[Senate Hearing 118-236]
[From the U.S. Government Publishing Office]




                                ------                                S.
                                                         S.  Hrg. 118-236
 
                     THE GREAT TAX ESCAPE: CLOSING
                    CORPORATE LOOPHOLES THAT REWARD
                      OFFSHORING JOBS AND PROFITS

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

                                HEARING

                               before the

                        COMMITTEE ON THE BUDGET
                          UNITED STATES SENATE

                    ONE HUNDRED EIGHTEENTH CONGRESS

                             SECOND SESSION

                               ----------                              

                            January 17, 2024

                               ----------                              

           Printed for the use of the Committee on the Budget
           
           
           
           
         [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT] 
         
         
         
         
         
         
         
         
  
           










                                 


                                                        S. Hrg. 118-236

                     THE GREAT TAX ESCAPE: CLOSING
                    CORPORATE LOOPHOLES THAT REWARD
                      OFFSHORING JOBS AND PROFITS

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

                                HEARING

                               before the

                        COMMITTEE ON THE BUDGET
                          UNITED STATES SENATE

                    ONE HUNDRED EIGHTEENTH CONGRESS

                             SECOND SESSION

                               __________

                            January 17, 2024

                               __________

           Printed for the use of the Committee on the Budget


                            www.govinfo.gov
                            
                            
                               ______

                 U.S. GOVERNMENT PUBLISHING OFFICE 
54-922                   WASHINGTON : 2024










                         
                            
             
                            
                            
                            
                            
                            
                        COMMITTEE ON THE BUDGET

               SHELDON WHITEHOUSE, Rhode Island, Chairman
PATTY MURRAY, Washington             CHARLES E. GRASSLEY, Iowa
RON WYDEN, Oregon                    MIKE CRAPO, Idaho
DEBBIE STABENOW, Michigan            LINDSEY O. GRAHAM, South Carolina
BERNARD SANDERS, Vermont             RON JOHNSON, Wisconsin
MARK R. WARNER, Virginia             MITT ROMNEY, Utah
JEFF MERKLEY, Oregon                 ROGER MARSHALL, Kansas
TIM KAINE, Virginia                  MIKE BRAUN, Indiana
CHRIS VAN HOLLEN, Maryland           JOHN KENNEDY, Louisiana
BEN RAY LUJAN, New Mexico            RICK SCOTT, Florida
ALEX PADILLA, California             MIKE LEE, Utah

                   Dan Dudis, Majority Staff Director
        Kolan Davis, Republican Staff Director and Chief Counsel
                   Mallory B. Nersesian, Chief Clerk 
                  Alexander C. Scioscia, Hearing Clerk
                            C O N T E N T S

                              ----------                              

                      WEDNESDAY, JANUARY 17, 2024
                OPENING STATEMENTS BY COMMITTEE MEMBERS

                                                                   Page
Senator Sheldon Whitehouse, Chairman.............................     1
    Prepared Statement...........................................    31
Senator Charles E. Grassley, Ranking Member......................     3
    Prepared Statement...........................................    34

                    STATEMENTS BY COMMITTEE MEMBERS

Senator Ron Johnson..............................................    15
Senator Alex Padilla.............................................    18
Senator Mike Braun...............................................    19
Senator Jeff Merkley.............................................    21
Senator Tim Kaine................................................    23
Senator Chris Van Hollen.........................................    25
Senator Ron Wyden................................................    28

                               WITNESSES

Dr. Kimberly Clausing, Eric M. Zolt Chair in Tax Law and Policy, 
  University of California, Los Angeles School of Law............     6
    Prepared Statement...........................................    38
Mr. Roy Houseman, Legislative Director, United Steelworkers......     7
    Prepared Statement...........................................    48
Mr. John Arensmeyer, Founder & CEO, Small Business Majority......     9
    Prepared Statement...........................................    54
Dr. James R. Hines Jr., Richard A. Musgrave Collegiate Professor 
  of Economics & L. Hart Wright Collegiate Professor of Law, 
  University of Michigan.........................................    11
    Prepared Statement...........................................    59
Ms. Mindy Herzfeld, Professor of Tax Practice, University of 
  Florida Levin College of Law...................................    12
    Prepared Statement...........................................    72

                                APPENDIX

Responses to post-hearing questions for the Record
    Dr. Clausing.................................................    89
    Dr. Hines....................................................    90
    Ms. Herzfeld.................................................    95
Charts submitted by Senator Charles E. Grassley..................   101
Statements submitted for the Record by Chairman Sheldon 
  Whitehouse.....................................................   104


           THE GREAT TAX ESCAPE: CLOSING CORPORATE LOOPHOLES



                         THAT REWARD OFFSHORING



                            JOBS AND PROFITS

                              ----------                              


                      WEDNESDAY, JANUARY 17, 2024

                                           Committee on the Budget,
                                                       U.S. Senate,
                                                    Washington, DC.
    The hearing was convened, pursuant to notice, at 10:01 
a.m., in the Dirksen Senate Office Building, Room SD-608, Hon. 
Sheldon Whitehouse, Chairman of the Committee, presiding.
    Present: Senators Whitehouse, Wyden, Merkley, Kaine, Van 
Hollen, Padilla, Johnson, Braun and R. Scott.
    Also present: Democratic Staff: Dan Dudis, Majority Staff 
Director; Dan RuBoss, Senior Tax and Economic Advisor and 
Member Outreach Director; Sion Bell, Tax Policy Advisor.
    Republican Staff: Chris Conlin, Deputy Staff Director; 
Krisann Pearce, General Counsel; Nick Wyatt, Professional Staff 
Member; Ryan Flynn, Staff Assistant.
    Witnesses:
    Dr. Kimberly Clausing, Eric M. Zolt Chair in Tax Law and 
Policy, University of California, Los Angeles School of Law
    Mr. Roy Houseman, Legislative Director, United Steelworkers
    Mr. John Arensmeyer, Founder & CEO, Small Business Majority
    Dr. James R. Hines, Jr., Richard A. Musgrave Collegiate 
Professor of Economics & L. Hart Wright Collegiate Professor of 
Law, University of Michigan
    Ms. Mindy Herzfeld, Professor of Tax Practice, University 
of Florida Levin College of Law

          OPENING STATEMENT OF CHAIRMAN WHITEHOUSE \1\
---------------------------------------------------------------------------

    \1\ Prepared statement of Chairman Whitehouse appears in the 
appendix on page 31.
---------------------------------------------------------------------------
    Chairman Whitehouse. All right. The hearing of the Budget 
Committee will come to order. Senator Grassley is not 
available, as has been reported, he's getting antibiotics 
treatment, but he and I have been in touch, and he says he is 
feeling much better, and looking forward to being back soon. 
And he's been courteous about encouraging the hearing to 
proceed given that some of you have come some distance.
    And his opening statement will be read into the record by 
Senator Johnson, who is sitting for him, so let me open with 
mine, and turn to Senator Johnson. Last year the Budget 
Committee held several hearings addressing how tax cuts for 
large multinational corporations and ultra-wealthy individuals 
have worsened income and wealth inequality in this country, and 
hurt small businesses, and blown a massive hole in the federal 
budget, creating enormous budget deficits.
    We have proposals on our side of the dais to raise revenue 
from the ultra-wealthy and large corporations. These proposals 
would place us on a sounder fiscal footing, and make our tax 
code fairer. I've invited my Republican colleagues to put forth 
their own tax fairness and revenue proposals, an invitation I 
renew today.
    Today's hearing is about how giant multinational 
corporations avoid taxes by stashing profits in international 
tax havens, and how the Trump tax laws made this offshoring 
worse. One example, a few years after the Trump tax scam took 
effect, United States multinational corporations reported 
nearly $40 billion worth of profits in Bermuda, which is about 
6 times Bermuda's entire actual economy.
    The victims of this obvious tax scam are American workers 
who lose jobs to overseas competition, small businesses who pay 
their taxes and have to compete with big businesses that don't, 
and kids and grandkids who get saddled with additional federal 
debt. In the words of Dr. Clausing, who is here with us today, 
the Trump laws offshoring provisions are America last tax 
policy.
    How is this even legal? Well, for decades loopholes in U.S. 
tax law have let companies use accounting tricks to move 
profits earned here in the United States to offshore tax 
havens. The Trump tax scam supercharged the offshoring 
incentive, claiming to set guardrails that many pointed out 
were doomed from the start.
    Spoiler alert, the guardrails didn't work, no surprise with 
the offshore tax breaks baked into the law that U.S. 
multinationals reported nearly 60 percent of their foreign 
profits in 2020 in 15 tax havens, dwarfing what theyreported in 
countries where they did real business.
    It's fakery, and it gets worse. The new Trump tax law 
didn't just help companies stash profits in sham shell 
companies, it created new incentives for offshoring real jobs 
and real investment. These offshoring provisions crated jobs 
all right, just not in America. Here's how the scam works. If a 
multinational funnels its profits offshore it gets half off 
discount on its taxes in the shell entity.
    Then come further exemptions. Build a factory overseas and 
pay zero percent on a portion of foreign profits. The more 
factories overseas, the more avoided tax. And because our 
friends always take care of big oil, big oil companies get a 
special added zero percent carveout.
    The best dodge is a combo of factories in foreign 
countries, and sham subsidiaries in tax havens like the Cayman 
Islands or Bermuda. This is happening right now. Senator Wyden 
investigated big pharma's tax dodging and showed how tax 
gimmicks let big corporations get away with paying almost 
nothing in taxes.
    One example, pharma giant AbbVie is an American company 
that makes 72 percent of its sales to Americans, but with a 
subsidiary in Bermuda, and manufacturing facilities in Puerto 
Rico, Singapore, and the Netherlands, they reported 100 percent 
of its profits offshore in 2019, evidently made no money in 
America.
    After the Trump tax scam passed, AbbVie's CEO bragged to 
investors that it would cut their tax rate in half. Sure 
enough, Senator Wyden's investigation found that AbbVie had a 
tax rate of just 8.6 percent in 2019, well below what small 
businesses, real American businesses, or teachers and 
firefighters contribute in taxes.
    When multinationals make a great tax escape, everyone else 
must pay the price. Offshore tax breaks hurt American workers 
by sending jobs overseas. Sure enough, since the Trump tax scam 
passed, multinational corporations have increased foreign 
investment more than domestic investment. The tax scam hurts 
small businesses, who pay their taxes, but must compete with 
big multinationals using sophisticated tax schemes to game the 
system.
    Even large domestic companies can be hurt. I ask to put 
into the record a statement from Rhode Island headquartered, 
CVS, a purely American company that has to watch big, 
international companies use offshore tax scams to pay less 
tax.\2\
---------------------------------------------------------------------------
    \2\ Statement submitted by Chairman Whitehouse appears in the 
appendix on page 104.
---------------------------------------------------------------------------
    These offshore loopholes add hundreds of billions of 
dollars to the deficit every year. If you're looking for a way 
to reduce federal debt, and bring jobs and investment back to 
America, removing a tax scam that rewards offshoring is an 
obvious solution. We can do that. My No Tax Breaks for 
Outsourcing Act would shut down the scam.
    It's simple. U.S. multinationals would pay the same tax 
rate on foreign profits as real American businesses pay. The 
Biden administration and Senators Wyden, Warner, and Brown, and 
Senator Sanders all have related proposals. Each plan would 
implement the global minimum tax agreement negotiated by 
Secretary Yellen to end the international race to the bottom in 
corporate tax rates.
    We'll boost the competitiveness of American domestic 
businesses of all sizes, and boost America's competitiveness as 
a place for jobs and investment. It even boosts the 
competitiveness of U.S. headquarters of multinationals because 
foreign competitors will pay a minimum tax on foreign profits.
    America can't compete with a zero percent tax rate in some 
offshore tax haven. And we shouldn't let that scam persist. 
Corporations should contribute a fair share to American 
infrastructure, national defense, and education. Investments 
that help make America the best place in the world to do 
business.
    When we stop the offshoring tax scam, America and Americans 
will win. With that, I turn to Senator Johnson to read the 
opening statement of Ranking Member Grassley.

         OPENING STATEMENT OF SENATOR GRASSLEY \3\ \4\
---------------------------------------------------------------------------

    \3\ Prepared statement of Senator Grassley appears in the appendix 
on page 34.
    \4\ Senator Grassley's opening statement was read by Senator 
Johnson.
---------------------------------------------------------------------------
    Senator Johnson. Thank you, Mr. Chairman. And if Senator 
Grassley is watching I think we both wish him a full and speedy 
recovery. And I'm happy to read his opening statement.
    ``Mr. Chairman, thank you for calling today's hearing on 
our international tax system. The subject of this hearing is a 
blast from the past. The issue of corporations shifting profits 
and operations offshore was a problem Senator Baucus and 
Senator Grassley explored regularly, as either Chair or Ranking 
Member of Finance for much of the 2000s.
    ``Most egregious abuses, including companies switching 
their headquarters offshore in name only for the primary 
purpose of avoiding U.S. tax. To stem the tide of the so-called 
corporate inversions Senator Baucus and Grassley spearheaded 
anti-inversion legislation enacted in 2004.
    ``However, they understood that any inversions and other 
abuses for good would require reforming our uncompetitive 
corporate tax code. Over the following 12 years a bipartisan 
consensus emerged a high corporate tax rate, coupled with an 
outdated worldwide system of taxation needed to go, but 
legislative action remained elusive.
    ``Our corporate tax system was being strained to its 
breaking point. We faced a resurgence of corporate inversions, 
tax motivated foreign takeovers, and a shrinking corporate tax 
base. Then in 2017 Republicans enacted the Tax Cuts and Jobs 
Act (TCJA) to modernize our international tax system and bring 
our corporate tax rate in line with other developed nations.
    ``This included enacting strong anti-base erosion profit 
shifting rules. These reforms reversed a decade's long trend of 
a shrinking corporate tax base, driven in part by corporate 
profit shifting and base erosion practices. As shown by this 
chart, the Congressional Budget Office (CBO) now projects our 
corporate tax base to be on the verge of becoming larger than 
at any time in the last 20 years.\5\
---------------------------------------------------------------------------
    \5\ Chart submitted by Senator Grassley appears in the appendix on 
page 101.
---------------------------------------------------------------------------
    ``As explained by the 2023 paper published in the 
Contemporary County Research Journal, under our previous tax 
code foreign income was heavily tax favored. This research 
confirms our reforms largely eliminated this tax bias. 
Moreover, the adoption of a lower corporate tax rate, and other 
pro-growth reforms, made the U.S. a more attractive place for 
both domestic and foreign investment.
    ``Some Democrats have tried to demonize these reforms, 
particularly the lowering of the corporate tax rate from 35 
percent to 21 percent, as a supposed radical right wing 
corporate tax giveaway. What they don't tell you is these 
reforms merely move the U.S. from being a high tax outlier 
amongst our major trading partners to the middle of the pack.
    ``The truth is TCJA was a thoughtful and measured response 
for problems that plagued our tax system for decades, and it 
worked. Upon its passage companies called off inversion plans, 
and there have been no reports of major inversion transactions 
since. According to a study recently released by the National 
Bureau of Economic Research, TCJA significantly boosted 
domestic investment contributing to higher wages and economic 
growth.
    ``Jason Furman, who was President Obama's Chair of Economic 
Advisers, responded to the robust evidence in this paper 
exclaiming, `taxes actually do matter,' along with a series of 
online posts praising the study.
    ``I support continuing to explore options to further 
improve our international tax system, but proposals included in 
President Biden's proposed budgets to Congress would take 
America's tax code backwards. President Biden wants to take us 
back to having the highest corporate tax rate amongst our major 
trading partners, and back to an international tax system that 
put U.S. companies at a disadvantage in overseas markets, while 
also surrendering our sovereignty and tax base to foreign 
nations.
    ``This means lower wages and lost jobs. This Senator 
Grassley cannot support.'' That ends his statement. I'll just 
say that from my standpoint, I would never defend the U.S. 
corporate tax system. I mean it's a mess. It's complicated, and 
what I would like to see is this Committee and the Finance 
Committee work towards tax simplification, and tax 
rationalization.
    We're talking about all kinds of complex tax issues in this 
hearing today, and if we just focus our attention on what we 
can do to eliminate the complexity and focus on simplifying and 
rationalizing a tax system, I think an awful lot of these 
problems will take care of themselves.
    Well with that, you know, thank you, and I look forward to 
hearing from all the witnesses.
    Chairman Whitehouse. I think on that point, Senator 
Johnson, we may have some common cause.
    Senator Johnson. There you go.
    Chairman Whitehouse. And let me introduce the witnesses. 
Our first is Dr. Kim Clausing, who is the Eric M. Zolt Chair in 
Tax Law and Policy at the University of California, Los 
Angeles. She previously served in the Biden administration as 
the Deputy Assistant Secretary for Tax Analysis at theTreasury 
Department.
    Next is Roy Houseman, the Legislative Director for the 
United Steelworkers and Vice President of the Union Label and 
Service Trade Department at American Federation of Labor and 
Congress of Industrial Organizations (AFL-CIO). Prior to 
joining the United Steelworkers in 2011, Houseman served as a 
City Council member for Ward 2 in the City of Missoula, 
Montana. Presumably he's had to put up with John Tester.
    Third, we have John Arensmeyer, the Founder and CEO of 
Small Business Majority, the leading advocate for America's 
small businesses. Prior to launching Small Business Majority 18 
years ago, Mr. Arensmeyer was the Founder and CEO of ACI 
Interactive, an award-winning, international interactive 
communications company.
    Next will be Dr. James R. Hines, Jr. of the Richard. 
Musgrave Professor of Economics and the Department of Economics 
and the L. Hart Wright Collegiate Professor of Law in the Law 
School at the University of Michigan. He's the Research 
Director of the Office of Tax Policy Research in the Stephen M. 
Ross School of Business.
    And finally, Mindy Herzfeld is joining us. She's Professor 
of Tax Practice at the University of Florida Levin College of 
Law. Since 2014 she's been contributing Editor to Tax Notes 
International. She's written hundreds of articles on 
international tax policy, as well as other tax policy matters.
    I welcome you all, and Dr. Clausing if you could proceed. 
We'll try to keep you to 5 minutes each. Your full statements 
will be made a matter of the record.

 STATEMENT OF DR. KIMBERLY CLAUSING, ERIC M. ZOLT CHAIR IN TAX 
LAW AND POLICY, UNIVERSITY OF CALIFORNIA, LOS ANGELES SCHOOL OF 
                            LAW \6\
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    \6\ Prepared statement of Dr. Clausing appears in the appendix on 
page 38.
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    Dr. Clausing. Thank you Chairman Whitehouse, and members of 
the Committee for inviting me today to share my views on the 
international tax reform. Today I will make four key points. 
First, international tax is a policy area that deeply benefits 
from international cooperation.
    Because capital is very mobile across borders, over the 
past 4 years governments have steadily lowered their corporate 
tax rates, operating out of fear that they will otherwise lose 
jobs, investment and tax-base to countries with rock bottom tax 
rates. Governments have been particularly generous to the 
largest, most dominant, multinational companies, who often 
benefit from special regimes and rates.
    Fortunately, by working together with other countries, we 
can counter those trends. The recent international tax 
agreement now being implemented throughout the world, will levy 
minimum levels of corporate tax. About 90 percent of 
multinational companies are already on track to be covered by 
the agreement.
    The agreement reduces the pressures of tax competition, and 
it helps any government that wants to protect their corporate 
tax base, and have a fair and efficient tax system. Here in the 
United States global minimum tax adoption gives us more policy 
space to raise revenue from the corporate tax.
    The Organisation for Economic Co-operation and Development 
(OECD) recently did a comparison of countries in terms of their 
corporate tax revenues relative to the size of their economy. 
Of 115 countries, we're ranking 105th in terms of corporate 
revenue, despite having more profitable corporations on the 
Forbes Global 2000 list than any other country.
    There is certainly room to raise more revenue from U.S. 
corporations, and this agreement will help us do that. My 
second point is that the Tax Cuts and Jobs Act laid some really 
important groundwork for future reform, but it has a 
disappointing record in terms of both offshoring and profit 
shifting, which continue to be a very large problem.
    The global intangible low-taxed income (GILTI) provision of 
the Tax Cuts and Jobs Act favors every type of foreign income 
relative to U.S. income, whether in high tax or low tax 
countries, which directly encourages the offshoring of economic 
activity and profit.
    My third point is that the Tax Cuts and Jobs Act made a 
large contribution to our high levels of deficits and debt that 
we see today, while making the tax system less progressive, and 
less efficient.
    Deficits are now forecast to run about 6 percent of gross 
domestic product (GDP)over the coming decade, and debt levels 
will rise to nearly 120 percent of GDP, and of note, these forecasts do 
not incorporate the nearly $4 trillion price tag of extending Tax Cuts 
and Jobs Act provisions that are either scheduled to expire at the end 
of next year, or the business tax provisions that are already causing 
tax increases that were built into the Tax Cuts and Jobs Act.
    As a whole, those extensions are simply unaffordable, and 
beyond that we need to reduce the primary budget deficit. 
Raising revenue is important, but it need not entail 
particularly high rates. Even a returning of the corporate rate 
to 28 percent, which is halfway between current law and pre Tax 
Cuts and Jobs Act law, together with international reforms that 
would counter profit shifting and offshoring, would raise about 
$1.5 trillion.
    We don't need high rates if we can get serious about 
reducing the gaming that occurs when there are large rate 
differentials between types of income, and in this case, 
foreign and domestic income. The corporate tax rate also has a 
very important role to play in building a fair and efficient 
tax system. The corporate tax is a progressive tax, so 
increasing it will fall more heavily on shareholders than on 
ordinary workers.
    Further, the tax system is often our only shot at taxing 
capital income, since most capital income goes untaxed at the 
individual level, or benefits from deferral. Taxing 
multinational income also serves the efficiency of our 
capitalism. Since Adam Smith, we've known that market economies 
work best when competition is vibrant, but over the past few 
decades the U.S. economy has become less and less competitive.
    By taxing the largest, multinational companies at some 
minimum rate, we can make it easier for small businesses to 
grow and compete, and we can create a more level playing field 
at home for our domestic competition. Finally, international 
tax reforms are at the ready, that would help us respond to 
these challenges.
    Senator Whitehouse has sponsored legislation as one 
promising way forward. The Biden administration and the Tax 
Writing Committees, have also suggested important, 
international tax reforms that would meet the moment.
    Today such reforms are good, not only for revenue and 
fairness and efficiency, but they are also consistent with U.S. 
leadership in the world economy. Helping us work together with 
our partners abroad to address global collective action 
problems like profit shifting, and like offshoring, and like 
tax competition.
    This cooperation also builds the trust that is needed to 
tackle other global collective action problems that are very 
pressing today, including those surrounding climate change, and 
national security. Thank you so much, and I look forward to 
taking your questions.
    Chairman Whitehouse. Thank you very much. Mr. Houseman.

    STATEMENT OF ROY HOUSEMAN, LEGISLATIVE DIRECTOR, UNITED 
                        STEELWORKERS \7\
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    \7\ Prepared statement of Mr. Houseman appears in the appendix on 
page 48.
---------------------------------------------------------------------------
    Mr. Houseman. Okay. Good morning Chairman Whitehouse, my 
regards to Ranking Member Grassley, and Member Johnson, and 
members of the Committee. My name is Roy Houseman. I'm the 
Legislative Director for the United Steelworkers, or USW.
    I have the honor to provide this testimony for not only the 
USW, but on behalf of the American Federation of Labor and 
Congress of Industrial Organizations, or the AFL-CIO, 
representing 60 member unions, and their nearly 13 million 
members.
    As the largest manufacturing union in North America, the 
USW represents about 850,000 active and retired members in a 
wide range of industries from healthcare nurses to 
manufacturers of paper, tires and yes, steel manufacturing. The 
success of union members in really every U.S. based private 
sector employer, is very much dependent on the tax and trade 
policies elected leaders, like yourselves vote for and 
implement for our great nation.
    That is why the AFL-CIO and Steelworkers strongly support 
No Tax Breaks for Outsourcing, sponsored by Chairman 
Whitehouse, and in the House of Representatives by Lloyd 
Doggett. The legislation reprioritizes the U.S. tax code 
towards American manufacturing, and corrects policies which 
currently encourage American based companies to shift 
manufacturing plants overseas.
    As countries across the globe compete to expand their own 
manufacturing prowess, our elected leaders need to rethink tax 
policy choices voted on by previous Congresses, and enacted by 
previous administrations. I am certain that the Tax Cut and 
Jobs Act of 2017 also known as the Trump Tax Law, remains 
divisive in the United States Senate.
    The AFL-CIO and the USW remain strongly opposed to the 
legislation for reasons such as more than half of the benefit 
of the law went to the top 5 percent of taxpayers in 2020. 
However, for the purpose of this hearing, the union and 
employers on both sides of the aisle need to rethink tax 
incentives, which provide benefits to multinational 
corporations to outsource to foes and friends alike.
    My written testimony highlights problems with complex tax 
terms that others on this panel have significant day to day 
experience on. Within the simplest terms, tax bill drafters 
created a system where the profits of U.S. multinationals 
overseas firms are effectively subject to a minimum tax rate of 
10.5 percent versus the U.S. corporate rate of 21 percent.
    My sincere hope is that every Senator here understands the 
significant incentives multinationals have over domestic 
companies by paying half the corporate rate on their overseas 
profits. It is important to note that foreign governments 
already offer significant subsidies to companies who locate 
overseas. The USW has filed legal subsidies by China, and a 
host of other countries through our nation's antidumping and 
countervailing duty laws with reasonable success.
    One database currently highlights that there are a total of 
5,977 subsidy policy changes and awards implemented by other 
nations. For the regular union member, it is frustrating that 
the U.S. tax code heaps a tax subsidy on top of a rack of 
foreign subsidies to encourage outsourcing.
    Having been a shop floor paper worker myself, I'm confident 
the vast majority of USW members file their 1040 tax form, 
grumble a bit about their taxes, and eagerly await any refund 
entitled. However, you ask them if it makes any sense that 
American corporations as a group reported to the IRS that they 
earned $60 billion in the Cayman Islands in 2019, when the 
entire economic output of that tiny nation was just $6 billion 
that year, I am confident they would call this a tax loophole.
    It is time to end this doublespeak math, and start treating 
tax havens for what they are. The practice as mentioned in my 
testimony, costs the United States tens of billions every year. 
Similar legislation to the No Tax Breaks for Outsourcing Act 
received a Joint Committee on Taxation Score.
    That bill closed off nearly $1 trillion dollars in tax 
loopholes over a 10 year budget window. To give perspective, 
Congress and President Biden fashioned a bipartisan investment 
in our domestic semiconductor industry, commonly known as 
CHIPS, with the potential to create hundreds of thousands of 
jobs, and maintain our global competitive edge in 
semiconductors for around $79 billion. Congress could fund 12 
CHIP style bills with the revenue they currently give away to 
multinationals in the tax code.
    It is with extreme confidence that I could go to nearly any 
USW member in your states, explain the basics of No Tax Breaks 
for Outsourcing, and they would see this as sensible policy to 
bolster our democracy, get unproductive money out of tax 
shelters, and put it to work in the U.S. economy. Thank you, 
and I look forward to any questions you may have.
    Chairman Whitehouse. Thank you very much. Mr. Arensmeyer.

  STATEMENT OF JOHN ARENSMEYER, FOUNDER & CEO, SMALL BUSINESS 
                          MAJORITY \8\
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    \8\ Prepared statement of Mr. Arensmeyer appears in the appendix on 
page 54.
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    Mr. Arensmeyer. Chairman Whitehouse, Senator Johnson and 
members of the Committee, I'm the Founder and CEO of Small 
Business Majority, a national small business organization that 
empowers America's diverse entrepreneurs to build a thriving 
and equitable economy.
    We engage our network of more than 85,000 small businesses 
and 1,500 business and community partners to advocate for 
public policy solutions and deliver resources to our nation's 
primary job creators. Primarily those in under-resourced 
communities. Our work is bolstered by research, and the voices 
of real small business owners.
    Prior to launching Small Business Majority nearly 20 years 
ago, I was the Founder and CEO of an award-winning, interactive 
communications company, which I ran for 12 years. So on behalf 
of our nation's 33 million small businesses, and as a long-time 
entrepreneur, I look forward to speaking about the critical 
importance of a system of taxation that promotes inclusive 
entrepreneurship as the foundation of our economy, one where 
individuals and corporations pay their fair share.
    In 2021, we conducted multiple surveys finding that 
America's small businesses strongly believe our nation's tax 
system favors large corporations and the wealthy over Main 
Street. Specifically, small businesses feel disadvantaged by 
loopholes that allow larger and wealthier businesses to avoid 
paying their fair share of taxes.
    Almost three-quarters agree that the current tax system 
favors big business over small business. Nearly 70 percent 
cited that offshore tax loopholes allowed bigger businesses to 
avoid paying their fair share, and two-thirds said they support 
setting a minimum tax rate of 21 percent on corporate offshore 
profits.
    While large corporations continue to outsource production, 
investments and output, resulting in them paying fewer taxes, 
our nation's smallest businesses, those that policymakers claim 
to be the backbone of our economy, simply do not have the same 
luxury.
    Like small business enterprises across the country, 75 
percent of small businesses in our network have fewer than 10 
employees. They do not have the in-house capacity, tax 
expertise, or legal counsel to help them manipulate complex tax 
loopholes to their advantage, thus creating a competitive 
disadvantage versus big corporations.
    While we're here to discuss offshore international tax 
loopholes, it should not be viewed in a vacuum. The 2017 Tax 
Cuts and Jobs Act, so-called Trump Tax Law, that claimed to 
bring benefits to America's smallest businesses, has failed on 
that score.
    Take the pass-through deductions as an example. While it is 
true that 95 percent of small businesses pass their profits and 
losses to their owners, a fact that is repeated ad nauseum by 
those advocating for tax cuts for the wealthy, that statistic 
on its own is meaningless. Based on a 2022 Tax Policy Center, 
only 4.5 percent of businesses have pass through income tax at 
the top two rates, and almost 70 percent of all pass-through 
income is earned by those few businesses in those two rarified 
brackets, not your typical Main Street small businesses.
    I should note that the average pass-through revenue for 
small business is $33,000. The average pass-through revenue for 
those in the top 2 brackets is over $500,000. As such, we 
support legislative efforts to clamp down on loopholes for the 
wealthiest corporations in America, including the No Tax Breaks 
for Outsourcing Act proposed by Chairman Whitehouse.
    The 2017 tax law created new incentives to outsource 
production and jobs by cutting the tax rate in half for 
overseas investments, leaving Made in America based businesses, 
large and small, to pick up the slack. Requiring multinationals 
to pay the same rate on profits earned abroad, would rectify 
this inequity.
    The money the large corporations are writing off in tax 
deductions overseas, would be better spent here at home to 
reduce our deficit, and fund critical programs that 
entrepreneurs rely on, including increased Small Business 
Administration (SBA) lending capacity. The SBA's 
entrepreneurial development programs, such as the Women's 
Business Centers and Small Business Development Centers, 
expansion of the Community Development Financial Institutions 
(CDFI) Fund, removing the risk of further reductions in the 
state's small business credit initiative, and full funding for 
the minority business development agency. I'll finish with a 
quote from Small Business Majority National Councilman Clifton 
Broumand, owner of Man and Machine, a medical keyboard and 
mouse manufacturer in Landover, Maryland, that exports its 
products.
    ``Large businesses get to hide their taxes via overseas 
shell corporations. I pay taxes in foreign locations and in the 
United States on my business's profits. But if you have a lot 
of money to throw at a lot of lawyers, you're going to find a 
way to avoid paying those taxes.''
    Clifton has not seen a penny from the promises of the 2017 
tax law. Indeed, he stated that ironically if he, as a small 
business owner, wanted to reap any benefits from the tax law, 
he would simply buy stock in a multinational company. Thank you 
for your time, I look forward to taking your questions.
    Chairman Whitehouse. Thanks so much. Dr. Hines, over to 
you.

   STATEMENT OF DR. JAMES R. HINES, JR., RICHARD A. MUSGRAVE 
COLLEGIATE PROFESSOR OF ECONOMICS AND L. HART WRIGHT COLLEGIATE 
          PROFESSOR OF LAW, UNIVERSITY OF MICHIGAN \9\
---------------------------------------------------------------------------

    \9\ Prepared statement of Dr. Hines appears in the appendix on page 
59.
---------------------------------------------------------------------------
    Dr. Hines. Chairman Whitehouse, Ranking Member Grassley, 
and other distinguished members of this Committee, thank you 
for the opportunity to participate in these hearings. These 
hearings concern incentives created by the tax system for firms 
to offshore jobs and profits.
    In thinking about jobs, it is important to bear in mind 
that in an advanced, competitive economy like ours, people work 
for companies, and are paid according to their productivities. 
It's not a secret: as the U.S. economy becomes more productive, 
as U.S. companies become more productive, U.S. workers are 
better paid.
    Consequently, the way to protect jobs, the way to create 
good jobs, is to have a highly productive economy. The tax 
system plays a role in that, since efficient tax incentives 
promote economic performance, and inefficient tax incentives 
impair it. In the international arena, it is inefficient to 
subject the foreign operations of U.S. companies to significant 
U.S. taxes.
    The reason why is that U.S. taxes do not bear on the 
foreign companies with which the U.S. firms compete in the 
foreign markets in which they operate. All the taxes do is to 
put U.S. companies at a competitive disadvantage. This impairs 
their productivity, which spills over to U.S. operations, 
thereby depressing job opportunities and wages in the United 
States.
    It can be tempting to think that foreign business activity 
by U.S. companies comes at the expense of U.S. workers, but 
actually what hurts U.S. workers are policies and actions that 
reduce the productivity of the U.S. economy. Greater foreign 
opportunities usually enhance job creation and compensation in 
the United States.
    The evidence indicates that 10 percent greater foreign 
investment by U.S. multinational companies is associated with 
2.6 percent greater U.S. investment by the same firms. And 10 
percent greater foreign employee compensation is associated 
with 3.7 percent greater U.S. employee compensation.
    Foreign business opportunities generally make U.S. 
companies more productive, thereby increasing their demand for 
U.S. labor. This matters because more than one-quarter of U.S. 
private sector employment is in multinational companies.
    The 2017 U.S. tax legislation significantly changed 
incentives facing U.S. firms, due to the reduction in the 
statutory corporate tax rate from 35 percent to 21 percent, the 
move to a territorial system, the introduction of GILTI, Base 
Erosion and Anti-Abuse Tax (BEAT), Foreign-Derived Intangible 
Income (FDII), and numerous other provisions.
    These changes made it possible for U.S. firms to operate on 
a more competitive basis relative to foreign firms. The 2017 
legislation was directed at the problem, identified by prior 
Congresses, the Obama administration, and the Trump 
administration, that the U.S. taxation of foreign profits 
indirectly discouraged economic activity in the United States 
by making it more difficult for U.S. firms to compete in 
foreign markets.
    The 2017 legislation also significantly reduced incentives 
to report profits outside the United States. Of course, even 
with the lower statutory tax rate, GILTI, and the other new 
provisions, many U.S. taxpayers would save taxes if they could 
report profits in zero tax foreign locations.
    People are worried about this problem, but it is important 
not to exaggerate its magnitude. Even when the U.S. tax rate 
was 35 percent, and there was no GILTI, most large, U.S. 
multinationals had no tax haven affiliates at all. These firms 
were certainly not shifting profits to tax havens, which tells 
us that doing so is costly, difficult, and usually infeasible.
    We need to enforce our tax laws, but should do so with the 
clear sense of what the problems are, and what we are trying to 
accomplish. It is in the country's interest, and more 
specifically, in the interest of U.S. workers, to have a 
competitive tax system that supports the economy, while 
collecting the revenue that we need.
    This problem is difficult enough with exaggerating any of 
its components. Wise design of U.S. policy has the potential to 
position the country for robust economic growth, and U.S. 
economic fortunes depend on it.
    Chairman Whitehouse. Thank you very much. Ms. Herzfeld, Dr. 
Herzfeld.

    STATEMENT OF MINDY HERZFELD, PROFESSOR OF TAX PRACTICE, 
        UNIVERSITY OF FLORIDA LEVIN COLLEGE OF LAW \10\
---------------------------------------------------------------------------

    \10\ Prepared statement of Ms. Herzfeld appears in the appendix on 
page 72.
---------------------------------------------------------------------------
    Ms. Herzfeld. I'm not a doctor. Chairman Whitehouse, 
Ranking Member Grassley, and members of the Committee, thank 
you for the opportunity to testify today. My testimony will 
focus on three points. The importance of protecting the U.S. 
tax base as it relates to cross border income, the ways in 
which the Tax Cuts and Jobs Act strengthened that base, and the 
risks that the OECD agreement, the two pillar project, poses to 
that base and to U.S. revenues.
    Both for a mix of both foreign and domestic policy reasons, 
Congress has, since the early days of the income tax, provided 
favorable tax treatment for foreign earnings. It primarily does 
so by allowing a credit, rather than a deduction for foreign 
taxes paid.
    And because both the U.S. tax and legal systems respect 
corporations as separate entities, and because the income of 
corporations generally isn't subject to tax to their 
shareholders until received as a dividend, foreign earnings 
have historically not been subject to U.S. tax until 
repatriated.
    Now at various times over the past century Congress has 
imposed limits on this treatment in response to profit shifting 
concerns. In 1962 it enacted the Subpart F regime, which taxes 
certain income of foreign corporations currently to their U.S. 
shareholders. Congress has also enacted exit taxes, including 
an anti-inversion statute.
    Beginning in the 1990s a number of trends combined to put 
pressure on the system. Due to globalization, foreign markets 
became more important for U.S. companies, and developments in 
logistics and transportation led to the growth of global supply 
chains.
    At the same time other countries became more aggressive in 
using tax incentives to compete for foreign investment. 
Corporate tax rates worldwide decreased sharply, and tax 
preferences, such as patent boxes, enacted to lure Intellectual 
Property (IP) investment and assets became popular.
    The pressure these trends put on the U.S. international tax 
system was manifested by a rising trend in inversions, U.S. 
companies reincorporating overseas, and foreign acquisitions of 
U.S. companies, transfers of high value IP offshore, and an 
increasing pile of offshore cash.
    TCJA addressed these concerns, incorporating many 
bipartisan proposals. Reducing the rate to 21 percent 
significantly reduced the incentives for shifting profits, 
assets and entities overseas. Inversions have essentially 
stopped. A strengthened interest expense limitation minimized 
the benefits of base erosion.
    The participation exemption addressed the lockout effect.
    The FDII deduction encouraged companies to repatriate their 
IP to the U.S., and the GILTI tax reduced incentives for 
outbound profit shifting. But the TCJA was mostly about 
strengthening secondary U.S. taxing rights. And soon after 
enactment of TCJA the OECD kicked off the second phase of its 
base erosion and profit shifting project, the results of which 
grant other countries primary taxing rights over profits, which 
the U.S. has historically asserting taxing rights over.
    With the active participation of U.S. Treasury, the project 
has to date had two outcomes. Pillar one, which is primarily 
focused on U.S. tech companies, represents a reallocation of 
historical taxing rights from the U.S. to market economies. And 
under pillar two, the global minimum tax agreement, the U.S. 
has encouraged other countries to adopt minimum taxes of 15 
percent.
    The U.S. in doing so, essentially subsidizes these taxes 
through the foreign tax credit. The Joint Committee on Tax has 
estimated that the global minimum tax could cost the U.S. 
hundreds of billions in revenue, while the OECD has estimated 
that the primary beneficiaries of this tax are investment hubs, 
low tax restrictions. No estimates for the cost to the U.S. of 
pillar one have been released.
    The OECD agreement also opened the door for other countries 
to impose taxes on the U.S. domestic income tax base, through 
the Under Taxed Profits Rule, or UTPR. Under this provision, 
U.S. business credits effectively become subsidies for other 
countries revenue collection.
    One of the most concerning aspects of pillar two is the 
extent to which the OECD has stepped into the shoes of Congress 
and Treasury, in writing rules that directly impact U.S. 
taxpayers without any of the oversight provided by the 
legislative process, or as required by the Administrative 
Procedure Act.
    Congress could consider addressing process concerns 
relating to the OECD project by mandating greater oversight 
over international tax rulemaking, and it could address 
underlying problems with the U.S. tax rules exposed by the 
project by better defining the U.S. base to ensure primary 
taxing rights over profits from U.S. created intangibles.
    Thank you again for inviting me to testify. I'd be happy to 
answer any questions you may have.
    Chairman Whitehouse. Thanks, Ms. Herzfeld, I appreciate it. 
Let me begin by channeling my friend and predecessor Kent 
Conrad, who sat here as Chair of the Budget Committee for many 
years, and was Chair when I first came to the Senate. And he 
used to feature a graphic with a picture of a building in the 
Cayman Islands called Ugland House, in which 18,000 
corporations purported to do business.
    It's only five stories high, only a couple of windows wide, 
clearly as Kent would say, the business was being done in 
Ugland House was monkey business, rather than real business. 
And I hope that we can agree that allowing international tax 
shelters like that, where companies actually aren't doing any 
real business, isn't just bad policy, but it ought to be 
nauseating to us to allow that kind of mischief to take place.
    Let me talk a little bit about the global minimum tax rate, 
Dr. Clausing, and we've heard some testimony in the Finance 
Committee, and this Committee over the years that there's 
advantage, and we don't want to be anti-competitive for 
companies seeking lower tax rates.
    The factor that that claim always seems to leave out is the 
differentiation between a multinational corporation and the 
American corporation, and the relative advantage of the 
multinational, either of locating factories and jobs overseas, 
or of playing games with Ugland Houses and fake overseas shell 
companies to give themselves competitive advantage against 
another American company.
    And I can imagine, for instance, a big multinational that 
has a subsidiary, and the subsidiary's perhaps a chain of 
stores that compete with locally owned stores, tire stores, who 
knows what. And because the multinational pays super low tax 
rates, they can help their subsidiaries compete more 
successfully against the locally owned small business.
    Is that a real concern? And how much impact do you think 
that fixing this problem will have in supporting both, I guess 
I would call them real American businesses, both large and 
small?
    Dr. Clausing. Yes. Thank you for that question. I think it 
illustrates that there's multiple types of competitiveness that 
we should keep an eye on. One type of competitiveness is the 
competitiveness of U.S. companies when they face foreign 
competitors abroad, right? And those competitors abroad may 
have zero tax rates, right, and our companies pay a higher tax 
rate.
    So one of the great things about the pillar two agreement 
is it raises that tax rate abroad from 0 to 15. So that already 
helps with that type of competitiveness. But a second type of 
competitiveness, which I think is more pertinent to your 
question, is the competitiveness of the U.S. location, and if 
we think about our interests as a country, it's in having our 
location be a competitive place to do activities, right?
    So if our firms when they operate here in the United States 
in states like Rhode Island or Wisconsin, if they're paying 21 
percent on their U.S. operations, but they're getting a 50 
percent discount to be abroad, that tilts the playing field in 
favor of operations abroad instead of in the United States.
    And it also tilts the playing field between different types 
of actors in our competition, as you point out, Senator 
Whitehouse, that small firms that don't have the advantage of 
having these subsidiaries offshore have to pay the full 
statutory rate. Whereas big firms can get their global rate 
down to half that rate by managing to earn most of their profit 
offshore as we saw on the AbbVie example that you mentioned in 
your opening statement.
    Chairman Whitehouse. Which may or may not be really earned.
    Dr. Clausing. Yes.
    Chairman Whitehouse. Offshore.
    Dr. Clausing. Indeed.
    Chairman Whitehouse. And I ask you for the record if you 
wouldn't mind giving us a couple of sort of juicy examples of 
where enormous profits are declared overseas without apparently 
any collateral work being done there. And that it's purely an 
accounting scam if you would.
    Mr. Arensmeyer, you've been, you know, active in trying to 
fight for small businesses against this kind of anti-
competitive advantage for big multinationals against American 
small businesses. Would you care to add anything to what Dr. 
Clausing has said?
    Mr. Arensmeyer. Well, Chairman Whitehouse, small businesses 
are looking for nothing more than a level playing field. And 
clearly, you have a situation where they cannot compete tax 
wise with entities that are able to get a more favorable tax 
rate based on a portion of their business being offshore.
    It's as simple as that, and small businesses have no--only 
1 percent of small business even export, so we're talking about 
businesses who are purely domestic, and they don't have if 
there was any opportunity to take advantage of anything, they 
don't have the lawyers and, the accountants to help them do it.
    So that's all small businesses want is a level playing 
field with their competitors.
    Chairman Whitehouse. Senator Johnson.

                  STATEMENT OF SENATOR JOHNSON

    Senator Johnson. Thank you, Mr. Chairman. First of all, Mr. 
Arensmeyer, I completely agree with you. Whether you realize it 
or not, I wasn't a big fan of the tax reform, particularly in 
its initial state because we were making a huge disparity 
between C corps and pass-throughs, so I'm the guy that held out 
to make sure that we got some measure of relief for pass-
throughs.
    It's not the way I would have done it. I guess what I want 
to talk about I think, first of all, I want to thank the 
Chairman for holding this hearing, and I want to point out I 
think there's potential for a lot more agreement on this issue 
than there is disagreement.
    Part of my frustration here in Congress is no matter what 
issue you're talking about, whether it's healthcare reform, 
pharmacy benefit managers (PBM) reform, tax reforms, I'm always 
looking at whatever piece of legislation is being proposed as 
just another band-aid on top of a dying patient.
    Yeah. Our tax system is a mess. And so I guess what I want 
the Chairman, colleagues, the witnesses, I'd like people to 
think outside the box, and I hate the term tax reform. One of 
my favorite sayings is all change is not progress. All movement 
is not forward. Just because you're reforming something doesn't 
make--doesn't say you're making it better.
    In the end I voted for the tax bill because it's better 
than what we had, but and it did stop inversions. It did 
attract, you know, profit back on shore, but it's far from 
perfect. So, I would like to go back to a clean sheet of paper, 
and how do you design a simple and rational system. I'll just 
throw it on the table, start with a concept that income is 
income. I mean it is just bizarre that we take a look at a 
different entity, we're going to tax you at that rate versus an 
individual taxed at that rate.
    In terms of capital gains you'd rather just pick a rate out 
of the air. Why not index to inflation? To really account for 
and then tax it at a normal rate. So yeah, Iactually did during 
2017 lead up to it, I had my own tax proposal. I called it a true 
Warren Buffet tax.
    The basic concept is you just turn all businesses into 
pass-through entities. You tax income at the shareholder level. 
You tax it once at progressive rates. I'd like to see a flat 
tax rate, but I think that ship has sailed. I'm not utterly 
opposed to progressive tax rates, so some measure of fairness, 
as long as it doesn't, you know, exceed a certain threshold, 
and most Americans don't believe that the federal government 
should ever take more than 30 percent of anybody's income.
    So, I guess I would just like to ask all of the witnesses, 
if you are looking at a simple and rational tax system, what 
would be the first thing you would look at? What would be the 
first thing you would eliminate? Again, I would eliminate C 
Corps. I'd turn them into pass-through entities, and tax all 
business income at the shareholder level. And I'll start with 
you, Dr. Clausing.
    Dr. Clausing. I agree that I think we can have a much 
fairer, more equitable, more efficient system if we focus on 
differentials between types of income, rather than keeping the 
rate particularly high. On the individual side that would mean 
more uniform rates between labor and capital. On the business 
side, I agree that we should avoid distortions in 
organizational form, and tax all large businesses similarly.
    But we should also try to avoid big preferences for foreign 
income relative to domestic income. And by reducing those rate 
differentials, we can keep the overall rates reasonable, while 
still raising enough revenue. . .
    Senator Johnson. Let me interrupt. When I said income is 
income, there wouldn't be differences. Everything would be 
taxed at the same rates. We'd figure out how to do that. Mr. 
Houseman.
    Mr. Houseman. Yeah. I mean I think for our union the 
concept and key piece for this discussion was really this idea 
that we provide incentives through the tax code to outsource. 
And I think this idea of adjusting revenue, making sure that, 
you know, American based companies, like paper companies in 
Wisconsin, like Graphic Packaging Corporation of America, where 
domestic firms are not having to compete against global players 
at a rate that on the tax side, so that they're doing this 
weird competition.
    So I think for us, the union, we see you know, as you say, 
somewhat simplification, but ensuring that our international 
tax system actually generates the revenue similar to what we 
try and generate here from our American companies.
    Senator Johnson. Again, I understand that competing 
overseas that adds a new complexity. I mean if we just had, you 
know, our country and that's all we need to worry about, I mean 
now we have to have businesses compete overseas. Mr. 
Arensmeyer.
    Mr. Arensmeyer. Well absolutely, evening out the rate would 
do a lot. I mean I don't know if you're proposing to actually 
have capital gains and ordinary income rates more closely 
aligned. We would agree with that. I do think there are some 
practical issues of taxing shareholders who are shareholders in 
big, multinational corporations.
    Senator Johnson. It's imminently doable. We got computers 
now. We talk to the shareholder services, we do far more 
complex things than what you're contemplating.
    Mr. Arensmeyer. I would be interested to hear the reaction 
of a number of people, primarily shareholders in these 
corporations to that, but in theory.
    Senator Johnson. Well let me just say, you know, the beauty 
of this scheme is if you were a low-income worker, the way you 
collect the taxes through withholding, the corporation will pay 
the tax for the shareholder, so if you're a low-income 
taxpayer, you'll get a refund then over that backup 
withholding.
    If you're Warren Buffet, you're going to put more pressure 
on corporations to pay dividends, which would help reallocate 
capital through the economy. So, again there's a lot of--but 
plus I'd also, I would treat--I would assess income based on 
cash. Cash base. So you can get rid of all these other, you 
know, amortization, depreciation, you know, it's cash income.
    You know, a foreign tax paid is a deduction, not a tax 
credit. I mean there's so many ways we can simplify this, and 
that's what I'm asking people to do. Dr. Hines.
    Dr. Hines. Senator Johnson, I think you should look into 
options with a value added tax. A value added tax does a lot of 
the things you just described. It taxes income comprehensively, 
and it taxes it at a common rate. The one thing is it only 
taxes the income when people spend it, so you have to wait 
until then to get the revenue.
    But people do eventually spend their income. More than 150 
countries have value added taxes. They raise revenue, they do 
so efficiently, and it's an alternative that is really worth 
looking into.
    Senator Johnson. They raise a lot of revenue because they 
put it on top of other things. Professor Herzfeld?
    Ms. Herzfeld. Yeah, thank you. I want to focus on your 
question or your point, income is income. And one of the large 
sources of complexity in our code, and also rising from the 
global minimum tax is that we now have multiple definitions of 
income. So we've got our historical tax code definition of 
income, but we've got the corporate alternative minimum tax 
that has another--it looks tofinancial statement income.
    And then we've got the global minimum tax that requires 
U.S. companies to now compute their income under that 
definition of financial statement income. And so, having a 
single, uniform definition of income would go a long way.
    Senator Johnson. Okay. Thank you, Mr. Chairman.
    Chairman Whitehouse. Thank you, Senator Johnson. Our order 
at the moment is Senator Padilla followed by Senator Braun, 
followed by Senator Merkley, followed by Senator Kaine. Senator 
Padilla.

                  STATEMENT OF SENATOR PADILLA

    Senator Padilla. Thank you, Mr. Chair. Good morning 
everybody. The impact of foreign tax loopholes extends far 
beyond just the record profits and inflated corporate bonuses 
that we read about all too often. It also has a negative impact 
on federal and state revenues, federal and state budgets, 
driving up deficits, and limiting the opportunity for a 
government to make investments in communities, and provide 
support and programs that are so critical for so many families.
    Now this dynamic effectively, what we're doing Mr. Chair, 
is subsidizing offshoring. It's far more expensive than initial 
sticker prices may lead us to believe. It risks good paying 
jobs, as well as long-term reductions in GDP. The erosion of 
local tax bases and increased spending on social services, 
which becomes necessary to protect displaced workers.
    So, it's a compounded effect here. My question is for Dr. 
Clausing. How have foreign tax loopholes impacted state 
budgets? Let's focus on the state impacts for a moment, and how 
much state revenue is lost as a result of this offshore tax 
dodging?
    Dr. Clausing. Thank you so much for that question, Senator. 
It has an enormous effect on state budgets, in part because 
most state definitions of income piggyback on the federal 
definition. So when companies shift income offshore and earn it 
abroad, instead of earning it at home, that reduces federal 
revenues, and it also reduces state revenues in tandem.
    And there was a nice study by the Institute on Taxation & 
Economic Policy (ITEP), which looked at what states could gain 
from just closing simple loopholes in how they treat foreign 
income. And they found a $17 billion benefit potentially from 
relatively simple reforms across states. And you might be 
interested that California accounts for about $3 billion of 
that 17.
    Senator Padilla. Yeah. So not insignificant by any means. 
Now, I wanted to highlight for a moment a particular egregious 
loophole within the global, intangible low-taxed income, also 
referred as GILTI structure, specifically exempting income 
derived from foreign oil and gas extraction.
    The Treasury Department estimates the carve out amounts to 
about $84.8 billion a subsidy over 10 years for multinational 
drilling companies. At a time where the science is clear 
though, we have to act with urgency to prevent the worst of the 
climate crisis. It seems to me this carve out is unacceptable, 
and has outlived whatever usefulness it might have had.
    While the Inflation Reduction Act shifted several federal 
incentives towards clean energy and domestic sources, lingering 
carve outs for foreign oil and gas are entirely counter 
intuitive to these efforts. So Dr. Clausing, what policy 
changes should we consider as we work to reform the tax code in 
a climate conscious and forward looking way?
    Dr. Clausing. So, it's an excellent question. So, I was at 
Treasury when we looked at those estimates on the acronym is 
FOEGI, but the extra benefit that you get from having foreign 
oil energy and gas income offshore. And as you point out, it's 
an enormous benefit. $80 billion for closing that loophole. So 
that is one change that should be made absolutely, and I would 
point out that there's another $40 billion or so of subsidies 
within our tax code for fossil fuels, right?
    So if you could reverse those, you know, that would 
generate a lot of revenue as well. And finally, I would just 
also point out that Senator Whitehouse has legislation, the 
Clean Competition Act, that's also well worth considering in 
this time of global competition and climate change, that would 
use our power as a market economy, and our relatively clean 
production here in the United States to also encourage more 
global adoption of climate mitigation policies.
    So I think that that's another thing that we should be 
looking at in the time ahead.
    Senator Padilla. Thank you very much, and just in closing, 
Mr. Chair, I don't need to tell you for all of the climate 
deniers out there, for the cynics about renewable and other 
clean energy sources who complain, well where would they be 
without subsidy, subsidy, subsidy. Fossil fuels have benefited 
from enormous subsidies over the years, especially the foreign 
sources, so thank you Mr. Chair.
    Chairman Whitehouse. Testimony in this Committee says that 
the fossil fuel annual subsidy in the U.S. every year is over 
$600 billion from the International Monetary Fund, so it's a 
pretty serious number. Senator Braun. And that's billion with a 
B just to be clear, Senator Braun.

                   STATEMENT OF SENATOR BRAUN

    Senator Braun. Thank you, Mr. Chairman. I've been in so 
many of these hearings, and my observation is that we have two 
constants that are part of this discussion. You goback for 50 
years we've never generated other than a couple three years in the 
Clinton administration, maybe a couple years, more than 17.5 percent of 
our GDP in federal revenues.
    I'm not going to ask each one of you, but would you agree 
with that statistic? Are you aware of it? Just a nod of your 
head would be fine. I think it is. I mean it's black and white. 
The other thing that's a constant, since the Bush years would 
be that we've been running chronic deficits, and I think that's 
black and white too.
    It probably got started even back in the Reagan years when 
we did cut taxes and paid no attention to what we were going to 
do with spending. That makes perfect sense knowing how this 
place works. So, given that's a constant, and whenever you I 
think cut taxes, you're going to deplete Treasury revenues a 
little bit. The years one and two following it. Your economic 
growth generally does a little better. That might be kind of a 
tradeoff stubbornness, of why revenues never get much beyond 
17.5 percent.
    So regardless of what we do with offshore revenues, 
whatever we do here it seems like we'd want to make this place 
work with the reality of what the economy is able to do. I'd 
like to start over with Dr. Clausing, and then go across the 
board. And I want you to make a statement. Is it tax policy 
that's a bigger issue now on our trillion dollar deficits we 
generate every 6 months?
    When I got here it was every year about 5 years ago. Is it 
tax policy, or is it spending? And try to make sense with 
whatever your answer is that it doesn't violate that big 
statistic that we only generate 17.5 percent of our GDP in 
federal revenues. Dr. Clausing.
    Dr. Clausing. I think one thing we saw in the late 1990s, 
when we did move towards better and better budget situation, 
and ended up once with a surplus, I had to change all my class 
notes and describe it: Wow, the U.S. government can run a 
surplus, is that both taxes and spending are clearly important 
here.
    At the time that we ran that surplus, we got taxes relative 
to GDP and more in the neighborhood of 20 percent. I don't 
think the 17.5 is an inviolable rule and that number does move 
around quite a bit with that.
    Senator Braun. It's 25 percent where we're currently at. 
What do you think of it? And that's occurred through COVID, 
through the present administration. When you look at spending 
at its current levels, it's closer to 25 percent of GDP. I 
didn't cite that earlier, but that's probably out there. You 
could never raise revenues to reach that level. Would you agree 
with that?
    Dr. Clausing. I have a proposal that suggests we should aim 
to reduce primary deficits by about half to half the size that 
they are now. I do think we have a huge gap between spending 
and taxation, and that's a problem, and it's one that Congress 
should----
    Senator Braun. And you'd have to do that on the back of 
spending, just from the logic that we've been throwing around 
here.
    Dr. Clausing. I think taxes have an important role to play.
    Senator Braun. About half of it you said.
    Dr. Clausing. In increasing the deficit, and I think people 
need to be able to compromise and address both sides of that 
equation.
    Senator Braun. Okay. Mr. Houseman.
    Mr. Houseman. Yes. To your question, I think you know for 
AFL-CIO and Steelworkers, we see this idea that tax policy 
definition has a major factor in how we address and improve the 
reduced deficit.
    Senator Braun. Up to what level? I agree it may have a----
    Mr. Houseman. I think that if you're looking at a fact that 
in the current situation with all our foreign affairs issues 
that are going on right now, the fact that we have 12 aircraft 
carriers that need to be out there patrolling our seas, 
ensuring the safe transit of goods across a global economy, 
that we have to ensure that there may be revenue necessary to 
raise to ensure that the safety and security.
    Senator Braun. And I think everybody would say that's a 
generally statement that categorically disagree with, but put 
it in the context of running $2 trillion deficits annually.
    Mr. Houseman. Well, I think if you raise revenue to help 
reduce that deficit level, you're going to improve that overall 
health.
    Senator Braun. So you're with Dr. Clausing a little bit, 
maybe 50/50.
    Mr. Houseman. Yeah.
    Senator Braun. Okay.
    Mr. Arensmeyer. Correct me if I'm wrong, but I think the 
tax revenue shrinkage since the passage of the Trump tax law, 
I've seen estimates anywhere from 1 to $2 trillion. I defer to 
the experts.
    Senator Braun. $150 billion a year, which would be a very 
small percentage of our current $2 trillion deficits. I 
acknowledge that. Other than the CBO, right before COVID was 
showing that that was almost neutralized, so take that into 
consideration too, but I'll grant you what is real, $150 
billion per year, which is a small percentage of $2 trillion.
    Mr. Arensmeyer. Well, I believe there's been estimates if 
the Trump tax law was continued for an additional 10years it 
could be as much as a $4 trillion gap, so my only point is that tax 
revenue has come down, it's certainly not----
    Senator Braun. And that would kind of make sense if you're 
doubling the timeframe, but it's still percentagewise, the 
small part of our current borrowing and spending. I think I'm 
right there on the numbers, and I agree with you that if you 
double the timespan, it would be closer to $3 billion to 4, or 
$3 trillion to $4 trillion.
    Mr. Arensmeyer. I guess my answer to the question is that 
right now given the sort of reduction in tax revenue versus, 
you know, have we continued before, that it is more of a tax 
issue right now than it is a spending issue.
    Senator Braun. Well then I'd say you're saying 7.5 to 15 
percent of the deficit, which you just blamed on the Trump tax 
cuts, that's a much, much smaller figure than where the balance 
of that deficit is coming from. Dr. Hines?
    Chairman Whitehouse. Senator Braun, we've got three 
colleagues waiting in line.
    Senator Braun. Yes. Just you want to go real quickly just.
    Dr. Hines. Senator Braun, I completely agree with you that 
the deficit is a huge problem, and we need to do something 
about it. Obviously you can either cut spending or you can 
raise taxes, or some combination. Your question was is it 
possible to conceive of taxing say 25 percent of the national 
income?
    There are countries that do it, like France. And if you 
want to have the economy of France, you can have their 
policies. But that's what you get in an economy like France's, 
which is much less affluent than ours.
    Senator Braun. Thank you. Ms. Herzfeld.
    Ms. Herzfeld. Yeah, I think if you're addicted to spending 
no amount of revenues will be able to make that up.
    Senator Braun. I'd say you hit it right on the head. Thank 
you.
    Chairman Whitehouse. Senator Merkley.

                  STATEMENT OF SENATOR MERKLEY

    Senator Merkley. Thank you, Mr. Chairman. The Trump tax law 
slashed the corporate tax rate from 35 to 21 percent. And but 
that didn't trickle down to ordinary people, rather than 
raising wages corporations rewarded CEOs, they did stock buy 
backs, increasing the wealth of wealthy stockholders.
    An analysis from the IMF found that the top Standard and 
Poor's (S&P) 500 companies directed just 20 percent of the 
value of that tax cut towards capital expenditures or research 
and development, and put 80 percent, 5 out of every 5 dollars 
to buy backs and dividends.
    And yet the Washington Post reports just last Friday that 
Trump wants to continue that strategy of cutting the corporate 
rate even further. So Mr. Houseman, how would such a cut 
actually help small business and their employees when we saw 
that really what the tax cuts were designed under Trump were 
about helping mega corporations, and wealthy stockholders?
    Mr. Houseman. Yes. So, you know, from our, from the union's 
perspective, this is the smaller unionized companies that we 
work with day to day. You know, they pay their taxes, they 
produce a good, and then they provide it out to a larger--the 
economy. And when you have these sorts of tax incentives to 
build out in low tax havens, and you have the capability 
through, you know, hiring legal and tax advice.
    You just create this perverse incentive for the American, 
you know, for regular American workers, who don't feel like 
there's a fair competition. And I think that that's ultimately 
what we try and address here with, you know, no tax breaks for 
outsourcing, and other areas is that these issues like GILTI 
and others, they need to be updated.
    We need to address our Congressional--we need to approach 
this from like a constant movement towards improving our 
revenue to spending ratio, and it needs to be done in a timely 
fashion, which is really like something that the union workers 
do every 3 years when they bargain a contract.
    Senator Merkley. Well, I sure would like to see ordinary 
Americans benefit rather than more tax policy directed to make 
the wealthy wealthier. And I don't see how doing the same thing 
that provides 80 percent of the benefits to the wealthiest, is 
going to serve ordinary Americans. I want to, you mentioned 
that GILTI provision, which is also a provision that really 
helps drive our production overseas, which means even less go 
to employment here in America.
    So if you want corporations to make their products 
overseas, that would be a very good policy, but I'd prefer that 
we make our products here and employ Americans. Would you 
agree?
    Mr. Houseman. Absolutely. I mean for a union that has spent 
1 in 4 anti-dumping and countervailing duty orders, that is 
because the United Steelworkers have been a supporter of it. 
We've had to fight back against dumped and subsidized goods 
that have negatively impacted jobs here in the United States 
for decades.
    And the idea that tax policy could incentivize further 
outsourcing is absolutely atrocious. We should be using that 
revenue to generate and build American factories, notfactories 
somewhere else.
    Senator Merkley. Dr. Clausing, let me turn to you. The U.S. 
collects less in corporate tax revenues as a share of GDP than 
virtually any other advanced economy. How does that disparity 
in corporation taxation under the Trump tax law contribute to 
increased wealth inequality here in the United States?
    Dr. Clausing. Yes, the corporate tax is a very progressive 
tax, and if you compare it to our other ways of raising 
revenue, like labor income taxes, the payroll tax, it's by far 
the most progressive, major contributor to our tax system. So 
when they cut that corporate tax so dramatically in the Tax 
Cuts and Jobs Act, and if you look at the other provisions of 
the Act, they were also regressive, and it exacerbated the 
amount of income inequality in the United States.
    And that same study that was referenced in the opening 
Grassley remarks, finds that 80 percent of the benefit of those 
corporate tax cuts went to the top 10 percent of the 
population.
    Senator Merkley. Well, it seems to me that there's a 
profound sense of the system being rigged, which increases 
cynicism in America because we know that a large corporation 
uses a tremendous amount of the infrastructure built with our 
tax dollars, of our criminal justice system, of our trade 
system, of our education system, of all the people they hire.
    So isn't there something fundamentally unfair to have these 
massively wealthy corporations using massive amount of our 
infrastructure, and pay almost nothing towards sustaining it 
and improving it?
    Dr. Clausing. Yes. And then I would point out that it's 
also inefficient. If you look at the largest companies, most of 
what they're earning is above normal profits, and those profits 
can be taxed without distorting labor decisions, or investment 
decisions because they're earning above and beyond the normal 
amount that it takes to get their businesses to function.
    So I think moving the corporate tax base even more in the 
direction of a pure profits tax would be helpful, but it's an 
efficient way to raise revenue in addition to being a fair way 
to raise revenue.
    Senator Merkley. Thank you.
    Chairman Whitehouse. Senator Kaine.

                   STATEMENT OF SENATOR KAINE

    Senator Kaine. Thank you, Mr. Chair. In 2017 the Republican 
theory was to cut taxes on large corporations, and cut taxes on 
the profits they make overseas. And hope those companies will 
put their increased profits into new investments. In '21 and 
'22 we took a different direction.
    We invested in the nation's infrastructure. We invested in 
manufacturing, in industries that are poised to promote good 
jobs in the future, clean energy, advanced manufacturing, 
semiconductors and others. I'm a former mayor and governor, 
which means I still kind of think of myself as an economic 
developer, so I'm making pitches all the time to companies 
about why to come to Virginia.
    I'm on the phone at least once a week with some company 
trying to make a pitch. I was on the phone with a company 
yesterday who is really excited about some of the clean energy 
provisions in the Inflation Reduction Act, and some of the 
other estimates in the Infrastructure Bill.
    Talk about these two visions, the you know, cut taxes and 
count on companies making more to help grow the economy versus 
direct investment in infrastructure and manufacturing. It's 
going to be a great case study. It may take another 10 or 15 
years for people to really write the case study, but if I could 
begin with you, Dr. Clausing, talk about these two visions for 
growing the economy, and growing prosperity for everyday 
Americans.
    Dr. Clausing. Yes. I think when we saw the Tax Cuts and 
Jobs Act enacted, there was a big debate about whether it would 
pay for itself, which it didn't. Whether it would spur a new 
renaissance in wage growth and investment, which it did not. 
There was a lot of evidence that it increased the shareholder 
value, and in the runup to the legislation the stock market 
soared.
    It increased buy backs a lot, but there was very little 
discernable effect on aggregate investment in the United 
States, and I think that was partly because of the fact that a 
lot of this tax cut was directed at these excess profits. When 
you cut someone's tax on their excess profits, and they have 
extra money they're already undertaking all the investments 
that they thought were rational to take.
    And so, when you look at the benefits from that 
legislation, study after study has found that it mostly 
enriched shareholders, and it didn't really trickle down to the 
typical worker. I think the vision of more recent legislation, 
starting with the Infrastructure Bill, bipartisan bill, but 
also the CHIPS Act, which was bipartisan, and the Inflation 
Reduction Act, these are more about what I would call a more 
modern supply side economics.
    Or Secretary Yellen calls it that, so I'm really borrowing 
that term from her in the sense that it's focused on really 
investing in the fundamentals of the United States, focusing on 
the people, the infrastructure, building up the United States 
to have those fundamental strengths so that we can compete in a 
world economy.
    And to be a fundamentally strong economy, we need adequate 
tax revenue to pay for these kinds of investments, which I 
think Mr. Houseman pointed to as well. So I thinkthose types of 
investments are very useful in making our businesses work well if they 
have the infrastructure, and the human capital that they need.
    Senator Kaine. And Mr. Houseman, from worker's standpoint, 
and I'm proud to be a Senator from a state where the largest 
steelworkers union, and the international is located at our 
shipyard in Newport News. Talk about these two strategies, 
cutting corporate taxes versus investing in infrastructure and 
manufacturing, and how they affect working people.
    Mr. Houseman. Yeah. I mean I think, you know, historical 
precedent, when we did rural electrification, when we've now 
trying to do that with broadband, expansion across the country. 
I mean it gets people into the economy, gets them productive, 
gets them active.
    And it gives them the opportunity to participate in their 
democracy. And I think that that's ultimately one of the key 
pieces they hear when we talk about these direct investments 
towards communities in need. You know, the idea, maybe I'm a 
little old school, where I think it's important that every 
child gets every meal, you know, and that everyone doesn't have 
to fret about the bills.
    And when we do direct investment and encourage good, 
quality jobs, unionized jobs, we create an incentive out there 
in the economy that is so much more powerful than corporate tax 
cuts for the wealthiest people.
    Senator Kaine. Just one thing before I hand it back to you, 
Mr. Chair. I remember the evening we voted on the bill in 2017. 
We got handed the bill, you know, and were told we had to vote 
on it right away. Most of us hadn't seen it. It still had 
handwritten inner lineation that were hard to decipher. And 
then we got a chance to make amendments where we could speak 
for one minute, and then have a vote on an amendment.
    My corporations in Virginia, they liked the notion of 
corporate taxes going down, but they weren't ask for it at 21. 
They were saying can you do it at 25 or 26. And so I proposed 
an amendment that night recognizing that the corporate tax cuts 
in the proposal were permanent, but the individual tax cuts 
were temporary.
    I said why don't you just take the corporate tax rate if 
you're going to do it, and you're going to drop it, drop it to 
25 or 26, and then make the individual tax cuts permanent. And 
that got roundly voted down by my Republican colleagues, 
demonstrating that the preference was not to really assist the 
individuals in the tax code, but to assist the corporations.
    I still don't know that it would have been that great a 
bill, but it would have been a lot better bill if we had 
rebalanced it more to focus on individuals rather than on 
corporations. Thanks, Mr. Chair, I yield back.
    Chairman Whitehouse. Thank you very much, Senator Kaine. 
Senator Van Hollen.

                STATEMENT OF SENATOR VAN HOLLEN

    Senator Van Hollen. Thank you, Mr. Chairman. I know my 
friend and colleague, Senator Kaine, is a very effective 
economic recruiter, so long as he's not doing it from folks who 
are working in Maryland companies. Really, that's why we have 
peace across the Potomac.
    But I want to make one point at the outset here in terms of 
the conversation about 17 percent of GDP being somehow an 
immutable cap on revenue. That's clearly not true. I think Dr. 
Clausing, you pointed out that in the early, you know, around 
2000-2001 it was about 20 percent.
    And that also was the last time we actually did not run a 
deficit. Isn't that the case?
    Dr. Clausing. That's correct.
    Senator Van Hollen. That's right. And then of course we had 
the Bush tax cuts, and that erased that advantage. So the 
notion that somehow we cannot add additional revenue to meet 
the needs is clearly inconsistent with our own history. Let me 
ask you, Dr. Clausing, about country by country reporting, 
because we are focused on tax havens, and one of the challenges 
in our efforts to develop responsible tax policies is lack of 
information about how corporations use offshore tax havens.
    The Financial Accounting Standard Boards, FASB, has issued 
an international tax disclosure standard that would require 
additional disclosure of foreign taxes that companies pay. I've 
introduced legislation called The Disclosure of Tax Havens and 
Offshoring Act, to require the U.S. Securities and Exchange 
Commission (SEC) to mandate that large corporations disclose 
basic tax and financial information on a country by country 
basis.
    I think their investors have a right to know how exposed 
they are to tax havens, and how they are--how exposed they are 
to changes in tax policy. Could you talk about the importance 
of country by country reporting, and do you think it would 
provide valuable information for investors, the public, and 
policymakers?
    Dr. Clausing. Yes. I think this kind of reporting is very 
important, and it need not be particularly complicated if we're 
not asking for the release of an entire return. It's just how 
many employees, how much income, how much tax are you paying in 
different countries throughout the world.
    And the reason that's such useful information is while it's 
very simple information, it really forces companies to be 
transparent. If they're going to earn most of their income on 
an offshore location where they have almost no employment, then 
they should be willing to say that out loud to their investors, 
to their workers, to their consumers,and to the American 
public. Because what they're doing is effectively putting those tax 
burdens on others.
    And I think shining sunshine on this is in a way, a market 
friendly nudge. It's just saying tell us what you're doing. 
We're not going to regulate per se, we're just going to ask you 
to share your information with the public. And I think that 
sunshine might lead to useful changes in their behavior as 
well.
    Senator Van Hollen. No. I appreciate that, and you know, 
transparency usually works for the best of everybody, so people 
can't hide what they're doing from investors and the public and 
others. So there's a lot of talk about GILTI. I remember when 
the, you know, the Trump tax bill was on the floor of the 
Senate. Many of us, including myself, warned about the 
provisions that would encourage the offshoring of American 
investment, and jobs.
    But we talk about it in these very general ways. Could you 
talk a little bit about what you've seen since the passage of 
that bill with respect to its impact, and the fact that there's 
a greater incentive to invest in tangible assets overseas, 
rather than here at home. Mr. Houseman's spoke about that a 
little bit, but if you could just shine a little bit more of a 
light on how that mechanism works.
    Dr. Clausing. Yes. So there are four studies that are cited 
in my testimony that I would refer people to look at that sort 
of document this, but let's just talk about it pragmatically. 
So if you think about what a tangible investment is, It's 
something like plant or equipment. And when you have more 
tangible investments offshore, that generates more income 
that's free of U.S. tax. It's free of that GILTI because the 
first 10 percent return on those tangible assets offshore is 
completely free of U.S. tax.
    And we don't have anything analogous in the United States. 
We don't give people the first 10 percent return, you know, on 
their domestic assets in Maryland or Virginia. They don't have 
that. On the contrary, the FDII provision, which is this export 
subsidy, only gives the export subsidy for returns above a 
certain level.
    So if you take a tangible asset out of Maryland and you put 
it in an offshore haven, it will both increase your export 
subsidy in Maryland, ironically, and it will increase the 
amount of tax-free income offshore. So those are sort of to say 
the least, perverse incentives, that we've got baked into the 
code, and those four studies that I cite in the testimony 
document that they're having real effects on the location of 
tangible assets.
    Senator Van Hollen. I appreciate your walking us through 
that because it is complicated, but the bottom line is an 
incentive to ship U.S. jobs and investment overseas. Mr. 
Chairman, with your indulgence, I'd just like to ask every 
member of the panel a yes/no question. I've been doing this in 
a lot of these hearings.
    This discussion already came up, but because of the hype 
that was presented at the time of the Trump tax cuts, claiming 
that they would pay for themselves, I just ask everybody, 
especially our economists, whether in fact the Trump tax cuts 
paid for themselves. Let's just start with Dr. Clausing, and 
just go down the line.
    Dr. Clausing. They did not.
    Mr. Houseman. It does not appear so.
    Mr. Arensmeyer. They did not.
    Mr. Hines. No. They did not.
    Ms. Herzfeld. It's not something I'm qualified to speak to.
    Senator Van Hollen. Got it. Thank you. Thank you, Mr. 
Chairman.
    Chairman Whitehouse. Senator Van Hollen is pretty good at 
raising that question and getting clear answers to it.
    Hearing after hearing, so well done. Let me wrap up the 
hearing with my appreciation to the witnesses, and I'll close 
where I began, which is with Ugland House, Kent Conrad's 
favorite piece of real estate, at least for rhetorical 
purposes.
    And the preposterous claim that 18,000 different companies 
are actually doing business out of that one small location in 
the Cayman Islands. That kind of mischief ought to have no 
place in our tax code. And I hope we can find bipartisan ways 
to get rid of that kind of nonsense.
    Not only is it nonsense, or as Kent Conrad used to say, the 
business that's being done at Ugland House is monkey business. 
But it's also unfair because it builds a bias in favoring big 
companies that have the resources to employ the tax accountants 
and the lawyers, and all the people that are necessary to 
manage a fake entity in a foreign tax haven, versus the florist 
or the drycleaner, or the small business that is a real small 
business, the kind that Mr. Arensmeyer here is representing and 
speaking for.
    So at a minimum, we ought to be able to get rid of that 
nonsense, and I hope we can also come to some form of 
bipartisan agreement that creating an incentive for an American 
company to build a factory and hire workers overseas instead of 
in the United States, not because of some attraction of that 
foreign country, but because we have baked into the tax code, 
the U.S. tax code, that perverse incentive.
    I hope we can find a way to get some bipartisan progress 
there as well.
    Senator Johnson. Just quickly, Mr. Chairman. Senator Kaine, 
I had a great deal of sympathy for that amendment you offered, 
okay. You know I was digging my heals in to saywe've got to 
have much fairer treatment for pass-throughs, smaller businesses versus 
the C Corps.
    The problem we have right now is both sides have I would 
say abused the reconciliation process. When the stars align, 
you have the House, you have the Senate, and you have the 
Presidency abused the reconciliation process. You ram through 
whether it's tax cuts, or larger spending, at the last minute. 
Nobody sees any of this stuff, whether it's a spending bill or 
the tax bill, okay?
    That dysfunction has to end. What I would recommend, and 
why I appreciate this hearing so much is we've got a major 
fiscal cliff occurring in 2026. Small businesses are going to 
be really put at a disadvantage when again, I couldn't believe 
you know what I held on for was only 3 years.
    I would have been happy to increase the corporate tax rate 
to make that permanent, so we won't face this fiscal cliff. I 
guess what I'm suggesting is let's sit down now. I mean the 
hearing is a good start. Let's sit down with our offices, and 
let's start looking at these areas of agreement because I think 
there's a lot of agreement here.
    There's a lot of agreement. Starting with we've got a 
really complex and broken tax system. Let's simplify and 
rationalize it, so again, I've talked to the Chairman, you know 
about my true Warren Buffet tax. We talked about that in 2017. 
Let's start flushing these things out. Let's be honest about 
the complexity of this stuff.
    Let's try and set the rhetoric, condemn demagoguery aside, 
and let's really focus on, you know, the areas of agreement. 
I'd want to sit down with the Chairman of the Finance Committee 
as well. Now I see he's attended here. Let's start working on 
this now so that when we get to 2025 we actually have a 
bipartisan package, something we can all agree on, and pass in 
regular order, as opposed to abusing the reconciliation 
process.
    Chairman Whitehouse. Let me recognize and welcome the 
distinguished Chairman of the Finance Committee, and yield to 
him for his questions.

                   STATEMENT OF SENATOR WYDEN

    Senator Wyden. Well, I thank the Chairman, and I see also 
Senator Johnson and my colleagues here who have done very 
important work on these kinds of issues. I also want to 
recognize that in the house is my old neighbor, Kim Clausing, 
from southeast Portland. We've got to lure her back, and we so 
appreciate her being here.
    Look, what we're trying to do is use this year to the 
greatest extent possible for helping people, and then to tee up 
for 2025. Senator Whitehouse knows this in particular because, 
he is so knowledgeable about the budget. And as we try to, work 
through these issues, is that we are looking at a 3 year bill.
    So there will be an opportunity, for example, I very much 
liked the small business provision, the expensing provision, 
which is getting no coverage, and every progressive small 
business group likes that. And we're going to be doing that for 
3 years. And I very much like the fact that we are embarking on 
a pro-family policy because right now these families, and my 
understanding is about 70 percent of the eligible families have 
more than one child, but they really only get credit for one 
child for purposes of reimbursement policies.
    So, when Chairman Whitehouse and I talk about this stuff, 
you hit yourself in the head and say how in the world does that 
make sense? So what we're trying to do is to help people now, 
but to do smart things that tee everything up for 2025. Ms. 
Clausing, you've been working in these tax precincts for a long 
time. What do you see as the key priority for us going into the 
2025 debate?
    And as you know, you don't have to go into a lot with 
billionaires for the Chairman and me, because we've introduced 
the Billionaire Legislation. And Senator Johnson, by the way 
has talked to me about this over the years, so if he wants to 
make a billionaire income tax a bipartisan bill, I'm all in. 
But tell us what you think are the priorities for 2025.
    Dr. Clausing. Thank you, Senator Wyden for thatquestion, 
and for your leadership in this area. 2025, as you know, is such an 
important year for tax policy. And as I mentioned earlier, the price 
tag for a carte blanche extension of the Tax Cuts and Jobs Act is $4 
trillion, if you include the business provisions that are already 
starting to bite.
    So, I think my first priority for 2025 would be that we 
have to take serious deficit reduction, and not just simply 
extend a series of prior tax cuts that aren't necessarily 
working well. A second point is that I think we need to make 
progressive changes in our tax system. I think the child tax 
credit improvements that you're suggesting in the legislation 
under consideration right now, are a nice step in the right 
direction.
    I think we can afford to be even more generous with 
children, and with earned income tax credit, while collecting 
more from those at the top who can really afford it. A third 
principle is efficiency. I think that we didn't get a lot of 
bang for the buck in the Tax Cuts and Jobs Act, in terms of how 
much revenue we lost relative to how much investment and other 
useful things we encouraged, and there's some things like the 
R&D provisions that are actually discouraging benefits to 
greater society from research and development if we're having 
to amortize rather than expense that.
    And then finally, a fourth consideration that I think is 
really near and dear to my heart, and to your work, and to 
Senator Whitehouse's work, is ensuring that the U.S. can work 
with partner countries abroad to address some of these global 
collective action problems. And both climate change, and 
international tax competition are places where U.S. policy 
could better align with good policy and with what other 
countries.
    Senator Wyden. I'm almost out of my time.
    Dr. Clausing. Yes.
    Senator Wyden. And I just want to have you because you are 
so expert. You know, the Billionaire Policy now is really built 
on three words really ending, buy, borrow and die, which is the 
three word formula that allows billionaires to go for years on 
end, years and years paying little or nothing in taxes.
    I heard you say something about efficiency and revenue. 
Colleagues, the revenue estimate for eliminating effectively 
buy, borrow and die, is by Joint Committee on Taxation, $550 
billion over 10 years. Is there anything that raises more money 
from 900 billionaires? Colleagues, 900 billionaires. $550 
billion according to Joint Committee on Taxation, by 
effectively ending buy, borrow and die. Your thoughts on that.
    Dr. Clausing. Yeah, no. That is probably the most you're 
going to get from that population is through that legislation. 
You know, I think there are other things in the tax code that 
raise a lot of revenue, and the corporate increases that I was 
talking about earlier could bring in about $1.5 trillion if you 
cut the offshoring and profit shifting incentives and increase 
the corporate rate, but I think looking at ways in which people 
avoid and defer taxation on their capital income is a really 
important complement to that.
    Senator Wyden. Thank you, my colleagues, for all the extra 
time. Thank you for your good work, Mr. Chairman, and Senator 
Johnson, I look forward to working with you on this.
    Chairman Whitehouse. Yes. Thank you, Chairman Wyden. Thank 
you to all the witnesses for your participation, and your 
valuable help, and to Dr. Clausing for getting back to me with 
any particularly nauseating misuses of the foreign shell 
company scam, and as good as all the testimony was, I think the 
high point was Senator Johnson's confidence that we may be able 
to find some bipartisan action here.
    So, on that happy note, let's put the hearing to rest. 
Thank you very much.
    (Whereupon, at 11:32 a.m., Wednesday January 17, 2024 the 
hearing was adjourned.)
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