew up in taxed a worker less for labor than an owner
    for ownership, admired a builder more than a billionaire, and believed
    that anybody anytime should be able, with work and a fair set of rules,
    to become the best possible version of themselves.

        What we currently have, and lurch ever closer toward, is a society
    dominated by dynasties, by a class of people that start with such a
    massive head start that it would be impossible for anybody less
    fortunate to gain any ground on.

        Roughly 40 percent of the names on the Forbes 400 list of the
    richest people \2\ are people who inherited a sizable asset from a
    spouse or family member; 21.25 percent of the Forbes 400 inherited
    enough to make the list without lifting a finger; 17 percent have other
    family members on the list.
    ---------------------------------------------------------------------------
        \2\ https://d3n8a8pro7vhmx.cloudfront.net/ufe/legacy_url/410/
    BornOnThirdBase_2012.pdf?14
    48056427.

        The playing field isn't just uneven. It's a minefield for most
    Americans given high incarceration rates, failing public schools, and a
    job market that consigns 40 percent of American workers to below
    ---------------------------------------------------------------------------
    survival wage jobs.

        The America I dream of is fair. But my advantages have not been.
    And my philanthropy is a drop in the bucket against the structural
    challenges that need addressing before it will ever be fair.

        I do not want to live in a dynastic social structure, but we are
    fast on our way to building one, and the estate tax is one of the last
    taxes in place that at least uses some of the excess resources of those
    who do not need them to address the needs of other people who very much
    do. I'm pretty sure most Americans would agree with me.
                                double taxation
        Question. New York Democratic Representative Jerry Nadler recently
    tweeted, ``No one should ever be taxed twice on the same income. It's
    not fair and it's not just.''

        Do you agree with this view? If not, why not?

        Answer. Representative Nadler has a point, it would be a terrible
    injustice for someone to pay the same income tax twice or the same
    capital gains tax twice.

        But the government does reserve the right to tax transactions. That
    is where most of the revenues to do things like build roads and schools
    come from.

        When I buy gas, I pay a tax. When I buy food, I pay a tax. No one
    asks me if the money I am using to pay for those things has already
    been taxed. The money I use to buy things sits most of the time in a
    bank account which is filled periodically by proceeds from work that
    I've done, assets that I own, and all sorts of other kinds of income.

        These dollars arrive in my account due to many kinds of
    transactions--a sale, a dividend, a paycheck. Each of these is a
    separate and individual exchange of value for the value that the
    government taxes in exchange for the goods and services it provides to
    ensure that that transaction and the society within which it happens is
    running smoothly.

        Besides, money is fungible, usable for any purpose in a uniform and
    indistinguishable way, and therefore impossible to distinguish as
    ``already taxed'' or ``not yet taxed?'' Money is just . . . money?

        And isn't an estate tax a tax on just another transaction, the
    transfer of assets from the deceased person to their heirs? So why
    should it matter if some of it was already taxed during a previous and
    unrelated transaction? It's a sad transaction, of course, but a
    transaction, nevertheless. And the government does reserve the right to
    tax transactions.

        What's more, many estates are made up of appreciated assets--
    assets, in other words, that have never been taxed. But if, for
    instance, your estate owns a lot of shares in a car company, and if
    those assets are worth more today than they were worth in, say, 2009,
    that means that they would have been helped along by a massive
    government bailout that prevented the failure of that business along
    with many others. So, your shares rose alongside the rest of the stock
    market.

        The money for that bailout, it should be emphasized, came out of
    the pockets of many other hardworking taxpayers who never were
    consulted about whether or not that car company should get that bailout
    nor about any other aspect of where massive government support for
    corporations has gone. These are taxpayers, many of whom are paying a
    higher marginal tax rate than I am, even if the only way I make my
    money is by lying around on my couch waiting for the checks to roll in.

        If an estate has grown as the result of government intervention,
    does it not seem fair to you that that estate at the very least should
    pay its debt back upon the death of its beneficiary before it is passed
    along to anyone else?
                           gifts to the u.s. treasury
        Question. In your written testimony you wrote, ``And I can tell you
    from personal experience that too much money is a morally corrosive
    thing--it gnaws away at your character, it narrows your focus down onto
    your own well-being, it warps your idea of how much you matter, and
    rather than make you free, it turns you fearful of losing what you
    have.''

        Current law allows for donations to the Treasury. Do you think
    that's a viable option for those who are worried they have too much
    money?

        Where do you think is the correct place to draw the line in terms
    of how much is too much money?

        Answer. Thank you for your helpful suggestions here, Senator. I
    will take them under advisement. I feel the need to point out that I
    have given much of my wealth away and continue to labor away at the
    surprisingly hard work of giving it away well.

        I don't imagine I will be done until most of it is gone.

        Of course, my philanthropic gifts are optional, whereas a tax is an
    obligation. There is a reason that, in some cases, taxes are referred
    to as ``duties.''

        I love writing a check to the IRS no more than the next person, but
    I do so gladly because I would be foolish to pretend that my wealth has
    nothing to do with a robust system of public goods and services.

        My wealth is still my wealth, due to various things like a high-
    functioning legal system to protect me from theft, a publicly supported
    education system to draw a diversity of employees and colleagues, and a
    relatively satisfactory infrastructure which helps me, my colleagues,
    and the people who might watch the films that support the share price
    that keeps me wealthy get from place to place.

        I hope that the checks that I gladly, if not joyously, write to the
    IRS grow in size because I know for a fact that I do not pay my fair
    share for these public goods.

        What's more, I am painfully aware that because I do not pay my fair
    share, many people less fortunate than I end up shouldering the burden
    of an overstressed legal system, a public education system in steep
    decline, and a crumbling infrastructure.

        Shouldering, in other words, my burden.

        I find myself getting more comfortable every day as my brothers and
    sisters working minimum wage slowly sink into unacceptable poverty.

        There is a level of poverty that is identifiable and unacceptable,
    just as there is such a thing as too much wealth. Easier, in fact, to
    identify. And easier, if we are willing, to address.

        I would love to tell you what the precise level of wealth is that
    corrodes character.

        And I am sure, were I to identify a specific amount, say, 50
    million dollars, there would be heartbreaking cases of people right on
    the bubble who are hurt by that definition and would argue for it to be
    raised or lowered. Such has always been the case.

        Wouldn't it be wonderful if we could tailor our laws, laws with
    life-or-death consequences such as three-strikes laws, the death
    penalty, or abortion laws, to specific circumstances so that
    heartbreaking unintended consequences never arose?

        But, alas, heartbreaking unintended consequences have a way of
    arising despite our best intentions.

        Reasonable people can argue about the fairness of the application
    of laws. Still, sometimes circumstances lie so far outside of the
    spectrum of what might be called reasonable that to quibble about where
    the line might be would be a waste of our time. Such is the wealth we
    have seen build up in the hands of an ever-smaller group of
    billionaires.

        Lest you think I exaggerate, consider that from 1982 to 2011, the
    net worth of the individuals on that Forbes list had increased by 15
    times and that the cut-off for the list went from $75 million to over a
    billion.

        I can't tell you where wealth ends, and obscene wealth begins; I am
    content to let the politicians fight that out, but I do know that if a
    person has a billion dollars and they cannot find a way to live on
    $999,999,999.99, they don't need better wealth definitions, they need a
    psychiatrist.

                                     ______

             Prepared Statement of David Gamage, Professor of Law,
                    Maurer School of Law, Indiana University
        Thank you, Senators, for your invitation to speak with you today. I
    am a professor of tax law at Indiana University Bloomington's Maurer
    School of Law. I previously served in President Obama's Treasury
    Department, in the Office of Tax Policy. I have advised on and helped
    draft a variety of tax reform efforts at the Federal and State and
    local levels. I have published over seventy articles and academic
    essays on topics related to tax reform.\1\
    ---------------------------------------------------------------------------
        \1\ Most of my published and forthcoming scholarship can be found
    on SSRN, here: https://papers.ssrn.com/sol3/cf_dev/
    AbsByAuth.cfm?per_id=364730. My academic bio and CV can be found here:
    https://www.law.indiana.edu/about/people/bio.php?name=gamage-david.

        I am primarily devoting this written testimony to discussing the
    Ultra-Millionaire Tax Act of 2021 and the broader case for levying a
    Federal tax on extreme wealth holdings. As is well known, both wealth
    and income inequality have exploded over recent decades, with the gains
    from economic growth disproportionately going to the richest
    Americans.\2\ Meanwhile, as I will explain, our tax system is broken as
    applied to the ultra-wealthy, with many harmful consequences. A new
    Federal tax on extreme wealth holdings, like the Ultra-Millionaire Tax
    Act, should be a central component of reforms for fixing this
    disgraceful state of affairs.
    ---------------------------------------------------------------------------
        \2\ Chuck Marr, Samantha Jacoby, Sam Washington, and George Fenton,
    Asking Wealthiest Households to Pay Fairer Amount in Tax Would Help
    Fund a More Equitable Recovery 2-6, Center on Budget and Policy
    Priorities Report, April 22, 2021, available at https://www.cbpp.org/
    research/federal-tax/asking-wealthiest-households-to-pay-fairer-amount-
    in-tax-would-help-fund-a.

        Secondarily, I will more briefly write in support of both the Real
    Corporate Profits Tax Act of 2021 and proposals for improving IRS
    funding and for making it and other tax-enforcement funding less
    dependent on the annual appropriations process. All of these proposals
    go together as reforms for raising revenues needed for public
    investment while helping to fix some of the ways in which our tax
    system is currently broken and easily exploited by tax gaming by ultra-
    wealthy individuals and families and by large corporations. For the
    reasons I will explain, I strongly support all of these reform
    proposals.
          i. the case for a new federal tax on extreme wealth holdings
    A.  The U.S. Tax System Is Broken as Applied to the Ultra-Wealthy, With
            Many Harmful Consequences \3\
    ---------------------------------------------------------------------------
        \3\ This Section presents a summary of the analysis in Parts I and
    II of my forthcoming article, co-authored with John R. Brooks, Tax Now
    or Tax Never: Political Optionality and the Case for Current-Assessment
    Tax Reform, 100 N.C. L. Rev. (forthcoming), available at https://
    ssrn.com/abstract=3801164. Further support and elaboration of the
    arguments and analysis in this Section can be found in that Article.

        The U.S. tax system does a very poor job of taxing the ultra-
    wealthy.\4\ The ordinary rich--say, well-compensated doctors--typically
    pay quite a lot of income tax, doing their part to support the Nation.
    By contrast, most billionaires and mega-
    millionaires pay tax on only a small portion of their true economic
    gains. Indeed, many working-class individuals, such as nurses, teachers
    or firefighters, pay tax on a much larger share of their economic gains
    than do most of the wealthiest Americans.
    ---------------------------------------------------------------------------
        \4\ I use both the term ``ultra-wealthy'' and the phrase
    ``billionaires and mega-millionaires'' in this testimony to refer to
    households in the top 0.1 percent (more or less) of wealth in the
    United States, a group that is estimated to consist of approximately
    175,000 households who collectively own between 15 percent and 20
    percent of national wealth. Id. at 11-13.

        So how do billionaires and mega-millionaires escape paying their
    fair share? The answer is that our income tax generally does not reach
    large fortunes unless property is sold, or money is paid out in
    salaries or in stock dividends. Thus, by borrowing against appreciated
    assets and playing other financial games, the very rich can avoid
    ---------------------------------------------------------------------------
    taxation and still fund their lavish lifestyles.

        Most Americans predominantly earn wage and salary income, which the
    U.S. income tax measures reasonably well.\5\ By contrast, the ultra-
    wealthy predominantly earn income that arises from the returns to
    owning wealth (or that can be made to appear as though it arises from
    the returns to owning wealth), which the U.S. income tax measures
    dreadfully.\6\
    ---------------------------------------------------------------------------
        \5\ Lily Batchelder and David Kamin, Taxing the Rich: Issues and
    Options, September 11, 2019, at 4, available at https://ssrn.com/
    abstract=3452274.
        \6\ Id. at 4-8.

        This deep failure of the U.S. tax system has profound implications
    beyond just the resulting windfall for the ultra-wealthy. To begin
    with, this failure undermines the fairness of the entire tax system,
    especially by creating obstacles for members of historically
    disadvantaged groups to catch up to those who were born into greater
    privilege. As Palma Strand and Nicholas Mirkay--among many others \7\--
    have documented, the Federal income tax operates ``directly to increase
    wealth inequality, deepening preexisting historically based racial
    wealth disparities.''\8\ Specifically, by heavily taxing wage and
    salary incomes, and only lightly taxing the returns to owning wealth,
    the tax system obstructs historically disadvantaged groups from
    building wealth and economic power, while protecting the comparative
    economic power of historically advantaged groups that started
    accumulating financial wealth and related social capital during more
    illiberal periods.\9\
    ---------------------------------------------------------------------------
        \7\ E.g., Jeremy Bearer-Friend, Should the IRS Know Your Race? The
    Challenge of Colorblind Tax Data, 73 Tax Law Review 1, 39-41 (2019)
    (listing studies finding that tax policies have disparate racial
    outcomes); Dorothy A. Brown, Shades of the American Dream, 87 Wash. U.
    L. Rev. 329 (2009).
        \8\ Palma Joy Strand and Nicholas A. Mirkay, Racialized Tax
    Inequity: Wealth, Racism, and the U.S. System of Taxation, 15 NW. J. L.
    and Soc. Pol'y. 265, 266 (2020).
        \9\ Id. at 279.

        Beyond that, the failure of the U.S. income tax to meaningfully tax
    the ultra-wealthy creates massive inefficiencies and economic waste.
    The tax gaming strategies that ultra-wealthy taxpayers use to escape
    income taxation come at a cost, and these costs generally increase as
    the strategies get more complicated and aggressive to cover more
    economic income.\10\ Examples of these costs include reduced liquidity,
    the costs of taxpayer borrowing, transaction costs of tax-loss
    harvesting, deviating from taxpayers' risk-reduction and
    diversification preferences, the excessive complexity of more
    sophisticated forms of tax gaming, and the cost to businesses from
    using inefficient capital structures in order to generate tax savings.
    As C. Eugene Steuerle explained in his seminal book on the topic,
    ``insofar as capital income is concerned, the individual income tax is
    primarily a discretionary tax.''\11\ As a result, at least with respect
    to the investment income of the ultra-wealthy, the income tax is
    effectively just a tax on the limitations to tax gaming that deter
    wealthy taxpayers from gaming away all of their tax liabilities, so
    that ``the discretionary income tax on capital income is a tax on
    liquidity, risk reduction, and diversification rather than a tax on
    income.''\12\
    ---------------------------------------------------------------------------
        \10\ David Gamage, The Case for Taxing (All of) Labor Income,
    Consumption, Capital Income, and Wealth, 68 Tax L. Rev. 355, 375-82
    (2014), available at https://papers.ssrn.com/sol3/
    papers.cfm?abstract_id=2465522.
        \11\ C. Eugene Steuerle, Taxes, Loans, and Inflation: How the
    Nation's Wealth Becomes Misallocated 18 (Brookings Institution 1985).
        \12\ Id. at 19. My co-author John Brooks and I would add lack of
    complexity to Steuerle's list, as we view the excessive complexity of
    tax-motivated investment strategies as perhaps the largest form of
    economic waste, because this complexity interferes with designing
    investment and business strategies so as to maximize economic
    productivity and related pre-tax returns. Gamage and Brooks, supra note
    3, at 29.

        A key takeaway here is that tax gaming by the ultra-wealthy
    typically involves real economic costs and so the flaws in the income
    tax harm the overall U.S. economy. While incurring these costs may be
    rational for individual taxpayers, it is exceedingly wasteful to an
    economy as a whole.\13\ In other words, the productive potential of the
    overall economy is diminished because scarce resources are devoted to
    tax gaming at the expense of productive investment and business
    activity.
    ---------------------------------------------------------------------------
        \13\ Gamage, supra note 10, at 375-82.

        Furthermore, the manner in which the personal income tax is broken
    and readily exploited by the ultra-wealthy's tax gaming undermines the
    administrability of the entire tax system.\14\ This is because the ways
    in which the income tax fails with respect to the ultra-wealthy harm
    the integrity and functioning of the overall tax system, generating
    excessive and unnecessary legal complexity and uncertainty to the
    detriment of a great many small businesses and ordinary Americans.
    ---------------------------------------------------------------------------
        \14\ Gamage and Brooks, supra note 3, at 29-31.

        Finally, on top of all that, tax gaming by the ultra-wealthy
    deprives the government of much-needed revenues that could be used to
    fund public investment,\15\ undermines the public's tax morale and
    compliance norms,\16\ and likely also harms the public's faith in our
    overall economic and political system.\17\ For these and other related
    reasons,\18\ it is crucial that the tax system be reformed so that the
    ultra-wealthy cannot so easily escape paying their fair share. The
    revenues at stake are large and needed. But the many real social and
    economic harms that result from the ways in which our tax system is
    currently broken as applied to the ultra-wealthy are even stronger
    reasons for why we urgently need reform.
    ---------------------------------------------------------------------------
        \15\ Id. at 20-21.
        \16\ Id. at 25-26.
        \17\ Id. at 26.
        \18\ Id. at 19-31.
    ---------------------------------------------------------------------------
    B.  Limiting the Capital Gains Rate Preference and Stepped-Up Basis on
            Death Are Only Partial Fixes for the Deep Flaws in the Income
            Tax
        President Biden is reportedly proposing to raise the top capital
    gains tax rate so as to end the capital gains rate preference for
    taxpayers with income over $1 million and also limiting the special-
    preference provision that steps-up basis upon death.\19\ If enacted,
    these reforms would be important partial steps toward fixing the deep
    flaws in the U.S. tax system and alleviating the harmful consequences
    of those deep flaws.
    ---------------------------------------------------------------------------
        \19\ Jim Tankersley, Biden Will Seek Tax Increase on Rich to Fund
    Child Care and Education, NY Times, April 22, 2021, available at
    https://www.nytimes.com/2021/04/22/business/economy/biden-taxes.html.

        Unfortunately, as my co-author John R. Brooks and I explain in a
    forthcoming article, both history and theory imply that these reforms
    are unlikely to be fully successful or politically sustainable on their
    own.\20\ This is because the structure of the U.S. political system
    creates pressures that tend to undermine reforms of this sort over
    time, making such reforms politically fragile, unless the reforms are
    accompanied by current-assessment reforms like an annual wealth tax.
    ---------------------------------------------------------------------------
        \20\ This Section summarizes analysis from Part III of my
    forthcoming article with John R. Brooks, supra note 3.

        These pressures include that Federal budget rules make it so that
    much of the tax revenue that might theoretically be raised by reforms
    like the ones President Biden is proposing--if those reforms were
    sustained--will show up outside of the budget scoring window. This then
    makes it much more politically difficult to legislatively bolster and
    strengthen such reforms, while making it much easier politically for a
    future Congress to legislatively weaken or repeal such reforms. Indeed,
    absent an accompanying current-assessment reform, a future Congress
    might well find that proposals for undoing Biden's reforms by partially
    reenacting the capital gains rate preference would be scored as raising
    tax revenue within the relevant budget window, despite that the true
    ---------------------------------------------------------------------------
    effects would be large revenue losses outside of the budget window.

        Moreover, because President Biden's reforms would mostly retain the
    realization- based nature of the income tax, ultra-wealthy taxpayers
    would mostly continue to enjoy the choice of when to realize their tax
    liabilities--that is, when to exercise the option value of deciding in
    which future political regime a deferred tax liability would be
    realized, assessed, and paid. This creates strong incentives for ultra-
    wealthy taxpayers both to wait for (favorable to them) future legal or
    political changes and to lobby and exert other political pressures in
    the hopes of creating such future changes.

        For these and related reasons,\21\ President Biden's proposed
    reforms of limiting the capital gains tax rate preference and limiting
    the special provision offering step-up of basis upon death should be
    thought of as important steps toward fixing the personal tax system
    with respect to the ultra-wealthy, but not as complete solutions. A
    complete solution requires a current-assessment reform like an annual
    wealth tax, to accompany reforms like those proposed by President
    Biden.\22\
    ---------------------------------------------------------------------------
        \21\ Further support for and elaboration of everything in this
    Section can be found in my forthcoming Article with John R. Brooks, id.
        \22\ In my view, there are two primary models for a complete
    solution to fixing the personal tax system with respect to the ultra-
    wealthy. The first primary model would be to transform the personal
    income tax into a form of progressive spending tax along with also
    enacting an annual wealth tax. The annual wealth tax would play a
    critical role in this model, because, among other reasons, absent the
    annual wealth tax, transforming the personal income tax into a
    progressive spending tax would turbocharge deferral and thereby almost
    guarantee that the reforms would prove politically unsustainable when
    faced by gaming by the ultra-wealthy. See Gamage and Brooks, supra note
    3, at 48-51. The second primary model would be to transform the
    personal income tax into an accrual income tax (rather than a cash-
    realization based tax) such as through a mark-to-market reform.
    Although this approach could be viable without an accompanying annual
    wealth tax, implementing an annual wealth tax to accompany the accrual
    income tax reforms could help bolster the weaknesses in the accrual
    income tax reforms and also help ensure that taxpayers' prior wealth
    accumulations were sufficiently included in the overall personal tax
    base. In an unfinished draft article, I will explain how an annual
    wealth tax can be integrated with accrual income tax reforms (like a
    mark-to-market reform) so as to bolster the accrual income tax
    provisions and better limit the overall costs from tax gaming. Notably,
    if desired, an allowance-exemption for new investments can be built
    into the annual wealth tax, so as to partially exempt new investments
    from the annual wealth tax in order to prevent possible over-taxation
    of new investments by the combined annual wealth tax and accrual income
    tax regimes.
    ---------------------------------------------------------------------------
    C.  An Ideal Tax System Should Tax Both Income (or Consumption) and
            Wealth
        There are two major groups of philosophical theories about what a
    democratic nation should ideally tax. The first group of theories looks
    to taxpayers' ability to pay. The second group of theories looks to the
    benefits that taxpayers receive from the State. Both groups of theories
    strongly support taxing both income (or consumption) and wealth, at
    least as an ideal matter.

        Beginning with theories based on ability to pay, consider three
    sample taxpayers: imagine that in a given year that Taxpayer A has $50
    million of wealth and $10 million of income, whereas Taxpayer B has $50
    million of wealth and $1 million of income, and Taxpayer C has $20
    million of wealth and $10 million of income.

        Can there be any doubt that Taxpayer A has greater ability to pay
    as compared to either Taxpayer B or Taxpayer C? The reason that
    Taxpayer A has greater ability to pay is that both wealth and income
    are sources of economic power and well-being. All else being equal,
    having more of either wealth or income makes someone better off in the
    sense of ability to pay.

        Over an infinite time horizon, wealth and income are highly
    related, and it is often said that income equals consumption plus
    changes in wealth. But neither humans nor tax regimes survive unchanged
    over infinite time horizons. As John Maynard Keynes famously quipped,
    ``In the long run we are all dead.'' Similarly, in the long run, tax
    rates and other tax rules will inevitably be changed. Thus, when
    considering ability to pay, the short run matters. And, in the short
    run, wealth and income provide distinct information on taxpayers'
    ability to pay.

        Moving on to theories based on benefits that taxpayers receive from
    the State, among the most important of such benefits are the
    protections the State provides to both accumulated wealth and to newly
    earned gains in the forms of military and police protections and
    protections from the legal system. Absent such protections provided by
    the State, it would be difficult and dangerous to accumulate and
    maintain billions or mega-millions in wealth. It would also be
    difficult to earn new millions or to increase the worth of one's prior
    wealth holdings.

        Much more could be said about the philosophies of what a democratic
    government should ideally tax. But this short discussion should suffice
    to explain why the major philosophical theories support that an ideal
    tax system should tax both wealth and income (or possibly both wealth
    and consumption instead).

        Indeed, we can see an example of these justifications in the fee
    structures charged by private equity financiers. The typical fee
    structure charges both a 2-percent management fee on the total wealth
    invested plus an additional 20-percent fee on the profits earned from
    managed investments.\23\ There is good reason for this dual fee
    structure, on both the wealth invested and the income earned from that
    invested wealth. Private equity fund managers provide services both in
    the form of protecting and sustaining prior wealth accumulations and in
    the form of helping to grow new income from that wealth. The same is
    true of the services and benefits that the State provides to
    taxpayers--these services both help protect prior wealth accumulations
    and help with the earning of new income.
    ---------------------------------------------------------------------------
        \23\ Victor Fleischer, Two and Twenty: Taxing Partnership Profits
    in Private Equity Funds, 83 NYU L. Rev. 1, 1 (2008).

        Overall then, when comparing two taxpayers who both have the same
    annual income, if one has much greater wealth, then--all else being
    equal--the taxpayer with much greater wealth should pay more tax.
    D.  A Wealth Tax Is Definitely Constitutional
        Despite misleading statements sometimes made to the contrary, the
    Constitution clearly and unambiguously grants Congress the power to
    levy an annual wealth tax.\24\ For sure, there are constitutional
    uncertainties surrounding wealth tax proposals, and there is no
    guarantee that the Supreme Court would uphold any particular design for
    an annual wealth tax. Nevertheless, it is important to understand that
    Congress clearly has the power to levy an annual wealth tax, and that
    the constitutional uncertainties are only in regard to how such a tax
    must be designed.
    ---------------------------------------------------------------------------
        \24\ See, e.g., John R. Brooks and David Gamage, Why a Wealth Tax
    Is Definitely Constitutional, available at https://ssrn.com/
    abstract=3489997; United States v. Ptasynski, 462 U.S. 74, 79 (1983)
    (explaining that ``Congress's power to tax is virtually without
    limitation'' but that there is ``one specific limit on Congress's power
    to impose indirect taxes'' and that limit is the uniformity
    requirement).

        The primary question is whether the Constitution and Supreme Court
    precedent authorize a uniform wealth tax, or whether instead an annual
    wealth tax would be considered to be a form of direct tax that must be
    apportioned amongst the States by population. There are mixed Supreme
    Court precedents on this question. On the one hand, the holdings of two
    notable Supreme Court cases--the 1895 case of Pollock v. Farmers' Loan
    and Trust \25\ and the 1920 case of Eisner v. Macomber \26\--suggest
    that an annual wealth tax might be considered to be a direct tax that
    must be apportioned. However, both of these two Supreme Court cases
    have been at least partially overturned by subsequent Supreme Court
    decisions.\27\ Moreover, there is a long line of Supreme Court
    precedents supporting that an annual tax on extreme wealth holdings
    like the proposed Ultra-Millionaire Tax (in contrast to a tax based
    solely on the ownership of property itself like local government
    property taxes) should be considered a form of excise tax (as in the
    Supreme court decisions upholding the corporate income tax and estate
    and gift tax, among others), that would not need to be apportioned.\28\
    All sources considered, the most faithful interpretation of the overall
    body of Supreme Court precedents and of constitutional structure and
    history supports that the Supreme Court should uphold a uniform tax on
    extreme wealth holdings rather than requiring that it be
    apportioned.\29\
    ---------------------------------------------------------------------------
        \25\ 157 U.S. 429 (1895), affirmed on rehearing, 158 U.S. 601
    (1895).
        \26\ 252 U.S. 189 (1920).
        \27\ E.g., Helvering v. Bruun, 309 U.S. 461 (1940) (substantially
    limiting the holding of Eisner v. Macomber); Knowlton v. Moore, 178
    U.S. 41 (1900) (substantially limiting the holding of Pollock v.
    Farmers' Loan and Trust).
        \28\ E.g., Flint vs. Stone Tracy Co., 220 U.S. 107 (1911); Patton
    v. Brady, 184 U.S. 608 (1902); Knowlton v. Moore, 178 U.S. 41 (1900);
    Nicol v. Ames, 173 U.S. 509 (1899).
        \29\ Ari D. Glogower, David Gamage, and Kitty Richards, Why A
    Federal Wealth Tax Is Constitutional, Roosevelt Institute Issue Brief
    (2021), available at https://ssrn.com/abstract=3784560.

        Of course, the Supreme Court could decide otherwise, such as by
    reviving Pollock v. Farmers' Loan and Trust or Eisner v. Macomber to
    require that a tax on extreme wealth holdings be apportioned amongst
    the States by population. But all this would mean is that the wealth
    tax would need to be so apportioned. Congress passed five different
    apportioned Direct Tax Acts in the late 1700s and early 1800s, each
    levied on specific forms of wealth based solely on their ownership, so
    that these partial wealth taxes were considered to be direct taxes. To
    my knowledge, no one has ever disputed that these early Direct Tax Acts
    were clearly and unambiguously constitutional. Thus, these early Direct
    Tax Acts provide guidance and precedent for how we could design a
    ---------------------------------------------------------------------------
    modern apportioned tax on extreme wealth holdings.

        There are some complexities involved in designing a modern
    apportioned tax on extreme wealth holdings, and I cannot fully explain
    all of the relevant detail here. My co-author John R. Brooks and I are
    in the process of developing comprehensive recommendations and analysis
    in an unfinished draft article.\30\ A partial summary of our
    recommendations would be to follow the approach used by the 1798 Direct
    Tax Act which accomplished apportionment by combining uniform taxes on
    buildings and enslaved persons \31\ with a residual tax on land value
    within each State, with that residual tax structured to make the
    apportionment formulas work.\32\ We would recommend modifying this
    approach somewhat by accompanying a uniform tax on extreme wealth
    holdings (like the proposed Ultra-Millionaire Tax) with a residual tax
    on all real property within each State that is valued for purposes of
    local government real property taxes, and then adding in a substantial
    circuit-breaker so that--for example--individuals and families with
    annual household income of less than, say, four hundred thousand
    dollars would be exempt from the residual tax. It is also worth
    considering giving State governments the option to pay the residual tax
    via requisitions instead of having the tax levied on real property
    within the State, as was done in the Direct Tax Acts of 1813, 1815, and
    1816.\33\
    ---------------------------------------------------------------------------
        \30\ John R. Brooks and David Gamage, The Indirect Tax Canon,
    Apportionment, and Drafting a Constitutional Wealth Tax (unfinished
    draft manuscript available upon request).
        \31\ It is inescapable that the apportionment clause was largely
    (if not entirely) designed to protect the horrendous institution of
    slavery from what slaveholders would have considered to be excess
    taxation, and so analyzing the historical precedents for designing an
    apportioned direct tax requires--as disturbing as this is--analyzing
    how ``property'' in the form of enslaved persons was then taxed.
        \32\ Act of July 14 Sec. 2, 1 Stat. at 598.
        \33\ Charles F. Dunbar, The Direct Tax of 1861, 3 Q.J. Econ. 436,
    443-44 (1889).

        If the additional tax revenues raised by this residual tax or
    requisitions were used to fund general Federal Government expenditures,
    then this structure would arguably be inequitable, because larger
    revenues would be raised from States with less wealthy populations and
    smaller revenues from States with more wealthy populations. But such
    inequities are easily remedied by spending the revenues raised by the
    residual tax or requisitions primarily within States with less wealthy
    populations. One way of accomplishing this would be to use the extra
    residual tax and requisition revenues to fund grants to State
    legislatures, with sufficiently larger grants given to States with less
    wealthy populations so as to resolve any inequities, similar to what is
    done by other Federal nations like Canada and Australia through their
    fiscal equalization regimes. Another approach would be to use the
    residual tax revenues to fund a spending program that would primarily
    benefit States with less wealthy populations--this is in a sense how
    the Medicaid program currently works. Perhaps the easiest solution
    would be to fund new income tax credits. Such new credits could be
    designed so that most Americans with, say, annual income of less than
    $400,000 would receive credits larger than their liabilities under the
    residual tax or requisitions, and with Americans owning real property
    and having higher annual incomes then paying for the difference. In
    that manner, the overall structure--of a residual tax or requisitions
    funding tax credits--could be made progressive while resolving any
    ---------------------------------------------------------------------------
    potential interstate inequities.

        As this short discussion suggests, there are some complexities
    involved in designing an apportioned wealth tax and choices must be
    made about how to spend revenues so as to resolve potential inequities.
    But these challenges are all surmountable. Congress could design the
    apportionment regime as a fallback clause to be added to a uniform tax
    on extreme wealth so that the fallback apportionment regime would only
    go into effect in the event of an adverse Supreme Court ruling.
    Alternatively, Congress might opt to wait and see what happens, and
    only legislate an apportionment regime later if it becomes needed in
    the event of an adverse Supreme Court ruling. There are pros and cons
    to either approach. Either way, any revenues that might otherwise be
    lost from a potentially adverse Supreme Court ruling could be made up
    for either by making the fallback apportioned wealth tax retroactive to
    the date of the original legislation or by levying sufficiently higher
    wealth tax rates for the initial years following the apportioned wealth
    tax coming into effect.

        Again, the key takeaway is that Congress clearly and unambiguously
    has the power to levy an annual wealth tax. The constitutional
    uncertainties about how such a tax must be designed create some
    complexities and challenges, but these challenges are fully and readily
    surmountable. Properly designed, a Federal wealth tax is definitely
    constitutional.
    E.  The Proposed Ultra-Millionaire Tax Would Be Both Administrable and
            Superior at Valuation as Compared to the Existing Income Tax
        Valuation and measurement are key challenges in designing any form
    of taxation, especially with respect to ultra-wealthy individuals and
    families. The existing income tax does a reasonably decent job at
    measuring and valuing wages and salaries paid in money--the primary
    form of income earned by most Americans. But the existing income tax
    does an abysmal job at measuring and valuing the true economic gains of
    most ultra-wealthy taxpayers.

        Consider that the best evidence from the economics literature
    implies that the existing income tax only ever reaches less than a
    quarter of the true investment income of most ultra-wealthy
    taxpayers.\34\ This is abysmal indeed.
    ---------------------------------------------------------------------------
        \34\ Jenny Bourne et al., More Than They REALIZE: The Income of the
    Wealthy, 71 Nat'l Tax J. 335. For discussion of this evidence, see
    Gamage and Brooks, supra note 3, at 14-16.

        For comparison, although the existing estate and gift tax has been
    much derided for how easy it is to game around and avoid, the best
    evidence from the economics literature implies that the existing estate
    and gift tax reaches about half of the true value of the wealth
    transferred by the estates of ultra-wealthy taxpayers.\35\ Over
    sufficiently long time periods, investment income and wealth become
    similar, and so while these estimates are not directly comparable, the
    measurements are comparable enough to conclude that the existing estate
    and gift tax probably does a better job of valuation and measurement
    with respect to ultra-wealthy taxpayers as compared to the existing
    income tax.
    ---------------------------------------------------------------------------
        \35\ Brian Raub, Barry Johnson, and Joseph Newcomb, A Comparison of
    Wealth Estimates for America's Wealthiest Decedents Using Tax Data and
    Data From the Forbes 400, National Tax Association Proceedings, 103rd
    Annual Conference on Taxation at 128-135 (2010).

        The proposed Ultra-Millionaire Tax would almost certainly be much
    better at valuation and measurement as compared to either the existing
    income tax or estate and gift tax (with respect to ultra-wealthy
    taxpayers). To begin with, many of the most important forms of tax
    avoidance games for escaping the estate and gift tax involve making
    transfers through trusts, and most of these sorts of games would be
    ineffective for escaping an annual wealth tax like the proposed Ultra-
    Millionaire Tax.\36\ Furthermore, the proposed Ultra-Millionaire Tax
    includes anti-abuse rules for limiting many of the valuation games most
    commonly used to avoid the estate and gift tax.\37\ Specifically, in
    accordance with the recommendations that I and others have made in
    prior writing,\38\ the proposed Ultra-Millionaire Tax authorizes the
    Treasury Department to require formulaic valuations based on proxy
    measurements, prospective measurements, or retrospective measurements,
    as best balances the goals of valuation accuracy, preventing gaming,
    and ensuring administrative and compliance ease for different
    categories of assets.\39\ Working with law professors Brian Galle and
    Darien Shanske and economist Emmanuel Saez, I have been developing a
    model set of valuation and enforcement rules for a wealth tax
    reform.\40\ The proposed Ultra-Millionaire Tax authorizes the Treasury
    Department to review and adopt our model rules or perhaps to develop
    superior alternatives.
    ---------------------------------------------------------------------------
        \36\ Jason S. Oh and Eric M. Zolt, Wealth Tax Design: Lessons From
    Estate Tax Avoidance, UCLA School of Law, Law-Econ Research Paper No.
    20-01, at 1, available at https://ssrn.com/abstract=3526515 (``Second,
    other structures . . . work well to minimize estate taxes but are of
    limited use for structuring around an annual wealth tax. Projecting
    wealth tax revenue using estate tax revenue without considering the
    revenue consequences of these strategies will understate wealth tax
    revenue.'').
        \37\ See Sec. 2902(d), authorizing the Treasury Department to
    establish valuation rules that may utilize ``retrospective and
    prospective formulaic valuation methods'' and which may ``require the
    use of formulaic valuation approaches for designated assets, including
    formulaic approaches based on proxies for determining presumptive
    valuations, formulaic approaches based on prospective adjustments from
    purchase prices or other prior events, or formulaic approaches based on
    retrospectively adding deferral charges based on eventual sale prices
    or other specified later events indicative of valuation'' and which may
    prohibit ``the use of valuation discounts.''.
        \38\ E.g., David Gamage, Ari D. Glogower, and Kitty Richards, How
    to Measure and Value Wealth for a Federal Wealth Tax Reform, Roosevelt
    Institute Issue Brief (2021), available at: https://ssrn.com/
    abstract=3817773; David Gamage, Five Key Research Findings on Wealth
    Taxation for the Super Rich (2019), available at: https://ssrn.com/
    abstract=3427827.
        \39\ Sec. 2902(d).
        \40\ An explanation of a work-in-progress draft of these rules, as
    tailored for a wealth tax reform proposal designed for the State of
    California, can be found here: https://eml.berkeley.edu/saez/galle-
    gamage-saez-shanskeCAwealthtaxMarch21.pdf.

        Ultimately, no form of taxation is completely immune to tax gaming
    responses, especially by ultra-wealthy taxpayers. But a proposal for
    tax reform should not be compared to some impossibly perfect ideal, but
    rather to plausible real-world alternatives. In that light, the
    proposed Ultra-Millionaire Tax is almost guaranteed to do a much better
    job at valuation and measurement with respect to ultra-wealthy
    taxpayers as compared to either the existing income tax or estate and
    gift tax. Moreover, because many of the tax gaming responses to a
    wealth tax would be distinct from the responses to an income tax, the
    overall costs of tax gaming can be minimized by levying both a wealth
    tax and an income tax (or, alternatively, both a wealth tax and a
    progressive consumption tax).\41\
    ---------------------------------------------------------------------------
        \41\ In addition to the more general reasons why levying two tax
    instruments with distinct gaming responses (such as both a wealth tax
    and an income tax) reduces the overall costs from tax gaming--as
    explained in Gamage, supra note 10--it is also the case that generating
    annual information on taxpayers' wealth assists in the enforcement of
    both an income tax and an estate and gift tax. See Jean-Blaise Eckert
    and Lukas Aebi, Wealth Taxation in Switzerland, Wealth Tax Commission
    Background Paper No. 133, at 12 (2020) (``Tax authorities also
    appreciate the fact that the wealth tax requires individuals to
    annually report their net wealth. The annual fluctuations in net
    wealth, together with statistical data on annual spending of
    individuals and households, allow the tax authorities the check the
    plausibility of the taxpayer's declared income. Thus, one may argue
    that the wealth tax also has a control function for income tax
    purposes.'').

        All of this can be achieved in a reasonably administrable manner.
    Our proposed model rules are based in part on the best features of the
    Swiss wealth tax, which has been a pillar of the Swiss tax system for
    well over 100 years \42\ and which is generally viewed as being both
    reasonably administrable and ``difficult to avoid with standard tax
    planning techniques.''\43\ For instance, our proposed model rules
    generally recommend using market-trading prices for valuing publicly
    traded assets, for which these prices are easily obtainable. For many
    other assets, our proposed model rules recommend using formulaic
    valuations based on readily available information--for example, we
    recommend that most privately held businesses be valued based on
    accounting information that is already being reported for Federal tax
    purposes. We recommend only relying on appraisals for the more limited
    sets of assets for which it is neither possible to calculate valuations
    based on market-trading prices or reasonable formulaic valuations. Even
    then, for assets for which we recommend that appraisals be required, we
    recommend only requiring an appraisal once every 10 years unless the
    taxpayer has engaged in a transaction that would substantially change
    the value of the asset, with the reported values from the appraisals
    then adjusted via formulas for subsequent years. Our overall proposed
    approach thus minimizes the use of appraisals and resulting
    administrative and compliance costs. We also recommend special
    allowance provisions for especially liquidity constrained taxpayers and
    for certain especially hard to value assets.
    ---------------------------------------------------------------------------
        \42\ Eckert and Aebi, id. at 3.
        \43\ Id. at 12.

        In summary, although no form of taxation is perfect, the proposed
    Ultra-Millionaire Tax is almost guaranteed to be superior at valuation
    and measurement with respect to the ultra-wealthy as compared to the
    existing income tax or estate and gift tax, and with limited
    administrative and compliance burdens.
           ii. the case for taxing ``real'' (book) corporate profits
        The U.S. corporate tax system is perhaps even more broken than the
    personal tax system. The Republicans' 2017 tax overhaul--the ``Tax Cuts
    and Jobs Act'' (TCJA)-- improved the corporate tax system in some ways
    but made it much worse in other ways.\44\ Arguably, the most profound
    change made by the TCJA was to slash the top statutory corporate income
    tax rate from 35 percent to 21 percent. Although this change has
    probably helped alleviate some of the international and financial-
    engineering pressures on the corporate tax system, it has come at a
    large cost to Federal revenues and to the progressivity of the overall
    tax system, and has opened the door to a new set of abusive tax games
    involving the use of the corporate form for tax sheltering
    purposes.\45\
    ---------------------------------------------------------------------------
        \44\ I discuss this in a prior co-authored article, David Kamin,
    David Gamage, Ari Glogower, Rebecca Kysar, Darien Shanske, et al., The
    Games They Will Play: Tax Games, Roadblocks, and Glitches Under the
    2017 Tax Legislation, 103 Minn. L. Rev. 1493 (2019), available at
    https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3089423.
        \45\ Id. at 5-16.

        The corporate tax system is in dire need of comprehensive reform.
    In my view, a comprehensive reform package should do all--or at least
    most--of the following: (a) raise the overall top corporate tax rate
    back to a level close to the top individual rate, as it was prior to
    the TCJA; (b) reform the corporate tax so that it would be partially
    destination-based, and only partially source-based, with the effective
    top rate on the source-based component then being set similar to other
    nations' source-based corporate tax rates, and with the effective top
    rate on the new border-adjusted destination-based component then making
    up the difference; (c) further incorporate carbon-based sustainable-
    development adjustments into the new border-adjusted destination-based
    component of the reformed corporate tax; (d) terminate the check-the-
    box regulations and abolish both subchapter K and section 199A, while
    reforming subchapter S, so that all large business entities would be
    taxed as corporations and without unnecessary and harmful preferences
    for remaining pass-through entities; (e) transform the corporate tax
    more fully in the direction of being a profits-only entity tax while
    equalizing the tax treatment of debt and equity financing, either
    through more comprehensive cost-of-capital allowance rules or by
    combining much tighter limitations on interest deductions with more
    generous expensing allowances; (f) more comprehensively limit the
    entity-level deductibility of high salaries and other forms of
    compensation; and (g) require partial, but only partial, book-tax
    conformity.\46\
    ---------------------------------------------------------------------------
        \46\ I am in the process of developing these recommendations in an
    unfinished work-in-progress article.

        I note this all as background, because a comprehensive reform
    package of this sort is not currently on the table. What is on the
    table are more limited sets of partial reforms. In the absence of more
    comprehensive reforms like those I note above, I will now explain why I
    support the Real Corporate Profits Tax Act of 2021 as a significant
    ---------------------------------------------------------------------------
    positive move toward improving the corporate tax system.

        In my view, the best analysis of issues related to proposals for
    book-tax conformity can be found in a 2009 article by law professor
    Daniel Shaviro.\47\ As Shaviro explains,\48\
    ---------------------------------------------------------------------------
        \47\ Daniel Shaviro, The Optimal Relationship Between Taxable
    Income and Financial Accounting Income: Analysis and a Proposal, 97
    Geo. L.J. 423 (2009).
        \48\ Id. at 425-26.

            One of the hallmarks of the ``Enron era'' in corporate
            governance was companies' increasing proficiency in reporting
            high earnings to investors and low taxable income to the
            Internal Revenue Service.' Enron has passed from the scene,
            and, perhaps, so have the worst abuses of the Enron era, but
            the book-tax gap, or excess of reported financial accounting
            income over taxable income, persists. In 2003, for example, all
            taxpaying corporations that filed U.S. returns were estimated
            to have reported pretax book income of $899 billion, as
            compared to net taxable income of only $455 billion, leaving a
            book-tax gap of $444 billion-an amount almost equal to the net
            taxable income that was reported. While the gap's exact causes,
            though much studied, remain imperfectly understood, most
            analysts agree that its persistence offers suggestive evidence
            of two ongoing, distinct evils. The first is earnings
            management, or managerial manipulation of reported financial
            accounting income in the hope of favorably influencing one's
            stock price or otherwise serving managerial goals. The second
            is tax sheltering, or reducing one's U.S. Federal income tax
            liability through various maneuvers that, even if lawful when
            engaged in, would likely be barred if they drew the
            government's close attention. Managerial incentives to engage
            in both remain strong, even if managers have grown less
    ---------------------------------------------------------------------------
            aggressive since the peak of the Enron era.

        To summarize, corporate taxpayers generally keep two sets of
    accounting books: one for reporting earnings to the Securities and
    Exchange Commission and to shareholders and other investors and
    potential investors, and another for reporting earnings to the Internal
    Revenue Service for tax purposes. Most analysts agree that corporate
    taxpayers often try to inflate reported earnings in the first set of
    books, so as to appear more profitable to shareholders and to other
    investors and potential investors. Most analysts likewise agree that
    corporate taxpayers often try to deflate reported earnings in the
    second set of books, so as to pay less tax.

        Some have proposed requiring full book-tax conformity, so that
    corporate taxpayers would be required to use the same set of books for
    both tax and financial accounting purposes. This has been the
    historical approach used by the German tax system, for example.
    However, as Shaviro persuasively explains, and as I suspect the
    Republican-invited witnesses to this hearing will emphasize, there are
    a number of problems and harmful consequences that might result from
    moving to full book-tax conformity that would probably make it not a
    good idea to do.

        But we needn't choose between all or nothing. Shaviro recommends an
    approach for accomplishing 50-percent book-tax conformity. Part of his
    reasoning--but summarized in my words--is that the potential harms and
    problems from book-tax conformity likely increase on the margin as the
    effective conformity percentage rises from 0 percent to 100 percent. By
    contrast, the advantages of book-tax conformity from reducing perverse
    incentives for inflating earnings reported to investors and for
    deflating earnings reported for tax purposes almost certainly do not
    similarly increase on the margin, and quite possibly decrease on the
    margin. It follows that there is probably an optimal percentage for
    requiring book-tax conformity of less than 100 percent but more than 0
    percent. As Shaviro elaborates,\49\
    ---------------------------------------------------------------------------
        \49\ Id. at 483-84.

            Taxable income and financial accounting income, while using a
            shared concept, serve very different purposes--determining
            current-year tax liability on the one hand, and providing a
            particular informational input to investors on the other. It is
            not surprising, therefore, that the two measures both ideally
    ---------------------------------------------------------------------------
            and actually have differences.

            Yet the persistent book-tax gap, or excess of reported
            financial accounting income over taxable income, reflects not
            these differences but corporate managers' incentives to engage
            in two socially undesirable activities: tax sheltering on
            behalf of shareholders and earnings management on their own
            behalf. Moving in the direction of requiring book-tax
            conformity would have the desirable feature of creating
            Madisonian tension between the managers' twin aims, reducing
            the incentive to play games and the scope of what they could
            accomplish.

            Absent political incentive problems, it might indeed make sense
            to adopt a one-book system or something close to it,
            notwithstanding the differences between the two measures'
            purposes. However, Congress, for the most part, currently
            confines its dark arts to the design of taxable income, while
            largely leaving accounting income to FASB, which helps make the
            Madisonian strategy less promising with respect to its
            decisions than those of corporate managers. A more directly
            involved Congress might be expected to worsen financial
            accounting income more than improve taxable income and in any
            event could not be required to keep the two measures in
            lockstep when it wanted to add opposite tax and accounting
            preferences to each.

            My suggested proposal, generally requiring a 50 percent
            adjustment of taxable income towards financial accounting
            income for large, publicly traded companies, is not a perfect
            solution to the competing considerations in this complicated
            but important area. Yet it would substantially improve current
            law if adopted, and even if just seriously considered, may help
            to advance the ongoing debate.

        The Real Corporate Profits Tax Act of 2021 is similar to Shaviro's
    proposal for partial book-tax conformity, but also different in
    important respects. To begin with, the Real Corporate Profits Tax Act
    would create a surtax of 7 percent of every dollar of book income above
    $100 million. As an addition to current law, this would effectively
    make the top corporate tax rate on large corporations 28 percent (the
    current top statutory rate of 21 percent plus the new 7-percent surtax
    rate), with an effective book-tax conformity percentage of 25 percent
    (the 7-percent surtax rate/the 28-percent combined rate). The Real
    Corporate Profits Tax Act of 2021 would thus not go as far as Shaviro's
    proposal in requiring book-tax conformity.

        The underlying mechanics are also different, as the 7-percent
    surtax would be based on complete book-tax conformity, but the book-tax
    conformity rules would only apply to that 7-percent surtax.
    Nevertheless, as with Shaviro's proposal, this should reduce the
    perverse incentives that corporate managers currently face to inflate
    earnings reported for financial accounting purposes and to deflate
    earnings reported for tax purposes, while largely avoiding the problems
    that might arise from more complete book-tax conformity. In particular,
    it seems rather unlikely to me that the mere existence of the 7-percent
    surtax rate would induce Congress to harmfully meddle with the FASB's
    decision-making as to financial accounting rules.

        Overall, there is a very strong case for moving to partial, but
    only partial, book-tax conformity for corporate taxpayers. The Real
    Corporate Profits Tax Act of 2021 is a reasonable approach for
    accomplishing this. All factors considered, the Real Corporate Profits
    Tax Act would raise substantial revenues needed to fund public
    investment, would significantly improve the progressivity of the
    overall tax system, and would reduce the perverse incentives corporate
    taxpayers currently face both to inflate earnings reported for
    financial accounting purposes and to deflate earnings reported for tax
    purposes so as to avoid tax. And it would accomplish all this while
    minimizing the potential harms that might result from more complete
    book-tax conformity. For all of these reasons, I support the Real
    Corporate Profits Tax Act of 2021 as an important and significant step
    toward a better corporate tax base.
    iii. the case for improving irs funding and making tax enforcement less
                 dependent on the annual appropriations process
        There is general agreement amongst tax experts that the IRS has
    been starved of funding over the recent decade and that this has been
    tremendously harmful to the tax system in a wide variety of ways.\50\
    The need for improving IRS funding is overwhelming.
    ---------------------------------------------------------------------------
        \50\ See, e.g., Leandra Lederman, Valuation as a Challenge for Tax
    Administration, 96 Notre Dame L. Rev. 1495, 1497 (2021) (``Audit rates
    are generally low, due to resource constraints. The Internal Revenue
    Service (IRS) in particular has seen its audit rates decline since
    2010, as Congress has starved it of funding.''); Natasha Sarin and
    Lawrence H. Summers, Shrinking the Tax Gap: Approaches and Revenue
    Potential, Tax Notes Federal, November 18, 2019.

        The most straightforward way to improve IRS funding would be to
    substantially increase the funding allotted through the annual
    appropriations process. And this should indeed be done, and promptly.
    But history suggests that this, alone, is insufficient. For instance,
    despite that the Affordable Care Act (ACA) required the IRS to take on
    substantial new obligations in order to enforce the tax provisions of
    the ACA, insufficient funding was granted to the IRS to accomplish
    these purposes, which harmed both the implementation of the ACA and the
    ---------------------------------------------------------------------------
    enforcement of the tax system more generally.

        It is thus time to consider going beyond just relying on the annual
    appropriations process to also provide dedicated multi-year mandatory
    funding streams and other more reliable funding appropriations to the
    IRS and perhaps also to other agencies charged with substantial tax
    enforcement obligations. Promising approaches for accomplishing these
    goals include: (a) appropriating funding that is essentially exempt
    from general annual limits via what is typically referred to as an
    ``allocation-
    adjustment'' mechanism; and (b) creating a multi-year ``mandatory''
    funding stream provided directly through new authorizing law.

        In addition to these proposals for improving IRS funding, I would
    also strongly recommend: (a) increasing third-party information-
    reporting requirements; and (b) extending the Federal False Claims Act
    to tax claims (but with high exemption limits so that only tax fraud by
    ultra-wealthy individuals and families and by large businesses and
    corporations would be liable for tax claims under the extended False
    Claims Act).\51\
    ---------------------------------------------------------------------------
        \51\ The provisions of New York State's False Claims Act that apply
    to tax claims are a good starting point for a model for such reforms. I
    am also in the process of developing further recommendations as part of
    the model valuation and enforcement rules that I am developing for
    wealth tax and related reforms.

        To further emphasize the need for increased and more-reliable tax-
    enforcement funding and for accompanying reforms to improve tax
    enforcement, I will close by quoting testimony recently provided to the
    House Ways and Means Committee by my colleague Leandra Lederman:\52\
    ---------------------------------------------------------------------------
        \52\ Leandra Lederman, The Importance of Enforcement to Taxpayer
    Fairness, at 6, prepared testimony for the hearing ``Taxpayer
    Fairness,'' October 13, 2020, U.S. House of Representatives, Committee
    on Ways and Means, Oversight Subcommittee, available at: https://
    waysandmeans.house.gov/sites/democrats.waysandmeans.house.gov/files/
    documents/Lederman--
    Prepared%20Testimony%20for%20the%20Hearing%20FINAL%20UPDATED%2010-12-
    20.pdf.

            Most important, enforcing the tax laws increases the fairness
            of the tax system. A progressive income tax tends to reduce
            income inequality. However, a recent study found that tax
            evasion unravels that effect. This is because higher-income
            taxpayers tend to have more opportunities for tax evasion.
            Taxpayer fairness thus calls for enforcement of the tax laws.
            It also calls for enforcement where there is more opportunity
            for noncompliance, even if these audits are more expensive to
            conduct because they cannot simply be done by correspondence,
            for example. Enforcement depends on IRS resources, so part of
    ---------------------------------------------------------------------------
            taxpayer fairness is adequately funding the IRS.

        Thank you again for inviting me to speak with you today, on these
    critical issues and reform proposals for creating opportunity through a
    fairer tax system. I look forward to answering any questions you might
    have.

                                     ______

               Questions Submitted for the Record to David Gamage
                    Questions Submitted by Hon. Bill Cassidy
                                  estate taxes
        Question. Senate Majority Leader Schumer has stated, with regard to
    the estate tax ``. . . any organic business--a farm, a small business,
    and frankly a large business--that would have to be broken up because
    of the extent of the tax should not be. A business is an ongoing
    organism. It employs sometimes 10 people and sometimes 10,000 people.
    To have to break that business up to pay any tax, to me, is
    counterproductive.''

        Do you agree that the tax code should not inhibit owners of any
    size business from being able to pass along that business, in full, to
    future generations?

        Answer. It is not difficult to include provisions in a wealth tax
    (or estate and gift tax) to mitigate liquidity issues for taxpayers
    like those who own or would inherit family businesses. That said, taken
    to the extreme, exempting privately held businesses from taxation is a
    recipe for both undermining our tax system and harming our economy
    because taxpayers would then engage in complicated and economically
    harmful tax gaming transactions to transform their wealth and income
    into forms made exempt from tax. These sorts of transactions are
    commonly done to escape both income taxation and estate and gift
    taxation today, and with many harmful consequences. For elaboration on
    this point, see David Gamage and John R. Brooks, ``Tax Now or Tax
    Never: Political Optionality and the Case for Current-Assessment Tax
    Reform, 100 North Carolina Law Review (forthcoming), available at SSRN:
    https://ssrn.com/abstract=3801164.
                                double taxation
        Question. New York Democratic Representative Jerry Nadler recently
    tweeted, ``No one should ever be taxed twice on the same income. It's
    not fair and it's not just.''

        Do you agree with this view? If not, why not?

        Answer. Without context, saying ``double taxation'' is meaningless.
    Inquiries into tax fairness and justice require examining real tax
    burdens and compared to ability to pay and benefits received from the
    State.

        With that in mind, it should be understood that most ultra-wealthy
    American taxpayers avoid paying any tax on most of their true income
    and wealth. The effective tax rates on most ultra-wealthy American
    taxpayers (as measured based on true income) are typically very low,
    often in single digits, and much lower than the effective tax rates
    paid by most ordinary middle class Americans. This is unfair, unjust,
    and creates many harmful consequences including harms to the economy
    from tax gaming. See David Gamage and John R. Brooks, ``Tax Now or Tax
    Never: Political Optionality and the Case for Current-Assessment Tax
    Reform,'' 100 North Carolina Law Review (forthcoming), available at
    SSRN: https://ssrn.com/abstract=3801164.
                         endowments accumulating wealth
        Question. Many universities have large, often multi-billion-dollar,
    endowment funds attached to them. Some of those funds have come from
    donations from people's wealth and estates. Most universities with
    endowments do not use all of their endowment funds to help students or
    researchers. Rather, they carry some of those funds forward, presumably
    to help ensure that resources can be made available for future students
    and researchers. That is, universities, with their endowment funds,
    build dynastic wealth.

        Families in the United States wish to do the same, yet some people
    deride bequest motives as some undue benefit to the ``rich'' or
    ``ultra-rich.'' People wish to accumulate wealth over time, using
    savings of some of their already-taxed income, and they choose not to
    consume all the accumulation in their lifetimes so that future members
    of their family can benefit. While that seems like altruism to me, it
    apparently seems like some sort of undeserved dynasty building to
    others.

        Since you are in the academic world, and must be aware that many
    universities hold large endowments that they build to effectively
    accumulate dynastic wealth. Should Congress increase taxation of
    university endowments and use the proceeds to spend on what some may
    view as more worthy social investments?

        Answer. Tax-exempt organizations like universities and churches are
    granted exemptions from taxation so as to advance their charitable
    purposes. These organizations are thus quite different from wealthy
    individuals and families. In my view, the tax benefits that Congress
    has provided to tax-exempt organizations (and to donors through the
    charitable contribution deduction) are probably somewhat too generous
    and should be reformed so as to prevent abusive forms of tax gaming and
    to better ensure that these tax benefits fulfill their intended
    purposes.

                                     ______

                     Prepared Statement of Scott A. Hodge,
                           President, Tax Foundation
        Thank you, Madame Chairman, Ranking Member Cassidy, members of the
    committee. I appreciate the opportunity to speak to you today about tax
    fairness, economic growth, and funding government investments.

        A famous economist once said, ``There are no solutions, there are
    only trade-offs.'' That lesson is especially true in tax policy and in
    the choices lawmakers must make in funding public investments.

        The scales of justice may have two trays, but tax policy has three
    trays that lawmakers must balance: revenues, equity, and economic
    growth. But, these factors cannot be balanced equally.

        In other words, lawmakers must decide which is most important: (1)
    how much revenues a tax will raise, (2) progressivity, or who bears the
    burden of the tax, or (3) what impact those tax changes will have on
    economic growth.

        Extensive economic modeling and empirical evidence tells us that
    there is a clear trade-off between progressivity and economic growth.
    This is especially true with so-called success taxes--taxes on capital
    and business income.

        Understanding these dynamics matters in how you fund government
    investments. Research by the Congressional Budget Office (CBO) has
    found that government investments deliver only half of the economic
    returns of private sector investments. Given the opportunity costs that
    come with government spending, lawmakers must be careful in choosing
    offsets that don't do more harm to the economy than the modest benefits
    generated by the public investments.

        Indeed, the U.S. tax system is already very progressive and
    redistributive, so making the tax code even more progressive through
    proposals such as a wealth tax, a minimum tax on book income, or an
    increase in the corporate tax rate are among the most economically
    damaging options that lawmakers could use to fund government
    investments. Inevitably, these tax policies would slow the economy and
    reduce the living standards of the very people the new government
    investments are intended to help.

        There are less economically harmful options to fund new government
    investments. These include cutting wasteful spending, expanding user
    fees, eliminating tax expenditures, and shifting the tax burden to
    consumption-based taxes.
                            is the tax system fair?
        Before we explore the trade-offs in tax policy, we should first
    address the perceived lack of fairness in the tax code.

        By any objective measure, the U.S. tax code is extremely
    progressive and very redistributive. Indeed, a study by economists at
    the Organisation for Economic Co-
    operation and Development (OECD) found that only Israel has a more
    progressive and more redistributive income tax system than the U.S.
    among the leading industrialized nations.\1\
    ---------------------------------------------------------------------------
        \1\ Peter Hoeller, Isabelle Joumard, Mauro Pisu, and Debra Bloch,
    ``Less Income Inequality and More Growth--Are They Compatible? Part 1.
    Mapping Income Inequality Across the OECD,'' OECD Economics Department
    Working Papers No. 924., 21, and Tables A1 and A2, January 10, 2012,
    https://www. doi.org/10.1787/5k9h297wxbnr-en. See also OECD, ``Growing
    Unequal? Income Distribution and Poverty in OECD Countries,'' October
    21, 2008, 104-107, https://www.doi.org/10.1787/9789264044197-en.

        As I outlined recently in testimony before the Senate Budget
    Committee,\2\ Internal Revenue Service (IRS) data indicates that the
    wealthy in America are bearing the heaviest share of the income tax
    burden than in any time in recent history.
    ---------------------------------------------------------------------------
        \2\ Scott A. Hodge, ``Testimony: Senate Budget Committee Hearing on
    the Progressivity of the U.S. Tax Code,'' March 25, 2021, https://
    www.taxfoundation.org/rich-pay-their-fair-share-of-taxes/.

        According to the latest IRS data for 2018--the year following
    enactment of the Tax Cuts and Jobs Act (TCJA)--the top 1 percent of
    taxpayers paid $616 billion in income taxes. As we can see in Figure 1,
    that amounts to 40 percent of all income taxes paid, the highest share
    since 1980, and a larger share of the tax burden than is borne by the
    bottom 90 percent of taxpayers combined (who represent about 130
    million taxpayers).\3\
    ---------------------------------------------------------------------------
        \3\ Erica York, ``Summary of the Latest Federal Income Tax Data,
    2021 Update,'' Tax Foundation, February 3, 2021, https://
    www.taxfoundation.org/federal-income-tax-data-2021/.

    [GRAPHIC] [TIFF OMITTED] T4271.001

        .epsThe tax and fiscal system are also very redistributive. A
    recent CBO study, The Distribution of Household Income, 2017,\4\
    provides an insight into the tax code's progressivity and the
    redistributive effects of Federal fiscal policy--both taxes and direct
    Federal benefits.
    ---------------------------------------------------------------------------
        \4\ Congressional Budget Office, ``The Distribution of Household
    Income, 2017,'' October 2, 2020, https://www.cbo.gov/publication/56575.

        Figure 2 shows that households in the bottom three quintiles
    collectively receive more than $1 trillion more in direct government
    benefits than they paid in all Federal taxes in 2017. In other words,
    60 percent of American households received more in benefits than they
    paid in Federal taxes.\5\
    ---------------------------------------------------------------------------
        \5\ Scott A. Hodge, ``Latest CBO Report on Incomes and Taxes Shows
    That the Federal Fiscal System Is Very Progressive,'' Tax Foundation,
    January 26, 2021, https://www.taxfoundation.org
    /biden-fiscal-policy/
    #::text=Conclusion,is%20very%20progressive%20and%20redistributive.

        By contrast, we can see that households in the top 20 percent paid
    $1.7 trillion more in taxes than they received in direct benefits, of
    ---------------------------------------------------------------------------
    which $728 billion came from households in the top 1 percent.

        These are the results that you would expect from a highly
    progressive fiscal system.

    [GRAPHIC] [TIFF OMITTED] T4271.002

        .epsMillions are off the tax rolls. Because of the expansion of
    various credits and deductions over the past 3 decades, millions of
    taxpayers pay no income taxes when they file their tax returns, and
    many receive sizable refunds despite having no tax liability.

        IRS data for 2018 indicates that more than 53 million low- and
    middle-income taxpayers paid no income taxes after benefiting from
    record amounts of tax credits, or nearly 35 percent of all filers.
    Indeed, the doubling of the Child Tax Credit (CTC) from $1,000 to
    $2,000 in the TCJA increased the number of non-payers by more than 4
    million.

        The recently enacted American Recovery Plan Act (ARPA) allows
    households with children to claim up to $3,600 for children under age 6
    or $3,000 for children 6 through 17 regardless of income. Our model
    estimates that this expansion of the CTC will increase the number of
    non-payers to 58.4 million--meaning 39 percent of all filers will have
    no income tax liability in 2021.
       corporate tax is most economically harmful, especially for workers
        Any discussion of corporate tax policies must begin with two
    economic realities. First, the corporate income tax is the most harmful
    tax for economic growth because capital is the most mobile factor in
    the economy and, thus, most sensitive to high tax rates.\6\ Second,
    academic research indicates that workers bear at least half of the
    economic burden of the corporate tax through reduced wages, especially
    for ``the low-skilled, women, and young workers.''\7\
    ---------------------------------------------------------------------------
        \6\ OECD, ``Tax Policy Reform and Economic Growth,'' OECD Tax
    Policy Studies, No. 20, November 3, 2010, https://www.doi.org/10.1787/
    9789264091085-en.
        \7\ Clemens Fuest, Andreas Peichl, and Sebastian Siegloch, ``Do
    Higher Corporate Taxes Reduce Wages? Micro Evidence From Germany,''
    American Economic Review 108:2 (February 2018): 393-418, https://
    www.doi.org/10.1257/aer.20130570.

    ---------------------------------------------------------------------------
        So, raising corporate taxes hurts workers and economic growth.

        It is also worth noting that the number of traditional C
    corporations in the U.S. has fallen to less than 1.6 million, fewest
    since 1974, and 1 million fewer than 3 decades ago. They have been
    supplanted by a dramatic rise in the number of pass-through business
    forms, such as S corporations and LLCs. As a result, there is more
    business income taxed on individual 1040 tax forms than traditional
    1120 corporate tax returns.\8\
    ---------------------------------------------------------------------------
        \8\ This shift in business forms has had a profound impact on
    perceptions of rising inequality. See Scott A. Hodge, ``The Real Lesson
    of 70 Percent Tax Rates on Entrepreneurial Income,'' Tax Foundation,
    January 29, 2019, 5, https://www.taxfoundation.org/70-tax-rate-
    entrepreneurial-income/.

        We can see from Figure 3 that corporate tax revenues have been
    highly volatile over the past 40 years, rising and falling with the
    business cycle.\9\ This volatility is despite the U.S. levying one of
    the highest corporate tax rates in the industrialized world, until the
    TCJA lowered the Federal rate from 35 percent to 21 percent.
    ---------------------------------------------------------------------------
        \9\ Garrett Watson and Alex Durante, ``Business Tax Collections
    Within Historical Norm After Accounting for Pass-through Business
    Taxes,'' April 15, 2021, https://www.taxfoundation.org/business-tax-
    collections-historical-norm/.

    [GRAPHIC] [TIFF OMITTED] T4271.003

        .epsWe can also see that income tax collections from pass-through
    businesses have been steadily rising and now largely equal the
    collections from traditional C corporations, each amounting to roughly
    ---------------------------------------------------------------------------
    1 percent of GDP.

        The U.S. tax system is most ``business dependent.'' While business
    tax collections can rise and fall due to economic conditions and
    changes in tax policies, the U.S. tax system is still one of the most
    ``business dependent'' systems anywhere according to a 2017 study by
    OECD economist Anna Milanez.

        Her report found that U.S. businesses either pay or remit more than
    93 percent of all the taxes collected by governments in the U.S.\10\ As
    Figure 4 illustrates, this includes taxes paid directly by businesses,
    such as corporate income taxes, property taxes, and excises taxes, as
    well as the taxes businesses remit on behalf of employees and
    customers, such as payroll taxes, withholding taxes, and sales taxes.
    ---------------------------------------------------------------------------
        \10\ Scott A. Hodge, ``U.S. Businesses Pay or Remit 93 Percent of
    All Taxes Collected in America,'' Tax Foundation, May 2, 2019, https://
    www.taxfoundation.org/businesses-pay-remit-93-percent-of-taxes-in-
    america/.

        Without businesses as their taxpayers and tax collectors, American
    governments would not have the resources to provide even the most basic
    ---------------------------------------------------------------------------
    services.

    [GRAPHIC] [TIFF OMITTED] T4271.004

        .epsTCJA policies reduced corporate collections but boosted capital
    investments. Many lawmakers are pointing to the fact that corporate tax
    collections have declined since the TCJA as evidence that corporations
    are not ``paying their fair share of taxes.''

        Considering the rhetoric surrounding the TCJA's corporate tax
    provisions, most people would never know that they comprised just 22
    percent of the TCJA's $1.45 trillion in total tax cuts. According to
    the Joint Committee on Taxation's scoring of the TCJA, the corporate
    tax reforms (which included the rate cut to 21 percent and the
    expensing provisions) were estimated to reduce tax revenues by about
    $654 billion over 10 years. However, half of this amount was offset by
    the TCJA's international tax provisions which were designed to raise
    over $324 billion, thus cutting the net amount of corporate tax relief
    to $328 billion over 10 years.

        If we consider the winners and losers from the various provisions,
    it is fair to say that the winners are largely the domestic firms that
    benefited from the lower corporate rate and bonus expensing, while the
    losers were the multinational firms that were targeted with higher
    taxes on their foreign income.

        Furthermore, as can be seen in Figure 5, the corporate tax relief
    was front-loaded in the first 5 years of the plan as the lower
    corporate tax rate and the bonus expensing provisions took hold to
    boost capital investment. These revenue ``losses'' were scheduled to
    turn to revenue increases after 2022 as the bonus expensing provision
    began to phase out and other planned tax increases (such as the
    amortization of Research and Development (R&D) expenses) kicked in.

    [GRAPHIC] [TIFF OMITTED] T4271.005

        .epsAlthough the political focus has been on the drop in corporate
    tax revenues post-TCJA, it appears that the combination of the bonus
    expensing provision and the lower corporate tax rate did spur an
    increase in corporate investment in things like equipment, buildings,
    and research and development. Table 1, shows that corporate fixed
    investment jumped 9.0 percent in nominal terms in 2018 following
    enactment of the TJCA, and increased an additional 4.4 percent in
    2019.\11\
    ---------------------------------------------------------------------------
        \11\ See also Alex Durante and William McBride, ``Corporate
    Investment Outweighs Federal Revenue Losses Since TCJA,'' April 22,
    2021, https://www.taxfoundation.org/tax-cuts-and-jobs-act-corporate-
    investment-revenue-loss/.

        While there are always a lot of factors that contribute to economic
    data, these results should not be surprising based on the empirical
    evidence from past expansions of bonus expensing of capital investments
    or other evidence from corporate tax changes around the world.\12\ With
    bonus expensing, it is important to remember that the only way firms
    can claim the tax benefit is to invest in new capital equipment.
    ---------------------------------------------------------------------------
        \12\ Scott A. Hodge, ``Empirical Evidence Shows Expensing Leads to
    More Investment and Higher Employment,'' May 19, 2020, https://
    www.taxfoundation.org/expensing-leads-to-more-investment-and-higher-
    employment/; and William McBride, ``What Is the Evidence on Taxes and
    Growth?'', Tax Foundation, December 18, 2012, https://
    www.taxfoundation.org/what-evidence-taxes-and-growth/.

        Moreover, unlike depreciation, which spreads the deduction for
    capital investments over time, bonus expensing is taken only in the
    year the purchase is made. So, a deduction for capital investment taken
    ---------------------------------------------------------------------------
    today does not translate into deductions taken in future years.

    [GRAPHIC] [TIFF OMITTED] T4271.006

     .epstrade-offs in tax policy: balancing revenues, equity, growth, and
                                   simplicity
        Over the past decade, Tax Foundation economists have modeled
    hundreds of changes to the tax code and found that it is nearly
    impossible to balance revenues, equity, and growth equally. Lawmakers
    will have to decide which of these factors is most important based on
    their values and priorities.

        For example, if lawmakers want to make the tax code more
    progressive and raise revenues, our model shows that they will likely
    have to give up some economic growth, because higher tax rates dampen
    economic activity, especially higher taxes on capital and labor.

        And slower growth often raises less revenues.

        On the other hand, simplifying the tax code, say by eliminating
    certain tax expenditures, not only can raise revenues, but it also can
    increase the progressivity of the code while doing less economic harm
    than raising marginal tax rates. The tax base matters just as much as
    tax rates.

        If lawmakers want to generate more economic growth, our model shows
    that they will likely have to give up some progressivity, and maybe
    some tax revenues too. Although, all things being equal, a larger
    economy will tend to generate more tax revenues than the baseline. But,
    contrary to what some advocates profess, tax cuts rarely pay for
    themselves.
                   the economic consequences of a wealth tax
        ``Tax Fairness'' and economic growth may not be compatible goals. A
    wealth tax is a good example of the trade-off between making the tax
    code more progressive and slower economic growth. Senator Elizabeth
    Warren's (D-MA) proposal would impose a 2-percent tax rate on every
    dollar of net wealth between $50 million and $1 billion, and a 6-
    percent tax rate on net wealth over $1 billion.

        Tax Foundation economists modeled the economic effects of this
    proposal using our Taxes and Growth (TAG 2.0) General Equilibrium Tax
    Model. On a conventional basis, the model determined that the proposal
    could raise nearly $2.2 trillion over 10 years and reduce the after-tax
    incomes of the top 1 percent of taxpayers by 13.5 percent.

        This new revenue and increased progressivity come with an economic
    cost. The model found that the wealth tax would reduce the size of the
    economy by 0.8 percent in the long run, shrink the capital stock by 2.0
    percent, wages by 0.7 percent, and eliminate 149,000 full-time
    equivalent jobs. It would ultimately reduce after-tax incomes across
    the board, and by 0.6 percent for the bottom quintile.\13\
    ---------------------------------------------------------------------------
        \13\ Tax Foundation, ``Options for Reforming America's Tax Code
    2.0,'' April 19, 2021, 45, https://www.taxfoundation.org/tax-reform-
    options/.

        To put this in perspective, the wealth taxes' hit to GDP is greater
    than the effect of raising the corporate tax rate to 28 percent and
    ---------------------------------------------------------------------------
    four times the economic impact of levying a $25 per-ton carbon tax.

        Interestingly, the TAG 2.0 model found that the wealth tax would
    reduce national income, measured by GNP (gross national product), by
    1.5 percent, nearly twice the impact to the broader economy as measured
    by national output, or GDP. Why is that?

        It turns out that the model determined that the wealth tax would
    force the wealthy to sell their assets to pay the tax, often at
    discount prices. Because the U.S. is an open economy and capital
    markets are global, the model indicated that foreign investors would
    purchase those assets, which is why national output (GDP) does not fall
    by as much as national income (GNP). But what this does mean is that
    the wealth tax would result in the transfer of ownership of those
    assets from wealthy Americans to wealthy foreigners.\14\
    ---------------------------------------------------------------------------
        \14\ Huaqun Li and Karl Smith, ``Analysis of Sen. Warren and Sen.
    Sanders' Wealth Tax Plans,'' Tax Foundation, January 28, 2020, https://
    www.taxfoundation.org/wealth-tax/.

        Thus, the unintended impact of a wealth tax is that it would
    transfer wealth from U.S. millionaires and billionaires to foreign
    billionaires and mean that American workers could increasingly be
    employed by foreign employers. Now owned by foreigners, these assets
    would be out of reach of the wealth tax.\15\
    ---------------------------------------------------------------------------
        \15\ Scott A. Hodge, ``Warren's Wealth Tax Enriches Foreign
    Billionaires,'' The Wall Street Journal, March 8, 2021. https://
    www.wsj.com/articles/warrens-wealth-tax-enriches-foreign-billionaires-
    11615227317.

    ---------------------------------------------------------------------------
        Equity and simplicity may also not be compatible goals.

        The various proposals to levy a minimum tax on corporate book
    income are also good examples of taxes aimed at making the system more
    progressive, but which would add considerable complexity to the code
    and ultimately retard economic growth.

        Senator Warren has proposed a ``Real Corporate Profits Tax'' to be
    levied at 7 percent of a corporation's profits as reported on financial
    statements after the first $100 million in profits.\16\ It would be
    assessed in addition to the standard corporate income tax.\17\
    ---------------------------------------------------------------------------
        \16\ For a detailed analysis, see Kyle Pomerleau, ``An Analysis of
    Senator Warren's `Real Corporate Profits Tax,' '' April 18, 2019,
    https://www.taxfoundation.org/elizabeth-warren-corporate-tax-plan/
    #::text=We%20estimate%20that%20the%20Real,the%20U.S.%20and%20world%20ec
    ono
    my.
        \17\ This section relies heavily on Garrett Watson and William
    McBride, ``Evaluating Proposals to Increase the Corporate Tax Rate and
    Levy a Minimum Tax on Corporate Book Income,'' Tax Foundation, February
    24, 2021, https://www.taxfoundation.org/biden-corporate-income-tax-
    rate/.

        President Biden proposed a minimum tax of 15 percent on the
    financial income of corporations reporting more than $100 million in
    book income. Unlike Warren's proposal, Biden's proposal would operate
    as an alternative minimum tax that would be applied to large
    corporations if their effective tax rate falls below 15 percent on
    ---------------------------------------------------------------------------
    income as reported on financial statements.

        A minimum tax on book income would introduce significant complexity
    into the corporate tax code while outsourcing key aspects of the
    corporate income tax to unelected decision-makers at the Financial
    Accounting Standards Board (FASB), who establish the standards for
    corporate book income.

        Our 2019 scoring of the Warren book tax proposal found that it
    would reduce the size of the economy by 1.9 percent, lower the capital
    stock by 3.3 percent, trim wages by 1.5 percent, and cost the economy
    over 450,000 jobs. And while those at the top of the income scale would
    see the largest declines in after-tax incomes, taxpayers in every
    income group would see their incomes fall as a result.

        Interestingly, our model estimated that the plan would raise $872
    billion over 10 years on a conventional basis, but after accounting for
    the economic impact of the tax, the model lowered that revenue estimate
    by nearly 50 percent to $476 billion. This is an indication that
    progressive taxes don't always deliver the amount of revenues that are
    predicted.

    [GRAPHIC] [TIFF OMITTED] T4271.007

        .epsThe Biden book tax proposal would not have as severe of an
    economic impact as the Warren version, nor would it raise as much
    revenue. However, I should note that we did not model the proposal
    separately from Biden's other corporate tax plans, such as raising the
    rate to 28 percent. Still, our TAG 2.0 model estimates that the Biden
    book tax proposal would raise about $203 billion over 10 years when
    combined with Biden's other tax proposals and reduce the size of the
    economy by 0.21 percent.

        The economic effect of a tax on book income depends on whether the
    tax is assessed as a minimum tax, like the Biden proposal, or if it is
    a tax applied to book income on top of the existing corporate income
    tax, like the Warren proposal. Both add complexity to the tax code, and
    both would slow economic growth.
                          trade-offs in infrastructure
        Lawmakers need to be very careful in deciding how to fund
    government investments because when the CBO reviewed the academic
    literature on the economic returns to public investments, it found that
    the economic benefits are relatively modest and about half the returns
    to private investments.\18\
    ---------------------------------------------------------------------------
        \18\ Scott A. Hodge, ``CBO Study: Benefits of Biden's $2 Trillion
    Infrastructure Plan Won't Outweigh $2 Trillion Tax Hike,'' Tax
    Foundation, March 31, 2021, https://www.taxfoundation.org/biden-
    infrastructure-spending-tax-hike/.

            CBO estimates that the average rate of return on private sector
            investment is currently about 10 percent--that is, that a $1
            increase in private investment, all else being equal, increases
            output by 10 cents over a year. As a result, the average rate
            of return on Federal investment in the illustrative policies
    ---------------------------------------------------------------------------
            examined in this report is about 5 percent.

        In other words, a $100 million Federal investment would increase
    GDP by $5 million, whereas the same private investment would boost GDP
    by $10 million.

        Various factors explain why Federal investments deliver smaller
    economic returns than private-sector investments. According to the CBO:

            That is because public investment is not driven by market
            forces; its goals include not only achieving positive economic
            returns but also improving quality of life, reducing
            inequities, and addressing other objectives. In addition, an
            increase in Federal investment spending is often partially
            offset by a decrease in investment spending by States and
            localities.\19\
    ---------------------------------------------------------------------------
        \19\ Congressional Budget Office, Budgeting for Federal Investment,
    April 2021, 22, https://www.cbo.gov/publication/57142.

        Thus, the CBO cautions, ``the macroeconomic effects of an increase
    in Federal investment would depend on how that spending is
    financed.''\20\ In particular, CBO modeling of large infrastructure
    spending financed by different tax approaches determined that
    progressive income taxes would have the most harmful impact on economic
    growth and, thus, do the most harm to future generations.\21\
    ---------------------------------------------------------------------------
        \20\ Ibid.
        \21\ Jaeger Nelson and Kerk Phillips, ``The Economic Effects of
    Financing a Large and Permanent Increase in Government Spending,''
    Congressional Budget Office, Working Paper 2021-03, March 22, 2021,
    https://www.cbo.gov/publication/57021.

        For example, it found that a progressive income tax (on all income)
    large enough to fund a 5-percent increase in spending would reduce the
    lifetime consumption of Americans born from 1980 to 1999 by 10.8
    percent and those born from 2000 to 2019 by 13.3 percent.\22\
    ---------------------------------------------------------------------------
        \22\ Ibid, Table 3, 30.

        This strongly indicates that if lawmakers want to avoid reducing
    the living standards of the next generation of Americans, they should
    avoid using progressive taxes to finance new government investments or
    programs.
             modeling options for financing infrastructure spending
        Tax Foundation economists recently modeled different funding
    mechanisms to pay for a stylized $1-trillion infrastructure plan. These
    include debt financing, increasing the corporate tax rate to either 28
    percent or 32 percent, and user fees and excise taxes.

        As Table 3 illustrates, the harmful effects of increasing the
    corporate tax rate swamp any benefits from the infrastructure spending.
    The 28-percent rate option would reduce the size of the economy by 0.5
    percent, while the 32-percent rate option would reduce the economy by a
    full 1.0 percent--clearly making the benefits of such a package not
    worth the costs.

        By contrast, our model found that the economic gains from spending
    with the debt financing option and the user fee/excise tax option
    outweighed the economic harm to GDP from the increased borrowing or the
    taxes (increased borrowing would reduce national income as measured by
    GNP).

        However, the only option that resulted in positive employment gains
    was the debt financing option. Again, this points to the trade-offs
    lawmakers must consider when financing Federal spending. Tax options
    have economic consequences, even if those effects don't outweigh the
    benefits of the Federal investments. That said, borrowing costs
    increase the overall cost of the debt financing option to over $1.2
    trillion. These costs will have to be paid back by future taxpayers.

    [GRAPHIC] [TIFF OMITTED] T4271.008

                                 .epsconclusion
        It may be a cliche, but there is no such thing as a free lunch in
    government spending or tax policy. Government investments are often
    sold to the public with the promise that they will improve lives and
    improve the economy. But, in fact, research finds that they deliver
    half of the economic benefits of private-sector investments.

        That means lawmakers must take great care in deciding how to
    finance government investments. Economic research and Tax Foundation
    modeling indicate there is a negative trade-off between progressive
    taxes on capital income--such as the wealth tax, minimum book tax on
    corporate income, and a higher corporate tax rate--and economic growth.
    These are among the most harmful taxes lawmakers could use to finance
    government investments. In every case, the economic harm caused by the
    taxes would swamp any of the benefits from the new spending, leaving
    taxpayers and the economy worse off.

                                     ______

              Questions Submitted for the Record to Scott A. Hodge
                    Questions Submitted by Hon. Bill Cassidy
                                  estate taxes
        Question. Senate Majority Leader Schumer has stated, with regard to
    the estate tax ``. . . any organic business--a farm, a small business,
    and frankly a large business--that would have to be broken up because
    of the extent of the tax should not be. A business is an ongoing
    organism. It employs sometimes 10 people and sometimes 10,000 people.
    To have to break that business up to pay any tax, to me, is
    counterproductive.''

        Do you agree that the tax code should not inhibit owners of any
    size business from being able to pass along that business, in full, to
    future generations?

        Answer. On a personal level, I find the estate tax immoral. I
    remember the sad feeling I had when I heard that Jackie Onassis's
    estate had to auction off JFK's humidor and rocking chair to pay the
    estate tax. Forcing families to sell off heirlooms to pay a tax just
    seems wrong to me.

        Similarly, most family businesses have been built up over a
    lifetime and are often asset-rich and cash-poor. To force a family to
    sell the business in order to pay the estate tax is wrong on many
    levels. In some cases, the only buyers are much larger firms, so the
    estate tax effectively punishes small business and favors larger ones.

        Using our Taxes and Growth General Equilibrium Tax Model, we found
    that repealing the estate and gift taxes would boost GDP by 0.1
    percent, increase the capital stock by 0.3 percent, and create 22,000
    jobs. Increasing GDP by 0.1 percent may not seem like much, but in a
    $20-trillion economy, that is more added GDP than the estate tax raises
    in a year. Another way of looking at this is that the estate tax costs
    more in lost GDP than it raises in taxes each year.
                                double taxation
        Question. New York Democratic Representative Jerry Nadler recently
    tweeted, ``No one should ever be taxed twice on the same income. It's
    not fair and it's not just.''

        Do you agree with this view? If not, why not?

        Answer. Yes, a basic tenant of good tax policy is that income
    should be taxed only once and as close to the source as possible.
    Unfortunately, there are many taxes that are simply second and third
    layers of tax on income that has already been taxed. The estate tax,
    discussed above, is a good example of that. In order to build wealth or
    a successful business, income is taxed first when it is earned as
    personal or business income. It is then taxed again as capital gains or
    dividends. Then taxed for a third or fourth time by the estate tax.

        In particular, capital gains and dividends are second layers of tax
    on corporate income. Corporate income is first taxed by the corporate
    income tax. These after-tax profits are taxed a second time at the
    shareholder level by the taxes on dividend and capital gains.
    Integrating the corporate and individual income taxes would remove this
    double layer of tax.
                            the walt disney company
        Question. As I mentioned at the hearing--paraphrasing Professor
    Hoopes--too often politicians use rhetoric like ``tax cheaters'' in
    order to shade political arguments. As another witness told us, to the
    extent taxpayers pay less tax in certain areas, they are doing so
    because of laws that Congress passed. Yet we are told that if a
    taxpayer follows the law, and its tax burden decreases, then somehow
    that taxpayer is a little immoral and we should go after it.

        And in fact, at the hearing, we had a live example of what appears
    to be the totally unfair and unsubstantiated disparagement of a
    taxpayer for simply following the law that Congress wrote. The Walt
    Disney Company is an iconic American company that, as far as I am
    aware, has never been accused by the IRS of being a ``tax cheat.'' And
    yet, one witness, Abigail Disney, suggested that, among other things,
    The Walt Disney Company used ``trickery'' to avoid paying taxes.

        It appears that Ms. Disney has no official connection with or
    position at The Walt Disney Company. I know that you are likewise not
    affiliated with The Walt Disney Company. Based on publicly available
    information, however, I would like to ask your thoughts on the validity
    of several of the claims made at the hearing.

        When I look at their financial reports, it certainly looks like The
    Walt Disney Company is a prolific taxpayer. In the years before passage
    of the TCJA, its effective tax rate appears to regularly be at or near
    35 percent, and in the several years after, its effective tax rate
    similarly tracks the statutory rate. Based on publicly available
    information, is there any credibility to the suggestion made at the
    hearing that The Walt Disney Company has ``gotten away without paying
    one cent in Federal income taxes''?

        Answer. Full disclosure Senator, I am a Disney shareholder. I own
    32 shares of Disney stock in a rollover IRA. So, I have a small
    personal interest in Disney's finances and profitability. That said, if
    any company has an effective tax rate either near or above the pre-2017
    statutory corporate tax rate of 35 percent, as appears to be the case
    here, then it would be incorrect to say that they are not paying their
    fair share or somehow ``getting away with it.''

        Question. Professor Hoopes testified that when a company issues
    stock options, it is ``literally just compensating [its] employees,''
    and ``that is a perfectly legitimate thing to deduct on your tax
    return.'' And yet, Ms. Disney calls that ``trickery.'' Can you clarify
    for the record the appropriate characterization of this practice?

        Answer. I would agree with Professor Hoopes that giving employees a
    stake in the company through stock options is a perfectly legitimate
    expense to deduct on a corporate tax return. It is no different than
    allowing companies to deduct salaries, wages, health-care costs,
    training, and other employee-related costs.

        Let's also not forget the symmetry in the tax code on stock
    options. While companies are allowed to deduct them, employees who take
    advantage of the options much either pay taxes on them as income or as
    capital gains. So, stock options don't go untaxed as critics imply.

        Question. When asked about so-called ``profit shifting schemes,''
    Ms. Disney accused The Walt Disney Company of saving $315 million in
    2013 alone in what was described as an effort to shift money earned in
    the U.S. to lower-taxed countries. Based on publicly available
    information, did the company in any way use an illegal ``scheme'' to
    ``artificially lower'' its tax obligation?

        Answer. This statement seems like a clear misunderstanding of how
    the U.S. corporate tax system worked before the changes made in the
    2017 Tax Cuts and Jobs Act. Prior to TCJA, companies could defer U.S.
    tax on their foreign earnings until those earnings were repatriated.
    However, when companies reinvested those foreign profits in their
    foreign operations--such as building a theme park or factory--they
    would declare those profits as ``permanently reinvested.''

        Prior to the 2017 tax changes, some companies may have reported on
    their financial statements how much U.S. tax they would have paid had
    they repatriated those profits dividends rather than permanently
    reinvest the earnings in their overseas operations. That seems to be
    the case here. Expanding the company's operations abroad should not be
    seen as a tax dodge or anything illegitimate. Indeed, it is a mistake
    to think that a company's foreign operations and profits won't be
    taxed, they will be simply be taxed by the country in which the profits
    are earned, just not a second time by the U.S.
              impact of wealth tax on ownership of domestic assets
        Question. You mentioned in your testimony that a wealth tax would
    create incentives for American assets to be owned by foreigners.

        What effects could this have on both tax revenues and the broader
    economy?

        Answer. This may be one of the least understood and unseen aspects
    of the wealth tax. The wealth tax is supposed to reduce inequality, but
    our tax model finds that it would lead to a shift in ownership of
    assets from rich Americans to rich foreigners.

        The reason for this is that the U.S. is an open economy and capital
    markets are global. So, our model determined that the wealth tax would
    force wealthy Americans to sell assets, such as stock, in order to pay
    the tax. This would often happen at a discount. But because capital
    markets are global, the model finds that foreign investors--such as
    hedge funds, sovereign wealth funds, or wealthy individuals--would
    purchase those assets. The Tax Policy Center found that as much as 40
    percent of U.S. equities are already owned by foreigners; that share
    likely would increase under a wealth tax.

        This transfer of wealth leads to an interesting phenomenon, whereby
    national output (as defined by GDP) would fall by 0.8 percent, but
    national income (as defined by GNP), would fall by 1.5 percent, nearly
    twice as much. Thus, the foreign capital would prevent the economy from
    shrinking as much as domestic saving is reduced.

        To put this impact on the economy in perspective, our model
    determined that Senator Warren's wealth tax plan would reduce the size
    of the economy by more than would occur from raising the corporate tax
    rate to 28 percent or implementing a $25 per ton carbon tax.

                                     ______

     Prepared Statement of Jeffrey L. Hoopes, Ph.D., Associate Professor,
      Kenan Flagler Business School, University of North Carolina, Chapel
                                      Hill
        Chairperson Warren, Ranking Member Cassidy, and distinguished
    members, I appreciate the opportunity to participate in this hearing
    about creating opportunity through a fairer tax system. I am an
    associate professor at the Kenan-Flagler Business School at the
    University of North Carolina. I am also the research director of the
    UNC Tax Center.\1\ My research focuses on corporate and individual
    taxation, and how taxation affects taxpayer behavior.
    ---------------------------------------------------------------------------
        \1\ The opinions expressed here are my own, and not that of any
    organization with which I am currently, or have been, affiliated, in
    any capacity (the University of North Carolina, the Kenan-Flagler
    Business School, the UNC Tax Center, the Internal Revenue Service,
    etc.).

        My testimony will focus on perceptions of fairness in the tax code
    and recent proposals to fix such perceived unfairness; specifically, a
    tax on book income and the wealth tax. My main message is that
    corporations and individuals remit the taxes they do, including in
    situations some perceive as unfair,\2\ frequently because of explicit
    allowances in the tax code.\3\ In other words, the largest holes in our
    national tax revenue bucket are ones Congress has, itself, poked, and
    not the product of elaborate tax planning schemes, as is a current
    misperception. If members of Congress seek to change the tax system,
    they should do so in ways that make the tax code simpler, rather than
    layer on additional taxes that will add complexity to the tax code, be
    difficult to administer, have unintended negative consequences, and,
    ultimately, likely be eventually eliminated, making our tax system less
    stable. Taxing book income and the wealth tax are two examples of two
    such inadvisable taxes.
    ---------------------------------------------------------------------------
        \2\ Fairness is often used in reference to our tax system or the
    tax code. Presidents Joe Biden (https://joebiden.com/two-tax-policies/
    ), Donald Trump (https://www.treasury.gov/press-center/press-releases/
    Documents/Tax-Framework.pdf), Barack Obama (https://obamawhitehouse.
    archives.gov/issues/taxes), George Bush (https://www.treasury.gov/
    press-center/press-releases/Documents/report30652.pdf), and Bill
    Clinton (https://clintonwhitehouse5.archives.gov/WH/Accomplishments/
    eightyears-03.html) have all advocated for a tax system that is
    ``fair,'' but have advocated for different tax systems that would
    produce different outcomes. As a result, it is difficult to know
    precisely what people are referring to when they reference a ``fair''
    tax system, as perceptions of fairness are subjective.
        \3\ I avoid the term ``loophole.'' A loophole is ``an ambiguity or
    omission in the text through which the intent of a statute, contract,
    or obligation may be evaded'' (see https://www.merriam-webster.com/
    dictionary/loophole). Very frequently people speak of loopholes that
    are simply provisions in the tax code that they do not like, but which
    were intended to provide exactly the outcome the provision is observed
    to provide. As Senator Russell B. Long noted, ``[A tax loophole is]
    something that benefits the other guy. If it benefits you, it is tax
    reform.'' The use of the word ``loophole,'' in my opinion, is a clear
    flag of political rhetoric rather than serious discussion about tax
    policy, and it obscures what the real flaws in the tax code are.
    Certainly true loopholes in the tax code exist, but they are infrequent
    and rarely represent the kind of dollars that provisions intentionally
    legislated do (in my opinion, a back-door Roth IRA would be an example
    of a well-known true tax loophole).
    ---------------------------------------------------------------------------
                perceived unfairness in the corporate tax system
        There are widespread perceptions that corporations do not pay their
    ``fair share'' of tax, and there are current proposals to increase
    corporate tax revenue in order to expand government programs and
    services.\4\ If Congress seeks to raise more revenue from corporations,
    it has the option to either raise the corporate tax rate, expand the
    corporate tax base, or do both.
    ---------------------------------------------------------------------------
        \4\ See https://www.pewresearch.org/politics/2017/04/14/top-
    frustrations-with-tax-system-sense-that-corporations-wealthy-dont-pay-
    fair-share/ for evidence on perceptions of tax fairness from 2017.
    Since then, the statutory corporate tax rate was reduced.

        Increasing the corporate tax rate is legislatively and
    administratively simple--firms would multiply their current tax base by
    a higher rate, and remit more tax. The distortions caused by the
    corporate tax would increase as the rate is increased, and because that
    higher tax is borne by consumers, capital owners, and/or employees,
    individuals will be affected by the increased corporate tax rate.
    However, no additional regulations, administrative procedure, etc.,
    would be required. Raising the corporate tax rate is a trade-off
    between balancing the generation of additional revenue and the well-
    known economic distortions associated with taxation. And while it
    certainly has fairness implications, I believe most concerns over
    ---------------------------------------------------------------------------
    fairness relate to misperceptions about the tax base.

        When I hear concerns that corporations are not paying their ``fair
    share'' of taxes, many relate to the tax base. That is, to some it
    feels unfair to see a company that is perceived to be ``big,''
    ``successful,'' or ``profitable'' not paying what one views as enough
    in taxes. These perceptions are frequently spurred by political
    rhetoric, because on their own, very few people spend much time
    pondering the size of corporate tax payments (Asay, Hoopes, Thornock,
    and Wilde 2021).
              perceived unfairness caused by misperceptions about
                          financial and tax accounting
        Much of the perception about corporate tax fairness follows from
    the fact that corporations compute profits in more than one way. One
    way in which corporations compute profits is according to the rules of
    the Internal Revenue Code. Congress creates these rules with at least
    three different goals: (1) raise revenue, (2) change taxpayer behavior,
    for example by incentivizing activities such as the R&D tax credit and
    the immediate expensing of investments in capital assets, and (3)
    redistribute income. Another way in which corporations compute profits
    is according to Generally Accepted Accounting Principles (GAAP). These
    rules, created by the Financial Accounting Standards Board (FASB), lay
    out rules for calculating income, the purpose of which is to inform
    stakeholders, such as investors, about the firm. The FASB is not
    concerned with collecting revenue, and, if firms change their behavior
    because of specific accounting rules, to some extent, the FASB
    considers it a failure--the FASB seeks only to accurately measure
    income produced by firms (Belnap, Dyreng, and Hoopes 2019).

        This mismatch between financial accounting income and taxable
    income frequently leads to allegations of ``unfairness.'' In my view,
    focusing on the gap between taxable and book income belies a
    fundamental misunderstanding of the purpose of the two different
    accounting systems. Expecting a firm to be profitable under the U.S.
    tax code because it is profitable under U.S. GAAP is akin to asking two
    different artists to draw the same picture, but give them different
    sized paintbrushes and different color paints, and expecting the
    pictures to look the same. Further, the reasons many U.S. firms can
    show profits under GAAP but remit no tax are well-known, well-
    understood, and, often created explicitly by Congress.\5\ Surely some
    companies engage in aggressive, sometimes even illegal, tax practices,
    but the estimates we have available to us suggest that the revenue loss
    from illegal practices is not as large as from tax expenditures and
    other legal allowances of the tax code. Further, these allowances are
    not secrets. U.S. firms above a certain size have to file a Schedule M-
    3 with the Internal Revenue Service which outlines the differences in
    taxable income calculated under the tax code and financial accounting
    income (Mills and Plesko 2003).\6\ The aggregate values of these
    differences are disclosed by the Internal Revenue Service. Below, I
    describe some of the biggest differences. I use data from the 2017
    Statistics of Income Line Counts, as these are the most recent data
    available from the IRS.\7\
    ---------------------------------------------------------------------------
        \5\ Interestingly, Amazon, a specific case which has drawn much
    attention, especially in 2018, and was one motivation for the Real
    Corporate Profits Tax (see https://elizabethwarren.com/plans/real-
    corporate-profits), reported much less in Federal tax than one might
    expect from their accounting income as a result of flawed financial
    accounting rules, rules flawed as a result of political pressure being
    put on the FASB (Zeff 2005). Such political pressure on the FASB would
    likely intensify if we were to tax book income. For details, see
    https://tax.unc.edu/index.php/news-media/why- didnt-amazon-pay-any-
    taxes-despite-having-huge-profits/.
        \6\ Further, public firms in the U.S. must publicly disclose the
    difference between 21 percent of their pretax income calculated
    according to U.S. GAAP, and, their actual GAAP effective tax rate,
    which also allows insights into why public firms can sometimes remit
    less than their financial accounting income would suggest.
        \7\ These values will certainly change as a result of the tax
    reform of 2017, but the message I am trying to convey with these values
    remains the same. These data can be found here: https://www.irs.gov/
    pub/irs-pdf/p5108.pdf.

        The M-3 lists many different items of revenue and expense
    (deductions) that are different for tax and financial accounting
    purposes. The largest difference is depreciation. U.S. corporations
    claimed $470 billion of depreciation expense according to their income
    statements (after adjusting for consolidation difference between book
    and tax accounting, which is also outlined on the M-3).\8\ However, due
    to rules for depreciation deductions (cost recovery) set by Congress,
    U.S. firms claimed $617 billion in depreciation deductions on their tax
    returns, a $147 billion difference. Over time, including with the Tax
    Cuts and Jobs Act, Congress has made the rules for tax depreciation
    more and more generous, allowing for faster and faster depreciation.
    This was an intentional act of Congress, aimed at increasing investment
    among U.S. firms. Research suggests that more generous depreciation
    increases investment, especially for smaller firms (e.g., House and
    Shapiro 2008; Zwick and Mahon 2017).
    ---------------------------------------------------------------------------
        \8\ While accelerated depreciation is allowed in many other
    countries for some types of assets, the U.S. is somewhat more generous
    than other nations with regards with its depreciation rules. See
    https://assets.ey.com/content/dam/ey-sites/ey-com/en_gl/topics/tax/
    guides/ey-worldwide-capital-and-fixed-assets-26-aug-2020.pdf?download.
    Recognizing the incentives it creates, several nations have enacted
    more generous depreciation rules in response to the COVID-19 pandemic,
    at least with regards to some types of assets.

        After generating a preliminary computation of taxable income by
    offsetting receipts against deductions, firms include the effects of
    any net operating losses. U.S. tax law gives the ability to offset tax
    losses against the income of other periods.\9\ This allowance
    recognizes that only profits are taxed, and, allowing firms to use tax
    losses from other years recognizes that a 1-year accounting period is
    an arbitrary feature of our tax code. Research suggests that the use of
    NOLs does encourage corporate investment in risky investments, which is
    important for economic growth (Langenmayr and Lester 2017). In 2017,
    firms used a total of $155 billion in net operating losses to reduce
    their taxable income before NOLs.
    ---------------------------------------------------------------------------
        \9\ The use of losses from one period to offset income in another
    period is extremely common in other countries (Bethmann, Jacob, and
    Muller 2017), as well as U.S. States (Ljungqvist, Zhang, and Zuo 2017).
    Many countries, including the U.S., made these rules more generous in
    response to the COVID-19 pandemic (Gallemore, Hollander, and Jacob
    2020).

        After subtracting net operating losses, businesses multiply this
    tax base by the corporate statutory tax rate. After arriving at this
    preliminary tax amount, firms subtract tax credits. One such example is
    the R&D tax credit, which provides incentives for companies to engage
    in research and experimentation. Academic studies suggests the credit
    is effective in spurring additional research by decreasing the after-
    tax cost of doing such research (e.g., Bloom, Griffith, and Van Reenen
    2002; Rao 2016).\10\ This credit was intentionally enacted into law by
    Congress to change corporate behavior.\11\ In 2017, $12 billion of R&D
    credit were claimed by U.S. firms. The sum of all general business tax
    credits in 2017 was $32 billion. As these are credits that reduce taxes
    on a dollar by dollar basis, at a 35 percent tax rate (which was the
    rate in the year these data are from), that is equivalent to a 32/0.35
    = $91 billion tax deduction.
    ---------------------------------------------------------------------------
        \10\ R&D tax credits are common worldwide. See https://
    assets.ey.com/content/dam/ey-sites/ey-com/en_gl/topics/tax/guides/ey-
    2020-randd-book-lowres-24-sept-2020.pdf?download. R&D credits are also
    common across U.S. States (Wilson 2009).
        \11\ Incidentally, the R&D tax credit was enacted more than a dozen
    different times, as this is one law that Congress historically only
    maintained on a temporary basis, historically contributing to tax
    policy uncertainty (Hoopes 2018). The R&D credit has been made
    permanent, but many other corporate tax laws are temporary. I know of
    no reasonable economic rationale for these provisions being temporary.

        Of the $388 billion in corporate taxes reported on Form 1120 in
    2017, just these three items, NOLs, depreciation deductions, and
    general business credits, account for the equivalent of $394 billion in
    tax deductions, creating $138 billion in lost revenue in 2017. This
    lost revenue is the result of explicit allowances in the Internal
    ---------------------------------------------------------------------------
    Revenue Code made by Congress.

        The differences between book and taxable income discussed above are
    all legal and simple applications of U.S. tax law, as passed and
    intended by Congress. To my knowledge, there is no widespread demand
    for the repeal of these measures. Yet, they create the large gap that
    some decry as ``unfair.'' However, some firms certainly engage in tax
    planning solely with the purpose of reducing their taxable income. Most
    of this planning is plausibly legal by large, public corporations, but,
    may not be what Congress intended when they passed the tax law. And,
    certainly, some corporate tax planning ultimately is determined to be
    illegal tax evasion. Many of these planning strategies involve shifting
    income to foreign jurisdictions. Most estimates of income shifting come
    from before the 2017 regime shift. One estimate suggests that the U.S.
    loses 4-8 percent of corporate tax revenues from income shifting
    (Blouin and Robinson 2021). In 2017, corporate tax revenue was $388
    billion, suggesting $16-31 billion in revenue was not
    collected.\12\, \13\ Even the most extreme of estimates of
    profit shifting pin 2017 estimates of profit shifting at $100 billion,
    still less than the three tax provisions I mention (Clausing 2020a). To
    be clear, amending the tax code and stronger enforcement of the tax
    code may help stem profit shifting to some extent, but, that is simply
    not where most revenue is lost.
    ---------------------------------------------------------------------------
        \12\ Consistent with this narrative, recent research highlights
    more precisely why many seemingly profitable firms pay nothing in tax
    (van der Geest and Jacob 2020). The paper finds that these ``zero-tax
    firms'' account for nearly 15 percent of listed firms in recent years.
    However, these firms achieve this outcome not as result of tax
    planning, but, rather, through NOLs and nontaxable income.
    International tax planning plays a minor role in the outcomes of these
    zero-tax firms.
        \13\ These estimates, although regarding a different underlying
    construction, are consistent in terms of the order of magnitude of the
    problem with the IRS's own estimates of the total net tax gap for
    corporations being $32 billion for the most recent time period covered
    by the tax gap estimates (see https://www.irs.gov/pub/irs-pdf/
    p5365.pdf).

        Note that these estimates are generated from before the 2017 tax
    reform change, before what Clausing (2020b) calls ``adjustment to the
    legislation.''\14\ The primary motivation for international tax
    planning is facing a high tax rate, and prior to 2017 the U.S.
    statutory corporate tax rate was one of the highest in the world.
    Further, the U.S. was one of the only developed countries with a
    worldwide tax system, which imposed this high tax rate on earnings
    abroad. Now, with a nominally territorial system and a lower corporate
    statutory tax rate, companies are reconfiguring their structures, and,
    determining how to operate in response to the current tax code.\15\
    Further, the estimates of income shifting I mentioned above were
    generated before the OECD had fully implemented its BEPS project, which
    may also have curtailed some profit shifting. It is too early to know
    the TCJA's net effect on aggregate profit shifting until more time
    lapses (although estimates that included 2020 data would be useful,
    but, to my knowledge, do not exist). As such, these estimates from
    before 2017 are not fully informative regarding the size of the problem
    now. However, even if tax-motivated income shifting by U.S.
    multinationals is as large a problem as it was before the TCJA, the
    estimates of income shifting are smaller, and some significantly
    smaller, than the figures I previously reported associated with the use
    of NOLs, tax credits, and accelerated depreciation.
    ---------------------------------------------------------------------------
        \14\ There are some estimates for income shifting following 2017,
    but, many involve numerical simulations, and none use data from after
    the tax system actually settled into its new equilibrium.
        \15\ The lower tax rate should encourage less income shifting,
    while the territorial tax system may encourage more planning, but, that
    increase should be checked, at least to some extent, with features like
    BEAT and GILTI.
    ---------------------------------------------------------------------------
                               taxing book income
        Owing to the perception that corporations don't pay a ``fair''
    amount of tax after arriving at taxable income according to the tax
    code and financial earnings according to U.S. GAAP, one solution to
    ensure that this perceived unfairness does not persist would be to fix
    whatever perceived flaws there are in the tax code so that firms pay a
    higher amount in tax. However, recently, rather than directly
    addressing the problem, several proposals have been floated that would
    include financial accounting income, in some form, in the corporate tax
    base--proposals that would tax book income. The intuition asserted by
    proponents of taxing book income is that corporations are incentivized
    to report high financial accounting income to shareholders, but a low
    taxable income to the IRS, such that incorporating financial accounting
    income directly into the tax base would net the two opposing incentives
    out. The empirical evidence, however, does not support this. Among
    other reasons, we should not include financial accounting in the tax
    base because to do so would distort the financial accounting process
    and politicize the FASB. Further, it is highly unlikely that it would
    persist as a permanent feature of the U.S. system, contributing to tax
    policy uncertainty, as evidenced by the fact it has been tried before
    as part of the Tax Revenue Act of 1986 but was soon after allowed to
    expire.

        Including financial accounting income in the tax base would distort
    financial accounting income. For example, when GAAP income was
    previously included in the tax base, companies made financial
    accounting choices that altered the communication of financial
    information and deteriorated the financial information available to
    investors (Gramlich 1991; Dhaliwal and Wang 1992; Boynton, Dobbins, and
    Plesko 1992; Manzon 1992). Recent reevaluation of previous studies of
    the issue confirm their original findings, and suggests financial
    accounting income may be even more sensitive to the tax rate than is
    taxable income, because the accrual estimation process affords more
    subjectivity to book reporting (Dharmapala 2020). These types of
    accounting choices lower the quality of financial accounting income,
    making it harder for investors to really understand what is happening
    at a firm (Blaylock, Gaertner, and Shevlin 2015; Hanlon, Laplante, and
    Shevlin 2005).

        This discussion of taxing book income is not the first time the
    U.S. has attempted to include book income in the tax base. The Tax
    Reform Act of 1986 included a tax that included book income in its
    base, the Business Untaxed Reported Profits (BURP), and is the setting
    of some of the previously mentioned research papers. The financial
    accounting literature is unified in finding that, in response to the
    BURP, firms managed earnings to lower financial accounting income.\16\
    This short-lived provision altered firm's financial accounting choices.
    There is reason to believe that if book income was once again included
    in the tax base, the same results would occur. In fact, it is likely
    that the manipulations to financial accounting income would be even
    more severe now, since, unlike in the late 1980s, firms now have a
    popular and credible alternative method of reporting their success to
    shareholders, which would reduce the financial accounting costs of
    lowering book income in response to a tax on book income. This
    alternative method of reporting income to investors, called pro-forma,
    non-GAAP, or street earnings, is much more common now that in the late
    1980s, and, would be difficult to regulate. Non-GAAP disclosures would
    provide an alternative method for firms to communicate profits
    unaffected by the tax on book income, but would damage the
    comparability and effectiveness of financial reporting, and negatively
    impact capital markets.
    ---------------------------------------------------------------------------
        \16\ In addition to the academic accounting literature being
    unified in finding negative effects of taxing book income, academic
    accountants themselves are also fairly united in opposing taxing book
    income. In 2019, I did an informal, but anonymous, survey of about 100
    accounting academics, and of the 39 that responded, 39 opposed a tax on
    book income. See https://tax.unc.edu/index.php/news-media/what-do-
    academic-accountants-think-of-senator-warrens-real-corporate-profits-
    tax/ for more details.

        Further, while the tax on book income has been advertised as
    simple, its actual implementation would be administratively difficult.
    Many important nuances would arise that need to sorted out in a costly
    regulatory process, and, this regulatory process may well make the
    system much more favorable to firms than at first anticipated.\17\ With
    the BURP, for example, regulatory guidance for implementation of the
    tax was still actually occurring after the BURP was no longer law.\18\
    ---------------------------------------------------------------------------
        \17\ As You (2017) notes, nearly half of lobbying activity aimed at
    specific legislation takes place after actual legislation as groups
    lobby to sway the implementation of the bill.
        \18\ For a detailed understanding of the tax, it would be important
    to know the details of the tax proposal, and we simply don't have
    enough information. For example, how are private firms taxed? If the
    tax only applies to public firms with GAAP audited financial
    statements, that would provide incentives for public firms to go
    private, eliminating the possibility of investing in these firms to
    average retail investors, while preserving this opportunity for the
    wealthy, which can invest in private equity. If the law allowed other
    bases other than GAAP audited pretax income, then the base would bemuch
    more manageable, and, the tax lesseffective. For other examples, see
    https://tax.unc.edu/index.php/news-media/what-to-do-with-danaos-an-
    application-of-the-real-corporate-profits-tax/ and https://tax.unc.edu/
    index.php/news-media/what-to-do-with-disney-an-application-of-the-real-
    corporate-profits-tax/.

        Finally, while a tax on book income would decrease the value of the
    financial accounting earnings signal to financial markets, it may also
    have the side effect of politicizing the Financial Accounting Standards
    Board (FASB), the creators of U.S. GAAP. The SEC does have official
    oversight of the FASB, but the FASB has, with a few notable exceptions
    (Zeff 2005), remained politically neutral. Its independence and
    political neutrality are key to its status as a highly respected
    standard setting body throughout the world. If the product of FASB
    deliberation was included in the tax base and had the ability to alter
    cash flows for firms, it seems plausible that the decisions of the FASB
    may be less independent. This would further erode the value of the
    ---------------------------------------------------------------------------
    earnings signal (Hanlon and Shevlin 2005).

        Finally, like the BURP, and the corporate AMT generally, I do not
    think a tax based on book income would persist as a viable tax
    instrument for long, in large part as a result of the negative outcomes
    outlined above. While corporations, as everyone else, generally support
    lighter taxation on themselves, they also value, to an extent that is
    hard to overstate, certainty with regards to the tax system. Taxes that
    are passed on the thinnest of partisan margins and lack any semblance
    of bipartisan support are very likely to be overturned the next time
    congressional power changes, as we are currently seeing with the TCJA.
    Businesses plan investments over very long horizons, and, it is
    essential to know what the tax system will look like as those
    investments play out. Regardless of the level of taxation, the constant
    changing nature of the tax code is an impediment to investment.
    Congress should do all they can to legislate tax law changes they
    believe in good faith will persist as law.

        We should not include financial accounting in the tax base because
    of the negative consequences it would cause. The revenue it would
    generate would likely be smaller than advertised as companies plan
    around it, and would not come close to compensating for the unintended
    consequences of such a law. I believe the imposition of such a tax
    would impose a net economic burden on the country and its citizens.
                                  wealth taxes
        Like with corporations, there is a common perception that wealthy
    people do not pay their fair share of taxes.\19\ And, like with
    corporations, this outcome is often an outcome of the tax system, not,
    in large part, because of tax planning in ways not intended by
    Congress.\20\ For example, the tax system in the U.S., and elsewhere,
    is based on the principle of realization, meaning that taxpayers do not
    pay taxes on unrealized income. For example, no matter how high a
    stock's price soars, under current tax law, a taxpayer would not be
    liable to pay taxes on that gain if she persisted in holding the
    stock--she is taxed only at the time of sale. This fundamental
    principle of taxation is responsible for many of the most commonly
    cited examples of wealthy individuals paying relatively little tax.\21\
    ---------------------------------------------------------------------------
        \19\ See https://www.pewresearch.org/politics/2017/04/14/top-
    frustrations-with-tax-system-sense-that-corporations-wealthy-dont-pay-
    fair-share/ for evidence from 2017. Since then, the individual tax rate
    was reduced.
        \20\ Unlike with corporations, there is likely more outright
    illegal tax evasion among individuals, although the extent of this
    evasion is very difficult to measure, and the most reliable measures we
    have predate some large shifts in individual tax enforcement (Guyton,
    Langetieg, Reck, Risch, and Zucman 2021).
        \21\ For example, if the founder of a large corporation with market
    cap of $1.5 trillion owns 10 percent of the firm, their basis in the
    corporation is likely small, and, they may well have $150 billion in
    unrealized capital gains. As long as the wealthy individual investor
    does not sell the stock and the corporation does not pay a dividend, no
    income is generated, and, no taxes are owed at the individual level
    (the corporation, and therefore, to some extent, its shareholders
    indirectly, may have paid substantial taxes).

        When large wealth is observed for individual taxpayers without a
    concomitant payment of tax, one proposal has been to tax wealth
    directly.\22\ This is, incidentally, analogous to when large book
    income exists but tax remittances are small, one proposed solution is
    to tax book income directly. At the Federal level, the U.S. does not
    currently tax the wealth of living taxpayers. Such a system would be a
    fundamentally new approach to taxation, and, would be very difficult to
    administer. Estimates for the revenue take for a wealth tax as proposed
    by Senator Warren in her 2020 presidential bid range near $112 billion
    per year (Smith, Zidar, and Zwick 2020), before accounting for
    behavioral response. There are several problems with a wealth tax that,
    in my opinion, outweigh the revenue generated by such a tax. These
    concerns primarily rely upon the tax being very costly to administer
    and enforce.\23\ There are also concerns that wealth taxation would
    cause unintended consequences, and, when thought of as income taxes,
    wealth taxes would be perceived by many as themselves ``unfair.''
    ---------------------------------------------------------------------------
        \22\ Another alternative would be to simply refine the taxation of
    the current ways that the very wealthy are able to access cash without
    actually immediately realizing capital gains, such as variable prepaid
    forward contracts. However, such limitations on the very wealthy
    accessing tax-free cash may not have a large impact on tax revenue or
    perceptions of fairness, as the cash that the very wealthy need to
    finance consumption can sometimes be a very small fraction of their
    total wealth. Nevertheless, such options should be considered.
        \23\ The wealth tax, as proposed, has been described as simple. In
    practice, these taxes are not simple. For example, Scheuer and Slemrod
    (2021) note, ``all wealth taxes exempt wealth below a certain
    threshold, which varies considerably across countries. Some wealth
    taxes do not apply to wealth held in a pension or life insurance
    account. Some have exemptions or reduced tax rates for the wealth in
    one's primary residence; more generally, wealth tax rules often differ
    across real estate and financial assets. There are reduced or deferred
    wealth taxes for certain business assets--for example, to prevent a
    situation where a family owned firm would need to be liquidated to
    satisfy a wealth tax liability. Wealth tax bases often leave out trusts
    established to pass wealth to later generations. Finally, wealth taxes
    have not been applied to implicit wealth in the form of an individual's
    human capital, although this is sometimes hard to disentangle from the
    value of business partnerships (such as law firms or doctors'
    practices).''

        Broad wealth taxes depend on wealthy individuals disclosing and
    valuing their assets. These valuations are highly subjective, and it
    would be administratively very costly and time-consuming for the IRS to
    challenge.\24\, \25\ Similar valuations are currently done
    in the context of the current estate tax, and, are often contentious
    and costly to challenge.\26\ However, unlike the estate tax, where each
    taxpayer only dies once, such that the estate tax is triggered only
    once, such valuations would need to be done on an annual basis for the
    wealth tax.\27\ Recent research confirms that the wealthiest
    individuals are able to hide their wealth in ways that even the most
    rigorous IRS audits (more rigorous than standard operational audits)
    simply cannot find, and, confirms that the wealth tax would be ripe for
    income tax evasion for those willing engage in such activities (Guyton,
    Langetieg, Reck, Risch, and Zucman 2021). The evadability of this tax
    would also make its application inequitable, with those holding wealth
    in forms that are difficult to conceal, and those unwilling to
    illegally conceal, bearing more of the burden of this tax than those
    holding other types of assets. In short, the administrative and
    enforcement costs, compared to the revenue generated make this tax an
    unattractive option to raise revenue.
    ---------------------------------------------------------------------------
        \24\ For one example of a particularly difficult to value asset in
    an estate tax setting, see https://tax.unc.edu/index.php/news-media/
    dead-birds-and-taxes/.
        \25\ Some have proposed narrowing the scope of the wealth tax to
    include only assets that are easy to value. This would erode the base
    subject to tax, as well as create distortions in asset holdings, and
    difficult to value assets would become tax favored. For example, this
    would place a tax on bringing a private firm public, and creating a
    market price for its equity. This would deprive normal retail investors
    of the ability to invest in as broad an array of firms, leaving some
    new firms who chose not to IPO to the purview of wealthy investors able
    to invest the large sums often required to invest in private equity.
        \26\ However, in the current estate tax, the valuation for estate
    tax purposes serves as the basis for the asset to the taxpayer
    inheriting the asset, and the two valuation incentives are somewhat add
    odds--potentially rationalizing some valuations. No such incentive
    would exist with wealth taxes.
        \27\ A valuation in one year would certainly be informative for the
    next year, but taxpayer may intentionally invest in higher-volatility
    assets that are more difficult to value as a way of avoiding wealth
    taxation.

        There is also some empirical evidence on the effects of wealth
    taxation with regards to taxpayer mobility. As the U.S. has never
    really had a wealth tax, this evidence comes from other countries,
    where the intuitional setting may be very different, so it is hard to
    know how generalizable these findings are.\28\ But, in general, as
    summarized by Scheuer and Slemrod (2021), ``Studies of the European
    wealth taxes often, but not always, find a substantial behavioral
    response.'' The U.S. case may be different because the U.S. is a larger
    country and potentially harder to flee, but, on the other hand, the
    dollar values at stake are much, much larger in the U.S. context.
    ---------------------------------------------------------------------------
        \28\ There are also papers on income taxes on high-income
    individuals, but, as I view an income tax as fundamentally different
    than a wealth tax, I do not find this evidence as particularly
    relevant. However, this literature does find some mobility effects with
    regards to high-income taxpayers facing taxes targeting high income
    taxpayers. See https://tax.unc.edu/index.php/news-media/do-
    billionaires-move-to-avoid-taxes-what-does-the-evidence-say/ for
    examples.

        Next, the wealth tax, when thought of as an income tax, would be
    perceived by many to be unfair. To convert a wealth tax on the total
    value of ones assets, one need simply divide the wealth tax rate by the
    rate of return on the assets being taxed. So, for example, if assets
    grow at 20 percent, and the wealth tax rate is 2 percent, that is
    equivalent to a 20-percent annual income tax rate. Alternatively, if
    asset growth is slow in a year, and returns are 2 percent, and the
    wealth tax is 4 percent (within the realm of proposed rates in the
    U.S.), that would be equivalent to a 200-percent income tax in that
    year.\29\, \30\
    ---------------------------------------------------------------------------
        \29\ Some wealth tax systems have capped the wealth tax at measures
    of disposable income. While this can eliminate the problem of absurd
    tax rate, it adds complexity to the system, and, generally would lead
    to the ultra-wealthy being perceived as undertaxed, as the disposable
    income of a multi-billionaire may not be that different than the
    disposable income of a mere multi-millionaire.
        \30\ In general, these extremely high income tax-equivalent rates
    would happen in bad economic times, which is the opposite of the pro-
    cyclical nature of the income tax.

        Many of these considerations have played a role in the historical
    failure of wealth taxation. Like the tax on book income, wealth taxes
    have been implemented in the past, and generally have not persisted. A
    dozen high-income EU countries have tried wealth taxes, and this form
    of taxation persists in very few of these countries (Scheuer and
    Slemrod 2021). The wealth tax failed to succeed in these countries even
    when the stakes were relatively low--in EU countries in which wealth
    taxation existed, never was the tax levied at the level considered in
    recent proposals in the U.S. (Scheuer and Slemrod 2021).\31\
    ---------------------------------------------------------------------------
        \31\ For example, according to Scheuer and Slemrod (2021), the
    Sanders wealth tax would raise 1.56 percent of GDP in taxes, and the
    Warren wealth tax would raise 1.34 percent. For comparison, the wealth
    tax in Demark raised 0.06 percent of GDP, in Iceland 0.48 percent, and
    in Switzerland raises 1.08 percent. For more details on why specific EU
    countries decided to abandon these taxes, see https://www.oecd.org/
    publications/the-role-and-design-of-net-wealth-taxes-in-the-oecd-
    9789264290303-en.htm.

        Finally, the tax would be subject to claims of unconstitutionality.
    Constitutional scholars have asserted that the wealth tax may be
    unconstitutional (Jensen 2019; Hemel 2019), or constitutional (Johnsen
    and Dellinger 2018; Glogower 2020). In my opinion, all the arguments of
    these scholars really confirm is that there are arguments to be made on
    both sides of a hotly contested issue, and, if legislated, the wealth
    tax would end up being tried in court, and would create administrative
    havoc as the case wound its way through the court system.\32\ Further,
    regardless of whether the law would be struck down in court, like the
    tax on book income, the law has so little bipartisan support that it
    seems extremely likely that it would be eliminated legislatively if the
    courts did not eliminate it.\33\ This would contribute to the
    instability in our tax system.
    ---------------------------------------------------------------------------
        \32\ This exact scenario is currently playing itself out in
    Argentina, which recently passed a wealth tax. See https://
    news.bloombergtax.com/daily-tax-report-international/wealth-tax-sends-
    argentinas-rich-to-court-in-last- minute-fight.
        \33\ In my view, the opinion of Larry Summers on this point is
    useful: Summers recently noted that spending time on ``a proposal that
    the Supreme Court has better than a 50-percent chance of declaring
    unconstitutional, that has very little chance of passing through the
    Congress, whose revenue potential is extraordinarily in doubt . . .
    seems to me to potentially sacrifice an immense opportunity.'' See
    https://thehill.com/policy/finance/466851-former-clinton-treasury-
    secretary-knocks-wealth-tax-very-little-chance-of.
    ---------------------------------------------------------------------------
                                   conclusion
        My message is that most of the ways in which large corporations and
    wealthy taxpayers remit taxes at a level the general public may
    perceive to be ``unfair'' are legal methods intentionally legislated by
    Congress. The income tax in actuality is very broad. However, Congress
    has legislated many exceptions to its broad ability to collect taxes.
    If members of Congress seek to raise additional revenue in order to
    expand the size and scope of government and combat perceptions of
    fairness, they should start by examining the many items that are
    currently labeled as ``tax expenditures'' by the Treasury.\34\ Rather
    than layer on fundamentally new tax systems, members of Congress should
    call out specific provisions they believe should be changed, take them
    to the court of public opinion, and, change those provisions.
    Plastering over a broken tax code with other fundamentally flawed laws,
    which have been used previously and failed, is not good tax policy.
    ---------------------------------------------------------------------------
        \34\ For the list of 2020 tax expenditures, see here: https://
    home.treasury.gov/system/files/131/Tax-Expenditures-FY2020.pdf.
    ---------------------------------------------------------------------------
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    Hanlon, M., Laplante Stacie Kelley, and T. Shevlin. 2005. Evidence for
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                                     ______

         Questions Submitted for the Record to Jeffrey L. Hoopes, Ph.D.
                    Questions Submitted by Hon. Bill Cassidy
                                  estate taxes
        Question. Senate Majority Leader Schumer has stated, with regard to
    the estate tax ``. . . any organic business--a farm, a small business,
    and frankly a large business--that would have to be broken up because
    of the extent of the tax should not be. A business is an ongoing
    organism. It employs sometimes 10 people and sometimes 10,000 people.
    To have to break that business up to pay any tax, to me, is
    counterproductive.''

        Do you agree that the tax code should not inhibit owners of any
    size business from being able to pass along that business, in full, to
    future generations?

        Answer. My children's great, great, great, grandfather, Lot Adams,
    after whom my youngest son is named, was born in England, but, after
    having immigrated to the U.S., and facing religious persecution, went
    to the safety of the Rocky Mountains. He filed a Homestead Act claim,
    and, established a farm in Riverside, ID. My wife's grandfather, Bill
    Adams, as hard-working a man as I ever knew, celebrated a century of
    his family being on that same farm in southeastern Idaho, with the
    designation of an Idaho Century Farm, in 1986. He lived there until he
    died, with his work gloves on, in 2018, and, his son now lives at the
    farm.\1\ I have at least some understanding of what it means to keep a
    farm in the family. The current Federal estate tax has many provisions
    enacted with the intention to allow farmers to not have to liquidate
    farm assets to satisfy the estate tax, and, given these provisions, as
    well as the very high current threshold below which no estate tax is
    owed, family farms are rarely, if ever, liquidated to satisfy the
    estate tax.\2\ This is not to say farmers are not burdened by the
    estate tax, and would be better off without it--they are burdened, and
    would be better off without it. I support provisions that allow for
    some assets to be transferred between generations tax-free, as
    currently exist. Assuming the need for an estate tax, I also support
    provisions that allow those estate taxes to be paid over long periods
    of time for those with non-liquid, closely held assets, such that
    returns from assets may be used to satisfy the tax debt, as opposed to
    the proceeds from the sale of the assets themselves, as currently
    exist.
    ---------------------------------------------------------------------------
        \1\ My direct ancestors, regrettably, were never successful enough
    farmers, or successful at anything, for that matter, to have anything
    of great monetary worth to pass down to any future generation.
        \2\ According to 2019 IRS data, there were 269 estate tax returns
    with a positive tax liability that had any farm assets. A farm asset is
    very different than a farmer--for example, Bill Gates has billions of
    dollar of farm assets (https://nypost.com/2021/02/27/why-bill-gates-is-
    now-the-us-biggest-farmland-owner/). Many, if not most, if not all, of
    these ``farm assets'' could simply be held as part of a real estate
    portfolio by people who have no active involvement with actual farming.
    And, even if it does include some farmers who actively farm on real
    farms, all this says is that they paid some estate tax, not that they
    lost their farm as a result of the estate tax. Farm assets from taxable
    returns appear to be a tiny fraction (1.72 percent of all assets). The
    average ``farm asset'' is worth $4.9 million. I emailed the American
    Farm Bureau asking if they had any examples of farmers who lost their
    farms because of the estate tax, but received no reply. In 2001, they
    could allegedly provide no examples of a farm being lost because of the
    estate tax (https://www.nytimes.com/2001/04/08/us/talk-of-lost-farms-
    reflects-muddle-of-estate-tax-debate.html).

        In my opinion, claims of businesses, farms, etc., being broken up
    because of the estate tax are generally overstated. Business are rarely
    broken up because of the estate tax, partly because of costly and
    counterproductive estate planning that those subject to the estate tax
    engage in. In my view, opposition to the estate tax should not hinge on
    the fact that it, in fact, breaks up business, as this is relatively
    rare, but that it engenders costly and counterproductive tax planning
    for relatively little revenue ($12 billion or so a year), that it
    disincentivizes saving,\3\ and other reasons.
    ---------------------------------------------------------------------------
        \3\ https://tax.unc.edu/index.php/news-media/presidential-
    campaigns-now-half-off/.
    ---------------------------------------------------------------------------
                                double taxation
        Question. New York Democratic Representative Jerry Nadler recently
    tweeted, ``No one should ever be taxed twice on the same income. It's
    not fair and it's not just.''

        Do you agree with this view? If not, why not?

        Answer. Accounting, economics, or tax law, those areas in which my
    knowledge qualifies me to opine on this question, do not define
    ``fair'' or ``just,'' so I cannot opine on whether double taxation is
    fair or just.

        In some contexts, the term ``double taxation'' is meaningful. For
    example, corporate income is taxed at least twice, once as a result of
    the corporate income tax, and the second time as a dividend or capital
    gains tax. The term ``double taxation'' is useful in this context
    because there are alternatives to corporations which are taxed only
    once, at the individual level (instead of twice, at the entity and
    individual level). But, as applied to individuals in many cases, such
    as the example from Representative Nadler, generally when people talk
    about being taxed twice, they really mean they are facing taxes they
    don't agree with, and need some rhetorical devise to use against the
    unliked tax. You often can't meaningfully count the number of times
    income is taxed.

        For example, I work for UNC, and am compensated by UNC. I pay
    Federal and State taxes on that income. With that income, for example,
    I have bought a used truck. I paid a sales tax on the truck upon
    purchase, plus recurring taxes/fees to the State to license the
    vehicle. I pay gas taxes at the Federal and State level to keep the
    truck running on roads I sometimes pay taxes (tolls) for the privilege
    to drive on. I could also buy stock with that same income. As an owner
    of a corporation, the income of my corporation is subject to the
    corporate income tax at the State and Federal level. Even if I realize
    no real increase in value (my rate of return is less than the interest
    rate), I may pay capital gains taxes on the illusionary capital gain
    when I sell the stock. In some alternative world where I had more than
    $22 million in net estate that would be subject to the estate tax, all
    that was left of that income, and all I bought with it, would be taxed
    upon my death. In yet another alternative reality where a future
    democratic Congress passed a wealth tax, I may pay annual taxes on all
    assets I own.

        How many times would my UNC income, which enabled all of the
    activities above, be taxed? It does not matter. Good tax policy should
    not be evaluated on the number of times income is taxed, but, rather,
    whether any given tax meets the objectives that society has for a good
    tax. Another way to think about this is this: is taxing the same income
    twice at 10 percent any different than taxing it once at 20 percent?
    Not really. But we would all prefer 10 percent to 20 percent, at least
    if it is our income being taxed!

        Incidentally, Representative Nadler was speaking of the limitation
    on the SALT deduction when talking about double taxation. The
    Republican-passed Tax Cuts and Jobs Act limited the ability of the very
    wealthy to deduct their State and local taxes. That Democrats often
    lament that the wealthy are not paying their ``fair share'' of tax,
    while simultaneously arguing that the wealthy should get a tax
    deduction for paying property taxes on houses far out of reach of the
    middle class, represents the support of two inconsistent ideas.
                         history of ultra-wealthy taxes
        Question. Some taxes have been passed by Congress on the basis that
    they would largely target the ultra-wealthy and then have gradually
    been expanded to include a larger set of taxpayers.

        Can you comment on this history?

        Answer. Taxes are often aimed at the very wealthy initially, to get
    buy-in in a democracy, and then applied to more and more taxpayers. We
    have seen evidence of this buy-in seeking process recently with
    promises by Democratic politicians that they would not raise taxes on
    anyone making under $400,000,\4\ that a wealth tax would only apply to
    75,000 households,\5\ or, that the tax on book income would only apply
    to only 45 companies.\6\ The main virtue of these taxes seems to be
    that someone else will pay them. As Senator Russell Long noted, a
    mantra of Democratic tax reform seems to be ``Don't tax you, don't tax
    me, tax that fellow behind the tree!''
    ---------------------------------------------------------------------------
        \4\ https://www.wsj.com/articles/why-biden-would-start-tax-
    increases-at-400-000-a-year-116017
    30000.
        \5\ https://elizabethwarren.com/plans/ultra-millionaire-tax.
        \6\ https://www.wsj.com/articles/biden-softens-tax-proposal-aimed-
    at-profitable-companies-that-pay-little-11617809422.

        However, these taxes often expand to affect more taxpayers. This
    certainly happened with the income tax. Initially, less than a few
    percent of the population had an income tax liability, and the top
    rates were very low. Then, that rate creeped up and up as the
    government expanded, more and more activities fell into its scope, and,
    politicians realized they could spend more money. World War II
    dramatically exacerbated this effect, turning the tax from a class tax,
    into a mass tax.\7\ Another example is the individual AMT, which
    started as a tax aimed at only the very rich, but, which ended up
    affecting millions of taxpayers each year in 2017 \8\ (before it was
    changed by the TCJA,\9\ which dramatically reduced the number of
    taxpayers affected).\10\
    ---------------------------------------------------------------------------
        \7\ https://americancentury.omeka.wlu.edu/exhibits/show/creating-
    the-modern-taxing-sta/from-a-class-tax-to-a-mass-tax.
        \8\ https://www.irs.gov/pub/irs-prior/p4801--2019.pdf.
        \9\ https://www.taxpolicycenter.org/briefing-book/who-pays-amt.
        \10\ https://www.irs.gov/pub/irs-pdf/p4801.pdf.
    ---------------------------------------------------------------------------
                              taxing book profits
        Question. U.S. companies generally prepare two measures of income
    each year, financial accounting or book income and taxable income.
    These two measures of income are distinct and separate as they serve
    different purposes and are intended for different audiences.

        Can you explain the reason for these two standards, and do you
    think a difference between these two measures necessarily means that
    companies are doing something nefarious?

        Answer. Financial accounting standards exist so that investors, and
    others, can judge the economic well-being of a company. The tax law
    exists to collect revenue from taxpayers, to change taxpayer behavior,
    and to redistribute income. A difference between these two measures is
    built into the system because of their different purposes, and if the
    two measures were identical, I would suspect something odd was going on
    at a company. They are not meant to be the same, as they are different
    measures. Anyone observing a difference in the two measures and
    suggesting something nefarious fundamentally misunderstands the tax
    system, or is deceptive.
                                 tax incentives
        Question. In order to incentivize U.S. investment in capital
    expenditures like machinery and equipment, the Tax Cuts and Jobs Act
    provided the ability for American businesses to expense certain capital
    assets, like manufacturing equipment. Businesses may also receive a tax
    credit for R&D expense, which has historically received significant
    bipartisan support. On the other hand, book income requires deducting
    assets over a longer period of time, and it does not allow credits,
    which creates significant differences between book and taxable income.

        If Congress has provided a tax incentive, like expensing of capital
    assets or R&D credits, what is the effect of imposing a minimum tax on
    book income?

        Answer. It depends on whether you allow those items to be added
    back to a minimum tax on book income. Currently, President Biden's
    proposal allows taxpayers to adjust for the value of general business
    credits, which, in my mind, admits that financial accounting income is
    not a proper base for taxing income, as it has to be adjusted to look
    more like taxable income before it can be used. If those adjustments
    were not allowed, it would dampen the incenting effect of these tax
    incentives with regards to the entire tax system. Other adjustments may
    also be added \11\ to adjust for the awkward fact that under President
    Biden's current tax on book income, settling sexual harassment
    lawsuits, illegally dumping nuclear waste, or any other illegal
    activity, is tax deductible.
    ---------------------------------------------------------------------------
        \11\ https://fortune.com/2021/05/15/biden-warren-tax-proposal-book-
    income/.
    ---------------------------------------------------------------------------
                            burden on new investment
        Question. Would imposing a tax on book income raise the effective
    tax burden on new investment and what might be the impact on levels of
    investment?

        Answer. Assuming a positive time value of money and that
    adjustments were not allowed for accelerated depreciation, relative to
    the current tax code, the tax burden on new investment would be
    increased. With no assumptions, added corporate income tax could affect
    investment, especially for financially constrained firms. Net
    investment would decrease.
                                     losers
        Question. Who are the likely losers if the U.S. was to adopt a
    ``book'' income tax like the real corporate profits tax?

        Answer. Companies who would pay more tax would be losers. Investors
    who depend on the integrity of the current financial accounting system
    would be losers. Society which depends on well-functioning capital
    markets would be losers.

        To be clear, the world will not end if we tax book income. Often
    detractors from a tax proposal make it seem as if not passing that law
    is the only thing keeping society from spiraling into some kind of
    Hobbesian nightmare. But, tax book income is an ill-advised tax, and
    would make us worse off relative to collecting the same amount in tax
    from corporations in some other way, for reasons I outline in my
    written testimony.\12\
    ---------------------------------------------------------------------------
        \12\ https://www.finance.senate.gov/imo/media/doc/
    Hoopes%20Testimony.pdf.
    ---------------------------------------------------------------------------
                                      burp
        Question. A short-lived tax on book profits was implemented in
    1986, and studies have shown that companies altered accounting
    practices in response to the tax, causing a deterioration in the
    information environment for both investors and the IRS.

        Is it possible to tax book profits without affecting the
    information environment? Would a worse information environment be a
    worthwhile price to pay for implementing a tax on book profits?

        Answer. No, it would not be possible. Companies respond to
    incentives and will face incentives to manipulate book income if it is
    taxed. Since a similar amount of revenue could be generated many other
    ways which, in my opinion, would not impose as large a burden, it would
    not be a worthwhile price to pay.

                                     ______

            Prepared Statement of Kyle Pomerleau, Resident Fellow,
                         American Enterprise Institute
                         fair and efficient tax policy
        Chair Warren, Ranking Member Cassidy, and members of the committee,
    thank you for the opportunity to speak today. My name is Kyle
    Pomerleau, and I am a resident fellow at the American Enterprise
    Institute, where I research Federal tax policy.

        In my testimony, I provide an overview of tax policies lawmakers
    are currently discussing. I then consider the challenges of two
    recently proposed policies: a wealth tax and a tax on the book income
    of corporations. I conclude by discussing alternative revenue sources
    that I think lawmakers should consider.
                                   background
        Two major spending packages are currently under consideration. The
    first, the ``American Jobs Plan,'' is a $2.7 trillion proposal that
    includes increased spending on traditional infrastructure, research and
    development, job training, and long-term care.\1\ The second proposal
    is the ``American Family Plan.'' Although the plan's details are not
    yet released, news outlets report that it will include spending on
    child care, paid family leave, universal pre-K, community college, and
    an extension of the recently expanded Child Tax Credit.\2\
    ---------------------------------------------------------------------------
        \1\ ``What's in President Biden's American Jobs Plan?'', Committee
    for Responsible Federal Budget, April 2, 2021, https://www.crfb.org/
    blogs/whats-president-bidens-american-jobs-plan.
        \2\ Jim Tankersley, ``Biden Will Seek Tax Increase on Rich to Fund
    Child Care and Education,'' The New York Times, April 22, 2021, https:/
    /www.nytimes.com/2021/04/22/business/biden-taxes.html.

        Lawmakers are contemplating tax increases on corporations and high-
    income households to finance this new spending. President Joe Biden has
    proposed raising the corporate income tax rate to 28 percent, raising
    the tax burden on the foreign profits of U.S. multinational
    corporations, and enacting a minimum tax on the book income of
    corporations. The proposal would also replace the base erosion and
    anti-abuse tax (BEAT) with a new provision called ``SHIELD,'' which is
    aimed at preventing profit shifting to low-tax jurisdictions. Finally,
    ---------------------------------------------------------------------------
    it would eliminate several tax provisions for fossil fuel companies.

        In addition, the administration plans to increase the top
    individual income tax rate from 37 percent to 39.6 percent. It will
    also raise the top capital gains rate from 20 percent to 39.6 percent
    and make death a realization event for capital gains.\3\
    ---------------------------------------------------------------------------
        \3\ Tankersley, ``Biden Will Seek Tax Increase on Rich to Fund
    Child Care and Education.''

        Other lawmakers have introduced proposals to increase taxes on
    corporations and high-income households. The Senate Finance Committee
    chairman, Senator Wyden (D-OR), has suggested taxing capital gains
    mark-to-market for high-income households.\4\ Senator Elizabeth Warren
    (D-MA) has also suggested taxing corporations based on their book
    income and has a proposal to enact an annual, progressive wealth tax.
    President Biden, during the campaign, also proposed raising the estate
    and gift tax.\5\
    ---------------------------------------------------------------------------
        \4\ Richard Rubin, ``Democrats' Emerging Tax Idea: Look Beyond
    Income, Target Wealth,'' Wall Street Journal, August 27, 2019, https://
    www.wsj.com/articles/democrats-emerging-tax-idea-look-beyond-income-
    target-wealth-11566916571.
        \5\ Kyle Pomerleau and Grant Seiter, ``An analysis of Joe Biden's
    tax proposals, October 2020 update,'' American Enterprise Institute,
    October 13, 2020, https://www.aei.org/research-products/report/an-
    analysis-of-joe-bidens-tax-proposals-october-2020-update/.

        These proposals would raise trillions in new revenue for the
    Federal Government and would be highly progressive. However, a few of
    these ideas pose considerable challenges.
                               taxing book income
        President Biden has proposed enacting a 15-percent minimum tax on
    the book income, or financial statement income, of U.S.
    corporations.\6\ Corporations would be required to pay the greater of
    their ordinary corporate tax liability or 15 percent of their book
    income. The proposal would only apply to corporations with net income
    of $2 billion or more. It would allow corporations to reduce their book
    income with net operating losses and offset their book-tax liability
    with the foreign tax credit and general business credits such as the
    research and development credit and green energy credits.\7\
    ---------------------------------------------------------------------------
        \6\ Kyle Pomerleau, ``Joe Biden's Alternative Minimum Book Tax,''
    Tax Notes Federal, October 5, 2020, pp. 109-116, https://www.aei.org/
    wp-content/uploads/2020/11/Pomerleau-On-the-Margin-October-5-
    2020.pdf?x91208.
        \7\ ``The Made in America Tax Plan,'' Treasury, April 2021, https:/
    /home.treasury.gov/system/files/136/MadeInAmericaTaxPlan_Report.pdf.

        Senator Elizabeth Warren has also proposed an add-on book tax.
    Warren's proposal, in contrast, would not be a minimum tax.
    Corporations would be required to pay a tax equal to 7 percent of their
    book income each year in addition to the ordinary corporate income tax.
    The proposal would exempt the first $100 million in net income. It is
    unclear how Warren's book tax would interact with the ordinary
    corporate income tax. Nor is it known whether corporations would be
    able to offset their book-tax liability with any credits.\8\
    ---------------------------------------------------------------------------
        \8\ Kyle Pomerleau, ``An Analysis of Senator Warren's `Real
    Corporate Profits Tax,' '' Tax Foundation, April 18, 2019, https://
    taxfoundation.org/elizabeth-warren-corporate-tax-plan/.
    ---------------------------------------------------------------------------
    Taxing Book Income Does Not Necessarily Address Tax Avoidance
        Both proposals are driven by the perception that the large
    corporations that report low effective tax rates are engaged in
    aggressive tax avoidance. Recently, the Institute on Taxation and
    Economic Policy (ITEP) released a report highlighting 55 corporations
    that reported positive net income but zero or negative Federal tax
    liability in 2020.\9\ Although this result is striking, it is not
    necessarily evidence of aggressive tax avoidance.
    ---------------------------------------------------------------------------
        \9\ Matthew Gardner and Steve Wamhoff, ``55 Corporations Paid $0 in
    Federal Taxes on 2020 Profits,'' Institute on Taxation and Economic
    Policy, April 2, 2021, https://itep.org/55-profitable-corporations-
    zero-corporate-tax/.

        Each year, corporations prepare two measures of income: book income
    and taxable income. Although both are measures of income, they serve
    different purposes and are intended for different audiences. Book
    income follows generally accepted accounting principles (GAAP), as set
    by the Financial Accounting Standards Board (FASB), and is meant to
    provide information to investors and creditors about a corporation's
    performance. In general, book income tries to align the recognition of
    income with its associated expenses. And while the FASB prescribes
    standards, corporations have some leeway in how to account for certain
    expenses and income.\10\
    ---------------------------------------------------------------------------
        \10\ Kyle Pomerleau, ``Joe Biden's Alternative Minimum Book Tax,''
    Tax Notes Federal, October 5, 2020, pp. 109-116, https://www.aei.org/
    wp-content/uploads/2020/11/Pomerleau-On-the-Margin-October-5-
    2020.pdf?x91208.

        Taxable income is set by the Internal Revenue Code (IRC) and is
    prepared for the IRS and is meant to determine a corporation's tax
    liability. In addition, the tax code includes provisions that are meant
    to accomplish other goals, such as encouraging or discouraging certain
    behaviors. In contrast with book income, taxable income is calculated
    based on strict rules with little leeway in how revenue or expenses are
    ---------------------------------------------------------------------------
    realized.

        In any given year, corporations may have differences in book and
    taxable income that have little to do with tax avoidance. For example,
    corporations that benefit from accelerated depreciation may receive
    large upfront deductions for new investments. In the first year, this
    will result in lower taxable income than book income. In the following
    year, the corporation would no longer have any deductions but would
    continue to deduct the asset for book purposes. This could result in
    taxable income that is higher than book income.

        Taxing book income may result in corporations adjusting book income
    to avoid taxes. Empirical evidence suggests that taxing book income
    could reduce the informational quality of book income for investors and
    creditors. Between 1987 and 1989, the Federal Government used book
    income to calculate the corporate alternative minimum tax. As a result,
    firms shifted sales outside the window during which book income
    impacted tax liability.
    Taxing Book Income Could Undermine Congress's Policy Goals
        Taxing book income would outsource a portion of the tax code to an
    unelected nonprofit organization.\11\ As mentioned previously,
    financial accounting income is regulated by the FASB. Any changes that
    the FASB makes to accounting standards would have a direct impact on
    the book tax base and Federal tax revenue. These decisions would be
    made without Congress's fiscal or other goals in mind. Creating a link
    between the FASB decisions and Federal revenue will create an incentive
    for Congress to lobby the board to make or refrain from making changes.
    ---------------------------------------------------------------------------
        \11\ Pomerleau, ``Joe Biden's Alternative Minimum Book Tax.''

        It is unclear why Congress would desire to link tax collections to
    book income as it would undermine many of Congress's own policy goals.
    For example, Congress wanted to limit executive pay by limiting the
    deduction for compensation. Some limit has been in place since the
    1990s. However, companies would be able to fully deduct executive
    compensation against their book income. A pure book income tax would
    ---------------------------------------------------------------------------
    also disallow credits such as green energy credits.

        The Biden administration has already scaled back its book tax for
    this reason. As mentioned above, Biden's proposal for a minimum tax on
    book income allows corporations to offset book-tax liability by using
    general business credits. This maintains the incentive effects of the
    credits but weakens the book tax and means it will raise little
    revenue.
    Taxing Book Income Would Distort Investment Incentives
        Taxing book income would also impact investment incentives in the
    United States. The impact on investment incentives will depend on
    whether the tax is a minimum tax or an add-on tax that corporations are
    required to pay each year.

        If a corporation were subject to an add-on book tax each year, as
    they would be under Senator Warren's proposal, it would raise the tax
    burden on new investment. A significant difference between book income
    and taxable income is the treatment of capital expenditures or
    investments. In calculating taxable income, corporations can expense or
    fully deduct the cost of short-lived assets. Expensing eliminates the
    tax on marginal investments. In contrast, book income would require
    businesses to deduct all investments over their useful lives, which
    would increase the effective tax burden on new investment.

        The impact on investment incentives of Biden's proposal for a
    minimum tax, on the other hand, would depend on how businesses interact
    with the tax. Corporations would not be perpetually subject to either
    the book or the ordinary income tax. They would move between the two
    systems and may make an initial investment under one tax and face taxes
    on the returns on that investment under the other tax. Since the tax
    rates on these taxes are different, the minimum tax may either reduce
    or increase the tax burden on new investment (Table 1).\12\
    ---------------------------------------------------------------------------
        \12\ Pomerleau, ``Joe Biden's Alternative Minimum Book Tax.''

               Table 1. Marginal Effective Tax Rate by Asset,  Ordinary Corporate Tax, and Book Tax, 2021
    ----------------------------------------------------------------------------------------------------------------
                                                                                      Three Years
                                                      Ordinary                          Ordinary
                                                   Corporate Tax                     Corporate Tax,   Five Years on
                                                    (Current Law     15% Book Tax    Switch to Book   Book Tax, Back
                                                      and 28%                         Tax for Five     to  Ordinary
                                                  Statutory Rate)                    Years, Back to        Tax
                                                                                      Ordinary Tax
    ----------------------------------------------------------------------------------------------------------------
    Overall                                                3.53%            8.75%           -2.15%           13.59%
    ----------------------------------------------------------------------------------------------------------------
        Machinery                                        -10.57%            9.47%          -22.80%           14.07%
    ----------------------------------------------------------------------------------------------------------------
        Intellectual Property                            -29.06%           -1.99%          -42.22%            0.46%
    ----------------------------------------------------------------------------------------------------------------
        Structures                                         6.37%            9.47%            3.45%           12.66%
    ----------------------------------------------------------------------------------------------------------------
        Land                                              20.38%            9.47%           18.98%           18.64%
    ----------------------------------------------------------------------------------------------------------------
        Inventory                                         25.20%           12.41%           21.06%           20.04%
    ----------------------------------------------------------------------------------------------------------------
    Standard Deviation                                    18.23%            3.91%           22.74%            7.64%
    ----------------------------------------------------------------------------------------------------------------
    Source: Kyle Pomerleau, ``Joe Biden's Alternative Minimum Book Tax,'' Tax Notes Federal, October 5, 2020, pp.
      109-116.

                                 taxing wealth
        Several lawmakers have proposed an annual tax on the wealth of very
    high-net-worth households. During the presidential campaign, Senator
    Elizabeth Warren proposed a progressive wealth tax that would levy a 2-
    percent per year tax on net wealth between $50 million and $1 billion
    and 6 percent per year on net wealth of $1 billion and more. Similarly,
    Senator Bernie Sanders proposed levying an annual tax on net wealth
    from 1 percent to as high as 8 percent.
    Taxing Wealth Would Place a High Burden on Saving
        Supporters of a wealth tax typically argue that the tax places only
    a low-rate tax on wealth. Senator Warren famously argued that her 2-
    percent annual wealth tax is a ``2 cent'' tax. This is highly
    misleading. A wealth tax taxes a stock of wealth each year. As a
    result, even at what seems to be a low tax rate, a wealth tax places a
    significant burden on saving.

        The burden a wealth tax places on saving can be measured by the tax
    wedge it places between pre-tax and after-tax returns. Take, for
    example, an asset with a pre-tax rate of return of 3 percent. A wealth
    tax of just 0.2 percent would reduce the return on that asset to 2.8
    percent, resulting in an effective tax rate of 7 percent. A more
    substantial tax rate of 2 percent would reduce the return to 1 percent,
    for an effective tax rate of 67 percent. A 3-percent wealth tax would
    result in an effective tax rate of 100 percent.

        Reducing the after-tax return on saving could lead to a reduction
    in national saving. The impact lower savings would have on the economy
    depends on how open the U.S. economy is to foreign investment. In a
    closed economy, a reduction in national saving would reduce the amount
    of saving available to finance productive capital. This would result in
    a smaller capital stock, lower labor productivity, and, ultimately,
    lower wages for workers. In contrast, if the economy is very open to
    foreign investment, the reduction in national saving would result in an
    inflow of capital from abroad. This increase in lending would lead to
    an increase in the trade deficit, an increase in foreign ownership of
    U.S. assets, and ultimately a reduction in national income.

        The U.S. economy is open, but it is implausible that the U.S.
    economy is perfectly open. As a result, we would see a combination of
    both effects. The wealth tax would likely have a negative impact on the
    domestic capital stock, wages, and economic output. In addition, it
    would result in an inflow of foreign capital, an increase in the trade
    deficit, and a reduction in national income.

        Two groups have estimated the wealth tax's impact on the economy
    and found it would have a negative impact. The Penn Wharton Budget
    Model found that Senator Warren's wealth tax proposal would reduce
    gross domestic product (GDP) by 1.2 percent by 2050.\13\ The Tax
    Foundation found that a wealth tax like Warren's campaign proposal
    would reduce GDP by 0.8 percent in the long run, but because they
    assume the economy is very open to foreign capital, the wealth tax
    would reduce national income by 1.5 percent.\14\
    ---------------------------------------------------------------------------
        \13\ ``Budgetary and Economic Effects of Senator Elizabeth Warren's
    Wealth Tax Legislation,'' Penn Wharton Budget Model, March 15, 2021,
    https://budgetmodel.wharton.upenn.edu/issues/2021/3/15/budgetary-
    effects-of-senator-warren-wealth-tax.
        \14\ ``Options for Reforming America's Tax Code 2.0,'' Tax
    Foundation, April 19, 2021, https://taxfoundation.org/tax- reform-
    options/?option=32.
    ---------------------------------------------------------------------------
    A Wealth Tax's Revenue Potential Is Uncertain
        Proponents of a progressive wealth tax argue that it could raise a
    large amount of revenue progressively. It would indeed be a very
    progressive source of revenue, but the amount of revenue a wealth tax
    will raise remains uncertain. Revenue estimates of wealth tax proposals
    vary significantly. At the low end, Larry Summers and Natasha Sarin
    estimate that a wealth tax could raise as little as $366 billion over a
    decade. In contrast, Lily Batchelder and David Kamin estimate that a
    wealth tax could raise as much as $5.3 trillion over the same
    period.\15\ The large range of estimates reflects the wide variation in
    several assumptions.
    ---------------------------------------------------------------------------
        \15\ Kyle Pomerleau, ``How Much Revenue Would a Wealth Tax
    Raise?'', Tax Notes Federal, April 20, 2020, pp. 481-493, https://
    www.aei.org/wp-content/uploads/2020/05/Pomerleau-On-the-Margin-April-
    20-2020.pdf?x91208.

        The amount of revenue a highly progressive wealth tax will raise
    depends on how much wealth is held by the wealthiest households. Unlike
    with income, no administrative data on wealth exists.\16\ As a result,
    researchers must develop methods to estimate the share of wealth held
    by high-income households. These methods produce a range of estimates
    of the share of wealth by the top 0.1 percent. For example, using
    estate tax returns, researchers estimated that the top share of wealth
    was 10 percent in 2014. In contrast, research that capitalized income
    reported on tax returns found that the share could be as high as 20
    percent.
    ---------------------------------------------------------------------------
        \16\ Pomerleau, ``How Much Revenue Would a Wealth Tax Raise?''

        The amount of revenue that the Federal Government will raise also
    depends on how taxpayers respond to the wealth tax. In the presence of
    the wealth tax, taxpayers would have an incentive to reduce their
    reported wealth. Researchers use elasticities of taxable wealth with
    respect to the wealth tax rate to estimate this effect. Studies of
    taxpayer response to the wealth tax have a wide range of elasticities,
    and some estimates are unrealistically small and imply levels of
    avoidance that are far lower than the avoidance response we expect from
    ---------------------------------------------------------------------------
    the income tax.

        A wealth tax would also reduce the accumulation of wealth and
    reduce the amount a wealth tax would raise in the long run. One of the
    stated goals of the wealth tax is to reduce the amount of wealth held
    by the wealthiest individuals in the United States. For example,
    economists Gabriel Zucman and Emmanuel Saez estimated that Warren's
    wealth tax proposal would have eroded the share of total wealth held by
    the Forbes 400 by more than half if the tax had been in place since
    1982. Taxing away this wealth would raise revenue in the near term, by
    would erode its own base.

        A reduction in wealth would also have a negative impact on other
    sources of Federal revenue. A large source of individual income tax
    receipts comes from capital income: capital gains, dividends, interest
    income, and business income. This income represents the returns to
    wealth. If the total amount of wealth falls due to evasion, avoidance,
    or reduced saving, total capital income reported to the IRS would also
    fall.

        The wealth tax risks not raising any revenue at all. This is
    because the wealth tax, if enacted, is likely to face a constitutional
    challenge. The U.S. Constitution requires that all ``direct taxes'' be
    apportioned by the States by population. The 16th amendment exempts the
    income tax. If courts determine that the wealth tax is a direct tax, it
    would either need to be apportioned by State population, which would be
    undesirable, or would be struck down altogether.\17\ Other taxes would
    not face this risk.
    ---------------------------------------------------------------------------
        \17\ Alan Viard, ``Wealth Taxation: An Overview of the Issues,''
    Maintaining the Strength of American Capitalism (Aspen Institute
    Economic Strategy Group, 2019), ed. Melissa S. Kearney and Amy Ganz,
    https://www.aei.org/research-products/report/wealth-taxation-an-
    overview-of-the-issues/.
    ---------------------------------------------------------------------------
                 lawmakers should focus on broader-based taxes
        Given the downsides of taxing wealth and book income, lawmakers
    should consider other sources of revenue that would be simpler to
    administer and more economically efficient. Below, I discuss three
    options: a gas tax or vehicle miles traveled (VMT) tax, a carbon tax,
    and a value-added tax (VAT).
    Gas Taxes and VMT Taxes
        A portion of President Biden's spending proposals include an
    expansion of infrastructure. Currently, the Federal Government finances
    most of its infrastructure spending through the Highway Trust Fund
    (HTF). The HTF provides funding for highways and other capital projects
    primarily through grants to State and local governments.\18\ The HTF
    receives most of its revenue from the 18.4 cents per gallon tax on
    gasoline and 24.4 cents per gallon tax on diesel fuel.
    ---------------------------------------------------------------------------
        \18\ Joseph Kile, ``Testimony on Addressing the Long-Term Solvency
    of the Highway Trust Fund,'' testimony before the Committee on
    Environment and Public Works, U.S. Senate, April 14, 2021, https://
    www.cbo.gov/publication/57138.

        The taxes and spending associated with the HTF are based on the
    ``benefit principle'' of taxation. This principle states that the
    fiscal costs of a government service should be borne primarily by those
    who benefit. Since the consumption of gasoline roughly corresponds with
    the use of roads, it is seen as a fair way to finance road construction
    and repair. This is not only fair, but it is more efficient. Financing
    roads with taxes and fees that correspond with driving effectively sets
    a price on road use. This helps address many of the costs, or
    externalities, associated with driving such as congestion, noise, and
    ---------------------------------------------------------------------------
    pollution.

        According to the Congressional Budget Office, raising the gas and
    diesel tax by 15 cents per gallon and adjusting it for inflation going
    forward would raise $291 billion over the next 10 years. Raising the
    taxes by 35 cents would raise $627 billion over the same period.\19\
    This amount of revenue would cover the current HTF shortfall and raise
    additional revenue that could be used to finance new infrastructure
    spending.
    ---------------------------------------------------------------------------
        \19\ Kile, ``Testimony on Addressing the Long-Term Solvency of the
    Highway Trust Fund.''

        That said, the gas tax is not perfect. Motor vehicles are becoming
    more fuel efficient and can now use less gasoline per mile driven.
    Motorists can drive as much or more but pay less in tax. In addition,
    the gas tax does not address road congestion. The cost a driver places
    on others in an urban area is much higher than in a rural area. As a
    result, a fixed Federal gas tax will underprice driving in the city and
    overprice driving elsewhere.\20\
    ---------------------------------------------------------------------------
        \20\ Congressional Budget Office, Alternative Approaches to Funding
    Highways, March 2011, https://www.cbo.gov/sites/default/files/112th-
    congress-2011-2012/reports/03-23-highwayfund
    ing.pdf.

        To address these shortcomings, lawmakers could also consider a VMT
    tax in combination with a gas tax. A VMT tax would charge drivers based
    on the miles they travel. As a result, the tax would be less sensitive
    to increases in fuel efficiency of vehicles. In addition, the VMT tax
    could vary by location and time of day to address congestion in densely
    populated areas.\21\
    ---------------------------------------------------------------------------
        \21\ Congressional Budget Office, Alternative Approaches to Funding
    Highways.
    ---------------------------------------------------------------------------
    A Carbon Tax
        The Biden administration has also expressed interest in addressing
    climate change in their spending package. A policy that would
    simultaneously address this issue and raise additional Federal revenue
    would be a carbon tax. A carbon tax is an excise tax levied on the
    production of greenhouse gas emissions. Most proposals would set the
    tax at some rate per metric ton, such as $50 per metric ton, and would
    collect the tax directly from businesses who emit carbon dioxide and
    other greenhouse gasses.

        If considered, a carbon tax should also include a border adjustment
    that would apply to the embedded carbon emissions from imports and
    exempt exports from the tax.\22\ This would eliminate the incentive for
    U.S. producers to shift emissions out of the United States and would
    put a price on goods produced in countries such as China and India that
    end up being consumed in the United States.
    ---------------------------------------------------------------------------
        \22\ Shuting Pomerleau, ``Border Adjustments in a Carbon Tax,''
    Niskanen Center, July 30, 2020, https://www.niskanencenter.org/border-
    adjustments-in-a-carbon-tax/.

        Research from various economists and analysts has found that a
    carbon tax would reduce greenhouse gas emissions. For example, one
    economist found that even a $15 per metric ton carbon tax could reduce
    greenhouse gas emissions by 14 percent. Other researchers found that
    carbon taxes in European countries have reduced emissions by 15
    percent.\23\
    ---------------------------------------------------------------------------
        \23\ William G. Gale, ``The Wisdom of a Carbon Tax,'' Tax Policy
    Center, March, 2016, http://www.taxpolicycenter.org/sites/default/
    files/publication/130216/2000740-the-wisdom-of-a-carbon-tax.pdf.

        While reducing greenhouse gas emissions, a carbon tax also would
    raise revenue for the Federal Government. The amount of revenue will
    depend on the rate. However, the Tax Policy Center estimated that a $50
    per metric ton carbon tax would raise $2.1 trillion between 2020 and
    2029.\24\
    ---------------------------------------------------------------------------
        \24\ Joseph Rosenberg, Eric Toder, and Chenxi Lu, ``Distributional
    Implications of a Carbon Tax,'' Tax Policy Center, July 2018, https://
    www.taxpolicycenter.org/sites/default/files/publication/155473/
    distributional_implications_of_a_carbon_tax_5.pdf.
    ---------------------------------------------------------------------------
    A Value-Added Tax
        Even before the pandemic and President Biden's spending proposals,
    the Federal Government faced a fiscal imbalance. A tax favored by
    economists that could finance new spending and address the fiscal
    imbalance is the value-added tax, or VAT.

        A VAT is a broad-based tax on goods and services. A VAT is like a
    sales tax, but it is collected in stages along the production process.
    Take, for example, the process of making bread under a 10-percent VAT.
    When a farmer sells wheat to the baker for $40, he charges the baker
    $44 ($40 for the wheat plus $4 for the VAT that the farmer remits to
    the government). The baker then sells the bread to the consumer for$110
    ($100 for the bread plus $10 in VAT). However, the baker gets a credit
    for the $4 VAT it already paid on the wheat, for a net VAT burden on
    the baker of $6. The total tax ends up being $10 ($4 paid by the farmer
    and $6 paid by the baker) on the $100 loaf of bread.\25\
    ---------------------------------------------------------------------------
        \25\ William G. Gale, ``Raising Revenue With a Progressive Value-
    Added Tax,'' Tax Policy Center, https://www.taxpolicycenter.org/sites/
    default/files/publication/160238/raising-revenue-with-
    a-progressive-value-added-tax_1.pdf.

        VATs are common globally. Every country in the Organisation for
    Economic Co-operation and Development (OECD) except the United States
    raises revenue through a VAT. In fact, more than 160 countries have a
    VAT. Among OECD countries, the average VAT rate is 19.3 percent and
    ranges from 5 percent to as high as 27 percent.\26\
    ---------------------------------------------------------------------------
        \26\ Alan Viard, ``Rethink Tax Policy to Address the Long-Term
    Fiscal Imbalance,'' AEI Government Priorities, https://
    priorities.aei.org/rethink-tax-policy-to-address-the-long-term-fiscal-
    imbalance/.

        A VAT would raise a significant amount of revenue for the Federal
    Government, but the revenue will depend on how broad the tax base is.
    According to research by William Gale, a broad-based VAT that covered
    most domestic consumption could raise $842.4 billion each year or $10
    trillion over the next decade.\27\
    ---------------------------------------------------------------------------
        \27\ Gale, ``Raising Revenue With a Progressive Value-Added Tax.''

        A VAT would be more economically efficient than the income tax or a
    wealth tax. A VAT is a tax on consumption. As a result, it does not
    distort saving or investment decisions like the income tax does. In
    addition, the VAT is border-adjusted, which means it avoids distorting
    business' location decisions--businesses cannot avoid the tax by
    ---------------------------------------------------------------------------
    shifting certain assets or income out of the United States.

        Enacting a VAT would be equivalent to applying a one-time tax on
    wealth. Households finance part of their consumption with existing
    wealth.\28\ When the VAT is enacted, the price level would rise by the
    amount of the tax. This would immediately reduce the value of all
    existing wealth, and the Federal Government would collect revenue as
    individuals spend down their wealth. Since this would be a one-time tax
    on existing wealth, it would not distort saving and investment
    decisions like an annual wealth tax.
    ---------------------------------------------------------------------------
        \28\ Gale, ``Raising Revenue With a Progressive Value-Added Tax.''
    ---------------------------------------------------------------------------
    Addressing Regressivity
        Lawmakers have expressed concerns that taxes such as the gas tax, a
    VMT tax, a carbon tax, or a VAT would be regressive. Indeed, these
    taxes would place a larger burden on lower- and moderate-income
    households as a share of income than high-income households. The Tax
    Policy Center estimates that in the first year after implementation, a
    carbon tax would reduce the after-tax income of households in the
    bottom 20 percent by 2.1 percent. At the same time, the top 20 percent
    of households would see a reduction in after-tax income of 1.4
    percent.\29\
    ---------------------------------------------------------------------------
        \29\ Joseph Rosenberg, Eric Toder, and Chenxi Lu, Distributional
    Implications of a Carbon Tax.

        Lawmakers should consider the distribution of the entire fiscal
    system, not just one tax in isolation. The regressivity of these taxes
    could be offset with transfers or other tax reductions for low-income
    households.\30\ For example, many advocates of the carbon tax have
    suggested using some of the carbon tax revenue to reduce taxes or send
    rebates to low-income households. This would make a carbon tax
    proposal, on net, highly progressive.\31\ In addition, without these
    taxes, lawmakers would need to make even larger future reductions in
    programs such as Medicare and Social Security, which would be far more
    regressive than these taxes.\32\
    ---------------------------------------------------------------------------
        \30\ Pomerleau, ``Options to Fix the Highway Trust Fund.''
        \31\ Kyle Pomerleau and Elke Asen, ``Carbon Tax and Revenue
    Recycling: Revenue, Economic, and Distributional Implications,'' Tax
    Foundation, November 6, 2019, https://taxfoundation.org/carbon-tax/.
        \32\ Alan Viard, ``Rethink Tax Policy to Address the Long-Term
    Fiscal Imbalance.''
    ---------------------------------------------------------------------------
                                   conclusion
        President Biden and other lawmakers have proposed a host of tax
    increases on corporations and high-income households to finance
    spending. Two revenue-raising proposals have gained prominence over the
    last couple of years: a wealth tax and taxing the book income of
    corporations. These taxes come with notable downsides.

        Lawmakers should consider broader-based taxes to finance new
    government spending and address the Federal Government's fiscal
    imbalance. Raising the gas tax or enacting a VMT tax would be a
    reasonable way to pay for infrastructure. A carbon tax would help
    address climate change while raising revenue. A VAT could raise
    additional revenue with a limited negative impact on the economy.

                                     ______

              Questions Submitted for the Record to Kyle Pomerleau
                    Questions Submitted by Hon. Bill Cassidy
                                  estate taxes
        Question. Senate Majority Leader Schumer has stated, with regard to
    the estate tax ``. . . any organic business--a farm, a small business,
    and frankly a large business--that would have to be broken up because
    of the extent of the tax should not be. A business is an ongoing
    organism. It employs sometimes 10 people and sometimes 10,000 people.
    To have to break that business up to pay any tax, to me, is
    counterproductive.''

        Do you agree that the tax code should not inhibit owners of any
    size business from being able to pass along that business, in full, to
    future generations?

        Answer. The primary goal of a tax system is to raise revenue to
    finance government spending. Levying taxes requires making tradeoffs
    because taxes impose costs on the economy and distort economic decision
    making. Some taxes have a large impact on taxpayer decisions and the
    economy for each dollar in revenue they raise.

        The estate tax, while a highly progressive tax, is a tax that
    raises relatively little revenue for the distortions it causes. One
    issue with the estate tax is that it could require taxpayers to sell
    assets, including business assets, to pay the tax. As a result, the tax
    can lead to businesses changing ownership simply for tax purposes.
    Lawmaker should avoid instituting taxes that can greatly influence
    taxpayer behavior.
                                double taxation
        Question. New York Democratic Representative Jerry Nadler recently
    tweeted, ``No one should ever be taxed twice on the same income. It's
    not fair and it's not just.''

        Do you agree with this view? If not, why not?

        Answer. Whether income is taxed twice or once isn't necessarily the
    most important issue. Rather, it's the total tax burden on that income.

        Under current law, the Federal Government levies multiple taxes
    that apply to the same income. For example, the income tax and the
    payroll tax both apply to wages and both taxes can apply to the same
    exact income. However, this is not necessarily a problem. This is
    because the income tax funds general government services while the
    payroll tax funds Social Security and Medicare. Likewise, individuals
    pay Federal income taxes and receive benefits provided by the Federal
    Government and pay State and local income taxes to receive benefits
    provided by State and local governments. Two taxes for two sets of
    benefits.

        Rather, lawmakers should pay close attention to the total tax
    burden they are placing are certain activities. Placing multiple taxes
    on the same income can raise the effective tax burden on that income
    and can impact incentives. For example, the total tax burden on
    corporate income can be high because it faces both the entity level tax
    and the individual income tax on capital gains and dividends.

        A tax like the wealth tax would place an additional tax on the
    return to saving, which is already taxed under the individual income
    tax. As a result, the total tax burden under a system with an income
    tax and a high-rate wealth tax like the one Sen. Warren is proposing
    could apply effective tax rates over 100 percent on some income.
               effective rates if biden tax proposals are adopted
        Question. President Biden has proposed a number of changes to the
    tax code that would significantly increase tax rates.

        Could you estimate the marginal rate a successful medium to large
    size business of $50 million should expect to face if all of the Biden
    tax proposals were to become law today?

        Answer. Under current law, the top marginal income tax rate is 37
    percent. In addition, business owners generally need to pay self-
    employment taxes on income of 2.9 percent plus the 0.9 percent Medicare
    surtax. On top of that, business owners need to pay State and local
    income taxes that vary significantly from State to State, but the
    average is about 5 percent. Considering deductions that taxpayers
    receive for self-employment taxes and section 199A, the top marginal
    tax rate on self-
    employment income under current law is about 37 percent.

        Under Biden's proposal to raise the top marginal tax rate to 39.6
    percent, the all-in marginal tax rate on self-employment income would
    rise to about 39.7 percent.

                                     ______

                   Prepared Statement of Cheryl Straughter,
                            Owner, Soleil Restaurant
        Senator Warren, Ranking Member Cassidy, and members of the
    committee, I want to thank you for allowing me to testify today.

        I am not a billionaire, or an ultra-millionaire. I'm not even
    close. During my life, there have been times where I worried about my
    status as a thousand-aire. I'm the chef and owner of Soleil, a small
    restaurant located in Boston, MA. I am also a social worker and member
    of the Boston Black Hospitality Coalition.

        I opened my restaurant in 2018, in an area of Boston called Nubian
    Square. This was a thriving commercial district when I was younger, and
    I fondly remember shopping with my mother Shirley and boarding the
    elevated train that once operated all the way downtown.

        Over the years, disinvestment the community led businesses and
    families to leave. But when an opportunity arose to take over a vacant
    space in the neighborhood, I knew that I wanted to be part of the
    future of Nubian Square.

        I'm proud to run this small business. Along the way to my current
    role, I've been an employee, a student, and a caregiver. I work hard
    for myself, my family, my employees, and my community, and I care
    deeply about all of their well-being.

        And that's why it's so important that we have a fair tax system.

        I can't say that I enjoy paying taxes, but I am proud to pay them.
    The revenue collected from our taxes is what we use to pay for the
    government services we care about: schools, health care, Social
    Security.

        I value those services, and I know they make my community and our
    Nation better. But the unfairness of the current tax system is what
    drives people crazy.

        At Soleil, and I've got eight employees that work for me. Their
    incomes are reported to the IRS, and they pay their taxes based on that
    income, including paying a percentage of their income for Social
    Security and Medicare. But I know the ultra-rich are different. Their
    income doesn't usually come from a paycheck, it comes from investments
    and other holdings. That means that they often pay less in taxes than
    my own employees. And I know the ultra-rich have a bunch of ways to
    hide their income or avoid paying taxes on it. That is unfair.

        Asking ultra-millionaires and billionaires to pay a small percent
    of their massive wealth is a no-brainer. If you have a huge fortune,
    and you benefit from all that this country has provided, you ought to
    be paying your fair share. It's more than fair that they be asked to
    pay a small percent of their wealth--and I just can't understand why
    the wealthiest and luckiest people in the world would be complaining
    about it being such a hardship.

        It's the same with the big businesses that I compete with. They're
    able to use their resources to lower the amount of tax they pay--like
    hiring expensive lawyers and accountants, or shifting some of their
    profits overseas. Many Fortune 500 companies don't pay any taxes at
    all! It's hard enough to compete and run a business during a pandemic--
    it's nearly impossible to do that when the tax system is rigged against
    you.

        Our country has many needs right now. A fairer tax system would
    give us the opportunity to provide affordable child care, create a
    better education system, and repair our roads. We could provide more
    support to small businesses, especially those owned by African
    Americans and other groups that do not have easy access to financing,
    and make housing more affordable.

        These are important national priorities, and they're also things
    that I want for my family. I know that these investments will make our
    communities better and stronger, and help our economy grow. That will
    be good for me, good for my employees, good for my customers, and good
    for my business and businesses all over the country.

        I am happy to answer any of your questions. Thank you for inviting
    me to today's hearing, and thank you for your work to make our tax
    system fairer and our Nation stronger.

                                     ______

            Questions Submitted for the Record to Cheryl Straughter
                    Questions Submitted by Hon. Bill Cassidy
                                  estate taxes
        Question. Senate Majority Leader Schumer has stated, with regard to
    the estate tax ``. . . any organic business--a farm, a small business,
    and frankly a large business--that would have to be broken up because
    of the extent of the tax should not be. A business is an ongoing
    organism. It employs sometimes 10 people and sometimes 10,000 people.
    To have to break that business up to pay any tax, to me, is
    counterproductive.''

        Do you agree that the tax code should not inhibit owners of any
    size business from being able to pass along that business, in full, to
    future generations?

        Answer. I believe the tax code should support small businesses that
    serve the needs of our communities. For the vast majority of business
    owners in this country, I do not believe the tax code inhibits them
    from passing along their businesses to future generations. It is my
    understanding that the biggest estates in our country--those that meet
    the $11.7 million threshold to be subject to the estate tax--are
    provided with special accommodations to pay any tax they owe in the
    form of extended time periods and lower interest rates, especially if
    the estate consists of a farm or small business. Senator Warren's
    ultra-millionaire tax also includes accommodations for anyone subject
    to the tax (wealth of more than $50 million) who has liquidity
    constraints. These kinds of accommodations seem reasonable to me.
                                double taxation
        Question. New York Democratic Representative Jerry Nadler recently
    tweeted, ``No one should ever be taxed twice on the same income. It's
    not fair and it's not just.''

        Do you agree with this view? If not, why not?

        Answer. I believe a fair and just tax system is one that doesn't
    privilege wealth over work--my employees shouldn't be paying higher tax
    rates than the wealthiest people in this country just because they work
    for a paycheck rather than grow their wealth through holding stocks. My
    small business shouldn't be paying more in taxes than the big
    corporations just because we don't have expensive lawyers or
    accountants to help us eliminate our tax liability. We should not have
    a tax system that allows Fortune 500 companies to not pay federal
    income tax at all. A fair and just tax system is one that would ensure
    that everyone is paying their fair share and we have the money we need
    to invest in communities like mine.

                                     ______

                 Prepared Statement of Hon. Elizabeth Warren,
                       a U.S. Senator From Massachusetts
        Good afternoon. Welcome to this year's first hearing of the Finance
    Committee's Subcommittee on Fiscal Responsibility and Economic Growth.
    I want to thank our ranking member, Senator Cassidy, for working with
    me and my team to make this hearing successful.

        This subcommittee will focus on how we can create opportunities for
    every American, build a more equitable economy, and invest in our
    future prosperity.

        President Biden has proposed a $2-trillion infrastructure package,
    outlining the benefits of investing in roads, bridges, broadband,
    housing--the things people need to get to work. He's also about to
    unveil a plan for the caregiving economy, including child care,
    universal pre-K, and free community college. Current estimates put the
    price tag of that package at $1.5 trillion.

        All these investments would make the lives of millions of people
    better, but they carry a total price tag of $3.5 trillion, so how would
    we pay for them? Today, we will address that question by talking about
    revenues--where the money comes from to build a stronger future.

        There are a variety of proposals that would help move us toward
    that stronger future. I will highlight just three that I have put
    forward.

        First, a wealth tax would impose an annual 2-cent tax on fortunes
    over $50 million. It would not raise taxes on 99.9 percent of Americans
    by a single penny. That one tax would bring in $3 trillion.

        Second, the Real Corporate Profits Tax would force companies like
    Amazon, FedEx, and Nike, that make billions of dollars in profits and
    pay little or nothing in Federal income taxes, to pay more. The Real
    Corporate Profits Tax would apply only to corporations that report
    profits to their shareholders and the public of more than $100M. These
    companies would pay 7 percent of those reported profits--which they use
    to justify the big salaries and bonuses they pay their CEOs--no matter
    how many tax loopholes they find or how many scams they run. President
    Biden has a similar approach. My version would raise about $1.3
    trillion.

        Finally, I have proposed increasing tax enforcement for wealthy
    individuals and giant corporations. This plan provides mandatory
    funding for the IRS that is focused on making sure the rich and
    powerful get caught when they break the law. Estimates from the
    Commissioner of the IRS indicated we lose $1 trillion a year from tax
    cheating. If we stepped up enforcement to cut the cheating by only 20
    percent, we could raise as much as $1.8 trillion over the next decade.

        These three big ideas alone would raise more than $6 trillion,
    enough to pay for every single penny of President Biden's American Jobs
    Plan, then pay for every single penny of his American Families Plan,
    and still have more than $2 trillion left over. As these numbers show,
    our Nation can do both--invest in American families and pay for it
    without raising taxes on those same families. We can build a country
    that creates opportunity, not just for those at the top, but for
    everyone.

        These ideas have their critics. In fact, I invited one of the
    loudest critics--billionaire Leon Cooperman--here today to discuss
    these proposals with the members of this committee and the American
    public. After all, that is how democracy is supposed to work: citizens
    and stakeholders discuss ideas, and then our elected representatives
    vote. I'm disappointed that Mr. Cooperman decided he was more
    comfortable taking softball questions on cable news than subjecting his
    views to debate in the U.S. Senate.

        Mr. Cooperman may have been too frightened to come here today, but
    others were not. Today we are joined by a panel of distinguished
    witnesses, including several academics and tax policy experts,
    millionaire Abigail Disney, and small business owner Cheryl Straughter,
    who have a variety of views on these proposals and are willing to
    discuss and debate them in public.

        A fairer tax system is about making our country better and
    stronger. It's about allowing us to make investments in our economy by
    asking the wealthiest Americans and biggest corporations to pay their
    fair share.

        I'm looking forward to this discussion today, and I thank our
    witnesses and my colleagues for joining us.

                                     ______

                                 Communications

                                  ----------

                   Association of Americans Resident Overseas

                               4 rue de Chevreuse

                               75006 Paris, France

                            Tel: +33 (0)1 4720 2415

                             Website: www.aaro.org

                            Email: contact@aaro.org

                                                           May 11, 2021

    U.S. Senate
    Committee on Finance
    Dirksen Senate Office Bldg.
    Washington, DC 20510-6200

    The Association of American Residents Overseas (AARO) welcomes this
    opportunity to inform the Senate Committee on Finance of the deep
    concerns of Americans abroad in relation to existing and future U.S.
    legislation and regulation. AARO is a Paris-based, non-partisan,
    volunteer, not-for-profit organization that represents the interests of
    Americans abroad throughout the world, including stateside residents
    who share our concerns.

    Thanks to communication with its active membership of over 1,000 and
    constant contact with many other overseas Americans throughout the
    world, AARO is particularly familiar with the issues of interest to
    Americans abroad. AARO periodically conducts extensive surveys of
    overseas Americans to determine precisely the nature of these issues
    and the real-life effect of burdens borne as a result of U.S.
    legislation, regulation, and the lack of access and support for
    Americans abroad from public and private entities.

    AARO has very recently completed such a survey, which clearly
    demonstrated that certain U.S. legislation and regulations,
    particularly in the areas of taxation (as a consequence of citizen-
    based taxation) and access to financial services (aggravated by the
    Foreign Account Tax Compliance Act--FATCA--and the current regulations
    for filing the annual Financial Bank Account Report--FBAR), create
    serious issues of fairness for overseas Americans. This has led to
    discrimination against overseas Americans in terms of access to
    governmental and private sector services as well as the abrupt
    withdrawal of such services due to the cost of compliance, inherent and
    irreconcilable conflicts with the law of the country of residence, and
    access mechanisms that cannot be used because they are solely designed
    for those resident in the U.S. Our survey data on taxation and banking
    can be found here \1\ and on FATCA and FBAR here.\2\
    ---------------------------------------------------------------------------
        \1\ https://www.aaro.org/images/pdf/AARO_ARTICLE_6_TWO_SYSTEMS-
    2021_AVRIL.pdf
        \2\ https://www.aaro.org/images/pdf/
    AARO_ARTICLE_2_FATCA_22FEB21pdf.pdf.

    The increasing seriousness of this situation is demonstrated by the
    unfortunate sharp increase over recent years of the number of Americans
    considering or deciding to renounce American citizenship. AARO
    emphasizes that the decision to renounce citizenship is not solely or
    entirely taken out a reluctance to avoid U.S. taxation but can reflect
    the extreme difficulties American taxpayers face when faced with their
    obligations to the U.S. government as well as the government wherever
    they reside. This becomes even more acute and potentially decisive
    when, for example, marriage or other family relationships involving
    ---------------------------------------------------------------------------
    different nationalities and thus conflicting fiscal obligations.

    AARO often hears from Americans overseas for a multitude of reasons,
    including those who feel frustrated in their attempts to familiarize
    fellow Americans, including their representatives in Congress, with the
    real-life burdens, resulting from their status. Denial of local banking
    services due to the U.S. imposing extra-
    territorial compliance obligations for American customers due to FATCA
    or the forced closure of U.S. investment or bank accounts due to
    residence outside the U.S. have occasionally caused enough personal
    stress to bring on emotional problems. We believe that the lack of
    empathy among members of Congress and U.S. officials is in large part
    the result of a patently false idea of just who American ``expats'' are
    combined with a tendency of ``experts'' to evaluate issues from an
    often inaccurate and purely quantitative perspective that ignores or is
    dismissive of the difficulties that Americans abroad must confront in
    real-life.

    Both our surveys and real-life experience living abroad, often for
    decades, belie the notion that the American community abroad is
    comprised of wealthy, tax-dodging, unpatriotic expats living in
    splendid isolation from the local community as personified in old
    novels and films. On the contrary, many Americans overseas are persons
    of very modest means who have difficulty coming up with the funds
    (exceeding $1,000 at a minimum, according to our survey) to hire the
    often essential accounting/tax experts to counsel and prepare the
    several declarations required even for the majority of filers who do
    not owe tax and maintain ``foreign'' bank accounts in their country of
    residence for their daily needs. We believe that the dismissive
    attitude towards the problems of Americans abroad as evidenced in the
    testimony of Professor Gamage before the Committee on April 27th
    results from an unintentional but real discriminatory attitude coined
    as ``placism'' by one of our board members, Laura Snyder ``Taxing the
    American Emigrant,'' 74(2) Tax Lawyer 299 (2021), https://
    papers.ssrn.com/sol3/papers.cfm?abstract_id=3795480.

    Other Americans find themselves living abroad through corporate
    transfers, opportunities sought in line with our typically American
    entrepreneurial spirit, or for more personal reasons. The most notable
    in the latter category include retirement and following one's spouse.
    Americans pursuing professional opportunities may be better off
    financially but not always. Younger Americans in particular, seeking
    education, adventure, romance, and professionally enriching
    opportunities overseas, are often of modest means. The same can be said
    of retirees. Whatever their personal situation, however, Americans
    considering life abroad or already established overseas must expend
    considerable time and may need to pay high consulting fees when
    confronting the extreme complexity inherent in navigating between two
    legal and regulatory frameworks (that of the U.S. and their country of
    residence). Too often, commentators offer conclusions that ignore the
    reality that tax treaties, foreign country FATCA compliance agreements,
    and the like do not resolve many problems resulting from the
    inevitability of individuals and small American-owned businesses being
    ``caught in the middle'' between the U.S. and their country of
    residence. The unanticipated, unjust, and devastating effects of the
    Global Intangible Low-Taxed Income (GILTI) and ``transition tax''
    provisions of the 2017 Tax Cuts and Jobs Act have crippled this
    particular group.

    Americans abroad are loyal, patriotic citizens who do their best to
    comply with American law within an increasingly complex regulatory
    framework. They encounter discrimination, for example, in the forced
    closure of banking and investment accounts abroad and in the U.S. They
    are denied access to governmental services that are provided to their
    fellow Americans living in the U.S. (for example, obtaining a
    ``transcript'' of their tax filing situation from the IRS or obtaining
    locally relevant tax counsel after the U.S. government closed IRS
    offices in a number of embassies).

    Our members and the larger community of Americans who contact us
    increasingly look to Congress for solutions on how best to alleviate
    unnecessary burdens while preserving the overall objectives of U.S.
    policy. This does not take into account foreign governments and the
    European Union, which find themselves under pressure to respond to
    American unilateralism from dual nationals and citizens who, for
    various reasons acquired American nationality ``accidentally'' or
    unintentionally.

    We hope that legislators are concerned about the welfare and interests
    of Americans abroad, whose estimated number may be as high as nine
    million, rivaling the population of most U.S. states. We are, however,
    not convinced that Congress is studying and debating sufficiently the
    potential negative effects on individual Americans living overseas when
    it considers new legislation and regulation.

    We therefore urge members of Congress, and, in particular, members of
    this important committee to support the initiative of Representative
    Maloney, co-chair of the Americans Abroad caucus, to pass HR 2710 which
    would establish a Commission on Americans Living Abroad.

    Thank you for offering us this opportunity to make our views known. We
    remain at your disposal.

    Paul Atkinson
    Chairman, Banking Committee

    Fred Einbinder
    Vice-President for Advocacy

    William Jordan
    President

                                     ______

                       Letter Submitted by Vania K. Baker
    U.S. Senate
    Committee on Finance

    To Whom It May Concern:

    I am a citizen of the United States of America--a supposed citadel of
    liberty and justice. However, today, I am writing to call attention to
    the extreme injustice of the U.S. extraterritorial tax regime and how
    it severely limits the freedoms of individual U.S. citizens living
    outside of the United States. This system is profoundly unfair and it
    is high time that the extraterritorial tax system be abolished with the
    goal of ``Creating Opportunity Through a Fairer Tax System''.

    For the record, I (like most U.S. emigrants) did not move away from the
    United States to avoid U.S. taxation, but rather for mundane pursuits
    pertaining to work, study and/or family as life does not necessarily
    have to happen only within the United States. In fact, I have
    discovered that through living outside of the United States, I am not
    only subject to (1) taxation in the country where I live, but also to
    (2) a more punitive form of taxation than what is imposed upon U.S.
    residents! My only crime seems to be that I have chosen to live outside
    of the United States and so, perplexingly, my income and assets are now
    considered foreign to the United States while they are in actuality
    local to me.

    Moreover, I am writing to express my great concern regarding the
    failure of the Senate Finance Committee in considering the impact of
    this proposed tax legislation upon U.S. Americans living abroad. We are
    average, ordinary, and everyday people. Because we are flesh and blood
    humans, we need to eat. Because we will get old and retire, we need to
    invest in and develop pensions. Because we are individuals with
    responsibilities to our families, our communities, and our countries of
    residence, we may need to operate our own small businesses. We are
    definitely NOT mini multinational corporations and we are tired of
    being treated as though our normal day-to-day activities are somehow
    ``offshore'' and deserving of punishment. We ARE tax compliant in our
    countries of residence. We pay a lot of tax. We pay our fair share. We
    do this even though it is almost impossible for U.S. to be both tax
    compliant in our country of residence and be compliant with U.S. tax
    laws. We don't understand why U.S. tax laws are being applied in an
    extraterritorial manner to income and assets which are not in the
    United States. Other countries do not tax their citizens who live in
    the United States? Why should the United States tax U.S. citizens
    living in other countries?

    As a fellow U.S. emigrant (who will go unnamed) has previously
    described:

    ``Imagine you were born in Canada, but moved to Texas as a young
    person, obtained U.S. citizenship and built your family life and career
    in Texas. You love your life in Texas, but there is one BIG catch: you
    have to pay higher Canadian tax rates on your income, often on top of
    the taxes you're already paying in the U.S., for services such as
    Canadian nationalized healthcare which you never personally benefit
    from. You can't take advantage of U.S. tax programs such as 401K plans
    or education deductions because they are not `Canadian approved'
    programs, so you have to pay even higher tax to Canada on the income
    you are supposed to be able to deduct. Furthermore, Texas banks have to
    report all of your financial records to the Canadian tax authorities
    and, as a result, very few banks will accept you as a client so you
    can't shop around for a better mortgage or a higher savings interest
    rate. On top of all this, jobs in which you would have bank authority
    or signatory power don't want to hire you even if you are the best
    candidate because all of the organization's financial information would
    have to be sent to the Canadian financial authorities. Finally, you are
    effectively barred from investing in any kind of mutual funds or
    investment instruments in Texas because they are treated by Canada as
    `offshore' accounts, overseen by the Canadian Financial Crimes Unit,
    with onerous reporting requirements and punitive tax rates. All of this
    because you were born in Canada and so therefore, due to your place of
    origin, you are treated differently from AND more punitively than other
    Americans--even those born in other countries who are living in the
    U.S. Then, imagine that your repeated calls to change the system to
    something more equitable were systematically ignored by both Canadian
    and U.S. authorities. Sound unfair? This is the reality I have to
    contend with every day as a U.S. person residing in Switzerland.''

    Our situation is bad. It is unique. Only the African dictatorship of
    Eritrea follows the lead of the United States by imposing worldwide
    taxation upon its citizens who live outside of the country.

    The Senate Finance Committee's sheer indifference regarding this
    situation is incomprehensible. Interestingly, in 2015, the Senate
    Finance Committee recommended changes to the U.S. extraterritorial tax
    regimes. There have been no changes for the better, but rather many
    changes for the worse.

    So far, the 2021 Senate Finance Hearings have been astoundingly
    incompetent. The Committee is so focused on corporations that it does
    not acknowledge at all the changes such corporate tax will have upon
    ordinary individuals. It has not been mentioned how this obsession with
    the taxation of corporations will, instead, produce a greater-reaching
    impact upon countless individuals rather than on those few corporations
    the Committee is fixated on.

    The hearing on April 27, 2021--about a wealth tax--took the treatment
    of U.S. citizens abroad to a whole new level. The bottom line is this:

    As was described, Elizabeth Warren's proposed wealth tax will result in
    (1) taxation of assets earned outside of the U.S. and (2) the taxation
    of our non-U.S. citizen spouses who we share our lives with.

    Question: Would the U.S. be okay with China imposing taxes upon all
    property situated within the United States owned by Chinese citizens?
    Would you think it fair to be forced into the tax system of your
    foreign spouse's country of birth when you've never even step foot in
    said country?

    If any of this comes as a surprise, it is either because adequate time
    has never been set aside to consider such important ramifications or it
    is simply being ignored how this translates into the U.S. having an
    extraterritorial tax regime--a regime imposed upon U.S. Americans
    abroad. All indications are that Warren's proposed wealth tax will
    actually leverage the injustice of U.S. citizenship-based taxation to
    make the whole world part of its tax base.

    There are no other words for what is trying to be done to ordinary U.S.
    emigrants other than predatory, obscene and unjustifiable. These tax
    practices must stop. If not, we will all eventually acquire another
    citizenship AND be forced to take the traumatic act of renouncing the
    citizenship we were born with. I would like to believe the U.S. is
    better than this.

                                     ______

                     Letter Submitted by Cody Gentry Barrow
    U.S. Senate
    Committee on Finance

    Sir/ma'am,

    I am an American citizen living in The Netherlands, effective August
    2019. I vote in the State of Massachusetts because it is my most recent
    U.S. residence. I spent most of my career prior to moving abroad in
    Virginia. I believe my profile is unusual among individual submissions
    from Americans abroad you may receive, as I will explain below. It is
    certainly extraordinary for an individual with my security clearance
    \1\ and government service experience to permanently reside abroad as a
    private citizen and express this level of concern with our nation's
    extraterritorial policies. I ask you and your staff members take my
    statement seriously as someone who served more than half his adult life
    to this nation.
    ---------------------------------------------------------------------------
        \1\ Between 2004 through approximately 2020 I held a Top Secret--
    Sensitive Compartmented Information (SCI) security clearance with
    Single Scope Background Investigation adjudicated by the Defense
    Intelligence Agency (DIA), National Security Agency (NSA), and United
    States Air Force (USAF), including full-scope and counterintelligence
    polygraphs adjudicated by NSA. I was additionally responsible for
    Special Access Program and Special Access Required compartmented
    programs and indoctrinated into numerous such compartments, some of
    which were otherwise exclusive to Agency directors and Senior Executive
    Service personnel.

    As you know, the United States is the only developed nation in the
    world that taxes its citizens based on citizenship rather than where
    they reside and work. As a lifelong American patriot who has simply
    elected to work for a Dutch company and permanently reside abroad in
    the ``second act'' of his life, your committee's inattention to
    extraterritorial taxation and citizenship-based taxation issues has
    caused this military and intelligence veteran extreme and unnecessary
    financial distress. These issues also reflect poorly diplomatically
    with our Allied partners, including the Kingdom of the Netherlands,
    struggling with ``accidental Americans'' and the undue hardships placed
    upon U.S. citizens abroad due to FATCA and PFIC laws' unfortunate
    inadequate accounting for individual citizens pursuing middle-class
    ---------------------------------------------------------------------------
    lives.

    For background, I am a former senior grade intelligence officer (GG/GS-
    14) and military veteran with experience in Afghanistan countering
    Taliban information operations on behalf of United States Cyber
    Command, of which I am a plank-holding (founding) member; the National
    Security Agency; and the Pentagon, where I worked with the Office of
    the Undersecretary of Defense for Intelligence, the Office of the
    Secretary of Defense for Policy, and was responsible on behalf of the
    Defense Intelligence Agency for strategic information operations
    program policy and special operations programs in direct engagement
    with the Secretary of Defense and in some cases the President, at the
    time President Barack Obama. You may also find several of my
    publications with the government/intelligence/academia think tank, the
    Intelligence and National Security Alliance (INSA), in the
    footnotes.\2\, \3\
    ---------------------------------------------------------------------------
        \2\ Please see my 2018 publication, Getting Ahead of Influence
    Operations, coauthored with the former Director of the National
    Security Agency and former Deputy Director of the Central Intelligence
    Agency, here: https://www.insaonline.org/getting-ahead-of-foreign-
    influence-operations-may-2018/.
        \3\ Please see my other publication, A Framework for Cyber
    Indications and Warning, co-
    authored with other industry leaders and former intelligence officials
    here: https://www.
    insaonline.org/a-framework-for-cyber-indications-and-warning/.

    As you can imagine, this makes it all the more painful and excruciating
    that U.S. extraterritorial taxation policy has placed me in the highly
    unusual position of tax advisors suggesting I consider ``unthinkable''
    options, such as citizenship renunciation, simply to pursue an ordinary
    life with a retirement plan, investment options in standard vehicles
    like ETFs, and other norms afforded to other American citizens without
    the extreme duress placed upon citizens abroad because of PFIC, FATCA,
    and other rules that classify middle-class individuals abroad as
    second-class citizens. This of course is not the course I will take. My
    intention is to remain an American citizen and to work through my
    elected officials to make our policies fair to Americans. It is always
    possible I will return to the U.S., my home country, and I should not
    be in a position of tax advisors suggesting I consider permanent
    ---------------------------------------------------------------------------
    separation simply to experience a normal life while residing abroad.

    I assure this honorable committee that no American ever fled to Europe
    to evade taxes. European tax rates are among the highest in the world,
    including in wealth and capital gains unprotected from any double
    taxation exemption treaty, which is yet one more reason why U.S.
    citizens ought not be taxed both by their adopted nation and their home
    nation.

    Here are some of the issues faced with citizenship-based taxation
    instead of residency-based taxation:

          Each treatment of U.S. citizens' abroad bank accounts, pensions,
    and other ordinary tenets of a healthy financial life are treated as
    ``foreign'' by the Internal Revenue Service (IRS), but for us these are
    local institutions. The United States's highly irregular and unique
    citizenship-based taxation system inadequately accommodates American
    citizens permanently living abroad.

          PFIC regulations similarly classify U.S. citizens' investments
    as ``foreign,'' levying an extreme tax on middle-class Americans simply
    trying to invest in local equities, either for retirement or in the
    hope of improving their situation with capital gains investments. We
    cannot even invest in exchange-traded funds (ETFs), because European-
    based ETFs are classified as ``foreign''--they are local to us--and
    local institutions will not allow investment in U.S.-based ETFs.

          The 2014 FATCA law, well-intentioned to prevent tax evasion and
    schemes, is a crushing regulatory burden on ordinary Americans. Foreign
    institutions are not willing to conduct business with middle-class U.S.
    citizens solely because of the burden levied here.

          U.S. tax treaties and policies to help prevent double taxation
    like FEIE and FTC are ineffective and incomplete. They have capped wage
    limits too low for professionals working and paid in Euro currencies
    and in professional fields. While my earned wage income may be higher
    than median, I am also taxed at a 49% rate by my country in Europe and
    I am paid at the market rate for a cybersecurity professional--my
    industry after leaving the government. I am not, nor likely ever will
    be, ``wealthy'' or a ``fat cat.'' I am a working cyber intelligence
    professional. I am simply taxed twice, unlike any of my colleagues who
    are citizens of other developed nations--they are taxed based on where
    they reside and work, not based on their passport.

          Not in my case, but in other cases many American citizens have
    not been to the U.S., or in some cases have never been to the U.S., in
    many years. Many do not have any ties to the U.S. They do not have
    employment in the U.S. Yet the U.S. taxes them based on their passport,
    leading to a painful stigma against U.S. citizenship and resulting in
    more ``burden'' than gift. This is especially painful for me to witness
    as a former service member.

          This has led to an increasingly negative diplomatic
    image\4\, \5\, \6\ for the United States through
    what has become ``Accidental Americans,'' who contend with citizenship-
    based taxation's unintended negative effects regularly.\7\
    ---------------------------------------------------------------------------
        \4\ Dutch MPs call for action on accidental American bank accounts:
    https://www.
    dutchnews.nl/news/2020/11/dutch-mps-call-for-action-on-accidential-
    american-bank-accounts/.
        \5\ France's ``accidental Americans'' file new suit over bank
    refusals: https://www.thelocal.fr/20200706/frances-accidental-
    americans-file-new-suit-over-bank-refusals/.
        \6\ Accidental Americans Appeal FATCA in Luxembourg Court: https://
    www.law360.com/tax-authority/articles/1372690/accidental-americans-
    appeal-fatca-in-luxembourg-court.
        \7\ Why ``Accidental Americans'' Are Desperate to Give Up Their
    U.S. Citizenship: https://time.com/5922972/accidental-americans-fatca/.

    While U.S. citizenship brings global protection and diplomatic services
    and it is a privilege to be a citizen of what is frankly still the
    greatest country on Earth, these U.S. citizens receive no benefits, use
    no services, and pay double taxes based on their passport. Citizens of
    every other developed country--in fact, every country save the African
    dictatorship of Eritrea--pay taxes based only on where they reside and
    ---------------------------------------------------------------------------
    are employed.

    There is simply no excuse for citizenship-based taxation and immense
    distress wrangling with the IRS each year for citizens that use no
    services and have no connection to the United States besides their
    passport.

    There is no excuse for classifying home sales, investments, and other
    aspects of normal financial planning as ``foreign'' investments and
    incurring a 40% tax penalty that other American citizens do not endure.
    For U.S. citizens abroad, these are local investments.

    These are local homes where U.S. citizens abroad have purchased homes
    to raise their families, just as Americans domestically, but we are
    subject to highly irregular ``foreign'' tax penalties simply because we
    hold U.S. citizenship.

    These policies like PFIC and FATCA are well-intentioned and typically
    designed to prevent tax evasion, yet they have a severe effect of
    harming ordinary citizens while corporations and wealthy individuals
    find other ways to avoid taxes, such as leveraged borrowing. Neither
    the IRS nor the U.S. tax code acknowledges how much unnecessary burden
    these policies place on ordinary Americans who happen to live abroad.
    Many, perhaps most of these citizens have no affiliation with American
    employers or corporations in any capacity and are simply trying to live
    normal lives.

    There must be a more fair and equitable solution that would identify
    how many days a citizen has worked in the United States, or has visited
    the United States, and incur tax liability only in such circumstances.
    I am certain all U.S. citizens would be happy to pay taxes when working
    for American employers, residing in the United States, or using
    American services, et cetera. As it stands, American citizens abroad
    are in a unique and the most situation possible among developed
    nations--hamstrung with retirement, investment, home ownership, and
    other options--merely based on our passport.

    Americans should be proud of our passport, not afraid of how it will
    harm our futures or our families because of highly irregular tax
    policies. As well-intentioned as they may be, it is important to
    distinguish much more effectively between corporate entities evading
    taxes and individuals simply trying to live normal lives abroad.

    Please feel welcome to reach out to me with further engagement.

    Sincerely,

    Cody Gentry Barrow

                                     ______

                     Letter Submitted by Claude Beauregard
    U.S. Senate
    Committee on Finance

    To Whom This May Concern:

    I am a proud citizen of the United States of America--that great
    citadel of freedom and justice. But, I am writing today to call
    attention to the extreme injustice of the U.S. extraterritorial tax
    regime and how it severely limits the freedom of individual U.S.
    citizens living outside the United States. This system is very unfair
    and it's high time that the extraterritorial tax system be abolished
    with the goal of ``Creating Opportunity Through a Fairer Tax System.''

    The only thing that makes me different as an American from U.S.
    residents is that I live outside the United States. For the record, I
    did not move from the United States to avoid U.S. taxation. In fact, I
    have discovered that by living outside the United States I am subject
    to (1) taxation in the country where I live and (2) a more punitive
    form of taxation that what is imposed on U.S. residents. My only crime
    seems to be that I live outside the United States--and therefore my
    income and assets are foreign to the United States. But, the income and
    assets are actually local to me.

    I am writing to express my great concern about the failure of the
    Senate Finance Committee to consider the impact of proposed tax
    legislation on me and on Americans living abroad generally. We are
    average, ordinary, every day people. Because we are flesh and blood
    humans, we need to eat. Because we will get old and retire we need to
    save for retirement. Because we are individuals with responsibilities
    to our families, our communities and our countries of residence we may
    need to operate our own small businesses. We are definitely NOT mini
    multinational corporations and we are tired of being treated as though
    our normal day-to-day activities are somehow ``offshore'' and deserving
    of punishment. We are tax compliant in our countries of residence. We
    pay a lot of tax. We pay our fair share. We do this even though it is
    almost impossible for us to be both tax compliant in our country of
    residence and be compliant with U.S. tax laws. We don't understand why
    U.S. tax laws are being applied in an extraterritorial manner to income
    and assets that are not in the United States. Other countries don't
    their citizens who live in the United States? Why should the United
    States tax U.S. citizens living in other countries?

    Our situation is bad. It is unique. Only the African dictatorship of
    Eritrea follows the lead of the United States by imposing worldwide
    taxation on its citizens who live outside the country.

    I really don't understand the indifference of the Senate Finance
    Committee to this situation. Interestingly, the Senate Finance
    Committee in 2015 recommended changes to the U.S. extraterritorial tax
    regimes. There have been no changes for the better, but many changes
    for the worse.

    So far, the 2021 Senate Finance Hearings have been very, very bad. The
    Committee is obsessed with corporations without acknowledging that
    changes to corporate tax will have a huge effect on individuals. You
    haven't mentioned that your obsession with the taxation of corporations
    will have a bigger impact on the many individuals than on the few
    corporations.

    The hearing on April 27, 2021--about a wealth tax--took the treatment
    of U.S. citizens abroad to a new level. The bottom line is this:

    As described Elizabeth Warren's proposed wealth tax will result in (1)
    taxation of assets earned outside the USA and (2) the taxation of our
    non-U.S. citizen spouses who we share our lives with.

    And to add insult to injury, Senator Warren's proposed wealth tax would
    bring assets acquired by U.S. citizens, after having moved from the
    United States, into the wealth tax system. Come on! My house was
    acquired after I moved from the United States. My local business has
    nothing to do with the United States. My non-U.S. citizen spouse's
    assets have nothing to do with United States.

    Question: Would the United States like it if China imposed taxes on all
    property situated in the United States that was owned by Chinese
    citizens?

    If this comes as a surprise to you it's because you either don't
    understand or are conveniently ignoring that the U.S. has
    extraterritorial tax regime--a regime imposed on Americans abroad. All
    indications are that the Warren wealth will actually leverage the
    injustice of United States citizenship-based taxation to make the whole
    world part of its tax base.

    Seriously, these predatory, obscene and unjustifiable tax practices
    must stop. It's simply not fair!!

    God Bless the United States of America!

                                     ______

                     Letter Submitted by Janeen Butler, CPA
    As a CPA practicing in tax, I have been following the tax debate for
    some time now. Sometimes I agree with Democrats and sometimes I agree
    with Republicans. I recognize that a tax policy that sounds good in
    theory can often times fall apart when working through the practicality
    of it. I absorb all the complaints and all the complex discussions, but
    at the end of it, I cannot help but think--if the bottom 95% were paid
    more this would solve so many problems. I appreciate the push for a
    higher minimum, but I believe it needs to go further than that. I often
    ask myself--is it a policy issue or a cultural issue? If a cultural
    issue, is there a policy that could nudge the cultural trend needed to
    strive towards sustainability. The key point is higher wages will help
    local economies and raise taxes. In order for trickle down to work, it
    has to actually trickle down. So how do you convince those at the top
    to start the ripple effect? I really think it can be done through a
    combination of cultural and policy shifting. Is it a matter of who goes
    first?

    There is a recent working paper from Rand Corporation that studies the
    declining trends in wages compared to GDP over the last three decades:
    https://www.
    rand.org/pubs/working_papers/WRA516-1.html. The bottom 95% is much
    worse off than in prior decades. Take that, combined with rising costs
    of healthcare, childcare, education, etc. and it is easy to see why
    Americans are frustrated. A middle class family should be able to pay
    their bills without stressing and go on a vacation or two a year
    without charging it all on the credit card. A strong middle class
    family allows individuals to move up on Maslow's hierarchy of needs and
    contribute to their local communities, either with time or money. Those
    that you would think ``should'' be middle class based on their jobs are
    still struggling to pay their bills without stressing or go on those
    family vacations. I blame the entire economic ecosystem and below is my
    summary for how to look at it holistically and brainstorming ideas for
    shifting it.

    Let's look at the ripple effect of higher wages in the U.S. I hear that
    small companies cannot afford to pay higher wages and I believe them. I
    also believe that if we start with the big companies, the small
    companies will be able to pay higher wages. Take the example of a
    Walmart or some other big company into a neighborhood (I don't mean to
    just pick on Walmart). Think about how much money they extract out of
    that town only to put back in by way of low wages. Now, let's imagine
    Walmart starts paying more to every level of employee. People in that
    town now have more money. What might that achieve?

         1. Able to pay for child care.
         2. Get out of debt.
         3. Able to enroll children in extracurricular activities.
         4. Dine out at local restaurants.
         5. Explore more--mini and big vacations which stimulates
    economies.
         6. Fix up their homes (supports local contractors).
         7. Eat healthier (reduce healthcare costs).
         8. Less stress (reduce healthcare costs).
         9. Start choosing to shop locally and not just big box stores.
        10. Donate to local charities.
        11. Pay more in income taxes, sales taxes, and payroll taxes.

    While I cannot guarantee how an individual will spend their money, I
    can say that I have seen a large cultural shift in the desire to
    support local businesses. Those that can afford it, recognize it costs
    more to have ethically sourced items from well-paid labor-they are
    willing to pay for it. Plus it's the cool thing to do! Here in my state
    of Arizona, we have an organization called Local First AZ that does a
    fantastic job of elevating local businesses and towns to explore.
    People are not solely driven by price, they will care about how they
    spend their dollars if they can afford to.

    So now that the big companies have started pushing those extra dollars
    into that town, what happens next? Now some of the smaller companies
    will inevitably see an increase to their bottom line and will have the
    money to pay their employees more and I imagine have more to keep for
    themselves as owners and so the virtuous cycle continues. I acknowledge
    that a strong cultural message has to be pushed out by local towns to
    promote shopping local vs. ordering everything on Amazon. I still order
    plenty on Amazon, but a conscious effort to support local can do
    wonders for our hometown economies.

    So how do you get the first ones to pay more wages? Here is my rough
    draft brainstorm. . . .

    No one likes to pay taxes. I wish that wasn't the case, but it just is.
    I would say owners like paying employees more than paying taxes, so
    let's make that happen. So what if we raise taxes as planned, but then
    offer a credit for increasing wages in which the government basically
    subsidizes the extra wages to get them to a point where they are in the
    same (or close) position they would be in under current TCJA tax law.
    I'm not going to go through how the math would work at this time, but I
    know a formula could be devised to come to that result. This would
    still have a positive net impact on tax revenues due to the increase
    income and payroll taxes on the recipients of the increased wages (not
    to mention increased sales taxes). In logistical terms, I think this is
    achievable through information already provided by businesses. You
    could look at the average increase in wages by taking the total wages
    per the W-3 less officer compensation on form 1125-E (highly
    compensated officer wages should be subtracted out of the formula) and
    divide by total employees as reported on W-3 (less the number of
    officers), then compare year over year.

    I know it seems drastic to offer this type of credit, but I believe it
    will result in the intended result. I worry that raising taxes doesn't
    get to the root of the problem. Somehow we have to get every day
    Americans to be paid more. I try not to be too cynical, but I wish
    companies would do the right thing and see how it would improve the
    economy as a whole, but maybe the big companies see how dependent
    people are on their low prices? I think what most Americans were
    thinking when they heard ``Make America Great Again'' was a longing for
    the days before big companies, where you had cute downtown areas full
    of local shops and communities were very connected. I think most of us
    would love that, liberal or conservative. I'm not trying to destroy the
    big companies; they do provide jobs, economies of scale, and
    conveniences; but we could all benefit from a better balance. More
    money in our paychecks would provide us with the power to make those
    consumer choices and support our own communities to make them better.

                                     ______

                Letter Submitted by Anne-Marie Yarbrough Buzatu
    Dear Committee Members,

    Imagine you were born in Canada, but moved to Texas as a young person,
    obtained U.S. citizenship and built your family life and career in
    Texas. You love your life in Texas, but there is one BIG catch: you
    have to pay higher Canadian tax rates on your income, often on top of
    the taxes you are already paying in the U.S., for services such as
    Canadian nationalized health care that you never personally benefit
    from. You can't take advantage of U.S. tax programs such as 401K plans
    and education deductions because they are not ``Canadian approved''
    programs, so you have to pay Canada tax on the income you spend on
    those. Furthermore, Texas banks have to report all of your financial
    records to the Canadian tax authorities, and as a result very few banks
    will accept you as a client, so you can't shop around for a better
    mortgage or a higher savings interest rate. On top of this, jobs in
    which you would have bank authority or signatory power don't want to
    hire you even if you are the best candidate because all of the
    organization's financial information would have to be sent to the
    Canadian financial authorities. Finally, you are effectively barred
    from investing in any kind of mutual funds or investment instruments in
    Texas because they are treated by Canada as ``offshore'' accounts
    overseen by the Canadian Financial Crimes Unit, with onerous reporting
    requirements and punitive tax rates. All of this because you were born
    in Canada, and because of your place of origin you are treated
    differently from/more punitively than other Americans--even those born
    in other countries who are living in the U.S. Then imagine that your
    repeated calls to change the system to something more equitable were
    systematically ignored by both Canadian and U.S. authorities. Sound
    unfair? This is the reality I have to contend with every day as a
    ``U.S. person'' residing in Switzerland.

    I am an American citizen, born and raised in Texas, who has resided in
    Switzerland for more than 15 years, and who has recently obtained Swiss
    citizenship. Because of my status as a ``U.S. person'', I am
    discriminated against in Switzerland, my place of residence and now
    nationality, because of the U.S. practice of taxing ``U.S. persons'' on
    their worldwide income, and the Foreign Account Tax Compliance Act
    (FATCA) and the bilateral agreement that the U.S. negotiated with
    Switzerland in order to enforce FATCA. Furthermore, because I reside
    outside of the U.S., I am discriminated against as compared to my U.S.-
    based compatriots and am unable to benefit from a whole host of social
    benefits, tax deductions and banking services. Here are a few examples:

          I am effectively banned from opening an investment account in
    Switzerland, my place of residence and nationality, because financial
    institutions do not want to assume the onerous reporting requirements
    that come with a potential withholding fee of 30%.
          Nearly all banks in Switzerland will not accept me as a client
    for regular banking services for the same reasons, so there is no way
    for me to compare banking services or take advantage of offers that are
    not provided by the one bank that will accept me (UBS).
          Nearly all U.S.-based investment firms and banks will not accept
    me as a client because I am not a resident of the U.S.
          I pay into a retirement fund that is very similar to a 401K
    program, and which provides similar tax advantages in Switzerland
    because I am only taxed on that income when I take it out at
    retirement; but both my and the employer's contributions are taxed by
    the U.S. in the year I earn them meaning I am taxed at a punitive rate.
          I cannot take deductions for my sons' university tuition because
    they schools they go to are not on the U.S. Department of Education's
    Database of Accredited Post Secondary Institutions and Programs (DAPIP)
    \1\ or the Federal Student Loan Program list.\2\
    ---------------------------------------------------------------------------
        \1\ https://ope.ed.gov/dapip/#/home.
        \2\ https://studentaid.gov/understand-aid/types/international.
    ---------------------------------------------------------------------------
          I am not able to benefit from a whole host of tax deductions and
    credits that my U.S.-residing compatriots do because I am not a
    resident of the U.S.
          Many IRS services are only available to U.S. residents, meaning
    that they are not available to me as a U.S. person residing abroad.
          Being a ``U.S. person'' has impacted me professionally because
    any Swiss institution I work and have bank signatory rights for would
    have to have their finances reported to the IRS. I have only worked for
    non-profit NGOs in Switzerland.
          In many cases Swiss taxes are assessed in a manner that is
    fundamentally incompatible with the U.S. income tax approach, meaning
    that in some cases I am double-taxed by both systems; the current U.S.-
    Swiss tax treaty does not effectively address these inconsistencies
    (see more below).

    U.S. taxation on my and my husband's income is disastrous for us, for
    numerous reasons which are laid out in detail in the below submission.
    However, before wading into the weeds, I wanted to put up front my
    recommendations for how to overhaul international taxation so that it
    is fairer and reduces discrimination against folks like myself:

        (1)  Change the system of citizen-based taxation of individuals to
    that of individual taxation on only income earned from U.S. sources,
    and not worldwide taxation, also known as resident-based taxation for
    individuals, the kind of income taxation that most of the rest of the
    world practices (for a relatively simple and fast interim fix to this
    issue by the U.S. Treasury while waiting on lengthier legislative
    processes, please read this article \3\);
    ---------------------------------------------------------------------------
        \3\ https://papers.ssrn.com/sol3/
    papers.cfm?abstract_id=3795480&fbclid=IwAR10eXmPraGW3
    Wuaa_VgnL7HYObjUBZz3302cglQOsT2rPyxtmy5SS7ibgU.
    ---------------------------------------------------------------------------
        (2)  Create a special committee that looks at the impacts of U.S.
    taxation on its nationals residing abroad so that any changes made to
    the tax code are reviewed by this body to ensure that our situations
    are taken into consideration, including analyses of how they are
    (in)compatible with the tax systems of the other 190+ countries in
    which U.S. persons live in order to protect against unintended negative
    consequences; and finally.
        (3)  To include formal representation of Americans living abroad in
    our representative bodies, as the approximately 9 million of us living
    abroad need a voice. Switzerland and France include seats for their
    citizens residing abroad in their Parliaments, and the U.S. can and
    should do the same.

    To understand why I am making these recommendations, please read the
    more personal account below.

    I was born and raised in Texas, where I lived most of my life until I
    and my family moved to Switzerland more than 15 years ago. We didn't
    feel we had much choice. In August 2005, my husband was laid off from
    his job in the high-tech sector. We had two young boys aged 4 and 7,
    and I was working as a part-time consultant and a more than full-time
    mom. Once my husband lost his job, we suddenly were faced with
    extremely high health insurance costs (COBRA), significant student loan
    debts and a high monthly rent with no income. My husband applied for
    several jobs and had a few interviews, but the one he got was working
    in IT for the International Computing Center, a UN-affiliated computer
    services organization, located in Geneva, Switzerland.

    In Switzerland, I went back to school studying the impact of war and on
    international security and human rights. I subsequently managed to
    carve out a really fulfilling career working for Swiss-based NGOs where
    I strive to limit the negative impacts of businesses on human rights,
    as well as work with the private sector to foster positive change, both
    on the ground as well as in the halls of international policy.

    I love the U.S. and have close ties with family members and several
    good friends who live there. Both of my elderly parents are alive, but
    have been experiencing some serious health issues of late. Before the
    pandemic, I typically would visit them at least once a year, and it has
    been tough waiting on the sidelines, hoping that I will be able to see
    them again before too long. It is important to me that I am able to
    visit them, and to be able to spend more time with them should they
    need extra care and support, and more generally I love getting back to
    the U.S. There are definitely things that I miss, like really good Tex-
    Mex (!) in an affordable restaurant, infinite sunsets over a West Texas
    sky, and easy, laid-back conversations with good friends and family.

    What I do not love is the U.S. taxation of people like me who live,
    work and pay taxes in a completely different tax system, which in many
    areas is completely incompatible with the U.S. tax system. As a matter
    of fact, you could say that the U.S. has three different distinct
    income tax regimes which creates different, unequal classes of
    taxation: 1. Residence--For U.S. residents, 2. U.S. Source--For non-
    resident aliens, 3. Extraterritorial--For Americans Abroad. This last
    regime to which I and my family are subject means that we don't get the
    same kinds of deductions and tax credits as our homeland-based
    compatriots. For example: I participate in an employer-contribution
    retirement program which is very similar to U.S. 401K programs: the
    employer matches my contributions, and I do not have to declare the
    employer nor my contributions on my Swiss taxes as they are paid, only
    when I take them out after retirement when I am likely earning much
    less. However, the U.S. taxes me on the employer contributions as well
    as my own contributions to the tax plan in the year that they are paid,
    so I am taxed by the U.S. on money I haven't even received, and likely
    at a higher tax rate than I would be at during retirement. Another
    example: my son is going to a university located in Berlin, Germany,
    however the school is not on the list of U.S. recognized educational
    institutions, so we are unable to deduct his tuition from our taxes.

    Furthermore, Swiss income taxes are structured completely differently
    from those of the U.S., and they are in most cases lower than the U.S.
    income tax rates. However, the cost of living in Switzerland is one of
    the highest in the world and is considerably higher than we were paying
    in Texas. People who visit from the U.S. are shocked at the prices in
    the stores and restaurants here, and renting/buying homes is extremely
    expensive. However, because of the relatively high salaries (in Geneva
    we have an approximately $25/hour min wage) and low taxes, these prices
    are generally affordable to people who work here. Less so for us: as
    ``U.S. persons'', because we are unable to take many of the same
    deductions as our homeland compatriots, we essentially have to pay
    higher U.S. taxes than Americans living in the U.S., higher taxes than
    others who live and work in Switzerland and pay the higher Swiss
    prices. And to be very clear, we are not earning very high salaries,
    but rather are at that sour spot of earning just a little more than the
    Foreign Earned Income Exemption (FEIE) once things like our employer
    contributions to pensions and other benefits--much of which we don't
    get in pocket--are taken into account. As such, we pay U.S. taxes at a
    pretty high rate on income that doesn't make it into our bank account
    and given the high cost of living we have here, this means we are
    penalized financially relative to our colleagues who are working
    similar jobs.

    Moreover, as U.S. persons residing abroad, we are not able to take
    advantage of many of the tax credits that are available to those living
    in the U.S. For example, in March 2018 we bought a Tesla Model 3 (the
    more affordable Tesla) and were under the impression that we would be
    able to get the $7,500 tax credit to help us offset the still
    significant cost. However, when we did our U.S. taxes, we learned that
    this tax credit was only available to those actually living in the
    U.S., not those living abroad. In a way I understand the rationale: our
    Tesla would not be directly benefitting those living in the U.S.
    (although it is contributing to an overall globally cleaner
    environment), and therefore we should get no incentive from the U.S. to
    buy it. However, by the same logic, we should not be paying taxes in
    the U.S. on income that we do not earn from there, to pay for an
    infrastructure and a Congress that does not directly benefit or
    represent us.

    Coming back to the incompatibility between Swiss and U.S. income tax
    systems, this is not just limited to the fact that similar Swiss
    retirement and education tax programs are not recognized by the U.S.,
    but also to completely different approaches in the manner of
    calculating income tax. For example, in Geneva the way that taxes are
    assessed in relationship to our townhouse is that the income tax
    authorities tax us on the fictional ``income'' we would have earned if
    we had been renting the house out (which we are not). The way they
    calculate this is very complicated and not fully known to me, but it
    has something to do with the type of property, when the property was
    built, where it is located, and the amount of income that we earn from
    our work (this last element helps to ensure that we will not be priced
    out of our home by property taxes even as property values rise).
    Furthermore, it is something we find out long after the fact of filing
    taxes. For example, for tax year 2020, we will file our Swiss tax
    returns in June of 2021 and we will get the calculation of this
    ``income tax on our property'' somewhere in October-November 2021, long
    after our U.S. tax returns are due and interest is being assessed on
    any unpaid amounts. Furthermore, its incompatibility with how U.S.
    assesses income and property taxes makes it really difficult to know
    how to include that in our tax returns. We tried to do it for a couple
    of years, but this did not seem to be accepted by the IRS, and then we
    had to pay additional taxes with penalties and interest. Now we do not
    even try to include these taxes we pay on our U.S. tax return, and so
    we are being double-taxed by both Swiss and U.S. jurisdictions on that
    income.

    When it comes to trying to get information, help and guidance from the
    IRS so that we can navigate these difficulties more easily, this is
    also not set up for those of us living abroad. Most of the time when I
    call the IRS, I get a message that the line is too busy and they are
    not accepting calls at that time. Sometimes I have gotten a message
    saying that the estimated wait is between a certain time, such as 7 to
    10 minutes, and then finally hung up after being on hold for more than
    30 minutes. Needless to say, there are no toll-free numbers for U.S.
    persons abroad, so of course we have to pay international long-distance
    rates. However, even many of the IRS online services are not available
    to those of us living outside of the U.S. (see below for an example).

    Another problem is that as ``U.S. persons'', nearly ALL banks will
    simply not open an account for us, which has huge implications on, for
    example, shopping for affordable mortgages from local/cantonal banks.

    Further, we are effectively banned from investing in any kind of
    stocks, bonds or mutual funds in our country of residence and
    nationality. We are getting older, and we wanted to try to invest in a
    mutual fund here to put aside a little extra money for our golden
    years. However, the only bank we found in Switzerland that would accept
    us as customers had a 250,000 Swiss Francs (about $270,000) minimum
    investment requirement--something that is definitely out of our league!
    Furthermore, we learned that even if we could and did invest in a
    mutual fund here in the country where we live (and now are also
    citizens of), that it would be treated by the U.S. as a ``Passive
    Foreign Investment Company'' and would be taxed at an exorbitant rate.

    Discrimination against me as a ``U.S. person'' has also impacted me
    professionally. After I was hired as the COO for a very small, non-
    profit Swiss NGO we learned that if I were given signatory rights on
    our organizational bank account, that the financial records of this
    Swiss organization would have to be sent to the IRS. Therefore, I do
    not have these rights, and I can't perform all of the functions of my
    role. This puts me at a disadvantage employment-wise relative to all of
    the qualified candidates who do not have U.S. citizenship.

    Furthermore, filing and paying taxes in the U.S. is extremely
    complicated, and
    calculations/corrections made by the IRS are not transparent. We have
    consistently filed and tried to pay our taxes in accordance with the
    rules as we understand them, although the tax code is not exactly
    straight-forward especially for people like us living outside the U.S.
    Sometimes we get bills years later without any explanation as to why or
    how new calculations were made. For example, we recently got a bill
    from the IRS from 2014 for nearly $8,000(!) This is a lot of money for
    us. I wrote the IRS and asked for an explanation of how they calculated
    this amount more than six years after the fact and got no response
    except for a threatening letter that they are going to levy taxes on
    our assets. I tried to go online to get a transcript of how they
    calculated this tax, however the online service is not available to
    persons who live abroad! There is a phone-in/write-in service to obtain
    tax transcripts, but it only goes back to the previous three years'
    returns. I tried to call anyway and was not able to get through.

    I am not against paying taxes, and fully recognize the necessity of
    them. If I were to earn any money from U.S. sources, it would make
    sense that I pay U.S. tax rates under the U.S. tax system, but not that
    I pay Swiss taxes on top of them. If every country taxed because of
    nationality (or even former permanent residence status) with no regard
    to the other nationalities and their accompanying tax systems, the
    impacts would be devastating: many persons here in Geneva have 3, 4 or
    even more nationalities, and having to satisfy the requirements of
    multiple different, incompatible national income tax systems on income
    earned in one country would not be sustainable, nor would it be fair.
    In this respect the U.S. is the only country (outside of Eritrea) that
    taxes on the basis of nationality/permanent residence, but this also
    highlights how incongruent and out of step this practice is with the
    rest of the world, and for its citizens/permanent residents who happen
    to reside in other countries. Every time Congress makes a change to the
    tax code, this directly impacts me and those of us living outside of
    the U.S. who are also subject to other tax code regulations. However,
    these impacts are rarely if ever discussed by members of Congress, and
    certainly not studied in depth as to how they will impact/interact with
    the other 190+ countries' income tax regimes where U.S. persons may be
    living. This results in devastating unintended consequences on ordinary
    folks: if I were rich, or a multinational, I would have the resources
    to figure out how to get around the different tax systems, but I am
    not.

    Finally, I cannot express the anger and frustration I feel when I read
    that Amazon and 54 other major U.S. corporations, as recently reported
    in The New York Times,\4\ paid ZERO income taxes on incredible, record-
    setting profits in the many billions. How is it that we, a middle-class
    family who hasn't even lived or earned any income in the U.S. for more
    than 15 years, are effectively paying more income taxes than Amazon?
    ---------------------------------------------------------------------------
        \4\ https://www.nytimes.com/2021/04/02/business/economy/zero-
    corporate-tax.html.

    ---------------------------------------------------------------------------
    Therefore, we ask you to:

        (1)  Change the system of citizen-based taxation of individuals to
    that of individual taxation on only income earned from U.S. sources,
    and not worldwide taxation, also known as resident-based taxation for
    individuals, the kind of income taxation that most of the rest of the
    world practices (for a relatively simple and fast interim fix to this
    issue by the U.S. Treasury while waiting on lengthier legislative
    processes, please read this article \5\);
    ---------------------------------------------------------------------------
        \5\ https://papers.ssrn.com/sol3/
    papers.cfm?abstract_id=3795480&fbclid=IwAR10eXmPraGW3
    Wuaa_VgnL7HYObjUBZz3302cglQOsT2rPyxtmy5SS7ibgU.
    ---------------------------------------------------------------------------
        (2)  Create a special committee that looks at the impacts of U.S.
    taxation on its nationals residing abroad so that any changes made to
    the tax code are reviewed by this body to ensure that our situations
    are taken into consideration in such regulation and to protect against
    unintended consequences; and finally
        (3)  To include formal representation of Americans living abroad in
    our representative bodies, as the approximately 9 million of us living
    abroad need a voice. Switzerland and France include seats for their
    citizens residing abroad in their Parliaments, and the U.S. can and
    should do the same.

    We should not be penalized and discriminated against just because we
    were born in, had American parents or lived a significant time in the
    U.S., and reside in another country. Furthermore, we can be an
    important resource to the U.S.--we can play the role of ``local
    ambassador'' in our countries of residence, helping to bridge
    differences and forge understandings between the U.S. and the countries
    we call home, which is increasingly important in our highly
    interconnected, shrinking world.

    As a last note, it is more than somewhat ironic that the U.S.
    ostensibly got its start over a tax dispute with its overseas colonial
    parent, with American revolutionaries crying out the slogan ``no
    taxation without representation,'' launching a war that brought about
    the birth of our nation, and yet it taxes folks like me who earn their
    income completely outside the U.S. system and have no effective
    representation on the U.S.-created impacts we face living abroad. That
    notion of justice, of democratic representation and fair taxation is
    fundamental to the very identity of the United States, and yet somehow
    it is the only developed country that burdens individuals such as
    myself with a tax imposition that does not take into account the
    situations in which we are living, and which prevents us from fully
    participating in the societies of which we are part.

    Many have said that you, our representatives, don't care for U.S.
    persons residing abroad, that we don't matter enough in terms of votes
    or funding, that our situations don't play well on media platforms in
    terms of messaging, that we don't have enough pull or importance to get
    any attention. However, I am still hoping that you can care about
    something that is wrong and unfair, even if it isn't politically
    expeditious. In fact, it is my American-bred idealism and pragmatic,
    can-do spirit that make me believe that we can work together to develop
    an income tax system that is fair and not unduly burdensome, and that
    honors those fundamental American values which we all hold dear.

    I thank you for your time and attention, and hope that this submission
    will be fully considered by the Committee. I would be happy to provide
    any additional information or support to help you better understand the
    implications of the U.S. income tax system on folks like me who live in
    other countries.

    Sincerely,

    Anne-Marie Yarbrough Buzatu

                                     ______

                            Center for Fiscal Equity

                          14448 Parkvale Road, Suite 6

                              Rockville, MD 20853

                          fiscalequitycenter@yahoo.com

                        Statement of Michael G. Bindner

    Chairman Warren and Ranking Member Cassidy, thank you for the
    opportunity to submit these comments for the record to the Committee on
    this topic. I am guessing that wealth taxes will be on the agenda. I
    will start there and then offer an alternative tax reform proposal,
    which includes methods to invest in human capital and include state
    governments in reform.

    The Nature of Wealth

    Money is not only a medium to exchange goods. It is also a decision
    tool to exchange power. Power is the ability to demand resources and
    labor. Capitalism seeks to consolidate this power into the hands of the
    owners of capital. Socialism seeks to distribute this power to society,
    using common action to do so. State capitalism and state socialism are
    the same thing, with modern mixed economies consisting of private
    capitalism and social democracy.

    Karl Marx understood the economics of production. When he wrote,
    finance was a game, not a science. He had no idea that the Boom-Bust
    Cycle exists because of the interaction of tax and finance. Modern
    Marxists are still obsessed with rewarding production rather than
    considering the entire enterprise. Enabling workers are as essential as
    production, from distribution to design to marketing. Worse, they are
    not really up to speed on how the economics of the CEO and tax policy
    are interrelated or how to go from democratic socialism to the real
    thing.

    Social Democrats have no clue either. Indeed, most Democratic
    Socialists, like Bernie Sanders, have mostly Social Democratic tools in
    their kit. Free college and Medicare for All are not really socialism,
    they are simply better birdseed. Elizabeth Warren at least admits that
    she is still a capitalist. So do the Social Democrats of Scandinavia
    and Western Europe. Their proposals have no clue on how to get from
    Social Democracy to Democratic Socialism--or to the real thing.

    The essential fact in any system that uses money is that money buys
    work from people. Since work is a function of time, as our lives, money
    essentially buys people. Another way to look at money and savings is
    through class analysis. Savings is the power to make others work
    without working yourself. When realized, savings purchase essentials
    and luxuries. Even poor people deserve some level of luxury.

    In an unbalanced economy, the working class do not even receive the
    essentials. Scarcity in essential goods is the incentive used to compel
    work. Inadequate income is used to compel work on a consistent basis.
    The argument against guaranteed income is that if work can be
    compelled, hyperinflation and shortages result.

    The Nature of Income

    Income is the return on assets, including sold labor. This includes the
    return on taxation of assets. The challenge for public policy is
    providing for adequate income and assets for all households so that no
    worker can be considered someone else's property. How badly we have
    failed at this is impossible to see until we look clearly at the
    elements of the ``supply side.''

    Absolute Income is adjusted gross income plus unrealized income. Wealth
    taxes are an attempt to go after part two, in its stored form, on an
    annual basis. They will never pass because, if done correctly, the
    wealth will be destroyed. For some, that is likely the goal. If it is
    done ineffectively (by self-reporting or creating loopholes) it
    legitimates assets which have no inherent value.

    In the macro-economy, absolute income is gross national product plus
    stored future income plus speculative income. Current economic
    discourse and statistics do not, and likely cannot, capture the
    difference between the last two, although looking at income class
    helps.

    This inability to separate future spending from speculation does not
    mean we cannot quantify unrealized income. Doing so shows why taxing
    wealth and unrealized income are close to impossible. Here is a hint:
    it does not really exist. Once that secret is out, capitalism' s days
    are numbered.

    Unrealized income =

    the net unrealized gain on traded equity and securitized assets held
    for less than a year

    + the unrealized net gain on assets held for more than a year

    + additions to retained earnings for the year that are attributable to
    shareholders or partners if it were to be distributed

    + increased value in a year of physical assets less their distribution
    expense.

    All of the above include increased asset values and undistributed
    earnings for assets held offshore.

    Asset prices and retained income and asset book values can be valued
    and are related but are not mutually exclusive. Asset prices may or may
    not reflect retained earnings and physical or market value of real
    assets and may, in fact, be junk assets based on fraud. Bonds have the
    same features and are valuable based on currently expected future
    income--including whether tax income attributable from holding these
    bonds can ever be collected.

    All value is market-based. These values may or may not relate to the
    productive power of the underlying physical and human assets. Mass
    resignations and innovations may turn today's intellectual property
    into dust. This is why capitalism is a less than perfect driver of real
    innovation. Income inequality and hierarchical control are designed to
    protect against sudden devaluations in both private and state
    capitalism. Individual and cooperative socialist organizations (from
    communes to partnerships) always threaten intellectual property held by
    capitalists.

    Taxing Wealth

    Anything that can be valued can be taxed. Indeed, it may even be easier
    to tax than capital gains, which largely rely on self reporting. Either
    total wealth and growth in wealth can be taxed in the micro level.
    Unrealized income can be estimated by the entities owned as of December
    31st of each year. Any overlap between stock price and retained
    earnings can be taken into account. Indeed, reporting this would be
    beneficial to investors. This is the easy part.

    The hard part is generating the liquidity to pay the tax. Actually,
    this is not hard at all. It merely requires the entity owned to write a
    check. You could not tax corporate income and the investor's share of
    it twice. If wealth were to be taxed, it is easier to tax the total
    value of the entity rather than taxing its owners. It is much less
    work.

    Who really shoulders the burden is a more serious concern. Because of
    the monopsonist nature of most employment and the monopolist nature of
    most goods, the wealthy will not pay it.

            First, stock prices will go down to reduce burden.
            Second, wages will go down.
            Third, consumer prices will go up.

    Firms have people who run the numbers and a duty to maximize
    shareholder value. Indeed, internal rents will increase because the
    labor to make such calculations will be taken from the labor surplus
    generated from extraction, production, distribution and enabling work.

    Debt Ownership and Tax Reform

    Getting the wealthy and upper-middle classes on board is essential to
    reform. The way to do this is to make clear who owes and owns the debt.
    Space limits prevent a thorough discussion of this, but I have attached
    a summary from my forthcoming book, Debt as Class Warfare in an
    attachment. When it is complete, I will send copies to the whole
    Committee and will be available to discuss it in detail.

    An Asset Value-Added Tax, which is described below, captures a fifth of
    each trade or return from capital when bought or paid. It is a much
    more efficient way to extract the money. These include marking the base
    to market at option exercise and the first sale after inheritance, gift
    or donation and zero rates sales to qualified Employee Stock Ownership
    Plans. There is a huge volume of literature on how employee-ownership
    expands opportunity, including a fair bit of it by me. We can discuss
    this as well at a later time.

    Please see a second attachment detailing the Center's Tax Reform
    proposals. These also include a proposal to create tax prepayment bonds
    to shift wealth from speculation and market debt to federal debt
    retirement.

    The nation has already taken steps on the journey to reform in passing
    the American Rescue Plan Act.

    The ARPA has its pluses and its minuses. On the minus side, families
    who had adequate income during the pandemic now have money to blow.
    Instead of spending it they are using it to speculate. Masses of people
    are about to enter the bottom half of EFT and Crypto markets, which
    will allow the top tiers of the scheme (whose seed money was provided
    by the Ryan-Brady-Trump tax cuts) to get out.

    On the plus side, the increased child tax credit and its new
    refundability will provide long term economic security families. The
    second essential step is to increase the minimum wage so that no one
    has to work for free or have a decreased standard of living without
    working by living solely on the CTC.

    The minimum wage should be immediately increased to match the
    Republican offer of $10 per hour. To return wages to 1965 levels, which
    rewarded productivity gains, the wage should be increased over time to
    $12 per hour and adjusted for inflation automatically every year,
    starting now. The current challenge in implementing a higher CTC is how
    to get the money to families immediately. Doing so through direct IRS
    payments cannot be a long term solution.

    There are two avenues to distribute money to families. The first is to
    add CTC benefits to unemployment, retirement, educational (TANF and
    college) and disability benefits. The CTC should be high enough to
    replace survivor's benefits for children.

    The second is to distribute them with pay through employers. This can
    be done with long term tax reform, but in the interim can be
    accomplished by having employers start increasing wages immediately to
    distribute the credit to workers and their families, allowing them to
    subtract these payments from their quarterly corporate or income tax
    bills.

    Over the long haul, tax reform is necessary to cement these gains.
    Please see our tax reform plan in the third attachment. It is designed
    to provide adequate income and services to families (both with
    increased minimum wages and child tax credits) through employer-paid
    taxes, funding government services through a goods and services tax,
    separating out taxation of capital gains and income from income to an
    asset value added tax and higher tier subtraction VAT collections on
    wage income up to the $330,000 level and above, with additional
    personal income taxation for incomes over $425,000.

    The top rates for higher tier subtraction VAT, personal income taxes
    and asset VAT would all be set to the same rate, say 26%, so that forms
    of income are not manipulated to avoid taxation. It would also
    effectively raise taxes on salaried income to 52%, with capital incomes
    reinvested or investments funded by salary income adding an additional
    26% of taxation. Spending money will also trigger taxation.

    Adding the effect of lower tier subtraction VAT collection to taxation
    on business owners and the top marginal rate approaches 90%. Such taxes
    are meant to prevent payment of extreme salaries rather than maximizing
    revenue. This provides more wages to the rest of the population,
    especially to those who are not adequately compensated at lower income
    levels.

    Reform allows a rebalancing of fiscal responsibilities. The federal
    child tax credit we propose, plus increases in the minimum wage to at
    least $12/hour may provide enough family income in most states. Other
    states would add additional support through a state subtraction VAT.
    Comprehensive reform will truly end welfare as we know it by giving
    families what they need for a decent living.

    Human Capital Funding and State Government Participation

    The state S-VAT would fund education, with options for funding private
    schools either as donors or clients. Espinoza v. Montana has settled
    the question of whether this is constitutional. Now the question is the
    political will to enact such tuition support and for private schools to
    allow teachers to organize.

    It would also fund remedial education, english as a second language
    (regardless of immigration status), junior college and technical
    education and pay for all students who have completed sophomore year in
    high school or, after their cohort has reached that level.

    Retail sales taxes, corporate income and most personal income tax
    filing would be replaced with the S-VAT and a border adjustable goods
    and services credit-invoice tax (which we call I-VAT for short). The
    state-level I-VAT would fund public safety and commercial regulation.
    Property taxes, without the burden of funding education, would fun both
    building inspections and local public works, with the latter
    supplemented by tolls, motor fuel and/or carbon value added taxes (also
    receipt visible).

    States would collect federal S-VAT and I-VAT, review compliance audits
    and investigate and prosecute criminal violations.

    An asset VAT at the state level would collect taxes on rental income
    (as would the federal AVAT), with states collecting an additional AVAT
    on real property transfers with price appreciation. This levy would be
    collected at closing and forwarded to states. Other AVAT collections
    would be collected by brokers and submitted to the U.S. Securities and
    Exchange Commission.

    Any state AVAT collected on financial transactions would be forwarded
    to the states by the SEC. I would not recommend state enactment of such
    levies should an international or OECD AVAT rate be negotiated. This
    type of competition leads to a race to the bottom.

    Any state-level debt service and retirement would be satisfied by
    higher salary surtax. State constitutional amendments to implement
    these changes would also include permission to incur debt in a
    federally declared disaster. This debt would be satisfied by any
    federal disaster assistance and the salary surtax.

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

    Attachment--Debt as Class Warfare, September 24, 2020

    Visibility into how the national debt, held by both the public and the
    government at the household level, sheds light on why Social Security,
    rather than payments for interest on the public debt, are a concern of
    so many sponsored advocacy institutions across the political spectrum.

    Direct household attribution exists through direct bond holdings,
    income provided by Social Security payments and secondary financial
    instruments backed with debt assets. Using the Federal Reserve Consumer
    Finance Survey and federal worker and Social Security payment and tax
    information, we have calculated who owes and who owns the national debt
    by income quintile. Federal Reserve and Bank holdings are attributed
    based on household checking and savings account sizes.

    Responsibility to repay the debt is attributed based on personal income
    tax collection. Payroll taxes create an asset for the payer, so they
    are not included in the calculation of who owes the debt. Calculations
    based on debt held when our study on the debt was published,
    distributed based on the latest data (2017) from the IRS Data Book show
    a ratio of $16.5 of debt for every dollar of income tax paid.

    This table shows a summary level distribution of income, national debt
    and debt assets in three groupings based on share of Adjusted Gross
    Income received, rather than by number of households. This answers the
    perennial question of who is in the middle class.

    [GRAPHIC] [TIFF OMITTED] T4271.009

    .epsThe bottom 75% of taxpaying units hold few, if any, public debt
    assets in the form of Treasury Bonds or Securities or in accounts
    holding such assets. Their main national debt assets are held on their
    behalf by the Government. They are owed more debt than they owe through
    taxes.

    The next highest 20% (the middle class), hold few bonds, a third of
    bond-backed financial assets and a quarter of government held
    retirement assets.

    The top 5% (roughly 8.5% of households) own the vast majority of non-
    government retirement holdings and collect (and roll-over) most net
    interest payments. This stratum owns very little of retirement assets
    held by the government, hence their interest in controlling these
    costs. Their excess liability over assets is mostly attributable to
    internationally held debt. Roughly $4 trillion of this debt is held by
    institutions, with the rest held by individual bond holds, including
    debt held by members of this stratum in off-shore accounts.

    Source: Settling (and Squaring) Accounts: Who Really Owes the National
    Debt? Who Owns It; available from Amazon at https://www.amazon.com/dp/
    B08FRQFF8S.

    Attachment--Tax Reform, Center for Fiscal Equity, March 5, 2021

    Individual payroll taxes. These are optional taxes for Old-Age and
    Survivors Insurance after age 60 for widows or 62 for retirees. We say
    optional because the collection of these taxes occurs if an income
    sensitive retirement income is deemed necessary for program acceptance.
    Higher incomes for most seniors would result if an employer
    contribution funded by the Subtraction VAT described below were
    credited on an equal dollar basis to all workers. If employee taxes are
    retained, the ceiling should be lowered to $85,000 to reduce benefits
    paid to wealthier individuals and a $16,000 floor should be established
    so that Earned Income Tax Credits are no longer needed. Subsidies for
    single workers should be abandoned in favor of radically higher minimum
    wages.

    Wage Surtaxes. Individual income taxes on salaries, which exclude
    business taxes, above an individual standard deduction of $85,000 per
    year, will range from 6.5% to 26%. This tax will fund net interest on
    the debt (which will no longer be rolled over into new borrowing),
    redemption of the Social Security Trust Fund, strategic, sea and non-
    continental U.S. military deployments, veterans' health benefits as the
    result of battlefield injuries, including mental health and addiction
    and eventual debt reduction. Transferring OASDI employer funding from
    existing payroll taxes would increase the rate but would allow it to
    decline over time. So would peace.

    Asset Value-Added Tax (A-VAT). A replacement for capital gains taxes,
    dividend taxes, and the estate tax. It will apply to asset sales,
    dividend distributions, exercised options, rental income, inherited and
    gifted assets and the profits from short sales. Tax payments for option
    exercises and inherited assets will be reset, with prior tax payments
    for that asset eliminated so that the seller gets no benefit from them.
    In this perspective, it is the owner's increase in value that is taxed.

    As with any sale of liquid or real assets, sales to a qualified broad-
    based Employee Stock Ownership Plan will be tax free. These taxes will
    fund the same spending items as income or S-VAT surtaxes. This tax will
    end Tax Gap issues owed by high income individuals. A 26% rate is
    between the GOP 24% rate (including ACA-SM and Pease surtaxes) and the
    Democratic 28% rate. It's time to quit playing football with tax rates
    to attract side bets.

    Subtraction Value-Added Tax (S-VAT). These are employer paid Net
    Business Receipts Taxes. S-VAT is a vehicle for tax benefits, including

          Health insurance or direct care, including veterans' health care
    for non-
    battlefield injuries and long term care.
          Employer paid educational costs in lieu of taxes are provided as
    either employee-directed contributions to the public or private
    unionized school of their choice or direct tuition payments for
    employee children or for workers (including ESL and remedial skills).
    Wages will be paid to students to meet opportunity costs.
          Most importantly, a refundable child tax credit at median income
    levels (with inflation adjustments) distributed with pay.

    Subsistence level benefits force the poor into servile labor. Wages and
    benefits must be high enough to provide justice and human dignity. This
    allows the ending of state administered subsidy programs and
    discourages abortions, and as such enactment must be scored as a must
    pass in voting rankings by pro-life organizations (and feminist
    organizations as well). To assure child subsidies are distributed, S-
    VAT will not be border adjustable.

    The S-VAT is also used for personal accounts in Social Security,
    provided that these accounts are insured through an insurance fund for
    all such accounts, that accounts go toward employee-ownership rather
    than for a subsidy for the investment industry. Both employers and
    employees must consent to a shift to these accounts, which will occur
    if corporate democracy in existing ESOPs is given a thorough test. So
    far it has not. S-VAT funded retirement accounts will be equal-dollar
    credited for every worker. They also have the advantage of drawing on
    both payroll and profit, making it less regressive.

    A multi-tier S-VAT could replace income surtaxes in the same range.
    Some will use corporations to avoid these taxes, but that corporation
    would then pay all invoice and subtraction VAT payments (which would
    distribute tax benefits). Distributions from such corporations will be
    considered salary, not dividends.

    Invoice Value-Added Tax (I-VAT). Border adjustable taxes will appear on
    purchase invoices. The rate varies according to what is being financed.
    If Medicare for All does not contain offsets for employers who fund
    their own medical personnel or for personal retirement accounts, both
    of which would otherwise be funded by an S-VAT, then they would be
    funded by the I-VAT to take advantage of border adjustability. I-VAT
    also forces everyone, from the working poor to the beneficiaries of
    inherited wealth, to pay taxes and share in the cost of government.
    Enactment of both the A-VAT and I-VAT ends the need for capital gains
    and inheritance taxes (apart from any initial payout). This tax would
    take care of the low-income Tax Gap.

    I-VAT will fund domestic discretionary spending, equal dollar employer
    OASI contributions, and non-nuclear, non-deployed military spending,
    possibly on a regional basis. Regional I-VAT would both require a
    constitutional amendment to change the requirement that all excises be
    national and to discourage unnecessary spending, especially when
    allocated for electoral reasons rather than program needs. The latter
    could also be funded by the asset VAT (decreasing the rate by from
    19.5% to 13%).

    As part of enactment, gross wages will be reduced to take into account
    the shift to S-VAT and I-VAT, however net income will be increased by
    the same percentage as the I-VAT. Adoption of S-VAT and I-VAT will
    replace pass-through and proprietary business and corporate income
    taxes.

    Carbon Value-Added Tax (C-VAT). A Carbon tax with receipt visibility,
    which allows comparison shopping based on carbon content, even if it
    means a more expensive item with lower carbon is purchased. C-VAT would
    also replace fuel taxes. It will fund transportation costs, including
    mass transit, and research into alternative fuels (including fusion).
    This tax would not be border adjustable.

    Summary

    This plan can be summarized as a list of specific actions:

    1.  Increase the standard deduction to workers making salaried income
    of $425,001 and over, shifting business filing to a separate tax on
    employers and eliminating all credits and deductions--starting at 6.5%,
    going up to 26%, in $85,000 brackets.

    2.  Shift special rate taxes on capital income and gains from the
    income tax to an asset VAT. Expand the exclusion for sales to an ESOP
    to cooperatives and include sales of common and preferred stock. Mark
    option exercise and the first sale after inheritance, gift or donation
    to market.

    3.  End personal filing for incomes under $425,000.

    4.  Employers distribute the child tax credit with wages as an offset
    to their quarterly tax filing (ending annual filings).

    5.  Employers collect and pay lower tier income taxes, starting at
    $85,000 at 6.5%, with an increase to 13% for all salary payments over
    $170,000 going up 6.5% for every $85,000--up to $340,000.

    6.  Shift payment of HI, DI, SM (ACA) payroll taxes employee taxes to
    employers, remove caps on employer payroll taxes and credit them to
    workers on an equal dollar basis.

    7.  Employer paid taxes could as easily be called a subtraction VAT,
    abolishing corporate income taxes. These should not be zero rated at
    the border.

    8.  Expand current state/federal intergovernmental subtraction VAT to a
    full GST with limited exclusions (food would be taxed) and add a
    federal portion, which would also be collected by the states. Make
    these taxes zero rated at the border. Rate should be 19.5% and replace
    employer OASI contributions. Credit workers on an equal dollar basis.

    9.  Change employee OASI of 6.5% from $18,000 to $85,000 income.

                                     ______

                          Letter Submitted by Jak Dac
    U.S. Senate
    Committee on Finance

    To Whom This May Concern:

    I am a proud citizen of the United States of America--that great
    citadel of freedom and justice. But, I am writing today to call
    attention to the extreme injustice of the U.S. extraterritorial tax
    regime and how it severely limits the freedom of individual U.S.
    citizens living outside the United States. This system is very unfair
    and it's high time that the extraterritorial tax system be abolished
    with the goal of ``Creating Opportunity Through a Fairer Tax System.''

    The only thing that makes me different as an American from U.S.
    residents is that I live outside the United States. For the record, I
    did not move from the United States to avoid U.S. taxation. In fact, I
    have discovered that by living outside the United States I am subject
    to (1) taxation in the country where I live and (2) a more punitive
    form of taxation that what is imposed on U.S. residents. My only crime
    seems to be that I live outside the United States--and therefore my
    income and assets are foreign to the United States. But, the income and
    assets are actually local to me.

    I am writing to express my great concern about the failure of the
    Senate Finance Committee to consider the impact of proposed tax
    legislation on me and on Americans living abroad generally. We are
    average, ordinary, every day people. Because we are flesh and blood
    humans, we need to eat. Because we will get old and retire we need to
    save for retirement. Because we are individuals with responsibilities
    to our families, our communities and our countries of residence we may
    need to operate our own small businesses. We are definitely NOT mini
    multinational corporations and we are tired of being treated as though
    our normal day-to-day activities are somehow ``offshore'' and deserving
    of punishment. We are tax compliant in our countries of residence. We
    pay a lot of tax. We pay our fair share. We do this even though it is
    almost impossible for us to be both tax compliant in our country of
    residence and be compliant with U.S. tax laws. We don't understand why
    U.S. tax laws are being applied in an extraterritorial manner to income
    and assets that are not in the United States. Other countries don't tax
    their citizens who live in the United States. Why should the United
    States tax U.S. citizens living in other countries?

    Our situation is bad. It is unique. Only the African dictatorship of
    Eritrea follows the lead of the United States by imposing worldwide
    taxation on its citizens who live outside the country.

    I really don't understand the indifference of the Senate Finance
    Committee to this situation. Interestingly, the Senate Finance
    Committee in 2015 recommended changes to the U.S. extraterritorial tax
    regimes. There have been no changes for the better, but many changes
    for the worse.

    So far, the 2021 Senate Finance Hearings have been very, very bad. The
    Committee is obsessed with corporations without acknowledging that
    changes to corporate tax will have a huge effect on individuals. You
    haven't mentioned that your obsession with the taxation of corporations
    will have a bigger impact on the many individuals than on the few
    corporations.

    The hearing on April 27, 2021--about a wealth tax--took the treatment
    of U.S. citizens abroad to a new level. The bottom line is this:

    As described Elizabeth Warren's proposed wealth tax will result in (1)
    taxation of assets earned outside the A and (2) the taxation of our
    non-U.S. citizen spouses who we share our lives with.

    And to add insult to injury, Senator Warren's proposed wealth tax would
    bring assets acquired by U.S. citizens, after having moved from the
    United States, into the wealth tax system. Come on! My house was
    acquired after I moved from the United States. My local business has
    nothing to do with the United States. My non-U.S. citizen spouse's
    assets have nothing to do with United States.

    Question: Would the United States like it if China imposed taxes on all
    property situated in the United States that was owned by Chinese
    citizens?

    If this comes as a surprise to you it's because you either don't
    understand or are conveniently ignoring that the U.S. has
    extraterritorial tax regime--a regime imposed on Americans abroad. All
    indications are that the Warren wealth will actually leverage the
    injustice of United States citizenship-based taxation to make the whole
    world part of its tax base.

    Seriously, these predatory, obscene and unjustifiable tax practices
    must stop. It's simply not fair!!

    God Bless the United States of America!

                                     ______

                         Letter Submitted by Paul Dale
    U.S. Senate
    Committee on Finance

    To Whom This May Concern:

    I am writing to express my great concern about the failure of the
    Senate Finance Committee to consider the impact of proposed tax
    legislation on me and on Americans living abroad generally. We are
    average, ordinary, every day people. We pay a lot of tax. We pay our
    fair share. We do this even though it is almost impossible for us to be
    both tax compliant in our country of residence and be compliant with
    U.S. tax laws.

    We don't understand why U.S. tax laws are being applied in an
    extraterritorial manner to income and assets that are not in the United
    States. Other countries don't their citizens who live in the United
    States? Why should the United States tax U.S. citizens living and
    earning in other countries?

    Our situation is bad. It is unique. Only the African dictatorship of
    Eritrea follows the lead of the United States by imposing worldwide
    taxation on its citizens who live outside the country.

    I really don't understand the indifference of the Senate Finance
    Committee to this situation. Interestingly, the Senate Finance
    Committee in 2015 recommended changes to the U.S. extraterritorial tax
    regimes. There have been no changes for the better, but many changes
    for the worse.

    So far, the 2021 Senate Finance Hearings have been very, very bad. The
    Committee is obsessed with corporations without acknowledging that
    changes to corporate tax will have a huge effect on individuals. You
    haven't mentioned that your obsession with the taxation of corporations
    will have a bigger impact on the many individuals than on the few
    corporations.

    The hearing on April 27, 2021--about a wealth tax--took the treatment
    of U.S. citizens abroad to a new level. The bottom line is this:

    As described Elizabeth Warren's proposed wealth tax will result in (1)
    taxation of assets earned outside the USA and (2) the taxation of our
    non-U.S. citizen spouses who we share our lives with.

    And to add insult to injury, Senator Warren's proposed wealth tax would
    bring assets acquired by U.S. citizens, after having moved from the
    United States, into the wealth tax system. I am an American only by
    accident of birth I move back to the UK with my British parents when I
    was only months old.

    Everything (yes EVERYTHING), I have earned has been done outside the
    borders of the U.S., I have never lived in the U.S., but somehow the
    U.S. believes my foreign income belongs to it. I have not earned one
    single penny in the U.S., I use no services and I have no family or
    connections to the U.S. apart from a birth certificate. Additionally,
    all my non-U.S. citizen spouse's assets have nothing to do with United
    States, but means we have to keep as financially separated as possible,
    which is a ridiculous state to be in because of archaic and punitive
    laws of Citizenship based taxation.

    Question: Would the United States like it if China imposed taxes on all
    property situated in the United States that was owned by Chinese
    citizens?

    Please just let me expatriate without the huge cost ($2350), why is it
    so expensive? Why is the U.S. the most expensive country to expatriate
    from? Why does it cost more to renounce citizenship then to gain it?
    Why can there not be a clause or provision ``if you paid 0 taxes for
    the last 5 years'' you can expatriate for free? As at the moment my tax
    returns are nothing but a burden for myself and the IRS, with time and
    money wasted by both parties for zero tax due.

    If this comes as a surprise to you it's because you either don't
    understand or are conveniently ignoring that the U.S. has
    extraterritorial tax regime--a regime imposed on Americans abroad. All
    indications are that the Warren wealth will actually leverage the
    injustice of United States citizenship-based taxation to make the whole
    world part of its tax base.

    Seriously, these predatory, obscene and unjustifiable tax practices
    must stop. It's simply not fair!! Please join the rest of the world and
    tax on Residence, it is the only fair way, as an African Dictatorship
    is strange bedfellow for a country that prides itself on freedom.

                                     ______

                   Letter Submitted by Sylvia Jeanet de Bruin
    U.S. Senate
    Committee on Finance

    U.S. Senator Elizabeth Warren (MA)
    U.S. Edward ``Ed'' Markey (MA)
    U.S. Representative Lori Trahan (MA 3rd District)

    Dear Senators,

    As an individual, I support efforts to create opportunity through a
    fairer tax code. I look forward to the hearing next week where these
    opportunities are presented.

    But I worry. Whenever the discussion comes up--that we must close the
    tax gap. Make people pay their fair share, something usually gets lost.
    In an effort to create opportunity for America's middle class, we
    overseas citizens are almost always treated as collateral damage.

    And we too, are part of America's middle class.

    We vote. We pay our U.S. taxes. We pay our taxes to the country we live
    in. But we are constantly treated as not even second class citizens. We
    are constantly and structurally deprived of opportunities that are
    already granted to every ordinary working class resident of the U.S.

    When you talk about fairness and creating opportunity, please consider
    all of the opportunities that the U.S. tax code deprives me, 9 million
    overseas Americans, and our families of:

    The Opportunity to Have a Savings Account at a Bank

    Because of unintended consequences related to the Foreign Accounts Tax
    Compliance Act (FATCA), U.S. citizens are treated as a liability by any
    reputable financial institution outside of the United States.

    Even when providing my SSN and full unredacted copies of my tax returns
    proving compliance with U.S. tax obligations, it is nearly impossible
    to be accepted for an interest-bearing bank account where I live.

    Because banks are so terrified of the possibility that a U.S. citizen
    becomes a customer while fully compliant on their tax obligations, but
    later fails to pay them, they simply deny all law abiding U.S. citizens
    access to financial services out of fear of a few bad eggs.

    This is because the banks regard the 30% withholding penalty in cases
    of non-
    compliant account holders as a ``corporate death penalty''. It's simply
    cheaper and safer for them to ban all U.S. citizens from having an
    account, even if we make every effort to comply with regulations.

    The Opportunity to Have Investments in the Country I Live in

    I am not a sophisticated investor. The most suitable products for me to
    own are safe and sane investments like a mutual fund or Exchange Traded
    Fund (ETF), rather than trying to pick winning stocks.

    Unfortunately, because the United States considers all investment funds
    based outside of the United States to be suspect, I am subject to
    punitive PFIC reporting and tax rules.

    Were I to buy the ``VT'' Vanguard Total World ETF investment fund from
    the NYSE-ARCA exchange, I would pay 15% to 20% in capital gains upon
    selling it. I'd be fully able to deduct or carry forward losses, if
    they occur.

    Were I to buy the ``VWRL'' Vanguard FTSE All-World UCITS USD ETF
    investment fund from the NYSE-EuroNext exchange, I'd be subjected to
    37% ordinary income tax on unrealized capital gains each year, limited
    deductibility, and a brutal 37 hour reporting form to be filed each and
    every year.

    These are nearly identical funds, they are tightly regulated in U.S.
    and EU jurisdictions, but because one fund is from outside of the U.S.,
    I cannot safely invest my money in it.

    It's a moot point though. I don't have access to investment brokerage
    services where I live, because I'm a U.S. citizen.

    A North Korean or Cuban customer is perfectly acceptable, and they can
    invest in a Vanguard fund through a bank here. I as a U.S. citizen
    cannot. All because of U.S. regulations that uniquely affect U.S.
    citizens.

    The Opportunity to Have Investments in the Country I Am a Citizen of

    The logical conclusion after reading the previous paragraph is to say,
    ``Just buy the U.S. fund''.

    This is not an option for overseas Americans in many jurisdictions.

    Because the United States is the only country in the world that
    subjects its citizens to an extraterritorial tax regime, local
    financial regulations don't account for the possibility that someone is
    either denied access to local financial services or that those services
    are severely penalized by the tax code of a country they don't live in.

    Within Europe, multiple barriers exist to a U.S. citizen investing in a
    U.S. bank account. While I don't live in Germany or Italy, which apply
    similar punitive rules do discourage investment in offshore locations
    like the United States, the European MiFiD II/PRIIPs regulations
    prevent EU residents without a high net worth from investing in non-EU
    investment products.

    I suppose if I was rich and could afford the $500,000 minimum assets
    under management and a 1.0% annual fee, I'd qualify for a specialized
    investment manager that could put my money in U.S. based funds.

    I'm middle class though, so I have to suck it up and stick to a 0%
    interest checking account.

    Because the U.S. tax code penalizes investments outside of the U.S.,
    even by people outside of the U.S., and because I am required to keep
    my investments in the EU, I am unable to follow good financial
    practices and invest my money.

    The Opportunity to Start My Own Small Business

    There's nothing that outright stops me from starting my own business in
    the country where I live, but the United States sure goes out of its
    way to make it difficult.

    If I wanted to start a business, there are so many barriers that I'd
    face that citizens of any other country would not:

          I'd be denied business loans, on account of being a U.S. person
          I'd have difficulty finding a business bank account, on account
    of being a U.S. person
          I'd have to set aside a big pile of money for my super
    complicated 5471 form
          I'd have to pay GILTI tax, as a ``U.S. company'' in the
    Netherlands. Any competitors here wouldn't, because they're not
    American owned.
          I'd possibly have to pay self-employment tax, which no other
    competitor would need to do.

    No other country throws up such barriers to its own citizen starting
    small businesses in the countries they live in. They're just happy to
    see their citizens being successful. In America, only a large
    multinational is able to do business abroad.

    The Opportunity to Have a Retirement That is Above Subsistence Levels

    In most countries, the U.S. included, it is assumed that individuals
    will save for their retirement.

    Unfortunately, this is also not an option for me, as a U.S. citizen.

    Contributing to a Traditional IRA isn't an option--MiFiD II rules mean
    that most U.S. financial institutions will turn me away, for fear of
    hurting their compliance in the EU.

    Contributing to a Roth IRA isn't an option--those aren't recognized as
    valid account types by most countries, and they'll be subject to double
    taxation.

    Contributing to a 401k isn't an option--I don't have a U.S. employer.

    I suppose I could contribute to a Dutch retirement account, subject to
    rules similar to an IRA, but stricter.

    Except it's not clear that that'd not trigger those horrible PFIC
    rules. I'm not rich, so I can't afford tens of thousands of dollars in
    accounting costs to fill out forms that were designed to be as
    complicated and time consuming as possible. Even if I could, accountant
    fees would eat up any benefit of saving for retirement.

    And besides, most financial institutions here want nothing to do with
    Americans.

    I'll just have to settle for whatever the social security system in my
    current home country would pay out. The Windfall Elimination Provision
    ensures that even if I did move back to the United States and work for
    an additional 10 years for a total of more than 35 years of U.S. years,
    I wouldn't get a full social security payment.

    The Opportunity to Refinance My Mortgage Safely

    In many countries, it's normal to refinance a mortgage every few years.
    Unfortunately, the U.S. has a concept of ``phantom gains'' that makes
    this a very complicated and expensive process.

    If I took out a loan for =100,000 today, and I paid it back next year,
    I'm liable for ordinary income taxation on any savings that resulted
    from the Euro declining in value.

    =100,000 is $118,000 today, but if it's $100,000 next year because the
    exchange rate dropped--well, that's clearly an $18,000 gain, even
    though that also means my home is worth less, my salary paid in euros
    is worth less, and I'm no richer despite these ``phantom gains'' that
    the U.S. tax code has invented.

    If I lived in the U.S., where my mortgage was in U.S. dollars, I
    wouldn't need to worry about a change in the exchange rate leading to a
    massive tax bill on money that I never had.

    The Opportunity to Sell My Home at a Loss and Not Be Punitively Taxed

    What if there was a housing crisis and I needed to sell my home at a
    loss? I better hope that the U.S. dollar has stayed strong relative to
    the Euro.

    Suppose that I bought a house this year for =100,000, with an EUR-USD
    exchange rate of $1.18 to the Euro. If the exchange rate is $1.35 5
    years from now, I would have a capital gain even if I sold the house
    for a loss at =90,000.

    Only Americans need to pay capital gains tax when selling the house,
    they live in, in another country. Only Americans need to worry about
    their capital loss being taxed as a gain.

    The Opportunity for a Mortgage Interest Deduction

    If I lived in the U.S., I'd be able to deduct the interest I pay on my
    mortgage from my U.S. taxes.

    But because I am a U.S. citizen that does not live in the U.S., the tax
    code does not permit me to deduct my mortgage interest from the taxes I
    pay to a country I don't even live in.

    The Opportunity for My Child to Benefit From the Taxes I Pay

    What about our child? He'd hopefully receive benefits from the 49.5%
    income tax that I pay here. We happily pay them to ensure a strong
    social safety net.

    Once again though, that global taxation throws a wrench in things.
    Benefits here like child support benefit, disability benefits, or
    student study are considered unearned income, subject to taxation by
    the U.S.

    Because some of these are paid to children or individuals with no
    income, they likely will end up paying U.S. taxes because they have no
    foreign taxes to offset it--because those are paid at another point in
    time, when they are in the workforce.

    China doesn't tax government benefits of its Dutch residents. Germany
    doesn't tax government benefits of its Dutch residents. But America is
    happy to undermine the opportunities the Netherlands (and other foreign
    lands) have for their residents.

    The Opportunity to Feel Safe When Filing My Taxes

    As if it wasn't painful enough to be deprived of these opportunities,
    entirely because the United States insists on being the one weird
    developed country that taxes nonresident citizens, we haven't even
    touched on compliance.

    It's not subject to legal protections against excessive fines--they're
    penalties, not fines. Penalties are never excessive.

    When a U.S. resident makes an honest, non-willful mistake on their
    taxes, the IRS determines whether or not to request an amendment and to
    assess reasonable
    interest-based penalties.

    On most matters involving international forms--the FBAR, the FATCA
    8938, the PFIC 8621 forms, we see a far more punitive approach. Non-
    willful errors are subject to a $10,000 fine, and willful errors are
    the greater of $100,000 or half of the money in the concerned account.
    Even if the information reporting error did not lead to a material
    income reporting error.

    Of course, lines between non-willful and willful are blurry, given that
    the Treasury has sometimes gone as far as considering an insufficient
    understanding of the tax code to be willful negligence.

    Either way, it doesn't matter--the penalties for honest mistakes are
    remarkably high in comparison to those made by U.S. residents. So,
    while a resident can trust that a small mistake will not have dire
    financial consequences, nonresident citizens don't get that.

    It's pretty clear what the U.S. Government thinks of us. One of our
    annual information reporting forms goes to the Treasury's Financial
    Crimes Enforcement Network.

    We're lumped in with criminals simply because we have accounts in the
    countries we live in.

    We don't get the opportunity to rest easy at the end of tax season. We
    instead get to stay up late, hoping that we did not make one single
    mistake.

    Conclusion

    If Congress wishes to look at making a fairer tax system that creates
    opportunity and benefit for ordinary Americans, it should take a moment
    to look at the numerous ways in which the tax code discriminates
    against U.S. citizens that live abroad.

    We are subject to a separate, but more punitive tax system than the one
    that U.S. residents live in.

    The opportunities we are deprived of did not stem from nothing--much of
    this, FATCA, PFIC, GILTI, and all the weirdness around exchange rates
    stems from a legitimate desire to make sure that the top 0.1% of
    Americans pay their fair share of taxes.

    But it seems that at some point along the way, Congress lost sight of
    the goal. The U.S. tax code and treasury regulations are stripping away
    any form of financial opportunity for middle-class citizens that live
    abroad.

    The rich can afford high powered lawyers to work around this. They can
    freely invest in the U.S. if they live in Europe because of the size of
    their bank accounts. They are not bothered by the thousands of dollars
    of tax preparation fees necessary to work with the mess that is foreign
    taxes, U.S. taxes, the tax treaties, and the forms needed to reconcile
    all of this.

    They will never suffer the pain and humiliation of paying thousands of
    dollars to complete compliance paperwork that ultimately proves that
    they rightfully owed nothing that year. If you're going to invoke terms
    like ``civic duty'' and ``citizens have obligations''--at least make
    those duties and obligations benefit the state. I would rather pay the
    IRS than an accountant.

    Please understand that every time you talk about fairness, and about
    dealing with offshore issues, you are also talking about making life
    tougher for ordinary Americans that live on other shores.

    The 7 to 9 million overseas Americans, an overwhelmingly average folk
    that closely reflects the population living in the U.S., have been
    crying out for necessary reform and relief for over a decade now, with
    no meaningful talk from Congress about improvement.

    Please stop taking away the opportunities that are afforded to
    Americans back home and other residents of the countries we live in.

                                     ______

                                Democrats Abroad

                                  PO Box 15130

                              Washington, DC 20003

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

                                                            May 7, 2021

     RE: ``Creating Opportunity Through a Fairer Tax System''--Comments and
                        Recommendations in Support of Americans Abroad

    Democrats Abroad is grateful to comment on matters covered in the April
    27th Fiscal Responsibility and Economic Growth Subcommittee hearing and
    noted in the chair and co-chair statements on ``Creating Opportunity
    Through a Fairer Tax System.'' This submission reflects the experience
    of non- resident citizens navigating inequitable provisions in the U.S.
    tax system and it includes recommendations to address tax code
    injustices created by tax policy established without a clear
    understanding of its impact on ordinary, middle-class Americans living
    abroad.

    I. SUMMARY

    The State Department estimates there are 9 million Americans living
    outside the United States. Unfortunately, we suffer from the stubborn
    misperception--driving the development of tax policy and regulations--
    that Americans abroad are uniformly ``high-rollers'', living a life of
    luxury in low- or no-tax countries. Research published at the behest of
    Congressional staff demonstrates that we live abroad primarily because
    a relationship, employment, education, or adventure took us abroad, and
    we decided to stay.\1\ The vast majority of us are middle-class
    Americans, working, raising families, and retiring in countries with a
    higher overall tax-burden than the U.S. The tax policies and
    regulations that affect Americans abroad do not reflect this reality,
    but instead penalize millions of us ordinary American citizens in
    attempts to foil a few bad actors.
    ---------------------------------------------------------------------------
        \1\ ``Tax Filing From Abroad: 2019 Research on Non-Resident
    Americans and U.S. taxation,'' Bit.ly/FilingFromAbroad.

    Filing taxes from abroad and navigating the convergence of the U.S. and
    a non-U.S. tax system is stunningly complex. Research has found most
    seek the services of expensive tax return preparers to produce filings
    that commonly show that we owe no U.S. tax.\2\
    ---------------------------------------------------------------------------
        \2\ ``Tax Filing From Abroad,'' and ``Can We Please Stop Paying
    Twice?: Reforming the U.S. Tax Code for Americans Abroad,'' Bit.ly/
    CanWePleaseStopPayingTwice.

    Democrats Abroad recognizes that the American Jobs Plan and American
    Families Plan--federal government spending programs essential to
    supporting Americans through the pandemic, rescuing the economy and
    investing in our future prosperity--are going to place pressure on
    ---------------------------------------------------------------------------
    current and future taxpayers.

    Democrats Abroad supports the aim of raising additional federal
    government revenue from those wealthy Americans and large U.S.
    corporations not paying their fair share. We celebrate President
    Biden's pledge not to raise taxes on those making under $400,000 per
    annum. We laud the actions of Congress in advancing tax policies that
    treat low-income Americans differently from high-income Americans, such
    as the income-based eligibility criteria for receiving CARES Act and
    American Rescue Plan Act pandemic aid. And we strongly support the Made
    In America Tax Plan reforms to the Tax Cuts and Jobs Act that remove
    incentives to offshore jobs and R&D, move profits to low-tax
    jurisdictions, and abuse tax havens.

    However, we also need Congress to address the distressing taxation
    predicament of working-class Americans living abroad. We need Congress
    to understand our community, recognize our tax problems and enact
    reforms to reduce the hardships we inadvertently suffer due to laws
    meant to deal with bad actors, not ordinary citizens.

    Americans abroad long to be placed on a taxation par with others who
    live and are taxed in a country other than their country of
    citizenship. Most tax systems require citizens to declare revenue in
    the country where the taxpayer generates it, i.e.,
    residency-based taxation (RBT). Democrats Abroad and the other
    organizations representing Americans abroad have had detailed
    discussions with Congress about a proposal to enact RBT and other
    reforms for Americans abroad that eliminate double taxation, remove
    barriers to banking, saving and investing and simplify filing from
    abroad.

    We will continue to advocate in support of an RBT model that provides
    relief to Americans abroad, prevents residency-driven U.S. tax
    avoidance and is revenue neutral to the federal government.\3\ We
    believe the time will come when Congress embraces RBT.
    ---------------------------------------------------------------------------
        \3\ Democrats Abroad supports an RBT model that includes a means-
    tested transition tax, i.e., a tax on the wealth of High Net Worth
    individuals seeking non-resident U.S. tax status. RBT is not
    incompatible with a wealth tax.
    ---------------------------------------------------------------------------

    Reform Recommendations

    Now when the government is building a fairer tax system to create
    opportunity for all Americans, we recommend these reforms for Americans
    abroad,\4\ which comply with the Biden Administration's plan to place
    the greatest burden of taxation on those with the greatest ability to
    pay.
    ---------------------------------------------------------------------------
        \4\ Americans abroad eligible for these reforms will satisfy the
    IRS Substantial Presence Test for offshore residency.

    1.  A tax filing exemption for Americans abroad compliant with
    financial account reporting requirements who owe zero U.S. tax. We
    believe this reform fits into the aims and proposed provisions of the
    ---------------------------------------------------------------------------
    American Families Plan.

    2.  An exemption from GILTI taxes on the profits of controlled foreign
    corporations owned by Americans abroad compliant with foreign financial
    account reporting requirements who have income under $400,000. We
    believe this reform fits into the proposed provisions of the Made In
    America Tax Plan.

    3.  Updates to the Report of Foreign Bank and Financial Accounts (FBAR)
    including: the indexation of the FBAR reporting threshold for
    inflation; creation of an FBAR filing threshold for Americans abroad
    that is five (5) times higher than the indexed threshold; the
    elimination of FBAR and FATCA filing-duplication; modification of the
    enormously out-of-proportion penalties for non- willful neglect to file
    FBAR reports; and reinstatement of the option to paper-file the FBAR.

    Further, we re-affirm our support for an exemption for Americans abroad
    from FATCA reporting of the financial accounts in the country where
    they live and pay tax. We believe these financial account reporting
    reforms fit into the proposed provisions of the American Jobs Plan/Made
    in America Tax Plan.

    II. BACKGROUND

    For many years Americans abroad have been speaking to U.S. lawmakers
    about the genuine personal and financial hardships we experience due to
    the taxation of our income both by our country of residence and by the
    U.S. The harm caused to Americans abroad by inordinately complex U.S.
    tax-filing, by double taxation, and by
    policy-borne barriers to banking, saving, and investing, is so severe
    that it often feels to us that the U.S. is punishing us for moving to
    another country.

    Congress enacts tax policy, and Treasury implements it, in our view
    without giving adequate prior consideration for the unintended adverse
    impact it might have on ordinary working-class Americans who are living
    abroad. We do not live abroad to avoid paying taxes; we pay taxes in
    the countries we live in, the vast majority of which have higher tax
    rates than does the U.S. Americans abroad need Congress and Treasury
    officials to understand who we are so that they can strike a better
    balance in policy making between discouraging and apprehending tax
    cheats--which we strongly support--and caring for the welfare of
    ordinary Americans living abroad.

    Americans abroad understand that we are collateral damage in an on-
    going war against tax cheats. Those seeking to hide assessable income
    from the IRS engage legions of clever lawyers, bankers, accountants,
    and formation agents to collaborate on the development of ever-more
    complex tax-avoidance schemes. The fight against their tireless efforts
    routinely results in policy that makes life harder for ordinary
    Americans abroad. In alignment with Congressional efforts and the Biden
    Administration's intent, we strongly support efforts to crack down on
    tax cheats; however, the next tax reform debate must take into
    consideration the perspective of Americans abroad, a gravely
    misunderstood and under-acknowledged community.

     WHO ARE AMERICANS ABROAD AND WHAT ARE OUR TAX PROBLEMS?

    a. We Are Not ``Fat Cats''

    Democrats Abroad wants desperately to vanquish the persistent,
    apocryphal stereotype that the 9 million American civilians living
    abroad are wealthy ``fat cats'' avoiding U.S. taxes. The vast majority
    of us are ordinary working-class Americans, about whom our research has
    found:\5\
    ---------------------------------------------------------------------------
        \5\ ``Tax Filing From Abroad.''

          61% had household income less than $100,000.
          72% were married, 71% of whom to non-U.S. spouses.
          63% owned their own home.
          32% had moved abroad for marriage or a relationship.
          25% had left the U.S. for work/employment.
          64% had made their home abroad and had no plan to return to the
    U.S.
          Most live in countries with a higher overall tax-burden than the
    U.S.

    b. Tax Problems for Individuals \6\
    ---------------------------------------------------------------------------

        \6\ ``23 Tax Problems for Americans Abroad and 3 Solutions,''
    Bit.ly/23TaxProblemsFor
    AmericansAbroad.
    ---------------------------------------------------------------------------
    While the Foreign Earned Income Exclusion and Foreign Tax Credit
    provide some protection from double taxation, there are many types of
    income that fall outside those provisions and are double taxed. These
    include income associated with retirees and with vulnerable citizens
    living on foreign government social welfare. Some U.S. tax treaties
    protect savings in statutory retirement accounts from double taxation,
    but, as we have informed this Committee previously, most treaties do
    not.

    Punitive tax-treatment of non-U.S. investment (Passive Foreign
    Investment Companies or PFICs) and saving vehicles, combined with
    provisions in securities, national security, and banking laws, make
    saving for retirement or the family's future very expensive and
    inefficient, if not impossible. They create obstacles to saving and
    investing both in the U.S. and abroad, which is an intolerable hardship
    for families.

    Even the family home puts the non-resident taxpayer at risk. Americans
    abroad are entitled to no deduction for interest on a home mortgage,
    nor to favorable capital gains and other tax treatment on sale. In
    fact, they are at risk of a capital gains tax liability should
    fluctuations in exchange rates create an artificial gain at the time of
    property sale or even re-finance.

    Filing from abroad is inordinately complex, forcing most Americans
    abroad to seek the services of expensive tax-return preparers who
    understand the tax systems of both the U.S. and the country where they
    reside. On average, Americans abroad pay nearly triple what U.S.-based
    filers pay for tax preparation. Therefore, most are paying heavily to
    maintain U.S. tax compliance even though they owe no tax to the U.S.
    government.

    The burden of tax filing from abroad is compounded by foreign financial
    account reporting requirements. Since the Foreign Account Tax
    Compliance Act (FATCA) fully implemented double-disclosure foreign
    account and financial asset reporting--meaning that both the individual
    and their bank must report--30% of Americans abroad have reported
    impaired access to even ordinary financial products and services where
    they live.\7\ This ``lockout'' of Americans abroad by foreign banks and
    financial institutions has been enormously disruptive for those
    affected, as noted in sworn testimony to the April 26, 2017 House
    Subcommittee on Government Operations hearing, ``Reviewing the
    Unintended Consequences of FATCA.''\8\
    ---------------------------------------------------------------------------
        \7\ ''Tax Filing From Abroad.''
        \8\ https://www.govinfo.gov/content/pkg/CHRG-115hhrg28503/pdf/CHRG-
    115hhrg28503.pdf.

    Failure to comply with FBAR reporting requirements for foreign bank and
    other foreign financial accounts carries heavy penalties that are far
    out of proportion to the taxpayer lapse, especially when, for example,
    it is due to ignorance borne of IRS neglect, language barriers, or lack
    of ability to use or to access electronic devices which are mandatory
    ---------------------------------------------------------------------------
    for FBAR filing.

    Non-U.S. domestic partners of Americans abroad often remove their U.S.
    spouse from financial accounts to avoid U.S. financial account
    reporting requirements, making the American vulnerable to financial
    abuse, manipulation, or neglect.

    Americans abroad also suffer from serious deficiencies in IRS service
    and support. For many years the IRS has provided little to no advice
    about tax-filing obligations to non-resident citizens. Ignorance,
    misinformation, and confusion abound, even among consulate and embassy
    staff. In recent years the IRS has withdrawn staff from international
    postings and replaced them with telephone and online support that
    vastly underestimates how inordinately difficult it is to file taxes
    from abroad. FreeFile programs are not suited to non-resident filers
    and free support from volunteer tax return preparers available to aged
    and indigent taxpayers in the U.S. is not accessible to those living
    abroad.

    The unfortunate experiences of Americans abroad in accessing the
    pandemic aid provide further evidence of the need for greater attention
    by the IRS to our needs. Research published in October 2020 on
    Americans abroad and the CARES Act indicates that only two in three
    Americans abroad who were eligible for a CARES Act stimulus payment
    received one. Further, 70% of those who received the aid received a
    check, which took on average 12 weeks to arrive and be converted into
    cash.\9\ IRS data suggesting 90% of CARES Act stimulus payments were
    distributed within two weeks clearly made no accommodation for the time
    it took for the cash to actually reach the hands of Americans abroad
    (and turned a blind eye to the fees incurred for cashing a U.S.
    government check abroad.)
    ---------------------------------------------------------------------------
        \9\ ``Americans Abroad and CARES Act Aid,'' Bit.ly/
    CARESActandAmericansAbroad.

    The IRS cannot deposit funds, e.g., stimulus payments or tax refunds,
    into a non-resident American's foreign bank account. Direct deposit is
    available for bank accounts located only in the U.S. Requests by
    Americans abroad groups to change this policy have so far yielded no
    response, but given the Social Security Administration, Veterans
    Administration and Railroad Retirement Board have worked out how to
    make payments into the non-U.S. bank accounts of beneficiaries living
    abroad, we are hopeful the IRS will soon work out a way.

    c. Tax Problems for Employees and Small Business Owners

    U.S. taxation puts job-seeking Americans abroad pursuing tax-
    equalization at a competitive disadvantage in the job market as it
    makes them 40% more expensive for companies to hire than those of other
    nationalities.

    Financial account reporting requirements make Americans abroad very
    unattractive as business partners to those averse to sending their
    business's financial information to the U.S. government.

    The Repatriation and GILTI taxes in the 2017 Tax Cuts and Jobs Act are
    causing an existential crisis for the small to medium-sized businesses
    owned by Americans abroad. The reforms that ushered in these new taxes
    have been enormously beneficial for American companies with profits in
    overseas subsidiaries. But conversely, for Americans abroad, retirement
    savings held in their business are being drained to pay Repatriation
    tax and their current and future earnings are double taxed by GILTI;
    those Americans are being forced to either restructure their businesses
    at considerable cost or to close them entirely.

     d. Transformational Policy Is Coming; Don't Leave Americans Abroad Out

    The programs in the American Jobs Plan/Made In America Tax Plan and the
    American Families Plan comprise a generation-defining investment in
    American commercial and social infrastructure and a commitment to grow
    the middle-class and expand the benefits of economic growth to all
    Americans.

    Americans living abroad manage U.S. businesses and other enterprises,
    promote U.S. interests and serve as unofficial ambassadors of American
    culture and values. They contribute to the U.S. economy, industry,
    foreign relations, incoming investment and cultural exchange, all of
    which Congress has made little attempt to understand. Americans abroad
    are yet another component of U.S. infrastructure that the government
    has neglected and in which the government has underinvested. The
    reforms outlined herein will produce new personal and financial
    opportunities for the community of Americans abroad and will ensure
    they are not left out of this transformational policy-making.

    Implementing residency-based taxation, a FATCA filing exemption for the
    accounts of Americans abroad in the countries where they live and
    already pay tax, and reforms to improve the FBAR would address all
    these problems. However, we also understand that (1) the pandemic has
    put the government under enormous revenue pressure to invest in
    physical and social infrastructure to put the American economy back on
    its feet, and (2) we have more work to do to persuade Congress that
    residency-based taxation can be introduced without expanding tax
    avoidance by High Net Worth Americans. We have therefore established
    three reform recommendations for incorporation into the American Jobs
    Plan/Made In America Tax Plan and the American Families Plan that will
    provide desperately needed relief to Americans abroad.

     III. THE CASE FOR A FILING EXEMPTION FOR AMERICANS ABROAD WHO OWE NO
                        U.S. TAX

    Americans abroad bear onerous tax compliance responsibilities, facing
    taxation firstly by their country of residence and then by the U.S.
    Those who do have a U.S. tax liability are paying twice on the same
    dollar of income.

    Filing from abroad is inordinately complex and IRS support is
    insufficient to enable Americans abroad to easily comply. IRS resources
    outside the U.S. have been withdrawn. IRS telephone support is not
    accessible from many countries and, when it is, the number is not toll-
    free, wait times are lengthy and reports suggest operators lack the
    knowledge to address questions particular to non-resident filers.

    The IRS's Volunteer Income Tax Assistance (VITA) and Tax Counseling for
    the Elderly (TCE) programs offer free basic tax return preparation to
    qualified individuals in the U.S. only.\10\ The IRS Locator tool that
    connects qualified individuals with program volunteers in their local
    area uses U.S. zip codes. There is no online version of the program for
    Americans abroad. IRS 2021 communications recruiting tax preparation
    participants for the program does not solicit applications from those
    skilled and prepared to help eligible Americans abroad.
    ---------------------------------------------------------------------------
        \10\ https://www.irs.gov/individuals/free-tax-return-preparation-
    for-qualifying-taxpayers.

    The IRS FreeFile fillable forms for electronic filing have multiple
    barriers to access by Americans abroad.\11\ Creating an IRS account to
    file electronically requires a U.S. telephone number. Many e:forms
    require the filer to provide a U.S. address. Entering a foreign
    address--even U.S. military addresses abroad--may cause the system to
    reject the return entirely. Two of the forms most commonly used by
    Americans abroad--Form 2555 for declaring bona fide offshore residency
    and the Foreign Earned Income Exclusion and Form 1116 for claiming a
    Foreign Tax Credit--cannot be filed electronically because required
    attachments cannot be included. The FreeFile fillable forms system does
    not include the Foreign Employee Compensation Form nor Form 2350,
    Application for Extension of Time to File U.S. Income Tax Return.
    ---------------------------------------------------------------------------
        \11\ https://www.irs.gov/filing/free-file-fillable-forms/free-file-
    fillable-forms-military-and-international-filers.

    The IRS YouTube channel provides video support to U.S. taxpayers and
    advisers that help them file; but there are no videos specifically
    addressing the myriad problems and challenges faced by Americans
    abroad.\12\
    ---------------------------------------------------------------------------
        \12\ https://www.youtube.com/channel/UCcWZOFh3l-1LC7UvhdCXxQg.

    For all these reasons, nearly 60% of Americans filing from abroad pay
    tax return preparers to complete their U.S. reports and returns.\13\
    More than 60% pay more than $500 for tax return preparation
    services,\14\ in some cases much more. This compares to the U.S.
    average cost for tax preparation of $175-$275.\15\
    ---------------------------------------------------------------------------
        \13\ ``Tax Filing From Abroad.''
        \14\ ``Tax Filing From Abroad.''
        \15\ https://www.thebalance.com/tax-preparation-prices-and-fees-
    3193048.

    The irony is that non-resident filers are often paying these exorbitant
    fees to professionals to prepare tax returns that indicate that there
    is no U.S. tax to pay. Sixty percent of Americans abroad have income
    under $100,000.\16\ Overseas residency makes them eligible for the
    Foreign Earned Income Exclusion ($107,600 in 2020) and most have
    Foreign Tax Credits for tax already paid.
    ---------------------------------------------------------------------------
        \16\ ``Tax Filing From Abroad.''

    PROPOSAL: We propose eliminating the tax filing requirement for
    ---------------------------------------------------------------------------
    Americans abroad who owe no tax.

          The IRS Substantial Presence Test \17\ exists for taxpayers to
    certify offshore residency.
    ---------------------------------------------------------------------------
        \17\ https://www.irs.gov/individuals/international-taxpayers/
    substantial-presence-test.
    ---------------------------------------------------------------------------
          Tax calculation worksheets can assist ordinary earners to
    demonstrate that they have a $0 U.S. tax liability.
          Declarations can be established for non-resident taxpayers to
    certify their eligibility for the $0 tax liability filing exemption.
          The IRS has already established categories of Americans who do
    not have to file, having defined filing status, age and annually-
    updated income eligibility criteria.
          De Minimis provisions can exclude High Net Worth taxpayers from
    eligibility for the $0 tax liability filing exemption.
          FBAR filings and FATCA filings keep IRS eyes on taxpayers even
    if they don't have to file.

    The American Families Plan holds the promise of delivering an historic
    shift towards a more equitable America. Americans abroad ask not to be
    left out. As we have demonstrated, the Internal Revenue Code is in many
    ways highly punitive to ordinary American families living middle-class
    lives abroad and is, therefore, unjust. A tax filing exemption for
    those working-class Americans who do not owe any U.S. tax would provide
    consequential relief to American families abroad with no impact on
    government revenue-raising.

     IV. THE CASE FOR A GILTI TAX EXEMPTION FOR AMERICANS ABROAD WITH
                        INCOME UNDER $400,000

    Research on Americans abroad published in 2017 and 2019 indicates
    somewhere between 2% and 20% of Americans abroad own and operate small
    to medium sized businesses registered in the countries where they
    live.\18\ Americans abroad owning and operating businesses are an
    exceedingly diverse group; they are architects, yoga instructors,
    retailers, recruiters, beekeepers, IT professionals, film and
    television producers, music distributors, advertising agents, financial
    servicer providers and more. Comments from some of them about the 2017
    Tax Cuts and Jobs Act (TCJA) are included in a briefing document we
    published for Congress in 2018 entitled ``Another Accidental Tax
    Penalty for Americans Abroad: This Time Hitting Small to Medium Sized
    Business Owners.''\19\
    ---------------------------------------------------------------------------
        \18\ ``Tax Filing From Abroad'' and ``Can We Please Stop Paying
    Twice?''
        \19\ ``Another Accidental Tax Penalty for Americans Abroad: This
    Time Hitting Small to Medium Sized Business Owners,'' bit.ly/
    AnotherAccidentalTax.

    The Repatriation Tax and the GILTI Tax introduced in the TCJA were
    carefully negotiated by corporate America over many years; however,
    they came as a great shock to small business owners living abroad.
    Although the Repatriation Tax and GILTI Tax provided enormous tax
    relief to U.S. multinationals, enabling them to repatriate profits of
    their offshore subsidiaries at deeply discounted tax rates and with
    offsets and deductions that ensure that little to no tax is due, the
    impact on individuals who own companies registered abroad has been
    ---------------------------------------------------------------------------
    devastating.

    Owners of small to medium sized businesses without access to employer-
    provided retirement savings plans often retain profits in their
    businesses to save for retirement. The Repatriation Tax, imposed
    retroactively on retained profits going back as far as 1986, is
    devouring their retirement savings. Those without funds to meet the tax
    have had to liquidate assets, which may have attracted capital gains or
    other local tax, further increasing their financial pain.

    The GILTI Taxes on all future earnings--earnings already taxed in the
    country where the business is registered and operates--must be declared
    on the owner's personal tax filing, taxed at the taxpayer's marginal
    rate rather than the 10.5% rate (50% of 21% corporate tax rate)
    available to corporations, afforded none of the foreign tax credits
    available to corporations and calculated using a highly complex formula
    that references corporate factors wholly irrelevant to small
    businesses. The absence of provisions relevant to the small to medium
    sized businesses owned by Americans abroad suggest that the GILTI tax
    was not conceived with the small to medium sized businesses of ordinary
    Americans abroad in mind.

    New GILTI rules finalized by Treasury in the middle of 2020 gave
    individuals a means of accessing the discounted corporate tax rate
    (Sec. 962 election) and the 50% tax rate discount (Sec. 250 deduction)
    available to corporations. Claiming the Sec. 962 election and Sec. 250
    deduction, however, is inordinately complex and very expensive.
    Further, it does not completely resolve the double taxation issues, as
    the profits of their companies will be taxed yet again when the profits
    are paid out to the business owner as dividends. So, although
    regulatory relief was provided, it is incomplete and it is not
    commercially accessible to ordinary working class Americans abroad who
    rely on their businesses to provide for themselves and their families.
    Many of them have already been forced to close their businesses after
    years of investment and effort, or to undergo costly corporate re-
    structuring. In either case the outcome is highly punitive.

    American business owners abroad have truly suffered under the burden of
    the double taxation wrought by Repatriation and GILTI. And now the
    pandemic has in many cases increased economic duress. The Made In
    America Tax Plan proposals increasing the GILTI tax to perhaps twice
    the current rate. The prospect of the GILTI tax increase is causing
    anger and levels of distress for everyday working class American
    families that Congress should find intolerable and unacceptable.

    PROPOSAL: We propose a GILTI tax exemption for the profits of small
    businesses owned by Americans abroad with income under $400,000 per
    annum.

          The IRS Substantial Presence Test \20\ exists for taxpayers to
    demonstrate offshore residency.
    ---------------------------------------------------------------------------
        \20\ https://www.irs.gov/individuals/international-taxpayers/
    substantial-presence-test.
    ---------------------------------------------------------------------------
          Tax calculation worksheets assist ordinary earners to
    demonstrate that they have income under $400,000.
          As Made in America Tax Plan proposals include increasing the
    GILTI tax rate, this exemption is consistent with President Biden's
    pledge not to increase taxes on any American with income under $400,000
    per annum
          De Minimis provisions can exclude High Net Worth taxpayers from
    eligibility for the GILTI Tax exemption.
          Eligibility criteria applicable to the taxpayer's business can
    include limits on annual turnover, employees or other.
          Declarations can be established for Americans abroad who own
    small to medium size businesses abroad to certify their eligibility for
    the GILTI Tax exemption.
          FBAR filings and FATCA filings keep IRS eyes on taxpayers.

    The American Jobs Plan/Made In America Tax Plan lays out the steps
    towards a fairer tax code that rewards work and not wealth, and makes
    sure that corporations and the highest income individuals pay their
    fair share. An exemption for middle class Americans from the GILTI tax,
    a tax that was never meant to impact them, fulfils these ambitions and
    is consistent with President Biden's promise to protect those making
    income under $400,000 per annum from tax increases.

     V. THE CASE FOR REFORMS TO THE REPORT OF FOREIGN BANK AND FINANCIAL
                        ACCOUNTS (FBAR) AND FATCA

    Court cases involving an FBAR violations are not rare. The foreign
    financial account reporting requirement is clearly instrumental in the
    apprehension of tax evaders using offshore financial accounts to hide
    assessable income. The perpetrators, however, are invariably citizens
    living inside of the U.S. rather than living abroad.\21\
    ---------------------------------------------------------------------------
        \21\ https://www.cbo.gov/sites/default/files/114th-congress-2015-
    2016/workingpaper/52199-wp-taxcompliance.pdf.

    Rules guiding the implementation of the FBAR have not been adjusted
    since the law was passed in 1970. Reasonable updates can both improve
    the report's focus on bad actors and simplify compliance for Americans
    ---------------------------------------------------------------------------
    abroad.

    PROPOSAL: We propose the following reforms to the FBAR.

    1.  Index the $10,000 reporting threshold for inflation.

    2.  Create a separate reporting threshold for Americans living abroad
    perhaps 5 times higher.

    3.  Address the duplication of reporting on FBAR and FATCA, as
    recommended by the IRS National Taxpayer Advocate.

    4.  Modify the out-of-proportion penalties for non-willful failure to
    disclose accounts.

    5.  Restore the option to submit FBAR paper filings.

    6.  Provide for FBAR reporting in Spanish and other languages.

    Further, we re-affirm our long-standing support for the Overseas
    Americans Financial Access Act which would exempt from FATCA reporting
    the foreign financial accounts of Americans abroad in the countries
    where they live and face taxation because tax cheats do not hide
    assessable income in the countries where they live. Further, the
    Corporate Transparency Act adds a powerful new tool for discouraging
    and apprehending tax cheats. As the law mandating disclosure of
    beneficial interests in anonymous shell companies is implemented,
    reports will illuminate the activities of the tax cheats and other bad
    actors that foreign financial account disclosure did not.

    Consistent with President Biden's vision in the American Families Plan,
    these reforms help ensure that all Americans have access to essential
    banking services and the financial infrastructure necessary to create
    opportunity. They can be modified to exempt certain individuals from
    eligibility and ensure they enhance existing tax enforcement
    mechanisms. They will focus policy on bad actors and provide relief to
    those who have long suffered unintended adverse consequences, such as
    bank lock outs. Finally, these FBAR and FATCA reform recommendations
    are entirely consistent with the goals of getting everyone to pay their
    fair share.

    Thank you for the opportunity to comment and provide recommendations.
    Not since the Carter Administration has there been a hearing in the
    U.S. Congress on Americans living abroad and the range of serious
    personal and financial problems U.S. taxation causes for them, their
    families, their businesses and the U.S. and non-U.S. entities they do
    business with. We re-state our belief that it is past time that the
    issues of Americans abroad be heard, documented in the public record,
    and addressed by the government.

    Thank you for your interest in these matters. Please contact Carmelan
    Polce of our Taxation Task Force (+61 404 767 088 or
    carmelan@democratsabroad.org) or the undersigned with any questions
    about the information and recommendations provided herein.

    Sincerely,

    Julia Bryan
    Global Chair
    Democrats Abroad
    +1 (843) 628-2280
    chair@democratsabroad.org

    CC: The Honorable Nancy Pelosi      The Honorable Charles Schumer
        Speaker of the House            Majority Leader
        U.S. House of Representatives   U.S. Senate
        Office of the Speaker, United
    States                              S-224, United States Capitol
        Capitol                         Washington, DC 20515
        Washington, DC 20515

        The Honorable Kevin McCarthy    The Honorable Mitch McConnell
        Minority Leader                 Minority Leader
        U.S. House of Representatives   United States Senate
        H-204, United States Capitol    S-230, United States Capitol
        Washington, DC 20515            Washington, DC 20515

        The Honorable Ron Wyden         The Honorable Mike Crapo
        Chairman                        Ranking Member
        United States Senate            United States Senate
        Committee of Finance            Committee of Finance
        221 Dirksen Senate Office
    Building                            219 Dirksen Senate Office Building
        Washington, DC 20510            Washington, DC 20510

        The Honorable Elizabeth Warren  The Honorable Bill Cassidy
        Chair                           Ranking Member
        U.S. Senate                     U.S. Senate
        Subcommittee on Fiscal          Subcommittee on Fiscal
        Responsibility and Economic
    Growth                              Responsibility and Economic Growth
        309 Hart Senate Office Building 520 Hart Senate Office Building
        Washington, DC 20510            Washington, DC 20510

        The Honorable Richard E. Neal   The Honorable Kevin Brady
        Chairman                        Ranking Member
        U.S. House of Representatives   U.S. House of Representatives
        Committee on Ways and Means     Committee on Ways and Means
        1102 Longworth House Office     1139 Longworth House Office
        Building                        Building
        Washington, DC 20515            Washington, DC 20515

        The Honorable Carolyn Maloney   The Honorable Dina Titus
        Americans Abroad Caucus         Americans Abroad Caucus
        2308 Rayburn House Office
    Building                            2464 Rayburn House Office Building
        Washington, DC 20515            Washington, DC 20515

                                     ______

                       Letter Submitted by Susan De Paul
    U.S. Senate
    Committee on Finance

    To whom it may concern,

    I am a proud citizen of the United States of America, but I am writing
    today to call attention to the injustice of the U.S. extraterritorial
    tax regime and how it severely limits the freedom of individual U.S.
    citizens living outside the United States. This system is highly
    unfair, and it's time that the extraterritorial tax system be abolished
    with the goal of ``Creating Opportunity Through a Fairer Tax System''
    as proposed by the organization Stop Extraterritorial American Taxation
    (SEAT).

    The only thing that makes me different from U.S. residents is that I
    live outside the United States. For the record, I did not move from the
    United States to avoid U.S. taxation. In fact, I have discovered that
    by living outside the United States I am subject to (1) taxation in the
    country where I live and (2) a more punitive form of taxation by the
    U.S. than what is imposed on U.S. residents. My only crime seems to be
    that I live outside the United States--and, therefore, my income and
    assets are foreign to the United States. However, the income and assets
    are actually local to me.

    I am writing to express my deep concern about the failure of the Senate
    Finance Committee to consider the impact of proposed tax legislation on
    me and on Americans living abroad generally. We are average, ordinary,
    everyday people. Because we are flesh and blood humans, we need to eat.
    Because we will get old and plan to eventually retire, we need to save
    for retirement. Because we are individuals with responsibilities to our
    families, our communities, and our countries of residence, we may need
    to operate our own small businesses. We are definitely NOT mini-
    multinational corporations, and we are tired of being treated as though
    our normal day-to-day activities are somehow ``offshore'' and deserving
    of punishment. We are tax-compliant in our countries of residence. We
    pay a lot of tax. We pay our fair share. We do this even though it is
    almost impossible for us to be both tax-compliant in our country of
    residence and compliant with U.S. tax laws. We do not understand why
    U.S. tax laws are being applied in an extraterritorial manner to income
    and assets that are neither generated nor disposed of in the United
    States. Other countries do not tax their citizens who live in the
    United States. Why should the United States tax U.S. citizens living in
    other countries?

    Our situation is bad. It is also nearly unique. Only the African
    dictatorship of Eritrea follows the lead of the United States by
    imposing worldwide taxation on its citizens who live outside the
    country.

    I do not understand the indifference of the Senate Finance Committee to
    this situation. Interestingly, the Senate Finance Committee in 2015
    recommended changes to the U.S. extraterritorial tax regimes.
    Unfortunately, there have been no changes for the better but many
    changes for the worse.

    So far, the 2021 Senate Finance Hearings have been very, very bad for
    U.S. citizens living abroad and the Committee shows absolutely no
    understanding of the issues facing us. The Committee is obsessed with
    corporations without acknowledging that changes to corporate tax will
    have a huge effect on individuals.

    The taxation of corporations will have a bigger impact on many
    individuals with small businesses than on a relatively small number of
    corporations.

    The hearing on April 27, 2021--about a wealth tax--took the treatment
    of U.S. citizens abroad to a new level. The bottom line is this: as
    described Elizabeth Warren's proposed wealth tax will result in (1)
    taxation of assets earned outside the U.S.A. and (2) the taxation of
    our non-U.S. citizen spouses whom we share our lives with.

    To add insult to injury, Senator Warren's proposed wealth tax would tax
    assets acquired abroad by U.S. citizens. Houses purchased abroad with
    foreign earnings have nothing to do with the United States, nor do
    small businesses that were founded abroad. My non-U.S. citizen spouse's
    assets also have nothing to do with United States.

    Here is an interesting question: Would the United States like it if
    China imposed taxes on all property situated in the United States that
    was owned by Chinese citizens?

    Admittedly, the current threshold for the wealth tax is $50 million
    and, therefore, far beyond the middle class. However, there is no
    provision for it to be indexed to inflation. As U.S. citizens who live
    abroad well know, the Report of Foreign Bank and Financial Accounts
    (FBAR) minimum reporting threshold of $10k remains unchanged since 1970
    even though $10,000 in 1970 is worth $68,267 today. Similarly, the
    level of the Foreign Earned Income Exclusion (FEIE) was set at $75k in
    1981 but was not indexed to inflation for several decades. Although
    $75k in 1981 is equivalent to $226k in 2021 dollars, the current FEIE
    level is only $107k. Past policies aimed at ``wealthy'' expatriates
    have a way of trickling down into the middle class, and I do not want
    to see future generations of ordinary Americans (such as my
    foreign-born children) burdened in this way.

    As for consideration of the foreign spouse's assets, even those with
    modest incomes would presumably need their spouses to prove that they
    are not in the $50 million wealth range if this law passes, but why
    should a person without U.S. citizenship and without even a green card
    be obliged to report their assets to what is (to them) an entirely
    foreign government? Non-U.S.-resident, non-citizen spouses without
    green cards have none of the benefits of U.S. citizenship (neither in
    terms of employment rights nor inheritance). They do not use the
    infrastructure of the U.S., and needless to say, they cannot vote. The
    money they have earned has been earned abroad. Taxing such people is a
    massive overreach by the U.S. into other countries' jurisdictions.

    If this comes as a surprise to you it's because you either do not
    understand or are conveniently ignoring that the U.S. has
    extraterritorial tax regime--a regime imposed on Americans abroad. All
    indications are that the Warren wealth tax will actually leverage the
    injustice of United States citizenship-based taxation to make the whole
    world part of its tax base.

    I support efforts to make sure that U.S. residents do not evade
    taxation by stashing their wealth in shell companies and secret
    accounts, but there is a significant difference between hiding taxable
    income that was earned within the U.S. and being taxed twice on money
    legally earned abroad by U.S. citizens who also live abroad. I would
    like to see evidence that the Senate understands this important
    distinction.

                                     ______

                    Letter Submitted by Christine Dymkowski
    I am writing again in the probably forlorn hope that someone in
    Washington will finally pay attention to the extreme injustice of the
    U.S. extraterritorial tax regime and how it severely limits the freedom
    of individual U.S. citizens living outside the United States. This
    extremely unfair system needs to be abolished, if you really intend to
    ``Creat[e] Opportunity Through a Fairer Tax System''.

    I did not move from the United States to avoid U.S. taxation, but
    because I fell in love with someone British. I have lived and worked in
    the UK my entire adult life, and because I live outside the United
    States, I am subject to (1) taxation in the UK and (2) a more punitive
    form of U.S. taxation than is imposed on U.S. residents. This is
    because my income and assets are foreign to the United States, although
    they are actually local to me.

    I am greatly disappointed by the continued failure of the Senate
    Finance Committee to consider the impact of proposed tax legislation on
    individual Americans living abroad. We are ordinary people who need to
    earn a living and save for retirement. We are NOT mini multinational
    corporations hiding U.S. assets ``offshore''. Because of the U.S.'s
    punitive tax treatment of Americans living abroad, we find it almost
    impossible to be tax compliant both in our country of residence and
    with U.S. tax laws. I do not understand why U.S. tax laws are being
    applied in an extraterritorial manner to income and assets that have
    nothing to do with the United States. Other countries don't tax their
    citizens who live in the United States, so why should the United States
    tax U.S. citizens living in other countries?

    Our situation is uniquely bad. Only dictator-led Eritrea follows the
    lead of the United States in imposing worldwide taxation on its
    citizens who live outside the country, but for them it's only 2% of
    income, rather than the confiscatory rate that the U.S. imposes on, for
    example, mutual funds local to me. It's ironic that the U.S. State
    Department regularly condemned Eritrea for its extraterritorial tax
    until, I presume, it realized the U.S. is guilty of worse.

    I cannot understand the indifference of the Senate Finance Committee to
    this unjust situation, especially when, as long ago as 2015, the SFC
    itself recommended changes to the U.S. extraterritorial tax regime.
    There have been no changes for the better, but many changes for the
    worse.

    So far, the 2021 Senate Finance Hearings have been totally inadequate.
    The Committee is obsessed with corporations and ignores the ways in
    which changes to corporate tax will have a huge effect on individuals.
    The hearing on April 27, 2021--about Elizabeth Warren's proposed wealth
    tax--took the treatment of U.S. citizens abroad to a new level,
    proposing (1) the taxation of assets earned outside the USA and (2) the
    taxation of our non-U.S. citizen spouses.

    Try to imagine this situation from the opposite point of view. Would
    the U.S. be happy if Europeans living in the U.S., working for U.S.
    companies, and earning U.S. dollars had to pay tax not only to the U.S.
    but to the countries of which they are citizens? I doubt it.

    Please stop ignoring the fact that the U.S. extraterritorial tax regime
    makes life difficult, if not impossible, for Americans living abroad.
    Show that you understand the difference between stateside Americans
    trying to hide assets and avoid paying tax and Americans living abroad
    who have no financial and economic ties to the U.S.

                                     ______

                     Letter Submitted by Ashley Lynn Ellis
    Dear Senate Finance Committee,

    I have written previous, very long letters to your committee and to my
    Senators and they seem to just be ignored. So in this brief message, I
    am asking you to please stop tax discrimination against U.S. citizens
    abroad. We probably are the most discriminated group in U.S. tax code,
    yet we are NEVER considered. We are ALWAYS IGNORED. Please make
    revisions to current rules (FATCA, GILTI, FBAR reporting, etc.) that
    consider middle class Americans abroad.

    In our local countries, we NEED to be able to EASILY have interest
    savings accounts, pensions, life insurance savings plans, own
    businesses, etc. We need to be able to compete locally. Allow us to
    live like regular people should. Stop imposing high fines and
    pretentious laws on those of us who are low or middle class people. I
    live in a developing country and cannot have a life insurance savings
    account because the reporting to the IRS costs more than any benefit.
    That is extremely unjust. I have zero retirement options. Also, the IRS
    website does not allow any online services for expats (IP Pin number,
    for example). We do not have equal access to hardly anything, yet are
    slammed with the highest penalties.

    I get migraines and lose sleep over this. I never am moving back to the
    U.S. I worry daily about my children's future. I already tell them they
    can renounce U.S. citizenship if they want to be successful in their
    home country, and it breaks my heart I have to tell my kids these
    things. I wish they could be both American and Mexican. It is
    ridiculous. Please make reforms to protect middles class Americans
    abroad, or just switch the Residency Based Taxation like the rest of
    the developed world. Let us live our lives where we choose. We are
    subject to local tax laws and it makes no sense that the U.S. does
    this. FATCA is the biggest nightmare. Stop discriminating against us.
    Stop ignoring us. Stop forcing us to renounce citizenship. Help us.

    I hope you read this and do not leave us behind.

    Thank you,

    Your average American abroad

                                     ______

                         Letter Submitted by Mark Engen
    To Whom This May Concern:

    I am a proud citizen of the United States of America, living overseas--
    I am ``boots on the ground,'' helping to escort U.S. products and
    services into the global markets.

    Currently, the U.S. tax system taxes me because I am in a citizen.
    Worse yet, it requires tax forms of me no matter where I live. The tax
    forms are more complex and restrictive than any citizen living in USA.
    The taxforming system means that the taxation policies and regulations
    make it nearly impossible to own a business and impossible to have a
    mutual fund. It also makes it more difficult for me to have a bank
    account. FATCA/FBAR also destroys my financial privacy. FATCA/FBAR
    means that it is impossible to fulfil any nondisclosure agreements with
    my employer, and would make it impossible for me to have any financial
    leadership position with bank signature authority.

    Extra-territorial tax reporting, taxing, and financial account tracking
    are unfair, immoral, and unconstitutional.

    All countries tax their RESIDENTS and not their CITIZENS.

    You must:

        -  End FATCA. It is unconstitutional and makes U.S. expatriate
    patriots into suspected criminals. The penalties are horrendous and
    redundant.

        -  End FBAR. It is unconstitutional and makes U.S. expatriate
    patriots into suspected criminals. The penalties are horrendous and
    redundant.

        -  Throughout the U.S. tax system, replace ``U.S. citizen'' with
    ``U.S. resident.''

        -  End all tax-reporting forms for citizens not residing in USA.

    This proposal is tax neutral. It is a myth that USA can gain tax
    revenue from overseas residents. Please see this article showing that
    USA cannot gain revenue and the cost of processing forms is creating
    deficit spending.

    https://isaacbrocksociety.ca/2016/03/08/us-expats-evade-taxation-not-
    mythbusted-91-5-of-expats-live-in-high-tax-regions/.

                                     ______

                      Letter Submitted by Andrea Fernandez
    U.S. Senate
    Committee on Finance
    Subcommittee on Fiscal Responsibility and Economic Growth

    To the members of the Subcommittee on Fiscal Responsibility and
    Economic Growth:

    I am writing to you as an ordinary U.S. citizen who happens to live
    abroad and would like to share my perspective on ``a fairer tax
    system''.

    I have lived in London for the last 13 years. I can assure you I am not
    a tax dodger trying to escape the U.S. tax system. I got transferred
    here for 6 months with a consultancy I worked for and fell in love with
    the city. Eventually I changed jobs, got married, bought a house and
    had a child. I don't know that I will stay in the UK forever, as my mom
    is elderly, but I like having the flexibility.

    Today I am a Director at a non-profit organization focused on
    supporting cities around the world to address the climate crisis--
    hardly the picture of a wealthy expat living a life of luxury. Please
    keep in mind that there are millions of ordinary Americans overseas who
    are salaried workers, who aren't living off of investment income. I
    dutifully pay my high taxes to the British government and under the
    dual taxation treaty, fortunately that usually eliminates my U.S. tax
    burden. And yet like so many others, I have to shell out
    700 to prepare tax forms to prove to the U.S. that I don't
    owe it taxes from my UK income. The complexity of U.S. tax preparation
    makes it very difficult for me to do this on my own. Meanwhile IRS
    officers are wasting their time reviewing forms for people who don't
    actually owe tax.

    The U.S. is one of only two countries in the world that uses citizen-
    based taxation, the other being Eritrea. I firmly believe one should
    pay taxes in the country that is protecting you, providing you
    infrastructure, education, healthcare, fire and police services and of
    late, vaccines. And that, my dear Senate Committee on Finance, is not
    the U.S. The burden of being a U.S. citizen abroad is tremendous--many
    banks don't want to provide us services and investment opportunities
    (including company pension plans) are really constrained, given the
    need to think about both U.S. and UK tax treatment and reporting
    requirements.

    I will share another grave injustice. I spent 6 weeks working from the
    city of Medellin, Colombia in the summer of 2019. I discovered there is
    a whole world of digital nomads, U.S. citizens who have jobs that allow
    them to work remotely. These digital nomads essentially live year-round
    in Colombia but take breaks in the middle of the year to ensure their
    Colombian tourist visas can get renewed. They live and work in
    Colombia, using infrastructure the country provides. And yet they pay
    ZERO tax to the Colombian government, and continue to pay taxes the
    U.S. It is morally repugnant that there are Americans living abroad in
    poor countries in the shadows of the economy without paying anything to
    the country they live in. And yet they see nothing wrong this because
    they are hiding behind the U.S. requirements of citizen-based taxation.
    Is that fair?

    It is absolutely true that there are crazy wealthy Americans who live
    abroad and try to evade taxes. But as the Panama Papers show, people
    who have that level of wealth have very sophisticated mechanisms to
    hide their investments in offshore companies and spend just enough time
    in homes they own around the world to not trigger residential taxation.
    By all means go after these types who are making their money in the
    U.S. and evading the IRS. But please don't forget the needs of ordinary
    salaried Americans who need justice and equity as well. The UK doesn't
    tax Brits living and working in the U.S.--why is it fair the other way
    around?

    My understanding is Senator Warren's proposed wealth tax could result
    in (1) taxation of assets earned outside the USA, including assets
    acquired after having moved from the U.S. and (2) the taxation of our
    non-U.S. citizen spouses who we share our lives with. Now my British
    husband's assets from his job in the education sector may generate a
    tax burden to the U.S.? This is absolute MADNESS. Imagine the UK
    wanting to tax assets of the 700,000 Brits who live and work in the
    U.S.--this is Taxation without Foundation. Or what if the Chinese
    government sought to tax the assets of property owned by its citizens
    in the U.S.? There would be outrage by people on this very Committee.

    According to the Tax Justice Network's Financial Secrecy Index,\1\
    Switzerland is the number one country on the world in term of their
    secrecy and the scale of their offshore financial activities. Do you
    know who number two is? The United States of America. Your focus of
    extraterritorial taxation seems very misdirected when the U.S. is the
    world's number two tax haven.
    ---------------------------------------------------------------------------
        \1\ https://fsi.taxjustice.net/en/introduction/introducing-the-fsi.

    What is a fairer tax system? It's one that is equitable, that treats
    working people fairly, that gets its fair share from the super-rich,
    that ensures corporations earning revenues in the U.S. pay their fair
    share, that taxes its residents who are benefitting from its
    infrastructure and services, and that does not burden ordinary
    Americans abroad. It is time to end citizen-based taxation for
    ---------------------------------------------------------------------------
    individuals and shift to residence-based taxation.

    I ask you to please consider the reconsider the significant impact and
    perverse outcomes of the reforms you are contemplating on ordinary
    citizens abroad and think more broadly about what a fairer tax system
    means for Americans living abroad.

    Thank you for your consideration.

    Sincerely,

    Andrea Fernandez

                                     ______

                       Letter Submitted by Aaron Fishbone

                                  May 11, 2021

    U.S. Senate
    Committee on Finance
    Subcommittee on Fiscal Responsibility and Economic Growth

    Dear Committee, I moved abroad to be with my wife who is from another
    country and now we have 2 dual national children. We both work and pay
    a relatively high tax rate to the government of Slovakia, where we
    live. I'm not complaining--we pay our share and get good quality and
    highly affordable medical care, (and many, many other public goods and
    services) as a result. Notably and importantly, this includes things
    like paid family leave to raise and care for our children. In Slovakia
    our wages are adequate, but we live on a budget even here and they are
    not adequate to pay for additional tax preparation in the USA for the
    income earned in Slovakia, or for a tax professional who knows both
    Slovak and American tax law and their convergence, nor for taxes in the
    US for income we don't earn there. I now qualify for and file under the
    foreign earned income exclusion, but in my first two years here it was
    a mess and I was double taxed as a sole proprietor while I was trying
    to find my way and get settled, which took a significant portion out of
    my savings and was very frustrating and dispiriting.

    I pay into the tax system here (again, at a high rate as required here)
    and am eligible for benefits like paid family leave. I should be able
    to take full advantage of this pro-family, pro-child measure which I
    have financially contributed to without fear that I might be taxed
    additionally in the USA for doing so. The money that would be taxed
    (for no good reason) is money I would want to live on, or, should I
    have any extra, invest in my children's 527 plan.

    I support the need for the U.S. Government to invest heavily to help us
    recover from the pandemic, to recover economically, and to invest
    heavily in the jobs of the future and building cleaner energy
    infrastructure, and will need to look at tax increases for some tax
    brackets to pay for this. Nonetheless, I urge the committee to
    recognize that I and many other Americans overseas are not wealthy, and
    are trying to live our lives and be with our families, and should not
    face an onerous, additional tax burden or double taxation for doing so.

    Thank you.

    Aaron Fishbone

                                     ______

                       Letter Submitted by Leland Gordon
    U.S. Senate
    Subcommittee on Fiscal Responsibility and Growth

    May 9, 2021

    Dear Sir/Madame:

    I am an American/Canadian citizen permanently living in Canada. I am
    required to still file U.S. taxes along with Canadian taxes. I have
    lived in Winnipeg since 2008. I was a good U.S. resident when I lived
    in Miamisburg, Ohio and paid U.S. taxes.

    The IRS filing process when living abroad is complicated. It is also
    expensive; typically, $400 a year, as it requires a specialized
    accountant. The forms are not the same as a typical U.S. tax return. It
    also wastes IRS resources, as most filers end up not owing U.S. tax.

    The U.S. is the only major country in the world that makes its citizens
    file taxes when living abroad. Every year I get stressed due to the
    burden of the U.S. filing. I am required to file U.S. taxes for the
    rest of my life. It is just not fair.

    This policy is having a significant effect on thousands of citizens
    permanently living abroad who still absentee vote.

    I am requesting the foreign tax filing requirement for U.S. citizens be
    removed and instead be made residence based. This is an issue that
    could likely garner bipartisan support.

    Sincerely and respectfully,

    Leland Gordon

                                     ______

                       Letter Submitted by Jeffrey Gunsch
    U.S. Senate
    Committee on Finance

    To Whom This May Concern:

    I am no longer a proud citizen of the United States of America. I am an
    angry American citizen living outside the United States. The reasons
    for why I am angry will be outlined in this letter. I live in Taiwan
    where I am a tax resident and where I am subject to full taxation
    already. I am writing today to call attention to the extreme injustice
    of the U.S. extraterritorial tax regime and how it severely limits the
    freedom of individual U.S. citizens living outside the United States.
    This system is very unfair and it's high time that the extraterritorial
    tax system be abolished with the goal of ``Creating Opportunity Through
    a Fairer Tax System.''

    The only thing that makes me different as an American from U.S.
    residents is that I live outside the United States. For the record, I
    did not move from the United States to avoid U.S. taxation! Contrary to
    public view and even some in government! In fact, I have been sickened
    that I am subject to (1) taxation in the country where I live and (2) a
    more punitive form of taxation that what is imposed on U.S. residents.
    As well as embassy fees for services which my taxes should pay already
    anyway! My only crime seems to be that I live outside the United
    States--and therefore my income and assets are foreign to the United
    States. But, the income and assets are actually local to me.

    I am writing to express the Senate Finance Committee continually fails
    to consider and understand the impact of the proposed tax legislation
    on me and on Americans living abroad generally both past and present
    and that we are tired of it. We are average, ordinary, every day
    people. Do you not want us to be able to retire anywhere and have to go
    on welfare? We have responsibilities to our families, our communities
    and our countries of residence and we may need to operate our own small
    businesses. We are definitely NOT mini multinational corporations and
    we are tired of being treated as such through our normal day-to-day
    activities are somehow seen as ``offshore'' and deserving of
    punishment. Seriously? Because we have a job, not in the U.S., we are
    tax cheats? Because we pay taxes to another country's government, we
    are tax evaders? When will this rhetoric in the U.S. government stop?
    We are tax compliant in our countries of residence! We pay a lot of
    tax! We pay WAY MORE than our fair share. We do this even though it is
    almost impossible for us to be both tax compliant in our country of
    residence and be compliant with U.S. tax laws. We don't understand why
    U.S. tax laws are being applied in an extraterritorial manner to income
    and assets that are not in the United States! Other countries don't tax
    their citizens who live in the United States? Why should the United
    States tax U.S. citizens living in other countries?? Please explain? Is
    it because you think we use some services in the U.S.? Guess what? We
    do not! If we need service, we also have to pay for that at our
    embassy! By the way, being we pay U.S. taxes, where are our vaccines?
    The U.S. government should supply them for ALL U.S. citizens living
    overseas until you stop taxing us!

    Our situation is bad. It is unique. Only the African dictatorship of
    Eritrea follows the lead of the United States by imposing worldwide
    taxation on its citizens who live outside the country. But even their
    system is more fair than what the U.S. inflicts on U.S. Citizens!

    I really don't understand the indifference of the Senate Finance
    Committee to this situation. Interestingly, the Senate Finance
    Committee in 2015, recommended changes to the U.S. extraterritorial tax
    regimes. There have been no changes for the better, but many changes
    for the worse.

    So far the 2021 Senate Finance Hearings have been very, very bad. The
    Committee is obsessed with corporations without acknowledging that
    changes to corporate tax will have a huge effect on individuals. You
    haven't mentioned that your obsession with the taxation of
    corporations, will have a bigger impact on the many, individuals than
    on the few corporations.

    The hearing on April 27, 2021--about a wealth tax--took the treatment
    of U.S. citizens abroad to a new level. The bottom line is this:

    As described Elizabeth Warren's proposed wealth tax will result in (1)
    taxation of assets earned outside the USA and (2) the taxation of our
    non-U.S. citizen spouses who we share our lives with. And to add insult
    to injury, Senator Warren's proposed wealth tax would bring assets
    acquired by U.S. citizens, after having moved from the United States,
    into the wealth tax system. Come on! My house was acquired after I
    moved from the United States! Not BEFORE, the U.S. has no right to tax
    my house in a foreign country paid for by foreign currency, from a
    foreign job! Which to me is all local!! Local currency! Local job!
    Local Property! My local business has nothing to do with the United
    States! Period! My non-U.S. citizen spouse's assets have nothing to do
    with United States. Stop asking for them, stop spying on her, stop
    asking questions! It is none of your business quite frankly! She is not
    and will never be a U.S. Citizen! Period!

    Question: Would the United States like it if China imposed taxes on all
    property situated in the United States that was owned by Chinese
    citizens?

    If this comes as a surprise to you it's because you either don't
    understand or are conveniently ignoring the U.S. has extraterritorial
    tax regime--a regime imposed on Americans abroad. All indications are
    that the Warren wealth will actually leverage the injustice of United
    States citizenship-based taxation to make the whole world part of its
    tax base.

    It makes me wonder if anyone in the U.S. Government has actually lived
    and worked and banked post-FATCA outside the U.S. without the comfy
    situation of being a U.S. Government employee? Because it seems like
    you totally do not understand and do not want to understand the
    situation you are forcing us to accept or comply with! Seriously, these
    predatory, obscene and unjustifiable tax practices must stop. It's
    simply not fair and unconstitutional!

    In last week's Senate Finance Committee hearing, one of the witnesses
    claimed that the U.S. system of extraterritorial taxation "works quite
    well." He also stated:

            You pay a substantial exit tax under current law by revoking
            citizenship. Not many people do it. Some do. If they don't
            value the protections and services provided to citizens of the
            United States then fine. But the protections and services
            provided to extreme wealth are huge and most ultra-wealthy
            benefit tremendously from being United States citizens and
            having those protections and services, and it's fair to have
            them pay a reasonable amount of tax on that which they
            currently are not.

    I do not agree with this at all!!!! Firstly it does not work well, this
    witness fails to understand our situation as stated again and again
    throughout this letter. Secondly, many citizens are renouncing, but it
    is not being reported! Or it is being reported because they want to
    avoid taxes which could not be further from the truth! We overseas
    Americans are sick and tired of the rhetoric from the U.S. Government,
    partisan and targeting those who do not live in the U.S. and to appease
    the voter base! We do not pay a reasonable amount, we pay an
    extraordinary amount which is unfair! I pay more than 35% of my income
    in taxes to two different governments on just 30k a year! This is
    ludicrous!

    Secondly this witness claims that we benefit tremendously from being a
    U.S. citizen, really? Please explain how? I am double taxed, I have no
    representation in Congress, I am forced to fill out FBAR forms to
    report foreign account balances, which take me a lot of time due to the
    complexity in forms, local laws, etc., I get no benefits from that
    taxation, and I am having my bank accounts closed in both the U.S. and
    where I live overseas, I have been threatened by my banks that I need
    to comply with U.S. law on foreign soil, that seems like a sanction to
    me, and I am constantly worried about not being able to retire. So
    please explain to me what my magic little blue passport entitles me to?

    The time has come for the United States to abandon its extraterritorial
    tax regime and join the rest of the world in adopting a system of
    residence-based taxation. And get rid of FATCA and just leave us alone!

                                     ______

                    Letter Submitted by Nicholas Matthew Lee
    U.S. Senate
    Committee on Finance

    Cc: U.S. Representative Madeline Dean (PA 4th District)
        U.S. Senator Bob Casey, Jr. (PA)
        U.S. Senator Pat Toomey (PA)

    Dear Senators,

    As an individual, I support efforts to create opportunity through a
    fairer tax code. I look forward to the hearing next week where these
    opportunities are presented.

    But I worry. Whenever the discussion comes up--that we must close the
    tax gap. Make people pay their fair share, something usually gets lost.
    In an effort to create opportunity for America's middle class, us
    overseas citizens are almost always treated as collateral damage.

    And we too, are part of America's middle class.

    We vote. We pay our U.S. taxes. We pay our taxes to the country we live
    in. But we are constantly treated as not even second class citizens. We
    are constantly and structurally deprived of opportunities that are
    already granted to every ordinary working class resident of the U.S.

    When you talk about fairness and creating opportunity, please consider
    all of the opportunities that the U.S. tax code deprives me, 9 million
    overseas Americans, and our families of:

    The Opportunity to Have a Savings Account at a Bank

    Because of unintended consequences related to the Foreign Accounts Tax
    Compliance Act (FATCA), U.S. citizens are treated as a liability by any
    reputable financial institution outside of the United States.

    Even when providing my SSN and full unredacted copies of my tax returns
    proving compliance with U.S. tax obligations, it is nearly impossible
    to be accepted for an interest-bearing bank account where I live.

    Because banks are so terrified of the possibility that a U.S. citizen
    becomes a customer while fully compliant on their tax obligations, but
    later fails to pay them, they simply deny all law abiding U.S. citizens
    access to financial services out of fear of a few bad eggs.

    This is because the banks regard the 30% withholding penalty in cases
    of non-
    compliant account holders as a ``corporate death penalty''. It's simply
    cheaper and safer for them to ban all U.S. citizens from having an
    account, even if we make every effort to comply with regulations.

    The Opportunity to Have Investments in the Country I Live in

    I am not a sophisticated investor. The most suitable products for me to
    own are safe and sane investments like a mutual fund or Exchange Traded
    Fund (ETF), rather than trying to pick winning stocks.

    Unfortunately, because the United States considers all investment funds
    based outside of the United States to be suspect, I am subject to
    punitive PFIC reporting and tax rules.

    Were I to buy the ``VT'' Vanguard Total World ETF investment fund from
    the NYSE-ARCA exchange, I would pay 15% to 20% in capital gains upon
    selling it. I'd be fully able to deduct or carry forward losses, if
    they occur.

    Were I to buy the ``VWRL'' Vanguard FTSE All-World UCITS USD ETF
    investment fund from the NYSE-EuroNext exchange, I'd be subjected to
    37% ordinary income tax on unrealized capital gains each year, limited
    deductibility, and a brutal 37 hour reporting form to be filed each and
    every year.

    These are nearly identical funds, they are tightly regulated in U.S.
    and EU jurisdictions, but because one fund is from outside of the U.S.,
    I cannot safely invest my money in it.

    It's a moot point though. I don't have access to investment brokerage
    services where I live, because I'm a U.S. citizen.

    A North Korean or Cuban customer is perfectly acceptable, and they can
    invest in a Vanguard fund through a bank here. I as a U.S. citizen
    cannot. All because of U.S. regulations that uniquely affect U.S.
    citizens.

    The Opportunity to Have Investments in the Country I am a Citizen of

    The logical conclusion after reading the previous paragraph is to say,
    ``just buy the U.S. fund.''

    This is not an option for overseas Americans in many jurisdictions.

    Because the United States is the only country in the world that
    subjects its citizens to an extraterritorial tax regime, local
    financial regulations don't account for the possibility that someone is
    either denied access to local financial services or that those services
    are severely penalized by the tax code of a country they don't live in.

    Within Europe, multiple barriers exist to a U.S. citizen investing in a
    U.S. bank account. While I don't live in Germany or Italy, which apply
    similar punitive rules do discourage investment in offshore locations
    like the United States, the European MiFiD II/PRIIPs regulations
    prevent EU residents without a high net worth from investing in non-EU
    investment products.

    I suppose if I was rich and could afford the $500,000 minimum assets
    under management and a 1.0% annual fee, I'd qualify for a specialized
    investment manager that could put my money in U.S. based funds.

    I'm middle class though, so I have to suck it up and stick to a 0%
    interest checking account.

    Because the U.S. tax code penalizes investments outside of the U.S.,
    even by people outside of the U.S., and because I am required to keep
    my investments in the EU, I am unable to follow good financial
    practices and invest my money.

    The Opportunity to Start My Own Small Business

    There's nothing that outright stops me from starting my own business in
    the country where I live, but the United States sure goes out of its
    way to make it difficult.

    If I wanted to start a business, there are so many barriers that I'd
    face that citizens of any other country would not:

          I'd be denied business loans, on account of being a U.S. person.
          I'd have difficulty finding a business bank account, on account
    of being a U.S. person.
          I'd have to set aside a big pile of money for my super
    complicated 5471 form.
          I'd have to pay GILTI tax, as a ``U.S. company'' in the
    Netherlands. Any competitors here wouldn't, because they're not
    American owned.
          I'd possibly have to pay self-employment tax, which no other
    competitor would need to do.

    No other country throws up such barriers to its own citizen starting
    small businesses in the countries they live in. They're just happy to
    see their citizens being successful. In America, only a large
    multinational is able to do business abroad.

    The Opportunity to Have a Retirement That is Above Subsistence Levels

    In most countries, the U.S. included, it is assumed that individuals
    will save for their retirement.

    Unfortunately, this is also not an option for me, as a U.S. citizen.

    Contributing to a Traditional IRA isn't an option--MiFiD II rules mean
    that most U.S. financial institutions will turn me away, for fear of
    hurting their compliance in the EU.

    Contributing to a Roth IRA isn't an option--those aren't recognized as
    valid account types by most countries, and they'll be subject to double
    taxation.

    Contributing to a 401k isn't an option--I don't have a U.S. employer.

    I suppose I could contribute to a Dutch retirement account, subject to
    rules similar to an IRA, but stricter.

    Except it's not clear that that'd not trigger those horrible PFIC
    rules. I'm not rich, so I can't afford tens of thousands of dollars in
    accounting costs to fill out forms that were designed to be as
    complicated and time consuming as possible. Even if I could, accountant
    fees would eat up any benefit of saving for retirement.

    And besides, most financial institutions here want nothing to do with
    Americans.

    I'll just have to settle for whatever the social security system in my
    current home country would pay out. The Windfall Elimination Provision
    ensures that even if I did move back to the United States and start
    working for 35 years, I wouldn't get a full social security payment.

    The Opportunity to Refinance My Mortgage Safely

    In many countries, it's normal to refinance a mortgage every few years.
    Unfortunately, the U.S. has a concept of ``phantom gains'' that makes
    this a very complicated and expensive process.

    If I took out a loan for =100,000 today, and I paid it back next year,
    I'm liable for ordinary income taxation on any savings that resulted
    from the Euro declining in value.

    =100,000 is $118,000 today, but if it's $100,000 next year because the
    exchange rate dropped--well, that's clearly an $18,000 gain, even
    though that also means my home is worth less, my salary paid in euros
    is worth less, and I'm no richer despite these ``phantom gains'' that
    the U.S. tax code has invented.

    If I lived in the U.S., where my mortgage was in U.S. dollars, I
    wouldn't need to worry about a change in the exchange rate leading to a
    massive tax bill on money that I never had.

    The Opportunity to Sell My Home at a Loss and Not Be Punitively Taxed

    What if there was a housing crisis and I needed to sell my home at a
    loss? I better hope that the U.S. dollar has stayed strong relative to
    the Euro.

    Suppose that I bought a house this year for =100,000, with an EUR-D
    exchange rate of $1.18 to the Euro. If the exchange rate is $1.35 5
    years from now, I would have a capital gain even if I sold the house
    for a loss at =90,000.

    Only Americans need to pay capital gains tax when selling the house,
    they live in, in another country. Only Americans need to worry about
    their capital loss being taxed as a gain.

    The Opportunity for a Mortgage Interest Deduction

    If I lived in the U.S., I'd be able to deduct the interest I pay on my
    mortgage from my U.S. taxes.

    But because I am a U.S. citizen that does not live in the U.S., the tax
    code does not permit me to deduct my mortgage interest from the taxes I
    pay to a country I don't even live in.

    The Opportunity to Marry Freely, Without Fear

    At some point, I would like to marry my partner. Unfortunately, doing
    so would take away so many opportunities from her.

    She'd be unable to have a savings account here, because banks fear
    spouses of U.S. citizens.

    She'd be unable to have investments where we live, because brokerages
    fear people married to a U.S. citizen.

    She'd be unable to have investments in the U.S. because she has never
    lived in the U.S., nor does she have an SSN. Even if she had one, EU
    rules would prevent that too.

    She'd be unable to have a small business, because community property
    rules would mean that I am a partial owner of her business, and then
    her & her business partners would have to deal with Controlled Foreign
    Company issues and GILTI taxes.

    She'd be unable to retire, because in the Netherlands, retirement
    accounts are joint property, and that would then mean we have PFIC
    problems that would bankrupt us.

    So whenever a family member asks, why aren't you getting married yet,
    you have to sadly answer ``Because I love her, and I can't do that to
    her.''

    Because only America taxes its overseas citizens in this way.

    The Opportunity for My Children to Benefit From the Taxes I Pay

    What if we had children? They'd hopefully receive benefits from the
    49.5% income tax that I pay here. We happily pay them to ensure a
    strong social safety net.

    Once again though, that global taxation throws a wrench in things.
    Benefits here like child support benefit, disability benefits, or
    student study are considered unearned income, subject to taxation by
    the U.S.

    Because some of these are paid to children or individuals with no
    income, they likely will end up paying U.S. taxes because they have no
    foreign taxes to offset it--because those are paid at another point in
    time, when they are in the workforce.

    China doesn't tax government benefits of its Dutch residents. Germany
    doesn't tax government benefits of its Dutch residents. But America is
    happy to undermine the opportunities the Netherlands (and other foreign
    lands) have for their residents.

    The Opportunity to Feel Safe When Filing My Taxes

    As if it wasn't painful enough to be deprived of these opportunities,
    entirely because the United States insists on being the one weird
    developed country that taxes nonresident citizens, we haven't even
    touched on compliance.

    It's not subject to legal protections against excessive fines--they're
    penalties, not fines. Penalties are never excessive.

    When a U.S. resident makes an honest, non-willful mistake on their
    taxes, the IRS determines whether or not to request an amendment and
    too assess reasonable interest-based penalties.

    On most matters involving international forms--the FBAR, the FATCA
    8938, the PFIC 8621 forms, we see a far more punitive approach. Non-
    willful errors are subject to a $10,000 fine, and willful errors are
    the greater of $100,000 or half of the money in the concerned account.
    Even if the information reporting error did not lead to a material
    income reporting error.

    Of course, lines between non-willful and willful are blurry, given that
    the Treasury has sometimes gone as far as considering an insufficient
    understanding of the tax code to be willful negligence.

    Either way, it doesn't matter--the penalties for honest mistakes are
    remarkably high in comparison to those made by U.S. residents. So,
    while a resident can trust that a small mistake will not have dire
    financial consequences, nonresident citizens don't get that.

    It's pretty clear what the U.S. Government thinks of us. One of our
    annual information reporting forms goes to the Treasury's Financial
    Crimes Enforcement Network.

    We're lumped in with criminals simply because we have accounts in the
    countries we live in.

    We don't get the opportunity to rest easy at the end of tax season. We
    instead get to stay up late, hoping that we did not make one single
    mistake.

    Conclusion

    If Congress wishes to look at making a fairer tax system that creates
    opportunity and benefit for ordinary Americans, it should take a moment
    to look at the numerous ways in which the tax code discriminates
    against U.S. citizens that live abroad.

    We are subject to a separate, but more punitive tax system than the one
    that U.S. residents live in.

    The opportunities we are deprived of did not stem from nothing--much of
    this, FATCA, PFIC, GILTI, and all the weirdness around exchange rates
    stems from a legitimate desire to make sure that the top 0.1% of
    Americans pay their fair share of taxes.

    But it seems that at some point along the way, Congress lost sight of
    the goal. The U.S. tax code and treasury regulations are stripping away
    any form of financial opportunity for middle-class citizens that live
    abroad.

    The rich can afford high powered lawyers to work around this. They can
    freely invest in the U.S. if they live in Europe because of the size of
    their bank accounts. They are not bothered by the thousands of dollars
    of tax preparation fees necessary to work with the mess that is foreign
    taxes, U.S. taxes, the tax treaties, and the forms needed to reconcile
    all of this.

    They will never suffer the pain and humiliation of paying thousands of
    dollars to complete compliance paperwork that ultimately proves that
    they rightfully owed nothing that year. If you're going to invoke terms
    like ``civic duty'' and ``citizens have obligations''--at least make
    those duties and obligations benefit the state. I would rather pay the
    IRS than an accountant.

    Please understand that every time you talk about fairness, and about
    dealing with offshore issues, you are also talking about making life
    tougher for ordinary Americans that live on other shores.

    The 7 to 9 million overseas Americans, an overwhelmingly average folk
    that closely reflects the population living in the U.S., have been
    crying out for necessary reform and relief for over a decade now, with
    no meaningful talk from Congress about improvement.

    Please stop taking away the opportunities that are afforded to
    Americans back home and other residents of the countries we live in.

                                     ______

                       Letter Submitted by Pamela Miller
    May 11, 2021

    U.S. Senate
    Committee on Finance
    Subcommittee on Fiscal Responsibility and Economic Growth
    Dirksen Senate Office Bldg.
    Washington, DC 20510-6200

    To the Senate Committee on Finance:

    Thank you for the opportunity to submit this statement for the record
    of your recent hearing in the Subcommittee on Fiscal Responsibility and
    Economic Growth.

    Almost 25 years ago, I married a Belgian citizen and moved from
    Tennessee to Belgium to start our life together in his home country.
    During the early years of our marriage, we worked, bought a house
    together, and had two children (BE-U.S. dual citizens). Career
    opportunities, education opportunities, and home ownership are a few of
    the reasons we decided to stay in Belgium and raise our family here.

    I implore the Subcommittee to listen to the voices of U.S. citizens
    living abroad when considering any further changes to U.S. tax system.
    Below are a few of the major impacts FATCA and Citizen based taxation
    have on my life abroad.

    ISSUES

          Before FATCA, my banking options were those I could expect in
    the U.S.--checking/savings/retirement/investment/college savings for
    the children. After FATCA, my bank, out of fear of the penalties
    imposed for mistakes in compliance on the reporting requirements, has
    closed all my accounts save my checking account. I am no longer able to
    save for my retirement nor attempt to improve my financial standing via
    investments. I was a financially independent woman but have now become
    financially dependent upon my husband for our future retirement.

          In a few years, our children will be old enough to join the work
    force, marry if they desire, and consider home ownership. Should our
    sons decide to continue living abroad, home ownership and retirement
    savings, savings of any kind, will not be available to them unless they
    renounce their U.S. citizenship. Our sons identify as Americans and
    hope to one day live in the U.S., but they also expect part of their
    adulthood will be spent living overseas. The potential decision to
    renounce their U.S. citizenship will not be taken lightly, but already
    serves as a source of stress and concern for us.

          Annual filing of taxes and FBAR is a financial and psychological
    burden. Due to the complexities of filing from abroad, I use the
    services of a specialized tax accountant in spite of the fact that my
    income has never, in 25 years, exceeded the Foreign Earned Income
    Exclusion. However, I invest time and money every year to prove that
    and must comb through bank records to be able to accurately file the
    FBAR report.

    While I understand the original intent of FATCA, I believe the full
    impact of the legislation on average American citizens living overseas
    was not fully investigated and the stories of the subsequent reality of
    financial life of Americans abroad have not been heard. Repeal of
    FATCA, or instituting Residence Based taxation like all other countries
    in the world (save Eritrea), would afford citizens such as myself some
    relief from our current financial situation. This combined with changes
    to or the elimination of FBAR reporting would allow us to once again
    have the financial freedoms our fellow citizens in the U.S. enjoy.

    CONCLUSION

    I am a proud U.S. citizen and have raised my sons to be the same. Our
    family lives what would be considered in the U.S. a middle-class life.
    It pains me to be treated like a tax cheat by my own country for the
    simple reason that I married and live abroad. Now is your opportunity
    to rectify the U.S. International tax situation for non-resident
    Americans and give some relief to your fellow citizens who have been
    struggling under the burden of FATCA and CBT for more than 10 years.

    Sincerely,

    Pamela Miller
    Voting in Tennessee (9th Congressional District)

                                     ______

                            National Taxpayers Union

                          122 C Street, NW, Suite 650

                              Washington, DC 20001

                             Phone: (703) 683-5700

                              Fax: (703) 683-5722

                              https://www.ntu.org/

    The Honorable Elizabeth Warren
    Chair
    Subcommittee on Fiscal Responsibility and Economic Growth
    219 Dirksen Senate Office Building
    Washington, DC 20510

    The Honorable Bill Cassidy
    Ranking Member
    Subcommittee on Fiscal Responsibility and Economic Growth
    520 Hart Senate Office Building
    Washington, DC 20510

    Dear Chair Warren, Ranking Member Cassidy, and Members of the
    Subcommittee:

    On behalf of National Taxpayers Union (NTU), the nation's oldest
    taxpayer advocacy organization, I wish to submit this statement for
    your hearing ``Creating Opportunity Through a Fairer Tax System.'' NTU
    has advocated for a simpler, fairer, and more growth-oriented tax code
    for all 51-plus years of our existence, so we welcome your broad focus
    on reforming and improving the U.S. tax system. However, we are
    concerned that some of the proposals that may be discussed today--such
    as a national wealth tax, a minimum tax on corporations' ``book
    profits,'' and a swift and significant increase to the budget of the
    Internal Revenue Service (IRS) without accompanying reforms--could make
    the tax code more complex, less fair, and, in turn, stunt economic
    growth at a fragile point in the country's recovery from the COVID-19
    pandemic.

     A National Wealth Tax Would Be Extremely Difficult to Administer,
                        Could Adversely Bias Investment Decisions, and
                        Raises Legal and Constitutional Concerns

    My colleagues at NTU and NTU Foundation (NTUF) have written extensively
    on national wealth tax proposals, both in the abstract and in response
    to Chair Warren's specific wealth tax proposal. We have raised a number
    of concerns that your latest proposal falls short of addressing.

    The first and perhaps foremost concern is the significant challenges
    the IRS would face in administering a wealth tax. Experts from across
    the ideological spectrum have raised legitimate questions over how the
    IRS would value intangible assets, how the agency would handle
    valuation appeals, and how those responsible for collecting the wealth
    tax would tackle tax planning and avoidance measures that reduce a
    taxpayer's base.

    As Lawrence Summers, former Treasury Secretary under President Obama,
    co-wrote with law and finance professor Natasha Serin in a 2019
    Washington Post op-ed:

            We suspect that to a great extent [the discrepancy between our
            estimate for wealth tax revenue and the estimate from
            economists Emmanuel Saez and Gabriel Zucman] reflects the
            myriad ways wealthy people avoid paying estate taxes that in
            some form will be applicable in any actually legislated wealth
            tax. These include questionable appraisals; valuation discounts
            for illiquidity and lack of control; establishment of trusts
            that enable division of assets among family members with
            substantial founder control; planning devices that give some
            income to charity while keeping the remainder for the donor and
            her beneficiaries; tax-advantaged lending schemes; and other
            complex devices known only to sophisticated investors. Except
            for reducing a naive calculation by 15 percent, Saez and Zucman
            do not seem to take account of these devices.\1\
    ---------------------------------------------------------------------------
        \1\ Summers, Lawrence H., and Sarin, Natasha. ``Opinion: A `wealth
    tax' presents a revenue estimation puzzle.'' The Washington Post, April
    4, 2019. Retrieved from: https://www.washington
    post.com/opinions/2019/04/04/wealth-tax-presents-revenue-estimation-
    puzzle/?noredirect=on (Accessed April 21, 2021).

    Unfortunately, the ``Ultra-Millionaire Tax Act of 2021,'' as currently
    written, defers all the work of developing a valuation methodology to
    the Department of Treasury, and instructs them to finish their work in
    a mere 12 months. This is an inordinate task to put on regulators in a
    short amount of time, and lawmakers should instead heed the lessons of
    multiple European countries that struggle to administer a wealth tax.
    ---------------------------------------------------------------------------
    As one report from National Public Radio (NPR) explained:

            In 1990, twelve countries in Europe had a wealth tax. Today,
            there are only three: Norway, Spain, and Switzerland. According
            to reports by the OECD and others, there were some clear themes
            with the policy: it was expensive to administer, it was hard on
            people with lots of assets but little cash, it distorted saving
            and investment decisions, it pushed the rich and their money
            out of the taxing countries--and, perhaps worst of all, it
            didn't raise much revenue.\2\
    ---------------------------------------------------------------------------
        \2\ Rosalsky, Greg. ``If a Wealth Tax Is Such a Good Idea, Why Did
    Europe Kill Theirs?'' National Public Radio, February 26, 2019.
    Retrieved from: https://www.npr.org/sections/money/2019/02/26/
    698057356/if-a-wealth-tax-is-such-a-good-idea-why-did-europe-kill-
    theirs (Accessed April 21, 2021).

    Indeed, experts at the Organisation for Economic Co-operation and
    Development (OECD) have found that wealth taxes ``[reduce] the amount
    of capital available, which may in turn affect entrepreneurship and
    business creation as access to capital is an important determinant of
    an individual's propensity to start a business.'' \3\
    ---------------------------------------------------------------------------
        \3\ OECD. (2018). ``The Role and Design of Net Wealth Taxes in the
    OECD.'' Retrieved from: https://read.oecd-ilibrary.org/taxation/the-
    role-and-design-of-net-wealth-taxes-in-the-oecd_97892
    64290303-en (Accessed April 21, 2021).

    NTUF's Andrew Wilford raised additional concerns over the potential
    impact a wealth tax could have on charitable contributions to private
    foundations and on market competitiveness (should smaller, start-up
    companies with reduced access to capital need to sell their businesses
    more often to larger competitors).\4\
    ---------------------------------------------------------------------------
        \4\ Wilford, Andrew. ``Warren's Recycled Wealth Tax Plan Suffers
    From All the Same Faults as Previous Versions.'' NTU Foundation, April
    1, 2021. Retrieved from: https://www.ntu.org/foundation/detail/warrens-
    recycled-wealth-tax-plan-suffers-from-all-the-same-faults-as-previous-
    ver
    sions.

    Wilford also noted the numerous legal or constitutional concerns with
    the proposed wealth tax as designed in the ``Ultra-Millionaire Tax
    ---------------------------------------------------------------------------
    Act'':

            The first major legal barrier, not unique to Warren's specific
            proposal but pertinent nonetheless, is the Constitutional
            requirement that ``direct taxes'' be apportioned equally among
            the states based on population. Back in 1895, the Supreme Court
            ruled in Pollock v. Farmers Loan and Trust Company that income
            taxes violated this Constitutional requirement that direct
            taxes be equally apportioned. Now, taxpayers are on the hook
            for income taxes today because the Sixteenth Amendment overrode
            this decision via the appropriate constitutional process, but
            it did so specifically for income taxes.

            Wealth taxes would still be subject to this constitutional
            requirement.

            . . . Warren's framework does raise another unique problem,
            however. The right to exit a country has been recognized as a
            fundamental human right since the time of the Magna Carta, and
            was confirmed by the U.N. Universal Declaration of Human Rights
            in 1948. In the United States, the Supreme Court ruled in Kent
            v. Dulles (1958) that the Fifth Amendment protects the right to
            exit.\5\
    ---------------------------------------------------------------------------
        \5\ Ibid.

    For all of the above reasons and more, lawmakers should swiftly and
    completely abandon wealth tax proposals, which would likely fall well
    short of even the stated goal of developing a fairer U.S. tax system.

     Minimum Taxes on Corporate ``Book Profits'' Would Cut Against
                        Legitimate, Growth-Oriented Provisions of the Code,
                        Potentially Reducing Investment and Harming Job,
                        Wage, and Economic Growth

    In a viral exchange you had with Dr. Kimberly Clausing at a recent
    Senate Finance Committee hearing, Chair Warren referred to legitimate
    provisions of the tax code such as expensing for research and
    development (R&D) costs, carryforwards for net operating losses (NOLs),
    and deductions for employee stock compensation as ``loopholes and tax
    shelters.''\6\ With respect, we could not disagree more strongly with
    this assessment.
    ---------------------------------------------------------------------------
        \6\ @SenWarren. (March 25, 2021). Twitter. Retrieved from: https://
    twitter.com/SenWarren/status/1375189145476288513 (Accessed April 21,
    2021).

    As Members of the Subcommittee well know, the tax code includes many
    cost recovery provisions for U.S. businesses, including a variety of
    tax deductions and credits for business activities that lawmakers have
    determined are worth incentivizing in the code. In the case of Amazon,
    the company discussed in this viral exchange, experts have shared in
    the pages of The Wall Street Journal \7\ and at NTUF \8\ that Amazon's
    delta between taxable profits and so-called ``book profits'' can be
    explained by a number of legitimate provisions of the code mentioned
    above, including R&D incentives and NOLs.
    ---------------------------------------------------------------------------
        \7\ Rubin, Richard. ``Does Amazon Really Pay No Taxes? Here's the
    Complicated Answer.'' The Wall Street Journal, June 14, 2019. Retrieved
    from: https://www.wsj.com/articles/does-amazon-really-pay-no-taxes-
    heres-the-complicated-answer-11560504602 (Accessed April 21, 2021).
        \8\ Kaeding, Nicole. ``Profitable Companies Aren't Always
    Profitable.'' NTU Foundation, January 28, 2020. Retrieved from: https:/
    /www.ntu.org/foundation/detail/profitable-companies-arent-always-
    profitable (Accessed April 21, 2021).

    This brings us to your proposal, Chair Warren, to establish a minimum
    15 percent tax on companies' ``book income.'' As you know, President
    Biden has adopted this proposal for his ``Made in America Tax
    Plan.''\9\
    ---------------------------------------------------------------------------
        \9\ U.S. Department of the Treasury. (April 2021). ``The Made in
    America Tax Plan.'' Retrieved from: https://home.treasury.gov/system/
    files/136/MadeInAmericaTaxPlan_Report.pdf (Accessed April 21, 2021).

    We have numerous concerns with this proposed tax increase, as we
    ---------------------------------------------------------------------------
    outlined shortly after President Biden introduced the plan:

            To use an oversimplified example, a company that experiences a
            $100 million net operating loss in one year but a $10 million
            net operating profit over each of the next 10 years may
            ultimately pay nothing in corporate income tax under current
            law. Under Biden's plan, though, not only would that company
            have $0 in net profit over 11 years but they would pay an
            additional $15 million in minimum ``book income'' taxes over
            that period, reducing their net profits over the 11-year period
            to below zero.\10\
    ---------------------------------------------------------------------------
        \10\ Lautz, Andrew; Aiello, Thomas; and Yepez, Will. ``13 Reasons
    Why Biden's American Jobs Plan Is a Bad Deal for Taxpayers.'' National
    Taxpayers Union, April 1, 2021. Retrieved from: https://www.ntu.org/
    publications/detail/13-reasons-why-bidens-american-jobs-plan-is-a-bad-
    deal-for-taxpayers.

    That oversimplified example only considers a business taking NOL
    carryforwards. Additional businesses could be punished under a minimum
    tax on ``book income'' simply for investing in R&D, or for providing
    their employees with a competitive level of compensation. Companies
    with high revenue but low profit margins would see profits further
    reduced under such a proposal, forcing difficult tradeoffs at those
    companies that could, in turn, negatively impact job, wage, and
    economic growth. The Tax Foundation estimated that an earlier version
    of President Biden's minimum tax proposal ``would reduce long-run
    economic output by about 0.21 percent in combination with Biden's other
    tax proposals'' (such as an increase in the corporate tax rate from 21
    percent to 28 percent).\11\
    ---------------------------------------------------------------------------
        \11\ Watson, Garrett, and McBride, William. ``Evaluating Proposals
    to Increase the Corporate Tax Rate and Levy a Minimum Tax on Corporate
    Book Income.'' Tax Foundation, February 24, 2021. Retrieved from:
    https://taxfoundation.org/biden-corporate-income-tax-rate/#Key
    (Accessed April 21, 2021.)

    For all of the above reasons and more, lawmakers should abandon plans
    to establish a minimum corporate tax on ``book profits.'' Doing so
    could harm America's leading job creators at a fragile point in the
    country's economic recovery from a swift but severe recession.

     A Bloated IRS Budget Will Not Produce a Fairer Tax System Without
                        Accompanying Reforms

    As NTU Foundation's Andrew Wilford noted in his analysis of the
    ``Ultra-Millionaire Tax Act'':

            Warren's solution to this problem is to throw money at the IRS
            and hope they can figure it out. Warren would spend $100
            billion over 10 years to ``rebuild and strengthen'' the IRS--
            more than eight times the agency's entire FY 2021 operating
            budget. Of this amount, 70 percent would be devoted simply to
            enforcing the wealth tax. Beyond that, there's little in the
            way of practical solutions to administrative difficulties
            Warren's wealth tax would face.\12\
    ---------------------------------------------------------------------------
        \12\ Wilford, Andrew. ``Warren's Recycled Wealth Tax Plan Suffers
    From All the Same Faults as Previous Versions.'' NTU Foundation, April
    1, 2021. Retrieved from: https://www.ntu.org/foundation/detail/warrens-
    recycled-wealth-tax-plan-suffers-from-all-the-same-faults-as-previous-
    versions.

    Indeed, throwing money at the Internal Revenue Service (IRS) without
    accompanying reforms could have the opposite effect intended by
    lawmakers here, making the tax code less fair and less efficient. NTU
    and NTU Foundation have closely tracked IRS reform efforts for decades,
    and significant additional work is necessary before lawmakers hand the
    IRS a proverbial wad of cash that significantly outstrips current
    ---------------------------------------------------------------------------
    funding.

    NTU worked closely with the late Rep. John Lewis (D-GA) on IRS reform,
    who often noted the disproportionate impact tax compliance and
    enforcement had on small businesses and on communities of color.\13\ In
    2017, NTU President Pete Sepp issued several broad recommendations to
    then-Secretary of Treasury Steven Mnuchin on how to improve the IRS,
    including focusing on key areas of complexity and measuring tax
    compliance burdens more accurately.\14\ While the IRS has no doubt made
    progress since then, in part due to the passage of the bipartisan
    Taxpayer First Act and in part due to the tax simplicity gains made
    under the Tax Cuts and Jobs Act (TCJA), much work remains to be done on
    all the recommendations NTU issued 4 years ago.
    ---------------------------------------------------------------------------
        \13\ Sepp, Pete. ``An Appreciation: Congressman John Lewis, 1940-
    2020.'' National Taxpayers Union, July 27, 2020. Retrieved from:
    https://www.ntu.org/publications/detail/an-appreciation-congressman-
    john-lewis-1940-2020.
        \14\ Sepp, Pete. ``NTU's Pete Sepp Outlines Tax Reform.'' National
    Taxpayers Union, August 3, 2017. Retrieved from: https://www.ntu.org/
    publications/detail/ntus-pete-sepp-outlines-tax-reform.

    NTU and NTU Foundation have also expressed regular concern over
    ``shifting positions and ambiguous regulations'' from the IRS when it
    comes to enforcement. For instance, in the one area of conservation
    ---------------------------------------------------------------------------
    easement deductions:

            Despite cross-partisan congressional support for conservation
            easement deductions, the IRS has engaged in draconian
            enforcement actions, new rules issued without public input and
            applying retroactively, and zealous valuation denials against
            many taxpayers who claim them.\15\
    ---------------------------------------------------------------------------
        \15\ Bishop-Henchman, Joe. ``NTUF Amicus Brief: Taxpayers Harmed by
    IRS's Shifting Positions and Ambiguous Regulations on Easements.'' NTU
    Foundation, February 2, 2021. Retrieved from: https://www.ntu.org/
    foundation/detail/ntuf-amicus-brief-taxpayers-harmed-by-irss-shifting-
    positions-and-ambiguous-regulations-on-easements.

    Needless to say, developing, implementing, and administering a wealth
    tax regime (or even a minimum corporate tax) would likely be orders of
    magnitude more difficult than the current conservation easement debacle
    at the IRS, and significantly increasing the agency's budget to do so
    without necessary reform proposals should be a non-starter for
    lawmakers. While lawmakers and tax policy experts have legitimate
    concerns about the tax gap that may be addressed by IRS reform and a
    more efficient allocation of resources, a big budget hike for the IRS
    is not the solution some lawmakers think it is.

    Alternatives to Building a Fairer Tax System

    To the extent that lawmakers can reduce or eliminate tax provisions
    that make the code less efficient and/or provide a disproportionate
    amount of benefits to wealthy households without corresponding economic
    benefits, NTU believes that several reform options could accomplish the
    stated goals of this hearing without adversely impacting investment
    decisions or harming economic growth. Possible reform options include,
    but are not limited to:

          Repealing the state and local tax (SALT) deduction, which
    currently confers nearly 90 percent of benefits to households making
    six figures or more per year.\16\ This deduction results in more than
    $20 billion per year in forgone revenue, and incentivizes states and
    municipalities to raise taxes on their residents and businesses.
    ---------------------------------------------------------------------------
        \16\ Congressional Research Service. (December 2020). ``Tax
    Expenditures: Compendium of Background Material on Individual
    Provisions.'' Retrieved from: https://www.govinfo.gov/content/pkg/CPRT-
    116SPRT42597/pdf/CPRT-116SPRT42597.pdf#page=1087 (Accessed April 21,
    2021).
    ---------------------------------------------------------------------------
          Limiting the new, generous Child Tax Credit (CTC) and Child and
    Dependent Care Tax Credit (CDCTC) to households making less than six
    figures per year. As NTU has written before, ``[i]f the goal of CTC
    expansion is to reduce child poverty, it is not necessary to direct an
    extraordinarily generous benefit to six-figure households.''\17\
    Congressional Research Service (CRS) estimates from before the American
    Rescue Plan's CTC expansion indicate that 40.1 percent of the CTC
    benefit in 2020 went to households making six figures or more per year,
    likely totaling tens of billions of dollars in foregone revenue.\18\
    The CDCTC is even more regressive, with 73.5 percent of the benefit in
    2020 going to households making six figures or more per year.\19\
    ---------------------------------------------------------------------------
        \17\ Lautz, Andrew. ``Lawmakers Want to Make the Child Tax Credit
    Expansion Permanent. They Should Pay For It.'' National Taxpayers
    Union, March 16, 2021. Retrieved from: https://www.ntu.org/
    publications/detail/lawmakers-want-to-make-the-child-tax-credit-
    expansion-permanent-they-should-pay-for-it.
        \18\ Congressional Research Service. (December 2020). ``Tax
    Expenditures: Compendium of Background Material on Individual
    Provisions.'' Retrieved from: https://www.govinfo.gov/content/pkg/CPRT-
    116SPRT42597/pdf/CPRT-116SPRT42597.pdf#page=835.
        \19\ Ibid, page 788.
    ---------------------------------------------------------------------------
          Limiting the current-law electric vehicle (EV) credit, or future
    expansions and extensions of the EV credit, to households making less
    than six figures per year: CRS estimates that ``[i]n 2018, more than
    half of the plug-in vehicle credits were claimed on tax returns with
    adjusted gross income (AGI) of $200,000 or more.''\20\ This is a
    regressive credit that should be pared back, notwithstanding a push
    from the Biden administration and some lawmakers to make the EV credit
    more generous.
    ---------------------------------------------------------------------------
        \20\ Ibid, page 174.
    ---------------------------------------------------------------------------
          Repealing or rolling back tax credits that serve as subsidies
    for narrow, parochial, or temporal interests: As former NTU Foundation
    Vice President Nicole Kaeding put it in 2019, some of the provisions
    regularly considered as so-called tax extenders ``are not ideal.''
    Kaeding went on: ``Many of the extenders involve subsidies for energy
    projects, such as credits for biofuel, biodiesel, and electric
    vehicles. These industries should not be penalized by the U.S. tax
    code, but they shouldn't get a leg up either.''\21\ To sum up: not all
    extenders are created equal, nor are all credits, deductions, and
    expensing provisions in the tax code made equal.
    ---------------------------------------------------------------------------
        \21\ Kaeding, Nicole. ``Not All Extenders Are Created Equal.'' NTU
    Foundation, September 25, 2019. Retrieved from: https://www.ntu.org/
    foundation/detail/not-all-extenders-are-created-equal.
    ---------------------------------------------------------------------------

    Conclusion

    We appreciate your attention to and consideration of NTU's views and
    positions on a proposed wealth tax, a corporate minimum tax, IRS reform
    and enforcement, and a number of additional issues addressed in this
    submission. To the extent you and your colleagues agree with our ideas
    of how to (and how to not) make the tax code simpler, fairer, and more
    oriented to economic growth, we would be pleased to answer any
    questions you may have and to work with you further.

    Sincerely,

    Andrew Lautz, Director of Federal Policy

    CC: The Honorable Ron Wyden, Chair, Senate Committee on Finance
        The Honorable Mike Crapo, Ranking Member, Senate Committee on
    Finance
         The Honorable Richard Burr, Member, Subcommittee on Fiscal
    Responsibility and Economic Growth

                                     ______

                        Letter Submitted by Karl Steinke

     Submission on behalf of Stop Extraterritorial American Taxation (SEAT)

    U.S. Senate
    Committee on Finance

    To Whom This May Concern:

    I am a citizen of the United States. I have been living outside of the
    United States since 1995. I am writing today to call attention to the
    extreme injustice of the U.S. extraterritorial tax regime and how it
    severely limits the freedom of individual U.S. citizens living outside
    the United States. This system is very unfair and it's high time that
    the extraterritorial tax system be abolished with the goal of
    ``Creating Opportunity Through a Fairer Tax System.''

    The only thing that makes me different as an American from U.S.
    residents is that I live outside the United States. For the record, I
    did not move from the United States to avoid U.S. taxation. In fact, I
    have discovered that by living outside the United States I am subject
    to (1) taxation in the country where I live and (2) a more punitive
    form of taxation that what is imposed on U.S. residents. My only crime
    seems to be that I live outside the United States--and therefore my
    income and assets are foreign to the United States. But, the income and
    assets are actually local to me.

    I am writing to express my great concern about the failure of the
    Senate Finance Committee to consider the impact of proposed tax
    legislation on me and on Americans living abroad generally. We are
    average, ordinary, every day people. Because we are flesh and blood
    humans, we need to eat. Because we will get old and retire we need to
    save for retirement. Because we are individuals with responsibilities
    to our families, our communities and our countries of residence we may
    need to operate our own small businesses. We are definitely NOT mini
    multinational corporations and we are tired of being treated as though
    our normal day-to-day activities are somehow ``offshore'' and deserving
    of punishment. We are tax compliant in our countries of residence. I am
    tax compliant in the U.S. as well.

    We pay a lot of tax. We pay our fair share. We do this even though it
    is almost impossible for us to be both tax compliant in our country of
    residence and be compliant with U.S. tax laws. We don't understand why
    U.S. tax laws are being applied in an extraterritorial manner to income
    and assets that are not in the United States. Other countries don't
    their citizens who live in the United States? Why should the United
    States tax U.S. citizens living in other countries.

    Our situation is bad. It is unique. Only the African dictatorship of
    Eritrea--follows the lead of the United States--by imposing worldwide
    taxation on its citizens who live outside the country.

    I really don't understand the indifference of the Senate Finance
    Committee to this situation. Interestingly, the Senate Finance
    Committee in 2015, recommended changes to the U.S. extraterritorial tax
    regimes. There have been no changes for the better, but many changes
    for the worse.

    So far the 2021 Senate Finance Hearings have been very, very bad. The
    Committee is obsessed with corporations without acknowledging that
    changes to corporate tax will have a huge effect on individuals. You
    haven't mentioned that your obsession with the taxation of
    corporations, will have a bigger impact on the many individuals than on
    the few corporations.

    The hearing on April 27, 2021--about a wealth tax--took the treatment
    of U.S. citizens abroad to a new level. The bottom line is this:

    As described Elizabeth Warren's proposed wealth tax will result in (1)
    taxation of assets earned outside the USA and (2) the taxation of our
    non-U.S. citizen spouses who we share our lives with.

    And to add insult to injury, Senator Warren's proposed wealth tax would
    bring assets acquired by U.S. citizens, after having moved from the
    United States, into the wealth tax system. Come on! My house was
    acquired after I moved from the United States. My local business has
    nothing to do with the United States. My non-U.S. citizen spouse's
    assets have nothing to do with United States.

    Question: Would the United States like it if China imposed taxes on all
    property situated in the United States that was owned by Chinese
    citizens?

    If this comes as a surprise to you it's because you either don't
    understand or are conveniently ignoring the U.S. has extraterritorial
    tax regime--a regime imposed on Americans abroad. All indications are
    that the Warren wealth will actually leverage the injustice of United
    States citizenship-based taxation to make the whole world part of its
    tax base.

    Seriously, these predatory, obscene and unjustifiable tax practices
    must stop. It's simply not fair!

    Thank you,

    Karl Steinke

                                     ______

                 Stop Extraterritorial American Taxation (SEAT)

                              3 impasse Beausejour

                             78600 Le Mesnil le Roi

                                     France

                             http://www.seatnow.org

                                info@seatnow.org

                                                             7 May 2021

    Please accept this as our submission with respect to the subject of the
    April 27, 2021 Senate Finance Committee Hearing: ``Creating Opportunity
    Through a Fairer Tax System.''

    Previous hearings have focused on large corporations and high net worth
    individuals. The hearing on April 27, 2021 focused on a wealth tax. No
    hearing has recognized the impact of the proposals on U.S. citizens
    living outside the United States who are tax residents of countries
    outside the United States. It is important for Congress to understand
    that any change in the U.S. tax system that does not remove the current
    citizenship-based extraterritorial tax regime will exacerbate the
    problems facing U.S. emigrants and the small businesses they run in
    their countries of residence. In this hearing, the problems created by
    extraterritorial taxation were not only ignored, but one witness held
    up the citizenship-based extraterritorial tax regime as the reason why
    a wealth tax would work for the U.S. when it has failed in so many
    other countries.

    In our submission, we remind the committee of the problems created by
    the extraterritorial tax system and discuss the implications of using
    citizenship-based taxation as an enforcement tool for a wealth tax on
    ordinary Americans living outside of the U.S.

    Part A: Context

    The Internal Revenue Code establishes three distinct U.S. tax regimes:

        1.  Non-resident Alien Tax Regime: Taxation on U.S. source income
    only
        2.  Tax Regime For U.S. Residents: Taxation of U.S. residents on
    worldwide income (regardless of citizenship)
        3.  Extraterritorial Tax Regime: Taxation of the worldwide income,
    mostly non-U.S. source income of individuals who are U.S. citizens, who
    do not live in the United States and are tax residents of other
    countries. This is a separate and more punitive tax regime \1\ than
    that imposed on U.S. citizens living outside the United States. To put
    it simply: The extraterritorial tax regime is based on citizenship
    regardless of economic or physical connection to the United States.
    Some--including the Committee witness Professor Gamage--refer to the
    extraterritorial tax regime as ``citizenship-based taxation.''
    ---------------------------------------------------------------------------
        \1\ https://www.taxconnections.com/taxblog/the-united-states-
    imposes-a-separate-and-much-more-punitive-tax- on-u-s-citizens-who-are-
    residents-of-other-countries/.

    The extraterritorial tax regime applies to the non-U.S. source income
    of U.S. citizens (and Green Card holders) who live outside the United
    States and are tax residents of other countries. For example a U.S.
    citizen Yoga teacher living in France who is paid in France is subject
    to U.S. taxation on that French income. The extraterritorial tax regime
    is a more punitive and more penalty-laden regime than the tax regime
    imposed on U.S. residents. This is the direct result of the income and
    assets of Americans abroad being (although local to the individual),
    ---------------------------------------------------------------------------
    foreign to the United States.

    Indeed, the Senate Finance Committee recognized the problem of the
    extraterritorial tax regime, at least as early as 2015. That is when
    the Senate Finance Committee Bipartisan Tax Working Group \2\ on
    International Tax concluded their report \3\ with the following
    paragraphs:
    ---------------------------------------------------------------------------
        \2\ https://www.finance.senate.gov/chairmans-news/finance-
    committee-bipartisan-tax-working-group-reports.
        \3\ http://www.finance.senate.gov/download/?id=E1FA3F08-B00C-4AA8-
    BFC9-7901BD68A30D.

            According to working group submissions, there are currently 7.6
            million American citizens living outside of the United States.
            Of the 347 submissions made to the international working group,
            nearly three-quarters dealt with the international taxation of
            individuals, mainly focusing on citizenship-based taxation, the
            Foreign Account Tax Compliance Act (FATCA), and the Report of
    ---------------------------------------------------------------------------
            Foreign Bank and Financial Accounts (FBAR).

            While the co-chairs were not able to produce a comprehensive
            plan to overhaul the taxation of individual Americans living
            overseas within the time-constraints placed on the working
            group, the co-chairs urge the Chairman and Ranking Member to
            carefully consider the concerns articulated in the submissions
            moving forward.

    In other words, in 2015 the Senate Finance Committee recommended that
    that the negative effects of the extraterritorial tax regime be
    specifically considered.

    Six years have passed and there is still no movement on overhauling the
    taxation of individual U.S. citizens living overseas, in spite of the
    clear directive from the International Tax Working Group. In fact, the
    situation for U.S. citizens abroad has gotten far worse. This is due in
    large part to the enhancements to the Subpart F regime in TCJA.\4\ We
    informed the Senate Finance Committee in that regard in our submission
    dated April 22, 2021, available here.\5\
    ---------------------------------------------------------------------------
        \4\ An Act to provide for reconciliation pursuant to titles II and
    V of the concurrent resolution on the budget for fiscal year 2018,
    Public Law 115-97. Known colloquially as The Tax Cuts and Jobs Act
    (TCJA).
        \5\ http://seatnow.org/wp-content/uploads/2021/04/SEAT-Submission-
    Overhauling-International-Taxation.pdf.

    The Senate Finance Committee Must Consider Its Laws from The
    ---------------------------------------------------------------------------
    Perspective of Both:

        A.  The tax regime imposed on U.S. residents; and
        B.  The extraterritorial tax regime imposed on U.S. citizens living
    outside the United States.

    SEAT is unaware of a single instance in which the Senate Finance
    Committee has considered how proposed legislation affects U.S. citizens
    abroad--who are subject to the U.S. extraterritorial tax regime.

    SEAT respectfully submits that because the United States is operating
    an extraterritorial tax regime which applies uniquely to U.S. citizens
    abroad, the Senate Finance Committee has an obligation to follow the
    2015 directive of the Senate Finance Committee and consider the impact
    of tax changes on U.S. citizens abroad, who are by definition subject
    to the extraterritorial tax regime.

     The Scope of the 2021 Senate Finance Committee Hearings--No
                        Consideration of Individuals

    Since March 2021 the Senate Finance Committee has been considering
    changes to the workings of the U.S. tax system. For the most part the
    hearings have discussed tax changes to U.S. corporations. Neither the
    Committee itself, nor a single witness has mentioned or considered the
    profound implications of the proposed changes to corporate taxation, on
    the millions of individual U.S. citizens living in the United States or
    living abroad. Yet, as we have described in previous submissions, the
    proposed changes to corporate tax will impact far more individual U.S.
    citizens abroad than U.S. multinationals. This follows from the fact
    that when a U.S. citizen runs a small business using the business
    structures common in their non-U.S. country of residence they are often
    treated as a U.S. Shareholder of a Foreign Corporation, and are
    therefore subject to the same Subpart F rules that apply to
    multinational corporations headquartered in the U.S.

     Part B: Implications of a Wealth Tax for U.S. Citizens Living Abroad

    The title to this hearing bears little relation to what the hearing was
    actually about. The hearing was for the purpose of introducing Senator
    Warren's proposed wealth tax. Hence, our remarks in this submission,
    will be restricted to the question of a Wealth Tax and its implications
    for the millions of individual U.S. citizens living abroad, who are
    subject to the extraterritorial (citizenship) tax regime.

    About the Wealth Tax in General--Senator Warren in her own words:
    excerpts from a recent CNBC interview . . .\6\
    ---------------------------------------------------------------------------
        \6\ https://www.cnbc.com/2021/01/28/first-on-cnbc-cnbc-transcript-
    senator-elizabeth-warren-d-mass-speaks-with-cnbcs-closing-bell-
    today.html.

            Warren. Based on fact, the wealthiest in this country are
            paying less in taxes than everyone else. Asking them to step up
            and pay a little more and you're telling me that they would
            forfeit their American citizenship, or they had to do that and
            I'm just calling her bluff on that. I'm sorry that's not going
    ---------------------------------------------------------------------------
            to happen.

            Warren. Look, they want to use American workers. They want to
            use American highways. They want to use American police forces.
            They want to use American infrastructure, but they just don't
            want to help pay to support it. And that's the trick, a wealth
            tax needs to be national because you can still get advantages,
            if you move from state to state. But the idea behind wealth tax
            is you have to pay it if you're an American citizen. It doesn't
            matter whether you live in Texas or California or even whether
            you move to Europe or South America. If you want to keep your
            American citizenship, you pay the wealth tax and it doesn't
            matter where you put your assets. You can try to hide them in
            the Cayman Islands, you can try to put them up in Switzerland,
            but it doesn't matter, you still pay the two-cent wealth tax.
            And here's the nice thing about that, you know, a lot of the
            wealth is quite visible and easy to see, it's right there in
            the stock market. A two-cent wealth tax changes this country
            fundamentally because it means we say as a nation, we are going
            to invest in the next generation. We're going to invest in
            creating opportunity not just for a handful at the top, we're
            going to create opportunity for all of our kids. That's how we
            build a strong future in this country.

    Senator Warren's own words confirm that the effectiveness of her
    proposed wealth tax is dependent on the application of the U.S.
    extraterritorial
    (citizenship-based) tax regime which is imposed on U.S. citizens
    abroad.

    SEAT would like to raise three issues about this proposed wealth tax:
    first the measurement of the dollar threshold over which the tax
    applies, second, how the tax base is computed, and third, the potential
    impact of the proposed enforcement methods.

    Wealth Tax Threshold

    On or about March 1, 2021, Senator Warren introduced her proposed
    ``Ultra-Millionaire Tax Act of 2021''. The threshold for the tax is $50
    million USD. There is nothing in the proposed act that suggests this
    threshold is indexed to inflation. Even if the threshold is NOT lowered
    (which it will most certainly be), the inevitability of inflation will
    ensure that more and more people are ensnared by it. In the same way
    that the late Senator Kennedy referred to the 877A Exit Tax \7\ as the
    billionaire's tax \8\ (when it applied to everyday people), over time,
    the wealth tax will become the millionaires' tax that will be applied
    to (by the standards of today) thousandaires.
    ---------------------------------------------------------------------------
        \7\ http://citizenshipsolutions.ca/2018/11/14/considering-
    renouncing-us-citizenship-thinking-citizide-abandoning-your-greencard-
    expatriationlaw-webinar-explaining-the-s-877a-exit-tax/.
        \8\ http://citizenshipsolutions.ca/2015/04/05/part-5-the-exit-tax-
    in-action-five-actual-scenarios-with-5-actual- completed-u-s-tax-
    returns/.

    Furthermore, the threshold is measured in U.S. Dollars. This is fair
    enough for individuals whose wealth and income are tied to the U.S.
    economy. However, for U.S. citizens whose economic life is exercised
    entirely outside of the U.S., the requirement that all U.S. tax
    computations be made as if they ran their lives and businesses in U.S.
    Dollars creates currency risk for individuals whose financial life
    actually runs in a single currency.

    What is included in the tax base?

    Senator Warren's wealth tax would apply to the non-U.S. assets (among
    other things) of U.S. citizens living in other countries. U.S. citizens
    include: 1. American Expatriates (living abroad temporarily) 2.
    American Emigrants (living permanently outside the United States) 3.
    Accidental Americans (possibly never having lived in the United
    States). This would include assets that are part of the economies of
    other sovereign nations and that were accumulated after the individual
    emigrated from the U.S.; that is, the tax base includes assets that
    have no economic connection to the United States.

    Furthermore, it is drafted in a way that the assets of the non-U.S.
    citizen spouse may be part of the calculation!

    Therefore: To impose the wealth tax on U.S. citizens abroad is to
    impose the wealth tax on (1) tax residents of other countries and (2)
    on assets in other countries which may not necessarily be owned by U.S.
    Citizens.

    As explained by U.S. tax lawyer Virginia La Torre Jeker,\9\ the
    proposed wealth tax applies to anybody in the world. Nonresidents
    (however they may be defined) would be assessed a wealth tax based only
    on their U.S. assets. A podcast with Virginia La Torre Jeker about the
    impact of the wealth tax on U.S. citizens living abroad is available at
    this link.\10\
    ---------------------------------------------------------------------------
        \9\ https://us-tax.org/2021/03/11/what-does-senator-warrens-
    proposed-wealth-tax-mean-for-you/.
        \10\ https://prep.podbean.com/e/the-impact-of-the-proposed-warren-
    wealth-tax-on-americans-abroad/.
    ---------------------------------------------------------------------------

     Using the Extraterritorial Tax Regime as an Enforcement Tool for a
                        Wealth Tax

    Professor David Gamage confirms that the extraterritorial tax regime,
    which the 2015 Senate Finance Committee recommended should be
    reconsidered, is the tool used to enforce the proposed wealth tax!

    What follows is a transcript of part of Professor Gamage's testimony at
    the April 27, 2021 hearing:

            1:15:10--Second exchange between Senator Cassidy and David
            Gamage

            Cassidy. Do you favor a worldwide wealth tax because that
            doesn't seem practical to me but that seems like people can
            move and they do. And capital can move and it does. One example
            for example: I understand that China has an incredible capital
            flight and if there's any country that's done its best to
            surveille everything about every one of its citizens it's China
            and yet they have significant capital flight. So, would you
            recommend a global wealth tax?

            Gamage. The United States tax system--the current income tax is
            citizenship-based and taxes all worldwide income for citizens
            and always has. This is a key difference between the U.S. tax
            system and the French tax system. You can't escape the U.S.
            taxation without revoking your citizenship and paying a
            substantial exit tax. That's current law and it works quite
            well.

            Cassidy. And so the idea that somebody would give up their
            citizenship--I think one of the partners that made a lot of
            money from selling--some big Silicon Valley going public,
            renounced his citizenship and moved to Singapore, if I remember
            correctly. I'm gathering from you you feel as if that problem
            would be minimal.

            Gamage. It historically has been minimal and you pay a big exit
            tax. . . .

            Cassidy. Historically we haven't had a wealth tax so I'm not
            sure we can use past history to predict future actions to kind
            of paraphrase the financial commercial.

            Gamage. Again, you pay a substantial exit tax under current law
            by revoking citizenship. Not many people do it. Some do. If
            they don't value the protections and services provided to
            citizens of the United States then fine. But the protections
            and services provided to extreme wealth are huge and most
            ultra-wealthy benefit tremendously from being United States
            citizens and having those protections and services, and it's
            fair to have them pay a reasonable amount of tax on that which
            they currently are not.

    It's not clear what part(s) of the current extraterritorial tax system
    Professor Gamage thinks work ``quite well'', but from the perspective
    of Americans actually living outside of the U.S., the system is
    inherently dysfunctional. Numerous surveys \11\ have been conducted
    which provide ample evidence that the U.S. tax laws (including the
    FATCA enforcement system) have resulted in handicapping Americans
    abroad whose financial lives are necessarily foreign to the U.S. These
    Americans have difficulty keeping bank accounts, saving for retirement,
    and running small businesses. Furthermore, while high net worth
    individuals might pay a substantial exit tax to renounce their U.S.
    citizenship, the threshold for this tax has been set at such a low
    level that middle-class Americans with retirement savings are often
    subject to this tax that was initially aimed at billionaires.
    ---------------------------------------------------------------------------
        \11\ See, for example, ``Survey Report: Being an American Outside
    of America Is No Longer Safe'' (2021) at http://seatnow.org/
    survey_report_intro_page/; ``I Feel Threatened by My Very Identity:
    U.S. Taxation and FATCA Survey'' (2019) at http://
    citizenshipsolutions.ca/2019/10/27/recently-released-survey-report-
    dispels-myth-of-the-wealthy-american-abroad-and-demonstrates-why
    -middle-class-americans-abroad-are-forced-to-renounce-us-citizenship/.
    ---------------------------------------------------------------------------

     Part C: The Senate Finance Committee Continues a Long History of
                        Misunderstanding and Prejudice Toward U.S. Citizens
                        Abroad

    Former Senator Max Baucus--one of Senator Wyden's predecessors as Chair
    of the Senate Finance Committee--was not immune to this prejudice. In
    1995, he stated:

            [Americans] are going to great lengths, thousands of miles to
            other countries, to avoid paying their fair share. In a
            metaphorical sense, burning the flag, giving up what should be
            their most sacred possession, their American citizenship, to
            find a tax loophole. . . . These are precisely the sort of
            greedy, unpatriotic people that FDR called malefactors of great
            wealth. . . . Let us not allow more of these rich freeloaders
            to get away.\12\
    ---------------------------------------------------------------------------
        \12\ 3 Senate Committee on Finance, ``Tax Treatment of Expatriated
    Citizens:'' Hearing on S. 453, S. 700, H.R. 831, H.R. 981, H.R. 1535
    and H.R. 1812, 104th Congress 2 (July 11, 1995), https://
    www.finance.senate.gov/imo/media/doc/Hrg104-795.pdf [https://perma.cc/
    7LDH-XW26] (statement of Senator Max Baucus). See also https://www.c-
    span.org/video/?66084-1/tax-treatment-expatriates.

    This profoundly ignorant comment from Senator Baucus, alongside many
    others expressed by other members of the United States Congress dating
    back to the Civil War right up to today,\13\ expose longstanding and
    deep-seated prejudices against Americans who live outside the United
    States. Is it any wonder that these prejudices have been translated
    into extraterritorial taxation and banking policies that are highly
    damaging to Americans and green card holders living outside the United
    States? It appears that Senator Warren's wealth tax is premised on many
    of the same profoundly ignorant assumptions about U.S. citizens living
    outside the United States.
    ---------------------------------------------------------------------------
        \13\ Laura Snyder, ``Taxing the American Emigrant,'' 74(2) Tax
    Lawyer 299 (2021). Available at SSRN: https://ssrn.com/
    abstract=3795480, at 317-20.
    ---------------------------------------------------------------------------

     Part D: The Solution: Ending the U.S. Extraterritorial AKA
                        Citizenship-Based Tax Regime

    The best solution to this problem is for the United States to come into
    alignment with every other developed nation on the planet and move to a
    residence-based taxation system for individuals. Taxing non-resident
    citizens is ``Mission Impossible,'' as it is impossible to fairly
    administer an extraterritorial tax system and afford non-resident U.S.
    citizens the rights guaranteed by the Taxpayer Bill of Rights (IRC
    Sec. 7803(a)(3)), by multiple human rights instruments and by the U.S.
    Constitution.\14\
    ---------------------------------------------------------------------------
        \14\ Laura Snyder, Karen Alpert, and John Richardson, ``Mission
    Impossible: Extraterritorial Taxation and the IRS,'' 170 Tax Notes
    Federal 1827 (March 22, 2021). Available at SSRN: https://ssrn.com/
    abstract=3828673.

    It is well past the time that the Senate Finance Committee act upon the
    call of the 2015 Senate Finance Committee Bipartisan Tax Working Group
    on International Tax, and finally accord to Americans living outside
    the United States the full attention, concern, and respect to which
    they are entitled as U.S. citizens. It is also well past time to put an
    end to the taxation and banking policies that penalize them so
    ---------------------------------------------------------------------------
    severely.

    Thank you for your attention to these matters.

    Respectfully submitted by:

    Dr. Laura Snyder (President)
    Dr. Karen Alpert
    Suzanne Herman
    David Johnstone
    Keith Redmond
    John Richardson
    _______________________________________________________________________

     About SEAT--Education to Facilitate Change

    Stop Extraterritorial American Taxation (SEAT) is an independent,
    nonpartisan organization with no affiliation with the tax compliance
    industry. The mission of SEAT is to provide an educational platform for
    individuals, policymakers, governments, academics, and professionals
    about the terrible effects of U.S. extraterritorial taxation. The
    imposition of U.S. taxation on the residents of other countries damages
    the lives of the affected individuals and siphons capital from the
    economies of other nations while eroding their sovereignty.

    While SEAT is created under the laws of France (Law of 1901), it is an
    international organization. http://www.seatnow.org.

                                     ______

                        Letter Submitted by Juan Valdez
    U.S. Senate
    Committee on Finance

    I am a proud American citizen who lives outside the United States. To
    be clear: I am an individual. I am not a corporation. I am not a
    multinational. I did not move from the United States to avoid paying
    U.S. taxes. But, by moving from the United States, I am automatically
    subject to the U.S. Extraterritorial tax regime--a regime that imposes
    more punitive taxation and reporting on Americans living abroad--than
    is imposed on American residents. This is because the Internal Revenue
    Code treats all things foreign to the United States punitively.

    I moved from the United States because wanting to experience new
    cultures. In fact, am a full tax resident the country where I live.
    But, because I actually live and work in New Zealand I am required to
    pay taxes and assume responsibility for my financial and retirement
    planning here, where I live. My income, financial and retirement assets
    are foreign to the United States, but are local to me. Because my
    income and financial assets, although local to me, are foreign to the
    United States I am subject to the U.S. Extraterritorial tax regime. As
    such, I am subject to constant stress and fear of penalties should I
    make mistakes in complying with the Internal Revenue Code. Furthermore,
    I find it very difficult to find competent professional help. The help
    I can find is very expensive (often costing more than $1500 a year).

    I know that you will find it difficult to relate to this. However,
    because and only because, I live outside the United States, my
    difficulties include the following:

          Difficulty in maintaining bank/financial accounts where I live
          FATCA has provided incentives for banks in my country to refuse
    to deal with U.S. citizens
          Punitive Taxation on non-U.S. mutual funds
          Being able to participate in non-U.S. pensions and still get the
    benefits of tax deferral available to my neighbors
          Taxation on the sale of my principal residence which is not
    taxed in the country where I live
          Difficulty in carrying on a business. It is normal for people in
    my country to carry on business through small business corporations--
    which are taxed punitively by the IRS (GILTI)
          Having the retirement savings in my corporation effectively
    confiscated by the 965 Transition Tax
          Being subject to income based on phantom capital gains. (Because
    I required to live my life tethered to the U.S. dollar, fluctuations in
    the exchange rate can result in unexpected fake income)

    To be clear, I am and will always be a proud American. But I find it
    very difficult to maintain compliance with both the U.S. Internal
    Revenue Code and the tax code of my country of residence. Because of
    this dual tax obligation, I am finding it very difficult to save and
    invest for retirement. What one country gives, the other country takes.
    The necessity of complying with both tax regimes means that I get the
    worst of each tax regime. As a result, I feel that I am being forced to
    consider whether it is possible to retain my U.S. citizenship. No proud
    American should be forced to choose between his cherished U.S.
    citizenship and the need to engage in responsible financial/retirement
    planning.

    It is terribly unfair, that because I live outside the United States,
    that I am forced to choose between my responsibilities to plan for
    retirement and my responsibilities under the Internal Revenue Code. Why
    should I be subject to additional requirements that resident Americans
    are not? I am not living in the United States and using services in the
    United States. I have even been denied a COVID-19 vaccine from the U.S.
    Government (because I don't live in the United States) while being
    required to pay taxes to the United States!

    The U.S. Extraterritorial tax system is terribly unfair.

    A great American writer, the late Pat Conroy, began his book ``The
    Prince of Tides'' with the words:

    ``My wound is geography. It is also my anchorage, my port of call.''

    Although, my U.S. citizenship is my anchorage and my port of call. The
    unfair U.S. extraterritorial tax regime--triggered by my geography''--
    is most definitely my wound.

    Please fix this extreme injustice!

                                     ______

                   Letter Submitted by Dominik Van Opdenbosch
    I would like to comment on the hearing on ``Creating Opportunity
    Through a Fairer Tax System''. Within his testimony, Mr. David Gamage
    stated that citizenship-based taxation ``works quite well''. I strongly
    object to this statement.

    Please understand that all legislative actions with regards to taxes
    for residents inside the U.S. have also impacts on residents outside
    the U.S. and often enough the impacts are not considered and reflected
    enough in the legislative process.

    As an example: I wanted to volunteer here for a local non-profit
    charity organization as treasurer. I could not do that because of FBAR
    and FACTA requirements this would mean that the bank account details of
    the non-profit had to be sent to the U.S. As a citizen of the EU, I am
    also obliged to follow GDPR rules and make sure that no personal data
    and financial data are collected and shared. Finally, I decided not to
    volunteer. The same holds for promotions inside a company, where at
    some point you might get filing authority over a bank account. FACTA
    also results in bank accounts being closed as European banks fear the
    draconian penalties of not complying.

    More generally, the U.S. extraterritorial tax regime makes it difficult
    for us to save, invest, participate in pension plans, and generally
    behave in a financially responsible way. This is because all of these
    essential activities are taking place in my country of residence and
    not in the United States. My retirement investments are foreign to the
    United States but local to me. The tax systems are usually mutually
    incompatible.

    There is no assistance from the IRS on how to translate specifics of
    foreign taxes into the U.S. tax code. That usually requires hiring
    costly ex-pat tax advisors even for very simple tax filings. If there
    is a global tax system, I would expect some assistance in my native
    language and with a local office, I can visit or call to help me with
    details.

    And please don't believe that foreign tax rules and/or the Foreign
    Earned Income Exclusion solve these problems. They don't! Take PFIC as
    an example: I followed my local (from a U.S. perspective foreign)
    investment advisor and bought some ETFs from the money I earned solely
    overseas. I later found that they are subject to double taxation. As a
    tax resident of both the United States and my country of residence, I
    get the worst of both tax systems. If you want to open a business here
    you pay local taxes and GILTI taxes. This puts you into a considerable
    disadvantage compared to non-U.S. citizens.

    This is extremely unjust. For many years, Americans abroad feel like
    second-class citizens and have been attempting to get both Treasury and
    Congress to address these issues.

    It is not about rich people trying to evade taxes. It is about the
    average American that happens to live outside the U.S. We can not
    afford expensive lawyers that optimize our financial situations. We are
    stuck with two tax systems. Don't think that the U.S. tax system for
    ex-pats is the same as for U.S. residents. It is much more complex and
    underestimated by lawmakers. I would encourage you to invite actual ex-
    pats into the senate hearings to have first-hand witnesses of the
    complexity and Kafkaesque situation. It is time to change to residency-
    based taxation.

    I hope you find this statement valuable. I believe it helps to
    understand and address the issues of million of American workers around
    the world.

                                     ______

                      Letter Submitted by Genelle Windsor
    U.S. citizens who live outside of the U.S. are residents of other
    countries and pay taxes in those countries. This is called RBT
    (residency-based taxation). The United States has CBT (citizen-based
    taxation). Besides Eritrea, the United States is the only country in
    the world to have CBT. The United States should eliminate CBT and
    convert to RBT to be fairer to the U.S. citizens who do not live in the
    United States.

    The current hearing in the Senate Finance committee is researching how
    taxes can be fairer. In past discussions, the bills before the Senate
    to change the taxation of U.S. citizens living outside of the United
    States had to be ``revenue neutral''. This means, that if the law is
    changed, the United States does not want to lose any tax revenue. The
    previous proposed solution was to tax U.S. sourced income such as
    interest in U.S. banks, U.S. social security and capital gains in the
    U.S. at a flat 30%.

    With the current law (CBT), a U.S. citizen living outside of the United
    States first pays tax in the country where she lives, then declares
    worldwide income on the U.S. tax return and can pay taxes in the U.S.
    as well, depending on the income amount. If a choice between CBT and
    RBT is available to U.S. citizens living outside of the U.S., a U.S.
    citizen can opt for RBT for all of the income earned or accrued outside
    of the United States. Then any income in the United States would be
    taxed at 30%. So, if a U.S. citizen living outside of the United States
    is dependent on U.S. social security, adopting RBT would significantly
    reduce those social security benefits by the 30% tax. Few people living
    outside of the United States could afford to opt for RBT in this case.
    These people would have to continue with the CBT option or face
    financial hardships. As you can see with this example, the U.S.
    citizens living outside of the United States with the least income
    (social security) would bear the brunt of ``revenue neutrality''. These
    U.S. citizens would have to remain with the unfair CBT rule and
    continue paying very expensive tax accounts to do their U.S. taxes. The
    tax accountants can charge between $1,100.00 and $3,000.00 to do a tax
    return for one year. This is still less than a tax of 30% on the social
    security income. If the option of RBT or CBT is available when filling
    out a U.S. tax return, the less well off people will still be paying
    more taxes while the people with more money will pay less.

    Most countries who practice RBT tax residents only (not citizens). For
    example, if a person has revenue in two countries, he pays taxes in the
    country where he resides, not in the country where the revenue is
    generated. If a person earns income in the United Kingdom and France,
    all of that income is taxed in the United Kingdom if the person lives
    in the United Kingdom and in France if the person lives in France.
    Taxes are paid for services. If you pay taxes in a country where you do
    not reside, you do not get the services because the services are
    residency based. Medicare is an example of this. U.S. citizens must
    reside in the United States to receive Medicare benefits.

    Tax treaties have been written with the United States with many
    countries. This tells you that at least the United States realizes that
    U.S. citizens should not be taxed twice on the same income. If the U.S.
    citizen uses the tax treaty, he may end up paying no tax. So, regarding
    revenue neutrality, tax treaties have to be written, tax returns have
    to be processed, and IRS staff have to be trained on how to deal with
    tax returns from U.S. citizens who do not live in the United States.
    This is an extra cost to process tax returns where the tax payer may
    not owe anything. If RBT were adopted, the IRS would save this money.
    Please take this into consideration when you are calculating revenue
    neutrality. RBT could actually be revenue neutral.

    CBT is an unjust system and causes great anguish to the U.S. citizens
    living abroad who are trying to be tax compliant. Abolishing an unjust
    system should not be dependent on revenue.

                                     ______

                        Letter Submitted by Libin Zhang
        The following was published in 171 Tax Notes Federal 87 (April 5,
    2021).

     A Wealth Tax on Ultra-Millionaire Charitable Trusts and Marriages

        In a recent article,\1\ Marie Sapirie discussed some key aspects of
    the Ultra-
    Millionaire Tax Act of 2021 (S. 510), a bill proposed by Senate Finance
    Committee member and former Presidential candidate Elizabeth Warren, D-
    Mass. If enacted, the law would generally impose an annual 2 percent
    wealth tax on the net value of a taxpayer's total assets above $50
    million and below $1 billion, and an annual 3 percent or 6 percent tax
    on the net value of a taxpayer's assets in excess of $1 billion.
    ---------------------------------------------------------------------------
        \1\ Marie Sapirie, ``She Has a Plan for That: Examining the Ultra-
    Millionaire Tax,'' Tax Notes Federal, March 29, 2021, p. 1981.

    ---------------------------------------------------------------------------
        Two additional observations are worth noting.

        First, a ``taxpayer'' subject to the wealth tax is an individual, a
    married couple, or a trust other than a trust described in section
    401(a) and section 501(a). A trust that is exempt only under section
    501(a) can still be subject to the wealth tax. In other words, tax-
    exempt pension trusts are exempt from the wealth tax, but charitable
    trusts are subject to the wealth tax if they have more than $50 million
    of assets.

        It is unclear why charitable lead trusts, charitable remainder
    trusts, and other tax-exempt trusts with charitable purposes are
    targeted as ultra-millionaires that should pay the tax. The annual
    wealth tax would have a significant adverse effect on the non-profit
    organizations that are beneficiaries of charitable trusts or are
    themselves organized as trusts in legal form. Proponents of the bill
    may not fully appreciate the different types of trusts under the tax
    code.

        Second, the same thresholds of $50 million and $1 billion of assets
    apply to a single individual or a married couple (whether filing
    jointly or separately). Two single individuals effectively lose half of
    their combined exemptions if they are married.

        For example, let's assume there are two individuals with the
    hypothetical names of ``A-Rod'' and ``J-Lo,'' who work in the sports
    and entertainment industries, respectively. A-Rod has $700 million of
    assets under the government's valuation method, consisting of half real
    estate and other investments and half intangible assets such as his
    ability to generate endorsement income that is valued using the
    discounted cash flow method. Similarly, J-Lo used to have little but
    now has $700 million of assets under the wealth tax regime, based on a
    valuation of her Louboutins and other designer outfits, rocks, and
    rights to royalty income from movies, English and Spanish language
    music albums, and reality TV shows.\2\
    ---------------------------------------------------------------------------
        \2\ For examples of how the Internal Revenue Service may value
    celebrity likeness and music rights, see Ben Sisario, ``I.R.S. Says
    Prince's Estate Worth Twice What Administrators Reported,'' The New
    York Times, January 4, 2021; Jeff Gottlieb, ``Michael Jackson Estate
    Embroiled in Tax Fight with IRS,'' Los Angeles Times, February 7, 2014
    (``Most of the dispute is over the value of Jackson's image, along with
    his interest in a trust that includes the rights to some of his songs
    and most of the Beatles catalog, including `Yesterday,' `Sgt. Pepper's
    Lonely Hearts Club Band' and `Get Back.' The estate valued Jackson's
    likeness at just $2,105. The IRS put it at $434.264 million.'')

        If A-Rod and J-Lo were married, they would have $1.4 billion of
    combined assets. The assets below the $50 million floor would be
    exempt. The next $950 million of assets would be subject to a 2 percent
    wealth tax of $19 million per year. The remaining $400 million of
    assets would be subject to a wealth tax of up to 6 percent, or $24
    million per year. The married couple's annual wealth tax liability
    ---------------------------------------------------------------------------
    would be $43 million each year.

        In contrast, if A-Rod and J-Lo were not married and did a multi-
    year engagement instead, each person would have $50 million of exempt
    assets and $650 million of assets subject to a 2 percent wealth tax of
    $13 million each year. The two single individuals would collectively
    pay $26 million each year and therefore save $17 million or 40 percent
    of their annually wealth tax bill, achieved by wisely postponing
    marriage.

        There are similar marriage penalties in the $10,000 SALT deduction
    limitation and the home mortgage interest deduction limitation that are
    the same for a single individual or a married couple,\3\ but the social
    engineering in the wealth tax bill against marriage involves more
    substantial dollars. Although some may claim that love does not cost a
    thing and that marriage may have nontax benefits, the annual wealth tax
    can cost up to 6 percent of one's tangible and intangible assets each
    year. Celebrities and other high income individuals waiting for a
    wealth tax may be less likely to marry a fellow wealthy person from the
    block.
    ---------------------------------------------------------------------------
        \3\ See Libin Zhang, Marriage and the 2017 Tax Reform Law,
    Bloomberg Daily Tax Report (February 28, 2019).

    Sincerely,
    Libin Zhang
    March 27, 2021

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