[Senate Prints 113-31]
[From the U.S. Government Publishing Office]
113th Congress } COMMITTEE PRINT { S. Prt.
2d Session } { 113-31
___________________________________________________________________
STAFF REPORT ON COMPREHENSIVE
TAX REFORM FOR 2015 AND BEYOND
----------
Prepared by the Republican Staff of the
COMMITTEE ON FINANCE
UNITED STATES SENATE
[GRAPHIC] [TIFF OMITTED]
DECEMBER 2014
Printed for the use of the Committee on Finance
STAFF REPORT ON COMPREHENSIVE TAX REFORM FOR 2015 AND BEYOND
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113th Congress
2d Session COMMITTEE PRINT S. Prt.
113-31
_______________________________________________________________________
STAFF REPORT ON COMPREHENSIVE
TAX REFORM FOR 2015 AND BEYOND
----------
Prepared by the Republican Staff of the
COMMITTEE ON FINANCE
UNITED STATES SENATE
[GRAPHIC] [TIFF OMITTED]
DECEMBER 2014
Printed for the use of the Committee on Finance
COMMITTEE ON FINANCE
RON WYDEN, Oregon, Chairman
JOHN D. ROCKEFELLER IV, West ORRIN G. HATCH, Utah
Virginia CHUCK GRASSLEY, Iowa
CHARLES E. SCHUMER, New York MIKE CRAPO, Idaho
DEBBIE STABENOW, Michigan PAT ROBERTS, Kansas
MARIA CANTWELL, Washington MICHAEL B. ENZI, Wyoming
BILL NELSON, Florida JOHN CORNYN, Texas
ROBERT MENENDEZ, New Jersey JOHN THUNE, South Dakota
THOMAS R. CARPER, Delaware RICHARD BURR, North Carolina
BENJAMIN L. CARDIN, Maryland JOHNNY ISAKSON, Georgia
SHERROD BROWN, Ohio ROB PORTMAN, Ohio
MICHAEL F. BENNET, Colorado PATRICK J. TOOMEY, Pennsylvania
ROBERT P. CASEY, Jr., Pennsylvania
MARK R. WARNER, Virginia
Joshua Sheinkman, Staff Director
Chris Campbell, Republican Staff Director
(II)
C O N T E N T S
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Page
List of Figures.................................................. V
List of Tables................................................... VI
Foreword (Senator Orrin G. Hatch)................................ IX
Chapter 1: Introduction to Tax Reform............................ 1
Chapter 2: Where Have We Been?................................... 9
Chapter 3: Where Are We and Where Are We Going?.................. 30
Chapter 4: Individual Tax Reform................................. 42
A. Base of Taxation................................................42
B. Distribution of the Tax Burden..................................60
C. Tax Expenditures................................................71
D. Economic Growth Resulting from Tax Reform.......................79
E. Simplification..................................................91
F. Itemized Deductions.............................................95
G. Employer-Provided Health Insurance.............................100
H. Alternative Minimum Tax........................................102
I. Standard Deduction, Personal Exemptions, Dependency Exemptions,
Head of Household Status and the Child Tax Credit..............106
J. Earned Income Tax Credit (EITC) and the Additional Child Tax
Credit.........................................................109
K. Retirement Plans...............................................112
L. Education Tax Incentives.......................................115
Chapter 5: Business Tax Reform................................... 123
A. Background on Corporate Tax Integration........................126
B. Summary of Hearings Involving Corporate Tax Integration........136
C. Description of Current Law.....................................139
D. Distortions Created by a Classical System of Taxing Corporate
Earnings.......................................................150
E. Why Have Corporate Income Taxes................................158
F. The Need for Corporate Tax Integration.........................161
G. Who Bears the Burden of the Corporate Income Tax...............164
H. The Corporate Tax as a Revenue Source..........................172
I. Corporate Tax Expenditures.....................................176
J. Corporate Tax Rates............................................180
K. Methods of Partial or Complete Integration.....................185
L. Equivalence Between Dividends Paid Deduction and Imputation Cre202
M. Integration Regimes Under Current Law..........................204
N. Corporate Integration in Other Countries.......................208
O. Financial Accounting Treatment.................................211
P. Tax-Exempt Shareholders........................................213
Q. Foreign Shareholders...........................................219
R. Preferences....................................................224
S. Retained Earnings and Sales of Stock...........................228
T. Corporate Dividend Policy Response to Integration..............230
U. Pass-Through Business Entities.................................235
Chapter 6: International Tax Reform.............................. 239
A. Summary of Hearings Involving International Tax Reform.........243
B. Theories of International Taxation.............................246
C. Revenues from the U.S. International Tax System................251
D. The Need for a Territorial Tax System..........................252
E. Concerns Regarding a Territorial Tax System....................265
F. Patent or Innovation Box.......................................271
G. Worldwide Tax System with No Deferral..........................274
H. Minimum Tax....................................................278
I. Foreign Corporations...........................................279
J. Non-Resident U.S. Citizens.....................................282
Chapter 7: Conclusion............................................ 284
Bibliography..................................................... 286
Appendix......................................................... 313
Exhibit 1--Memorandum from Thomas A. Barthold (no date)...... 314
Exhibit 2--Memorandum from Thomas A. Barthold (Apr. 29, 2011) 315
Exhibit 3--Memorandum from Thomas A. Barthold (no date)...... 317
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List of Figures
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Page
Figure 3.1 GTotal Deficits or Surpluses, 1974-2024............... 31
Figure 3.2 GTotal Revenues and Outlays, 1974-2024................ 33
Figure 5.1 GTaxation under the Classical System.................. 141
Figure 5.2 GPercentage of Total Income Paid to Foreign Persons by
Income Type, 2007 and 2008..................................... 221
Figure 5.3 GPercentage of Total Taxes Withheld on Foreign Persons
by Income Type, 2007 and 2008.................................. 222
Figure 5.4 GDividend Changes at U.S. Companies................... 232
Figure 5.5 GStock Buybacks and Dividends: Aggregates for U.S.
Firms, 1988-2013............................................... 234
Figure 6.1 GProfits from Overseas Operations Growing as a
Percentage of Total Profits.................................... 239
Figure 6.2 GCompetition to Buy or Construct a Foreign
Manufacturing Plant............................................ 277
(V)
List of Tables
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Page
Table 2.1 GInternal Revenue Receipts by Principal Sources, 1913-
1945........................................................... 15
Table 2.2 GIndividual Income Tax Returns, 1913-1945............. 15
Table 2.3 GInternal Revenue Receipts by Principal Sources, 1946-
1985 (in Thousands)............................................ 20
Table 2.4 GInternal Revenue Receipts by Principal Sources, 1986-
2013 (in Thousands)............................................ 29
Table 3.1 GDeficits Projected in CBO's Baseline Budget
Projections (Billions of Dollars).............................. 34
Table 3.2 GDeficits Projected in CBO's Baseline (as a Percentage
of Gross Domestic Product)..................................... 34
Table 3.3 GActual Revenues for 2007 to 2013 (Billions of
Dollars)....................................................... 35
Table 3.4 GProjected Revenues for 2014 to 2024 (Billions of
Dollars)....................................................... 35
Table 3.5 GProjected Revenues for 2014 to 2024 (as a Percentage
of Gross Domestic Product)..................................... 36
Table 4.1 GVAT Rates in 2014 in OECD Countries.................. 53
Table 4.2 GSummary of Federal Income Tax Data, 2011............. 61
Table 4.3 GTotal Income Tax Shares, 1980-2011 (Percent of
Federal Income Tax Paid by Each Group)......................... 62
Table 4.4 GAverage Tax Rate, 1980-2011 (Percent of AGI Paid in
Federal Income Taxes).......................................... 63
Table 4.5 GFederal Individual Income Tax Returns with Zero or
Negative Tax Liability......................................... 65
Table 4.6 GNumber of Returns with Refundable Tax Credits in
Excess of Payroll Taxes........................................ 67
Table 4.7 GNumber of Returns with Refundable Tax Credits in
Excess of Payroll Taxes........................................ 68
Table 4.8 GTax Units With and Without Income Tax Liability in
2011........................................................... 69
Table 4.9 GTax Units Without Income Tax......................... 70
Table 4.10 GSum of Tax Expenditure Estimates by Type of Taxpayer,
Fiscal Years 2014-2018......................................... 73
Table 4.11 GTen Largest Tax Expenditures, 2014: Individuals...... 74
Table 4.12 GTaxes on Long-Term Capital Gains and Qualified
Dividends--2011................................................ 78
Table 4.13 GStatutory Tax Rates Under Present Law and Proposals.. 80
Table 4.14 GPercent Change in Real GDP Relative to Present Law
(Percent Change for the Period)................................ 81
Table 4.15 GPercent Change in Receipts Due to Change in GDP
(Percent Change for the Period)................................ 82
Table 4.16 GPercent Change in Real Producers' Capital Relative to
Present Law (Percent Change for the Period).................... 83
Table 4.17 GPercent Change in Real Residential Capital Relative
to Present Law (Percent Change for the Period)................. 84
Table 4.18 GChange in Interest Rates Relative to Present Law
(Change in Basis Points)....................................... 85
Table 4.19 GPercent Change in Private Sector Employment Relative
to Present Law (Percent Change for the Period)................. 86
Table 4.20 GPercent Change in Consumption Relative to Present Law
(Percent Change for the Period)................................ 87
Table 4.21 GPercent Change in Real GDP Relative to Present Law
(Percent Change for the Period)................................ 91
Table 4.22 GEmployer-Sponsored Retirement Plans.................. 113
Table 4.23 GEducation Tax Incentives............................. 117
Table 5.1 GPercentage Shares of Net Income, 1980-2008........... 151
Table 5.2 GMarginal Effective Tax Rates on New Investment....... 153
Table 5.3 GShares of Business Returns as a Percentage, 1980-2008 162
Table 5.4 GPercentage Composition of Receipts by Source, 1940-
2013........................................................... 173
Table 5.5 GReturns of Active Corporations, Other Than S
Corporations, REITs and RICs Tax Year 2011..................... 175
Table 5.6 GSum of Tax Expenditure Estimates by Type of Taxpayer,
Fiscal Years 2014-2018......................................... 176
Table 5.7 GTen Largest Tax Expenditures, 2014: Corporations..... 177
Table 5.8 GU.S. Statutory Corporate Tax Rates................... 180
Table 5.9 GU.S. Statutory Corporate Tax Rates (Including
Surtaxes)...................................................... 180
Table 5.10 GOECD Countries--Statutory Corporate Tax Rates........ 181
Table 5.11 GTax Rates (%) of OECD Countries, 2009 and 2010....... 184
Table 5.12 GEquivalence of Dividends Paid Deduction and
Imputation Credit.............................................. 203
Table 5.13 GEquivalence of Dividends Paid Deduction with
Withholding Tax and Imputation Credit.......................... 204
Table 5.14 GCorporate Integration in the OECD Countries.......... 209
Table 5.15 GDividends Paid Deduction and Financial Accounting.... 212
Table 5.16 GHoldings of Corporate Equities in Billions of Nominal
Dollars, 1990-2010............................................. 214
Table 5.17 GHoldings of Corporate Bonds in Billions of Nominal
Dollars, 1990-2010............................................. 215
Table 6.1 GForeign Share of Worldwide Profits of Some U.S.
Multinationals................................................. 240
Table 6.2 GForeign Tax Payments and Credits, 2007, 2008 and 2009 252
Table 6.3 GTax Treatment of Foreign Source Dividends............ 254
Table 6.4 GEffective Tax Rate (%) Per Dollar of Income Deferred
by a 35 Percent Rate Taxpayer for Different Deferral Periods
and Interest Rates............................................. 257
Table 6.5 GPercentage of Dividend Exemption..................... 262
Table 6.6 GComparison of EU Patent Box Regimes and U.K. Proposal 272
Foreword
We live in very partisan times. Indeed, it's become almost
clichee for politicians, like myself, to comment on the rank
partisanship that pervades in Washington, D.C. and to lament
the lack of progress or agreement on even the most simple and
fundamental issues of the day. But, make no mistake, that's the
world we're living in. However, despite partisan gridlock in
Congress on many issues, there is bipartisan agreement on the
need to fix our nation's broken tax code. Virtually everyone--
in Washington and elsewhere--agrees that, when it comes to our
tax system, the status quo is unacceptable. Everyone agrees
that our economy has stagnated, and too many Americans are out
of work or underemployed. And, our broken tax code is holding
back economic progress and job creation. That is why I have
made tax reform my highest priority, and I'm not alone.
Republicans and Democrats, representatives and senators
have all expressed a desire to move this effort forward. In
just the past few years, some, like Chairman Dave Camp of the
House Ways and Means Committee and Chairman Ron Wyden of the
Senate Finance Committee, have gone so far as to introduce tax
reform legislation. Others, like former Finance Committee
Chairman Max Baucus, have unveiled tax reform frameworks that
specify the direction they believe this effort should take.
There are ideas proposed by others as well. While I do not
believe that any of those efforts have cracked the proverbial
code when it comes to tax reform, I applaud them all.
Too often, when people talk about reforming our tax code,
they reduce the entire endeavor to a set of talking points--
``we just need to broaden the base and lower the rates''--as if
it were a simple exercise. That may work in the context of a
political campaign, but, as I'm sure my colleagues who have
actually put forward specific proposals can attest, tax reform
will be far more difficult and complicated than anything that
can be boiled down to a simple slogan. It will involve
balancing countless interests and making difficult choices
among numerous competing priorities. In fact, despite the
number of specific proposals that are out there, I don't know
that we've even scratched the surface on the degree of
difficulty we face when it comes to tax reform. Part of the
difficulty is natural, given that we live in a complex world
with a complex economy. The key is to understand the
complexities and wade through them to engineer a tax system
that enhances efficiency, fairness, and simplicity. Living in a
complex world does not mean that we should accept or promote
additional complexities from the tax system.
Despite the difficulties, I believe that reform is vital
and necessary to our nation's economic well-being. Our tax code
is a huge obstacle standing between us and continued
prosperity. The costs of compliance alone are staggering. And,
those costs are nothing compared to the economic distortions
created by a tax system that, far too often, picks winners and
losers. I believe this is true of both the individual tax
system as well as the business tax system. That is why I have
repeatedly called for a comprehensive approach that fixes the
tax code for individuals and families as well as corporations
and small businesses.
Once again, I commend those who have introduced specific
proposals for their contributions to the overall tax reform
debate. To continue this conversation and, hopefully, set the
stage for an even more robust discussion in the near future, I
asked my Senate Finance Committee staff to compile this report,
titled ``Comprehensive Tax Reform for 2015 and Beyond.'' The
report is intended to provide background on where we are and
where we have been with regard to our tax system as well as
some possible direction on where our reform efforts should go
in the near future. I believe it will be helpful both to tax
experts and academics, as well as those who do not spend all
their days steeped in these issues.
I want to thank my staff for their efforts in putting this
report together, particularly Chris Campbell, my Staff Director
for his leadership and counsel; Mark Prater, my Chief Tax
Counsel and Deputy Staff Director for his leadership and
unparalleled expertise on these matters; and Christopher Hanna,
my Senior Policy Advisor for Tax Reform, for taking the lead as
principal drafter of the report. I also want to thank Tony
Coughlan, Jim Lyons, Jeff Wrase, Preston Rutledge and Bryan
Hickman for their substantial contributions. Additional
assistance was provided by Shawn Novak, Peter Russo, Caleb
Wiley, Nick Wyatt, Robert Chun and Abegail Cave.
In conclusion, I want to stress that, if we are ever going
to make tax reform a reality, both parties will have to come
together to get it done. That will mean Republicans and
Democrats in both the Congress and the White House working
together toward a common goal that will benefit the American
people and help get our economy moving on a better course. To
some, that may sound like a fairy tale. But, at this point, I
do not believe we can consider tax reform to be an optional
exercise--it is a matter of necessity. That is why I am
optimistic that there is enough goodwill in Washington and
throughout our country to make this effort successful. I won't
speak for anyone else, but, I want to be clear: I am willing to
work with anyone--Republican or Democrat--to fix our country's
tax code. I hope others will view this report as an invitation
to work together on these issues.
Senator Orrin G. Hatch
Ranking Member
U.S. Senate Committee on Finance