[Senate Hearing 117-634]
[From the U.S. Government Publishing Office]
S. Hrg. 117-634
THE PRESIDENT'S FISCAL YEAR 2022 BUDGET
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HEARING
BEFORE THE
COMMITTEE ON FINANCE
UNITED STATES SENATE
ONE HUNDRED SEVENTEENTH CONGRESS
FIRST SESSION
__________
JUNE 16, 2021
__________
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
Printed for the use of the Committee on Finance
__________
U.S. GOVERNMENT PUBLISHING OFFICE
51-633-PDF WASHINGTON : 2023
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
(II)
C O N T E N T S
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OPENING STATEMENTS
Page
Wyden, Hon. Ron, a U.S. Senator from Oregon, chairman, Committee
on Finance..................................................... 1
Crapo, Hon. Mike, a U.S. Senator from Idaho...................... 3
.................................................................
ADMINISTRATION WITNESS
Yellen, Hon. Janet L., Secretary, Department of the Treasury,
Washington, DC................................................. 4
ALPHABETICAL LISTING AND APPENDIX MATERIAL
Crapo, Hon. Mike:
Opening statement............................................ 3
Prepared statement........................................... 43
Daines, Hon. Steve:
Letter to Secretary Yellen from Senator Daines, June 15, 2021 44
Wyden, Hon. Ron:
Opening statement............................................ 1
Prepared statement........................................... 45
Yellen, Hon. Janet L.:
Testimony.................................................... 4
Prepared statement........................................... 46
Responses to questions from committee members................ 47
Communication
Center for Fiscal Equity......................................... 103
(iii)
THE PRESIDENT'S FISCAL YEAR 2022 BUDGET
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WEDNESDAY, JUNE 16, 2021
U.S. Senate,
Committee on Finance,
Washington, DC.
The hearing was convened, pursuant to notice, at 10 a.m.,
via Webex, in the Dirksen Senate Office Building, Hon. Ron
Wyden (chairman of the committee) presiding.
Present: Senators Stabenow, Cantwell, Menendez, Carper,
Cardin, Brown, Bennet, Casey, Whitehouse, Hassan, Cortez Masto,
Warren, Crapo, Grassley, Cornyn, Thune, Portman, Toomey,
Lankford, Daines, Young, Sasse, and Barrasso.
Also present: Democratic staff: Adam Carasso, Senior Tax
and Economic Advisor; Joshua Sheinkman, Staff Director; and
Tiffany Smith, Chief Tax Counsel. Republican staff: Gregg
Richard, Staff Director; Don Snyder, Tax Counsel; and Mike
Quickel, Policy Director.
OPENING STATEMENT OF HON. RON WYDEN, A U.S. SENATOR FROM
OREGON, CHAIRMAN, COMMITTEE ON FINANCE
The Chairman. This morning the Finance Committee is pleased
to be able to welcome Treasury Secretary Yellen to discuss the
President's 2022 budget proposal. There is lots to discuss, and
time is tight.
Let's begin with tax. Last Tuesday, Americans woke up to
what appeared to be the largest unauthorized disclosure of
taxpayer data in history. As I said at the time, the committee
takes the confidentiality of taxpayer data very seriously. And
I expect that an appropriate investigation is underway. I want
to thank Treasury officials who held a briefing with the staff
this week on the subject.
This committee takes confidentiality seriously. I also take
the issue of economic fairness very seriously. The information
in the ProPublica report depicts a tax system in which the
wealthiest people in the Nation pay rock-bottom tax rates,
sometimes zero. What is worse is that it is all perfectly
legal. The details may not have been a surprise to those who
file taxes, but they are still a gut punch to read on the page.
Days later, another new report described a second big tax
rip-off; in this case, from the people who brought you the
carried-interest loophole. This is carried interest on
steroids. Wealthy investment managers and their lawyers seem to
turn even more of their wage income into tax-preferred capital
gains, using legal documents that essentially say ``presto
change-o'' in accounting lingo.
Even after whistleblowers came forward, the IRS enforcement
division found itself overmatched and outgunned, the results of
years of Republican budget cuts that hobbled their capacity to
crack down on corporate cheating.
On its way out the door in January, the Trump
administration gutted an effort to put even minor limits on
this behavior. Americans also learned that mega-corporations
have never contributed less Federal revenues in modern history
than they do right now. According to the Congressional Budget
Office, corporate tax revenue after the Trump tax law is down
nearly 40 percent from the 21st-century average. Many of the
largest corporations pay nothing--that is zero.
At the same time, stock buybacks that enrich wealthy
investors are through the roof. It was reported that from
January through May of this year, the mega-corporations
authorized half a trillion dollars in stock buybacks, the most
in 22 years. I bet there are going to be a lot of comments
today about people's trust in our tax system. What is damaging
to people's trust, in my view, is the rotten, cynical
unfairness that Americans who work for a living always seem to
get the short end of the stick.
The tax code on the books today says that a dollar gained
on the trading floor matters less than a dollar earned on the
factory floor. So it is not hard to grasp why middle-class
wage-earning taxpayers object to that idea. They are paying
taxes out of every paycheck to sustain a country whose
prosperity is swallowed up so often by wealthy individuals who
avoid paying a fair share themselves.
The President, and Democrats in Congress, have a big agenda
designed to create jobs, make it easier to raise a family, and
help all Americans get ahead. To fund that agenda, the Congress
has to make sure that mega-corporations and the wealthy, not
just workers, have skin in the game.
I will offer just a few specifics before I close. Senator
Brown, Senator Warner, and I recently debuted a plan that would
eliminate the Trump-era deduction for shipping manufacturing
jobs overseas and make sure that multinationals pay their fair
share. I also have a proposal dealing with the core unfairness
in the tax code with special rules that allow the wealthiest
people in America to pay little or nothing at all.
Democrats are working on a proposal to close the tax gap,
because protecting confidential taxpayer data and cracking down
on the tax cheats are not mutually exclusive. Congress must do
both.
This is a fairness-based approach to revenue, and I look
forward to working with Secretary Yellen, our guest today, on
these issues in the weeks and months ahead.
Finally, I want to thank Secretary Yellen for leading the
battle with respect to a minimum tax for mega-corporations
around the world. What the Secretary is working to do is to
stop the race to the bottom on taxes for the most powerful
corporations.
The key to moving forward, colleagues--and we will talk
about it today--is putting a quick stop to discriminatory
digital service taxes which unfairly target American workers
and American employees. I will have a question for Secretary
Yellen on that.
In the Rescue Plan passed in March, the Congress created a
major new economic lifeline for rural communities, and it is
all about making sure that people in these communities have
resources for schools, roads, and health care. Implementation
is underway, and I want to work with the Department and my
colleagues to get the job done.
One last bit of news. The Treasury Department and IRS are
getting ready to send the first Advance Child Tax Credit
payments out to American families. There has been a lot of hard
work, and I want to commend my colleagues--especially on the
committee, Senator Brown and Senator Bennet--for all their work
to get this program up and running for payments that have the
potential to cut child poverty in half if everybody does their
part to reach the vulnerable.
The committee will be talking about how to ensure that that
happens.
Secretary Yellen, thank you for joining us. We will hear
from Senator Crapo, and then we will have your opening
statement, Madam Secretary.
[The prepared statement of Chairman Wyden appears in the
appendix.]
OPENING STATEMENT OF HON. MIKE CRAPO,
A U.S. SENATOR FROM IDAHO
Senator Crapo. Thank you, Mr. Chairman. And thank you,
Secretary Yellen, for joining us today. Today we will discuss
the President's Fiscal Year 2022 budget and proposals for
Treasury and its agencies.
The administration's proposals to increase spending that
hit Americans with higher taxes and strangle the economy with
regulations and red tape are not a path to prosperity. The
President's budget envisions deficits of $14.5 trillion over
the next decade, with debt exploding to more than $39 trillion,
or 117 percent of GDP, by the end of Fiscal Year 2031.
Such high debt is risky, especially in the current high-
inflation environment. Consumer price inflation from April to
May was 7.7 percent at an annualized rate. And inflation for
durable goods was 36 percent at an annualized rate. With
inflation expectations becoming unanchored--which no one can
credibly claim cannot happen--the resulting increased interest
rates can turn Federal debt service costs into budget busters.
Treasury's top-line budget request of $22 billion is an
11.3-
percent increase over Fiscal Year 2021. And Treasury asked for
outsized increases across the board in its various agencies and
programs. I look forward to hearing more about Treasury's
budget proposals, and general explanations of tax proposals in
the so-called Green Book. Both proposals are heavy on tax
hikes, introducing new tax ideas of questionable merit and
seeking to inject more social policy goals into the income tax
system.
They also call for a mandatory financial information
reporting regime. Under this regime, financial institutions
would become agents of the IRS, tasked with monitoring and
reporting flows into and out of personal and business accounts
above a mere $600 threshold. The proposal, which is sold under
the guise of trying to close the tax gap, is very concerning
and pulls almost all taxpayers into a surveillance dragnet. The
era of big data should not be viewed as an opportunity for Big
Brother. I do not agree with some high-tax advocates that
private tax information should be a public good, with
governments and the public knowing every private aspect of
individual and business income and assets.
An overwhelming majority of taxpayers in this country are
law-abiding and pay the taxes they owe. My concerns are
amplified by the egregious apparent leak of private taxpayer
information out of the IRS, with the data ending up at
ProPublica, which reported sensationalized and misleading
claims about taxes paid by named individuals. While ProPublica
focused on wealthy people, an IRS leak may involve personal
information on American taxpayers across the income spectrum.
Secretary Yellen, it would be helpful for you to share what
is known at Treasury and the IRS about this apparent massive
data breach. I also look forward to hearing about the political
agreements struck by the administration and the G7.
A recent G7 communique reflects a shift in the U.S.
position in OECD negotiations that appears driven by the
administration's plans to significantly increase taxes on U.S.
businesses. The United States already has a robust global
minimum tax, GILTI, and no other country has moved to enact one
since. If Treasury envisions hiking taxes on U.S. businesses
domestically, including onerous changes to the minimum tax,
GILTI, before other countries adhere to global minimum taxes,
the U.S. could suffer from a first-mover disadvantage.
Higher U.S. tax rates instituted before other countries
move pose the risk of others not following through and a new
wave of inversion and foreign acquisition, arising because U.S.
businesses are once again unable to compete. Congress needs to
understand the analysis behind these proposals and whether any
agreement would allow foreign targeting of U.S. companies, or
special carve-outs for particular jurisdictions, including
China.
The G7 understandings also advocate for new mandatory
financial disclosures and funding for multilateral financial
institutions, including a new $650-billion general allocation
at the IMF of special drawing rights.
I am interested to hear about the outreach you have done
with congressional Republicans on both fund increases.
Additionally, I again ask that Treasury work to improve its
responsiveness to this committee.
Secretary Yellen, I look forward to learning more from you
today in our discussion.
Thank you, Mr. Chairman.
[The prepared statement of Senator Crapo appears in the
appendix.]
The Chairman. Thank you, Senator Crapo.
Secretary Yellen, the floor is yours.
STATEMENT OF HON. JANET L. YELLEN, SECRETARY, DEPARTMENT OF THE
TREASURY, WASHINGTON, DC
Secretary Yellen. Chairman Wyden, Ranking Member Crapo,
members of the committee, it is a pleasure to be with you.
When I took office back in January, the first and most
urgent problem confronting our economy was obviously the
pandemic, helping people make it to the other side of the
crisis, and ensuring they were met there by a robust recovery.
Thanks to this Congress and its passage of the American
Rescue Plan, we are well on our way towards that goal. But we
have to be clear-eyed about something. The pandemic is not our
only economic problem. Long before a single American was
infected with COVID-19, millions of people in this country were
running up against a series of long-term structural economic
challenges that undermined their ability to make a good living.
For instance, wage inequality. In healthy economies, we see
wage growth across the distribution for workers making the
highest incomes and those making the lowest. But over the past
several decades, that has not been the case in our economy.
Where the highest earners have seen their income grow, families
at the bottom end of the distribution have seen their pay
stagnate. Gender and racial pay gaps also persist.
At the same time, the labor force participation has been
dropping. Even before the pandemic, the share of American women
in the workforce lagged far behind many other wealthy nations.
These trends have coincided with the reordering of the economic
map. There have always been richer areas of the country and
poorer areas, but for most of the 20th century, the latter were
catching up with the former. The country was rising together,
and today this is less true. There is a divergence among local
economies. Some areas are growing more prosperous, and others
are stagnating.
Climate change adds a fresh layer of crisis on top of this.
The average cost of climate-related disasters is expected to
double every 5 years.
And of course, there is racial inequality. When I started
studying economics in 1963, the average black family's wealth
was about 15 percent of the average white family. Maybe that is
not surprising. Jim Crow laws were still in effect. But what is
surprising is, it is almost 60 years later, and that ratio has
barely changed.
These destructive forces--the divergence in wages and in
geographic areas, the declining labor force participation, the
rise of climate change, and the persistence of racial
inequality--all these are combining to block tens of millions
of Americans from the prosperous parts of our economy.
There are clear reasons why these destructive forces have
festered. The private sector does not make enough of the types
of investments needed to reverse them: training programs that
can lead to higher wages, child care and paid leave that would
help people rejoin the workforce, or infrastructure that would
lower carbon emissions and spur growth in neglected
communities.
For 40 years we have not done that, not as much as we
should have. We need to remedy this lack of investment. We need
ambitious fiscal policy to start unwinding these trends. And if
there is a short summary of the President's budget, that is it.
The budget, which includes both the American Jobs and
American Families Plans will repair the fractured foundations
of our economy. It does it through a series of smart policies,
including child care and paid leave so more parents can join
the workforce; a mass modernization in greening of America's
infrastructure to spur commerce and reduce emissions; an
investment to make housing and education available for all; and
the list goes on.
We need to make these investments at some point, and now is
fiscally the most strategic time to make them. We expect the
cost for these will remain well below historic levels through
the coming decade. We have a window to invest in ourselves.
In fact, this budget is both fiscally strategic and
fiscally responsible. It pays for itself through a long-overdue
reformation of the tax code that will make it fairer, without
touching the vast majority of Americans, those who earn less
than $400,000 a year.
There are some tough tradeoffs in fiscal policy, but a
fairer tax code for a structurally sound economy is not one of
them.
With that, I am happy to take your questions.
[The prepared statement of Secretary Yellen appears in the
appendix.]
The Chairman. Thank you very much, Secretary Yellen. And a
fairer tax code for a structurally sound economy sounds like a
pretty good deal for the American people, and thank you for
your leadership.
First, Secretary Yellen, I appreciate the President's
opposition to raising gas taxes. And the fact is that indexing
the gas tax is just a way to start raising taxes on working
people next year, rather than this year.
I want to now move to questions. And let me start with
congratulations. A ground-breaking G7 agreement that helps halt
the race to the bottom on corporate taxes is extraordinarily
important, and you have moved these negotiations forward in a
way that would have just been implausible even 6 months ago.
And so, I want to commend you for that. They are a shared goal
of ensuring mega-corporations pay their fair share of taxes to
fund the investments.
Now, I remain concerned about how long digital service
taxes are going to stay in place once an agreement is struck.
Our foreign counterparts have often put in place discriminatory
taxes that target American workers and American employers. And
these discriminatory taxes I consider to be digital daggers
aimed at some of our most successful, high-skill workers and
the places that employ them. They should never have been put in
place, and yet they remain and even grow.
How are you working to put an end to these digital service
taxes in the negotiations?
Secretary Yellen. Thank you, Senator Wyden. We share your
goal of making discriminatory digital services taxes a thing of
the past. And we have made substantial progress here. At the
G7, we have achieved agreement that there will be a removal of
all DSTs and other relevant similar measures on all companies.
This relates to our insistence at the OECD on both the
standstill and rollback of DSTs. The steering group member
countries have accepted that DSTs need to be rolled back, and
that is important progress.
Additionally, we have changed the norms surrounding DSTs,
conveying to our trading partners that the discriminatory
nature of these taxes is unacceptable to the United States. By
conveying this message multilaterally, rather than through
threats and retaliation, we have also prevented a series of
trade disputes that are harmful to U.S. businesses, workers,
and consumers.
That being said, we are also retaining all options for
discouraging the use of DSTs. The U.S. Trade Representative has
started trade retaliation procedures via investigation and
sanctions under section 301. And we are keeping that tool
available to use if it were to become necessary to get prompt
action to eliminate DSTs. While we very much hope to avoid
trade conflicts, this tool remains a useful lever, and it
brings countries to the bargaining table.
The Chairman. I need to get to another area, Madam
Secretary. And your statement sounds constructive to me. What
the American people want to know is, when are these
discriminatory taxes going to go away?
So, I would like to close this questioning out. Can you
commit to a swift resolution to get rid of these discriminatory
taxes that are so bad for our high-skill, high-wage workers?
Secretary Yellen. We are pursuing absolutely every avenue
toward a swift and comprehensive standstill and rollback of our
DSTs. We are well aware of the importance of this issue, and we
are exploring numerous options in this space, recognizing that
foreign sovereigns have political concerns in this space that
frankly are every bit as heartfelt as ours.
But let me emphasize again, we share your goals here. We
are committed to resolving this issue both on its merit, and
because it was standing in the way of a once-in-a-generation
opportunity to create a new international tax system to end
this spurious and longstanding problem of profit shifting and
corporate tax----
The Chairman. I have one other question. But for purposes
of shorthand, these discriminatory taxes against our workers
and our employers have got to go. And we will continue that
discussion to make sure that that happens quickly.
With respect to my last question, you and I have talked
about my view that congressional oversight is so important.
Three months ago, I wrote to you requesting information
relating to Treasury's handling of the Halkbank/Erdogan
investigation during the Trump administration.
I have sent a number of requests. I know your team has a
lot on its plate, but we have not gotten what we need. And here
is what the question is about. Your team seems to believe that
we want all kinds of information relating to a DOJ
investigation. That is not what we are interested in.
We want to see how Treasury and your predecessor handled
the matter with Erdogan and Halkbank. So my question to you is,
can you commit to me that the committee will have substantive
production on those requests by the time we start our July
session? These are matters in front of Treasury, not Justice.
Secretary Yellen. I promise to discuss this with my staff
and get back to you promptly.
The Chairman. Good. I just want to emphasize: we are not
asking for documents that relate to DOJ and DOJ's
investigation. We need Treasury documents to get to the bottom
of this major scandal and examine Halkbank and Erdogan.
I am over my time.
Senator Crapo?
Senator Crapo. Thank you, Mr. Chairman.
And, Secretary Yellen, continuing to focus on the OECD
international tax negotiations, the administration has proposed
a 15-percent global minimum tax at the OECD. However, the
administration's domestic tax agenda includes raising our
current global minimum tax, the GILTI tax effective rate, to
more than 26 percent. And the administration appears to be
pushing for changes to U.S. law before any other country has
even enacted a global minimum tax.
A number of countries have pushed back on the idea,
including Ireland, Hungary, and India, and most notably China.
In fact, there are even reports that China will not sign a
global minimum tax without carve-outs for its companies and tax
policies.
So my first question is, is the administration's position
that the U.S. should increase its global minimum tax, the GILTI
for its minimum tax, to an effective rate of 26 percent before
others, including China, enact a minimum tax themselves?
Secretary Yellen. Well, we have proposed a global minimum
tax effective rate of 21 percent, not 26 percent. And what we
are working toward internationally is a global minimum tax that
is at least 15 percent, and hopefully higher than that. What
the G7 agreed to in London last week was that they would adopt
a global minimum tax of at least 15 percent--not 15 percent but
hopefully higher than that. And I think if we are able to make
progress domestically on reforming our GILTI, which needs to be
on a country-by-country basis rather than a blended basis, and
ourselves move it into the same territory we are asking other
countries to do, I think we have a very good chance of getting
them to agree. And we are really looking for agreement on this
by the time of the leaders' G20 summit next October. I think we
have a very good chance of getting very broad-based agreement
on this in the OECD and----
Senator Crapo. It sounds to me like you are saying that you
think the United States should move first, regardless of
whether there is a global agreement.
Secretary Yellen. Well, I think we are trying to move these
things in tandem. We feel very good about the progress that we
are making internationally and feel the United States would be
in a better situation, and it would help to fund the important
proposals in the President's budget to close tax loopholes that
are--if we raise this tax and reform it, we are going to stop
incentives that many American firms now have to shift profits
and actual production activity away from our shores.
Senator Crapo. Well, I take it that you are saying that you
are not ruling out, at least, that the United States would act
first? But even if we acted in conjunction with the OECD, that
does not include a number of critical other nations, some of
which have already signaled that they will not do a global
minimum tax.
Secretary Yellen. Well, Senator----
Senator Crapo. Go ahead.
Secretary Yellen. You mentioned Ireland and a few other
countries. I had very constructive bilateral conversations with
the Irish Finance Minister and believe that he is going to be
working with us to try to raise the global minimum tax, even
though that is a highly consequential matter for Ireland.
I believe the entire EU will, in the end, go along with
higher minimum taxes. Now if there are a few countries--we do
need global agreement on this. But we do not need every country
to go along with it, because the Pillar 2 minimum taxes contain
an enforcement mechanism whereby we will be able to incent
hold-out tax havens that do not want to go along with this deal
to come onboard and establish a global minimum tax. And if they
are unwilling even so to do so, we are proposing changes to the
BEAT to make it more effective and to deny foreign corporations
in the United States the deductions that enable them to shift
their profits offshore.
Senator Crapo. Well, thank you. My time is up. I think you
are referring to what has been called the ``SHIELD'' concept--
--
Secretary Yellen. That's correct.
Senator Crapo. I do not have time to get into it with you
right now, but I will, in questions submitted, ask you to
explain that concept and how it is that you believe it will
work to force other nations to turn it around.
I understand the basics of what it is, and I do not see
personally how that is going to work. But I will ask you to
clarify that in your written responses.
Secretary Yellen. I will.
The Chairman. Thank you, Senator Crapo. And let me also say
to colleagues that Secretary Yellen has a hard stop time, and
so we are going to have to stick to 5 minutes.
Senator Stabenow?
Senator Stabenow. Well, thank you very much, Mr. Chairman
and Ranking Member. Secretary Yellen, it is always wonderful to
have an opportunity to see you. And thank you so much for your
incredible service.
I just want to start with a general comment, Mr. Chairman.
I think probably today, as I have heard in other committees as
well, we are going to hear a lot about deficits being out of
control. And I just always have to put this in some context.
I was in the House of Representatives in 1997 when we
balanced the budget for the first time in 30 years under a
Democratic President, Bill Clinton. I went into the Senate. We
started exploding deficits under a Republican President, for a
number of different reasons, but ended his tenure with a
financial crisis.
Then the Democratic President comes in, President Obama,
and he has to dig our way out of a financial crisis. By the
time he leaves, we are bringing down the deficit. We go into
the next President, President Trump, who explodes the deficit
again. Now we have a Democratic President who is having to dig
us out of a different kind of crisis, which is the health
pandemic, and trying to right-size things.
So from my perspective in working with Democratic
Presidents, we have tried step by step to do the right policies
to not only bring down the deficit, but to make sure that
things are being done right for people in our country.
So, Secretary Yellen, I wanted to talk to you specifically
about that, in terms of the tax code, because there are clear
differences between what President Biden wants, what we want as
the Democratic majority, what our Republican colleagues did in
their time in charge, the largest tax cuts for the wealthiest
in our country in 2017.
We put in place the Child Tax Credit. We want to extend
that further. The President extends it for 5 years. I would
love to see it, as well, extended permanently, the idea of a
tax cut for working families. And then you juxtapose that whole
discussion of what we want to do with what we have talked about
and have had hearings on in the committee, on what is called
the tax gap, the difference between what people owe and what
people pay. And when we look more closely at that--and the
former IRS Commissioner calls that gap as large as $1 trillion
a year. I do not know if that is accurate. It is certainly, I
think, believable. It is several hundred billion. But when you
look at that, again from a fairness standpoint--a study in 2019
found that Humphreys County in Mississippi was the most heavily
audited county in America--mostly African American, a third
under the poverty line, mostly focused on the Earned Income Tax
Credit--rather than wealthy people with complicated tax forms
with ways to hide their income, and so on. So we see tax rates
that are unfair, and then we see not reporting income, hiding
income, and so on.
So could you just speak broadly about what the President is
talking about with tax cuts for working people, and then asking
everybody to pay their fair share--and frankly, I do not think
it is a tax increase to ask a billionaire to pay more than zero
on their taxes. People in Michigan do not think that. But could
you speak, just in the big picture, about right-sizing the tax
system and making sure that everybody pays what they are
supposed to be paying?
Secretary Yellen. Thank you for that question, Senator.
President Biden feels that it is crucial that we have a tax
system that is fair, and one where we enforce tax laws so that
individuals and corporations pay what they owe. And we really
need to do that in order to assist hardworking low-income
families, for example with the Child Tax Credit that you
mentioned that is working now to reduce child poverty by almost
50 percent and give children and families the opportunities
they need to succeed in America, and to get ahead.
As you pointed out, there is an enormous tax gap. One
number we have been using, one estimate is that it will amount
to at least $7 trillion over the next decade. And it largely
reflects shortfalls in collections for high-income individuals
and corporations.
And we have proposed--the Biden budget proposes to close
this tax gap by giving the IRS the resources and the
technology, and the money and long-term time perspective, they
need to recruit and train and retain qualified staff that can
conduct specialized, complicated audits.
We have also proposed to give the IRS a bit more
information that will greatly enhance its ability to target
those audits at those who are noncompliant, and not at
taxpayers who are obeying the law and paying what they owe.
The Chairman. I thank my colleague from Michigan. We have
25 Senators waiting to ask questions.
Next is Senator Grassley.
Senator Grassley. Thank you, Mr. Chairman.
I want to talk about stepped-up basis--and this is a hot
topic in every one of the town meetings I have had across Iowa
ever since the President proposed it. And I know that the
President has said, well, there is going to be some sort of
special rule to protect family operations by allowing them to
delay payment of the tax. But farmers do not buy farmland to
buy it one day and sell it the next day.
Farmers in Iowa and throughout the Midwest, the family
farmers, they do it to pass down their family operations from
one generation to another generation. And sometimes I run into
farmers who are in the fourth or fifth generation of farming;
even six or seven generations occasionally you run into.
So I want to quote what the Democrat Chairman of the House
Agriculture Committee, David Scott, said recently about this
administration's proposed exceptions, quote: ``Could still
result in significant tax burdens on family farming
operations.''
So my question is, isn't Chairman Scott correct in regard
to that? Is it really your point that family farms of several
generations ought to be broken up because of doing away with
the stepped-up basis to raise money for this?
Secretary Yellen. Senator Grassley, the President's
proposal would enable a family to hold onto its farm, and to
pass it down through generations without paying any tax on
that. And so the same would be true for small businesses. As
long as the property remains within the family, there would be
no taxes collected. Only if the farm were eventually sold would
there be taxes. And that would not be on the value of the farm,
it would only be on gains in the value of the farm.
We feel that eliminating stepped-up basis in death is an
important way of closing what is really a significant loophole,
which is that capital gains can escape taxation entirely if
individuals hold property until death. And the President's
proposal includes an exclusion of $1 million in capital gains
for an individual, and $2 million for a couple, and an
additional up to $500,000 for a couple if a primary residence
is involved. And in the case of family farms and businesses,
there would be no tax levied as long as it stays in the family.
Senator Grassley. Okay.
On another question, you were recently quoted as saying,
quote, ``I don't think there's going to be an inflationary
problem, but if there is, the Fed will be counted on to address
it.''
I find this nonchalant approach to the risk of inflation
very troubling. As we know from the 1970s, once inflation takes
off, getting it back under control can require very painful
measures. The early 1980s proved that. As former Treasury
Secretary Summers recently stated in an interview with Time
magazine, quote, ``The Fed has had almost no success in gently
bringing down inflation once an economy has started to
overheat.''
Isn't it incumbent upon the President, you as Secretary of
Treasury, and even us in the Congress, to take inflationary
risks seriously by pursuing responsible fiscal policies and not
just expect the Fed to clean up a mess after the fact?
Secretary Yellen. Senator Grassley, we are monitoring
inflation very carefully, and we do take it very seriously. No
one wants to return to the bad time of inflation of the 1970s.
And I have put forward the view previously--I think this is
what most economists think--that the current burst of inflation
we have seen reflects the difficulties of reopening an economy
that has been shut down, that has seen huge swings in spending
patterns, and is experiencing bottlenecks.
And we are taking steps, those we can, to deal with the
bottlenecks that are affecting the economy now. It is
critically important that fiscal policies be put on a
responsible course. As Treasury Secretary, I take that
responsibility very seriously, and I believe that the budget
that the President has proposed is indeed fiscally responsible.
And I would be glad to--I see you are running out of time, but
I would be glad to explain in detail why I hold that view.
The Chairman. Thank you, Senator Grassley.
Senator Cantwell is tied up in a hearing. The next two are
Senator Cornyn and Senator Menendez.
Senator Cornyn, and then Senator Menendez.
Senator Cornyn. Thank you, Madam Secretary, for joining us
today.
First of all, I want to ask you, when it comes to
negotiating a global minimum tax with the G7, what do you and
the administration see the role of Congress as being?
Secretary Yellen. Well, any agreement that we are able to
reach--and the G7 is just one group, an important group that
has expressed support for this approach. The largest group
involved is the OECD. Negotiations have been going on there for
many years. Anything that affects U.S. tax law must be enacted
by the U.S. Congress. So, Congress plays a critical role.
Senator Cornyn. Thank you.
The administration has proposed to make spending for the
IRS mandatory spending. But as you know, the appropriations
process is an important part of congressional oversight into an
agency like the IRS.
Are you endorsing this idea that Congress will be removed
from oversight of the Internal Revenue Service?
Secretary Yellen. No; I have no such thought. I think it is
important that Congress have oversight of all the executive
branch activities and of agencies like the IRS. We have
proposed an increase in mandatory spending because the IRS
really does not have the kind of budget certainty that it needs
to undertake long-term programs of modernization of their
technology, and hiring and training and retaining the qualified
cadre of staff that are needed to improve their audit
performance, and trying to close the tax gap. And we think the
certainty that comes with a long period of assured funding--and
what we have proposed, we think, is within IRS's wheelhouse to
practically increase their expenditures at a pace of around 10
percent a year.
Senator Cornyn. How is that different, Madam Secretary,
from every other Federal Government agency?
Secretary Yellen. Well, really these are long-term
investments that are just required. We are seeing a 20-percent
real shrinkage of IRS's budget, and----
Senator Cornyn. I understand. I understand your argument,
but how does that differ from any other government agency? I am
sure all Federal Government agencies would like to have
mandatory spending and diminished congressional control over
their budget. How is that different?
Secretary Yellen. Well, it is not inherently different, and
most of IRS's budget would continue to go through an annual
appropriation.
Senator Cornyn. On another matter, Madam Secretary, my
constituents have expressed concern about the retroactive
nature of the administration's proposal to increase the capital
gains tax. The administration's Green Book notes that the
proposal would, quote, ``be effective for gains required to be
recognized after the date of announcement.''
First, a clarification. What date does this refer to, ``the
date of announcement''?
Secretary Yellen. I will have to get back to you on that,
Senator.
Senator Cornyn. Fair enough. And the other concern that I
have heard from my constituents is the fundamental unfairness
to people making long-term plans, whether as individuals or
small businesses or the like, to basically change the rules of
the game on capital gains after they have relied upon existing
rules in order to plan their affairs, whether it is a business
or an individual or the like.
So do you think it is fair to basically retroactively
change the rules of the game when it comes to capital gains?
Secretary Yellen. I--you know, Congress has the ability to
change the tax laws, and has done so on many, many different
occasions. And I do not see a prospective change in rules
pertaining to the taxation of future realizations of capital
gains as being a retroactive feature.
Senator Cornyn. Let me ask you one last question about the
Foreign Investment Risk Review Modernization Act. As you know,
Congress has given Treasury new responsibilities under CFIUS,
the Committee on Foreign Investment and, as I understand it, is
working with some of our allies to create a similar policy
within their jurisdiction.
I think it would be helpful for the U.S. to create a
multilateral mechanism to address predatory practices by
countries like China and the other countries where our national
security interests are involved.
Is there a process in place to discuss with our allies a
mechanism to create a CFIUS-type process so that China and
other countries could not basically exploit the gaps in that
sort of coverage and scrutiny?
Secretary Yellen. So I agree with you that that would be a
very desirable thing for other countries to do. And I do not
know that I would say there is a process in effect, but I know
that we have had conversations with many different countries
about putting in place such a process or enhancing processes
that they may already have. They have indicated a willingness,
and I have worked jointly with them, and I think it is
something we absolutely should be encouraging.
The Chairman. The time of the Senator has expired.
Senator Menendez?
Senator Menendez. Prior to the Trump corporate tax giveaway
bill in 2017, the corporate rate was 35 percent, the tax rate.
After this giveaway, the corporate tax rate was lowered to 21
percent.
Secretary Yellen, as a result of the Trump tax cuts in
2017, what is the new average effective corporate tax rate that
U.S. corporations are paying?
Secretary Yellen. Um, I believe the number that I have seen
on an all-inclusive corporate tax rate that would include also
State corporate taxes is a little bit under 26 percent, maybe
25.8 percent. And if you look at other G7 countries, our
effective tax rate is a little bit below theirs. Theirs is
something closer to 28 percent.
Senator Menendez. Well, I think the average effective tax
rate paid by U.S. corporations, as I have seen it, dropped
after the Trump tax bill, the effective rate, by nearly half,
to almost 8 percent. And in New Jersey, the average rate for a
hardworking family was double that of the U.S. corporations at
about 15 percent.
Isn't it fair to say that the cost of the Trump corporate
tax cuts was a whopping $1.5 trillion unpaid for?
Secretary Yellen. It was very expensive. And really, I did
not see any--and I believe most economists saw very little
evidence of a boom in investment spending or productivity that
resulted from it. So----
Senator Menendez. So----
Secretary Yellen. The reason our deficits are as large as
they are now--of course the pandemic contributed, but the 2017
law made a big contribution.
Senator Menendez. So only the previous administration could
manage to lose $1.5 trillion in tax revenue while still raising
taxes on millions of hardworking families. You know, rather
than provide much-needed relief to hardworking families that
already paid too much in taxes, the 2017 Trump corporate tax
bill actually made things worse as it imposed an arbitrary
$10,000 cap on State and local tax deductions, one of the
oldest deductions in the code.
This provision disproportionately impacts New Jersey and
other States that make investments in our public schools,
roads, bridges, other critical infrastructures. Do you think it
is a coincidence that States hardest hit by the SALT cap like
New Jersey are also the States that have invested the most in
public education systems, and their roads, and transit and
highways?
Secretary Yellen. Well, I mean that is one reason that
these States have higher State and local taxes, is to invest in
public infrastructure. And as you know, the Biden
administration thinks those investments are critically
important.
Senator Menendez. Yes. And of course, this is why States
like New Jersey contribute more to the Federal Treasury than
they receive, while other States receive far more from the
Federal Treasury than they donate.
And so it does not make sense, I think, to punish taxpayers
in States like New Jersey that choose to make investments in
their people and in their infrastructure that make it a blue
chip State, that make it a maker State that therefore
contributes to the Federal Treasury.
But in reviewing the Treasury's Green Book--which I have
here with me--which provides an explanation of the President's
revenue proposals including for infrastructure, I was
disappointed to see that the SALT deduction is not discussed
anywhere in the President's tax proposals.
Now you and I discussed this at length during your
confirmation. I discussed the same with your deputy. Both of
you committed during your confirmation hearing to do a study
and evaluate the SALT deduction. Yet, there is nothing in that
book. So I expect much more. I expect to see what that
commitment is going to yield.
And finally, your office responded to me yesterday, 6
months later, to my questions in your nomination hearing about
the question of how many Latinos were hired, what is the
overall inclusion. The fact is that we see very little progress
being made in new hires.
The Office of Minority and Women Inclusion at Treasury has
identified that over the past 5 years--which of course precedes
this administration--there remains a consistent
underrepresentation of Hispanic employees. I hope you are aware
that, according to industry publications, the largest money
managers have nearly $54 trillion under their management. And
of those, minority and women managers represent less than 1
percent. And yet research by the Knight Foundation shows that
diverse managers perform the same, if not better, than
mainstream managers.
So I would like to see the Treasury Department as a force,
both in its representation in its department and in creating
this access to capital and opportunities. I do not know--when
we have billions in Federal pension funds and other funds--why
it is that only 1 percent of minorities and women get to manage
that money, and this other group of individuals gets to manage
99 percent.
I want to see some real change, and I hope you will be
committed to that.
Secretary Yellen. I am committed to it. I have met with our
OMWI officer, and diversity and inclusion in our contracting
and in hiring is a very high priority. I am committed to
working hard to change these numbers.
The Chairman. Thank you. Thank you, Senator Menendez. I
also want to say, on Senator Menendez's important point about
corporate taxes, according to the Congressional Budget Office,
corporate income tax revenue after the Trump tax law is down
nearly 40 percent from the 21st-century average. I thank my
colleague.
Next is Senator Thune.
Senator Thune. Thank you, Mr. Chairman.
Madam Secretary, welcome back to the committee. As you can
tell, I am in another committee room marking up a bill at the
Commerce Committee. But let me ask a question about this issue
of inflation, which I am sure has been talked about a good bit
already today, but it is the highest, as I think you know, in
13 years. Consumer prices are rising at 5 percent, and
according to the latest Consumer Price Index, the indexes for
all items except food and energy are up 3.8 percent, which is
the largest yearly increase in almost 30 years.
The energy index rose 28.5 percent over the last year, and
according to a survey by the Federal Reserve Bank of New York,
fears of inflation a year ahead hit their highest level on
record, with a consumer expectation of 4 percent.
Do you view this inflationary trend as transitory, or do
you expect an extended period of raised inflation?
Secretary Yellen. Well, I previously said that I see
important transitory influences at work, and I do not
anticipate that it will be permanent. But we continue to
monitor inflation data very carefully and, importantly, for the
long-run inflation outlook, we see inflation expectations by
most measures--there are many different measures--but by most
measures we see those expectations as being well anchored. And
I think the consensus of forecasters is that this bout is
temporary.
Partly what we are seeing is that prices had just collapsed
at the onset of the pandemic in the service sector, where
demand collapsed. As the economy is opening back up again,
prices are now moving back to a normal level in leisure,
hospitality, air fares, and the like. In most cases, prices
remain below pre-pandemic levels, but they are rising. And that
is some of what is going on here.
But there are also bottlenecks, and clearly firms are
having difficulty hiring workers. I believe our economy is on
track to get back to a more normal operation, and that
inflation will decline over time. But we are going to monitor
this very, very carefully.
Senator Thune. Do you still agree with the administration's
projection of 2 percent for the year?
Secretary Yellen. Well, the projections that we made were
back in February. And what we said agreed very closely with the
blue chip at the time. We are going to be doing a mid-session
review and coming out with a new forecast, as certainly for
this year inflation will be higher than that.
Senator Thune. Let me switch gears here for a minute. The
Biden administration has proposed having banks report to the
IRS, both inflows and outflows, of business and personal
accounts, which would be a significant new intrusion into
taxpayers' lives.
Yet just last week the IRS had one of the most widespread
breaches in the agency's history in order to advance a
political agenda. And this apparent leak, a targeted leak--a
targeted attack, I should say--on a select few Americans
undermines the heart of public trust between taxpayers and the
IRS's ability to safeguard private information.
Can you tell me how the Treasury and the IRS hold
individuals accountable who break Federal law by sharing
confidential tax information and tax returns? And will you
commit to updating us immediately on what steps the
administration is taking to ensure this does not happen again?
And can you maybe tell us what steps you have taken so far?
Secretary Yellen. Yes. This was a very serious situation,
and I and the Treasury Department take very seriously the
protection of government data. We have referred this matter to
the Treasury Inspector General and to the Department of
Justice.
The IRS Commissioner is looking into the matter, as is the
Treasury Inspector General for Tax Administration. But we are
only one week out on this, and I really want to emphasize we do
not know what happened. We do not have any facts at this point.
I promise to keep you updated on what we find. But it is
absolutely top priority to safeguard taxpayer data. When we see
the results of the investigations that are done, if there are
actions that we need to take to shore up the protection of this
information, you have my absolute word that we will do so, and
we will keep you and Congress informed on what we are doing and
what we are finding on this.
Senator Thune. Mr. Chairman, my time has expired, but I
will submit a question for the record dealing with the issue of
the stepped-up basis tax proposal as it pertains to a family-
owned business or farms and ranches. I am very interested in
what the administration's proposals are to exempt--or protect,
I should say--those types of entities from what would be an
incredibly crushing and onerous tax.
The Chairman. Thank you very much, Senator Thune.
Senator Carper is next.
Senator Carper. Thanks, Mr. Chairman. Madam Secretary,
thanks very much for joining us today, and for your
extraordinary leadership over all these years.
My colleagues have heard me say more than a few times,
whenever someone is offering changes to the tax code, I ask
four questions with respect to those changes. Is it fair? Does
it enhance or diminish economic growth? Does it simplify the
tax code or make it more complex? And lastly I ask, what is the
effect on the budget deficit and the fiscal situation?
The first of those guiding principles deals with fairness.
It is my experience that people are generally willing to pay
their fair share of taxes as long as they are convinced that
others are doing the same. And I am pleased that many of the
proposed investments in the Treasury Department's budget are
designed to reflect that principle of fairness.
For example, I have been a long-time proponent of providing
greater funding and resources for IRS enforcement operations.
Each dollar spent on IRS enforcement generates, I am told, a
return on investment of at least $5, and some say it may be
higher. That is a pretty decent return on our investment. And I
support those proposals very strongly.
The budget proposal from the administration will help close
the tax gap and ensure that large corporations and high-income
individuals will be more likely to pay their fair share.
Another principle that guides my decision-making is the need
for fiscal responsibility, and I believe things worth having
are worth paying for, and that must be a consideration.
The Chairman. Good.
Senator Carper. Mr. Chairman, you said ``good''?
The Chairman. Sorry; I just wanted to cheer you. Your
points are very important. Go ahead.
Senator Carper. Very good. Thank you. The administration
includes many options to make the tax code fair and fiscally
responsible, including reversing parts of the 2017 tax law, and
we should definitely consider these ideas as well as other
options to level the playing field, such as lowering the
exemption level on the estate tax.
A question, Madam Secretary. Can you highlight some of the
provisions in your budget request that most effectively
strengthen the fairness of our tax system? And would you share
with us your thoughts on how we can make these investments
while ensuring that our decisions are fiscally responsible,
please?
Secretary Yellen. Yes. We have tried to make the tax system
fairer in our proposals. The President has pledged that no
taxpayer earning under $400,000 will see their taxes raised by
as much as a penny. And he has been absolutely scrupulous in
adhering to that promise.
So the tax proposals on the individual side would target
only very high-income taxpayers by raising the top rate back to
where it was, but it would only apply to joint filers earning
over about $509,000.
He proposes to raise rates on dividends and capital gains
on the principle that it is not fair for workers to pay a
larger share of their wage income than wealthy individuals pay
on their rewards, their income from capital.
So he proposes to equalize that, equalize those rates on
income from capital gains and dividends, and from work. And he
has proposed to--in the step-up of basis at death, or when
gifts are given, that also was unfair that by holding an asset
throughout one's life it can completely escape taxation--
capital gains taxation--totally.
And fairness also means collecting what is owed under our
tax code from everyone, rich or poor. And wage income which is
reported to the IRS is accurately reported to a level of 97, 98
percent on tax returns, so those earning W-2 wage income do pay
what they owe. The tax gap really reflects shortfalls in
reporting by high-income individuals and by companies. And the
President's proposal would seek to remedy that by providing the
IRS the resources they need to audit high-income individuals
and companies that are responsible for that tax gap to improve
tax compliance, to make the tax system fairer, and to collect
the information.
There is enough information to give a guide as to where the
auditing resources should be used so that we do have fairer tax
collection.
The Chairman. Thank you, Senator Carper. We still have 16
Senators to ask questions.
And next is Senator Portman.
Senator Portman. Thank you, Mr. Chairman, and thank you,
Secretary Yellen, for joining us again. I have found this a
fascinating dialogue this morning. I am going to ask questions
I had not planned to ask because it seems like everybody on the
Democratic side has decided that the 2017 tax reform bill had a
negative impact on our economy and on the opportunity for
people to get ahead. So let me just ask a few questions to be
sure we are working from the same facts, because it seems like
this is kind of a fact-free zone on that particular topic.
Do you agree that--with regard to the tax bill which was
implemented in 2018, and then of course COVID-19 hit in early
2020, so let's say in the 18 months prior to February of 2020,
which was when the COVID pandemic hit and affected our economy
in such negative ways--would you agree that, during that time
period, we had significant improvements to the economy and to
the equality that we all seek, meaning that lower-income
individuals have a better shot. And in particular, do you agree
that the poverty rate during that period was the lowest it has
been in the history of our country since we began keeping track
back in the 1950s? Yes, or no?
Secretary Yellen. I agree that that was a period of good
economic performance in the ways you just said. But it was a
continuation of trends we had seen in the prior years, with
recovery----
Senator Portman. Let's talk about that for a second, if we
could, Madam Secretary. It was the lowest poverty rate in the
history of our country. You said it continued a trend. That is
not true. With regard to wages, when you take inflation into
account, wages had been going down in my home State and
nationally. In the 18 months prior to February of 2020, we had
19 straight months, actually, in 2020 February, of wage gains
of 3 percent or more on an annualized basis. Isn't that true?
Secretary Yellen. I agree that there were good wage gains,
especially at the bottom of the income spectrum----
Senator Portman. You've just said what I was going to add,
which is the lower quartile particularly benefited, as well as
a lot of middle-income Americans. And that was a huge relief
for us in my home State and elsewhere in the unemployment
numbers. Do you agree unemployment was at a 50-year low?
Secretary Yellen. Absolutely. But I would----
Senator Portman. For Hispanics and blacks and other
marginalized groups, it was the lowest ever in history.
Secretary Yellen. Yes. And I think those were wonderful----
Senator Portman. What were----
Secretary Yellen. Those were wonderful developments. We had
a full employment economy, tight labor markets. And, just as a
weak economy imposes the largest losses on disadvantaged groups
or minorities, on low-income workers, a strong labor market
does exactly the opposite. And we had a good, strong labor
market that was conferring those benefits.
I simply would argue that this was largely a continuation
of trends that had been in place and continued. I do not
believe that was caused by the 2017 tax act. It certainly was
not harmed by that act, either. Those trends were very
favorable.
Senator Portman. Yes, well, many economists would differ,
including the Congressional Budget Office, which is a
nonpartisan group up here that says that the corporate tax
reform that you apparently oppose allowed for workers to gain a
lot of benefits. In fact, they said 75 percent of the benefits
went to workers' salaries, wage gains we just talked about, and
went to workers' benefits, 75 percent of it.
They also said that $1.6 trillion--this is a Joint Tax
number as well--came back into the U.S. economy in terms of
repatriation, $1.6 trillion. And you made the point earlier
that somehow everybody was leaving the United States during
that time period. That is not true. In fact, inversions
flipped; we did not have any inversions virtually in that time
period I am talking about as compared to previously when we had
a lot of them.
So in terms of advances, we were going the wrong way in
terms of losing jobs and investments overseas. Anyway, I
appreciate your background and experience, but I just think
that we have misinformed the public as to what happened in 2017
in the interest of somehow raising taxes on the workers I
represent, who are going to be hit by these higher corporate
taxes that you would like to put in place.
I am also very concerned about the budget. You said this
morning--I heard you saying that you are proposing ambitious
fiscal policy. It is ambitious, taking the country's debt to
historic levels as a percentage of GDP, which is how we measure
it, and a $14-trillion increase in spending over the next 10
years.
So as you know, during your nomination I supported you and
I said, ``Would you commit to me to be the fiscally responsible
one?'' And you said you would. So I hope that you will begin to
do that and get us back on track.
Secretary Yellen. I believe we are getting back on track
because, for 15 years, every dollar of spending proposed in
this budget is paid for. And over 20 years, there is a
substantial reduction in outstanding debt. Over the next
decade, the real interest cost on the debt is projected to be
either negative or just barely positive. And in the interest
rate environment that we are in now and have been in before the
pandemic, we have had an opportunity to finance critical
investments that will make our economy grow more quickly and be
more productive and fairer and have the ability to pay for
them. And we will end up with more tax revenue from the changes
to the tax code that will benefit our economy into future
decades when problems of aging populations will get to our
entitlement program----
The Chairman. The time----
Secretary Yellen. And I believe this is fiscally very
responsible.
The Chairman. The time of the----
Senator Portman. We can disagree about that.
Thanks, Mr. Chairman.
The Chairman. Our next Senator will be Senator Cardin.
[No response.]
The Chairman. Senator Toomey?
[No response.]
The Chairman. Senator Brown?
[No response.]
The Chairman. Senator Scott?
[No response.]
The Chairman. Senator Bennet is next.
Senator Bennet. Hello, Mr. Chairman. Can you hear me?
The Chairman. Yes, we can hear you fine.
Senator Bennet. Thank you very much.
Madam Secretary, I want to thank you and your team very
much for the work that they have done to get ready for the
monthly distribution of the Child Tax Credit. We are very
grateful for that.
I wonder if you could talk a little bit about what that
work has looked like and where we are in that process?
Secretary Yellen. So first of all, Senator Bennet, thank
you so much for your leadership on this issue. I think putting
this Child Tax Credit in place really is an important step, and
we are proposing to continue it, to make the nonrefundablity
permanent and the increase in the size of it.
We have worked very hard with the IRS to begin monthly
payments to eligible families, starting July 15th. The IRS, I
believe, is ready to make those distributions. Special
attention has gone to how to create awareness and make sure
that the families that did not file a tax return this year or
last year know about their eligibility for the Child Tax
Credit, and to apply for it.
The IRS opened a Non-filer portal yesterday, and it will
take some time to fully develop. It will be necessary to
collect more information about individuals than the IRS needed
for the first rounds of Economic Impact Payments. But they are
developing that portal, and it will be available to non-filers.
And we are working hard with members of Congress and through
many different areas to get the word out into those communities
and the nonprofit organizations that work with individuals--
low-income individuals who really need that money, are eligible
for it, but do not file taxes.
Senator Bennet. I appreciate it, the Non-filer portal and
everything, so much. I also--I have another question on another
topic I want to address but, Madam Secretary, I know you know
how important this is to working families in this country. And
there are a lot of us who have not given up hope that we can
find a way to work together to make the Child Tax Credit
permanent. It does not make any sense to me that we would do
something that was this valuable and then turn around and raise
taxes basically on working people who can least afford it.
So we are going to fight hard through this process to try
to make it permanent, and I hope we will be able to persuade
the administration at the moment to do it.
I want to just shift gears, with what little time I have
left. In May, this committee held a hearing on financing
options to bolster American infrastructure. And I was pleased
with the response and support from my colleagues on both sides
of the aisle for bringing back a taxable bond option similar to
Build America Bonds created in the 2009 Recovery Act to help
State and local governments with critical public projects. My
colleague, Senator Wicker, and I recently introduced our
bipartisan American Infrastructure Bond Act to do just that.
The bill would create a new class of direct-pay taxable bonds
that would be attractive to investors who do not benefit from
traditional tax-exempt bonds, such as pension funds and
institutional investors.
And the President has proposed creating a similar type of
bonds called Qualified School Infrastructure Bonds, which would
be limited to construction and repair of schools.
I am interested in your views on tools like American
Infrastructure Bonds that States and local governments could
use for infrastructure projects that could include, but not
necessarily be limited to, public schools.
Secretary Yellen. Senator Bennet, I think it is an
important and interesting proposal. As you mentioned, our
budget proposal does use a tool like that for schools. There is
also an additional $15 billion proposed for Private Activity
Bonds to support transportation infrastructure. But this is an
important area where we would definitely be willing to work
with you and your staff to understand how a tool like this
could help broadly with the Nation's infrastructure, and how it
could be coordinated with the infrastructure spending proposals
we have made.
Senator Bennet. Thank you, Mr. Chairman.
The Chairman. I thank my colleague.
Senator Cardin is next.
Senator Cardin. Thank you, Mr. Chairman. And, Secretary
Yellen, thank you very much for your service.
I want to get your view as to how we can use the tax code
more effectively to deal with investment of resources to build
wealth and equity in communities across the country that have
been traditionally underserved.
We have several tools that are available. We have the Low-
Income Housing Tax Credit. We have the historic tax credits. We
have now the Opportunity Zones. I want to talk about two that
are in the President's budget and get your view as to how you
intend to use these tools to deal with the lack of housing
opportunities in underserved communities.
The New Markets Tax Credit, which I have sought to be made
permanent, is made permanent under the President's budget. So
that is one tool that has been very effective in Maryland and
throughout the country. So I am interested in your views as to
how you would utilize the New Markets Tax Credit.
And then there is the new program, the Neighborhood Homes
Investment Act, which I am a proud sponsor of, along with
Senator Portman, that deals with the tax credits to deal with
the appraisal gap between the value and needs in underserved
communities. In the President's budget, you also have funding
for that new tool to deal with underserved communities.
Could you just share with our committee how the Biden
administration intends to use the tax code to help serve
communities that have been left behind in the past?
Secretary Yellen. Well, Senator Cardin, we certainly share
the broad aim of trying to help communities that have been left
behind. And we have the toolkit that has a number of important
elements in it. And you have mentioned two that we think can
make a real contribution.
The New Markets Tax Credit--as you mentioned, the President
has proposed an additional allocation. And we think that it is
an important way of channeling funds to qualified community
development entities that, in turn, can make investments in
low-income communities.
And we will work through, if this proposal is enacted into
law, to get that money out and make sure that it is used
effectively.
And I think the second proposal that you mentioned, the
Neighborhood Homes Investment Act, also fills a need that is
really not addressed anywhere else, as far as I know, in our
tax structure. We have credits to encourage the construction
and rehabilitation of rental properties, but this would
encourage construction and rehabilitation of owner-occupied
housing in distressed neighborhoods.
And if this is enacted, we would--Treasury would write
rules to make sure that this money is used effectively and is
awarded on a competitive basis.
Senator Cardin. Thank you for that. We recognize that, in
regard to the new program, the Neighborhood Homes Investment
Act, we do not have a track record on that. On the New Markets
Tax Credits, we have a track record. So I would just urge you
to work with us as we look to give you that authority as to how
it would be implemented so that we can maintain the broad
bipartisan support we have.
I think it can play a critically important role in reaching
a gap that we have today in neighborhoods that are great
neighborhoods, but the appraised values just do not allow for
the traditional financing.
So I thank you for your commitment, and, Mr. Chairman, I
will yield back. Thank you.
The Chairman. Thank you, Senator Cardin. And your good work
on the Neighborhood Homes Investment Act and Secretary Yellen's
support are clearly paying off. And I am going to put it in my
big housing bill that I will be introducing shortly--credit to
you and the Secretary, Senator Cardin.
Next will be Senator Brown.
Senator Brown. Thank you, Mr. Chairman.
Madam Secretary, it is nice to see you again as always. I
will echo the words of a number of my colleagues, Senator
Bennet most recently, about the Child Tax Credit. I remember
when you and I talked soon after your nomination, and I asked
you about this, and you promised that--you said it would be a
challenge, but you promised that the IRS would find a way to
make the monthly disbursal of $250 or $300 for a child happen,
and you did it even earlier than we, with your immense talents
and persuasive ability, thought you could.
So apparently, 65 million kids across the country will get
this financial boost. It will help parents. Senator Casey and I
have talked about this, and when we sat together on the Senator
floor when we voted on this package, that was the best day--
certainly I cannot speak for him, but the best day of my career
was seeing these 10 years of work come forward in this way. And
the temporary expansion of the EITC and CTC is so important,
and I appreciate your commitment to work with us to make this
permanent. So thank you again for that.
My first question is about your efforts on international
tax. People in Ohio are furious that our tax code rewards
companies when they ship jobs overseas and stick profits in a
tax haven. I am working with Chairman Wyden and Senator Warner
to fix that. The agreement you secured with the G7 could help
us reverse that race to the bottom on corporate taxes.
If you would, speaking of that, how will that help workers
in my State, especially workers who live in fear that their
factory will be shuttered and their jobs shifted overseas?
Secretary Yellen. So I think workers, Senator, in Ohio are
right to worry that our tax system contains incentives that
make it profitable, in some cases, for American firms to move
jobs overseas, and also sometimes to move income overseas to
deprive the U.S. of tax revenue we could use and absolutely
need for things like the Child Tax Credit, and for education,
research and development, manufacturing, and other things that
would be very positive for them.
So I was pleased that, at the G7, we were able to get a
unanimous support on the part of our allies for creating a
global minimum tax of at least 15 percent. We are hoping that
by the time this is finalized, we can get countries to agree to
a higher rate than that.
And what we have had is a race to the bottom in corporate
taxes that has just cannibalized tax bases in the United States
and around the world, depriving us of the revenue to invest in
good jobs and education and addressing climate change and the
like. And I am hopeful that Congress will adopt changes to
make--we have a global minimum tax, but we need to make changes
to make it more effective. And establishing a global agreement
will definitely address incentives that firms now have to shift
jobs abroad, and will really address unfair competition that
American businesses face from foreign-based corporations that
are based in low-tax areas or make use of tax havens.
Senator Brown. The other frustration--well, anger is
probably a better word--that so many Ohioans exhibit about the
tax system is how they pay their taxes every week, every month,
every paycheck, at the end of the year, whatever, but they also
see so many who do not. And the so many who do not are so often
some of the wealthiest people in the country. And I think
people recognize the problem is that the IRS is underfunded on
the one hand, and also outmatched by sophisticated actors whose
money is hard to follow.
Tell us, if you would, briefly--and my last question, Mr.
Chairman--how does the President's compliance proposal benefit
honest taxpayers who currently have to compete with dishonest
cheats?
Secretary Yellen. So, with proposed and substantial
investments in the IRS to improve their ability to collect
taxes from high-income earners and companies, where audit rates
have diminished more than 80 percent over the last decade--and
that is where the tax gap is that we propose collecting. Having
the IRS collect just a few additional pieces of information
that will be simple for financial institutions to provide will
help the IRS target their audits on the individuals who are not
paying their fair share and who lead honest taxpayers--who earn
mainly wage income that is accurately reported to the IRS--lead
them to feel that they are not getting fair treatment because
high-income individuals and companies, either because of our
tax laws or because they do not accurately report their income,
are able to evade their responsibilities.
The Chairman. The time has expired.
And the next two are Senator Lankford and Senator Casey.
Senator Lankford. Madam Secretary, thank you for your
testimony today. I do want to make just a couple of quick
statements. You made the comment earlier about a fiscally
responsible budget.
This budget does spend almost 25 percent of GDP. That is
well above the 50-year average. That is even above the amount
during the 2009 stimulus time period, when there was a very
large jump. It assumes a very large increase in spending. And
one other corrective statement that I want to be able to make,
you talked about the difference in wages for the different
types of earners.
The lowest quartile of income earners, after the 2017 tax
changes, actually went up faster than all the rest. I noticed
you went back and looked at a 20-year average, rather than
actually looking at what happened since the 2017 tax change.
After the 2017 tax change--I know you know this statistic--but
the lowest quartile of earners actually went up faster than all
other quartiles of earners. So I do want to make that
correction.
I want to go back to something Senator Brown just mentioned
as well, about trying to gather information. You mentioned
getting information on more high-income earners, that if the
IRS had that, they would be able to do a better job of actually
closing the tax gap.
But in your budget request, you actually are asking for
information for every transaction for every individual of $600
or more. Now, when I asked the Commissioner about this--
currently banks turn in information of $10,000 or more, and the
IRS has a difficult time processing that much data.
Now we are talking about individuals with $600 or more in
transactions. Can you tell me why you need that information,
that level of granularity? That is not about high-income
earners, that's about getting more information on everyone.
Secretary Yellen. We are asking financial institutions that
already have an obligation to report on the 1099-INT form
interest earned by individuals if it amounts to more than a
minimal amount--I cannot remember, maybe there is a $10 cutoff.
We are simply asking to add two boxes to that form, one that
would be the aggregate inflows into the account over the course
of the year, and the second would be the aggregate outflows
from the account. So it is not detailed information. It is for
accounts where there is already a provision of information from
financial institutions directly to the IRS.
And we are proposing two additional bits of data that are
easily accessible and involve essentially no additional burden
on financial institutions. Those pieces of information are not
actionable. They are not taxable items in their own right. But
they will greatly assist the IRS in knowing where to target
their audit resources.
Senator Lankford. So here is the challenge that I have. As
recently as last week--obviously there was an enormous leak
from the IRS that we have seen. We do not know how many
documents have been leaked out, and an institution has started
publishing private tax information for individuals. I know
there are a lot of individuals who say those are wealthy
people, so stick it to them; we will put the wealthy
information out there.
The problem is, it is a violation of Federal law. And your
request is to get a lot more information from private
individuals. We also need to see what the IRS is doing. And I
heard your answer earlier to Senator Thune, because publishing
that data is against Federal law as well.
So it is not just an instance of, if you release the data
that that is also a felony, but actually publishing that data
is also a felony, if they know it is tax data. And from the
ProPublica article, they know it is tax data. It was quote, end
quote, ``given to them anonymously.'' We do not know that to be
true. But we do know that it is a Federal offense for them to
be able to do that.
So what we want to know is, what is the IRS doing about
this? And you have said you are going to give that to Senator
Thune. Thank you for that. How are they actually following up
on it? We will ask the DOJ what they are actually doing as
well. But gathering that kind of data on every single
individual and then to have this large a breach from the IRS
reminds me of old times in the IRS when, quite frankly,
Congress gave them less money until they actually took care of
all their internal issues.
So it does not help us or actually encourage us to help
with the tax gap. I do want to mention one other issue, though,
and I am looking forward to that information and getting back
to Senator Thune on what is happening on this breach.
Secretary Yellen. Senator, I just want to make one thing
clear. We do not know what the source of this information was.
And we do not know that it was a leak from the IRS. We are
investigating this. It is a very serious matter. We have
referred it to DOJ, the Inspector General, the FBI. But we do
not know it was a leak from the IRS.
Senator Lankford. I have one more question that I need to
state, and that is on the energy issue side. I was very
surprised, because you talked about the fiscal responsibility
side of this, but you're talking about, at the end of this
year, wiping out every kind of tax treatment, even normal tax
treatment for businesses that do oil and gas, by the end of
2021.
I do not know if the IRS has done any kind of study on what
that would do for jobs, or what that would do for the price of
gasoline across the United States and how that would increase
the inflation rate across the country; if that would make us
more energy independent or more energy dependent, what that
would do to the smallest mom and pop companies that do oil and
gas, because they have percent depletion. Those are a lot of
family businesses.
Has there been any study from IRS on any of those issues?
And you can get this back to me in writing. The proposals that
you made even for normal tax treatment for oil and gas
companies look like they will have a dramatic effect on the
price of gasoline for individuals all over the country and
would be a huge hit on jobs and energy independence.
The Chairman. My colleague's time has expired. And,
Secretary Yellen, he indicated it would be acceptable to answer
in writing. We will get that, Senator Lankford.
Next is Senator Casey.
Senator Casey. Mr. Chairman, thanks very much for this
opportunity. And, Secretary Yellen, we are honored to have you
with us today. And thank you for, really, two things: one, for
your ongoing public service at a challenging time for the
Nation; and secondly, the way you have done throughout your
career of making the connection between economic policy and the
betterment of our families, and making that connection over and
over again.
Secretary Yellen. Thank you.
Senator Casey. And I especially appreciate the work you
have done to lift up the provisions in the Rescue Plan in your
conversations with Senator Bennet, Senator Brown, and others
who have done so much for our children.
I wanted to ask you, first and foremost, about women's
rights. You have discussed your objective with respect to
promoting full legal rights, and greater economic and education
opportunities for both women and girls, not just here at home,
but around the world. I share those goals, and I know a lot of
the members of our committee do.
The Senate recently advanced legislation that Senator
Cortez Masto and I worked on to ensure that our trade and
development programs, and particularly GSP, include measures on
nondiscrimination, measures on women's economic empowerment,
people protection, and human rights as criteria.
So would you discuss how you intend to engage with the IMF,
the World Bank, and the interagency here at home to support the
objective of inclusive recovery in the U.S. and around the
world?
Senator Yellen. Well, thank you, Senator, for that
question. I think this just simply has to be a very important
priority. And it has been a priority for President Biden in
thinking about how we need, here in the United States, to
recover from the pandemic. When you see the disproportionate
negative effect that this pandemic has had on women, and often
minority and low-income women, it motivates both features of
the American Rescue Plan and it has also motivated many of the
proposals in the President's budget that would address wages
and working conditions in the care economy, child care and the
like.
And as you said, in our international work, this is
something that we want to see promoted around the world. And we
are working with the IMF, the Multilateral Development Banks,
the World Bank, to ensure that for the kinds of goals that you
mentioned--women's rights, nondiscrimination--we examine every
project that we vote on at these organizations with that
perspective in mind.
And increasingly this has become a feature of the programs
that these institutions run. But it is just as important, and
in many countries more important, to promote women's rights and
their participation in the economy as in the United States.
Senator Casey. Thank you. And in light of the recent
developments we have had around the Child Tax Credit expansion
and the Earned Income Tax credit, as well as the Child and
Dependent Care Tax credit--all of which contributed to the
conclusion reached by those who spend their lives analyzing
child poverty, that that combined effect of those Rescue Plan
provisions would cut child poverty in half--I wish those who
have been touting the 2017 tax cut would have voted for the
Rescue Plan, and maybe they will vote for it when we make some
of the provisions that lift up families permanent.
The purpose of this--and I know we have a vote on. I will
send you a written question, Madam Secretary, regarding some of
these issues that we are going to try to extend beyond the
Rescue Plan to lift up families. One of them involves not just
children, but an additional policy on homeless services and for
people with disabilities. But I will send that to you in
writing, and I yield back to the chairman 7 seconds. Thanks
very much.
Secretary Yellen. Thank you, Senator Casey.
The Chairman. Colleagues, we want to keep going. I believe
Senator Crapo is with us.
Senator Crapo. That is correct, Mr. Chairman.
The Chairman. Wonderful. Thank you, Senator Crapo. Next in
line is Senator Warner. I do not believe he is here. Senator
Young is next, and he is here. And with Senator Crapo's
graciousness, I will run over and vote and come right back, and
we will keep this going. And we will meet your timetable,
Secretary Yellen.
Senator Crapo, Senator Young is recognized.
Senator Young. Well, thank you to the chairman.
Madam Secretary, welcome. One major incentive for domestic
investment is section 174 of the Internal Revenue Code,
allowing U.S. businesses to immediately deduct R&D costs. This
provision has historically received bipartisan support, as it
incentivizes research investment and job creation here in the
United States.
Beginning next year, however, U.S. businesses will be
required to capitalize and amortize those costs over 5 years,
rather than immediately deducting them. Earlier this summer I
reintroduced the American Innovation and Jobs Act, along with
Senator Hassan, to prevent the expiration of this important
provision. Allowing businesses to continue to deduct their
research and experimental costs would be a critical incentive
for investment and innovation in the United States. This
legislation has received considerable bipartisan support, with
many of my esteemed colleagues on this committee, from both
sides of the aisle, joining the effort.
In your response to questions for the record at your
nomination hearing back in January, you stated that you would
carefully consider the concerns raised regarding the
deductibility of research expenditures, paying particular
attention to any effects on small businesses during the
recovery.
So I ask you, Madam Secretary, given President Biden's
interest in encouraging investment in manufacturing, jobs, and
innovation in the United States, would you encourage Congress
to build back better by maintaining the current immediate
deductibility of R&D expenses?
Secretary Yellen. So, Senator Young, thank you for that
question. You are absolutely right that promoting innovation is
a critical priority for President Biden. And it is a very
important contributor to productivity growth in this country.
And we are absolutely looking for ways to do that. And
certainly, continuing to allow firms to expense R&D rather than
shifting to amortizing would be one very effective way to bring
that about. There could also be more generous R&D tax credits.
There might be other approaches. But many OECD countries do
permit expensing of R&D.
So this is something we certainly would want to work with
you on and find a way to be supportive of more tax support for
R&D. I would mention that the President's budget proposes to
repeal the Foreign-Derived Intangible Income feature of the tax
law----
Senator Young. Madam Secretary, could I just interject? Why
is our proposal not in the President's Green Book?
Secretary Yellen. I think the President has proposed to
repeal the FDII exemption and to use the money for support of
R&D, but he wants to work with Congress to decide on what is
the best approach to doing that. Certainly, he is open to this
strategy.
Senator Young. Okay. Well, in consultation with other
eminent economists and learned individuals and policy experts,
and with colleagues alike, they believe that we would get a lot
more bang for the buck through the American Innovation and Jobs
Act with Senator Hassan than we would through the FDII
manipulation that you mentioned. The two are not entirely
equivalent. So I am going to move on, in light of the time
limitations here, and other colleagues needing to speak.
I'll just note that the administration's revenue proposals
released last month contain over $2 trillion of tax increases
on U.S. businesses, including increasing the U.S. corporate tax
rate from 21 percent to 28 percent for tax years beginning
after 2021. That of course would include a tax itself,
somewhat, on workers and consumers.
This proposal would create a 32.5-percent combined U.S.
corporate income tax burden when considering State and local
taxes. By comparison--and my time is running out--by
comparison, China has a 25-percent rate, and the OECD countries
have a 23.5 percent average rate. When thinking about American
competitiveness, I think it is very important that we focus on
this issue.
And I will allow the chairman--the ranking member--to
proceed.
Senator Crapo [presiding]. All right. Thank you, Senator
Young.
Next on my list is Senator Whitehouse. Are you there,
Senator Whitehouse?
[No response.]
Senator Crapo. I will move on to Senator Sasse.
[No response.]
Senator Crapo. All right, rather than just go through the
list, are there any Senators--I do not see any Senators. Are
there any Senators who are with us?
Senator Cortez Masto just came up. All right, Senator
Cortez Masto, you may go.
Senator Cortez Masto. Thank you.
Secretary Yellen, it is great to see you. Thank you for all
of your good work. And thank you for the conversations this
morning. As I was listening to them--so let me ask a couple of
questions that you have not addressed.
This one is around the Financial Crimes Enforcement
Network. So there is work that has been done by bipartisan
Senators. I joined with Senators Cassidy, Moran, Thune, and
Warren. It is the Financial Crimes Enforcement Network
Improvement Act. It was included in the Anti-Money Laundering
Act. And what the bill does is, it gives them the authority to
work with Tribal governments in monitoring digital currency and
to investigate financial issues related to domestic terrorism.
My question to you is, how will the President's budget
request ensure that the Financial Crimes Enforcement Network
meets the requirements of the law? If you can address that,
that would be great.
Secretary Yellen. Well, I will probably have to get back to
you with details on that. There is a significant request in the
budget for FinCEN. Part of it is to build the beneficial
ownership database, which was authorized by the NDAA Act since
the beginning, but it needs funds in order to do that. But
FinCEN's work is very important, and I can get back to you with
details about the specific issue you asked about.
Senator Cortez Masto. Thank you, Madame Secretary. And
please include--and I will include this request as well--the
geographic targeting orders that require U.S. title insurance
companies to identify the actual person behind the shell
companies. I am very interested in that as well. So, please, if
you can follow up on that, that would be great.
And then let me just do one final question for you. Again,
like my colleagues, I want to thank the administration for
including extension of the refundable credits like the Child
Tax Credit and the Earned Income Tax Credit in this year's
budget proposal.
I am a supporter, along with my colleagues--we support
extensions of these. But as we continue to build toward
recovery, we need to be as inclusive as possible for all
families and children. And the 2017 tax cuts eliminated
longstanding access to the Child Tax Credit for over a million
immigrant children, despite the requirement to work and pay
taxes in order to qualify.
Because of this, working families in my home State lost out
on over $36.7 million invested per year they had previously
been eligible for. Would you and the Biden administration
support restoring eligibility of these children to qualify for
the CTC?
Secretary Yellen. The Biden administration is certainly
concerned about these children. I do not know that they have
taken a position on this particular issue, but again, I promise
to get back to you and would look forward to working with you
on this important matter.
Senator Cortez Masto. I appreciate it. It is an important
matter. And thank you again, Secretary Yellen, for joining us
this morning.
I yield the remainder of my time.
Senator Crapo. Thank you very much, Senator Cortez Masto. I
do not see the cameras on for any other Senators at this point.
Are there any other Senators who have made it back from the
vote?
[No response.]
Senator Crapo. All right. Well, not seeing any, Madam
Secretary, I want to ask a couple more questions while we are
waiting for Senator Wyden to return, or another Senator.
When we concluded our discussion earlier, you had just
mentioned the SHIELD concept in terms of assuring that nations
who are not willing to join in the global minimum tax agreement
are pressured into joining that agreement.
Could you describe a little more clearly how that is
intended to work?
Secretary Yellen. Yes. It is intended to counter foreign
company profit shifting by denying deductions to firms
operating in the United States when they make deductions that
reflect payments to their own affiliates, a parent or another
affiliate, if that affiliate is based in a tax haven that does
not have a global minimum tax.
So that is a way that foreign companies operating in the
United States make use of tax havens. And by denying those
deductions, it makes it impossible for these firms to shift
income derived from U.S. activities into tax haven countries.
In addition, given that a tax haven would be able to see
that its failure to adopt a global minimum tax is depriving
them--and this is a tool that is not only something that we are
proposing in the Biden budget, but it is also embodied in the
OECD agreement that is being worked out. It is intended--it is
called ``an under-tax payment rule.'' And a mechanism of this
sort is one that every country will have available to it to
deal with tax havens, countries that do adopt the global
minimum tax. And it should incent tax havens to want to adopt a
global minimum tax, because it is going to deprive them of the
benefits that they seek to gain by having yet lower tax rates.
So we think that the SHIELD proposal will more effectively
counter this incentive than the current system, the BEAT system
that is in place.
Senator Crapo. Thank you. I still have more questions and
concerns about it, but I see that a couple of my colleagues
have returned from the vote. And, Senator Sasse, you are next.
Senator Sasse. Thank you, Senator Crapo.
Secretary Yellen, thank you for being here. Sorry we are
popping in and out on you during this vote.
Secretary Yellen. That's okay.
Senator Sasse. I am glad to get a little time with you.
Before you were confirmed, I wrote to you about the strategic
perils of economic and broader interdependence with the Chinese
Communist Party. And now that you have been in office for, I
guess pushing 6 months, and have had a chance to read
intelligence products consistently since then, I would just be
curious as to an update on your current thinking about whether
some degree of financial and technological decoupling from the
CCP will be required over the next 4 years?
Secretary Yellen. So that is a really big question. You
know, we certainly recognize in the Biden administration that
China is our most serious competitor, and that it poses
challenges to our security and our democratic values.
We are looking at the full range of tools that we have to
push back, and to address practices that harm us, our national
security, and our broader economic interests. You know, it is
conceivable--certainly our process denies, through CFIUS,
China's ability to make investments in the United States that
would harm national security.
You know, I would worry somewhat about complete
technological decoupling, which our conflict with China could
result in, a growing decoupling of technologies between the
United States and China. I worry that if we are too broad in
our policies in terms of how we approach this, that we can lose
the benefits that come from having globally integrated
technology systems where advances in one country benefit
countries worldwide.
The globe has benefited substantially from spillovers of
technological development in one place to other places. I would
worry about a decoupled global system. And many of our allies
would be very reluctant, I think, to all but stop doing
business in China.
So you know, this is a difficult issue. It is one we are
concerned about, but protecting our national security and
economic security is paramount.
Senator Sasse. So let me pull on the word ``complete,''
about complete decoupling, because I agree with you that is not
where we are headed. Obviously agricultural and industrial
engagement is nearly inevitable. I live on the bread basket of
the world. On a per-acre basis, the Ogallala Aquifer in
Nebraska right now is probably the most productive farm and
ranch land anywhere in all of human history.
We need export markets. There are not enough folks to
consume all the protein. Nebraska is the largest cattle State
in the Union now, as well as in corn and beans. So obviously we
want foreign markets. But if you move up the complexity ladder
from agricultural and industrial goods to the technological
goods and services, obviously you are right. The supply chains
are going to remain integrated globally. But there are some
aspects of technologies that are uniquely dangerous, and huge
parts of the future of the world are going to be U.S./
democratic capitalist free nations that believe in open
navigation of the seaways, human rights, the rule of law, et
cetera. Or there is going to be more of a CCP, digital
authoritarian-led Internet in portions of the technological
world.
So, short of complete technological decoupling, which
surely you are right about, what are some mid-points that you
envision as plausible stopping points and scenarios over the
next 3 or 4 years?
Secretary Yellen. Well, I think national security has to be
a key concern. And we have to be assiduous in evaluating
economic policies that--for example, through monitoring of
individual data--can pose risks to our national security. And
so some technology in those areas.
I expect that we will have decoupling, because we have to
protect our national security.
Senator Sasse. There is--am I out of time?
Senator Crapo. Yes, your time is up, Senator. Sorry.
Senator Sasse. Gotcha. Thank you, Secretary Yellen. I will
follow up as well.
Thanks, Mike.
Senator Crapo. Thank you.
And I saw Senator Barrasso, but he stepped away from his
desk. Are you there, Senator Barrasso?
[No response.]
Senator Warren. I am here.
Senator Crapo. I see you, Senator Warren. Senator Warren,
you may go next.
Senator Warren. Thank you.
So welcome, Chair Yellen. It is good to see you--or
Secretary Yellen. It is good to see you here.
Last week, ProPublica published an investigation into some
of the wealthiest American tax returns showing that year after
year, multibillionaires paid basically no Federal income taxes.
And here is the worst part: it is possible that they did it all
legally.
That is because, year after year, lobbyists and members of
Congress have worked together to hollow out the tax code. So,
take Jeff Bezos. He is the second richest person in the world,
whose net worth is nearly $195 billion, but his salary is about
the same as the average public-school teacher in Massachusetts:
$80,000.
So, Secretary Yellen, I want to ask about who our tax code
is structured to benefit--Jeff Bezos, or our Massachusetts
public school teacher? The average family in America pays about
7.2 percent of their total wealth in taxes, and that includes
public school teachers. If the same rate applied to Jeff Bezos
last year, he would have paid $14 billion in taxes.
So, Secretary Yellen, if all we do is increase the Federal
income tax rate, is it ever possible for Mr. Bezos to pay the
same proportion of his wealth in taxes as the average public
school teacher?
Secretary Yellen. Well, President Biden is proposing
important ways to address this disparity----
Senator Warren. I understand that. But let's just start
with our current tax code. If we continue to focus on the
income tax, will Jeff Bezos ever pay a proportionate amount of
his wealth as the State of Massachusetts public school teacher?
Secretary Yellen. Well, if we raise the rate on capital
gains, and we eliminate step-up of basis, and regard death as a
realization event so that all of those capital gains are taxed
and not allowed to permanently--so if we tax capital gains and
work----
Senator Warren. Secretary Yellen, I do not want to
interrupt you, but my question was pretty simple. It was about
income taxes. I think what you are saying is, the only way we
are ever going to get a fair tax rate from Jeff Bezos is if we
tax something other than income. His income is only $80,000 a
year. And Jeff Bezos uses all the tricks he can to keep his
money in the form of what is today tax-free wealth.
So let me ask a different question. If billionaires like
Jeff Bezos have wages about like the average public school
teacher, how do they have the money to buy mansions and private
islands and super-yachts? Well, the answer is, they can borrow
against their wealth rather than realize the gains on stock
growth.
So, Secretary Yellen, do multimillionaires pay taxes when
they borrow against wealth to do things like buy super-yachts?
Secretary Yellen. Well, to the extent that they avoid
capital gains by selling assets to support their spending
needs, they avoid paying a capital gains tax. And even if they
did, the capital gains tax is lower than what your school
teacher in Massachusetts may pay. And so that seems like unfair
tax avoidance. And of course, anyone can borrow against assets,
but billionaires have lots to borrow against.
Senator Warren. Well, actually, let me ask you about that,
because I think you are going to the heart of the matter. Does
the public school teacher in Massachusetts have the same
options as Jeff Bezos, that is, the option to collect stock
instead of a salary, the option to pay no taxes, the option to
accumulate wealth tax-free, and to have plenty of cash flow to
pay her bills by engaging in borrowing?
Secretary Yellen. No. Your school teacher does not have
most of those options. And the Biden proposal would end many of
these options for very rich individuals, in a whole variety of
different ways. The carried interest loophole would be closed.
There would be higher capital gains taxes, and no step-up of
basis. All of that would----
Senator Warren. So, under our current law, the teacher is
going to pay her taxes year after year to help support her
community and to help support the Nation. And Jeff Bezos gets
to laugh at her for paying full freight while he keeps his
money, and even builds his personal wealth without paying a
penny more in taxes.
Our tax code basically lets billionaires like Bezos opt
out. It says, once you accumulate enough wealth, you do not
have to pay to help run this country anymore. Jeff Bezos is a
billionaire grifter, and so are the rest of these hugely
wealthy people who pay next to nothing in taxes.
So, Secretary Yellen, we have a choice. Do you think we
should give up trying to tax the ultra-rich like Jeff Bezos? Or
should we change our tax laws so billionaires also have to pay
to run the country?
Secretary Yellen. We have proposed to change the tax laws
to make them much fairer on all of these dimensions, and that
is central to the tax proposals President Biden has put into
this budget.
Senator Warren. I support the President's proposals. They
will go a long way to build revenue for everyone by making
taxes on millionaires a little fairer. But I want to point out
that the easiest, most obvious solution to this system is
instituting a wealth tax. A tax on people worth more than $50
million would provide at least $3 trillion in revenue. And that
is money for universal child care, for taking on the housing
crisis, for rebuilding our infrastructure.
This is about choices. We can fund universal child care, or
we can hand Jeff Bezos enough money to build a super-yacht----
Senator Crapo. Thank you, Senator----
Senator Warren. Or we can make the tax code work for public
school teachers, not Jeff Bezos.
Thank you, Mr. Chairman.
Senator Crapo. We need to move on. Thank you.
Senator Whitehouse, you are next.
Senator Whitehouse. Great. Thank you very much, Senator
Crapo. I appreciate it.
And, Secretary Yellen, we are reaching the end of a long
hearing for you, and I appreciate your patience and fortitude
with all of us. First, a word of congratulations. I think the
global minimum tax agreement is a really big deal----
Secretary Yellen. Thank you.
Senator Whitehouse [continuing]. And very significant, and
a really important stopper against a race to the bottom of
corporations competing with each other, and countries competing
with each other over tax gimmickry, not on innovation and good
management.
So, thank you for that. And anything you can do to push
that 15-percent number up, you have a cheering band of
enthusiasts in the Senate to urge you on.
Secretary Yellen. Thank you.
Senator Whitehouse. The second flag I wanted to put in
place was with respect to the negotiations that we are going to
be coming into on climate internationally. You have expressed
your support for putting a price on carbon emissions. A number
of, I think we are seven, Senators are filing an updated carbon
pricing bill in the Senate tomorrow.
I do not think that a carbon price is ``the'' solution, but
I think it is an irreplaceable part of the solution. And it is
the only way I can think of to offset the $600-billion subsidy
that the IMF has reported fossil fuel gets every single year
just in the United States of America.
So I hope you will stick to your guns to make sure that we
are on a safe trajectory to less than 1.5 degrees Celsius
global warming, and stick to your guns on pricing carbon to
make sure we get there.
Secretary Yellen. You know I am supportive of carbon
pricing. It is something I have long been in favor of. And
President Biden, I believe, is also supportive of using carbon
pricing.
He has proposed a clean energy standard that would achieve
100-percent carbon-free electricity production by 2035. That is
an important step he wants to take to cut emissions in line
with our nationally determined position.
Senator Whitehouse. That is another important part of the
solution. But if I may, I would like to go on to my question I
have for you.
Secretary Yellen. Yes, sir.
Senator Whitehouse. You have spoken about the problem that
has emerged with 501(c)3 and 501(c)4 organizations. The
chairman opened the hearing by talking about the importance of
taxpayer confidentiality and his expectation that an
investigation was underway. With respect to the 501(c)3s and
501(c)4s, we have seen political abuse. It is, in my view,
contrary to law. It has been influenced heavily by special
interests, and the result has been corrosive to democracy.
I have asked you to look into this, and I hope that, in the
same way that we conduct investigations of leaks of taxpayer
information, we can also expect investigation into what went
wrong in the 501(c) space. In particular, you mentioned that
there has been a referral to DOJ on the taxpayer
confidentiality breach.
Secretary Yellen. Yes.
Senator Whitehouse. I have been pushing for an explanation
as to why, for a decade, neither the IRS nor Treasury made a
referral to DOJ when 501(c)3 and 501(c)4 forms came in that
were patently inconsistent with other forms filed with election
agencies, both under oath, which would seem to predicate a
simple false statement investigation.
So again, back to this 501(c)3, 501(c)4 mischief, I really
hope that you will task some entity within Treasury to report
to you and to us on what the heck went wrong? And what produced
this miserable decade of 501(c)3 and 501(c)4 abuse?
Secretary Yellen. I understand the importance of this
issue, Senator Whitehouse. We really need to get that money out
of politics, and this is an important area. In learning about
this issue, I have found out how very complicated it has been.
And I know, for example, that the IRS has been prohibited from
issuing guidance in this area for a number of years.
I do believe that it deserves serious study, and I promise
to do that.
The Chairman. The time of the----
Senator Whitehouse. Yes, I understand my time is over. I
just wanted to add that I think we can solve that problem, and
I know we intend to.
The Chairman. And, Senator Whitehouse, Madam Secretary,
apropos of your comment that this is very complicated, Senator
Whitehouse has consistently been a voice for transparency and
accountability on dark money, and we very much appreciate all
his leadership.
We are getting close to the Secretary's stop time, but
Senator Hassan is here.
Senator Hassan. Well, thank you so much, Chair Wyden and
Ranking Member Crapo. And, Secretary Yellen, thank you so much
for a long morning, but a very fruitful one, and we appreciate
it very much.
I wanted to start to just follow up on a conversation you
had earlier this morning with Senator Young concerning the R&D
tax bill that he and I are co-sponsoring to strengthen R&D tax
incentives for startups and innovative American businesses.
In your confirmation hearing, we discussed the importance
of promoting domestic R&D, which is key for out-competing China
and creating jobs as the economy recovers from COVID-19.
Secretary Yellen, will you continue working with this
committee to strengthen R&D incentives in the tax code,
including by expanding the R&D credit for startups and small
businesses?
Secretary Yellen. Certainly. It is a high priority of
President Biden. It is a priority in the budget. There are some
areas that lack specificity, but we want to do more to promote
R&D. I am glad to work with you on this and to discuss the
specifics.
Senator Hassan. Well, thank you so much. I appreciate that,
and I look forward to it.
Another topic. Madam Secretary, in your confirmation
hearing, we also discussed the importance of Treasury programs
that combat the financing of terrorist and criminal
organizations. I was pleased to see the President's proposed
budget included a request for $196 million in funding for the
Office of Terrorism and Financial Intelligence, a $10-million
increase from last year's funding level.
Can you speak to how this increased funding will help
Treasury combat terrorists and organized crime financing?
Secretary Yellen. Yes. This is a very important office, and
it has seen a very big increase in its role and mission over
the last 5 or 6 years. Among other things, it manages more than
30 sanctions programs, and sanctions have proven a critical
national security tool.
I think imposing sanctions has advanced U.S. national
security and foreign policy interests in areas including
counterterrorism, protection of human rights, combating drug
trafficking, anticorruption, and nonproliferation. And the
request for additional funds is to support an increase in
staffing for OFAC and for IT infrastructure.
Senator Hassan. Well, thank you for that clarification. And
I am also glad to hear about the IT infrastructure piece,
because it is so critically important in Treasury, as well as
so many other agencies across government.
I also want to turn to the issue of unfair trade and supply
chains. I was encouraged to see that, as part of the
President's supply chain review, the administration recommended
creating a strike force led by the U.S. Trade Representative
that would address unfair trade practices that impact the
domestic supply chain.
In the bipartisan U.S. Innovation and Competition Act, I
pushed for a similar amendment that is now in there that would
strengthen investigations of major trading partners whose
unfair practices systemically affect U.S. supply chains and
workers.
Secretary Yellen, how is the Treasury supporting broader
efforts to combat unfair trade practices and strengthen supply
chain resiliency?
Secretary Yellen. Well, Senator, immediately upon taking
office, the President directed a whole-of-government effort to
shore up our supply chains, and addressing unfair trade
practices is a key component of that work.
We welcome fair competition from abroad, but in too many
circumstances, unfair foreign subsidies and trade practices
have adversely affected U.S. competitiveness and impacted
manufacturing unfairly.
So the administration is really implementing a
comprehensive strategy to push back on unfair competition that
erodes the resilience of our supply chains and industries. And
the strike force that you described will be led by USTR, and it
is one element of the strategy whose goal will be to identify
unfair trade practices that have eroded U.S. critical supply
chains. And they will recommend trade actions to address these
practices.
Senator Hassan. Thank you so much, Madame Secretary. Thank
you, Mr. Chair.
I will submit one more question for the record about
implementing the Employee Retention Tax Credit for businesses
that started up during the pandemic. I appreciate your time.
Thank you.
The Chairman. I very much appreciate my colleague's work on
that Employee Retention Tax Credit that was in the first
package. Thank you.
Senator Hassan. Thank you.
The Chairman. Senator Toomey is back.
Senator Toomey. Thank you very much, Mr. Chairman. Welcome
back, Secretary Yellen.
I have to say--and I think this will not come as a surprise
to you--I am just extremely disappointed by this entire process
that you and your colleagues have engaged in with the G7. This
idea that countries that are pursuing greater economic freedom,
and the prosperity that comes from it, that that constitutes a
race to the bottom, I think could not be a worse way to think
about this.
Expanding economic freedom, diminishing the burden
countries put on their businesses, their economies, their
opportunities for growth, that is not a race to the bottom that
we should try to prevent. That is a race we ought to be
winning. And I just completely disagree.
And by the way, I think everybody has to acknowledge that
there is an implicit confession in this whole effort, which is
that the Biden proposals with respect to tax reform make us
less competitive. And that is why we need these other countries
to inflict the same kind of damage on their economies that he
is suggesting we do to ours.
I think it is completely misguided, I have to say. Let me
get to one of the specifics. You know very well, and we all
remember that prior to the TCJA, U.S. multinationals had a
significant incentive to establish their headquarters in some
other country, almost any other country, at least from a tax
point of view, because we had such an onerous tax regime on the
income earned overseas, especially if you wanted to bring it
back home.
We addressed this head-on. We made significant changes to
deal with this. And I have not been able to identify a single
corporate inversion of a major American company since the
enactment of TCJA.
And so maybe I missed something. Secretary Yellen, are you
aware of a single corporate inversion of a significant large
American multinational post-2017 tax reform?
Secretary Yellen. Well, what we are concerned with is
shifting of profits to tax havens, where the United States
loses the ability to gain the tax revenue, and competition from
firms in other countries that make use of tax havens. More
broadly, we do have to raise tax revenue in order to be able to
finance important expenditures that make----
Senator Toomey. Madam Secretary, I hate to--I really hate
to rudely interrupt, but I have just so little time. And so, I
know you want to raise taxes, and the President wants to raise
taxes, but rather than getting into a general debate about
that, I do want to--I would like to exchange some data with
you. The data that I have looked at suggests that there has
been no shifting of American corporate earnings to lower-tax
jurisdictions.
When I asked if you are aware of an inversion that has
happened since 2017, you kind of shifted to a different
question, which is a concern about income shifting. I still am
not aware of a single corporate inversion that has happened
since we eliminated the incentive to invert. And yet, we have
in the Biden proposal something called ``the SHIELD,'' which is
an acronym for Stopping Harmful Inversions and Ending Low-Tax
Developments. I do not know why you have to do something to
stop inversions that are not occurring.
I want to say, we have a global minimum tax. We have GILTI.
And most of the rest of the world does not. But we have it low
enough that it is not a prohibitive problem. The administration
is now proposing doubling the rate to 21 percent. But earlier
you told Senator Crapo--I heard you earlier in this hearing,
and I thought I understood you to say that the administration's
proposed effective GILTI rate is 21 percent. But as you know,
the existing tax law disallows taking full credit for all of
the overseas taxes paid. And that increases the effective rate
from the statutory 10 to about 13\1/8\. If you raised that to
21, unless you allow full credits--which current statute does
not--the effective rate will be 26\1/4\.
So my question for you is, are you contemplating allowing
the full crediting of foreign taxes paid, rather than the
partial crediting that occurs under the current law?
Secretary Yellen. I will get back to you on that, but I
believe we have not changed that.
The Chairman. I thank my colleague from Pennsylvania. We
have two other Senators waiting in the queue. I believe Senator
Daines is first, then Senator Barrasso. But we are going to get
you both in, and we can do it before the sand is out of the
hourglass and the Secretary has to leave.
Senator Daines?
Senator Daines. Mr. Chairman, thank you. Thanks, Secretary
Yellen for being here.
Secretary Yellen, I sent you a letter yesterday. You
probably have not had a chance to read it yet, so I would like
to ask for unanimous consent to submit it for the record, Mr.
Chairman.
[Secretary Yellen and the chairman speak simultaneously.]
The Chairman. Madam Secretary, just so the record is clear,
without objection, it is so ordered.
[The letter appears in the appendix on p. 44.]
Senator Daines. It is on a topic of cybersecurity,
something I am hearing frequently from Montana business owners
and across our country who worry about the major upticks in
cyber-attacks and ransomware payments that we have seen
recently. The attack on Colonial Pipeline controlled nearly
half of the gasoline, jet fuel, diesel fuel along the East
Coast and should serve as a wake-up call for the country. And
of course, we saw the same with the attack on our food supply
chain as well, most likely Russian cyber-attacks.
The financial system facilitates commerce in every
industry, and an attack of a similar kind that we saw on
Treasury, or a major financial institution, could cripple the
financial system as well as our economy.
Secretary Yellen, at the most recent Financial Stability
Oversight Council meeting just last Friday, the 11th of June,
you outlined three key priorities: one, vulnerability in non-
bank financial intermediation; two, climate change; and three,
Treasury market resilience.
I am concerned that Treasury's focus on longer-term risks
associated with climate change is coming at the expense of the
major threat, the immediate threats we are seeing from cyber-
attacks and ransomware attacks that we are seeing nearly on a
daily basis.
My question: do you really believe that cybersecurity of
our critical financial infrastructure, even after the recent
surge in attacks, is still not a top-three priority for the
FSOC?
Secretary Yellen. It is a huge priority, Senator Daines. It
is a great threat to financial stability. Treasury has long
taken the lead in trying to pull together the financial sector
to exchange information and to raise preparedness. It has
groups, fondly known as FBIIC and FSSCC, that are organized to
address financial sector threats. It is one of the most
important focuses these days in supervision of banking
organizations. The FFIEC, which is the group of Federal bank
regulators, has a comprehensive program. It is in the----
Senator Daines. Secretary Yellen, thank you. I just--you
know, we spent, both of us, years in managing large
organizations. And again, this is a zero-sum game, and
priorities say this is most important. And I just would hope
that what is going on right now with the cyber-attacks, that
something that truly could bring down the entire finances of
the U.S. Government should rise to a top three issue. Because
everything cannot be the most important thing.
I am just concerned. Climate change is a longer-term issue.
We have some very acute challenges today that could literally
bring down the financial system of the U.S. Government and our
country.
So I have a couple of other questions. I want to go back to
the G7 and the recent agreement into a global minimum corporate
tax rate of 15 percent. I think a bigger test is going to come
at the G20 next month, which includes China, of course. It is
clear that China does not have the best record of living up to
its commitments, whether we are talking about accession in the
WTO or otherwise.
Secretary Yellen, will you commit to not agree to any deal
that includes special carve-outs for China or any other
country? And what steps would you take to ensure that if China
does agree to a deal, it is held accountable to fulfill its
commitments?
Secretary Yellen. We would not agree to any type of carve-
out that would meaningfully weaken a robust global minimum tax
regime, not for China and not for other countries. We want this
to work and not be filled with loopholes.
We continue to work to try to bring China into this
agreement. Other countries are doing the same. We will see
where we are when we get to Venice in a couple of weeks with
the G20 meetings. I am hopeful China will decide it is in their
interests to join this agreement, but I do pledge that this is
not an agreement that we will weaken.
Senator Daines. Thank you.
The Chairman. My colleague's time has expired.
We have Senator Barrasso next. Madam Secretary, we are
going to have Senator Barrasso take his 5 minutes. The floor is
waiting for me. We will have you out within 3 or 4 minutes of
your hard stop, and I will be back to wrap up.
Okay; Senator Barrasso?
Senator Barrasso. Thanks, Mr. Chairman. Thank you very
much, Madam Secretary. Thanks for testifying before the
committee.
Your budget request is for about an 11.3-percent increase
from fiscal year 2021, and the Department's budget includes
about a 10.4-percent increase in the IRS budget. This includes
$5.5 billion in the enforcement account to hire more compliance
staff.
In my experience, the overwhelming majority of Americans,
and people in Wyoming, are trying to pay the correct amount of
taxes that they owe. The tax code is complex, and dealing with
the IRS, I have heard from people, can be intimidating. It can
be confusing. It can be stressful, and it can be never-ending.
Thankfully for many, we have a Taxpayer Advocate Service. I
think it is a very important tool that the IRS has to help
taxpayers. The Taxpayer Advocate--I meet with them in Wyoming.
They do not have the resources or the authority to resolve
every problem that taxpayers encounter with the IRS. The issues
that they can help with are limited, but their assistance and
guidance can really be invaluable. I have heard that from folks
at home.
Given the focus on enforcement in the budget, can you
detail to me how the Treasury Department and the IRS are going
to enhance the visibility of the Taxpayer Advocate and ensure
that their resources are available to help people receive
answers to questions and provide guidance to so many Americans
who are just simply trying to correctly follow the law?
Secretary Yellen. Well, I agree the taxpayer service
generally is not what any of us should want it to be at the
IRS. And this is partly due to lack of resources. The decrease
over the last decade of about 20 percent in real terms of
resources, and more recently the pandemic, has put special
strains on the IRS.
But the funding that we are seeking for IRS in the budget--
you mentioned the importance of compliance, and I would
emphasize that. The customer service, broadly speaking, is also
important. And that would be an important thing that we would
want to see greatly improved.
Senator Barrasso. Well, thank you. I agree with you. I
think it would be very helpful to the taxpayers who are trying
to comply, trying to follow the law, trying to get it right,
and sometimes just need a little assistance, and the taxpayer
advocacy group does do that.
I want to move to the budget singling out the producers of
oil and gas products by disallowing them from using certain tax
provisions such as intangible drilling costs and percentage
depletion. That proposal will almost certainly raise gas prices
at the pump. It will affect working Americans, leading to a
violation of the President's promise. He said he was not going
to raise taxes on anyone earning less than $400,000. So at the
same time, in some of the infrastructure spending discussions
with Congress, the administration has rejected even indexing
the gas tax. And the President told us that, when we were in
the Oval Office meeting with him. He said, no indexing the gas
tax or raising the gas tax, which would certainly raise gas
prices at the pump that would affect working Americans and
violate the President's tax pledge.
But what you are proposing in the budget is certainly going
to raise the cost at the pump. So it seems to me that the two
positions are inconsistent. The President is saying he does not
want gas prices to go up by adding taxes, but he is willing to
let gas prices go up by taking away some of the deductions that
exist right now for those people who produce America's energy.
Secretary Yellen. The President is very concerned, as most
countries around the world are, about climate change and sees
no policy justification for subsidizing fossil fuels. He really
believes that inefficient subsidies for this industry can
reduce more efficient investment elsewhere in the economy, and
he wants to see the United States become a global leader in
clean energy and to see an increase in really good jobs and a
rapidly growing sector.
So you know, his proposal includes subsidies for green
energy production and will create jobs in a new and expanding
sector. With respect to price increases, I have looked at some
recent studies on what the impact would be of phasing out the
fossil fuel subsidies. And generally, although there might be
some negative impacts, the impacts are generally found to be
small.
Senator Barrasso. Well, I appreciate your comments. It
looks like time has expired for me. I do not see the chairman
back yet, but I would point out that--and he will be back to
adjourn. If he shows up, I will stop immediately. We are facing
a $27-trillion debt. The budget requests a billion dollars for
the international Climate Change Fund. That is an increase of
almost 786 percent over funding from last year. It is happening
at a time when the American people are facing significant
challenges at home. Communities across our Nation are emerging
from the pandemic. Dealing with the soaring debt, declining
infrastructure--whether it is the Green New Deal or the U.N.
Climate Change Fund, the American people cannot afford these
kinds of policies.
Why should taxpayers support borrowing more money from
countries like China in order to spend it overseas to
international bureaucrats in the name of climate change? I do
not get that at all.
Secretary Yellen. Well, climate change is a global threat.
And while we need to make meaningful reductions of our own, our
efforts will not be successful in addressing the climate threat
unless we see similar efforts around the world.
And the United States committed, as part of its Paris
Agreement, to help provide funds for developing countries, for
low-income countries, to reduce their climate emissions and to
address the impacts of climate change. And we have upped our
contributions to the Green Climate Fund in order to make good
on that commitment, which is a very important one.
Senator Barrasso. Well, thank you very much, Madam
Secretary.
I see that the chairman has not yet returned from the vote.
I know you have a hard stop at 45 minutes after the hour. It is
now 44 minutes after the hour. I do not know if I am entitled
to adjourn the meeting, but if he does not come in within 1
minute, I would be happy to adjourn the meeting, because I know
you have places to be and commitments to meet.
Secretary Yellen. Thanks so much. It is much appreciated.
Thank you, Senator.
Senator Barrasso. Thank you, Madam Secretary.
[Pause.]
[Whereupon, at 12:50 p.m., the hearing was adjourned.]
A P P E N D I X
Additional Material Submitted for the Record
----------
Prepared Statement of Hon. Mike Crapo,
a U.S. Senator From Idaho
Thank you, Mr. Chairman, and thank you, Secretary Yellen, for
joining us today.
Today, we will discuss the President's Fiscal Year 2022 budget and
proposals for Treasury and its agencies. The administration's proposals
to increase spending, hit Americans with higher taxes, and strangle the
economy with regulations and red tape is not a path to prosperity.
The President's budget envisions deficits of $14.5 trillion over
the next decade, with debt exploding to more than $39 trillion, or 117
percent of GDP, by the end of fiscal year 2031. Such high debt is
risky, especially in the current high inflation environment.
Consumer price inflation from April to May was 7.7 percent at an
annualized rate, and inflation for durable goods was 36 percent at an
annualized rate. If inflation expectations become unanchored, which no
one can credibly claim cannot happen, the resulting increased interest
rates can turn Federal debt-service costs into budget busters.
Treasury's top-line budget request of $22 billion is an 11.3-
percent increase over fiscal year 2021, and Treasury asks for outsized
increases across the board in its various agencies and programs. I look
forward to hearing more about Treasury's budget proposals and general
explanations of tax proposals in the so-called Green Book.
Those proposals are heavy on tax hikes, introduce new tax ideas of
questionable merit, and seek to inject more social policy goals into
the income tax system. They also call for a mandatory financial
information reporting regime. Under this regime, financial institutions
would become agents of the IRS, tasked with monitoring and reporting
flows into and out of personal and business accounts above a mere $600
threshold.
The proposal, which is sold under the guise of trying to close the
tax gap, is very concerning and pulls almost all taxpayers into a
surveillance dragnet. The era of big data should not be viewed as an
opportunity for Big Brother. I do not agree with some high-tax
advocates that private tax information should be a public good, with
governments and the public knowing every private aspect of individual
and business income and assets.
An overwhelming majority of taxpayers in this country are law-
abiding and pay the taxes they owe. My concerns are amplified by the
egregious apparent leak of private taxpayer information out of the IRS,
with data ending up at ProPublica, which reported sensationalized and
misleading claims about taxes paid by named individuals. While
ProPublica focused on wealthy people, an IRS leak may involve personal
information on American taxpayers across the income spectrum.
Secretary Yellen, it would be helpful for you to share what is
known at Treasury and the IRS about the apparent massive data breach. I
also look forward to hearing about political agreements struck by the
administration and the G7. A recent G7 communique reflects a shift in
the U.S. position in OECD negotiations that appears driven by the
administration's plans to significantly increase taxes on U.S.
businesses.
The United States already has a robust global minimum tax, GILTI,
and no other country has moved to enact one since. If Treasury
envisions hiking taxes on U.S. businesses domestically, including
onerous changes to GILTI, before other countries adhere to a global
minimum tax, the U.S. could suffer from a first-mover disadvantage.
Higher U.S. tax rates instituted before other countries move poses
the risk of others not following through and a new wave of inversions
and foreign acquisitions arising because U.S. business are unable to
compete. Congress needs to understand the analysis behind your
proposals, and whether any agreement would allow foreign targeting of
U.S. companies or special carve-outs for particular jurisdictions,
including China.
The G7 understandings also advocate for new mandatory financial
disclosures and funding for multilateral financial institutions,
including a new $650-billion general allocation at the IMF of special
drawing rights. I am interested to hear about the outreach you have
done with Congressional Republicans on those funding increases.
Additionally, I again ask that Treasury work to improve its
responsiveness to this Committee.
Secretary Yellen, I look forward to learning more from our
discussions today.
Thank you, Mr. Chairman.
______
Submitted by Hon. Steve Daines,
a U.S. Senator From Montana
United States Senate
washington, dc 20510-2606
June 15, 2021
The Honorable Janet Yellen
Secretary
U.S. Department of the Treasury
1500 Pennsylvania Avenue, NW
Washington, DC 20220
Dear Secretary Yellen:
In light of the recent wave of cyber-attacks impacting both private
companies and government entities, I write today requesting an update
on Treasury's cyber infrastructure and general security in the face of
ongoing threats. This is a particularly pressing issue, and I am
concerned that it is not receiving the level of attention it deserves.
In recent months, we have seen a number of troubling, high-profile
cyber- and ransomware attacks targeting U.S. companies. Last month, a
ransomware attack targeting Colonial Pipeline Co. forced the company to
halt operations, resulting in fuel shortages across the southeastern
United States. Earlier this month, a ransomware attack against JBS USA
Holdings, Inc. halted operations at some of the largest meatpacking
plants in the United States. On June 1st, Scripps Health announced
that, due to a May ransomware attack, hackers had stolen personal data
from nearly 150,000 individuals. On June 11th, McDonald's Corp. told
employees that hackers had successfully stolen company data, including
employee information, from its systems in the United States, South
Korea, and Taiwan. Hackers have also recently targeted local entities
like ferry services in Massachusetts and water treatment plants in
Florida, suggesting that multinational corporations and national
governments are not the only entities subject to the threat of cyber-
and ransomware attacks. Unfortunately, the above instances of
successful cyber- and ransomware attacks undoubtedly represent a small
fraction of total attempts to violate the cybersecurity of U.S.
corporations, government agencies, and other entities.
In December of last year, it was revealed that the Treasury Department
was among the agencies impacted by the SolarWinds hack, one of the
worst data breaches in the history of the United States. It is clear
that cybercriminals, including those responsible for the SolarWinds
hack, have continued unabated and that further action is needed to
bolster Treasury's cybersecurity. This is particularly true in the wake
of the unauthorized disclosure of confidential taxpayer data published
by ProPublica. Luckily, the recent wave of cyber- and ransomware
attacks does not appear to have targeted U.S. banks, stock market
exchanges, mutual and pension funds, Federal Government agencies, or
other elements critical to the operations of the U.S. financial system.
However, that does not mean that U.S. financial infrastructure is
immune to attack. In fact, in recent years we have seen attacks
successfully target foreign central banks. In 2016, hackers installed
malware on the Bangladesh Central Bank's computer system resulting in
the theft of approximately $81 million.
The U.S. financial system is a critical component of U.S.
infrastructure. The industry holds trillions in assets and massive
amounts of American citizens' personal data. As criminals grow more
sophisticated and increasingly target ransomware attacks against U.S.
critical infrastructure, the Federal Government must ensure that its
defensive capabilities match the changing threat environment.
With that in mind, I have several questions for which I am hopeful you
can provide clarification:
How confident is Treasury that U.S. financial infrastructure is
capable of preventing cyber- and ransomware attacks from increasingly
sophisticated criminals?
What steps has Treasury recently taken to secure the
cybersecurity of U.S. financial infrastructure?
Has Treasury determined the full extent of the SolarWinds hack?
If not, could additional sanctions be considered if additional
perpetrators are identified?
The U.S. financial system relies in large part upon the security of
confidential data housed at the Treasury Department. As criminals grow
more sophisticated and increasingly target ransomware attacks against
U.S. critical infrastructure, the Federal Government must ensure that
its defensive capabilities match the changing threat environment. Thank
you for your work to protect the integrity of U.S. financial
infrastructure, and I look forward to receiving your answers to the
above questions.
Sincerely,
Steve Daines
United States Senator
______
Prepared Statement of Hon. Ron Wyden,
a U.S. Senator From Oregon
This morning the Finance Committee welcomes Treasury Secretary
Janet Yellen to discuss the President's 2022 budget proposal.
There's a lot for us to talk about this morning, and time is tight.
I'm going to begin with tax. On Tuesday of last week, the American
people woke up to what appeared to be the largest unauthorized
disclosure of taxpayer data in history. As I said at the time, this
committee takes the confidentiality of taxpayer data very seriously,
and I fully expect that an appropriate investigation is underway. I
also want to thank the Treasury officials who held a briefing with
staff this week on this subject.
This committee takes confidentiality seriously. I also take the
issue of economic fairness extremely seriously. The information in the
ProPublica report depicts a tax system in which the wealthiest people
in the country pay rock-bottom tax rates, sometimes zero. What's worse,
it's all perfectly legal. The details may not have been a surprise to
those who follow the tax debate closely, but they're still a gut punch
to read on the page.
Days later, another new report described another tax rip-off; in
this case, from the people who brought you the carried-interest
loophole. It's carried interest on steroids. Wealthy investment
managers and their lawyers schemed to turn even more of their wage
income into tax-preferred capital gains using legal documents that
essentially said ``presto change-o'' in accounting jargon. Even after
whistleblowers came forward, the IRS enforcement division found itself
overmatched and outgunned, the result of years of Republican budget
cuts that hobbled its capacity to crack down on corporate cheating. On
its way out the door in January, the Trump administration gutted an
effort to put even minor limitations on behavior like this.
Americans also learned recently that mega-corporations have never
contributed less to Federal revenues in modern history than they do
right now. According to the Congressional Budget Office, corporate
income tax revenue after the Trump tax law is down nearly 40 percent
from the 21st-century average. Many of the largest corporations pay
nothing--zero. At the same time, stock buybacks that enrich wealthy
investors are through the roof. It was reported that from January
through May of this year, mega-corporations authorized half a trillion
in stock buybacks, the most in 22 years.
I'd wager there's going to be a lot said during this hearing about
people's trust in our tax system. What's most damaging to people's
trust in the tax system, in my view, is its rotten, cynical unfairness
to Americans who work for a living. The tax code on the books today
says that a dollar gained on the trading floor matters more than a
dollar earned on the factory floor. It's not hard to grasp why middle-
class, wage-earning taxpayers object to that idea. They're paying taxes
out of every paycheck to sustain a country whose prosperity is
swallowed up mostly by wealthy individuals who avoid paying a fair
share themselves.
The President and Democrats in Congress have an extensive agenda
designed to create jobs, make it easier to raise a family, and help
every American get ahead. To fund that agenda, the Congress must ensure
that corporations and the wealthy--not just people who work for a
living--have skin in the game.
A few specifics. Senator Brown, Senator Warner, and I recently
debuted a plan that would eliminate the Trump-era deduction for
shipping manufacturing jobs overseas and ensure multinational
corporations pay a fair share.
I'll have a proposal dealing with a core unfairness of the tax
code, the special rules that allow the wealthiest individuals to pay
little or nothing at all. Democrats are also working on proposals to
close the tax gap, because protecting confidential taxpayer data and
cracking down on tax cheats are not mutually exclusive--Congress
absolutely must do both. This is a fairness-based approach to revenue
that the American people support, and I'm looking forward to working
with Secretary Yellen on these issues in the weeks and months ahead.
A few other issues to discuss before I wrap up. I want to thank
Secretary Yellen for leading the battle with respect to a minimum tax
for mega-corporations around the world. There is a new day ahead--no
more race to the bottom on taxes for the biggest, most powerful
corporations. Key to moving forward is putting a quick stop to
discriminatory digital service taxes, which unfairly target American
firms. I'll have a question for Secretary Yellen on that.
In the Rescue Plan passed in March, the Congress created a major,
new economic lifeline for rural communities and tribes. This program is
all about making sure people in these communities have resources for
schools, roads, and health care. Implementation is underway, and I want
to continue working with the Treasury Department and Senator Crapo to
get the job done.
And lastly, the Treasury and IRS are just weeks away from sending
the first Advance Child Tax Credit payments out to American families.
It's taken a lot of hard work to get this program up and running. These
payments have the potential to cut child poverty in half if everybody
does their part to reach vulnerable families. The committee will be
talking about how to ensure the program achieves that goal.
______
Prepared Statement of Hon. Janet L. Yellen, Secretary,
Department of the Treasury
Chairman Wyden, Ranking Member Crapo, it's a pleasure to be with
you.
When I took office back in January, the first--and most urgent--
problem confronting our economy was obviously the pandemic: helping
people make it to the other side of the crisis and ensuring they were
met there by a robust recovery. Thanks to this Congress--and its
passage of the American Rescue Plan--I believe we are well on our way
towards that goal.
But we have to be clear-eyed about something: the pandemic was not
our only economic problem. Long before a single American was infected
with COVID-19, millions of people in this country were running up
against a series of long-term, structural economic challenges that
undermined their ability to make a good living.
For instance, wage inequality. In healthy economies, we see wage
growth across the distribution--for workers making the highest incomes
and those making the lowest. But over the past several decades, that
has not been the case in our economy. While the highest earners have
seen their income grow, families at the bottom end of the distribution
have seen their pay stagnate. Gender and racial pay gaps also persist.
At the same time, labor force participation has been dropping. Even
before the pandemic, the share of American women in the workforce
lagged far behind many other wealthy nations.
These trends have coincided with a reordering of the economic map.
There have always been richer areas of the country and poorer areas,
but for most of the 20th century, the latter were catching up with the
former. The country was rising together. Today, this is less true.
There's a divergence among local economies, some areas that are growing
more prosperous and others that are stagnating.
Climate change adds a fresh layer of crisis on top of this--the
average cost of
climate-related disasters is expected to double every 5 years.
And of course, there is racial inequality: when I started studying
economics in 1963, the average black family's wealth was about 15% of
the average white family. Maybe that isn't surprising: Jim Crow laws
were still in effect. But what is surprising is that it's almost 60
years later, and that ratio has barely changed.
These destructive forces--the divergence in wages and of geographic
regions, the decline in labor force participation, the rise of climate
change, and the persistence of racial inequality--all these are
combining to block tens of millions of Americans from the prosperous
parts of our economy.
There are clear reasons why these destructive forces have festered.
The private sector does not make enough of the types of investments
needed to reverse them--training programs that can lead to higher
wages; childcare and paid leave that would help people rejoin the
workforce; or infrastructure that would lower carbon emissions and spur
growth in neglected communities. For 40 years we haven't done that. Not
as much as we should have.
We need to remedy this lack of investment. We need ambitious fiscal
policy to start unwinding these trends, and if there is a short summary
of the President's budget, that's it.
The budget, which includes both the American Jobs and Families
Plans, will repair the fractured foundations of our economy. It does so
through a series of smart policies, including child care and paid leave
so more parents can join the workforce; a mass modernization--and
greening--of America's infrastructure to spur commerce and reduce
emissions; an investment to make housing and education available to
all. The list goes on.
We need to make these investments at some point, and now is
fiscally the most strategic time to make them. We expect the cost of
Federal debt payments will remain well below historical levels through
the coming decade. We have a window to invest in ourselves.
In fact, this budget is both fiscally strategic and fiscally
responsible. It pays for itself through a long overdue reformation of
the tax code that will make it fairer, without touching the vast
majority of Americans, those who earn less than $400,000 a year.
There are some tough trade-offs in fiscal policy, but this--a
fairer tax code for a structurally sound economy--is not one of them.
With that, I am happy to take your questions.
______
Questions Submitted for the Record to Hon. Janet L. Yellen
Questions Submitted by Hon. Ron Wyden
Question. Under section 1332 of the Affordable Care Act, States can
apply for State Innovation Waivers giving them greater flexibility to
meet the needs of their residents while meeting key insurance guard
rails. A total of 15 States have received a 1332 waiver, and 14 States
receive pass-through funding under 1332 to finance reinsurance programs
to ensure affordable health insurance premiums in their States.
On March 11, 2021, the American Rescue Plan was enacted, giving
millions of Americans access to affordable health insurance through the
expanded Premium Tax Credit. To facilitate access to affordable health
insurance and the expanded Premium Tax Credits, the Biden-Harris
administration created a special enrollment period from February 15th
through August 15, 2021. As of May 31st, the Centers for Medicare and
Medicaid Services (CMS) reports that 13,000 Oregonians and more than
1.2 million people nationally have signed up for health insurance
through HealthCare.gov. The American Rescue Plan is providing much-
needed relief to millions.
States, particularly 1332 waiver States, are integral partners in
expanding health insurance coverage. In March, Oregon's State insurance
commissioner along with 13 other States wrote a letter requesting that
CMS and Treasury recalculate final pass-through funding for their
State-based reinsurance programs taking into account the changes in law
from the American Rescue Plan Act. In April, CMS notified States that
it would do so, but did not provide any guidance around when that
calculation would be complete noting in a FAQ the Department planned to
recalculate pass-through funding amounts. Specifically, the guidance
provided to States said that CMS would inform States of the adjusted
pass-through funding ``later this year.''
Can you provide a more specific timeline by which States can expect
to receive their adjusted final pass-through funding levels?
Answer. CMS and Treasury (the Departments) are working to swiftly
calculate updated section 1332 pass-through funding levels that reflect
the American Rescue Plan's (ARP) expansions of financial assistance to
individuals and families purchasing coverage through the health
insurance marketplace. The American Rescue Plan was a historic
legislative accomplishment that included the biggest improvement in
health care affordability since the Affordable Care Act (ACA) was
passed. Because of this unique and historic legislative change, the
Departments must use a different approach than what is typically used
to calculate pass through annually under prior law. We do not have a
more specific timeline at this time, but look forward to engaging
further with Congress and states when we have updates to share.
Question. Can you tell me how CMS and the Treasury Department
coordinate to calculate pass-through funding amounts for 1332 States
when there are changes in law?
Answer. CMS and Treasury work closely to jointly administer the
section 1332 waiver program. To date, the Departments leverage
Treasury's methodology for modeling health insurance coverage and
premium tax credits (PTC) at the State level, which is used for
evaluating section 1332 waiver applications and calculating pass-
through payments for States with approved section 1332 waivers. This
methodology was developed by Treasury's Office of Tax Analysis (OTA) in
collaboration with the Office of the Actuary, Centers for Medicare and
Medicaid Services (OACT/CMS). When there are changes in State or
Federal law that are expected to impact the savings in ACA financial
assistance yielded by a State's section 1332 waiver, the Departments
work to identify how those changes in law are expected to impact the
Federal savings due to the waiver and then estimate those impacts on
pass-through funding.
Question. From your perspective, what can Congress do to ensure
that there is the appropriation coordination between CMS and the
Department of the Treasury to provide timely and responsive updates to
1332 waiver States?
Answer. Along with CMS, Treasury looks forward to working with
Congress, and we look forward to continuing to work closely with States
with approved section 1332 waivers to address and account for any
changes in Federal law as they pertain to the section 1332 waiver
program. We understand that section 1332 pass-through funding,
including the updated amount attributable to the ARP, is crucial to
help States run their waiver program, and we appreciate the need for
timely updates. We will continue to work to expediently account for the
groundbreaking reforms ushered in by the ARP to help make health
insurance more accessible for American individuals and families.
Questions Submitted by Hon. John Barrasso
Question. In its fiscal year 2022 revenue proposal, the
administration proposes repealing several tax provisions utilized by
the fossil fuel industry. In some instances, such as with percentage
depletion, these provisions are repealed only for fossil fuel producers
and royalty owners, while allowing their continued use by other
industries. Clearly the proposed repeal is not for policy reasons, but
simply because the fossil fuel industry utilizes these provisions.
During our exchange at the hearing on June 16th, you referred to
these tax provisions as ``subsidies.'' The intangible drilling costs
tax deduction simply allows fossil fuel producers to immediately deduct
ordinary businesses expenses such as wages paid to their employees.
This is similar to the treatment of other ordinary necessary business
expenses such as capital investments and research and development
costs, which can also be deducted immediately.
In your view, are all tax deductions for ordinary business expenses
``subsidies'' to those industries that utilize those deductions?
If no, please provide a list of all tax deductions you would not
classify or refer to as a ``subsidy.''
Answer. In general, costs that benefit future periods must be
capitalized and recovered over such periods for income tax purposes,
rather than being expensed in the period the costs are incurred. In
addition, the uniform capitalization rules require certain direct and
indirect costs allocable to property to be included in inventory or
capitalized as part of the basis of such property. In general, the
uniform capitalization rules apply to real and tangible personal
property produced by the taxpayer or acquired for resale.
Special rules apply to intangible drilling and development costs
(IDCs). IDCs include all expenditures made by an operator for wages,
fuel, repairs, hauling, supplies, etc., incident to and necessary for
the drilling of wells and the preparation of wells for the production
of oil and gas. Under the special rules applicable to IDCs, an operator
(i.e., a person who holds a working or operating interest in any tract
or parcel of land either as a fee owner or under a lease or any other
form of contract granting working or operating rights) who pays or
incurs IDCs in the development of an oil or gas property located in the
United States may elect either to expense or capitalize those costs. If
a taxpayer elects to expense IDCs, the amount of the IDCs is deductible
as an expense in the taxable year the cost is paid or incurred. In the
case of an integrated oil company (i.e., a company that engages, either
directly or through a related enterprise, in substantial retailing or
refining activities) that has elected to expense IDCs, 30 percent of
the IDCs on productive wells must be capitalized and amortized over a
60-month period.
The expensing of IDCs, like other oil and gas preferences the
administration proposes to repeal, distorts markets by encouraging more
investment in the oil and natural gas industry than would occur under a
neutral system. This market distortion is inconsistent with the
administration's policy of supporting a clean energy economy and
reducing carbon emissions. Moreover, the subsidy for oil and natural
gas must ultimately be financed with taxes that cause other economic
distortions, e.g., underinvestment in other, potentially more
productive, areas of the economy. Capitalization of IDCs would place
the oil and gas industry on a cost recovery system similar to that of
other industries and reduce economic distortions.
Question. The administration's fiscal year 2022 revenue proposal
includes significant modifications to the taxation of family businesses
at the time of death. Currently, when an heir inherits an asset, their
tax basis in the asset is ``stepped up'' to an amount equal to the fair
market value of the asset atthe time of the decedent's death. If an
heir subsequently sells that asset, they only owe capital gains tax on
the gain during their period of ownership.
This policy ensures heirs do not pay taxes on what might simply be
inflation, and ensures they are not forced to sell the family ranch or
businesses just to pay a tax on an unrealized gain. The
administration's proposal would remove this longstanding policy and
force an heir to recognize gains in the asset and pay taxes on it, even
if there is no sale.
Multiple recent studies have demonstrated the harmful effects such
a policy would have on small ranches and businesses. The Agricultural
and Food Policy Center released a study on June 15 that analyzed the
elimination of step-up basis. The study revealed 92 of the 94
representative farms would be impacted, with additional tax liabilities
averaging $726,104 per farm. In April, Ernst and Young released a
similar study commissioned by the Family Business Estate Tax Coalition
that found a repeal of stepped-up basis would result in the loss of
80,000 jobs per year for the first 10 years, followed by the loss of
100,000 jobs each year afterwards.
Given the harmful impacts resulting from the administration's
proposal regarding stepped-up basis found by these studies, has the
Treasury Department modeled the impact this policy would have on small
businesses and family farms and ranches?
If so, please provide me with the results of Treasury's modeling.
Answer. To be clear, the administration's proposals do not make
changes to the existing estate tax rules. The capital gains proposal
would impose income tax on unrealized appreciation in assets
transferred by gift or at death, but would exempt the first $2 million
in capital gains for a married couple, in addition to up to $500,000 of
gain in their residence(s). To the extent income tax is imposed at
death under the capital gain proposal, an heir would take assets with a
fair market value (usually stepped-up) basis and prospectively would
only be liable for gain(s) on appreciation accruing only during the
heir's period of ownership of the asset(s). In addition, the proposal
provides special rules in recognition of the critical role that family
businesses (including farming and ranching businesses) play in our
communities and our economy. In the case of an interest in a family-
owned and operated business, any tax liability on unrealized
appreciation (after the aforementioned exemption of up to $2 million)
would not be due until the interest is sold or for as long as the
business remains family-owned and -operated.
Question. You recently attended the G7 finance ministers meeting in
London. The June 5th communique resulting from this meeting expressed
support for mandatory climate financial disclosures by private
companies and financial institutions.
Prior to offering an endorsement from the administration for
mandating disclosures, was there any outreach to Congress to see if
there is bipartisan support for mandatory climate and ESG disclosures
of companies in the private sector?
If so, can you describe that outreach?
If not, can you explain the reasoning for not engaging with
Congress on this issue prior to the release of the communique?
Answer. Domestic and international investors are seeking more
consistent, comparable, and reliable information on climate-related
risks and opportunities. The commitment among G7 members is to support
mandatory disclosure of climate-
related financial information in a manner that is in line with domestic
regulatory frameworks, which would include statutory frameworks in the
United States and other G7 jurisdictions.
In line with its mandate and regular procedures, the SEC recently
sought public input on climate-related financial disclosures as well as
the costs and benefits of different regulatory approaches related to
climate disclosure. The SEC will continue to work through the domestic
regulatory process to make sure it is meeting the needs of U.S.
investors and those who want to invest in our capital markets. We have
regularly engaged with Congress on climate change and look forward to
continue doing so.
Questions Submitted by Hon. Maria Cantwell
Question. I would like to follow up on your responses to my
questions following your confirmation hearing earlier this year about
climate change.
As you're well aware, climate change poses the greatest long-term
threat to our society, as well as more immediate threats from extreme
weather events such as the severe drought building across the west, and
increasing wildfire risks as we head into summer and the hurricane
season. In response to my questions for the record following your
nomination hearing earlier this year, you said, quote: ``We cannot
solve the climate crisis without effective carbon pricing;'' and, ``We
are all committed to doing everything we can to solve this crisis.''
I was reassured by your response and commitment to take action
within the administration to address climate change, but now I want to
talk about what steps you are taking to live up to that promise.
Since those QFRs, you announced the creation of a new climate hub
within the Treasury Department to bring the full force of the Treasury
Department to leverage finance and financial risk mitigation to
confront the threat of climate change.
You also stated that, ``Climate change presents new challenges and
opportunities for the U.S. economy,'' while also restating your prior
position that climate change requires an economy-wide investment by
industry and government along with strong global cooperation because
climate is, by its very nature, a global challenge.
I believe you're correct that addressing climate change presents
both a challenge and opportunity for the U.S. as the global market for
clean energy products will be a $23-trillion market, and that's just
through 2030 in 21 developing nations.
The innovation needed to develop these clean energy technologies by
the private sector is where the U.S. can lead by developing and
manufacturing clean energy technology we could export to the world.
To build this market, we need to provide policy certainty.
The one policy that you have previously supported, along with a
wide variety of groups ranging from the Business Roundtable, the
Chamber of Commerce, American Petroleum Institute, to Fortune 500
companies, 27 Nobel Laureate economists, and all four Federal Reserve
Chairs, is a price on carbon.
You previously stated that we need carbon pricing in order to
address the climate crisis, but we also need policies that protect the
most vulnerable families. I believe that enacting an economy-wide price
on carbon, paired with a dividend that returns the majority of revenue
back to individuals, can achieve both of these objectives cost-
effectively with very little government intervention.
Do you still agree that an economy-wide price on carbon, imposed
upstream at the mine or wellhead and subject to a cap on total
emissions is the most efficient way to reduce emissions by unleashing
the full potential of the markets to find the lowest cost solutions?
Do you agree with previous analysis from the Treasury Department's
Office of Tax Analysis that found a carbon cap and dividend policy
would protect the most vulnerable families because of the progressive
nature of a dividend policy?
You stated in April of this year in association with the
announcement of the Climate Hub within the Treasury that ``Climate
change requires economy-wide investments by industry and government.''
Do you believe that an economy-wide price on carbon would spur the
level of private sector investment that is needed to reduce emissions?
Do you believe that by auctioning off carbon permits and using a
portion of that revenue could provide the necessary Federal funding to
invest in the clean energy transition and ensure no communities are
left behind?
Answer. This administration has set ambitious climate goals, as
articulated in our Nationally Determined Contribution, and laid out a
robust ``whole-of-government'' approach to achieving those goals.
The administration's climate plan ensures that all Americans will
benefit from a cleaner economy and will create a carbon pollution-free
power sector by 2035 and a net zero emissions economy by no later than
2050. Redistributing the proceeds of a carbon tax or auctioned permits
would be one way to enable this. We look forward to working with
Congress to finalize the specific actions the country will take to
achieve our ambitious decarbonization goals.
There are multiple paths to reach these goals, and the U.S.
Federal, State, local, and tribal governments have many tools available
to work with civil society and the private sector to mobilize
investment to meet these goals while supporting a strong economy. The
administration's plan will provide good-paying jobs deploying carbon
pollution-free electricity generating resources, transmission, and
energy storage and leveraging the carbon pollution-free energy
potential of power plants retrofitted with carbon capture and existing
nuclear, while ensuring those facilities meet robust and rigorous
standards for worker, public, and environmental safety, as well as
environmental justice.
Question. In February of this year, during a meeting of the G7, you
stated that U.S. is prepared to take the lead in the global fight
against climate change.
What steps have you taken to follow up on that commitment?
Answer. This administration is committed to a whole-of-government
effort to mobilize the resources necessary for tackling climate change.
The President announced that the United States intends to double, by
2024, our annual public climate finance for developing countries
compared to what the United States was providing during the second half
of the Obama-Biden administration. The United States released America's
first-ever International Climate Finance Plan. Recognizing that it's
not just about how much finance we provide, but how we invest it, the
Plan aims to ensure that we use each public dollar as strategically as
possible to maximize impact on the ground and leverage the much larger
sums of private capital that will be needed.
At Treasury, we have created a Climate Hub to coordinate and
elevate the Department's efforts on climate change, from domestic
finance, to economic policy, to our international affairs teams.
Question. Would passage of a carbon cap and dividend program help
the U.S. regain its leadership position globally while also
demonstrating an efficient policy option other nations could employ?
Answer. President Biden is demonstrating global leadership by
fulfilling his promise to rejoin the Paris Accords on Day One. He has
brought the U.S. back to the table and is rallying the world to tackle
the climate crisis and creating economic prosperity at the same time.
The President has set an ambitious Nationally Determined Contribution
and articulated a plan to achieve our climate goals. We look forward to
working with Congress to finalize the specific actions the country will
take to achieve these ambitious goals.
Question. Today, President Biden is meeting with President Putin
and will raise continued cyber-attacks on U.S. companies and
infrastructure that originate in Russia. Since the Solarwinds attack,
we have seen ransomware attacks on the Colonial Pipeline and on meat
processor JBS.
These continued attacks have enormous costs on U.S. business and
have the potential to be major disruptions to the U.S. economy. The
United States must use all its tools to stop these attacks including
sanctions.
The Senate-passed China Competition bill contained new sanctions
authorities developed by our colleagues Senators Brown and Toomey to go
after Chinese actors responsible for cyberattacks against USG or
private sector networks. Congress passed the Countering America's
Adversaries Through Sanctions Act (CAATSA) in 2017 to authorize similar
sanctions targeted at Russian actors. And there are executive orders
that apply more generally, enabling you to target others responsible
for cyber-attacks against the United States.
As Treasury is undertaking the broad sanctions review you
previously testified about, have you come to any conclusions about
whether current legal authorities in place are sufficient?
Answer. The sanctions review that I asked Deputy Secretary Adeyemo
to lead is not focused on a particular sanctions program or individual
set of designations, but rather on identifying broad successes,
opportunities for changes or improvements, and steps for adapting
implementation across all sanctions programs. This will help to ensure
that sanctions remain relevant, rigorous, and fit to purpose, advancing
the national security, and foreign policy, and economic aims of the
United States. The review remains ongoing. However, we look forward to
briefing you when the review is completed.
Question. Has Treasury determined how we can better target these
attackers using existing sanctions authorities both to punish them and
to strongly deter future such attacks?
Answer. OFAC continues to target malicious cyber-enabled actors,
including pursuant to cyber-related Executive Order (E.O.). 13694, as
amended by E.O. 13757. Together with actions pursuant to various
country-specific sanctions authorities, these actions have aimed to
disrupt and deter malicious cyber-activity across the spectrum of
adversary States and criminal actors. OFAC has used these authorities
to counter a wide array of types of malicious cyber activity, to
include perpetrators of ransomware attacks and those who facilitate
ransomware transactions. Treasury is committed to continuing efforts to
hold malicious cyber actors accountable for their actions.
Question. How is Treasury working with our allies to ensure a
coordinated approach on cyber-related sanctions?
Answer. We appreciate that the effect of our sanctions can be
amplified when imposed in coordination with other U.S. government
efforts, and, where possible, in coordination with similar sanctions or
other complementary actions by allied and partner governments. Treasury
continues to explore working across the interagency and with allied and
partner governments to take complementary actions including joint
designations and coordinated messaging, to amplify our actions.
Multilateral pressure can limit the ability of targeted States or
persons to circumvent our actions and conveys united resolve that we
are willing and ready to hold cyber-criminals based in and affiliated
with Russia, China, and elsewhere accountable for their malicious
activities. In addition to coordination on sanctions, Treasury works
with allied and partner governments to urge them to take stronger
action against cyber-criminals and their associated networks of
supporters and facilitators and improve cybersecurity and resilience.
Question. I want to discuss an issue that I know is of serious
concern to both of us--our growing affordable housing crisis and the
need to build millions more housing units in Washington State and
nationwide.
As you know, I have been working with Senator Young, along with the
chairman and Senator Portman, to expand and strengthen the Low-Income
Housing Tax Credit.
Our legislation includes several critical increases to housing
credit resources and improvements to the program: a 50-percent
allocation increase for the credit overall, a reduction of the current
50-percent bond threshold to 25 percent so projects can more easily
access much-needed housing credit equity, and important basis boosts to
help extremely low-income populations as well as high-need areas
including rural and tribal communities. This is something we have been
able to make incremental progress on, most recently last December with
the enactment of the 4-percent floor.
But as we recover from the pandemic, now more than ever families
need access to more affordable housing. We have much more to do here.
So I was pleased to see that the President's budget includes
support for an expansion of LIHTC, and I look forward to working with
you to get that enacted in to law this Congress.
What is the Department's estimate for how many homes could be built
through these changes to LIHTC?
As we work towards these reforms, will you commit to do all you can
to work with myself, Senator Young, and our colleagues on expanding and
improving the Low-
Income Housing Tax Credit?
Answer. The administration is committed to working with Congress to
help make affordable housing a reality for more Americans. As you
mentioned, the President's budget includes a proposal to expand LIHTCs,
including a more than 100-percent allocation increase for the credits
in 2022 through 2026. The administration expects that these new LIHTCs
will support the construction or rehabilitation of tens of thousands of
affordable residential rental units for low-income tenants. Combining
the $55-billion revenue cost of these credits with investments
including $80 billion in HUD's HOME Investment Partnership program and
the housing trust fund, and $19 billion of revenue costs for
Neighborhood Homes Investment Credits, the President's plan proposes a
$313-billion investment to produce, preserve, and retrofit more than 2
million affordable and sustainable places to live for low-income
families. It pairs this investment with an innovative new approach that
will prevent State and local exclusionary zoning laws from driving up
the cost of construction and keeping families from moving to
neighborhoods with more opportunities for them and their kids. This
complements the administration's proposed changes to LIHTCs, which
include targeting the increase in credits towards neighborhoods of
opportunity.
Question. As you know, this summer the Federal Reserve plans to
release a research on digital currency. Other countries including China
are already moving ahead with plans to create their own official
digital currencies as the cryptocurrency market is now valued at $1.5
trillion and continues to grow.
According to press reports, U.S. financial regulatory agencies are
exploring new ways to regulate the cryptocurrency market. There are
risks from decentralized cryptocurrencies. We have seen cybercriminals
demand ransoms in cryptocurrencies. The cybersecurity of
cryptocurrencies themselves can also be an issue; they can be stolen.
In your view, what are the benefits of creating an official digital
currency? Will the U.S. be put at a competitive disadvantage as other
countries create their own digital currencies?
How is Treasury working to mitigate potential risks from
decentralized cryptocurrencies, including from transnational crime?
Answer. The Federal Reserve is exploring the potential benefits and
risks of Central Bank Digital Currencies (CBDCs) with a key focus on
how a CBDC or other efforts could improve domestic payments system and
its ability to serve the needs of households and businesses. A U.S.
CBDC would also raise important questions about monetary policy,
financial stability, consumer protection, and legal and privacy
considerations.
At the same, time we are mindful that confidence in the stability
of the international monetary system is underpinned by broader
considerations such as credible and longstanding public sector
commitments to transparency, the rule of law, and sound economic
governance. To further the continued stability of that system, Treasury
and other U.S. authorities are actively involved in a range of
international forums such as the G7, G20, and Financial Stability
Board, including efforts that could guide a jurisdiction if it decides
to introduce a CBDC.
The potential to send cryptocurrencies, a type of virtual currency,
nearly instantaneously and irrevocably across borders can increase
illicit finance risks, including potential misuse by transnational
criminals. Moreover, some cryptocurrencies can offer the anonymity of
cash without the same physical limitations. It is also possible to
transfer cryptocurrencies without the involvement of a financial
institution subject to AML/CFT obligations, exacerbating the illicit
finance risks.
Globally, many governments have yet to follow the lead of the
United States by putting in place laws consistent with the Financial
Action Task Force (FATF) standards for the regulation and supervision
of virtual assets including (i) cryptocurrencies and (ii) and virtual
asset service providers (VASPs). The lack of effective regulation,
supervision, and enforcement in many foreign jurisdictions can enable
continued misuse of cryptocurrencies through jurisdictional arbitrage.
Treasury, through the Office of Terrorist Finance and Financial Crimes
(TFFC), is working with the FATF to encourage global implementation of
the standards and to provide guidance on their implementation.
Treasury's Office of Terrorism and Financial Intelligence, particularly
TFFC and Financial Crimes Enforcement Network (FinCEN), also works with
other jurisdictions to pursue global implementation of the FATF
standards, as well as with the private sector to promote compliance.
______
Questions Submitted by Hon. Thomas R. Carper
Question. Through my work on this committee and as chairman of the
Senate Environment and Public Works Committee, I remain committed to
passing laws that will drive down dangerous emissions and clean energy
costs for consumers. We know that our climate crisis demands urgent
action. I share President Biden's belief that we must work to ensure
that our tax code helps our Nation combat this challenge, and, in doing
so, creates good-paying American jobs and strengthens our economy.
This committee recently marked up Chairman Wyden's Clean Energy for
America Act, which included a number of my top energy tax priorities--
including expanded incentives for clean hydrogen production, the
deployment of clean vehicle refueling infrastructure, and refundability
of our clean energy tax credits.
Can you share how the administration's budget request and tax
proposals will help us accelerate the transition to a cleaner economy
and spur job creation?
Answer. The budget makes historic investments that will help our
Nation build back better and lay the foundation for shared growth and
prosperity for decades to come. One cornerstone of these proposals is
around more efficient use of existing resources. This means focusing on
climate change and energy efficiency, infrastructure modernization and
resiliency, surface transportation, housing supply, supply chains,
childcare, and education, all of which are key components to job
creation.
The administration has proposed over $300 billion in incentives for
clean energy and the elimination of $35 billion in fossil fuel
incentives. (These figures do not include $174 billion in spending
programs for related to electric vehicles and charging stations, nor
$85 billion in additional taxes on foreign oil and gas income.) The
administration is also calling for a clean energy standard (CES) to
achieve 100-percent carbon emissions free electricity production by
2035; Treasury's estimates of clean energy tax credits assume CES
implementation. Most of the tax incentives for businesses would include
a direct pay option which would make the incentives more efficient as
project developers with insufficient tax liability would no longer need
to partner with firms with sufficient tax liability to use the credits.
Question. Now that we are emerging from the pandemic and working to
rebuild our economy, we need to be laser focused on getting people back
to work, as well as strengthening investment and increasing innovation
in the United States. In order to ensure a robust economic recovery,
changes to the tax code should encourage economic growth and help to
create a nurturing environment for job creation. This includes making
sure that these changes allow us maintain our competitiveness and
support good-paying jobs.
Can you share your thoughts on how to best maintain American
competitiveness, and how these tax and budget proposals may impact
economic growth and job creation?
Answer. The budget includes the American Jobs Plan--a once-in-a-
generation investment in America that will create millions of good
jobs, rebuild our country's infrastructure, and position the United
States to compete--as well as the American Families Plan--a historic
plan to help families cover the basic expenses that so many struggle
with now, including by providing an additional 4 years of free public
education through universal pre-school for all 3- and 4-year-olds and 2
years of community college, lowering health insurance premiums, and
continuing the American Rescue Plan's historic reductions in child
poverty.
The budget also reinvests in discretionary programs that are a
foundation of our country's strength--from expanding economic
opportunity and investing in education, to improving our public health
infrastructure and tackling the climate crisis, to restoring America's
place in the world and confronting 21st-century security challenges.
The budget provides a fiscally responsible path for delivering a
stronger, more prosperous economy. Under the budget's proposals, the
cost of Federal debt payments will remain well below historical levels
throughout the coming decade. And over the long run, the budget's
investments are more than fully paid for through long-overdue changes
to our tax code--reforming the corporate tax code to incentivize job
creation and investment in the U.S., revitalizing tax enforcement to
ensure that high-income Americans pay the tax they owe under the law,
and eliminating loopholes that reward wealth over work.
Over time, the savings from these reforms will exceed the up-front
cost of the investments, and by large and growing amounts. The American
Jobs Plan and American Families Plan together are paid for over 15
years. And the full set of proposals in the budget reduce the annual
deficit by the end of the 10-year budget window and reduce deficits by
over $2 trillion in the decade after that.
Overall, enacting the budget policies into law this year would
strengthen our Nation's economy and lay the foundation for shared
prosperity, while also improving the Nation's long-term fiscal outlook.
______
Questions Submitted by Hon. Bill Cassidy
Question. As you consider next steps in the OECD Pillar 2 project,
it's imperative that we consider how U.S.-based companies will stack up
against those of the world's second largest economy, the Chinese.
Although China is not part of the OECD, my understanding is that the
administration agrees that Chinese assent to an OECD Pillar 2 agreement
is a key factor in whether the agreement is truly global. A Bloomberg
News article dated June 9, 2021 entitled ``China's Likely Bid for Tax
Exemption Poses Risk to Global Accord'' notes that the general Chinese
corporate rate is 25 percent with a special 15-percent rate for
technology-related income, but that there are additional incentives
that can take that rate to 0 percent. The article also notes the
Chinese are likely seeking a carve-out that would preserve these
benefits.
Have the Chinese approached you to discuss a carve-out from the
OECD Pillar 2 agreement? Given how important these negotiations are to
the administration's priorities, are there scenarios in which you might
compromise with them?
Answer. The consensus we achieved at the Inclusive Framework was
unprecedented and signals great progress toward a historic deal on a
redesign of the international tax system. We actively worked with all
countries to make the consensus as broad as possible. We did not,
however, provide any special exceptions to China in doing so.
Question. The Chinese understandably want to preserve their
domestic incentives for production of intellectual property. But, this
administration has chosen to abandon policies like FDII which help
American businesses. I fear that your administration's priority is to
get a deal fast to raise trillions in business taxes to partially
offset partisan new spending programs. Once again, we find the U.S.
alone, and not aligned with the interests of U.S. companies, their
workers, and their communities.
Can you tell me why the U.S. is so isolated in abandoning policies,
like FDII, while other players insist on maintaining similar policies
that align with businesses based in their countries?
Answer. The United States and the international community are
nearing a comprehensive agreement on robust country-by-country minimum
taxes, seeking to end ``the race to the bottom'' on corporate tax
rates. Adequate taxation of internationally mobile capital helps
governments invest in infrastructure, clean energy, and education,
spurring future economic growth.
There are multiple problems with FDII. First, the FDII is not an
effective way to encourage R&D in the United States, since it provides
larger tax breaks to companies with excess profits (those already
reaping the rewards of prior innovation) and only targets those with
high export sales (omitting those companies with domestic sales).
Second, like the GILTI, the FDII deduction encourages offshoring of
real activity, since the export subsidy becomes less generous (all else
equal) as companies have higher U.S. tangible assets.
Repealing FDII would generate a large amount of revenue that could
be used to encourage research and development much more directly. As
one example, reversing the research amortization provision in the Tax
Cuts and Jobs Act of 2017 (and returning to expensing) would cost a
similar amount of revenue as FDII repeal would raise, but would benefit
not just established exporting firms, but also domestic firms and new
startups.
Question. Fossil fuels are integral to our Nation's economic
vitality and national security and cannot feasibly be replaced by
renewables at this time. Yet, the Biden administration has signaled
hostility to the fossil fuel industry across several different
agencies. In particular, on May 20th, the President issued an executive
order on climate related financial risk calling for you, as chair of
FSOC, to basically go find these yet unknown risks, whatever they may
be. You have said that ``our pensions'' depend on proper assessment of
climate-related risks to the financial system. At the G7, you
announced, ``we support moving towards mandatory climate related
financial disclosures.'' I worry this will turn into a self-fulfilling
prophecy in an attempt to drive pension funds away from investing in
energy companies.
Do you agree that the fossil fuel industry continues to be and will
continue to be critical for our national security and economic growth
and that domestic energy production tends to be cleaner and safer than
energy produced offshore?
Answer. The administration is proposing to eliminate fossil fuel
subsidies that distort markets by encouraging more investment in the
oil and gas industry than would occur under a neutral system. This
market distortion is inconsistent with the administration's policy of
supporting a clean energy economy and reducing carbon emissions.
Moreover, the subsidies must ultimately be financed with taxes that
result in other distortions, e.g., in reductions in investment in
other, potentially more productive, areas of the economy.
Fossil fuel companies additionally benefit from substantial
implicit subsidies, since they sell products that create externalities
but they do not have to pay or bear the costs for the damages caused by
these externalities. The administration has created a goal to create a
carbon pollution-free power sector by 2035 and net zero emissions
economy by no later than 2050. Meeting these goals will create millions
of good-paying, middle-class, union jobs and build the clean energy
economy of tomorrow.
Question. Your budget request includes billions in resources for
the Department of Treasury to go after the so-called ``tax gap.'' Of
course, the last Democratic administration used the IRS to intimidate
and attack disfavored groups.
Federal audits can be disruptive and costly even if they end up
finding no evidence of wrongdoing. Given the administration's posture,
how are you going to make sure IRS won't use these billions in new
money for enforcement to target or harass companies the administration
has decided are problematic, such as those in the fossil fuel sector?
Answer. The IRS has lost significant ground over the last decade,
as its budget has declined by 20 percent, leading to a substantial
decline in its workforce, particularly of specialized auditors who
conduct audits of global high net worth individuals, complex
partnerships, and large corporations. As a result, audit coverage has
dropped off significantly. For large corporations, it has been halved
over the last decade, declining from 98 percent in FY 2010 to around 50
percent today. There is a one-for-one relationship between the revenue
that the IRS is able to collect from examinations and the examinations
that it performs. The IRS currently does not have the tools that it
needs to pursue enforcement activities against large corporations and
the high-income taxpayers who own them, and the President's proposal
provides the IRS necessary resources.
The proposal also provides much needed information that the IRS can
use to appropriately target its enforcement activities. The IRS selects
audits for examination based on inferences about how likely a taxpayer
is to be noncompliant. But when the IRS has no visibility into opaque
income streams, it lacks the ability to target enforcement activity
effectively. Providing a lens into opaque income streams will decrease
the likelihood of disruptive and burdensome audits for the vast
majority of taxpayers who are already fully compliant with their tax
obligations.
Question. As you know, FinCEN has responsibility for combating all
forms of money laundering. I believe FinCEN has a vitally important
mission, and I was gratified to see that the administration is
requesting a significant budget increase of 50 percent over last year's
enacted levels, primarily to implement the anti-money laundering
legislation passed last year. I am interested in Trade-Based Money
Laundering, or TBML, in particular. As we have discussed before, TBML
is the least understood and most pervasive form of money laundering.
What are your thoughts on how Treasury and Congress can better
collaborate to more effectively combat TBML? Given the new staff that
comes with a new administration, could you connect my team with those
on yours best suited to speak to this issue?
Answer. The Financial Crimes Enforcement Network (FinCEN) is
currently pursuing a comprehensive study to enhance its understanding
of TBML-related illicit methods and vulnerabilities. We anticipate that
this study will serve as an integral platform and leverage point for
issuing collaborative and substantive recommendations to further
counter this elusive threat.
This study will include proposed strategies to combat TBML that may
include enhanced information exchange between FinCEN and its Treasury
partners in the sanction evasion and illicit financing realms, related
proactive targeting and strategic assessment initiatives, the
development and implementation of collaborative working groups, and
providing further guidance to relevant financial and business sectors.
I have asked FinCEN to contact your team to provide you an update
on this important issue.
Question. At your confirmation hearing, I asked about the
possibility of long-term bonds issued by the Treasury to take advantage
of historically low interest rates, and you agreed to look into this
question. I believe these interest rates may not remain low over the
next few years, and so want to take advantage if possible.
Has the Treasury given consideration to the possibility of issuing
long-term bonds? What have been your findings on the potential
implications?
Answer. Treasury continually evaluates the set of securities that
it issues to finance the government at the lowest cost to the taxpayer
over time. Treasury has given significant consideration to the
possibility of issuing additional longer-term bonds over the past
several years and will continue to explore this important issue,
including conducting broad investor outreach to gain an understanding
of market appetite.
Treasury has specifically explored a range of potential new long-
term debt products, including 20-year, 50-year, and 100-year bonds, all
with the goal of expanding borrowing capacity to finance the Federal
Government at the least cost over time. In May 2020, Treasury
reintroduced the 20-year bond, which has provided additional
substantial long-term financing capacity, offering investors additional
opportunities to invest and allowing Treasury to term-out the initial
increase in short-term financing in 2020.
______
Question Submitted by Hon. Catherine Cortez Masto
Question. Does the Treasury anticipate removing and/or scaling back
any of the eligible use categories for coronavirus State and local
fiscal recovery funds if the national emergency ends prior to the
expiration of funds?
Answer. None of the eligible use categories for the coronavirus
State and local fiscal recovery funds in the statute or Treasury's
interim final rule are conditioned on the continuation of the national
emergency declaration.
Eligible uses under sections 602 and 603 of the American Rescue
Plan Act are intended to support State and local governments in
responding to the pandemic. Specifically, under the eligible use
category for responding to the public health emergency and its negative
economic impacts, recipients may use funds for payroll and benefits
costs of public health and safety staff primarily dedicated to COVID-19
response, as well as rehiring of public sector staff up to pre-pandemic
levels. In the interim final rule, Treasury has asked stakeholders to
comment on how long these measures should remain in place.
Under the eligible use category for the provision of government
services to the extent of the reduction in revenue experienced due to
the COVID-19 public health emergency, Treasury is considering whether
to take into account other factors, including actions taken by the
recipient as well as the expiration of the COVID-19 public health
emergency, in determining whether to presume that revenue losses are
``due to'' the COVID-19 public health emergency. In the interim final
rule, Treasury has invited stakeholders to comment on the advantages
and disadvantages of this presumption, including when, if ever, during
the covered period it would be appropriate to reevaluate the
presumption that all losses are attributable to the COVID-19 public
health emergency.
______
Questions Submitted by Hon. Mike Crapo
irs funding for gathering personal bank information
Question. The Treasury Inspector General for Tax Administration--or
TIGTA--issued a report in 2017 on IRS criminal investigations during
the Obama administration of suspected violations of the Bank Secrecy
Act's anti-structuring provisions.
The IRS was enforcing those provisions primarily against
individuals and businesses whose income was obtained legally, and not
against criminals, according to TIGTA. Let me quote some excerpts from
TIGTA's report: ``. . . reasonable explanations by taxpayers were not
investigated . . .''; ``. . . investigators were encouraged to engage
in quick hits, where property was more quickly seized . . . rather than
pursuing cases with other criminal activity (such as drug trafficking
and money laundering), which are more time consuming . . .''; and
``When property owners were interviewed after the seizure, agents did
not always identify themselves properly, did not explain the purpose of
the interviews, did not advise property owners of any rights they might
have, and told property owners they had committed a crime at the
conclusion of the interviews.''
TIGTA determined that 91 percent of investigations it sampled where
sources of funds could be determined were businesses and individuals
whose funds were obtained legally. TIGTA also reported that: ``Most
people impacted by the program did not appear to be criminal
enterprises engaged in other alleged illegal activity;'' rather, they
were legal businesses such as jewelry stores, restaurant owners, gas
station owners, and others.
With what I just discussed in mind, I wonder if you have any
concerns about the administration's proposal to monitor Americans' bank
accounts. One proposal is to give the IRS an unprecedented large and
mandatory stream of funding to, in part, have private financial
institutions gather financial information from almost every individual
and business with flows of deposits or withdrawals of as little as $600
in checking, savings, and other accounts, and use the information to
determine if the IRS should target those individuals or businesses for
extra scrutiny.
And, I am sure you are aware of the fate of the requirement in the
partisan Affordable Care Act mandating that businesses file Form 1099
with the IRS for all purchases made from any vendor totaling $600 or
more per year. Following firm rejection of that effort by the American
people, President Obama was forced to repeal the offending provision.
The recent and significant apparent breach of individual taxpayer
privacy in the ProPublica alleged publication of individual private and
personal taxpayer information raises serious concerns regarding the
administration's bank monitoring scheme.
Please explain how monitoring almost every taxpayer's bank
accounts, for flows of as little as $600, with significant risks to
breaches of privacy, is at all necessary for tax administration.
Answer. When the IRS is able to verify the accuracy of tax filing
with third-party reports, compliance rates are more than 95 percent.
For opaque sources of income, where no such reporting exists,
compliance rates are under 50 percent. A comprehensive financial
reporting regime will finally shed a light on these income sources and
raise nearly $500 billion in additional tax revenue in a progressive
way, as high-end tax evaders realize that the IRS is better equipped to
address evasion.
The President's compliance initiatives do not constitute monitoring
taxpayers accounts; nor do they implicate taxpayer privacy concerns. In
fact, the proposal also includes a significant increase in resources
for the IRS to meet threats to the security of the tax system. For
honest taxpayers, there are no costs associated with this new regime--
only benefit. Audit rates of compliant taxpayers will decline as the
IRS is better able to target its enforcement activities. Additionally,
compliant small business owners--who today are at a disadvantage
because they are forced to compete against those who do not comply with
the tax code--will see this evasion advantage removed.
g7 agreement on imf special drawing rights (sdrs)
Question. The June 5th communique from the G7 finance ministers and
central bank governors put support behind a new general allocation of
Special Drawing Rights, or SDRs, and the IMF of $650 billion by the end
of August. Prior to offering of support from the administration for the
allocation, what discussions have you had with Republican members of
Congress on the issue?
Answer. On April 1, 2021, Treasury sent letters on my behalf to
Congress indicating our intent to consider a new $650 billion general
allocation of Special Drawing Rights (SDRs) by the International
Monetary Fund (IMF) and starting the 90-day consultation process, as
required by the Special Drawing Rights Act (``SDR Act''). I, as well as
the Deputy Secretary and Treasury staff, have consulted extensively
with Democratic and Republican members of Congress and their staffs on
the allocation before and during this consultation period.
debt limit and how long could extraordinary measures last
Question. The debt limit was suspended in August of 2019, and will
be reinstated on August 1st of this year at whatever level obtains on
that date covering all prior borrowing and borrowing that occurred
during the suspension. I understand that there are uncertainties in
projecting how long so-called extraordinary measures could last in the
event that the debt limit is not raised before August 1st. I also
understand that Treasury does, and should, model various scenarios.
As of today, what do you see as the most likely from among various
possible future scenarios in terms of how long extraordinary measures
would last if the debt limit is not raised before August 1st?
Answer. The period of time that extraordinary measures may last is
subject to considerable uncertainty due to a variety of factors,
including the challenges of forecasting the payments and receipts of
the U.S. government months into the future, exacerbated by the
heightened uncertainty in payments and receipts related to the economic
impact of the pandemic. Given this, Treasury is not able to currently
provide a specific estimate of how long extraordinary measures will
last. However, there are scenarios in which cash and extraordinary
measures could be exhausted soon after Congress returns from recess in
September. For example, on October 1st alone, cash and extraordinary
measures are expected to decrease by about $150 billion due to large
mandatory payments including a Department of Defense-related retirement
and health-care investment.
book minimum tax
Question. The Green Book highlights that there is a disparity
between the income reflected on corporations' financial statements and
the taxable income reported on tax returns. But comparing these
concepts is comparing apples and oranges. Calculations of book income
and taxable income are significantly different, and are prepared for
totally different audiences. The financial statements for public
companies are prepared for an audience of shareholders, creditors and
stakeholders and are required to follow generally accepted accounting
principles set by non-governmental agencies. Taxable income, on the
other hand, is determined and defined by Congress. When businesses
engage in certain behaviors, U.S. tax law allows them to legally make
adjustments to reduce their tax liability. For example, the Tax Cuts
and Jobs Act allowed businesses to immediately deduct 100 percent of
the cost of certain business property. This incentive led to increased
capital investment and jobs. The deduction that accompanies this
investment could allow a company to reduce its tax as a benefit for
engaging in this legally incentivized behavior.
The Green Book proposes a 15-percent corporate minimum tax on book
income as a potential solution for disparities between accounting and
tax law. However, in 1986 a similar minimum tax concept was tried but
ultimately failed as it was repealed after only a few years. Given
these differences between U.S. tax law and financial accounting
concepts, there appears to be a risk that imposing a tax on book income
would cede a portion of Congress' responsibility for defining taxable
income and could distort the economic benefits in the tax law. I have
two questions on this issue.
Do you agree that the scope of the corporate tax base and the
definition of taxable income is best suited for Congress to determine
and define?
Answer. Congress is responsible for legislating our tax laws, and
they have the primary role in defining the tax base. The administration
has proposed a limited book minimum tax that would act as a backstop
when there are large discrepancies between what a company is reporting
to their shareholders as financial income and what they are reporting
in taxable income. This proposal is directed at asking very large and
profitable companies with low or zero tax liabilities to pay their fair
share. The proposal is designed to avoid targeting companies with low
effective tax rates due to legitimate use of research and
experimentation tax credits and many general business tax credits. The
minimum book tax proposal is aimed at recapturing the tax revenue lost
to gaming and tax avoidance.
Question. Do you view a tax on book income as difficult, if not
impossible, to apply to foreign-based multinationals?
Answer. The book minimum tax would apply to very large and
profitable corporations based on financial reporting to their
shareholders, however certain modifications to that reporting may be
required in the case of a foreign-based multinationals. We look forward
to engaging with Congress on this proposal.
research and development
Question. One major incentive for domestic investment is section
174 of the Internal Revenue Code allowing U.S. businesses to
immediately deduct research and experimental (R&E) costs. This
provision has historically received bipartisan support as it
incentivizes research investment and job creation in the United States.
Beginning next year, however, U.S. businesses will be required to
capitalize and amortize those costs over 5 years rather than
immediately deducting them. Allowing businesses to continue to deduct
their research and experimental costs would be a critical incentive for
investment in innovation in the United States.
In your response to questions for the record in January, you stated
that you would carefully consider the concerns raised regarding the
deductibility of research expenditures, paying particular attention to
any effects on small businesses during the recovery.
Given President Biden's interest in encouraging investment in
manufacturing, jobs, and innovation in the United States, would you
encourage Congress to maintain the current immediate deductibility of
R&E expenses?
Answer. The administration has proposed repealing the FDII
deduction and using the associated revenue to more directly encourage
research and development. One possible use of this revenue would be to
reverse the imminent move toward R&E amortization created by the 2017
tax law, returning to immediate expensing. Another option would be
implementing more generous research tax credits. The administration is
open to working with Congress on the most effective way to encourage
research.
There are a number of policy options that would be a more effective
spur to domestic innovation than the FDII deduction. There are multiple
problems with the FDII deduction. First, the FDII deduction is not an
effective way to encourage R&D in the United States, since it provides
larger tax breaks to companies with excess profits (those already
reaping the rewards of prior innovation) and only targets those with
high export sales (omitting those companies with domestic sales).
Second, like the GILTI, the FDII deduction encourages offshoring of
real activity, since the export subsidy becomes less generous (all else
equal) as companies have higher U.S. tangible assets. Repealing FDII
would generate a large amount of revenue that could be used to
encourage research and development much more directly.
biden pledge not to raise taxes on anyone earning less than $400,000
Question. The President has been campaigning for his tax plans--
both before and after he was elected--on the premise that they would
not raise taxes for ``anyone'' making less than $400,000. Or, as the
Families Plan describes it: ``[N]o one making $400,000 per year or less
will see their taxes go up.'' And yet, without even accounting for
indirect effects, his plans explicitly increase taxes for persons
making less than $400,000 in several instances.
For example, two married taxpayers making significantly less than
$400,000--one of whom could be making as little as $109,320--could face
an individual income tax increase under the President's plan.
As another example, a taxpayer who literally makes no money--even
one with, for example, massive indebtedness or negative wealth--would
face significant tax increases were they ever fortunate enough to
acquire a valuable bequest or sell a valuable business.
Do you agree with the President's assertion that his tax plan does
not raise taxes at all on those making less than $400,000?
Answer. The President's plan does not raise taxes on any taxpayers
making less than $400,000. In your first example of a married couple,
their tax rate would not increase until they earned over $500,000, and
even then, it would only increase very modestly. In your second
example, capital gains are a form of income, and under the
administration's proposals, no taxpayers would face an increased tax
rate on their capital gains unless their income exceeded $1 million. We
are not presently proposing changes to the estate tax.
fairness and taxes
Question. Another core feature of the President's tax plan is to
require phantom gain realization for certain owners of capital assets--
for example, family businesses or farms. Perhaps recognizing the
political blowback the phantom gain realization proposal would generate
in this context, the President's tax plan also includes a proposal with
self-described ``protections'' for family business or farms that allow
family business or farm owners to defer--and do not exempt--the phantom
gain that the proposal would generate so long as the narrowly- defined
family group continues to both fully own and operate the business or
farm.
As you know, this proposal would apply to both built-in gains
arising today as well as those that were built in decades before, so
long as the deemed or actual transfer occurs in 2022 or beyond. This
proposal would also catch (and tax) simple inflation.
Thus, under this proposal working families who have simply passed
down a farm or business over multiple generations would be particularly
impacted, with the potential tax cascading and magnifying with each
passing transfer. And as soon as any owner joined the business who
could not meet the narrow definition of ``family'' or any non-
``family'' person begins to operate the business, all of this deferred
tax would become due. Given that the businesses and farms subject to
this proposal include ones that are generating no free cash flow, there
will be instances, perhaps many, where businesses and farms must be
sold or liened in order to pay the taxes due. The upshot of this
proposed ``protection'' is to create one of the worst and most unfair
lock-in effects I've ever seen.
How can the protection promised in the administration's proposal be
regarded as sufficient when it is certain that at least some family
farms and businesses will have to be sold to pay the tax on the phantom
gains?
Answer. The administration's capital gains proposal provides
generous exclusions for all taxpayers and additional protections to
ensure that family-owned and -operated businesses are not adversely
impacted. The proposal allows every individual a $1 million exclusion,
which for a married couple translates to a $2 million exclusion, plus
another total $500,000 for gains from one or more residences. The
proposal also recognizes the critical role of family businesses and
provides that the application of this proposal for gain realization on
the assets of a family-owned and -operated business could be deferred
in perpetuity while the business remains owned and operated by the
family. In terms of the important definitional concepts surrounding
family-owned businesses and requirements for family operation, the
administration welcomes the opportunity to work with Congress to ensure
that those protections are appropriately crafted.
cap gains taxation, president's plan, and taxation on gains from
inflation
Question. As you know, the President's plan nearly doubles the
maximum capital gains tax rate. As with many things in the President's
plan, it justifies the change in fairness, arguing that the increase is
necessary so that wealthy people pay a fair share. I want to focus on a
key component of the President's plan for capital assets: the lack of
any indexing with respect to tax basis.
As you know, because the tax basis of capital assets is not indexed
under the President's plan, taxpayers will owe (and pay) tax on simple
inflation--a phenomenon that has already become all too pronounced
since the President assumed office (and which would likely become worse
were his massive spending proposals to become enacted).
Do you believe that it is fair to double the tax on certain
taxpayers' inflation?
Answer. It is the case that capital gains taxes tax nominal, rather
than real, appreciation, when gains are realized. (Many other features
of our tax system are also nominal. For example, interest payments are
deductible in nominal terms, and interest income is taxed in nominal
terms.)
However, under current law, capital gains taxes are not levied
until realization occurs, and this is a substantial preference. Simply
put, a tax deferred is a tax saved, because tax not collected on
capital gains can continue to appreciate and accumulate returns on the
amount of uncollected tax, resulting in larger long-term gains relative
to a situation where each year's capital gains were taxed as they are
earned. In contrast, labor income has no such advantage. One is not
able to simply hold off paying tax on wage income until a future year,
accumulating returns on the tax payment in the meantime.
To consider the fairness of the capital tax system as a whole, it
is useful to consider all of these features in a holistic manner.
child tax credit severed from work in president's plan
Question. Republicans pushed through the adoption of the CTC in
1997 to support working families. And yet, the President's proposal to
extend the Democratic-led changes to the CTC for 2021 for another 5
years does not limit the enhancements to working families. In fact, the
changes completely sever the relationship between the CTC and work.
What does the administration have to say to the working families
whose taxes will be increased to fund expansions of the CTC to families
that don't work at all?
Answer. The CTC has been a bipartisan issue for a long time, and
expansions of it have been supported by numerous Republicans such as
Senators Marco Rubio, Mitt Romney, and Mike Lee. Reducing child poverty
and helping working families should not be a partisan issue. The vast
majority of recipients are working families who are trying to raise
strong, healthy families and this helps them in that goal. However, if
a parent is staying home to care for a child, the parent also benefits
from the expanded child credit. Members of both parties agree that the
more generous child tax credit passed in the American Rescue plan (and
the extension proposed in the American Families Plan) will dramatically
cut childhood poverty rates.
gilti
Question. During the hearing, you suggested the administration's
GILTI proposal would raise the effective rate on GILTI to 21 percent.
However, under current law, only 80 percent of foreign tax credits can
be utilized against GILTI, resulting in a 20-percent foreign tax credit
disallowance. Kimberly Clausing, the Deputy Assistant Secretary of
Treasury's Office of Tax Analysis, recently stated publicly that the
20-percent disallowance would be retained under the administration's
proposal. This would result in a 26.25-percent GILTI effective rate.
Can you confirm whether the administration's proposal would retain
the foreign tax credit disallowance and, if so, can you confirm that
the effective rate on GILTI would be 26.25 percent under the
administration's proposal?
Answer. As proposed, the administration's GILTI reform would retain
the 20-
percent foreign tax credit disallowance. The effective tax rate on a
company's foreign income would depend on where that company was
operating. If they were operating in a zero-tax country, the rate would
be 21 percent (paid to the United States); the effective tax rate on
foreign income very slowly rises as the foreign rate rises (with a
declining GILTI tax paid to the United States and the remainder of the
tax paid to the foreign country). The effective tax rate would
eventually reach 26.25, but only when the U.S. GILTI share of the tax
is very low, so it is not contributing very much to the overall tax
burden. At the top end, when the foreign tax rate is 26.25 percent, the
tax is paid to the foreign government and the United States collects no
GILTI tax.
Question. Is it the administration's position that the United
States should increase the GILTI rate to an effective rate of 26
percent before any other country has enacted a minimum tax?
Answer. The administration has proposed a 21-percent GILTI rate.
(The proposal suggests a deduction of 25 percent for GILTI income in
the context of a 28-percent headline rate.) This GILTI reform is good
policy, irrespective of the choices of our trading partners, as it
reduces the tilt in the playing field that favors foreign earnings and
operations over domestic earnings and operations. It also raises
revenue, improves the fairness of our tax system, and increases
efficiency.
Still, the present moment is an important time for international
cooperation in this area, and the U.S. government can lead countries
toward a global agreement on a strong, robust minimum tax, ending the
race to the bottom in corporate taxation.
The United States is seeking a global agreement on a minimum tax at
the highest possible rate. Even if it settles somewhat below 21
percent, today the global minimum tax rate is 0, far below our 10.5-
percent GILTI rate.
We are hopeful that many countries will find it in their interest
to join such an agreement, but even if they do not, we are not
powerless. The SHIELD proposal can counter foreign company profit
shifting. And simple anti-inversion measures, or even changes through
regulation, can be quite effective in stemming the incentive to invert,
as shown by the U.S. experience after the anti-inversion (and anti-
income stripping) regulations of the late Obama years.
Question. What is your position on China receiving a carve-out or
exception to the global minimum tax?
Answer. The consensus we achieved at the G20 and OECD Inclusive
Framework was unprecedented and signals great progress toward a
historic deal on a redesign of the international tax system. More work
needs to be done; however, Pillar 2 does not need the support of every
country to be successful. Due to the enforcement mechanism of the UTPR,
and our domestic corollary SHIELD proposal, if enough of the world's
GDP signs up for Pillar 2, these enforcement mechanisms will
incentivize other jurisdictions to also adopt minimum taxes by denying
deductions on related party payments in low-tax jurisdictions. We are
actively working with all countries to make the consensus as broad as
possible, but we are not providing any special exceptions that would
undermine the robustness of the regime.
Question. If countries do not enact a minimum tax at all, and the
U.S. raises the effective rate on GILTI to 26 percent, don't you think
that will make American companies less competitive globally?
Answer. The administration has proposed a 21-percent GILTI rate.
(The proposal suggests a deduction of 25 percent for GILTI income in
the context of a 28-percent headline rate.)
Concerns about the competitiveness of U.S. multinationals ignore
the evidence. Even before the Tax Cuts and Jobs Act of 2017
dramatically lowered U.S. corporate tax rates, U.S. multinational
companies paid similar effective tax rates as peers in other countries.
In recent years, the Joint Committee on Taxation shows effective tax
rates for U.S. multinational companies of about 8 percent. And, U.S.
corporate tax revenues are far lower than those in peer countries. Over
10 years, the American Jobs Plan proposals increase corporate taxes
modestly, to about 1.7 percent of GDP. In contrast, our trading
partners raise about 3 percent of GDP in corporate taxes.
Finally, it is important to remember that competitiveness is about
more than the success of U.S. companies in foreign merger and
acquisition bids. It is also about ensuring that our tax code doesn't
incentivize foreign operations at the expense of those at home. And, it
is about nurturing the many fundamental strengths that make the United
States a good place to do business. Investing in our institutions, in
the abilities and education of American workers, in the quality of our
infrastructure, and in cutting-edge research is all important.
shield
Question. The administration has suggested that its proposed
Stopping Harmful Inversions and Ending Low-Tax Developments (SHIELD)
provision would compel foreign countries to enact a global minimum tax
by disallowing deductions of companies that make a payment to a
jurisdiction with no minimum tax.
The only information we have on the SHIELD is the 2-page
description in the Green Book. There appear to be no detailed
specifications or draft language, and the concept has never been
tested.
Putting aside treaty or constitutionality issues, that seems quite
ambitious, and I'm not aware of whether that concept has ever been
tested.
Why should this high-level idea that has not been fully developed
or tested compel our biggest competitors, like China, to enact a global
minimum tax without any carve-outs?
Answer. The consensus we achieved at the G20 and Inclusive
Framework was unprecedented and signals great progress toward a
historic deal on a redesign of the international tax system. We
actively worked with all countries to make the consensus as broad as
possible. We did not provide any special exceptions to China in doing
so. Many countries recognize that, if they do not join consensus,
Pillar 2 includes the enforcement mechanism of the Undertaxed Payments
Rule (UTPR) that incentivizes jurisdictions to adopt Pillar 2 to the
extent that their profits in low-tax jurisdictions are taxed below the
minimum tax rate. The administration's SHIELD proposal incentivizes
countries in a similar manner.
Question. It seems more likely that China would view this as a
unilateral measure that will result in retaliation. Do you view that as
a concern?
Answer. Because SHIELD works similarly to the multilaterally agreed
upon UTPR, it is likely to be seen in this familiar light by other
countries.
Question. If the SHIELD would disallow deductions paid to a
jurisdiction with no global minimum tax, like China potentially,
wouldn't a Chinese company opt to avoid doing business through related
parties in countries with a minimum tax, like the U.S.; in other words,
doesn't this just incentivize companies to plan around the U.S.,
effectively reducing the amount of U.S. business activity and
investment?
Answer. If enough of the world's GDP joins the Pillar 2 framework,
then it would be impossible for companies to avoid doing business
through related parties in countries with a minimum tax. With countries
representing more than 90 percent of global GDP joining the Inclusive
Framework consensus, that tipping point has now been reached and
exceeded.
Question. My understanding of the administration's SHIELD proposal
is it would disallow deductions for payments made from U.S. companies
to any company located in a country without a global minimum tax, even
if that country is a treaty partner.
Wouldn't the SHIELD require treaty changes because it would run
afoul of non-discrimination clauses included in our tax treaties, and
shouldn't the administration be working with Congress on these
proposals given that treaty ratification would require significant
bipartisan support?
Answer. SHIELD has been designed to avoid conflicts with our treaty
obligations, but we look forward to engaging with Congress to move this
proposal forward.
oecd minimum tax
Question. Under the prior administration, Treasury took the
position that GILTI should be treated as a ``deemed compliant'' minimum
tax under Pillar 2--in other words, because it is a robust minimum tax
with a substance-based carve-out, similar to the minimum tax being
proposed at the OECD, GILTI should be treated as already complying with
any global minimum tax agreement. In fact, the Pillar 2 blueprint
explicitly stated that the Pillar 2 global minimum tax being considered
is actually more permissive in a number of ways than GILTI.
Has the administration abandoned the approach of proposing that
GILTI be treated as complying with any Pillar 2 global minimum tax
agreement?
Answer. The Biden-Harris administration will pursue a comprehensive
multinational agreement to update global tax rules in ways that
establish effective minimum taxation rules, prevent global profit-
shifting, and ensure that corporations pay their fair share. Pillar 2
is generally consistent with theadministration's budget proposals,
although we also anticipate a future need for deemed GILTI compliance
given the uniqueness of many features of the GILTI framework.
Question. If not, and the administration agrees to a global minimum
tax that is different than GILTI, does Congress have to enact changes
to GILTI?
Answer. See the response immediately above. Pillar 2 includes the
enforcement mechanism of the UTPR that incentivizes jurisdictions to
adopt Pillar 2 to the extent that their profits in low-tax
jurisdictions are taxed below the minimum tax rate. Whether or not
Congress adopts the President's proposal to reform GILTI, the taxes
paid by U.S.-parented groups under GILTI would still be taken into
account in applying the UTPR. The amount of UTPR liability would of
course depend on the terms of the final Pillar 2 agreement.
Question. What would happen to U.S. companies if the U.S. does not
have a compliant global minimum tax?
Answer. See the response immediately above.
Question. If U.S. companies would be subject to significant foreign
tax because of the U.S. not having a compliant global minimum tax,
doesn't that effectively force Congress's hand and effectively amount
to the administration compelling Congress to enact tax legislation?
Answer. Although the administration has committed to pursuing a
robust global minimum tax and has consulted with congressional members
and staff in crafting that commitment, Congress remains free to decide
whether and how to fulfill that goal.
oecd and digital taxes
Question. The initial basis for bipartisan support of Treasury's
efforts at the OECD was to eliminate digital services taxes and similar
unilateral measures, as I stated in my May 24th letter to you. But
while other G7 countries appear perfectly happy asserting more taxing
rights over large and successful U.S. companies under Pillar 1, certain
G7 members don't seem to be taking the immediate removal of unilateral
measures very seriously.
Specifically, the EU doesn't seem at all interested in holding up
their end of the bargain. Only a few days after the scheduled G20
finance ministers meeting next month, the EU is expected to unveil a
new gross-basis tax on digital companies with at least $300 million in
annual revenue. What may be most concerning about this is that the EU
has explicitly said this tax is NOT intended to be a temporary measure;
rather it will be ``independent of'' and ``coexist with the
implementation of an OECD agreement.'' Thus, not only do they want a
larger piece of the tax pie from our most successful companies under
Pillar 1 but also want to extract more from other emerging digital
companies--many of which would likely be U.S. based. And because this
tax will be on a gross basis, it will hit companies whether or not
they're actually profitable.
While the EU may justify the tax by asserting that it won't be
discriminatory on its face (it remains to be seen whether it'll be
discriminatory in application), the larger point is that gross-basis
taxes that ring-fence a specific industry are unacceptable. And it
would be unacceptable for the US to endorse any agreement that would
allow DSTs or similar unilateral measures like an EU digital levy to
coexist.
Do you agree that an EU digital levy would be a unilateral measure
that shouldn't be able to ``coexist'' with an OECD agreement under
Pillar 1? If not, why not?
Answer. A foundational premise of this OECD/G20 work is the
elimination of DSTs because DSTs are discriminatory against U.S. firms.
USTR's work on a section 301 response to DSTs is an important element
of this. We are concerned that the EU continues to advance its own ``EU
digital levy'' proposal, which the EU asserts would coexist with a
Pillar 1 system. The EU asserts that the digital levy will not be
discriminatory because it will apply to small firms and large firms
alike. If so, the digital levy could be closer to a consumption tax or
excise tax than a tariff. Much will depend on the details of the
eventual European Commission proposal, which has not been released. We
will closely monitor the developments in consultation with USTR and
Congress.
information and analysis on administration's oecd proposals
Question. In my May 24th letter, I asked you to provide additional
detail on the effect of the administration's proposed Pillar 1 strategy
on U.S. companies and U.S. revenues. Specifically, I requested Treasury
provide its analysis of companies that would be identified as in-scope
using the proposed Pillar 1 quantitative scope approach based on
publicly available information, as well as the amount of profit that
would be allocated from U.S. companies to foreign market jurisdictions
as well as amounts reallocated from foreign jurisdictions to the United
States. Your response suggests that Pillar 1 would be ``largely revenue
neutral'' but we have not received any additional company-specific
information or any information about how profit would be allocated from
the U.S. to foreign jurisdictions. This information is particularly
important for Congress to understand the effect of the proposed
approach and, without the information I request below, Congress will be
unable to determine whether Pillar 1 would discriminate against
American companies.
How many of the 100 companies Treasury expects to be captured by
Pillar 1 would be U.S. companies?
Answer. Treasury expects approximately half of the 100 companies in
scope to be U.S. companies.
Question. How much profit would be allocated from the United States
to foreign jurisdictions, and can you tell us which jurisdictions that
profit would be reallocated to?
Answer. The OECD Inclusive Framework has not agreed on the precise
double tax relief methodology for Pillar 1. How much profit would be
reallocated to and from the United States depends on these details.
Revenue under Pillar 1 will be sourced to the end market jurisdictions
where goods or services are used or consumed. The jurisdictions that
stand to receive the largest reallocations from U.S.-headquartered MNEs
are the larger markets to which U.S. MNEs source revenues, but precise
figures depend on the various revenue sourcing factors being developed
as part of Pillar 1. OTA has done multiple analyses of P1 as it has
evolved, making reasonable assumptions about double tax relief
methodology, and we have consistently found an impact on US revenues
that was small and that included zero in the confidence interval.
statistics of income data
Question. What role has the Office of Tax Analysis (OTA)
traditionally had in the IRS's production and release of statistics of
income (SOI) data; for example, does OTA edit or modify the
presentation of SOI data before its release?
Answer. SOI decides what data to release, though OTA may suggest
topics. OTA staff with subject area expertise often review tables for
SOI Tax Stats and articles written for the SOI Bulletin. Indeed, OTA
staff have written articles for the SOI Bulletin analyzing specific tax
data. OTA review typically focusses on clarifications of how the data
were gathered or analyzed. SOI has the ultimate decision on which
suggestions from OTA to incorporate.
Question. Do you expect that role to change in any way with respect
to future releases of SOI data and, if so, how?
Answer. There is no expectation that OTA's role would change with
respect to future releases of SOI data.
Question. Can you commit that OTA will not influence or modify the
presentation of future SOI data, or selectively pick which data are
presented?
Answer. OTA will continue to work with SOI to provide clear
presentations of tax data to the public.
______
Questions Submitted by Hon. Steve Daines
Question. On May 18, 2021, Stephen A. Martin, Director of Exempt
Organizations Rulings and Agreements at the Internal Revenue Service
(IRS) issued a ruling determining that Christians Engaged does not
qualify as a 501(c)(3). In the course of the ruling, Mr. Martin stated,
``[Christians Engaged] educate[s] Christians on what the bible says in
areas where they can be instrumental including the areas of sanctity of
life, the definition of marriage, biblical justice, freedom of speech,
defense, and borders and immigration, U.S. and Israel relations. The
bible teaches are typically affiliated with the [Republican] party and
candidates.''
Is it your position that Biblical positions are typically
affiliated with the Republican party?
Is it your position that educating voters on (a) what the Bible
says and (b) how that applies to a host of public issues including the
sanctity of life and marriage qualifies as ``prohibited political
campaign intervention'' sufficient to prohibit a group doing so from
qualifying as a tax-exempt 501(c)(3)?
Answer. As you are likely aware, the Treasury Department plays no
role in IRS ruling processes. Nonetheless, I understand from my staff's
review of publicly available information that the taxpayer about which
you are asking publicly disclosed that it has in fact received section
501(c)(3) status as a tax-exempt entity and expressed its thankfulness
to the IRS.
Question. One of your Deputy Assistant Secretaries, Tom West,
recently said with respect to the section 199A deduction that, ``It's
like when somebody is shot and the bullet is lodged somewhere close to
a critical organ, and the doctor said, `We're just going to leave the
bullet in, because it would be too risky to pull it out, and maybe it's
the only thing keeping the patient alive.' ''
As you know, changes to the 20-percent pass-through business
deduction were not included in the Green Book.
Do you agree with Mr. West that without the 20-percent deduction,
many businesses who survived the pandemic or who have yet to close may
have gone out of business if not for the 199A deduction? If not, why?
Answer. This administration has demonstrated its unwavering
commitment to helping businesses big and small navigate the challenges
of the pandemic, retain their employees, and build back as the economy
reopens. The American Rescue Plan provided unprecedented aid to small
businesses and their workers--and provided it in a timely manner. While
existing tax deductions may certainly have helped some of the
businesses that continued to turn a profit during the pandemic, the
businesses that suffered the most and needed the most help to survive
are unlikely to have benefited from section 199A, a provision that
applies to owners of profitable businesses.
Finally, while changes to section 199A were not included in the
administration's Green Book proposals, that does not change the fact
that independent analyses based on JCT reports have shown that over 60
percent of the benefits from the provision will go to the top 1 percent
of households.
______
Questions Submitted by Hon. Chuck Grassley
Question. Taxpayer information that appears to have originated with
the IRS has been published by ProPublica. Members of this committee are
engaged in getting to the bottom of this. I'm also looking into it in
my role as ranking member of the Judiciary Committee. Though the
ProPublica stories focus on the tax returns of a few billionaires and a
candidate for public office, we don't know if that's the entire
universe of compromised returns or if it's the first sign of a much
larger breach or leak.
When did you become aware that taxpayer data held by the IRS may
have been compromised?
Do you believe that confidential information that originated at the
IRS was the basis for the ProPublica piece? If so, do you know the full
scope of the leak or hack, and which, or how many, taxpayers had their
data stolen?
Did anyone who had advanced knowledge of the ProPublica piece, such
as a reporter or outside expert, contact the IRS or the Treasury
Department in advance of publication?
Answer. With respect to the ProPublica report, I am deeply troubled
by it. It is important to stress that unauthorized disclosure of
taxpayer information is a crime. Upon learning of this matter, it was
immediately referred to the FBI, Federal prosecutors, and Treasury
Department oversight authorities--all of whom have the independent
authority to investigate. We don't yet know what occurred--but all is
being done to get to the bottom of this potentially criminal activity.
Question. The President proposes to eliminate the benefit of
stepped-up basis rules on transfers of most assets at death. This
proposal would essentially create a second ``death tax'' by taxing
paper gains in property immediately upon transfer at death. The
Treasury description claims a special rule will protect family
operations by allowing them to delay payment of the tax. However, not
much detail has been provided concerning how this rule would work. The
little information that has been provided on the rule reminds me of the
Qualified Family Owned Business Interest (QFOBI) Deduction under former
section 2057. Section 2057 was ultimately repealed as it proved
unworkable and very few estates claimed the deduction. As Michael
Graetz, Deputy Assistant Secretary of Tax Policy for George H.W. Bush,
and Ian Shapiro wrote in 2005, ``Everyone now agrees--regardless of
which side of the issue they are on--that QFOBI has been a complete and
utter failure. . . . It did not solve anything. QFOBI has so many
requirements, so many structures and pitfalls, that very few family
businesses have obtained any tax relief at all because of it.''
In what ways do you expect the definition of a ``family-owned and -
operated business'' to materially differ from the definition of a
``qualified family-owned business interest'' under repealed section
2057? Would you expect similar ownership rules to apply that would
limit it's applicability to ownership interests of certain size? Would
the value of the business interest need to constitute as certain
percent of the decedents total gross estate to qualify?
Can you clarify whether the proposed special rule would provide for
a deferral of taxes owed or apply a carryover basis regime with respect
to family business property? If it's a deferral of taxes owed, would a
tax lien loom over the operations making it difficult to secure a
business loan or mortgage?
If any portion of the property is sold or transferred in the course
of managing the business, could that trigger an immediate significant
tax bill based on paper gains from the decedent's lifetime? Would this
be true even where an heir swapped a parcel of land with a neighbor
farmer given the President's also proposed to repeal like-kind
exchanges?
Answer. The administration's capital gains tax proposal is
fundamentally about taxing income from wealth the same way that we tax
income from work. There have been no proposals to change the existing
estate tax rules, but the proposal would impose a realization event
upon the transfer of appreciated assets, whether by gift or bequest.
Critically, as you note, the proposal provides that family-owned and
operated businesses should be able to defer the economic impact of the
application of this proposal for as long as the business remains in the
family. The administration has not suggested that existing or historic
definitions are the most appropriate in terms of filling in the details
of this proposal and in fact looks forward to working with Congress to
ensure that the critical definitional concepts are appropriately
crafted to protect family businesses.
Question. Recently you stated interest rates have been ``too low
now for a decade'' and that we should welcome higher rates. But, if
interest rates do increase, that could be catastrophic given the
trajectory of our national debt. Under the President's budget, public
debt is projected to reach 117 percent of GDP in 2031 and continue to
grow faster than the economy thereafter. According to CBO, with debt of
this size, even relatively small rises in interest rates above the
baseline can result in trillions of dollars in interest costs on the
debt. Given this, isn't the time to get our national debt under control
now, not after interest rates rise potentially sparking a debt crisis?
Answer. It is imperative that we put our Nation on a sustainable
long-term fiscal path. This requires a combination of policy decisions,
including not only making investments that bolster our Nation's
productivity and labor supply, but also taking action to offset the
costs of new investments. The President's American Families Plan and
American Jobs Plan are fully paid-for over time, which--when coupled
with the expected gains in productivity capacity--are an important step
towards achieving long-term fiscal health.
Question. The President has expressed concerns about large
corporations, including Amazon, not paying taxes. I assume this is one
of the reasons he is proposing a corporate minimum tax based on book
income. The President's budget indicates that certain credits, such as
for research and development and green energy would be permitted to be
taken against the book tax. This suggests to me the administration
recognizes that there may be legitimate policy reasons for tax rules to
differ from accounting rules even if it could result in a corporation
paying little or no tax. Can you clarify when, if ever, the
administration thinks it would be ok for a profitable corporation on a
book basis to pay zero tax?
Answer. The administration's proposals include a 15-percent minimum
tax on worldwide income for financial reporting purposes (book income)
for corporations with book income in excess of $2 billion. In
particular, taxpayers would calculate ``book tentative minimum tax''
equal to 15 percent of worldwide pre-tax book income (calculated after
subtracting unused book net operating loss carryovers from current year
book income), less General Business Credits (including R&D, clean
energy and housing tax credits) and foreign tax credits. The ``book
income tax'' equals the excess, if any, of the book tentative minimum
tax over regular tax. Additionally, taxpayers would be allowed to claim
a book tax credit (generated by a positive ``book income tax'') against
regular tax in future years (to the extent the regular tax liability in
such years exceeds the ``book tentative minimum tax'' in such years).
The administration has proposed this limited book minimum tax to
act as a backstop when there are large discrepancies between what a
company is reporting to their shareholders as financial income and what
they are reporting in taxable income. This proposal is directed at
asking very large and profitable companies with low or zero regular tax
liabilities to pay their fair share. The proposal is designed to avoid
targeting companies with low effective tax rates due to legitimate use
of research and experimentation tax credits and many general business
tax credits. The minimum book tax proposal is aimed at recapturing the
tax revenue lost to gaming and tax avoidance.
Question. One way Amazon is likely able to reduce its tax burden to
zero or near zero is by claiming green energy credits. This includes
credits for installing solar panels, purchasing electric vehicles, and
investing in renewable energy projects. The President proposes to
enhance and modify these credits, including by providing a ``direct
pay'' option. ``Direct pay'' allows a taxpayer to receive a payment
from Treasury for the value of the credit. This feature is especially
valuable for businesses that have little or no tax liability to claim a
credit against. Given this, do you have any concerns that a ``direct
pay'' option could result in large profitable corporations like Amazon
not only paying zero tax, but actually receiving a check from the IRS
instead?
Answer. The administration has not proposed to limit the use of
renewable energy related tax credits by specific companies. Our Budget
proposal would allow firms to take incentives as a direct pay option as
opposed to reducing a firm's tax liability. The President's plan to
make public investments in infrastructure, technology, research, and
the green industries of the future would help lay a strong foundation
for longstanding economic prosperity. It would also promote job
creation in the United States, ensuring that American workers benefit
from a robust domestic economy.
Question. Prior to the pandemic, revenue as a percent of GDP
averaged 17.4 percent for the past 50 years. This percent fluctuates
year to year, but has been fairly consistent in times of higher tax
rates and lower tax rates. Since the end of World War II, revenue as a
percent of GDP exceeded 19 percent in only 5 years. This included 3
years at the end of the 1990's during the height of the dot com bubble.
Under the President's budget, revenues equal or exceed 19 percent of
GDP each year after 2024 and are 19.9 percent of GDP in 2031. Given our
historical experience with revenues as a percent of GDP, do you believe
revenues at these levels would prove sustainable? Second, do you think
taxpayers will simply accept such a high tax burden with no change in
their economic activity or behavior?
Answer. In historical terms, the necessary share of tax revenue has
fluctuated with the spending side of the ledger; adding social programs
like Social Security and Medicare that are funded by payroll taxes has
raised the historical level of Federal revenue to GDP. It is important,
too, to distinguish the nature in which revenue is raised, as the
economic impacts of taxation depend critically on the design of the tax
provisions; simply evaluating a Nation's tax code based on the level of
GDP may overlook important aspects that can determine the code's
efficiency. For example, the President's fiscal agenda calls for
ambitious new programs in a wide array of programs, including
infrastructure, long-term care, health, child care, and many others--
while committing to more than offsetting the costs over 15 years.
Importantly, though, the President's plans do not raise taxes on anyone
making under $400,000 a year, and millions of Americans will benefit
from tax cuts through an expanded Earned Income Tax Credit, Child Tax
Credit, and Child and Dependent Care Tax Credit.
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Question Submitted by Hon. Maggie Hassan
Question. The American Rescue Plan contained my bipartisan bill
with Senator Braun to provide assistance--through the Employee
Retention Tax Credit--to new businesses that started during the
pandemic.
This assistance will be available starting in July, and it is
critical that the Treasury promptly issue guidance so that small
businesses can fully and quickly access this assistance.
When do you expect this guidance to be issued, and will you
continue working to ensure that new and small businesses have full
access to the Employee Retention Tax Credit?
Answer. Treasury staff and the IRS are working to issue additional
guidance regarding the important American Rescue Plan Act changes that
enhance the rules for the employee retention credit and intend to issue
the guidance in the next few weeks. Treasury and the IRS are committed
to issuing guidance that will ensure that recovery startup businesses
and other eligible employers have the information needed to claim the
employee retention credit in a timely manner for the third and fourth
quarter of 2021.
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Questions Submitted by Hon. James Lankford
Question. On June 8th, and again on June 16th, ProPublica published
articles concerning the private tax information of several American
citizens, while noting that the subject of their latest article is
``among thousands of wealthy people whose tax return data ProPublica
has obtained.''
Section 6103 of the Internal Revenue Code provides that ``returns
and return information shall be confidential,'' and prohibits any
officer or employee of the Federal or State government from disclosing
such information unless authorized by the taxpayer or provided under
Federal law. Further, section 7213 states that the unauthorized
disclosure of returns or return information is unlawful and is a felony
punishable by a $5,000 fine and/or imprisonment of up to 5 years.
Section 7213(a)(3) provides that it is unlawful for someone to whom any
return or return information is disclosed in an unauthorized manner to
print or publish such return or return information in any manner not
provided by law.
When did the Department become aware of the breach?
Was anyone at Treasury or the IRS notified in advance that
ProPublica would be publishing private tax return data on June 8th?
If yes, what steps were taken to stop ProPublica from publishing
private tax information?
What steps were taken after you became aware?
Have there been any corresponding updates to security systems to
ensure this information was not accessed from the outside?
While ProPublica states they have received this information
anonymously, their Code of Ethics notes that they strive to identify
all sources of information, and that ``[e]ditors have an obligation to
know the identity of unnamed sources in our stories. . . .''
Have any steps have been taken by TIGTA or others to contact
ProPublica to identify the source of the information?
Has anyone within the Treasury Department or IRS contacted
ProPublica and asked them to refrain from publishing any additional
private taxpayer data?
Has anyone within Treasury or the IRS notified ProPublica that
section 7213(a)(3) of the Internal Revenue Code states that it is
felony for ``any person to whom any return or return information (as
defined in section 6103(b)) is disclosed in a manner unauthorized by
this title thereafter willfully to print or publish in any manner not
provided by law any such return or return information,'' punishable by
a fine of up to $5,000 and/or imprisonment of up to 5 years?
Answer. With respect to the ProPublica report, I am deeply troubled
by it. It is important to stress that unauthorized disclosure of
taxpayer information is a crime. Upon learning of this matter, it was
immediately referred to the FBI, Federal prosecutors, and Treasury
Department oversight authorities--all of whom have the independent
authority to investigate. We don't yet know what occurred--but all is
being done to get to the bottom of this potentially criminal activity.
Question. I understand that the Green Book and President's FY 2022
budget articulate a new reporting requirement on financial accounts.
This would require financial institutions to report data on the
financial accounts of individuals, families, and businesses with flows
of deposits or withdrawals of as little as $600.
It seems to me that there are numerous occupations with variable
receipts and income flows, and that the $600 threshold would lead to a
massive amount of personal information flowing into the IRS.
Can you please explain how monitoring nearly every taxpayer's bank
accounts, for flows of as little as $600, is necessary for tax
administration?
What does the IRS specifically plan to use the financial account
records for and what details will be transmitted from the financial
institutions to the IRS under this proposal?
Do you have any concerns regarding the pure volume of information
that would be flowing into the IRS? Are you confident the IRS needs
this amount of information?
Given the news of late, are you confident that the IRS could
adequately protect taxpayers' information under this proposal?
Can you assure the American people that their information will not
be leaked or used for political reasons?
Answer. When the IRS has access to third-party reports to verify
tax filings, compliance rates are over 95 percent. In the absence of
third-party reporting, compliance rates are under 50 percent. The IRS
and GAO agree that additional information reporting is one of the best
ways to improve compliance.
The President's proposals shed a light on opaque income streams
without increasing taxpayer burden at all. This is accomplished by
leveraging the information that financial institutions already know
about their customers. This regime builds off of existing reports that
banks already provide to the IRS on interest that accrues on their
accounts. A bit of additional information--on account inflows and
outflows--can help the IRS try to identify when there is a difference
between taxpayers' reported financial positions and their true ones.
This will decrease the likelihood that compliant taxpayers are subject
to costly and burdensome audits. It will also benefit honest small
businesses, who today are at a disadvantage vis-a-vis those who evade
their tax liabilities.
It will be important to provide the IRS the resources it needs to
both absorb this volume of new information and effectively deploy it in
enforcement actions, and the President's compliance initiatives do just
this, providing the IRS with a sustained stream of mandatory funds to
build up a new infrastructure around financial account reporting and to
hire and train agents and researchers who will be able to glean
insights from the information provided, by applying modern techniques
like machine learning approaches.
The compliance initiatives were designed with taxpayer privacy
concerns front of mind. For example, the proposal includes significant
resources to ensure that the IRS has the tools it needs to meet threats
to the security of the tax system and to protect sensitive taxpayer
information.
Question. A few weeks ago, in a hearing with Commissioner Rettig,
the Commissioner said that the IRS still wasn't able to use all of the
FATCA information that the IRS receives.
Does it seem prudent to require the IRS to collect, handle,
process, and protect even more taxpayer information, when they aren't
yet able to fully utilize all of the information that they already
collect?
Answer. As the IRS tax gap estimates make clear, when third-party
information reports exist, compliance rates exceed 95 percent. Without
any information reporting, compliance rates are under 50 percent. This
creates an inequitable asymmetry in tax collections depending on the
form in which income is accrued. The GAO and IRS agree that
strengthening third-party information reporting is one of the best ways
to improve tax compliance. This information will help the IRS target
enforcement activities on evaders and decrease the likelihood of audits
for those who are already fully compliant with their tax obligations.
It will also create a more efficient tax system and raise substantial
revenue.
It is true that information alone is not enough. It will also be
imperative to provide the IRS the resources it needs to best deploy
this information, as well as existing information it collects--as the
President's proposal does. For example, today the IRS cannot
efficiently evaluate information on partnership information reports, or
on submissions required by FATCA. With modernized IT as well as
investment in hiring and training revenue agents capable of expending
significant time on complex, high-end examinations, the IRS will be
able to improve enforcement activities to the betterment of all
compliant taxpayers.
Question. I am very concerned about recent reports that China would
be seeking certain exemptions from a global minimum corporate tax.
Clearly, Beijing wants to retain the tax incentives that it sees as key
for its own economic development and success.
At our June 16th hearing, in response to a question from Senator
Daines, you said ``we will not agree to any type of carve-out that
would meaningfully weaken a robust global minimum tax regime, not for
China and not for other countries.''
What does ``meaningfully weaken'' mean?
Answer. We continue to believe that modest substance-based carve-
outs are consistent with a robust global minimum tax. As applied to
China, see answer directly below.
Question. Can you confirm that no agreement should be reached on
Pillar 2 where the U.S.'s biggest competitors, like China, are not
subject to the same terms as the United States?
Answer. The consensus we achieved at the G7 and G20 was
unprecedented and signals great progress toward a historic deal on a
redesign of the international tax system. More work needs to be done;
however, Pillar 2 does not need the support of every country to be
successful. Due to the enforcement mechanism of the UTPR, and our
domestic corollary SHIELD proposal, if enough of the world's GDP signs
up for Pillar 2, these enforcement mechanisms will incentivize other
jurisdictions to also adopt minimum taxes by denying deductions on
related party payments in low-tax jurisdictions. We are actively
working with all countries to make the consensus as broad as possible,
but we are not providing any special exceptions that would undermine
the robustness of the regime, for China or any other country.
Question. Earlier this month after your meeting in London, it was
reported that the G7 finance ministers had come to a top level
agreement on the allocation of taxing rights and global minimum tax
rules. Specifically, a Pillar 1 in which market countries would be
awarded the taxing rights on at least 20 percent of profit exceeding a
10-percent margin for the biggest multinationals, and a Pillar 2 that
includes a global minimum tax of at least 15 percent on a country-by-
country basis. As you know, the U.S. was the first to enact a global
minimum tax when Congress enacted the GILTI as part of the Tax Cuts and
Jobs Act. No other country currently has a global minimum tax.
While there have been reports of a G7 agreement, there are many
unanswered questions and many details yet to be determined. Further,
the OECD Inclusive Framework includes over 135 countries and
jurisdictions, some of which have already voiced concerns regarding the
G7 agreement.
Given this, do you believe that the US should increase its own
rates on its own companies, by modifying GILTI, before a detailed OECD
agreement is made and our international counterparts and competitors
enact corresponding changes to their own tax laws?
Answer. The United States is seeking a global agreement on a
minimum tax at the highest possible rate. Even if it settles somewhat
below 21 percent, today the global minimum tax rate is zero, far below
our 10.5-percent rate. To the extent that foreign countries also adopt
strong minimum taxes, that will also reduce any competitiveness
worries, while protecting our tax base from the profit shifting of
foreign multinational companies. Still, even absent agreement, we are
not powerless to address these problems. The SHIELD proposal can
counter foreign company profit shifting. And simple anti- inversion
measures, or even changes through regulation, can be quite effective in
stemming the incentive to invert, as shown by the U.S. experience after
the anti-inversion (and anti-income stripping) regulations of the late
Obama years.
Question. Is it prudent to wait until an actual OECD agreement is
met? Not only because it could be difficult to reach a final deal, but
also because any resulting deal could take years to implement?
Are you concerned that taking domestic action now could prove
harmful to U.S. businesses?
Answer. See answer to the immediate question above.
Question. The administration has repeatedly referenced the SHIELD
proposal in response to questions about increasing the U.S.'s minimum
tax before other countries enact similar measures. There are few
details and many questions regarding the proposed SHIELD regime, some
of which pertain to treaty modification and constitutionality, but the
administration continues to suggest this aggressive proposal is
necessary.
Are you suggesting that the SHIELD proposal, which we are still
awaiting details on, would compel our biggest competitors, like China,
to enact a global minimum tax?
To my understanding, this SHIELD proposal would deny deductions for
payments made to jurisdictions with no global minimum taxes, possibly
China for example. However, under this example, wouldn't a Chinese
company, instead, opt to avoid doing business in the United States
altogether? Wouldn't this just incentivize foreign businesses to plan
around the U.S. to avoid the SHIELD, leading to a reduction of U.S.
business activity and investment?
How is this end result different than a global tariff that
similarly increases the cost of doing any business in the U.S., leads
to higher costs passed onto U.S. consumers, or pushes business activity
out of the U.S. altogether?
Answer. The consensus achieved at the G7 and G20 is unprecedented
and signals great progress towards a redesign of the international tax
system. With countries representing more than 90 percent of global GDP
joining the Inclusive Framework consensus, the enforcement mechanisms
of the UTPR, and our SHIELD proposal, will incentivize jurisdictions to
adopt minimum taxes. As a result, with enough of the world's GDP
joining the Pillar 2 framework, it would be impossible for companies to
avoid doing business through related parties in countries with a
minimum tax.
Question. I am concerned that the administration's energy tax
proposals, which include the elimination of all oil and gas related
provisions, could drive up the cost of energy and make us more reliant
on imports. Moreover, increasing the cost of domestic production does
nothing to lower domestic demand; rather, we simply would import more
of these resources from other parts of the world and increase our
exposure to the whims of bad actors.
Has the Treasury Department conducted any studies about how the
removal of these energy tax provisions, such as expensing of intangible
drilling costs and percentage depletion, would affect the following:
jobs; the price of gasoline; home energy costs; small oil and gas
businesses; the inflation rate; U.S. energy independence, or
conversely, dependence; and the level of oil and gas imports?
What information can you provide regarding any of the
distributional impacts listed above?
Answer. The administration is proposing to eliminate fossil fuel
subsidies that distort markets by encouraging more investment in the
oil and gas industry than would occur under a neutral system. This
market distortion is inconsistent with the administration's policy of
supporting a clean energy economy and reducing carbon emissions.
Moreover, the subsidies must ultimately be financed with taxes that
result in other distortions, e.g., in reductions in investment in
other, potentially more productive, areas of the economy.
Fossil fuel companies additionally benefit from substantial
implicit subsidies, since they sell products that create externalities
but they do not have to pay or bear the costs for the damages caused by
these externalities. The administration has created a goal to create a
carbon pollution-free power sector by 2035 and net zero emissions
economy by no later than 2050. Meeting these goals will create millions
of good-paying, middle-class, union jobs and build the clean energy
economy of tomorrow.
Question. I had a good conversation with Secretary Granholm last
week in the Energy Committee about the transition to lower emission
energy sources. She assured me that the administration does think there
is value in transitioning to lower-
emissions fuels even if they aren't zero emission--especially in cases
where a transition from the status quo to zero emissions sources would
be unrealistic (e.g., where EVs don't have needed infrastructure or in
locations where renewable sources aren't compatible with the climate).
An example I have brought up a lot is that many areas in New England
could lower their emissions drastically by switching from heating oil
to natural gas, but due to the ``all or nothing'' preference of many
environmentalists, the status quo largely remains.
In terms of benefit to the environment, is each pound of avoided
CO2 emissions equal? Ultimately, does it matter how the
reduction was realized?
Answer. I would defer to my scientific colleagues on this question.
From a policy perspective, it's important to think about how the
actions we take to remove or avoid a pound of CO2 emissions
impact private capital flows, investment patterns, and other countries'
incentives to address their emissions, or impact future emissions. This
administration has set a net-zero economy as its goal and we must take
actions to enable this transition.
Question. If you agree with Secretary Granholm that there should be
a transition period, and that lower emission sources like natural gas
have a role to play, why does the administration propose making it more
difficult to produce natural gas domestically through the immediate
elimination of certain tax treatments like expensing of intangible
drilling costs and percentage depletion?
Answer. The administration is proposing to eliminate fossil fuel
subsidies that distort markets by encouraging more investment in the
oil and gas industry than would occur under a neutral system. This
market distortion is inconsistent with the administration's policy of
supporting a clean energy economy and reducing carbon emissions.
Moreover, the subsidies must ultimately be financed with taxes that
result in other distortions, e.g., in reductions in investment in
other, potentially more productive, areas of the economy.
Question. If generation of new sources is years out (at best), but
we hamstring our domestic oil and gas industry with higher costs
through modifications to our tax code, how do you anticipate our
economy will power itself in those years in between now and when the
new generation sources come online?
Relatedly, how would the elimination of these oil and gas
provisions, in conjunction with proposed increases to the corporate
rate and changes to our international tax rules, impact our domestic
energy producers' ability to compete with foreign-owned energy
businesses? Are you concerned that we may actually have to import oil
and gas to meet demand at lower prices?
Answer. In terms of new electricity generation capacity added each
year, renewable energy has outpaced fossil fuel capacity since 2015.
Renewable energy is generally cheaper, and because it is produced
locally, is preferable from a national security perspective. In
addition, with the rapidly falling costs of battery storage, the issue
of supply reliability is being quickly addressed.
As detailed in the ``General Explanations of the Administration's
Fiscal Year 2022 Revenue Proposals'' (the Green Book) released at the
end of May, the administration is proposing to remove 13 specific
subsidies for fossil fuel production. The proposal would repeal: (1)
the enhanced oil recovery credit for eligible costs attributable to a
qualified enhanced oil recovery project; (2) the credit for oil and gas
produced from marginal wells; (3) the expensing of intangible drilling
costs; (4) the deduction for costs paid or incurred for any tertiary
injectant used as part of a tertiary recovery method; (5) the exception
to passive loss limitations provided to working interests in oil and
natural gas properties; (6) the use of percentage depletion with
respect to oil and gas wells; (7) 2-year amortization of independent
producers' geological and geophysical expenditures, instead allowing
amortization over the 7-year period used by integrated oil and gas
producers; (8) expensing of exploration and development costs; (9)
percentage depletion for hard mineral fossil fuels; (10) capital gains
treatment for royalties; (11) the exemption from the corporate income
tax for publicly traded partnerships with qualifying income and gains
from activities relating to fossil fuels; (12) the Oil Spill Liability
Trust Fund excise tax exemption for crude oil derived from bitumen and
kerogen-rich rock; and (13) accelerated amortization for air pollution
control facilities.
These provisions of the tax code are specific to the oil, gas, and
coal industries and are estimated to cost taxpayers over $3 billion per
year. The objective of the administration's proposal is to bring the
tax treatment of oil, gas, and coal producers back in line with other
firms. Research suggests that repealing fossil fuel subsidies will not
lead to big changes in the markets for fossil fuels.
Question. If we do become more reliant on imports of oil and gas,
do you agree that this would actually result in more emissions since we
would have to transport the fuels here?
Answer. Renewable energy is the fastest-growing energy sector of
the United States, and global, electricity generation market. This
administration's policies leverage the cost advantage of these clean
and green technologies to further drive deployment.
Question. Reports out of the G7 meeting earlier this month indicate
your support for mandatory climate financial disclosures by private
companies and financial institutions. I also understand that, at the
end of last month, the Biden administration put forth a related
executive order on Climate-Related Financial Risk, setting in motion
the first steps toward government-wide mandates on climate disclosures
among financial regulators. I have significant concerns that such
requirements would unduly burden community and mid-size banks, which
are prevalent in my State, and would be detrimental to Oklahoma's
domestic conventional energy producers, resulting in targeting,
underinvestment, and instability.
Do you share concerns that these requirements could be both
unnecessarily burdensome, and lead to underinvestment in critical
infrastructure?
What is the goal of mandatory climate disclosures on private
companies?
Answer. Domestic and international investors are seeking more
consistent, comparable, and reliable information on climate-related
risks, impacts, and opportunities. G7 members discussed disclosure of
climate-related financial information in a manner that is in line with
domestic regulatory frameworks, including those in the United States.
In line with its mandate and regular procedures, the SEC recently
issued a request for public comment on whether and how they could
facilitate consistent, comparable, and reliable information on climate-
related disclosures as well as the costs and benefits of different
regulatory approaches related to climate disclosure. Investors and
those who want to raise capital or invest in our capital markets have
broadly noted that ensuring high-quality information to assess climate-
related financial risks is important for the efficient allocation of
capital and financial stability.
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Questions Submitted by Hon. Robert Menendez
Question. As a part of Secretary's Yellen's confirmation hearing in
January 2021, my office sent you a series of questions related to
diversity and inclusion at Treasury. Your office responded to my office
on June 15, 2021, and I would like further clarification on some of
your responses.
Your response to question number 1 is incomplete, as it only shows
the percentage of men and women for each race and/or ethnicity for
departmental offices at Treasury. Could you please provide me with a
total percentage for each race and ethnicity of employees at Treasury--
not just male and female breakdowns?
Answer. The previous question related solely to Departmental
Offices (Treasury Main Headquarters component). Attached is the data
for men/women and for race/ethnicity for all of Treasury. (Note: data
is as of the end of FY 2020.)
Treasury Workforce by Gender Against RCLF, CLF
------------------------------------------------------------------------
Treasury RCLF CLF
------------------------------------------------------------------------
Male 38.52% 36.39% 51.86%
------------------------------------------------------------------------
Female 61.48% 63.61% 48.14%
------------------------------------------------------------------------
Treasury Workforce by ERI Against RCLF, CLF
------------------------------------------------------------------------
Treasury RCLF CLF
------------------------------------------------------------------------
Hispanic 12.37% 8.54% 9.96%
------------------------------------------------------------------------
White 52.14% 74.64% 72.36%
------------------------------------------------------------------------
Black 27.50% 10.72% 12.02%
------------------------------------------------------------------------
Asian 6.54% 4.57% 3.90%
------------------------------------------------------------------------
NHOPI 0.18% 0.12% 0.14%
------------------------------------------------------------------------
AIAN 0.80% 0.90% 1.08%
------------------------------------------------------------------------
2+ 0.46% 0.51% 0.54%
------------------------------------------------------------------------
Question. As part of your responses to my questions related to the
January 2021 hearing, your office responded to my third question
related to minority representation detailed by the Office of Minority
Women and Inclusion (OMWI), by pointing out that the OMWI numbers are
``for Departmental Offices, not Treasury as a whole.''
Could you please provide additional information about the
differences provided by the OMWI office regarding the breakdown of race
and ethnicity of employees at Treasury?
Answer. OMWI serves as the Chief Diversity Office for Treasury's
Departmental Offices (DO), which comprise the Immediate Headquarters
Offices of the Secretary, Deputy Secretary, Under Secretaries,
Assistant Secretaries, and the Office of the Treasurer. The information
provided by OMWI relating to the SES workforce, contained only the SES
percentages for Departmental Offices (or Main Treasury headquarters
staff). The other percentages provided in our previous response (which
are incorporated below) include SES and equivalent staff for the entire
Department, which includes Treasury bureaus such as IRS, BEP, Mint,
OCC, etc.
The figures cited are for Departmental Offices, not Treasury as a
whole. As of FY 2020, 76.73 percent of permanent Senior Executive
Service (SES) positions in the Department are held by white employees.
Below is the breakdown by bureau.
----------------------------------------------------------------------------------------------------------------
Total Hispanic White Black Asian NHOPI AIAN 2+ Races
----------------------------------------------------------------------------------------------------------------
BEP Male 60.00% 0.00% 40.00% 10.00% 10.00% 0.00% 0.00% 0.00%
----------------------------------------------------------------------------------------------------
(10) Female 40.00% 10.00% 30.00% 0.00% 0.00% 0.00% 0.00% 0.00%
----------------------------------------------------------------------------------------------------------------
DO Male 72.73% 2.27% 64.39% 2.27% 3.79% 0.00% 0.00% 0.00%
----------------------------------------------------------------------------------------------------
(132) Female 27.27% 0.76% 21.21% 3.79% 1.52% 0.00% 0.00% 0.00%
----------------------------------------------------------------------------------------------------------------
FINCEN Male 80.00% 0.00% 80.00% 0.00% 0.00% 0.00% 0.00% 0.00%
----------------------------------------------------------------------------------------------------
(10) Female 20.00% 0.00% 10.00% 10.00% 0.00% 0.00% 0.00% 0.00%
----------------------------------------------------------------------------------------------------------------
FS Male 54.55% 3.03% 48.48% 3.03% 0.00% 0.00% 0.00% 0.00%
----------------------------------------------------------------------------------------------------
(33) Female 45.45% 0.00% 36.36% 3.03% 3.03% 0.00% 3.03% 0.00%
----------------------------------------------------------------------------------------------------------------
IRS Male 53.67% 3.09% 39.00% 7.72% 3.47% 0.00% 0.39% 0.00%
----------------------------------------------------------------------------------------------------
(259) Female 46.33% 1.93% 27.80% 15.06% 0.77% 0.00% 0.77% 0.00%
----------------------------------------------------------------------------------------------------------------
IRS-CC Male 61.29% 3.23% 54.84% 3.23% 0.00% 0.00% 0.00% 0.00%
----------------------------------------------------------------------------------------------------
(62) Female 38.71% 0.00% 35.48% 0.00% 1.61% 1.51% 0.00% 0.00%
----------------------------------------------------------------------------------------------------------------
MINT Male 91.67% 8.33% 75.00% 8.33% 0.00% 0.00% 0.00% 0.00%
----------------------------------------------------------------------------------------------------
(12) Female 8.33% 0.00% 8.33% 0.00% 0.00% 0.00% 0.00% 0.00%
----------------------------------------------------------------------------------------------------------------
OCC Male 68.52% 3.70% 53.70% 5.56% 5.56% 0.00% 0.00% 0.00%
----------------------------------------------------------------------------------------------------
(54) Female 31.48% 1.85% 20.37% 7.41% 1.85% 0.00% 0.00% 0.00%
----------------------------------------------------------------------------------------------------------------
OIG Male 28.57% 0.00% 28.57% 0.00% 0.00% 0.00% 0.00% 0.00%
----------------------------------------------------------------------------------------------------
(7) Female 71.43% 0.00% 57.14% 14.29% 0.00% 0.00% 0.00% 0.00%
SIGTARP Male 71.43% 0.00% 57.14% 14.29% 0.00% 0.00% 0.00% 0.00%
----------------------------------------------------------------------------------------------------
(7) Female 28.57% 0.00% 14.29% 0.00% 0.00% 14.29% 0.00% 0.00%
----------------------------------------------------------------------------------------------------------------
TIGTA Male 58.33% 0.00% 58.33% 0.00% 0.00% 0.00% 0.00% 0.00%
----------------------------------------------------------------------------------------------------
(12) Female 41.67% 8.33% 33.33% 0.00% 0.00% 0.00% 0.00% 0.00%
----------------------------------------------------------------------------------------------------------------
TTB Male 42.86% 0.00% 42.86% 0.00% 0.00% 0.00% 0.00% 0.00%
----------------------------------------------------------------------------------------------------
(7) Female 57.14% 0.00% 42.86% 0.00% 0.00% 0.00% 0.00% 14.29%
----------------------------------------------------------------------------------------------------------------
Treasury Male 61.22% 2.81% 50.00% 5.28% 2.97% 0.00% 0.17% 0.00%
----------------------------------------------------------------------------------------------------
(606) Female 38.78% 1.49% 26.73% 8.42% 1.16% 0.33% 0.50% 0.17%
----------------------------------------------------------------------------------------------------------------
Question. According to Pensions and Investments, the largest money
managers have $54.1 trillion under management. Of those, the largest
minority and women managers manage approximately $484.1 billion--or
less than 1 percent of all funds.\1\ Research performed by the Knight
Foundation shows that diverse money managers preform the same--if not
better than non-diverse money managers.\2\
---------------------------------------------------------------------------
\1\ ``Diversity, Equity and Inclusion: Debunking the Myths,''
Pensions and Investments (May 31, 2021), https://www.pionline.com/
deireport2021.
\2\ ``Diversifying Investments: A Study of Ownership Diversity and
Performance in the Asset Management Industry,'' Knight Foundation
(January 28, 2019), https://knightfoundation.org/reports/diversifying-
investments-a-study-of-ownership-diversity-and-performance-in-the-
asset-management-industry/.
How much do we have in Federal assets that are professionally
managed and how much is managed by minority and women managers?
Additionally, who on your staff is designated to ensure Federal assets
are professionally managed by minority and women managers, and has that
---------------------------------------------------------------------------
person directly engaged with Hispanic money managers and brokers?
Answer. Treasury Departmental Offices do not currently have Federal
assets under professional management. However, Treasury recently
designated two investment advisory firms, one of which is a minority-
owned firm, to provide underwriting and financial advisory services
with respect to the implementation of the $9 billion Emergency Capital
Investment Program.
______
Questions Submitted by Hon. Rob Portman
Question. The G7 Finance Leaders announced support for an ``at
least'' 15-
percent global minimum tax in their communique stemming from the
agreement made during the Finance Ministers meeting, which you attended
in the UK. This agreement relates to the OECD negotiations around
Pillar 2, which also imposes the tax on a country-by-country basis.
There seems to be some confusion on what exactly this proposal
represents, so I would appreciate it if you would answer a few basic
questions to clarify matters. There are obviously differences between a
country's headline corporate tax rate and the 15-percent global minimum
tax you are proposing. Most countries, the U.S. for example, already
have corporate tax rates that are higher than 15 percent.
Would you please explain the differences between our corporate rate
and a global minimum tax?
Answer. Currently the corporate income tax rate is 21 percent. The
administration proposes to increase the corporate tax rate to 28
percent.
The U.S. version of a global minimum tax was first enacted as the
Global Intangible Low-Taxed Income (GILTI) rules in 2017 and provides a
50-percent deduction with respect to income of a controlled foreign
corporation. The section 250 deduction generally results in a 10.5-
percent U.S. effective tax rate on a corporate U.S. shareholder's
global minimum tax inclusion under the current U.S. corporate tax rate
of 21 percent. The 50-percent deduction is scheduled to be reduced to
37.5 percent starting in 2026. The administration proposes that the
section 250 deduction for a global minimum tax inclusion be reduced to
25 percent, thereby generally increasing the U.S. effective tax rate
under the global minimum tax to 21 percent under the proposed U.S.
corporate income tax rate of 28 percent.
The Pillar 2 global minimum tax would operate similarly to the
administration's proposed minimum tax. While the contours are still
being negotiated, more than 130 countries have joined consensus on a
Pillar 2 rate of ``at least 15 percent.''
Question. Additionally, the administration has a proposal to impose
a 15-percent minimum tax on worldwide book income. Would you please
explain the difference between the book tax and the 15-percent global
minimum tax you proposed at the OECD?
Answer. The administration's proposal for a book minimum tax would
impose a 15-percent minimum tax on worldwide book income for
corporations with such income in excess of $2 billion. In particular,
taxpayers would calculate ``book tentative minimum tax'' equal to 15
percent of worldwide pre-tax book income (calculated after subtracting
unused book net operating loss carryovers from current book income),
less General Business Credits (including R&D, clean energy, and housing
tax credits) and foreign tax credits. The ``book income tax'' equals
the excess, if any, of the book tentative minimum tax over regular tax.
Additionally, taxpayers would be allowed to claim a book tax credit
(generated by a positive ``book income tax'') against regular tax in
future years (to the extent the regular tax liability in such years
exceeds the ``book tentative minimum tax'' in such years).
Question. The book minimum tax proposal differs from the Pillar 2
work or the domestic law minimum tax (GILTI) in the that the book
minimum tax addresses the tax rate of the entire financial group owned
by a particular taxpayer, while GILTI (and the Pillar 2 income
inclusion rule) address only the earnings of foreign subsidiaries.
Since the true U.S. corollary to the proposed 15-percent global minimum
tax is the Global Intangible Low-Taxed Income (GILTI) regime, it seems
that should be the focus.
How would the administration's proposals line up with what you are
proposing at the OECD?
Answer. The United States is seeking a global agreement on a
minimum tax at the highest possible rate. Even if it settles somewhat
below the administration's proposed domestic GILTI rate of 21 percent,
today the global minimum tax rate is zero. A global minimum tax
agreement will thus reduce the differential between the domestic
minimum rate and the global rate.
Question. When we implemented the Tax Cuts and Jobs Act, the
international portions stemmed from a task force I co-led back in 2015
with Senator Schumer on international tax, which recommended that we
make changes to the tax code to lower the rate, move to a territorial
system and make our companies more productive and more competitive. We
implemented a minimum tax on foreign earnings of U.S. companies--the
GILTI provision, which removed the lock-out effect and helped bring
$1.6 trillion back home for companies to invest here in the U.S. Today,
the United States remains the only country which imposes a global
minimum tax on active foreign earnings of our own multinational
companies. Pillar 2 of the OECD negotiations advocates for a global
minimum tax--my question is--what do you see as the timeline for the
OECD process?
Pascal Saint-Amans has stated the timing has slipped to October for
an agreement, while many commentators think that it could potentially
take years to get legislative details hammered out. In the coming
months, the administration and my colleagues across the aisle aim to
pass tax hikes including doubling the GILTI rate, imposing it on a
country-by-country basis, removing the qualified business asset
investment (QBAI) provision, and the benefit for Foreign-Derived
Intangible Income (FDII), all before we have actually reached an
agreement at the OECD.
If as you assert, the GILTI changes won't make U.S. businesses
uncompetitive because foreign nations are going to move too, should we
really be moving to make those changes before there's written agreement
at the OECD?
Answer. Although a global minimum tax will reduce the disparity
between the GILTI rate and current global minimum rate (which is
currently zero), concerns about the competitiveness of U.S.
multinationals are overstated. Even before the Tax Cuts and Jobs Act of
2017 dramatically lowered U.S. corporate tax rates, U.S. multinational
companies paid similar effective tax rates as peers in other countries.
In recent years, the Joint Committee on Taxation shows effective tax
rates for U.S. multinational companies of about 8 percent. And U.S.
corporate tax revenues are far lower than those in peer countries.
Finally, it is important to remember that competitiveness is about
more than the success of U.S. companies in foreign merger and
acquisition bids. It is also about ensuring that our tax code doesn't
incentivize foreign operations at the expense of those at home. And, it
is about nurturing the many fundamental strengths that make the United
States a good place to do business. Investing in our institutions, in
the abilities and education of American workers, in the quality of our
infrastructure, and in cutting-edge research is all important.
Question. Why should we put the competitiveness of our constituent
businesses in the hands of foreign governments?
Answer. See answer immediately above.
Question. Under the prior administration, the Treasury Department
took the position that our GILTI provision should be treated as a
``deemed compliant'' for purposes of Pillar 2. In other words, because
it is a robust minimum tax with a substance-based carve-out, similar to
the minimum tax being proposed at the OECD, GILTI should be treated as
already complying with any global minimum tax agreement and no changes
would be needed to the provision.
In fact, the OECD Pillar 2 blueprint explicitly stated that the
Pillar 2 global minimum tax being considered is actually more
permissive in a number of ways than GILTI (i.e., GILTI is more
onerous).
Has the Biden administration abandoned the approach of proposing
that current law GILTI be treated as complying with any Pillar 2 global
minimum tax agreement?
Answer. The Biden-Harris administration will pursue a comprehensive
multinational agreement to update global tax rules in ways that
establish effective minimum taxation rules, prevent global profit-
shifting, and ensure that corporations pay their fair share. We have
committed to implementing Pillar 2 in a manner consistent with the
administration's budget proposals, although we also anticipate a future
need for deemed GILTI compliance given the uniqueness of many features
of the GILTI framework.
Question. If not, and the administration agrees to a global minimum
tax that differs from GILTI, would Congress have to enact changes to
GILTI?
Answer. See the response immediately above. Pillar 2 includes the
enforcement mechanism of the UTPR that incentivizes jurisdictions to
adopt Pillar 2 to the extent that their profits in low-tax
jurisdictions are taxed below the minimum tax rate. If Congress does
not adopt the President's proposal to reform GILTI, the taxes paid by
U.S.-parented groups under GILTI would still be taken into account in
applying the UTPR.
Question. What would happen to U.S. companies if the U.S. does not
have a compliant global minimum tax? If U.S. companies would be subject
to significant foreign tax and deductions denied abroad due to the U.S.
not having a compliant global minimum tax, doesn't that effectively
force Congress's hand? Should the administration erode the separation
of powers and be able to compel Congress to enact tax legislation?
Answer. See the response immediately above. Although the
administration has committed to pursuing a robust global minimum tax
and has consulted with congressional members and staff in crafting that
commitment, Congress remains free to decide whether and how to fulfill
that goal.
Question. The administration's proposed book minimum tax is
dependent on the Financial Accounting Standard Board's (``FASB'')
accounting standards for income and loss recognition. Additionally,
under the Alternative Minimum Tax regime (pre-Tax Cuts and Jobs Act), a
credit was available for the book minimum tax in excess of regular tax
to mitigate the issue of timing differences between book and tax that
would result in paying tax twice.
Is there concern in relinquishing taxing incentives and control to
the FASB?
Answer. The book minimum tax, if enacted, would, to some degree,
have the tax code leverage elements of FASB definitions (and
potentially the International Accounting Standard Board's definitions
as well--see response below regarding the use of IFRS). However, it is
not clear at this time exactly how the ``book income base'' will be
defined (i.e., whether it's simply U.S. GAAP/IFRS determined book
income or if it is that book income amount adjusted for certain items
that Congress deems appropriate) or how future changes to U.S. GAAP/
IFRS will impact the book income base. We would note that this would
not be the first time that Congress has leveraged the U.S. GAAP and/or
IFRS rules to determine a taxpayer's Federal income tax liability. For
example, section 451(b) and (c) of the Internal Revenue Code, as
amended by the Tax Cuts and Jobs Act of 2017, both look to the timing
of reporting and definition of ``revenue'' in a taxpayer's financial
statements to determine the timing of recognizing corresponding items
of gross income for Federal income tax purposes.
Question. How would the proposal address taxpayers that use
accounting methods other than GAAP?
Answer. The administration would work with Congress to describe the
details of this proposal, and while it is uncertain at this time, the
book minimum tax could be based on U.S. GAAP and IFRS book income (at
least as a starting point) and could use a definition/ordering rule
similar to that for an ``applicable financial statement'' in section
451(b)(3) of the Internal Revenue Code. It is expected that all
taxpayers within the scope of the book minimum tax proposal (i.e.,
having worldwide book income in excess of $2 billion) would have
financial statements prepared under either U.S. GAAP or IFRS.
Question. Can you provide additional details as to how taxpayers
would account for timing differences between book and tax? Ms.
Batchelder suggested that the book tax credit (generated by a positive
book tax liability) cannot reduce tax liability below book tentative
minimum tax. So, is it possible that some taxpayers may never get the
benefit of the book tax credit for these timing differences?
Answer. As stated above, we believe the administration would need
to work with Congress to develop the details of the proposal. That
said, this regime would not be without precedent in the context of the
general accounting rules and prior minimum tax regimes. The proposal
addresses timing differences between book and tax the same way that
timing differences between the old alternative minimum tax base and
regular Federal income tax base were addressed under the alternative
minimum tax (AMT) regime (which had a credit regime similar to the one
being considered as part of the book minimum tax proposal). A book
minimum tax liability that is generated as a result of a timing
difference (e.g., tax deduction before a book deduction) could give
rise to a tax credit that is carried forward and used to offset regular
Federal income taxes in a future year (e.g., the taxable year in which
the timing difference reverses and the deduction is reflected in the
book income base--causing the regular Federal income tax base and
liability to exceed the book income base and the ``book tentative
minimum tax'' amount). All else being equal, the excess of the regular
Federal income tax liability over the ``book tentative minimum tax''
amount in the year the timing difference reverses should be equal to
the amount of the credit generated in the year the timing difference
initiated (i.e., the credit should make the taxpayer whole with respect
to the timing difference).
Question. The initial basis for bipartisan congressional support of
Treasury's efforts at the OECD was to eliminate digital services taxes
and similar unilateral measures. At the hearing, you committed to
``pursuing absolutely every avenue toward a swift and comprehensive
standstill and rollback of DSTs.'' However, the European Union still
continues to move full steam ahead on its digital levy. Only a few days
after the July G20 Finance Ministers meeting, the EU plans to release a
new gross-basis tax on digital companies with revenue above a certain
threshold. Even more concerning, this is not intended to be a temporary
measure. Rather, the EU somehow believes it will be ``complimentary''
to an OECD agreement. While the EU may assert this tax will be
``nondiscriminatory,'' it is difficult to understand how a gross-basis
tax that ring-fences a particular industry is not considered
discriminatory.
Do you believe that the proposed EU digital levy, as it has been
described, should survive an OECD agreement? If so, please explain how
this is compatible with the G7's stated goal of removing all DSTs and
relevant similar measures?
Answer. An important premise of this OECD/G20 work is the
elimination of DSTs because DSTs are discriminatory against U.S. firms.
USTR's work on a section 301 response to DSTs is an important element
of this. We are however concerned that the EU continues to advance its
own ``EU digital levy'' proposal, which the EU asserts would coexist
with a Pillar 1 system. The EU asserts that the digital levy will not
be discriminatory because it will apply to small firms and large firms
alike. If so, the digital levy could be closer to a consumption tax or
excise tax than a tariff. Much will depend on the details of the
eventual European Commission proposal, which has not been released. We
will closely monitor the developments in consultation with USTR and
Congress.
______
Questions Submitted by Hon. Ben Sasse
Question. The President's proposal would repeal the deduction for
Foreign-Derived Intangible Income (FDII). FDII is an important tool
that encourages U.S. companies to locate IP in the United States as
well as invest in innovative research here at home. Our competitors are
heavily investing in R&D, and I am concerned that the elimination of
FDII could discourage development of IP and new technologies in the
U.S. and put American companies back at a competitive disadvantage in
the global economy.
In the proposal to eliminate FDII, the Green Book stated that ``the
resulting revenue will be used to encourage R&D.'' However, no details
were given on how this would actually occur. Could you please elaborate
specifically on the administration's actual proposals to encourage R&D?
Answer. The administration has proposed repealing the FDII
deduction and using the associated revenue to more directly encourage
research and development. One possible use of this revenue would be to
reverse the imminent move toward R&E amortization created by the 2017
tax law, returning to expensing. Another option would be implementing
more generous research tax credits. The administration is open to
working with Congress on the most effective way to encourage research.
Either path would be a more effective spur to domestic innovation
that the FDII deduction. There are multiple problems with FDII. First,
the FDII is not an effective way to encourage R&D in the United States,
since it provides larger tax breaks to companies with excess profits
(those already reaping the rewards of prior innovation) and only
targets those with high export sales (omitting those companies with
domestic sales).
Second, like the GILTI, the FDII deduction encourages offshoring of
real activity, since the export subsidy becomes less generous (all else
equal) as companies have higher U.S. tangible assets. Repealing FDII
would generate a large amount of revenue that could be used to
encourage research and development much more directly.
Question. As the administration is moving to raise the global tax
rate and eliminate incentives to keep and develop IP in the U.S. (such
as FDII), China is only increasing its incentives to drive new research
to its shores.
In order to further their strategic focus on manufacturing
innovation, the Chinese Government recently announced a new enhanced
100-percent super-deduction for manufacturing enterprises. This new
incentive came in addition to the Chinese Government extending for 3
years the existing 75-percent super-deduction for R&D expenses.
I am worried that the elimination of FDII, with no plan in place to
replace it, will leave us at a severe competitive disadvantage. What
plan does the administration have, aside from repealing current
incentives, that would allow us to compete for high-tech innovation
with China?
Answer. Administration proposals are focused on improving American
competitiveness by investing in the fundamentals of the American
economy, including R&D, education, and infrastructure. The current FDII
incentive is not well-targeted at encouraging new research or a
stronger foundation for economic growth; instead, it rewards the above-
normal profits of a subset of companies, those that export. The
administration proposes replacing the FDII incentive with an equal
amount of tax expenditure, but targeting that tax expenditure directly
on tax incentives that encourage new research and development.
Question. Has the Treasury done any analysis on how their proposed
tax changes, including the repeal of FDII, would impact U.S.
competitiveness compared to our foreign counterparts--especially China?
And is this analysis that Treasury plans to conduct and make available
to Congress?
Answer. As noted above, the structure of the FDII rewards above-
normal profits of exporting companies. We propose the same size tax
incentive directly targeted at new R&D instead; this change should
increase U.S. competitiveness by incentivizing R&D, a longstanding
source of American economic strength.
Question. How have China's R&D incentives impacted multilateral
talks with the OECD and G20? Has there been any discussion about
possible carve-outs for these or any other incentives?
Answer. The consensus we achieved at the G20 and Inclusive
Framework was unprecedented and signals great progress toward a
historic deal on a redesign of the international tax system. We
actively worked with all countries to make the consensus as broad as
possible. We did not, however, provide any special exceptions to China
in doing so. Pillar 2 allows for modest substance-based carveouts that
will continue to allow the US and other countries to provide R&D
incentives.
e.o. 14302 on u.s. investment in prc military companies
Question. E.O. 14302 shifted the responsibility for sanctions
imposition from the Department of Defense to the Department of
Treasury. Please describe what you see are the major benefits of this
change. What would you say to skeptics that might be concerned Treasury
will not prioritize national security considerations over domestic
business interests?
Answer. Executive Order (E.O.) 14032 amended E.O. 13959 to create a
sustainable and strengthened framework for imposing prohibitions on
investments in Chinese defense and surveillance technology firms. This
improved framework provides the Secretary of the Treasury, in
consultation with the Secretary of State, and where appropriate, the
Secretary of Defense, with primary responsibility for making sanctions-
related determinations. Treasury's Office of Foreign Assets Control
(OFAC) is the U.S. government's primary economic sanctions expert,
administers more than 35 economic sanctions programs, and has extensive
experience coordinating with interagency partners to make sound
sanctions determinations.
OFAC is uniquely structured and resourced to implement sanctions
such as those in E.O. 13959, as amended by E.O. 14032, because OFAC has
investigative, licensing, compliance, targeting, regulatory, and policy
functions all under one roof. Treasury will continue to address the
threat posed by the PRC's military-industrial complex and its Military-
Civil Fusion strategy, and prioritize national security considerations,
in consultation with the Department of State and, as appropriate, the
Department of Defense, in making determinations about which individuals
and entities should be identified for sanctions, while balancing
concerns about unintended economic impacts.
Question. As a result of this new E.O., the investment ban
targeting publicly traded securities has been removed on many entities.
Can you please identify these companies and the evidentiary basis
Treasury used to inform the decision to remove the investment ban on
each company?
Answer. Of the 48 entities that had been listed under the previous
sanctions authority, 20 are not currently listed under the amended
authority, and, as a result, the investment restrictions do not apply
to them at this time. OFAC continues to evaluate companies under the
new criteria.
Question. Can you clarify whether U.S. investors can maintain
existing holdings of publicly traded securities of companies designated
under E.O. 14032? If so, what is the specific policy purpose for
maintaining existing holdings? What market signal does it send to allow
continued investment in entities that enable the military development
of the Chinese Communist Party?
Answer. While U.S. persons are prohibited, after the relevant
effective date, from engaging in the purchase or sale of publicly
traded securities of entities identified in or pursuant to E.O. 14032,
U.S. investors are not required to divest existing holdings of such
securities. The purchase and sale restrictions in E.O. 14032 are
designed to prevent U.S. capital from flowing into the Chinese defense
sector and Chinese companies that develop or use Chinese surveillance
technology to facilitate repression or serious human rights abuse. The
investment restrictions are intentionally targeted and scoped to
achieve that objective.
______
Questions Submitted by Hon. Tim Scott
Question. It seems our financial system's alarm bells are sounding
at a deafening volume for everyone except the Biden administration. In
May, consumer prices increased by 5 percent on an annualized basis, the
fastest pace since 2008. Now this may not be surprising to the millions
of working Americans who have endured as the cost of countless every
day goods and services rose during the pandemic--items parents depend
on to feed their families, to get to work, to maintain their homes, and
more.
American families are right to be concerned about the rise in the
cost of household goods and services. They are right to be concerned
about their paychecks suddenly not stretching as far as they did the
month before. For those on the bottom and middle of the income scale--
and especially our seniors--price increases are not just an
inconvenience. It's the promotion you worked all year to get just to
see it become a wash at the end of the month. It's your retirement
savings being pushed to limits that no one planned for. It's a
noticeable change in the standard of living for our most vulnerable
populations.
While this may be transitory, it seems to me President Biden isn't
leaving much of a margin for error.
As Americans continue to plan for the future, how certain are you
that higher inflation will not persist and that we won't see interest
rate hikes?
Are you at all concerned about the potential debt load and
inflation risk associated with this $6-trillion-plus budget proposal
and the strain it would have on the American economy if this isn't
merely transitory?
Is the administration concerned that inflationary effects and any
rate increases will be felt especially hard by our Nation's small
businesses and low-income families?
How might the growth in U.S. debt and debt-servicing costs hinder
our country's ability to respond quickly to any near-term volatility
events?
Answer. Throughout the pandemic, I have expected that the rate of
inflation would be moderately higher as the economy transitioned
between a steep recession and a healthy recovery. That expectation has
not changed, and is consistent with the Federal Reserve and
professional forecasters. As Treasury Secretary, I do not comment on
the expected trajectory of the Federal Reserve's monetary policy.
Concerning the impact of the administration's policies, I believe
these investments are both necessary to ensuring the long-term economic
health of our country, and a step towards fiscal sustainability given
the President's commitment to paying for the entirely of the proposals
over 15 years. These plans should bolster the gains to families and
businesses through increased investment, while mitigating any economic
harm associated with rising deficits. Under the President's plan, the
United States can be expected to maintain the ability to respond to
fiscal and economic emergencies given the historically low interest
rates and full faith in our ability to make timely payments on our
debt.
Question. As a former small business owner, I know the burdens,
risks, and obstacles that our Nation's entrepreneurs and small
businesses face every day. Small businesses are the backbone of our
economy, employing roughly half of the private workforce. This is why I
worked hard to ensure the 20 percent deduction for pass-through
businesses was included in tax reform. Unfortunately, throughout his
campaign, we heard President Biden repeatedly call for the elimination
of this important deduction. Like many, I was surprised to see that the
Green Book actually does not propose any changes to this provision for
small and medium-size job creators.
You previously committed to studying the impact of the deduction on
our Nation's small businesses. Can I assume that the Green Book does
not modify this important deduction because Treasury found that it
helps small businesses grow and compete?
Answer. Our focus this year has been providing direct assistance to
small businesses and working families to help them deal with the
challenges of the pandemic and building back from that. The American
Rescue Plan provided significant economic relief in the form of loans
for small businesses, expanded tax credits to help employers retain and
safely bring back workers, and grants to millions of the hardest hit
businesses. In terms of the Green Book, while changes to section 199A
were not included and we continue to consider how that provision would
fit in a more equitable tax regime, it has not escaped notice that
independent analyses based on JCT reports have shown that the benefits
from section 199A accrue overwhelmingly to the wealthiest households.
______
Questions Submitted by Hon. John Thune
Question. Thank you for agreeing to update me and the Senate
Finance Committee about what steps the administration is taking to
ensure such an IRS data breach does not happen again.
Were you or your staff informed about the IRS data breach in
advance of ProPublica's release of taxpayer information on June 8,
2021? If so, can you please identify the date(s) of being informed?
Since your Senate Finance Committee hearing on June 16th, what
steps have Treasury and the IRS taken to ensure such a release of
confidential taxpayer information does not happen again?
Answer. With respect to the ProPublica report, I am deeply troubled
by it. It is important to stress that unauthorized disclosure of
taxpayer information is a crime. Upon learning of this matter, it was
immediately referred to the FBI, Federal prosecutors, and Treasury
Department oversight authorities--all of whom have the independent
authority to investigate. We don't yet know what occurred--but all is
being done to get to the bottom of this potentially criminal activity.
Question. President Biden's $6-trillion budget proposes raising the
top tax rate on capital gains from 23.8 percent to 43.4 percent for
many Americans. The Treasury's Green Book states that the proposal
would be effective for gains required to be recognized after the date
of announcement, which has been interpreted by some as the date of when
the American Families Plan was first announced.
Can you please provide the date on which the Biden administration's
capital gains tax increase proposal is intended to be effective?
If the specific proposal were to be effective when the American
Families Plan was announced, would you consider this a retroactive tax
increase?
Answer. In order to score any tax proposal involving capital gains
it is necessary to set an effective date. The Green Book proposal
assumed it was effective on the date when the American Families Plan
was first announced. Obviously, the actual effective dates of any
provisions that are eventually enacted will depend on Congress.
Question. President Biden promised to protect small businesses and
family farms from being impacted with his new step-up in basis tax
proposal. Based on my understanding of the Green Book, the proposed
``protections'' simply delay the tax liability--rather than provide
real protection--for those continuing to operate the business or farm.
Does the Biden administration's ``protections'' for family-owned
businesses, farms, and ranches exempt them from the step-up in basis
tax proposal or simply delay the tax?
Answer. The administration's capital gains tax proposal provides
multiple, generous protections for small family businesses. First of
all, the proposal provides an exclusion of $1 million of gain for every
individual, and when that is combined for a married couple and the
additional exclusion for principal residences is considered, it means
that a family can exclude up to $2.5 million in gains from any taxation
under this proposal. The vast majority of taxpayers would therefore be
protected from any tax liability under this provision. In addition, as
you note, family-owned and operated businesses (including farming and
ranching businesses) are provided even greater protection under this
proposal. To the extent there is a realization event for an interest in
such a business and the gain amount is above the generous,
aforementioned thresholds, then the gain realized is not subject to tax
as long as the business continues to be family owned and operated. This
deferral means that the business can remain in the family for as long
as they choose, and that tax wouldn't be imposed until there was a
triggering event, such as a sale of the business, which would
presumably coincide with a liquidity event that allowed for payment of
the tax.
Question. Under the Biden administration's step-up in basis
proposal, the untaxed gains on investments held at death would be taxed
at a top rate of 39.6 percent, above an exemption of $1 million per
individual. There is a good chance that some parents might die with an
estate that has gained $1 million-plus in value over the course of
their lives, but their heir might be earning $40,000 or$50,000 a year.
Under such a scenario, is it plausible that an heir earning less
than $400,000 would be impacted by the administration's step-up in
basis tax proposal?
Answer. The capital gains tax on unrealized appreciation at death
would be imposed on the property of the decedent, rather than on the
recipient of the decedent's property. Thus, no tax imposed at death
under this proposal would be imposed on an heir, and the basis in the
property on which tax was imposed would be stepped-up.
Question. The administration has requested an all-time high budget
for the IRS of $13.2 billion, a 10.4-percent increase from last year's
enacted level. The Biden budget also requests approximately $80 billion
over a decade to the IRS in mandatory funding, which if enacted, would
put the agency's funding beyond the standard appropriations process and
not subject to congressional review. With the additional $80 billion,
Treasury estimates a return of $700 billion in revenue--a figure that
is drastically higher than the nonpartisan Congressional Budget
Office's related estimate.
As you know, CBO rules prohibit scoring hoped-for but entirely
uncertain revenue from IRS enforcement proposals. Does Treasury's
estimates account for CBO's scorekeeping rules with its $700 billion
revenue projection? If not, how would the JCT-CBO scorekeeping rules
alter Treasury's estimated projections and by what approximate amount?
Answer. It is difficult to compare the administration's compliance
initiatives to previous estimates because of differences in scale and
scope of the comprehensive proposal the President has put forth to
address the tax gap. Estimates from career economists at the Office of
Tax Analysis suggest that providing the IRS the resources and
information it needs to address sophisticated tax evasion would raise
at least $700 billion in a decade. These initiatives have not yet been
scored by official congressional scorekeepers, and we look forward to
their thoughts on the revenue potential. We anticipate a very
significant score, which relates to the policies designed and also the
enormous magnitude of the problem the administration is seeking to
address: 15 percent of taxes that are owed to the U.S. government are
uncollected each year. That is more than $600 billion this year, and
over $7 trillion over the next decade.
Question. Under the President's budget, the administration
estimates that debt would grow to 117 percent of Gross Domestic Product
(GDP) by the end of FY 2031, compared to the 113 percent of GDP under
the Office of Management and Budget's (OMB) baseline.
With the debt-to-GDP ratio at 111.8 percent for 2022 and rising to
117 percent of GDP by 2031 under the President's budget, would you
agree there is increasingly limited fiscal space should an adverse
shock to the economy occur?
What type of impact will the longer-run deficit have on U.S.
productivity capacity and productivity growth?
What specific concerns do you have about the historically high, and
increasing trajectory, of the U.S. deficit and debt?
Answer. The rising debt as a share of GDP is due to combination of
fiscal policies taken prior to the Biden administration and necessary
emergency actions taken to protect American families and the U.S.
economy from the devastating impacts of COVID. While this emergency
spending was critical to resolving the health crisis and maintain the
U.S. economy, it is imperative that we put our country on a path to
long-term fiscal sustainability. This requires a combination of
investments in the productivity capacity of the U.S. economy, coupled
with prudent fiscal actions to offset the costs of those investments.
The President's American Jobs and Families Plans achieves both these
objectives by making generational investments in a range of priorities,
while more than offsetting the costs over 15 years. These investments
should raise the productivity capacity of our economy, and will
ultimately bolster U.S. standards of living for decades.
______
Questions Submitted by Hon. Patrick J. Toomey
Question. In early June, ProPublica announced that it obtained 15
years of tax return data for thousands of Americans. This represents a
serious and unprecedented breach of privacy, and it further erodes
trust the American people have in government institutions to safeguard
their private information.
Although it has not been definitively determined as to what the
source of this leak is, ProPublica's description of the tax return data
and the nature of the information that has been published strongly
suggests that the information originated from within the IRS. What
makes me even more concerned is the fact that President Biden has
proposed requiring financial institutions to report account inflows and
outflows to the IRS. There are steep compliance costs and serious
privacy implications associated with this requirement. In fact, the
reporting requirement threshold that is proposed in the President's
Budget is just $600. According to the FDIC, the second and third top
reasons Americans do not have bank accounts, respectively, are that
they do not trust banks and avoiding a bank gives more privacy. I am
concerned about the risk of additional personal financial information
of millions of Americans being compromised.
Please detail what additional steps will need to be taken by the
IRS to safeguard taxpayers' account inflow and outflow data.
Answer. The administration has designed this regime with taxpayer
privacy concerns front of mind. That is why, as opposed to other
compliance proposals that have been advocated by outside actors, in the
administration's framework, information is flowing only one way--from
financial institutions to the IRS, as is the case with existing
information reports. Further, the proposal includes significant
resources to protect taxpayer information, giving the IRS the funding
it needs to invest in overhauling antiquated technology and meet
threats to the security of the tax system, like the 1.4 billion cyber-
attacks the IRS experiences annually.
Question. During the Senate Finance Committee hearing on June 16th,
I noted that, according to the Biden administration's revenue proposals
for FY 2022, there is no proposed change to the current law 80-percent
foreign tax credit (FTC) limitation under section 960(d) of the
Internal Revenue Code. Further, the administration has proposed
increasing the Federal corporate income tax rate to 28 percent. When
combined with the proposal to reduce the section 250 deduction for
GILTI to 25 percent, the tax rate assessed on GILTI would become 21
percent. However, once you take into account that the aforementioned
FTC limitation remains in place, the effective tax rate on GILTI
increases from 21 percent to 26.25 percent--double the current law
effective rate of 13.125 percent.
As a follow-up to my question during the hearing, can you confirm
that the administration's FY 2022 revenue proposals assume the current
law 80-percent FTC limitation under section 960(d) will remain in
place? If ``yes,'' is it true that the effective GILTI rate would equal
26.25 percent if the corporate income tax rate is increased to 28
percent and the section 250 deduction for GILTI is decreased from 50
percent to 25 percent?
Answer. The administration has proposed a 21-percent GILTI rate.
(The proposal suggests a deduction of 25 percent for GILTI income in
the context of a 28-percent headline rate.) As proposed, the
administration's GILTI reform would retain the 20-percent foreign tax
credit disallowance. The effective tax rate on a company's foreign
income would depend on where that company was operating. If they were
operating in a zero-tax country, the rate would be 21 percent (paid to
the United States); the effective tax rate on foreign income very
slowly rises as the foreign rate rises (with a declining GILTI tax paid
to the United States and the remainder of the tax paid to the foreign
country). The effective tax rate would eventually reach 26.25, but only
when the US GILTI share of the tax is very low, so it is not
contributing very much to the overall tax burden. At the top end, when
the foreign tax rate is 26.25 percent, the tax is paid to the foreign
government, and the United States collects no GILTI tax.
Question. In the questions for the record for your confirmation
hearing, you were asked whether you would keep in place the Treasury
Department's section 311 special measures on Iran if the country
continues to finance terrorism and fails to clean up its financial
system. You replied, ``I believe we should keep in place various
rigorous restrictions on Iran targeting its malign support for
terrorism until such time as this ceases.'' Please be more specific in
order to increase congressional confidence in the administration's Iran
policy.
Do you agree that Iran remains the world's largest state sponsor of
terrorism?
Answer. I defer to the State Department on their authority to
designate countries as state sponsors of terrorism. The Biden
administration is committed to countering any Iranian threat to our
forces, personnel, and vital interests, and will respond to any such
threat using Treasury authorities.
Question. Do you still agree with the determinations made by FinCEN
during the Obama and Trump administrations that Iran is a jurisdiction
of primary money laundering concern?
Answer. As you are aware, in October 2019, FinCEN issued a final
rule pursuant to section 311 of the USA PATRIOT Act finding Iran to be
a jurisdiction of primary money laundering concern and imposing the
Fifth Special Measure prohibiting the opening or maintaining of
correspondent accounts in the United States for, or on behalf of,
Iranian financial institutions, and the use of foreign financial
institutions' correspondent accounts at covered U.S. financial
institutions to process transactions involving Iranian financial
institutions.
FinCEN's jurisdictional 311 was based in part on: (1) evidence that
terrorists and entities involved in missile proliferation transacted
business in Iran, citing in particular the role of Central Bank of Iran
officials in facilitating terrorist financing, including for the Iran
Revolutionary Guard Corps (IRGC) QodsForce and Hizballah; the IRGC's
abuse of the international financial system; Iran's support for several
terrorist organizations and its pursuit of ballistic missile
technology; (2) the endemic corruption of Iran's government; (3) the
significant deficiencies in Iran's AML/CFT programs; and (4) the lack
of a mutual legal assistance treaty with the U.S. and any law
enforcement/regulatory cooperation. The Biden/Harris administration
remains concerned about these issues and will remain so until such time
as there is information available to confidently assess those factors
are no longer applicable to Iran.
Question. Since Iran has maintained its support for terrorism and
remains a jurisdiction of primary money laundering concern, will you
commit to keeping in place the section 311 special measures on Iran?
Answer. As I previously mentioned, the jurisdictional 311 was
imposed via rulemaking after finding that Iran constituted a primary
money laundering concern for reasons related to the financing of
terrorism, endemic government corruption, AML/CFT deficiencies and the
lack cooperation between the United States and Iran. Any changes to the
final rule must address these findings in accordance with applicable
legal requirements. I commit to undertake careful and deliberate
assessment of any changes prior to any discussions surrounding this
section 311 rulemaking finding Iran to be a jurisdiction of primary
money laundering concern.
______
Questions Submitted by Hon. Elizabeth Warren
Question. The OECD recently estimated that the United States is one
of only two major economies that have returned to pre-pandemic income
levels and one of only a handful of countries to leave the pandemic on
a higher growth path than it entered.\3\ That is, growth will actually
be higher following our response to the COVID-19 pandemic, despite the
challenges the pandemic posed to American workers, families, and
businesses.
---------------------------------------------------------------------------
\3\ OECD, ``No Ordinary Recovery: Navigating the Transition,'' OECD
Economic Outlook, May 2021, https://www.oecd.org/economic-outlook/may-
2021/.
How have the stimulus measures of the past year contributed to the
---------------------------------------------------------------------------
resilience and recovery of the U.S. economy?
Given that government stimulus and emergency measures were able to
maintain growth even through the pandemic, what does that suggest about
the impact that government investments in critical infrastructure--
roads and bridges, but also broadband, child care, and green energy--
could have had pre-pandemic and could have now?
Do you think we will be able to reach lower unemployment and higher
labor force participation levels than those pre-pandemic and, if so,
what will it take to get us there?
Answer. The support provided by the American Rescue Plan was
unambiguously critical to preserving the health of the U.S. economy, in
addition to saving lives. Numerous economic analyses have confirmed
that our economy trajectory is substantially higher than it would have
been in the absence of this legislation, and this is confirmed by
comparisons with other countries that undertook more muted measures to
preserve their health of their economies.
Of the many lessons that emerged during the pandemic, one was the
importance of providing a safety net to vulnerable populations. The
Biden administration and Congress committed to a collection of
policies--including childcare support, nutrition assistance, expanded
unemployment assistance, and improved access to broadband--aimed at
bolstering economic inclusion and mitigating the negative impact of the
economic downturn. These policies will deliver economic gains for years
to come.
The labor market outlook from before the pandemic, as confirmed by
the Congressional Budget Office and other forecasters, included the
projection that the labor force participation rate would decline over
time, largely due to a gradual aging of the population. During the
pandemic, we have witnessed a downturn in employment. An explicit goal
of the Biden administration's policies is to mitigate many of the
barriers to labor force participation, like high child care costs and
lack of paid leave, that drive down U.S. participation relative to our
economic competitors. If enacted, a large economic literature confirms
that these policies can be expected to raise participation and improve
the livelihoods of workers, especially women.
Question. Some conservative pundits and politicians are arguing
against further government investments in critical infrastructure,
citing inflation fears. However, the interest rate on 10-year Treasury
bonds stands at approximately 1.50 percent and has sunk as low as 1.35
percent, lower than before the COVID-19 crisis and lower than
essentially tenure at the Federal Reserve.\4\ Economists tell us that
real inflation fears should drive up bond yields as investors divest
from bonds, which have fixed income, thereby forcing down prices. That
is clearly not what is happening.
---------------------------------------------------------------------------
\4\ Tommy Stubbington and Joe Rennison, ``U.S. Treasuries have best
week in a year,'' Financial Times, June 11, 2021, https://www.ft.com/
content/6f0d541d-3a47-481f-810b-d41dab13a2c2; Vicky McKeever, ``10-year
Treasury yield touches 3-month low of 1.35 percent before rebounding,''
CNBC, June 21, 2021, https://www.cnbc.com/2021/06/21/us-bonds-10-year-
treasury-yield-falls-to-two-month-low.html.
What do these data and other economic indicators say about the
benefits of further government investments, including investments in
critical infrastructure like roads and bridges, broadband, child care,
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and green energy?
Answer. Real interest rates are currently negative, and nominal
interest rates are exceptionally low by historical standards. While the
administration projects these rates to rise over time, the projection
is also that rates (in both real and nominal terms) will remain low by
historical standards. At the same, while the recovery has featured a
modest elevation in price indices, the consensus expectation is that
these price pressures will abate in the near term and return to levels
that are consistent with the Federal Reserve's target. This outlook
indicates that the additional investment in critical public programs
should be viewed as opportunity to expand the productive capacity of
the U.S. economy, rather than a threat to the bond market. And members
of Congress who are concerned about the long-term fiscal trajectory
should be encouraged by the President's plans to more than offset the
cost of the American Families and Jobs Plans over 15 years.
Question. On June 12th, The New York Times published an
investigation of how infrequently the IRS audits private equity firms
and partnerships, despite the pattern of tax avoidance among firms.\5\
How would the Treasury Department's proposed tax compliance agenda
impact investigations of tax avoidance and evasion among private equity
firms and partnerships?
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\5\ Jesse Drucker and Danny Hakim, ``Private Inequity: How a
Powerful Industry Conquered the Tax System,'' The New York Times, June
12, 2021, https://www.nytimes.com/2021/06/12/business/private-equity-
taxes.html.
Answer. The President's tax proposals are designed around a central
objective: creating an equitable tax regime, where the wealthy and
large corporations and other businesses pay their fair share. The New
York Times investigation detailed various ways in which that is not the
case today, with a particular focus on the private equity industry. The
Biden administration has a multi-pronged approach to address the
avoidance and evasion at play here. Ensuring capital gains income is
taxed at ordinary income rates, like wage and salary income; and
repealing the benefits that accrue to private equity employees who make
use of the ``carried interest'' provision would work to address
avoidance concerns. With respect to evasion, the President has called
for a substantial increase in IRS resources over a multiyear period to
rebuild the agency after a decade of budget cuts have caused audit
rates to drop substantially for high-earners and the businesses they
own. For example, more than 4 million partnership returns were filed
last year but the IRS began only 7,500 partnership examinations. A
steady stream of resources will allow the IRS to hire, train, and
retain talented enforcement personnel to untangle complex multi-tiered
partnership structures and invest in technology to support these
investigations, such as software that can map out the relationships
between partnerships so auditors can visualize and better investigate
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complex business entity structures.
Question. In May 2020, TIGTA released an audit finding that high-
income nonfilers owing billions of dollars are not being worked by the
IRS.\6\ The report found that ``the IRS did not work 369,180 high-
income nonfilers, with estimated tax due of $20.8 billion'' and that
``510,235 high-income nonfilers, totaling estimated tax due of $24.9
billion, are sitting in one of the Collection function's inventory
streams and will likely not be pursued as resources decline.''
---------------------------------------------------------------------------
\6\ ``High-Income Nonfilers Owing Billions of Dollars Are Not Being
Worked by the Internal Revenue Service,'' Treasury Inspector General
for Tax administration, May 29, 2020, https://www.treasury.gov/tigta/
auditreports/2020reports/202030015fr.pdf.
How would the Treasury Department's proposed tax compliance agenda
---------------------------------------------------------------------------
impact investigations of tax evasion among high-income nonfilers?
Answer. The report referenced is striking. Between 2014-2016, just
a few hundred high-income nonfilers cost the government $10 billion in
unpaid tax liabilities over this period, and they were not even pursued
by the IRS. The IRS is already working to address this issue: in 2018,
it established a program to pursue all high-income nonfilers from tax
years 2016 through 2019, and it intends to select all high-income
nonfiling cases for enforcement action for tax years 2020 and beyond.
But this particular case is reflective of broader problems that the IRS
faces in the current environment. Its budget has declined by 20 percent
(in real terms) in the last decade, leading to substantial workforce
attrition, with the largest losses for complex revenue agents who are
capable of examining global high net-worth individuals and multiyear
partnerships. The result is that enforcement actions have decreased
most at the top of the income distribution. This is problematic as a
matter of revenue- raising, efficiency, and equity. That is why the
President's compliance initiatives provide the IRS the resources and
information needed to pursue this sophisticated evasion. This involves
a stream of multi-year funds to recruit and train agents to undertake
complex examinations, modernized technology to pursue evaders, and
additional information to help target enforcement actions
appropriately.
______
Questions Submitted by Hon. Todd Young
Question. Prior to the Tax Cuts and Jobs Act (TCJA), the U.S.
combined corporate income tax rate was the highest among developed
countries. Post-TCJA, the U.S. corporate tax rate is close to average,
as the 11th highest corporate tax rate out of the top 36 developed
countries.
As I noted during our interaction in the hearing, I am concerned
that a combined 32.5-percent tax rate, as proposed by President Biden,
will leave U.S. businesses uncompetitive on the world stage. I find it
hard to believe that other OECD nations--who currently have an average
corporate tax rate of 23.5 percent--will raise their rates in a
meaningful way, especially considering multilateral conversations
aren't leading to a global minimum above 15 percent. Second, it is
ludicrous to think that China will increase its 25-percent tax rate, so
we will yet again be hamstringing our domestic economic development
while bolstering China's.
Given that the current 21-percent U.S. corporate income tax rate
makes the United States an economically competitive environment that
naturally discourages profit shifting to lower-tax jurisdictions,
wouldn't an increase in the corporate tax rate be misplaced and lead to
higher unemployment rates and less domestic investment as the U.S.
economy recovers from the COVID-19 pandemic?
Answer. The American Jobs Plan's corporate tax provisions
incentivize job creation and investment here in the United States.
Unlike the 2017 tax law--which created new incentives to shift profits
and jobs overseas--this reform includes a strong global minimum tax on
multinational corporations and measures that will end the global race
to the bottom on corporate tax rates.
This way, we can reward companies that help to grow the U.S.
economy and create a more level playing field between domestic and
multinational companies. The revenue from these reforms will be used to
make investments in infrastructure, R&D, manufacturing, boosting the
long-term competitiveness of the U.S. economy.
Finally, the corporate income tax generally operates as a profits
tax, and as such, it is strongly countercyclical. Typically, companies
only pay corporate tax when they are profitable, and companies earning
losses (or carrying them forward from prior years) generally pay no
corporate tax. In contrast, other sources of tax revenue normally fall
more heavily on typical American workers and families, regardless of
economic conditions.
Question. During the hearing, as is reiterated in the Department of
the Treasury's Green Book, you advocated for repealing the Foreign-
Derived Intangible Income (FDII) deduction and replacing it with other
research and development (R&D) incentives. FDII was enacted as part of
the Tax Cuts and Jobs Act (TCJA) to encourage U.S. companies to retain
intangible property, and related jobs and economic activity, in the
United States. Since TCJA, I have heard a number of encouraging
examples of companies returning intellectual property (IP) and jobs to
the United States, or engaging in cutting-edge development of new IP in
the United States as a result of TCJA reforms like FDII.
Neither the Green Book nor your testimony before the committee
provided any detail on what those R&D incentives would entail. My
American Innovation and Jobs Act would provide additional incentives to
encourage small businesses and startups to invest in R&D activity in
the United States, but I view those proposals as complementary to FDII,
not as a replacement.
Can you please specify the exact R&D incentives the administration
is proposing?
Can you please confirm whether any of the proposals in my American
Innovation and Jobs Act are included in the administration's plans?
Answer. The administration has proposed repealing the FDII
deduction and using the associated revenue to more directly encourage
research and development. One possible use of this revenue would be to
reverse the imminent move toward R&E amortization created by the 2017
tax law, returning to expensing. Another option would be implementing
more generous research tax credits. The administration is open to
working with Congress on the most effective way to encourage research,
and we are happy to review the provisions in the American Jobs and
Innovation Act toward that end.
Either path would be a more effective spur to domestic innovation
that the FDII deduction. There are multiple problems with FDII. First,
the FDII is not an effective way to encourage R&D in the United States,
since it provides larger tax breaks to companies with excess profits
(those already reaping the rewards of prior innovation) and only
targets those with high export sales (omitting those companies with
domestic sales).
Second, like the GILTI, the FDII deduction encourages offshoring of
real activity, since the export subsidy becomes less generous (all else
equal) as companies have higher U.S. tangible assets. Repealing FDII
would generate a large amount of revenue that could be used to
encourage research and development much more directly.
Question. You also mentioned during your hearing testimony the
important role played by other tax incentives, such as the R&D Tax
Credit, which my American Innovation and Jobs Act seeks to expand.
Credits like that one are effective tools to encourage activity;
however, that incentive is diminished once tax liability can't be
reduced any further.
Do you believe that a global minimum tax should recognize the
important role played by these tax credits, or should a company that
invests in incentivized activity be limited in reducing their tax
liability to whatever global minimum rate is agreed upon?
Answer. The United States and the international community are
nearing a comprehensive agreement on robust country-by-country minimum
taxes, seeking to end ``the race to the bottom'' on corporate tax
rates. Adequate taxation of internationally mobile capital helps
governments invest in infrastructure, clean energy, and education,
spurring future economic growth.
There are multiple problems with FDII. First, the FDII is not an
effective way to encourage R&D in the United States, since it provides
larger tax breaks to companies with excess profits (those already
reaping the rewards of prior innovation) and only targets those with
high export sales (omitting those companies with domestic sales).
Second, like the GILTI, the FDII deduction encourages offshoring of
real activity, since the export subsidy becomes less generous (all else
equal) as companies have higher U.S. tangible assets.
Repealing FDII would generate a large amount of revenue that could
be used to encourage research and development much more directly. As
one example, reversing the research amortization provision in the Tax
Cuts and Jobs Act of 2017 (and returning to expensing) would cost a
similar amount of revenue as FDII repeal would raise, but would benefit
not just established exporting firms, but also domestic firms and new
startups.
Question. There has been a lot of concern regarding the recent
international tax framework agreed upon by the G7 nations. While there
is much more to be agreed to as the plan is taken up by the G20 and the
OECD, a pillar of this framework is support for the global minimum
corporate tax of at least 15 percent. As negotiations continue, it will
be important to be wary of high-tax, developed nations pushing for a
higher global minimum tax, such as your own administration's request
for a 21-percent global minimum, while developing nations are left with
fewer tools to attract economic activity.
Given the resistance from countries like Ireland who have benefited
from attractive, pro-business tax rates, what do you believe is the
likelihood of universal adoption of a global minimum tax, especially if
it lies somewhere above 15 percent?
Answer. The consensus we achieved at the G20 and Inclusive
Framework was unprecedented and signals great progress toward a
historic deal on a redesign of the international tax system. More than
130 countries have already joined consensus on a minimum tax of at
least 15 percent, representing more than 90 percent of the world's GDP.
Importantly, these countries represent both developed and emerging and
developing economies alike. The diversity of economies represented in
the consensus reflects Pillar 2's balance between preserving national
sovereignty while putting a floor on tax competition.
Question. Do you believe competitors like China will increase their
corporate tax rates in response to any increase by the United States,
especially when such countries are enjoying a competitive advantage
from their current lower rates?
Answer. See response above.
Question. How would a global minimum tax that is only partially
adopted by our country's peers and competitors leave U.S. businesses
that seek to compete in the global market?
Answer. Pillar 2 does not need the support of every country to be
successful. Due to the enforcement mechanism of the UTPR, and our
domestic corollary SHIELD proposal, if enough of the world's GDP signs
up for Pillar 2, these enforcement mechanisms will incentivize other
jurisdictions to also adopt minimum taxes by denying deductions on
related party payments in low-tax jurisdictions. Already, more than 130
countries representing more than 90 percent of the world's GDP has
joined consensus on Pillar 2, thus meeting and exceeding this tipping
point. We are actively working with all countries to make the consensus
as broad as possible, but we are not providing any special exceptions
that would undermine the robustness of the regime
Question. Section 321(b) of the Economic Aid to Hard-Hit Small
Businesses, Nonprofits, and Venues Act (title III of division N of
Public Law 116-260) requires the Secretary of the Treasury to testify
before the U.S. Senate Committee on Small Business and Entrepreneurship
regarding the implementation of the Act and the amendments made by the
Act no later than 120 days after enactment. To date, you have not
appeared before the Small Business Committee as required by law,
despite repeated requests by the ranking member. I understand that you
have offered lower-level officials to appear in your place, but have
not made yourself personally available despite the clear language of
the statute. As a member of the Small Business Committee, I am
concerned by this and sincerely hope that you will agree to testify
before the committee as required by law.
Will you commit to testifying personally before the U.S. Senate
Committee on Small Business and Entrepreneurship as required by section
321(b) of the Economic Aid to Hard-Hit Small Businesses, Nonprofits,
and Venues Act as soon as possible, but no later than August 5, 2021?
Answer. I am committed to providing the Senate Committee on Small
Business and Entrepreneurship the resources it needs to conduct proper
oversight of its programs. Small businesses play a critical role in our
economy by supporting millions of U.S. jobs and contributing
meaningfully to the communities they serve. I look forward to continued
engagement with the committee on these important matters.
Question. On May 10, 2021, the U.S. Department of the Treasury
released an interim final rule implementing the $350 billion in Federal
funds for State and local recovery provided by the American Rescue Plan
Act (ARPA). As part of this rule, Treasury released a factsheet
detailing eligible ways in which the money can be used, including
replacing lost public sector revenue, supporting COVID-19 response
efforts, and addressing negative economic impacts of the public health
emergency for households and businesses.
The interim final rule and fact sheet also address how funding can
be used for eligible construction projects, including broadband, water,
and sewer infrastructure. This explanation includes the following
language promoting the use of government-mandated project labor
agreements, local hire, and Davis-Bacon/prevailing wage regulations:
It is important that necessary investments in water, sewer, or
broadband infrastructure be carried out in ways that produce
high-quality infrastructure, avert disruptive and costly
delays, and promote efficiency. Treasury encourages recipients
to ensure that water, sewer, and broadband projects use strong
labor standards, including project labor agreements and
community benefits agreements that offer wages at or above the
prevailing rate and include local hire provisions, not only to
promote effective and efficient delivery of high-quality
infrastructure projects but also to support the economic
recovery through strong employment opportunities for workers.
Using these practices in construction projects may help to
ensure a reliable supply of skilled labor that would minimize
disruptions, such as those associated with labor disputes or
workplace injuries.
To provide public transparency on whether projects are using
practices that promote on-time and on-budget delivery, Treasury
will seek information from recipients on their workforce plans
and practices related to water, sewer, and broadband projects
undertaken with Fiscal Recovery Funds. Treasury will provide
additional guidance and instructions on the reporting
requirements at a later date.
I am concerned these provisions will both increase the cost of
construction and unfairly disadvantage qualified nonunion firms and
workers in favor of union labor from out of State. These provisions are
particularly concerning given that 87 percent of the U.S. construction
workforce currently does not belong to a union.
Since these labor guidelines were not included in the original
statute, can you please confirm that States and localities are not
required to comply with the labor standards in order to access ARPA
funding?
Answer. Treasury's interim final rule encourages use of strong
labor standards, but these policies are not requirements to access
funds. Use of strong labor standards, including project labor
agreements and community benefits agreements that offer wages at or
above the prevailing rate and include local hire provisions, not only
promotes effective and efficient delivery of high-quality
infrastructure projects but also supports the economic recovery through
strong employment opportunities for workers. Using these practices in
construction projects may help to ensure a reliable supply of skilled
labor that would minimize disruptions, such as those associated with
labor disputes or workplace injuries. Reporting responsibilities of
recipients are described in the Compliance and Reporting Guidance
(https://home.
treasury.gov/system/files/136/SLFRF-Compliance-and-Reporting-
Guidance.pdf). Please see page 21 for reporting responsibilities
related to workforce plans and practices for eligible infrastructure
projects.
Question. When do you expect Treasury will provide additional
guidance on reporting requirements?
Answer. Treasury released the Compliance and Reporting Guidance on
June 17, 2021.
Question. Will this be addressed during this interim final rule
rulemaking or during another rulemaking?
Answer. The interim final rule is open to public comment through
July 16, 2021. Treasury expects to release a final rule after taking
into account comments received.
Question. As you know, America's affordable housing crisis is not
just an urban problem, but it's a rural problem, as well as a suburban
problem, and it's inhibiting economic growth in Indiana and nationwide.
The lack of affordable housing is preventing hardworking Hoosiers from
pursuing the American dream. For example, right now, in my State, a
worker making minimum wage has to work over 70 hours a week just to
afford a modest one bedroom apartment and over 178,000 households pay
over 50 percent of their income on rent.
I am determined to solve this crisis, which is why I am proud to
lead critical legislation, along with my colleagues Senator Cantwell,
Chairman Wyden, and Senator Portman, called the Affordable Housing Tax
Credit Improvement Act (S. 1136). This bipartisan legislation is
focused on expanding and strengthening the Low-Income Housing Tax
Credit (LIHTC) and aligns with some of the priorities the
administration has outlined when it comes to improving and increasing
the supply of affordable housing.
I certainly do not agree with everything in the American Jobs Plan
or the President's budget proposal, but on the topic of expanding the
needed resources for LIHTC--an essential public-private partnership--I
hope we can continue to work together.
Will you commit to working with me and my Senate colleagues on the
important, broad-based, bipartisan proposals of the Affordable Housing
Credit Improvement Act, which will increase LIHTC resources to finance
the production or preservation of more than 2 million affordable rental
homes across the United States?
Answer. The administration is committed to working with Congress to
help make affordable housing a reality for more Americans. The
President's budget includes a proposal to expand LIHTCs, including a
more than 100-percent allocation increase for the credits in 2022
through 2026. The administration expects that these new LIHTCs will
support the construction or rehabilitation of tens of thousands of
affordable residential rental units for low-income tenants. Combining
the $55 billion revenue cost of these credits with investments
including $80 billion in HUD's HOME Investment Partnership program and
the Housing Trust Fund, and $19 billion of revenue costs for
Neighborhood Homes Investment Credits, the President's plan proposes a
$313-billion investment to produce, preserve, and retrofit more than 2
million affordable and sustainable places to live for low-income
families. It pairs this investment with an innovative new approach that
will prevent State and local exclusionary zoning laws from driving up
the cost of construction and keeping families from moving to
neighborhoods with more opportunities for them and their kids. This
complements the administration's proposed changes to LIHTCs, which
include targeting the increase in credits towards neighborhoods of
opportunity.
Question. When the Treasury Department and the IRS announced the
launch of the Non-filer tool to sign up for the advanced portion of the
Child Tax Credit, you stated that, ``We know working families can't put
off paying for doctor's visits or grocery bills, and this new tool will
help more people get their tax credit every month, starting in
July.''\7\ Now, just a few weeks out from the first payments going out,
I am hearing from my constituents that the IRS systems are clunky and
burdensome. For example, Hoosiers may be wary of sharing their driver's
license through a portal that was so quickly put together--especially
as the IRS is currently in the news for its inability to protect
taxpayer privacy--and I am hearing that the process can get held up by
phone number verification, including where the text message
verification codes never arrive. I agree that there should be secure
safeguards to protect against fraud and abuse, but I am concerned that
Hoosiers will be exhausted by this onerous process and ultimately give
up on pursuing, or conversely, opting out of these credits. With that
as a background, I'd like to ask a few questions about what the IRS and
Treasury are going to do to help Hoosiers receive the new credit.
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\7\ https://home.treasury.gov/news/press-releases/jy0227.
What is Treasury doing to streamline these online tools in the next
few weeks before a launch of payments going out the door? What actions
---------------------------------------------------------------------------
will continue through the next filing season?
Answer. On June 30th, the IRS announced an upgrade to a key online
tool available on IRS.gov, called the ``Child Tax Credit Update
Portal'' or ``CTC UP.'' This upgrade enables families to quickly and
easily update their bank account information and receive their monthly
advance Child Tax Credit (CTC) payments through direct deposit. Any
updates made on CTC UP by August 2nd will apply to the remaining
monthly payments for 2021, starting with the August 13th payment.
Families will receive their July 15th payment by direct deposit
into their bank account based on their information currently on file
with the IRS. Those who are not enrolled for direct deposit will
receive a check. The IRS encourages people who have not provided their
current bank account information to the IRS to update their information
through CTC UP so they can receive their advance CTC payments sooner.
To streamline the advance CTC payment experience, families may use
CTC UP to perform several account actions, including: (1) confirm their
eligibility for advance CTC payments; (2) determine if they are
enrolled to receive their monthly payments by direct deposit; (3)
change their direct deposit bank account information for monthly
payments starting August 13th; and (4) provide their bank account
information to enable them to switch monthly payment delivery from
paper checks to direct deposit into their bank account.
The IRS urges any family receiving checks to consider switching to
direct deposit. With direct deposit, families can access their money
more quickly. Also, direct deposit removes the time, worry, and expense
of cashing a check. In addition, direct deposit eliminates the chance
of a lost, stolen, or undelivered check.
To ensure families are aware of their options, taxpayers will
receive several letters regarding the 2021 advance CTC payments. The
IRS is sending letters to eligible families who filed either a 2019 or
2020 Federal income tax return or who used the Non-filer tool on
IRS.gov to register for an Economic Impact Payment (EIP). These
personalized letters will confirm the family's eligibility, the amount
of payments that they will receive, and the July 15 payment start date.
Families who receive these letters generally do not need to take any
further action. These letters follow up on the 2021 advance CTC
outreach letter mailed in early and mid-June to every family who
appeared to qualify for advance CTC payments.
IRS communications, outreach, and assistance will continue through
the 2022 filing season. To provide the latest information to taxpayers
about the 2021 CTC and advance CTC payments, the IRS developed a
special page on IRS.gov called ``Advance Child Tax Credit Payments in
2021.'' This site includes direct links to CTC UP as well as two other
online tools (the Child Tax Credit Non-filer Sign-up tool and the Child
Tax Credit Eligibility Assistant), several sets of frequently asked
questions and answers, and other useful resources.
In addition, the IRS is hosting Advance CTC Free Tax Prep Days and
CTC outreach events in select cities. During these events, IRS
employees, key community stakeholders, and volunteers will help
eligible families by providing them with useful information and, if
needed, assisting them in filing a 2020 tax return so that they can
begin receiving their monthly advance CTC payments. This 2020 return
also will enable these families to receive any first- or second-round
EIPs that they have not received, but to which they are eligible, as
well as to sign up for the third round of EIPs.
Question. Are taxpayers and non-filers able to make an appointment
at a Taxpayer Assistance Center (TAC) to sign up for these payments or
update their information in person?
Answer. Taxpayer Assistance Center (TAC) employees can assist
taxpayers in using the CTC tools made available on IRS.gov, including
CTC UP, the Child Tax Credit Non-filer Sign-up tool, and the Child Tax
Credit Eligibility Assistant. In addition, TAC employees can help
taxpayers determine their qualifications for the CTC and advance CTC
payments, as well as provide them with information and assistance with
IRS Free File. If a taxpayer did not file a 2020 or 2019 tax return
claiming the CTC, they can qualify for advance CTC payments by filing a
2020 tax return. IRS Free File is available for taxpayers to file a tax
return on IRS.gov. Taxpayers can make an appointment at a TAC to obtain
assistance with filing requirements and CTC qualifications. In
addition, frequently asked questions listed on the ``Advance Child Tax
Credit Payments in 2021'' page on IRS.gov provides additional
information on how to file a tax return to determine eligibility for
the CTC and advance CTC payments.
Question. Of the 10 TACs in Indiana, 7 remain closed. How long will
taxpayers be required to rely on glitch-ridden online systems and dead-
end phone calls to remedy their tax troubles?
Answer. IRS customer service representatives can assist taxpayers
who are unable to access, or experience difficulty using, the Child Tax
Credit Update Portal (CTC UP). Taxpayers can call the phone number
provided in their CTC outreach letter that they received from the IRS
in June, or they can make an appointment with their local TAC, to
receive assistance in (i) determining their eligibility for CTC and
advance CTC payments, as well as (ii) using IRS Free File and CTC UP.
Of the 10 TACs located in Indiana, 6 are open to the public. In
addition, there is one virtual service delivery site located in
Lafayette, IN. Two locations (South Bend and Terre Haute) of the four
closed locations will reopen for service once newly hired employees
have completed their training.
Question. What other non-web-based options to sign up for payments
or update information will be available by program's launch? What
options will be available before the end of the year, and when will
these roll out?
Answer. To receive advance CTC payments, taxpayers generally do not
need to take any special steps if they are eligible to receive these
payments based on either of their filed and processed 2020 or 2019
Federal income tax return.
Information entered into the Non-filer tool on IRS.gov for EIPs in
2020 created a simplified 2019 tax return. Therefore, individuals who
used the Non-filer tool for EIPs filed a 2019 tax return. Generally,
all taxpayers who filed a 2020 or 2019 tax return, including those who
used the Non-filer tool for EIPs, will automatically receive the
Advance CTC payments without needing to take any additional action.
Taxpayers must take action if they have not filed a 2020 or 2019
tax return. The IRS has launched a new online Non-filer Sign-Up tool
that will allow individuals who weren't required to file (and have not
filed) a tax return for 2020 to file a simplified tax return. This
simplified tax return will allow eligible individuals to register for
Advance CTC payments and the third EIP, as well as claim the 2020
Recovery Rebate Credit. Individuals who cannot access the Non-filer
Sign-Up tool may file a simplified tax return on paper.
For questions regarding eligibility and the status of payments, IRS
customer service representatives can assist taxpayers unable to access
the CTC Update Portal. Taxpayers can call the phone number on the CTC
Outreach letter they received in June or they can make an appointment
with their local TAC.
Question. Where will taxpayers with questions be able to turn to
for real-time, customized guidance on claiming the credit?
Answer. The IRS will continue to provide robust communications and
outreach to families throughout 2021 to provide information and
resources to help them understand and sign up for the advance CTC
payments for which they are eligible. In particular, the IRS has
created a special Advance Child Tax Credit 2021 page on IRS.gov, which
the IRS has designed to provide the most up-to-date information about
the credit and the advance CTC payments.
The IRS deployed a web-first strategy for the 2021 CTC and advance
CTC payments. In June 2021, the IRS mailed letters to taxpayers who may
be eligible for the CTC that provided a link to the Advance Child Tax
Credit 2021 page on IRS.gov. The letters also provided a toll-free
number for live assistance to help taxpayers understand the frequently
asked questions listed on IRS.gov, as well as how to unenroll from
advance CTC payments.
Question. Does Treasury anticipate any of the issues it faced in
distributing the Economic Impact Payments to affect the distribution of
the advance CTC? What steps have the IRS taken to minimize errors?
Answer. The IRS stands ready to serve the Nation's taxpayers--
continuing on the assistance that the agency provided throughout the
implementation of the Coronavirus Aid, Relief, and Economic Security
Act, the COVID-Related Tax Relief Act of 2020 (enacted as part of the
Consolidated Appropriations Act, 2021), and the American Rescue Plan.
As an administrative agency, the IRS will work to deliver all that the
CTC and advance CTC statutes require, and leverage the experience
gained by the agency while successfully delivering three rounds of
EIPs. Similar to EIP implementation, the IRS has put into place a
robust communication and outreach strategy to provide information and
resources to taxpayers and the IRS's partners. In addition, the IRS
continues to engage in extensive collaboration with stakeholders,
including the Bureau of the Fiscal Service and other Federal agencies,
in preparing for the timely issuance of the first round of advance CTC
payments.
Question. If a constituent has an issue with their payment--whether
the constituent cannot sign up or opt out, receives the wrong payment,
the payment is sent to the wrong bank, etc.--what is the fastest and
most secure avenue to rectify such issue? Will missed payments that
result from such errors be retroactively repaid?
Answer. The Child Tax Credit Update Portal (CTC UP) allows families
to verify their payment eligibility and, if needed, update their bank
account information. They can also unenroll from receiving the monthly
payments and instead receive a lump sum when they file their 2021
Federal tax return during next year's filing season. Additional
functionality will be added to CTC UP later this year to enable
individuals to update their mailing address, add or subtract the number
of their qualifying children, report a change in marital status, and
report a change in income. IRS customer service representatives can
assist taxpayers who are unable to access, or experience difficulty
using, CTC UP. Taxpayers can call the phone number on the CTC Outreach
letter they received in June or they can make an appointment with their
local TAC.
Taxpayer eligibility for advance CTC payments is based on their
2020 or 2019 Federal income tax return (including information entered
into the Non-filer tool for EIPs in 2020). If the taxpayer's 2020 tax
return has not been processed yet, their payment amount may begin or
change after the IRS processes their 2020 tax return. The IRS will
adjust the remaining payments in 2021 to increase or decrease the total
amount of advance CTC payments that should be disbursed during the
year.
If CTC UP indicates to an individual that an advance CTC payment
was disbursed to that individual, but the individual has not received
it within the applicable timeframe listed below, the individual can
request a payment trace to track the payment. However, the IRS will not
be able to trace a payment unless: 5 days have elapsed since the
deposit date for the bank account on file with the IRS, and the bank
provides that the bank has not received the payment; 4 weeks have
elapsed since the payment was mailed by check to a standard domestic
address on file with the IRS; 6 weeks have elapsed since the payment
was mailed, and there is a forwarding address on file with the local
post office; or 9 weeks have elapsed since the payment was mailed to a
foreign address.
To initiate a payment trace, the taxpayer can mail or fax a
completed Form 3911, Taxpayer Statement Regarding Refund.
Question. What is Treasury doing to educate taxpayers on this new
CTC process, including raising taxpayer awareness that the monthly CTC
payments may result in a smaller refund at tax filing time, or may even
result in the taxpayer owing money back to the Federal Government?
Answer. In May, the IRS began distributing information to the
agency's Volunteer Income Tax Assistance (VITA) and Tax Counseling for
the Elderly (TCE) partners regarding the 2021 CTC and advance CTC
payments. Although most VITA and TCE sites closed at the end of the
filing season, VITA and TCE partners were asked to share information
about the 2021 CTC and advance CTC payments directly with their
clients, as well as post information on their web pages, social media
accounts, and other media sources. The IRS frequently sends
communications to its VITA and TCE partners regarding tax statutes
enacted as part of the American Rescue Plan Act of 2021, including the
2021 CTC and advance CTC payments. These partners can then customize
the IRS communications to deliver that information most effectively to
the communities that they serve.
Question. I understand that the IRS is hosting Advance Child Tax
Credit Free Tax Prep Days in select metropolitan areas, none of which
are in Indiana and none of which are designed to assist rural
taxpayers. While I appreciate the IRS is recognizing that assistance in
onboarding individuals is important, what steps is the IRS taking to
provide outreach and resources to those outside of these metro areas,
including rural taxpayers that may not have reliable broadband to
access the IRS online tools?
Answer. Although most Volunteer Income Tax Assistance (VITA) and
Tax Counseling for the Elderly (TCE) sites closed at the end of the
filing season, all VITA and TCE sites were encouraged to partner with
the IRS to share information about the IRS's Advance Child Tax Credit
Free Tax Prep Days. VITA and TCE partners were asked to market the
events by posting information on the events through their social media
sources, as well as choosing to prepare returns. On June 25th and 26th,
participating IRS partners hosted events in 12 identified cities. Over
80 VITA and TCE partners across the Nation provided free tax return
preparation services during these events. The IRS and its partners will
again conduct Advance CTC Free Tax Prep Days in July. During these
events, IRS employees, key community stakeholders, and volunteers will
help eligible families file a 2020 tax return, if needed, to begin
receiving their monthly advance CTC payments.
Question. As the leading state sponsor of terrorism in the world,
the Iranian economy is of central importance to slowing Iran's
terrorist activities. I believe that the administration should provide
no sanctions relief, including relief that could be provided through
waivers or general licenses, that directly or indirectly benefits the
Central Bank of Iran until such time as the Treasury Department
determines the CBI is no longer connected to the IRGC or Iran's terror
finance activities.
Do you agree?
Answer. As the Biden-Harris administration has said, if Iran
implements its nuclear commitments under the JCPOA, the United States
would implement its commitments under the JCPOA to lift sanctions. At
the same time, it is important that Treasury continue its work to
enforce U.S. sanctions and combat Iran's support for terrorism, abuse
of human rights, weapons of mass destruction (WMD) proliferation and
ballistic missile development, as well as the regime's destabilizing
activities in the region.
Question. Do you agree with the role that National Iranian Oil
Company plays in the regime's economy?
Answer. Treasury has previously taken action to target NIOC under a
variety of authorities, including blocking NIOC for being owned or
controlled by the Government of Iran since 2008.
Question. Do you also agree that the administration should provide
no sanctions relief, including relief that could be provided through
waivers or general licenses, that directly or indirectly benefits the
National Iranian Oil Company, until such time as the Treasury
Department determines that NIOC is no longer connected to the IRGC or
Iran's terror finance activities?
Answer. I believe Iran should only enjoy sanctions relief under the
JCPOA if it takes the appropriate steps to resume compliance with its
nuclear commitments under the JCPOA. At the same time, it is important
that Treasury continue its work to enforce U.S. sanctions and combat
Iran's support for terrorism, abuse of human rights, weapons of mass
destruction (WMD) proliferation and ballistic missile development, as
well as the regime's destabilizing activities in the region.
Question. Do you agree that the United States has the right to
impose terrorism sanctions, that is sanctions imposed pursuant to E.O.
13224, on any entity for which sanctions relief was initially provided
under the JCPOA, including the Central Bank of Iran and the National
Iranian Oil Company?
Answer. Even under the terms of the JCPOA, Treasury would retain
the right to impose sanctions related to Iranian support for terrorism,
human rights abuses, WMD proliferation and ballistic missile
development, as well as the regime's destabilizing activities in the
region.
Question. I believe that it is of utmost importance that the IRS
safeguard confidential taxpayer information against unauthorized
disclosures. Taxpayers must have faith that their sensitive financial
information will be protected by the IRS and not exploited for
political or other gain. To that end, I recently joined my Senate
Finance Committee Republican colleagues in sending a letter to the
Inspector General for Tax Administration regarding the June 8, 2021,
ProPublica article titled, ``The Secret IRS Files: Trove of Never-
Before-Seen Records Reveal How the Wealthiest Avoid Income Tax.''\8\
That article strongly suggests that the taxpayer information described
therein originated from within the IRS, which, if true, constitutes a
serious breach of privacy and is a criminal violation of our tax laws.
My Senate colleagues and I requested that Inspector General George
immediately investigate this apparent leak.
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\8\ https://www.propublica.org/article/the-secret-irs-files-trove-
of-never-before-seen-records-reveal-how-the-wealthiest-avoid-income-
tax.
Do you commit to ensuring the Treasury Department, including the
IRS, cooperates fully and promptly with any investigation into the
ProPublica data release, including but not limited to investigations by
the U.S. Department of Justice and the Inspector General for Tax
Administration, and do you commit to taking immediate action to remedy
---------------------------------------------------------------------------
any shortcomings identified by any such investigation?
Answer. With respect to the ProPublica report, I am deeply troubled
by it. It is important to stress that an unauthorized disclosure of
taxpayer information is a crime. Immediately upon learning about this
matter, it was referred to the FBI, Federal prosecutors, and Treasury
Department oversight authorities, all of whom have the independent
authority to investigate. We are fully cooperative with their efforts
and are interested in doing all possible as quickly as possible to get
to the bottom of this potentially criminal activity.
Question. Since the onset of the coronavirus pandemic, the United
States government has pumped trillions of dollars into the economy and
swelled the money supply. After pushing through a nearly $2-trillion
so-called ``COVID relief'' bill, while a trillion of authorized relief
remained unspent, President Biden has laid out an unprecedented $6-
trillion budget that is only partially paid for with tax hikes that
will hamper our economic recovery. Earlier this month, the Bureau of
Labor Statistics released its May CPI data--a 5-percent increase over
the last year.
You have indicated that the White House should revise its inflation
estimate to 3 percent for the year, and the Federal Reserve has raised
its prediction to 3.4 percent. Do you still hold your earlier
assessment that this inflation is simply a transitory effect?
Are you concerned about any effects that further spending--as
proposed by the President, despite the trillions in deficit spending
already signed into law--will have on our economy over the next few
years?
Answer. My view on the inflation outlook has been, and remains,
that inflation is transitory as the economy pivots from a steep
recession back into recovery. This view is consistent with that of the
Federal Reserve, the Congressional Budget Office, and professional
forecasters, as measured through the Blue Chip forecast and other
metrics.
The fiscal proposals advanced by the President, which are fully
offset over 15 years, would expand the productivity capacity of the
U.S. economy by raising labor participation and bolstering
productivity. And I worry that in the absence of the proposed
investments in areas like infrastructure and policies to mitigate
climate change, our economy will begin to suffer the negative impacts
of insufficient public investment.
Question. I would like to get your thoughts on the ongoing
negotiations regarding a global tax agreement. Since the agreements
announced by the G7 nations earlier this month, France and others have
indicated that they still intend to continue their digital services tax
(DST), which the United States Trade Representative has found to
violate section 301.
Do you believe that the United States should move forward with
tariffs on nations imposing discriminatory DST? Shouldn't nations that
are entering into good faith negotiations be encouraged to drop their
own DSTs?
Answer. We share your goal of making discriminatory DSTs a thing of
the past, and we have made substantial progress here. At the Inclusive
Framework and G20, we've achieved consensus that there will be a
removal of all DSTs and other relevant similar measures on all
companies. Additionally, we have changed the norms surrounding DSTs,
conveying to our trading partners that the discriminatory nature of
these taxes is unacceptable to the United States. By conveying this
message multilaterally rather than through threats and retaliation, we
have also prevented a series of trade disputes that are harmful to U.S.
businesses, workers, and consumers. That being said, we are also
retaining all options for discouraging the use of DSTs. The USTR has
started trade retaliation procedures via investigation and sanctions
under section 301, and we are keeping that tool available to use if it
were to become necessary. While we very much hope to avoid trade
conflicts, this tool remains a useful lever to bring countries to the
bargaining table.
Question. Is there validity to the argument that the Pillar 1
agreement proposed by the G7 is mostly a repackaging of the digital
services tax?
Answer. We have carefully designed our Pillar 1 scope proposal so
that it does not ringfence U.S. digital companies, and instead brings
in many non-U.S. companies. Regarding Pillar 1, one of the primary
benefits of the U.S. comprehensive scoping proposal is that it would
only apply to multinational corporate groups that satisfy objective
quantitative criteria such as size and profitability thresholds, and
does not discriminate against certain business sectors. And,
importantly, by eliminating a chaotic array of digital unilateral
measures, Pillar 1 stabilizes the current regime in a way that will
benefit businesses and will provide tax certainty to them.
I would also note that we have not completed a detailed analysis of
the economic impact of Pillar 1 since the OECD Inclusive Framework has
not agreed on a profit reallocation formula for, Pillar 1. However,
based on earlier work for the October 2020 Blueprint scoping, the
possibility of no U.S. revenue impact was within the confidence
interval examined by the Office of Tax Analysis. This is largely due to
the U.S.'s position as both having a goods trade deficit and a services
trade surplus, which have offsetting revenue effects.
Question. Despite the Biden administration's commitment not to
raise taxes on the middle class, the Democrats' so-called COVID relief
package--passed this March with zero Republican votes-- prohibits
States from lowering tax rates over the next 4 years if such State
accepted COVID relief funding. The Treasury Department has since
announced that States will have to justify any tax cut by demonstrating
such cut was offset by other revenues.
The State of California, which is set to receive more than $27
billion in this latest COVID relief package--more than any other
State--recently announced a budget surplus of up to $76 billion, and
expects to be providing certain families with rebates of up to $600.
Do you believe there is a meaningful difference between a tax
decrease and a tax rebate?
Answer. Section 602(c)(2)(A) provides that States and territories
may not use funds provided under the State and Local Fiscal Relief Fund
from offsetting a reduction in net tax revenue resulting from a
``change in law, regulation, or other administrative interpretation
during the covered period'' that ``reduces any tax . . . or delays the
imposition of any tax or tax increase.'' Treasury's interim final rule
implements this provision as directed by Congress, including guidance
on the scope of changes covered under this provision. To determine
whether a change would be covered, a State or territory would consider
whether a change was made to law, regulation or other administrative
interpretation that was enacted during the covered period and that the
State or territory would assess or predict to have the effect of
reducing tax revenue. An assessment on this question is not possible in
the abstract; further details on the specific parameters of each policy
would be needed to determine whether there are relevant economic,
policy, or practical differences.
Question. If enacted, do you believe California's rebate proposal
would violate the ``no tax cut'' rule that was included in the American
Rescue Plan Act?
Answer. The net tax offset provision of the American Rescue Plan
Act does not prohibit any particular tax policies, and no tax cut or
other tax policy on its own would be sufficient to result in recoupment
of American Rescue Plan funds. As discussed further in the interim
final rule, implementing such policies would not result in recoupment
provided that States and territories that choose to implement them
could demonstrate that they have been paid for with other sources of
funds, including other tax increases, certain spending cuts, or
increased tax revenues resulting from economic growth.
______
Communication
----------
Center for Fiscal Equity
14448 Parkvale Road, Suite 6
Rockville, MD 20853
301-871-1395
[email protected]
Statement of Michael Bindner
Chairman Wyden and Ranking Member Crapo, thank you for taking my
comments. Our comments repeat those provided to the House Budget
Committee on June 9th, which were based on the topics presented in
their Committee backgrounder. This document hits the high points in the
budget. Additional options presented for consideration, either now or
in the future. Our revenue proposals impact how the Administration's
priorities are funded, which is why they are discussed first. Please
see attachment one for the details of our tax reform plan. Spending
items not under the purview of the Finance Committee are omitted.
Ensure big corporations pay their fair share. Corporate income taxes
would be discontinued and replaced by an employer-paid subtraction
value-added tax on all businesses, thus taxing both labor and capital
at the same rate for the first tier, with a proposed rate between 13%
and 20%. No net revenue would be collected. Rather, this tax would fund
an expanded refundable child tax credit at more generous than the
President's proposal, as well as health care costs for employees and
their families. Some employers will overpay, while others will get a
refund. Higher tier salary taxation will be collected with this tax.
A matching state tax would supplement the child tax credit in higher
cost states, while providing funds for education through the junior
college and vocational levels. States would collect both state and
federal taxes. These items will be discussed below.
End tax loopholes for the wealthy. Provide the IRS with the resources
it needs to crack down on wealthy tax cheats and improve taxpayer
services. In general, we propose ending personal income taxation for
all but the wealthiest taxpayers. The threshold for salary taxation
will be $85,000, however it will be collected by employers with tax
rates ranging from 12.5% to 25% at and above $340,000 per year.
Personal salary taxation will begin at $425,000 at 12.5%, increasing to
25% at $680,000, for an overall rate of 50% from both revenue streams.
The salary surtax could be remitted in advance by purchasing tax
prepayment bonds. This would reduce future net interest costs, which
are the main driver of future budget imbalance.
The largest loophole for the wealthy is not mentioned in the
President's Budget. If there is a third rail in income taxation that
mirrors the third rail in Social Security, this is it. The largest boon
to the wealthy is the exclusion of mutual funds from payment of capital
gains and income taxation. This ensures the accumulation of wealth by
the rich at the expense of everyone else. By our calculations, 28% of
mutual fund (and bond) assets are held by the top 1,450 families. Over
half of these assets are held by the top 0.01%. The bottom 90% hold
only 23% of such assets, and many of these are likely held by well-off
retirees.
Shifting taxation to an asset value-added tax from personal income
taxation at 25% (which is the rate currently being discussed in budget
negotiations) would tax capital gains, dividends at distribution, and
interest at distribution. Rental and real property assets will be taxed
at the state level. The federal tax would be remitted to the Securities
and Exchange Commission, while states would collect rental income
monthly and capital gains taxes at closing.
Asset VAT would be marked to market (not gain) at option exercise and
at the first sale after inheritance, gift and donation. The estate tax
would be repealed. Family businesses and assets would not have to be
sold to pay estate taxes, but once the family business is sold, any
advantage will be ended. There will be no loopholes, save one, and no
need for extra audit resources. The only loophole would be zero rating
sales to qualified Employee Stock Ownership Plans.
Cash inheritances would not be taxed, but because a goods and services
taxes will be established (increased minimum wages and child tax
credits will hold the working class harmless), heirs will no longer
evade taxation forever. Most tax dodges, such as large insurance
policies, will lose their allure.
Instead of an internationally agreed upon corporate minimum tax
corporate income tax, asset VAT rates will be coordinated so that
international market shifting will not occur based on tax rates.
Note to Republican Members: President Bush 41 was not denied a second
term because he went back on his no new taxes pledge. Indeed, the 1990
Tax Act began the period of growth in the 1990s, which were accelerated
by President Clinton. As we come out of the COVID recession, higher
taxes on the wealthy are desirable, and will occur.
The wealthy need to want to pay more. The current debt is
unsustainable, not because of COVID spending but because the rich
themselves are receiving more interest from the debt than what they owe
on it. The world will not tolerate this for long. See the final
attachment for more information on this.
Build world-class transportation infrastructure. Infrastructure should
not be paid for by the rich. Such funding is not sustainable over time.
Increased motor fuel taxes, with a return to projects coordinated
between members of Congress and local governments, is the traditional
approach until the late-Senator McCain led the charge against ``pork
barrel'' funding. The reality was the high taxes were considered
tolerable when paired with bringing home the bacon. Even Congressman
Ron Paul realized, at my urging, that agreed upon spending was
preferable to spending based entirely in the federal contracting and
grant sectors.
Motor vehicle fuel prices are generally inelastic to about $4.00 per
gallon or more. Taxes that result in fuel taxes below that point will
not affect revenue. Paired with improvements in public transit, the
emission of greenhouse gases, as well as more acute emissions, will be
served by higher prices.
Market manipulation of oil prices in the New York Mercantile Exchange
is not unheard of. Indeed, it likely had a cause in the Great
Recession, as oil traders tried to tap mortgage-backed securities when
prices dropped due to the examination of market practices by Congress.
The deregulation undertaken by Mr. Mulvaney in his service (if that is
what you want to call it) at the Consumer Finance Protection Bureau
undid the market reforms enacted in Dodd-Frank. Restoring these reforms
must be a priority.
With the rise of electric vehicles, some form of mileage based tax is
appropriate, although developing it is problematic. We must raise gas
taxes first while we develop the concept.
Invest in the knowledge, technologies, and actions needed to tackle the
climate crisis and lead in the clean energy economy. A carbon value-
added tax should fund improvements in technology. A VAT, rather than an
embedded tax, allows consumers more information in making their
consumption decisions. The possibilities for funding research have
already been submitted to the Energy and Water Development
Subcommittee. I suggest two initiatives:
Fusion is a game changer and should be funded on a crash basis before
we have to turn out the lights to avoid treading water. Helium-3 is
promising and there is even some noise about cold fusion on a larger
scale. Energy companies like how cheap coal is and how much cheaper and
more popular natural gas is. Utilities (and even coal producers) need
to be offered a way to hedge their bets. To move fusion, set up a
public-private partnership to sink in more money in exchange for the
right of first use. Any practical use of fusion will be big-industry.
It was never going to be any other way. Funds should be increased for
fusion now, with a promise of ever greater funding once industrial
partnerships are created.
One use for such cheap power is a new transportation system. We can
pilot this now, in cooperation with the Departments of Commerce and
Transportation, automobile manufacturers, utility companies and
eventually selected local governments. I described the project in my
CJS appropriation testimony.
To best utilize clean energy (even natural) automated cars with central
control (rather than their own AI) and energy distribution (rather than
being hampered by economically damaging battery development). The
latter is old technology, i.e., electric trains and buses.
The same consortia that fund the project can be the backbone for
implementing it. Individuals could own cars, while some would be for
hire (with monitoring, but not drivers). Debit cards or a link to
checking accounts would pay for the car itself (either to rent or own),
the roadway and the use of energy and computer services.
Prices would vary based on congestion and vehicles could be taken to a
public transportation hub (which might be located at their children's
school), with the vehicle returning home empty or going to the next
fare. If congestion is low, it may be affordable to drive to work. If
it is high, prices for public transit and commuting would be adjusted
accordingly. We can do this now. The technology is already available.
We need only be willing.
Make transformative investments in a renewed electric grid and energy-
related economic development. Energy infrastructure to power an
integrated electric car system would also carry household energy that
relies on an effective grid. We agree on all initiatives in the
President's Budget. These should eventually be funded by a carbon value
added tax. Such a tax will be easier to pass with vigorous enforcement
of environmental regulations, with punitive fines. Industry will beg
for such alternatives.
In the interim, while tax reform is in negotiations and development,
these projects should be funded by increased debt (which is appropriate
for capital projects), with increased taxation of the wealthy, both
immediately and through asset value-added and higher tier subtraction
VAT in the longer term.
Revitalize American manufacturing and small businesses, creating
economic and job growth across the country. From our usual comments on
international trade: Consumption taxes could have a big impact on
workers, industry and consumers. Enacting an I-VAT is far superior to a
tariff. The more government costs are loaded onto an I-VAT the better.
If the employer portion of Old-Age and Survivors Insurance, as well as
all of disability and hospital insurance are decoupled from income and
credited equally and personal retirement accounts are not used, there
is no reason not to load them onto an I-VAT. This tax is zero rated at
export and fully burdens imports.
Let us look at small business more closely. The cure for franchising,
which is designed to insulate large companies from inventory, property
and organized labor risks, would be less attractive with enactment of
an employer-paid subtraction value-added tax. Large firms would want
these tax benefits for themselves.
Gig work and the misuse of 1099 employment would also be reduced, which
will greatly decrease the number of small businesses as currently
measured. Federalizing the enforcement of existing labor law and
increasing both funding and fines for violation will also allow a focus
on true small businesses. Aid to small businesses can then be focused
to where it is needed.
Invest $400 billion in home or community-based care for seniors and
people with disabilities. Home and community-based care should be
funded by goods and services taxes as part of a newly created Medicare
Part E. Senior Medicaid should be entirely federalized, with other
clients insured through the President's proposal for a public option.
President Reagan's New Federalism proposal would have removed Medicaid
from state budgets in exchange for ending or block granting other
federal programs. This was a good idea then and a better idea now.
Medicaid Part E should be created to both relieve states and the
District of Columbia (or Washington, Douglass Commonwealth) from
providing Medicaid for seniors and the Disabled and seeing to the
enforcement of practice standards for nursing homes who receive these
funds.
President's Budget: Support workforce development; provide four
additional years of free education. Make historic investments in
education. Local welfare programs will channel clients to appropriate
educational programs (with no legal residency requirement), training
through workforce investment boards or other social services. One Stop
programs should really be handled in one stop. Programs, both public,
private and sectarian, should be funded by a state-level employer-paid
subtraction VAT. They will include the following:
English as a Second Language.
Expanded Job Corps.
General Education Degree preparation.
Technical and vocational training.
Psychiatric and occupational rehabilitation programs.
Community College and the first two years of four year programs
to an Associate's Degree or through sophomore year.
All of the above should include a stipend at the minimum wage (pending
satisfactory performance and be tuition free). Education providers will
be the conduit to tax benefits and any other state or federal
subsidies.
Medicaid for poor families should be distributed, where possible,
through the health insurance plan of their educational providers or the
plan for state and local government employees. SNAP payments should be
abolished, as well as TANF, except for people who cannot be enrolled in
another program. For these, SNAP must include a cash benefit, thus
ending the incentive to sell food stamps in order to buy toilet paper
or gasoline.
President's Budget: Make critical investments in child care. Childcare
is best provided by the employer or the employee-owned or cooperative
firm. On-site care, with separate spaces for well and sick children, as
well as an on-site medical site for sick employees, will uncomplicate
the morning and evening routine. Making yet another stop in an already
busy schedule adds to the stress of the day. Knowing that, if problems
arise, parents can be right there, will help workers focus on work.
Larger firms and government agencies can more easily provide such
facilities. Indeed, in the Reeves Center of the District Government,
such a site already exists. When the crisis is over, a staff visit
would prove illuminating. Smaller firms could make arrangements with
the landlord of the building where offices or stores are located,
including retail districts and shopping malls. For security reasons,
these would only serve local workers, but not retail customers.
These programs should be paid for with increased employer-paid
subtraction value added taxes, with credits for companies that provide
these benefits and higher taxes for those who do not. A tax on
employers would help society share the pain for requiring paid leave.
Firms that offer leave would receive a credit on their taxes
(especially low-wage firms).
Extend key tax benefits for lower- and middle-income workers and
families. The child tax credit level passed in the American Recovery
Act should be made permanent and doubled, with distribution through
private sector payrolls, unemployment insurance benefits, emergency
benefits for families and paid participation in educational programs.
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.
Deliver nutrition security to America's vulnerable families. Build and
retrofit buildings across the country for energy efficiency and
expanded housing options. Increase the supply, quality, and
affordability of rental housing. The best option for food security and
low income housing is to increase incomes by increasing the minimum
wage, increasing the child tax credit and monthly payments for old-age,
survivors and disability recipients. For the latter, rebasing past
wages to wage increases will help, but shifting the employer
contribution and disability insurance to funding with a border
adjustable goods and services tax, crediting past and future
contributions on an equal dollar basis (rather than as a match for the
employee contribution. VAT funding means a larger tax base and easier
rate increases.
Increasing the minimum wage to $10 should take effect immediately,
phasing to $12. You can argue about a $15 or $18 minimum after the
midterm elections. Higher minimum wages increase job growth, as lower-
wage employees spend every dime of the increase, as do higher-wage
workers below the middle-management level whose wages will also rise.
Provisions should also be included in law to hold franchisers harmless
if minimum wage increases impact their own livelihoods.
Meeting National Defense Needs. In general, we recommend that non-
strategic air and ground units based in CONUS be funded from the goods
and services tax, while sea, overseas (OCO) operations and veterans
benefits be funded with asset VAT and higher tier employer-paid
subtraction VAT revenues, which will also fund net interest and paying
down the Social Security and Medicare Trust Funds.
Essentially, federal defense spending which benefits the homeland will
be paid by American taxpayers, but not by exports. The current regime
can be seen as an unconstitutional export tax. Department of Defense
product and logistic commands will be funded based on where units are
assigned and based. Strategic systems will be nationally funded.
Overseas deployments and war are generally put on the national credit
card. It is generally better to tax higher income individuals rather
than paying them interest instead. The cash flows are the same, but
taxation means that the cash need not be paid back at interest.
Thank you for this opportunity to share these ideas with the committee.
As always, we are available to meet with members and staff or to
provide direct testimony on any topic you wish.
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. A single rate also stops gaming forms
of ownership. Lower rates are not as regressive as they seem. Only the
wealthy have capital gains in any significant amount. The de facto rate
for everyone else is zero.
The mutual fund exemption will be repealed. It is the biggest tax
shelter is the use of money market funds to accumulate capital gains
and income without taxation. This practice must end if salary surtaxes
no longer include non-salaried income. 75% of such funds are held by
the top 10% of households as measured by the 2019 Survey of Consumer
Finance by the Federal Reserve. I suspect the other 20% are held by
high income retirees. The working class will not be harmed. Applying
the Pareto Rule to higher income households leaves the top 1450
households with 30% of wealth. The proof of this proposition is the
shareholders list of Berkshire Hathaway.
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.
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.
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Amounts (Billions)
-------------------------------------------------------------------------------------------------------------------------------
Descending Cumulative Millions of Millions of Held by
Percentiles Returns Filed Returns Paying Income Tax Gross Debt Federal Held in Held in Assets Net of
Tax AGI Paid (Factor) Reserve and Held in Bonds Personal Government Debt Liability
16.55 Banks Accounts Debt
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
All returns total 143.3 99.4 10,937 1,601 26,500 5,238 4,222 3,854 5,384 (7,802)
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Top 5% IRS, 8.5% CPS, $208,053 7.2 7.2 3,995 947 15,671 2,926 3,693 2,411 294 (6,347)
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
5%-25% IRS, 8.5%-37.2% CPS, 28.7 28.3 3,566 432 7,146 1,399 529 1,046 1,238 (2,934)
$83,682
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Bottom 75% IRS, 62.8% CPS, $0 107.5 63.9 3,375 223 3,683 913 - 397 3,852 (1,479)
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
The 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.
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