[Senate Prints 113-31]
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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

                              ----------                              
                                                                   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
?

                            List of Figures

                              ----------                              
                                                                   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

                              ----------                              
                                                                   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