[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.
---------------------------------------------------------------------------
                               references
Asay, H.S., J.L. Hoopes, J.R. Thornock, and J.H. Wilde. 2021. Tax 
            Boycotts. Working paper.

Belnap, A., S.D. Dyreng, and J.L. Hoopes. 2019. File No. 2019-500: 
            Comments on the Revised Exposure Draft for the Proposed 
            Accounting Standards Update to Income Taxes (Topic 740). 
            Letter to FASB.

Bethmann, I., M. Jacob, and M.A. Muller. 2017. Tax Loss Carrybacks: 
            Investment Stimulus Versus Misallocation. The Accounting 
            Review 93 (4): 101-125.

Blaylock, B., F. Gaertner, and T. Shevlin. 2015. The association 
            between book-tax conformity and earnings management. Review 
            of Accounting Studies 20 (1): 141-172.

Bloom, N., R. Griffith, and J. Van Reenen. 2002. Do R&D tax credits 
            work? Evidence from a panel of countries 1979-1997. Journal 
            of Public Economics 85 (1): 1-31.

Blouin, J., and L.A. Robinson. 2021. Double Counting Accounting: How 
            Much Profit of Multinational Enterprises Is Really in Tax 
            Havens? Working paper.

Boynton, C., P. Dobbins, and G. Plesko. 1992. Earnings Management and 
            the Corporate Alternative Minimum Tax. Journal of 
            Accounting Research 30: 131-153.

Clausing, K.A. 2020a. How Big Is Profit Shifting? Working paper.

____. 2020b. Profit Shifting Before and After the Tax Cuts and Jobs 
            Act. National Tax Journal 73 (4): 1233-1266.

Dhaliwal, D., and S. Wang. 1992. The effect of book income adjustment 
            in the 1986 alternative minimum tax on corporate financial 
            reporting. Journal of Accounting and Economics 15 (1): 7-
            26.

Dharmapala, D. 2020. The Tax Elasticity of Financial Statement Income: 
            Implications for Current Reform Proposals. Working paper.

Gallemore, J., S. Hollander, and M. Jacob. 2020. Who CARES? Evidence on 
            the Corporate Tax Provisions of the Coronavirus Aid, 
            Relief, and Economic Security Act from SEC Filings. Working 
            paper.

van der Geest, J., and M. Jacob. 2020. Zero-Tax Firms. Working paper.

Glogower, A. 2020. A constitutional wealth tax. Michigan Law Review 118 
            (5): 717-784.

Gramlich, J.D. 1991. The Effect of the Alternative Minimum Tax Book 
            Income Adjustment on Accrual Decisions. Journal of the 
            American Taxation Association 13 (1): 36.

Guyton, J., P. Langetieg, D. Reck, M. Risch, and G. Zucman. 2021. Tax 
            Evasion at the Top of the Income Distribution: Theory and 
            Evidence. National Bureau of Economic Research.

Hanlon, M., Laplante Stacie Kelley, and T. Shevlin. 2005. Evidence for 
            the Possible Information Loss of Conforming Book Income and 
            Taxable Income. Journal of Law and Economics 48 (2): 407-
            442.

Hanlon, M., and T. Shevlin. 2005. Book-tax conformity for corporate 
            income: An introduction to the issues. In Tax Policy and 
            the Economy, Volume 19, 101-134. MIT Press.

Hemel, D. 2019. Taxing Wealth in an Uncertain World. National Tax 
            Journal 72 (4): 755-776.

Hoopes, J.L. 2018. The Effect of Temporary Tax Laws on Understanding 
            and Predicting Corporate Earnings. Unpublished 
            Dissertation, University of Michigan.

House, C.L., and M.D. Shapiro. 2008. Temporary Investment Tax 
            Incentives: Theory with Evidence from Bonus Depreciation. 
            American Economic Review 98 (3): 737-768.

Jensen, E.M. 2019. Is a Tax on Wealth Constitutional? Journal of 
            Taxation of Investments 36 (3): 79-86.

Johnsen, D., and W. Dellinger. 2018. The Constitutionality of a 
            National Wealth Tax. Indiana Law Journal 93 (1): 111-137.

Langenmayr, D., and R. Lester. 2017. Taxation and Corporate Risk-
            Taking. The Accounting Review 93 (3): 237-266.

Ljungqvist, A., L. Zhang, and L. Zuo. 2017. Sharing Risk With the 
            Government: How Taxes Affect Corporate Risk Taking. Journal 
            of Accounting Research 55 (3): 669-707.

Manzon, G.B. 1992. Earnings Management of Firms Subject to the 
            Alternative Minimum Tax. The Journal of the American 
            Taxation Association 14 (2): 88.

Mills, L.F., and G.E. Plesko. 2003. Bridging the Reporting Gap: A 
            Proposal for More Informative Reconciling of Book and Tax 
            Income. National Tax Journal 56 (4): 865-893.

Rao, N. 2016. Do Tax Credits Stimulate R&D Spending? The Effect of the 
            R&D Tax Credit in its First Decade. Journal of Public 
            Economics 140 (August): 1-12.

Scheuer, F., and J. Slemrod. 2021. Taxing Our Wealth. Journal of 
            Economic Perspectives 35 (1): 207-230.

Smith, M., O. Zidar, and E. Zwick. 2020. Top Wealth in America: New 
            Estimates and Implications for Taxing the Rich. Working 
            Papers. Working paper. Princeton University, Department of 
            Economics, Center for Economic Policy Studies.

Wilson, D.J. 2009. Beggar Thy Neighbor? The In-State, Out-of-State, and 
            Aggregate Effects of R&D Tax Credits. Review of Economics 
            and Statistics 91 (2): 431-436.

You, H.Y. 2017. Ex Post Lobbying. The Journal of Politics 79 (4): 1162-
            1176.

Zeff, S.A. 2005. The Evolution of U.S. GAAP: The Political Forces 
            Behind Professional Standards. The CPA Journal 75 (2): 18-
            29.

Zwick, E., and J. Mahon. 2017. Tax Policy and Heterogeneous Investment 
            Behavior. American Economic Review 107 (1): 217-248.

                                 ______
                                 
     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: [email protected]

                                                       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

                      [email protected]

                    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 
[email protected]) or the undersigned with any questions 
about the information and recommendations provided herein.

Sincerely,

Julia Bryan
Global Chair
Democrats Abroad
+1 (843) 628-2280
[email protected]

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

                            [email protected]

                                                         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

                                  [all]