Cspan s, where history unfolds daily. Now a Senate Finance Committee Hearing about ways to over haul the tax code. [ inaudible conversations ] we will discuss ways to improve the business provisions of the u. S. Tax code. With an eye towards creating jobs and boosting wages for American Workers and improving over all business climate. This part of the ongoing effort following years of tax hearings and last weeks hearing on individual reform. To draft and report tax reform legislation later this year. Members of both parties recognize the need to reform the way we tax business in the United States. As a former president obama noted when discussing his own frame work, the Current System quote does too little to encourage job creation and investment in the United States while allowing firms to benefit from incentives to low cat production and shift profit over sea. Unquote. Many elements of a particular business tax burden depend on the companies organizational forum. For example, sea corporations are taxed at the Corporate Tax rate. Are taxed at Corporate Tax rate. The top federal statutory Corporate Income tax rate has been 35 . Since 1993. And with state taxes added the United States average corporate statutory rate is the highest in the industrialized world. At more than 39. 1 . While some noted not al corporations pay the full rate, the average effective tax rate of u. S. Comp rations is the fourth highest among g 20 countries. According to to a recent analysis by young, when you integrate corporate level taxes and investor level taxes such as those on dividend and capitol gains. U. S. Tack rates are the second highest among developed country. Thats important given the United States taxes most corporate earnings that are distributed to shareholders twice. Both at the corporate and shareholder level. From the past few years i have been working on a corporate integration proposal that among other things will allow businesses to deduct their dividends pay to help alleviate the double tax problem. I view this as a compliment to a statutory reduction. Not a substitute. We held a few hearing last year. I wont delve too deeply. For now just say i continue to believe this idea whether it applies fully or in some other limited way can help and address a number of the problems where trying to solve with comprehensive tax reform. I look forward to continuing this conversation as the process moves forward. It is also important to note that while the u. S. Corporate tax rate remained unchanged for decades. The trend among foreign competitors has been to lower corporate rates, making american businesses increaseingly less competitive. This not just a republican talking point, this problem is widely acknowledged on both side of the aisle. Even former president bill clinton has signed into law the rate increase to 35 . Recently argued the rates should be lowered. I agree. Current business tax system in the disparity between the u. S. Comp corporate rate and foreign competitors corporate rates has created number of problems in the distortion. Reducing for example the Current Systems slows Economic Growth by impeding capitol formation hindering wage growth and job creation. Reducing productive capacity and lowering the standard of living in the United States. All of which directly harmed middle class families and individuals. The Current System lowers returns on investment, creating a bias against savings and investment. This hinders the creation of well across the economic spectrum. Including the middle class. The Current System gives corporations incentives to shift income production in intangible assets like intellectual property from the u. S. To lower tax foreign jurisdictions, there eroding our tax base. In tax reform we need to address all problems and distortions and many others as well. In particular we need to lower the Corporate Tax rate to relieve the burdens of tax imposes on American Workers. Who according to to many economists vary a significant part of the Corporate Tax. We need to reduce the burden on businesses whose earnings are reported and taxed on individual tax returns. These type of businesses include sole pry pry tor ships, limit liability, partnership and corporations. We need to fix our International Tax system. So that american businesses can compete in the global marketplace without facing significant disadvantages simply because they are headquartered in the United States. Each of these propositions is supported by people in both parties. Of course when politics enter the equation the story sounds much different. According to to some all republicans what to do in tax reform is give tax breaks to the super rich. Those may play well to political bases but they dont align with reality. As i noted in the hearing last week, all of the current tax reform ideas are aimed squarely at helping the middle class as well as low income families. Our chief goals particularly in business tax said reform are to increase Economic Growth, create new jobs, grow wages for the employees of both large and Small Businesses. Expand opportunities for all americans and improve standards of living for everyone in the United States. The proof i suppose will be in the pudding. As the Committee Works through this process with those goals in mind, i believe we will be able to demonstrate why those in the middle class should feel as though they have a stake in the discussion. And how these ideas to reform our Current System will help. Lets keep in mind that the status quo sluggish Economic Growth. Stagnant wages and decrease Work Force Participation hasnt exactly been doing the middle class any favors. The case for tax reform should be easy to make. I want to reiterate what i said last week. Mainly this committee will be the starting point for any tax reform legislation. That is considered in the senate. I expect will continue to hear more arguments about secret tax plans written behind closed doors. This committee is going to consider tax reform to regular order. That applies to both the drafting and the reporting of any tax reform bill. As i said last week i hope this process is by partisan. As with individual tax reform there are many areas of Business Tax Reform where thought ands interests of both republicans and democrats over lap. There is Fertile Ground for by partisan agreement on this. I hope we can take advantage of this historic opportunity together. I know my friend Ranking Member share these broad objectives. I appreciate that. In fact he has put forward his own proposals in the past. Likely with the same goals in mind. At the end of the day, we should all at the very least agree that the current tax system broken. And the current state of our economy shouldnt be accepted as the new normal. I look forward to a robust discussion of the issues here today. As well as some acknowledgment of the by partisan agreement that exists on the matters. With that ill turn to senator wyden. Thank you, mr. Chairman. Ill have to do committee hopping here in the next hour. Ill be brief. And before i get to the substance of todays hearing. I just need to talk briefly about whats coming down pike for this committee. Both here and on the floor. And as i told you the remarks im going make now do not in any way reflect my admiration for you, our friendship. The fact we just moved ahead on a very important chip bill at Childrens Health insurance bill. I want to set out my comments about what happened last night. Last night, the majority announced without consulting the minority that the finance committee will hold a hearing on the Cassidy Graham health care bill. I want to make clear, i believe that this is an abomination. Its an abomination of the process, abomination of the substance, and an abomination of the history of this storied committee. First of all, this bill is a prescription for suffering and disasterous consequences for millions of people. Second, the Budget Office has informed the congress that it will be several weeks at the very least before it can provide real estimates for the bill. So this means the majority is going to charge ahead. This bill is going to be a few roll call votes away from the president s desk, yet republicans here in the senate do not have answers to the key gut questions. Whats going to happen to the premiums paid by the American People . What is going to happen to their coverage . The idea the proposition that a bill this destructive, this far reaching can swing through the Senate Finance committee for a single hearing on a monday morning, hit the senate floor a day or two later makes a mockery of the legislative process that senator mccain so eloquently urged us to return to. Furthermore, this abomination of a process stands in sharp contrast to what we have been able to achieve with respect to the Childrens Health insurance program. What a sad commentary on the times, that when the committee ought to be celebrating a big victory for Something Like 9 million kids, for millions of families, the Cassidy Graham held erbil threats the health care of millions of children and families. Secondly, the reconciliation relies on secrecy, brute power and speed to ram purely partisan bills through the senate. And it is a train wreck to do it on health care. I think we have to note as we start this hearing that leader mcconnell is committed to reconciliation round two on tax reform. When we want on this side of the aisle to have colleagues working together in a bipartisan way. Ive written two full bipartisan bills. Leader mcconnell says were going to have another partisan bill, another completely partisan bill with respect to tax reform. And i think that too is a prescription for trouble. So the details that leak out of these big six meetings in my view suggest that whats underway is an unprecedented tax give away for the most fortunate and the biggest corporations in the country. The center piece could be a 2 trillion loophole dealing with something called passthrough status. Passthrough status is supposed to be all about Small Businesses. You know, the person whos running a cleaner or running a restaurant. Theres no question those Small Businesses, they fuel local economies, hire the most workers. They sure need a boost in tax reform, but any tax change that allows tax cheats to abuse passthrough status by selfdeclaring to avoid paying their fair share and dodge Social Security taxes would be worse than whats on the tax books today. The day the passthrough loophole bill becomes law it would make a mockery of the trump pledge to, quote, the rich arent going to gain at all with this plan, and thats just one element of what is on offer. Bottom line for me as we move to this crucial discussion, it is time for the congress to take the lies out of the Corporate Tax rate in america. Many of the biggest corporations in the country employ armies of lawyers and accountants who know every single one of the tax tricks. And they use them all to winnow down their tax rates to the low teens, to single digits, even zero. So that congress cannot pair a big corporate rate cut with a plan to enshrine a vast array of loopholes that lets corporations off the hook for paying their fair share. That is, in my view, a sure fire way to heap an even heavier burden on the middle class. So i look forward to discussing these issues. Mr. Chairman, im going to have to be out for a few minutes but i look forward to the discussion and i thank you for the chance to make this statement. Thank you, senator widen. Some of our Committee Members have requested a Committee Hearing for the health care proposal. A hearing will allow members on both sides to delve deeper into the policy and gain a better understanding of what the proposal is intended to achieve. So were going to have a hearing next week on this matter. I believe that members will benefit from a public discussion and examination of these issues. Yet, even though their request has been heard, and a hearing is on schedule, some members are still unsatisfied. Im not sure what else we can do on this matter to address every complaint. For today, our hearing is on the Business Tax Reform, and i hope we can focus these proceedings on that issue. Having said that, i would like to welcome each of our witnesses to our hearing today. We all appreciate your willingness to testify and answer questions today. Hearing each of your perspectives on tax reform will be critical to our process. First, well hear from ms. Scott hodge, the president of the Tax Foundation in washington, d. C. Where he has worked for the past 25 years. Before joining the Tax Foundation, mr. Hodge was director of tax and budget policy and citizens for a sound economy. He also spent ten years at the Heritage Foundation as a fellow analyzing budget and tax policy. Before that, he started his career in chicago where he helped fund the Heartman Institute in 1984. He holds a degree in Political Science from the university of illinois at chicago. Second, we will hear from donald b. Marron, an Institute Fellow and director of Economic Policy sni initiatives at the urban institute. In 2010 to 2013, the doctor led the urban brookings Tax Policy Center. Prior to joining urban, dr. Marron served as a member of the president s council of economic advisers and acting director of a congressional Budget Office. Hes also taught at the Georgetown Public Policy Institute and the university of chicagos graduate school of business. Dr. Marron studied mathematics at Harvard College and received his ph. D. In economics from the Massachusetts Institute of technology. Next, we will hear from troy k. Lewis, the immediate past chair of the Tax Executive Committee of the American Institute of certified accountants in washington, d. C. Mr. Lewis currently teaches at Brigham Young university in provo, utah. Hes in practice as a manager member of lewis and associates cpas, llc, in utah. He obtained his masters and bachelors of science from Brigham Young university. Hes also a Certified Public Accountant and a chartered Global Management accountant. Last but not least, well hear from mr. Jeff deboer, the founding president and ceo of the real estate roundtable where hes served since 1997. Mr. Deboer also serves as the chairman of the Real Estate Industry information sharing and Analysis Center as well as chairman of the National Real estate organizations. Mr. Deboer has also served as cochairman of the Advisory Board of the rand for terrorism Risk Management policy and was a Founding Member of the Steering Committee of the coalition to insure against terrorism. He holds degrees from washington and Lee University school of law and from youngstown college. Hes a member of the Virginia Bar Association and the american bar association. I want to thank all of you again for coming today. And i look forward to hearing your remarks, so mr. Hodge, well begin with you. If youll please begin, that would be great. Well, thank you, mr. Chairman and Ranking Member wyden, good to see you. All the members of the committee, i commend you for taking on the challenge of reforming americas business tax code, especially the task of overhauling our Corporate Tax system. Most important thing that congress and the administration can do to boost Economic Growth, lift wages, create jobs, and make the u. S. Economy more competitive globally is overhaul our business tax system. The Tax Foundations extensive Economic Research and tax modeling experience suggested the committee should have four priorities in mind when youre reforming the Corporate Tax system. We call these the four pillars of Corporate Tax reform. First, provide full expensing for capital investments. Second, cut the Corporate Tax rate to a globally competitive level such as 20 . Third, move to a competitive territorial system, and four, make all three of these priorities permanent. And while many of you, and many in the business community, may see some of these policies in conflict or competing for space in the tax plan, we see these pieces as complementary and essential, not in conflict. And our view, cutting the Corporate Tax rate and moving to a territorial system are essential for restoring u. S. Competitiveness and reducing the incentives for Profit Shifting and corporate inversions. These measures are also important for defining and reclaiming the u. S. Tax base. Right now, the European Union and the oecd are proposing policies such as a new turnover tax on companies that are directly aimed at raising taxes on u. S. Multinationals. Expensing we believe is key to reducing the cost to capital in order to revitalize u. S. Capital investment, which in turn will boost productivity and wages. Thus a good tax plan should include all three of these policies because they will not only boost Economic Growth but theyll do so in a way that leads to higher wages and Living Standards for working americans. However, these gains are not possible if the policies are made temporary. Temporary tax cuts deliver temporary results, where permanent tax reform delivers permanent economic benefits. Its hard to generate public support for Corporate Tax reform because most people dont see how it benefits them, but Corporate Tax reform may not put cash in peoples pockets in the same way a tax credit might, but it can have a powerful effect on spurring Economic Growth while lifting aftertax incomes and Living Standards. As just an example, we used our taxes and growth dynamic tax model to simulate the longterm economic effects of cutting the Corporate Tax rate to 20 and moving to full expensing for corporations. Our model indicates these two policies combined would increase the level of gdp by 3. 4 , lift wages by an average of 3. 8 , and create more than 860,000 new jobs. When we account for all of these economic factors, we find that the lower Corporate Tax rate and full expensing combined would boost the aftertax incomes of all americans by an average of 5. 2 , pretty good. One last thing about expensing, it does something no rate cut can. It eliminates pages from the tax code, saving business more than 448 million hours of compliance time and more than 23 billion in Compliance Costs each year. The great economist once said there are no solutions, there are only tradeoffs, and im sure youll all discovering that in looking at Corporate Tax reform. First, the math is very hard. Contrary to what some people believe, theres not as many loopholes in the Corporate Tax code as many think, so youll likely to have to think outside the box if you want Corporate Tax reform to be revenue neutral. Second, the economics of tax reform must be at the forefront of your decision making. If you make the wrong choice in the base broadeners you choose to offset your tax cuts, you can neutralize all the benefits youre trying to achieve through the reforms. These are the challenges, and theyll be hard choices ahead of you. But Corporate Tax reform done right is key to growing the economy, boosting family incomes, and making the u. S. A better place to do business in and do business from. So remember the four pillars of Corporate Tax reform. Full expensing, lower Corporate Tax rate, a territorial system, and permanence. Those are the right policies to make tax reform this tax reform effort a lasting success. So mr. Chairman, thank you very much for the opportunity to share these ideas. I look forward to any questions that you may have. Well, thank you. Mr. Marron, well turn to you. Thank you. Chairman hatch, members of the committee, thank you very much for inviting me to discuss Business Tax Reform. Americas business tax system is needlessly complex and economically harmful. Thoughtful reform can make it simpler, boost american competitiveness, create better jobs, and can promote shared prosperity, but tax reform is hard. Meaningful reforms create winners and losers. And you likely hear more complaints from the latter than praise from the former. I feel your pain. But at the risk of adding to it, my testimony today makes eight points about Business Tax Reform. First, thoughtful reform can promote Economic Growth, but we should be realistic about how much. More and better investment boost Economic Activity over time. The largest effects will occur beyond the tenyear budget window. If reform is revenue neutral, revenue raisers may temper that. If reform turns into tax cuts, deficits may crowd out private investment. Either way, the boost in near term growth may be modest. Dynamic scoring will thus play only a small role in paying for tax reform. Second, the Corporate Income tax makes our tax system more progressive. The Corporate Income tax falls on shareholders, investors more generally, and workers. Economist debate how much each group bears. Workers are clearly the most economically diverse. But they include highlypaid executives, professionals, and managers as well as rank and file employees. The bulk of the Corporate Tax burden thus falls on people with high incomes even if workers bear a substantial portion. Third, workers would benefit from reforms that encourage more and better investment in the United States. In the long run, wages, salaries, and benefits depend on worker productivity. Reforms that encourage investment and boost productivity would thus do more to help workers than those that merely increase shareholder profit. Fourth, taxing passthrough business income would inspire new tax avoidance. When taxpayers can switch from a high tax rate to a lower one, they often do so. Kansans did so when their state stopped passing through tax income. Investment managers convert labor income into longterm capital gains. Congress and the irs is try to limit tax avoidance, but the cost will be new complexity, arbitrary distinctions and new administrative burdens. Fifth, capping the top tax rate on passthrough business income would benefit only high income people. To benefit, taxpayers must have qualifying business income and be in a high tax bracket. Creating a complete schedule of passthrough rates could reduce this inequity, but it would expand the pool of taxpayers tempted by tax avoidance. Sixth, taxing passthrough business income at the corporate rate would not create a level playing field. It passes one layer of business tax, but Corporate Income faces two, at the company and again at taxable shareholders. Taxing passthroughs and corporations at the same rate would favor passthroughs over corporations. To get true tax parity, you could apply a higher tax rate on passthrough business income. You could levy a new tax on passthrough distributions or get rid of shareholder taxes. Seventh, it is difficult to pay for large tax cuts and business tax rates by limited tax breaks and deductions. Eliminating all Corporate Tax expenditures might be able to get you get a corporate rate down to 26 . You could try to go lower by cutting other business deductions such as interest payments, but deductions lose their value as tax rates fall. To pay for large rate reductions you need to raise other taxes or introduce new ones. Options include raises taxes on shareholders, adding a destination based cash flow tax or a carbon tax. Finally, making business tax cuts retroactive to january 1st, 2017, would not promote growth. Retroactive tax cuts would give a windfall to profitable businesses. That does little or nothing to encourage productive investment. Indeed, it could weaken growth by leaving less room for more progrowth reforms. Another downside, the benefits would go to shareholders, not workers. Thank you again. I look forward to your questions. Thank you. Thank you so much. Okay. Well go to the next one, mr. Lewis. Thank you for the opportunity to testify on behalf of the aicpa. As the committee tackles this rare opportunity to enact bold progrowth tax reform, we urge congress to take a holistic approach, to provide tax reform to all of americas businesses. Fair and equitable tax reform will drive Economic Growth and enhance the competitiveness of all types of american businesses, not only in the u. S. , but also abroad. The aicpa is a longtime advocate for an efficient and progrowth tax system. Based on principles of good tax policy. We need a tax system that is fair, stimulated Economic Growth, has minimal Compliance Costs and allows taxpayers to understand their tax obligations. These features of a tax system are achievable if principles of good tax policy are considered. Today, wed like to highlight a few tax reform issues that directly impact businesses and their owners. First, were concerned with and oppose any new limitations on the use of the cash method of accounting. The cash method is simpler in application, has fewer Compliance Costs, and doesnt require taxpayers to pay tax before receiving their income. Forcing businesses to switch to the cruel method unnecessarily discourages business growth. Increases Compliance Costs and imposes Financial Hardship on cash strapped businesses. Next, tax relief should not mean a rate reduction for only C Corporations. Congress should encourage or at least not discourage the formation of passthrough entities. Inequities would also arise from having significantly different income tax rates for business income based on an overly simplicistic approach. Such as one around the structure or general nature of the businesss activities. For example, excluding professional Service Firms from the benefit of a lower business rate reflects the view of the Service Industry that does not represent the current global environment. In todays economy, professional Service Firms are increasingly competing on an international level, with businesses organized as corporations. Theyll also require a significant investment and rely on the contribution of employees to generate a substantial portion of their revenue. Artificially limiting the use of a lower business rate regardless of the industry would penalize a business for operating as a passthrough entity. Professional Service Forums are an important sector in our economy and heavily contradict to the nations goals of creating better jobs and wages. Without the benefit of a fair and consistent rate reduction for all businesses, including passthrough entities, the incentive to start or grow a business is diminished. With a loss of jobs and reduction in wages. We recognize that producing a reduced rate on active business income will place additional pressure on the distinction between profits of the business and compensation of the owner operators. We recommend codifying traditional definitions of reasonable compensation and provide if necessary Additional Guidance from treasury and the irs. If Congress Moves forward with a fixed percentage split for business income such as treating 70 of passthrough earnings as employment income and 30 as return of capital, we recommend making a proposal a safe harbor rather than a hard and fast rule. A safe harbor would promote simplicity for many businesses without sacrificing fairness for others. It would also provide a uniform treatment among closely held business entity types. Another important issue is the ability to deduct interest expense. Business owners borrow to fund operations, working capital needs, equipment acquisition and even to build credit for future loans. These businesses rely on financing to survive. Equity financing for many startup businesses is simply not available. At a minimum, we should not take away or limit this critical deduction for many small and midsized businesses who with little or no access to Equity Capital are often forced to rely on debt financing. Finally, we encourage you to enact mobile workforce legislation, such as the bill introduced by senator thune. The burden of tracking and complying with all the different state payroll tax laws are complex and costly, particularly for small employers. The mobile workforce legislation provides a uniform National Standard for nonresident tax income withholder and a deduction for nonresident employees. Thank you for the opportunity to testify, and ill be happy to answer any questions you may have. Thank you. Were grateful for your testimony. Lets go to our final witness, mr. Deboer, and well listen to you. Good morning. Tax reforms impact on the commercial Real Estate Industry will have wide ranging effects on the economy and job creation. And the overall gdp. Im honored to be here today to talk with you about this issue. But its not the first time that our industry has been before this committee and talked about tax reform. In 1981, congress provided our industry with very aggressive tax incentives. These tax incentives spawned a robust tax shelter industry and resulted in the development of millions of buildings that had no tenants. In 1986, congress rightly eliminated these tax shelter provisions. However, the combination of these actions caused severe dislocation in real estate markets nationwide, caused great numbers of lost jobs, resulted in countless bankruptcies and many people believe that it ultimately led to the demise of the savings and loan industry. It took years for the economic pain to work through the system. Our industry steadily has recovered, and with congressional assistance, the federal taxation of Real Estate Investment today is much closer to matching the economics of the investment. As a result, commercial Real Estate Industry today is estimated to provide about 20 of the nations gdp. Our industry now employs millions of americans, provides local governments with its largest Revenue Source, and plays a key role in the Retirement Savings and Wealth Creation of americans. Importantly, commercial real estate markets today are largely imbalanced where supply only modestly exceeds demand. Despite our industrys relative positive health, we know the underlying economy can and should grow more rapidly. Properly designed tax reform can spur overall job creation, encourage more robust business expansion, improve the standard of living for all americans, and result in sustainable gdp increase. The first step should be reducing the tax on all job creating businesses. This action should not be limited to Corporate Income but also should include income through passthrough businesses, and i want to pledge to senator wyden that our industry and our Organization Work very hard to make sure there are not games played on compensation earned. A progrowth tax reform should also encourage and reward risk through capital gain, and capital gain should continue to recognize that its not just cash that is put in investment that should be rewarded. Some concepts, however, may have unintended consequences. For example, our Capital Markets today are the envy of the world, entrepreneurs are able to access debt amounts needed to provide their businesses with flexibility to build, operate, and grow their businesses. We should continue that and not end the deduction for business expense. The proposal to expense assets is troubling to us because it is suggested to apply to structures. We think that carries Great Potential negative consequences. Expensing structures would obviously encourage a lot of development, but were concerned that this development would not be supported by underlying demand, and such Economic Development is a false indicator of economic strength and will badly distort markets. This is not to say, however, that the current Cost Recovery system is correct for our industry. We think it should be shortened. And m. I. T. Has reviewed a wealth of data regarding buildings can their findings suggest that the properly Economic Life of buildings is 20 years. We believe a 20year life twinned with a continuation of the Interest Deduction will spur Sustainable Development and gdp expansion. The deduction for state and local property tax payments should continue. We think that will cause many businesses to leave our urban areas, and we reject that idea. We believe the Lifetime Exchange rules also should be continued. We think theyre a positive part of the economy. I would like to say in 2015, Congress Took a very positive step in the path act regarding the taxation of Foreign Investment in u. S. Real property. We urge you to now take another step and repeal that entirely. One final item that i would like to add. And that is that we would urge you to consider an Infrastructure Initiative of some type in tax reform. Action in this area is badly needed. It would create jobs, and if its done correctly, and by correctly, i mean to understand the transportation revolution that is going on in our country and where we will be going as far as Transportation Needs and mobility in the future. If we do it with congress and policymakers do it the correct way, it not only would create jobs but increase productivity for workers and our businesses. And i would be happy, we have submitted a detailed statement. I would be happy to respond to any questions about it or my comments today. Thank you. Well, thank you. Thank you so much. All four of you. We really appreciate you taking the time and putting in the effort to come and testify to us today. And well pay strict attention to your statements. I might add that today is senator tim scotts birthday. I dont think he looks a day over 29. And makes the rest of us look pretty old, ill tell you. Very appreciative for your contact lens, sir. I wish i could wear contact lenses. Well, were grateful to have you on the committee. You add a great deal to our committee, as do the other members. So let me start with you, mr. Hodge. In your testimony, you note that the Tax Foundation is generally supportive of corporate integration. Of course, corporate integration is an idea that i along with my staff have been exploring for several years now. In your written testimony, you note that reducing the Corporate Tax rate to 20 increases Economic Growth in the long run by 3. 1 . And results in 592,000 fulltime equivalent jobs and corporate only expensing achieves a very similar result. An increase in Economic Growth by 3 , resulting in 575,000 fulltime equivalent jobs. These projections are impressive. What struck me as very interesting is that in the Tax Foundations 2016 book options for reforming americas tax code, almost an identical Economic Growth and job projections occur with corporate integration that is allowing the corporation to deduct dividends. The Tax Foundation estimated an Economic Growth of almost 3 in the long run, 2. 9 , to be precise. And 535,000 fulltime equivalent jobs. And of course, corporate integration would eliminate the two levels of tax on corporate earnings and bring the tax treatment of debt and equity closer in alignment, which would reduce if not eliminate a lot of the distortions of the Current System. Would you share with us the Tax Foundations views on corporate integration in general, dividends paid deduction approach in particular . Thank you, mr. Chairman. You know, i was looking through the Tax Foundations archives and came across a 1977 Tax Foundation publication by marty fe feltstein, who i think you know well, on corporate integration. Since that time, there have been no fewer than a dozen corporate integration proposals that have come out of either congress or the white house. This is an issue of long standing study, and unfortunately, we have yet to see the kind of action that i think is necessary to remove the double taxation of Corporate Income and make business taxation more equitable. We believe that business income should be taxed only once. And at the same rate. As you noted in our analysis, it has the dramatic effect of lowering the effective Corporate Tax rate and having a substantial impact on longterm Economic Growth. But as you mentioned rightly, i think, it also improves or equalizes the treatment of debt and equity financing, as a result, makes the economy much, much more efficient. And i think a dividends paid deduction is a very thoughtful way to approach this. After all, Companies Get to deduct their interest costs. Why shouldnt they get to deduct the dividends they pay to shareholders . I think its certainly an approach that ought to deserve the attention and consideration of the committee, but also as you face or move forward on fundamental tax reform, ought to be a nice complement to the broader Corporate Tax reform efforts. Thank you. Mr. Lewis and mr. Deboer, you both included in your written statements concerns regarding limitations on the deductibility of interest expense. Mr. Lewis, your testimony laid out concerns for Small Businesses and service businesses. Mr. Deboer, your testimony laid out the potential significant negative effects on the Real Estate Industry of such a limitation. However, we frequently hear how the current tax treatment of debt and equity finances leads to overleveraging of businesses and limiting the deductibility of interest expense brings the tax treatment of the two more in sync. I would like your respective thoughts on that. Mr. Lewis and mr. Deboer, if you could do it for us. Ill take a crack at it first. Equity financing for many startups and small midsized businesses is simply not available. I think you have to start with that notion. So while the points that you just made are there, the combination, though, of taking away of taking away an interest expense deduction will put more burden on the Small Businesses. The reality is that Large Businesses have access to the equity markets. The Capital Markets, and Small Businesses dont. So many of our businesses, particularly the growth businesses, the entrepreneurial businesses are those businesses that rely on debt financing. Tax laws shouldnt discourage the formation of businesses. So the formations of new businesses is one of the best aspects we have in the u. S. Economic system, and i think it should continue. Thank you. Mr. Chairman, the issue of overleverage, i think, is really one that should be examined on an individual by individual basis. If theres overleverage, its a problem with the regulators that were supposed to be determining whether someone had too much leverage, and we would prefer the issue be dealt with there, not through the tax code. The use of debt is very, very important for all businesses. Not just startup businesses, and not just Small Businesses. But all businesses that need this kind of flexibility to use debt. Debt, by the way, allows entrepreneurs to retain more control over their business operation, if they have equity, they give up control of some of their business. They retain more control over their Business Operations by using debt. Its something that historically has been recognized as a cost of doing business like other costs of doing business. And we really see no reason to adjust it through the tax code. Thats not to say that we think that people should be overleveraged or that businesses should be overleveraged. They shouldnt be. There should be governors on that, and other parts of the government should act. By the way, in the Real Estate Industry, from a macro point of view, i believe our industry is now leveraged at about 60 publicly traded are leveraged at lower amounts, 40 or 45 on average. Were very mindful of the problems with overleverage. But its really a problem of whether the borrower itself is able to repay the amount. And it might be a low amount of leverage that they cant handle while others can handle higher amounts. Thank you for the question, though, sir. Its very important for the economy, i think, to continue to grow to have access to debt. Thanks to both of you. Senator grassley. For anybody or all of you, as part of a progrowth tax reform, theres been considerable debate over whats more important, lower rates or expensing. Mr. Hodge and dr. Marron, could you both elaborate on how you see the tradeoff between expensing of depreciation and lower rates, for example, do you view it as acceptable to lengthen the appreciation to help finance lower rates . Ill start out with the first part of that, mr. Grassley. We see expensing as the most powerful policy change that you can make to improve Economic Growth. And on an apples to apples basis, our models show that full expensing delivers twice the Economic Growth than a comparable rate cut. And thats because it really affects new investment, whereas a rate cut, a corporate rate cut, effects both new and old capital. New and old investment. So its benefits get distributed a little more broadly. But to the second point, i think we have to look back at the tax reform proposal that chairman camp put forward a few years ago, which lengthened depreciation lives in order to finance or offset the revenue lost from a corporate rate cut. What we found, all the models found this. The joint Committee Taxation model, shows lengthening depreciation lives raised the cost of capital to such an extent that it offset the benefits of the lower Corporate Tax rate on the other hand. And it ended up as an economic wash. I think you need to be extremely careful in looking at your offsets when youre looking to offset the corporate rate cut. My thoughts are going to be very, very similar. If you focus on expensing, what youre doing is providing incentives for new investment, which is the thing that is most beneficial for the economy, and i want to emphasize, it will also be most beneficial for workers. The research that my colleagues at the tack policy have done suggest if you focus on reductions that encourage investment, you get more of the benefits flowing to workers and relatively less of it focused on shareholders. That said, with a 35 top rate, you can make very good arguments for bringing that down as well as part of concerns about the competitiveness of our tax system. As scott just said, if your strategy is reduce the corporate rate and make depreciate and writeoffs less favorable, what youll see in all of the macro models is thats going to limit any growth benefit you get. Im going to ask the same two people something that senator hatch discussed with the others, because i want your opinions on it. Thats consideration of restrictions whether they should be imposed on the ability to deduct interest. As you know, the house blueprint generally eliminates interest as a business expense in exchange for going to a full expensing on capital assets. For the two of you, should any restriction on the deductibility of interest be considered to finance lower rates or faster depreciation . Ill go first on this one. There are two Great Schools of how you should tax. Right, theres the Income Tax School and the consumption tax school. In the Income Tax School, Interest Deductibility is an expense. You ought to be able to deduct it, and depreciate ought to follow the economic depreciation of assets over time. In the consumption tax view of the world, you should be able to tax everything immediately and you should not get a writeoff for Interest Deductibility. We have something in between where we have accelerated depreciation and allow deductibility. And the challenge is you can overencourage investment. You can create negative effective tax rates on investment. You can have some of the problems that jeff mentions happened in the 80s if you go too far of making investment favorable but allowing full deduction of interest. You can end up with excessive investment in certain sectors. Im very open to reducing Interest Deductibility if its paired with making depreciation more favorable. That moves in the direction of a consumption tax. Thats a logical and consistent way to design a tax system. I would echo much of what donald has said. I think that our models show that when you eliminate Interest Deductibility, it not only raises about 1. 2 trillion, but it does so and crafts a less harmful way than other options. And thus, when paired with a corporate rate cut or full expensing, you get the maximum benefit from those policies with the least amount of harm on the other side. There is also other advantages to eliminating the Interest Deductibility when it comes to perhaps reducing the amount of earnings stripping that we see, where foreign multinationals load up debt here on their domestic subsidiaries and then strip income out of the u. S. Tax base. There are other issues that we have talked about in terms of overleveraging and so forth, so there are many advantages to it. But we do understand that some industries are perhaps overreliant on it and it could be disruptive. It is one of the tradeoffs that will have to be made in order to get Economic Growth on the other side of the equation. Thanks to both of you. Thank you, senator. Senator carper. Thanks, mr. Chairman. I want to add to your birthday wishes to tim scott. Great to serve with you, tim, and happy birthday. Youre too young to remember a great song by Conway Twitty, and last weekend, i happened to listen to the radio driving around, and i heard a song i hadnt heard in years. It goes, its only make believe. I was trying to think what he was singing about. He was singing about a relationship with another person, but it could have just as easily have been difynamic scoring. Will the senator yield . Im happy to yield. You sure that was Conway Twitty and the twitty birds . He sang that . The same guy. Youre pretty good. Before he goes further down, i just want to say we have been down this road before. We did it in early 81 with tax cuts for higher income people. Didnt work. We did it in 2001. We ended up with more debt, and frankly not the kind of Economic Growth we had hoped for. The idea of trying it again, theres a saying, third times a charm. Im not sure the first two times were charms. I would be careful about going down this road again. So my question, dr. Marron, can you lay out for our committee what effect the largely deficit financial tax cut would have on longterm Economic Growth for the u. S. And on our deficits . Thank you. Sure. My pleasure. Thanks. So if you look at the cbo baseline forecast of where we are in fiscal terms today, were on track over the next decade in round numbers to spend around 50 trillion to bring in tax revenue around 40 trillion, therefore, to have deficits that cumulate over the decade of about 10 trillion. So that will build the debt from around 75 of gdp today to up around 90 of gdp by the end of the budget window. Thats problematic in its own way, right . We ought to be where the debt isnt rising faster than the economy. We want it to flatten out and eventually come down. If you did deficit finance tax cuts today, what you would have is more of that. We would have depending on the scenario, 1 trillion, 2 trillion of debt over the decade, adding 12 trillion to the debt over that period, and the finances would have to come from somewhere. One way it might be financed is by reducing the amount of private investment in the United States, that would therefore weaken the amount of growth from a tax reform. You should always think about these tax reform proposals as being a raise between the effects you get from the tax changes youre doing and any effects on the budget balance. If youre increasing deficits over this time period, theres going to be an offset. Typically in the models i have seen, typically the offset ends up overwhelming eventually so you end up losing your growth effects. There are some scenarios in which that doesnt happen, where foreign capital is available. It comes in and offset the hit to private investment, but youre left in a situation where, yes, the u. S. Economy is being more productive, but more of the benefits are going overseas rather than staying here. Either way, theres a cost to deficit financing. Let me ask a question, again of you, dr. Marron if i could. Could you show us what the evidence shows bears the cost of Corporate Tax in your assessment of the assumptions used in models claiming a great cut would allegedly help workers . Certainly, this is an area that economists have studied a lot in recent decades. I would say the consensus you see from the cbos and jcts and office of tax analysis and similar to what my friends at the Tax Policy Center do, is clearly workers pay some of the Corporate Income tax. One unfortunate side of the Corporate Income tax is to discourage investment in the United States. Workers have less capital to work with, less productive, wages are lower. The mainstream estimates of that are around 20 . You know, kind of in the 20 to 25 for the Corporate Tax system as a whole. At the Tax Policy Center, my colleagues emphasize it differs depending on what tax provision you look at, and if youre talking about just provisions focused really directly on investment, you can make an argument that about 50 of that is borne by workers. For the Corporate Taxes as a whole, the mainstream view is around 20 , 25 . All right. Im all for reducing our Corporate Tax rate, were not competitive with the rest of the world. There needs to be a reduction. I hope that as we address that concern, well keep in mind four questions. As we address more broadly, comprehensive tax reform. Number one, is it fair . Number two, does it foster Economic Growth or impede it . Number three, does it make the tax code more complex or less complex . And number four, what is the fiscal impact . Were six, seven years into the longest running economic expansion in the history of our country. Usually at this point in time, i would think we would be interested in addressing Corporate Tax problems, so were competitive with the rest of the world, but do so in a way thats fiscally sustainable. This deficit is going to exceed 700 billion. Thats seven years into an economic expansion. The economics i studied say that deficits when youre trying to stimulate the economy, deficit spend when youre in a recession, in a war, but when youre six, seven years into an economic expansion, the idea is somehow doing it all over again and increasing the deficit, i dont think we should do that. I dont think we should do that. Thank you so much. Thanks, senator. Senator toomey. Thank you. Im going to follow up briefly on the senator from delawares comments. But let me start with a question. Is there anybody on the panel who believes that Economic Growth and output is completely unaffected by all incentives and penalties in the tax code that theyre completely independent and the economys uninfluenced by good or bad tax policies . Anybody hold that view . Nobody holds that view. Doesnt it follow logically if you have better incentives and fewer penalties and you have a tax code that creates the right incentives for growth, you have more growth than you would otherwise . And if we achieve that, then its not a question of whether or not the economy grows more. Its a legitimate question about how much. And i think we all agree that if we have a bigger economy than we would otherwise have, then theres more Economic Activity to tax. So the logic behind dynamically scoring tax policy seems to me can only be a question of extent but not whether or not we do it. If you think the tax reform is actually counterproductive to growth, if you think its going to create disincentives and penalties for growth, then it should be scored accordingly, but isnt there a basic, mr. Hodge, isnt there a fundamental unavoidable logic that if you get the incentives right, you will have more growth, and if you have more growth, you can generate more revenue, and its a question of magnitude . Thats correct. And what we try to tell people about dynamic scoring is that by and large, most tax cuts dont pay for themselves. But depending on the type of tax cut, it can have Macro Economic effects which will have feedback effects on revenues and will minimize their longterm cost. A couple other things i want to get to quickly. Mr. Deboer, am i pronouncing that correctly . Thank you. Your point, you seem to be skeptical about the wisdom of allowing full expensing for structures. But that skepticism, i didnt hear that applied to other kinds of assets like vehicles, equipment, machinery, other sorts of things. And you acknowledge that expensing of those types of things, nonstructures, can be beneficial for Economic Growth, is that correct . Well, i dont necessarily disagree with that. But the facts are, i believe, that under the current law of depreciation and bonus depreciation that is in place, i believe roughly 60 of all Business Investments today are recovered within 18 months. I got very limited time. I appreciate that. So i am a little skeptical about the bump you would get from that. Thank you very much. Nice if we could move on. Mr. Lewis, you made a point about the accrual method versus the cash method of accounting. Is it true that a Fast Growing Company thats investing significantly in capital and growing its inventory could be in a position where it exceeds their cash flow . Certainly, so allowing companies to take the cash method has the great virtue of tremendous simplicity, but it also tends to align their cash flow better with their tax obligations, is that true . Yeah. Cash method accounting tends to be simpler like you said, and it does provide a lot of incentive for your compliance cost. You put more money into doing what they do best which is not accounting, which is growing their business, right. Would you be supportive of raising the threshold that is currently in law that allows for cash a cash basis for tax purposes . Yeah. We the aicpa has supported senator thunes invest act that had a provision in there to increase it to make it more available to smaller businesses. Thanks. Mr. Hodge, you had mentioned that dollar for dollar expensing has more impact on growth than lower marginal rates. Maybe than most of the other ideas we have been talking about. Could you briefly explain how that benefit translates to workers . How does that help average workers . How does that help wages . The key point here is by lowering the cost of capital, youre improving the opportunities for businesses to invest in tools which make their workers much more productive. Much more productive workers earn more over their lifetimes. And their standard of living rises as a result. So the key here is to incentivize new investment, to increase productivity which ultimately makes everyone better off in the long run. Thanks very much. Thanks, mr. Chairman. Mr. Chairman, thank you. I know my colleagues have been in the panel discussing dynamic scoring and the deficit. So i guess i definitely believe as we had our last hearing that dynamic scoring doesnt definitely lead to dramatic growth. It might, it might not. Mr. Deboer, one of the things im most interested in before we launch into this discussion about the tax code just as any business person would do, they take an assessment of the environment and what are the needs and opportunities of that company and what are the needs and opportunities of our nation. One of those things that i think has been missing in this equation as it relates to our discussion is what are those needs and opportunities as it relates to housing. Could you comment on that as it relates to the tax code and what we need to be doing . Certainly. I think, you know, most people, most Business People that operate certainly in urban areas recognize that theres a tremendous and growing shortage of what we would call a Workforce Housing. And so people that are middle american citizens, firemen, teachers, what have you, combined incomes working hard are being priced out of our nations cities. And we need to focus on ways to incentivize Affordable Housing. Not just low Income Housing which is obviously needed, but Workforce Housing as well. And we shouldnt lose sight of that. I dont have any solutions to share with you, but it is certainly a growing and troubling problem. And as we go forward, that part of our nation has to be included in whatever is done in Economic Growth. So do you think just cutting the Corporate Tax rate gets us Affordable Housing . Well, no, i dont think it really will have anything to do with Affordable Housing. It would put hopefully more people to work and it would provide more money in peoples paychecks and perhaps they would have more money to buy Workforce Housing, but it wouldnt directly stimulate it. Do you think Affordable Housing is a crisis in america . Im not sure i would call it a crisis. I think theres an awful lot of multifamily housing being constructed today. Meeting a demand for it, but its not meeting that segment of the economy. And people need to understand land is land and its going to cost the same thing regardless of its use almost. And Construction Costs are quite high. And so when people construct assets, multifamily, retail, office buildings, what have you, theyre paying roughly the same cost to construct them. And so its hard to understand why they would then provide low Income Housing or Workforce Housing because it doesnt pencil out for them from an economic point of view. So there does have to be assistance there, we think, whether thats zoning assistance or local tax break assistance or something from the federal. Or expansion of low Income Housing tax credit. Well or keep in mind as tax reform goes forward and rates lower, and im not suggesting we dont want lower rates, but the market for the lowincome tax credit is made more robust and more positive because of what rates are. As rates go down, those will become less valuable. Again, im not suggesting the rates dont come down. Im simply suggesting that if you keep the low Income Housing program as it is, the incentive will naturally be reduced and perhaps a rethinking of that incentive is in order. Well, i think you said something very important there, but im not sure everybody understood it. Basically i may not have understood it, but it was fun saying it. I think you said it technically correct, but the translation is that basically because a lot of people whove invested in Affordable Housing as we have given them incentives for investing in it through the program, as theyre sitting there waiting to see whats going to happen with the Corporate Tax rate or tax rates overall, theyre sitting on capital, actually suppressing the amount of availability investment in Affordable Housing at the same time as we have a crisis. So to me as we ponder this big question, particularly as it relates to this issue of dynamic scoring and whether youre going to get Dynamic Growth from it, i want to make sure everybody clearly understands that housing somehow has lost its way. It used to be in the 60s, 70s, 80s you would say when you want to stimulate the economy, the cheer would go up for housing. But you havent heard that cheer in a long time. Its time for us to focus on the fact that Affordable Housing is a crisis and its certainly a crisis in my state. Its certainly a crisis in seattle. And we need to make sure that were putting the right incentives in place. This is just as important as the rest of the discussion were having here. So thank you, mr. Deboer. If i may just add one thing. If you look at and it was referenced how long we are into the economic recovery and you looked at where forget about affordable or low Income Housing but simply Home Building in general is, it is off where it typically would be at this point in the recovery anyway. And if it was only where it should normally historically be, our gdp would be a point higher, some suggest. And i just throw that out. Thank you. Those solutions thank you. Now, i call that growth. Thank you. Thank you, mr. Chairman. Thank you, mr. Chairman. Ill make my questions quick because i have to go vote before we close that vote out. I was a Small Business owner for 15 to 16 years and i will tell you that the question that seems to be unanswered about senator toomey did a very good job of delineating the importance of from a competitive perspective lower rates equals a better Competitive Position against your folks in other countries. A lower rate also will encourage Economic Activity in a way that can be scored dynamically. The question is can we score dynamically accurately. The fact of the matter theres no question that the dynamic impact will be measurable, which means it will be positive. Another very important factor is the complexity of the code and the amount of time the Small Business owners spend preparing for the dreaded season of march 15th, august 15th, and the time the extensions run out. Can you speak for a few minutes on the Compliance Costs born by u. S. Small businesses under the current code and what that means longterm for our Competitive Position and the ability to grow jobs and make future investments . Well, i can just give you some overviews. Weve looked at the overall complexity of u. S. Code and tried to measure it. Americans spend close to 9 billion hours complying with the u. S. Tax system. The corporate part of that code is the most complex and the most costly. Things like the depreciation schedules among that as i mentioned earlier in my testimony cost u. S. Businesses about 23 billion a year in Compliance Costs. This is money thats not only drained from businesses but its time taken away from entrepreneurs. Instead of writing tax code, theyre trying to comply with or writing computer code, theyre complying with the tax code. This is wasted energy, wasted time, wasted resources that go to well, complying with the irs rather than trying to build a business. And thats simply unfair. Thank you, sir. Mr. Lewis . Thank you for the question. The aicpa has 12 Guiding Principles we believe should be considered as part of any tax reform discussion. Theres many of them but you hit on a couple of them i think are important. The first is equity and fairness on the one side. The other side is simplicity. The thing about it is often one principle in these 12 Guiding Principles has to be compromised at the expense of another to achieve the common objective. Its the tradeoff youre debating now where the rubber hits the road. Kicken siling the competing interests of each of the principles can be difficult. You know, the thing about it is the code will probably never be simple. But, man, it sure could be a lot less complex. Anything you can do along those lines to make it less complex will benefit all businesses in our country. Thank you, sir. Thank you, mr. Chairman. Unlike shane in the movie some time back, i realize that two thirds of the audience dont even know what im talking about, but at least shane never came back. Chairman hatch will come back. I remember 1986 the last time we did tax reform, we have pictures of the gentlemen in charge. When i review the tax proposal at that particular time, farmers in my district, i was then a member of the house, said they were going to take a pretty big hit. Real estate also said listen, this is really not what we think is appropriate. And then the s l business was very worried. Rightly so. They went out of business. One of my best friends went broke who had a cow calf operation. So i listen to those people and i voted no. I was only one of in a several state area that did that. I think the most important thing that happened in that regard is bob dole did not speak to me for six months. That wasnt all bad, but that was probably a very good relationship. I have a theory were all wrapped around the axel with regards to offsets and revenue, so on and so forth. You all have been talking about expensing depreciation, state and local taxes. You havent mentioned that. Im surprised you havent. The deduction of interest for various things. Your Health Insurance so on and so forth. When you do that, i have a red ant theory. Every time you touch something every time you touch something thats in the tax code its been there on purpose even though its nine feet tall and we have to do something. But i would prefer to see us do the big things. Not worry so much about the dynamic scoring although that is a big issue for many. Just from my personal preference. Lower the corporate rate, we have to do that. The business rate. I would prefer we call it a business rate. And also go from 7 to 3 in the bracket. Same with the middle class. I would fix amt. I would do something with estate tax. Theres one more that im missing. But oh. Repatriation, but obviously if you lower that rate, that supposedly takes care of that. And call it good. And not go into all these other details. I know some members in the house do not buy that argument at all, but it sure would save us a lot of time. And all these other things ive mentioned have different interests coming in and its the red ant theory based on experience when a senator from kansas tried to give a speech when he was standing on a hill of red ants. That didnt work out well. They crawl up your legs and bite you pretty good. How do you feel about that . More especially with the 1986 example. Anybody want to take that on . And the chairman is back and i will yield to him, but ill listen. But not for very long because i have to go vote. Very quickly. The 86 act got a lot of mythology over the years. We went back and modeled the effects of the 86 act. We found it raised the cost of capital mainly by shifting the tax burden onto businesses at the expense of giving tax cuts to individuals. It had a modest effect on actually slowing Economic Growth, not boosting growth well, and four years later our friends across the aisle simply raised taxes and there was a lot of blood on the ground. And i dont see the need for doing that again. So i hope we can stick to the big items and i know the distinguished chairman is back. Thank you. Thanks, senator. Senator cardon. Thank you, mr. Chairman. I thank all the witnesses. Mr. Deboer, im sorry i wasnt here when you were talking about incentives for Energy Efficiency. Were going to work to strongly preserve those issues. I want to talk about the pass throughs as to what is a fair way to handle this. Passthrough companies do not have to pay double taxation, that is true. However, when you look at global competition, they are still paying a much higher rate than their global competitors because of the marginal tax rates in the United States. And the overwhelming majority of american businesses do not pay the c rate. I believe it amounts to 5 of the companies, somewhere in that level. So as we look for reform in order to make our business tax structure more competitive, thats one of our goals for growth. What do we do about making sure we dont have the unintended consequences of hurting those companies that have the current status on passthroughs . How do we protect them if we dont do c rate, how do you deal with that issue . Senator cardin, ill take the first swing at that. And we do appreciate your work on Energy Efficiency for buildings. Its a very important topic Going Forward and hopefully it can be included. Passthroughs certainly for our industry, very, very few real estate businesses are operated in corporate format. Almost all our llcs, publicly traded or privately traded reits or partnerships, in fact, real estate consists of almost half of all partnerships in america. So were highly concerned and focused on how we can achieve a lower tax rate for those entities. Right now theres a 5 spread between corporate and the ordinary rate. We see no reason if the corporate rate is coming down that a comparable spread shouldnt be the result of tax reform this time. Or you are going to put passthrough entities, which really drive the economy in many ways in the United States, at a disadvantage not only globally but visavis their competitors in the corporate world here. So we want to work very, very much. I mentioned to senator wyden that we share the concern about potential shifting of what is servicerelated income in a passthrough into that lower bucket and weve worked very, very hard internally to try to come up with a way to deal with that. I thank you for that response. I think we all have to keep our eyes on this issue. It could get lost in the proposals being made. I agree with the point that you made particularly in the real estate sector. The passthroughs are critically important. I know in my statement. I know that the senator talked about being fiscally responsible. One of the worst things we could do is add to the deficit. Deficit finance tax reform. That would be an anchor on our Economic Growth. I know he talked about how we score and i hope we would use the joint tax traditional scoring. But i also raised another issue, one of the proposals out there has been talk about the timing of the 401 k s. That does little to reduce that scores as a revenue gainer even though over the longterm its neutral. And i think were going to have to be very careful, mr. Chairman, as we look at these issues. Theres also, of course, the Retirement Security issue. Very important. Make sure we not only maintain but strengthen those needs. I want to get to the fundamental point and that is if you really want to deal with competitive rates, if thats your issue on the business side of tax reform, i think its impossible to do unless you bring different revenues into the equation. Every industrial nation in the world except the United States uses consumption revenues in addition to income revenues. Were the only country that does not. How do we expect to have competitive Business Rates if we dont harmonize with the International Community as to the source of our revenues . So ive introduced a progressive consumption tax because one of my major objectives is to make sure that the tax code is at least is fair to the current code as it relates to middle income families and theres a way of doing it. But how do you get to competitive rates globally with industrial nations if we continue to be stubborn and use only income revenues to the exclusion of consumption revenues when the rest of the world is doing that . So i think youre left with a lot of bad choices, right . You could run much bigger deficits as a way to get the rate down, but thats not going to be good in the long run. I end up mentally in the same place where you are. If you want to get down to the rates, you know, below the high 20s, if you want to get lower on the rate youll need to go shopping for a new Revenue Source. The destinationbased cash flow tax was a species of consumption tax that had some of those attributes, bring in more revenue. Seems to have gone by the wayside. Theres more traditional value added taxes you could do. Im a fan of a carbon tax that could encourage clean energy. Help combat pollution. Would be a strategy. Then of course another strategy is also to look to shareholders. If youre reducing Corporate Taxes, you should keep in mind that one of the beneficiaries are going to be taxable shareholders. And its perfectly reasonable to look to them to think about ways of increasing taxes on shareholders to partly offset or fully offset the gain that they get. Ill give you credit for the progressive tax reform plan that you put forward. We modeled your plan and found it to be exceptionally progrowth. Not only i think progrowth but i think it was revenue positive. So it is possible, and you used offset of a valueadded tax to lower the Corporate Tax rate to at least 17 . And that had a pretty powerful effect on boosting Economic Growth with that lower corporate rate. Yeah. I appreciate that. My objective is that since america with industrial nations, is near the bottom, we should have a competitive advantage and not disadvantage. Nor brown. Thank you, mr. Chairman. Thank you to all four witnesses. Good to see all of you. Weve heard a lot of talk about whats good for large u. S. Companies. Weve heard frankly far too much talk about whats good for corporations and not enough talk about whats best for American Workers. And its American Workers who have been hurt most by our tax policy and our trade policy in the last 20 years. We need to encourage companies to invest in their greatest asset, the american worker. We do it with a carrot and a stick. This month along with senator durbin i introduced a patriot employer tax credit act. Simply says businesses that pay good wages of 15 an hour and provide benefit s and dont outsource their jobs and buy america, basically, that those companies would get a tax cut. Conversely, when corporations pay Poverty Level wages, someone has to pick up the tab. Its american taxpayers. Food stamps, housing vouchers, paying for medicaid, paying earned income tax credit. Taxpayers pick that up. So if youre a Huge Corporation under our proposal and you choose to pay your workers so little that they are disproportionately forced onto government assistance, you need to reimburse american taxpayers. That is our corporate free loader act. The debate over tax reform is a chance for us to reconsider how we have been told to think about this economy. You dont build the economy by doing a tax cut for corporations and hope it trickles down. We know from comparing the 90s to the next decade, that simply doesnt work. You build the economy by e investing in the middle class and build the economy outward. So doctor, offer suggestions for other ways we safeguard against Corporate Tax reform that overwhelmingly helps Corporate America at the expense of American Workers. Sure. I think you want to look through the lens of if youre doing Business Tax Reforms and business tax cuts, do they encourage more investment here . Because thats the one channel thats going to primarily that will have significant benefit for workers. And you want to deemphasize the cuts that are going to accrue to shareholders and not provide that competitive advantage. I think the other is you want to think about other aspects, you know, beyond the business tax code. Theres been a lot of discussion about worker credits, expanding the eitc, the earned income tax credit, things like that that could provide support and encouragement to a broader array of workers, boost take home pay. And i think thats very worthy to consider as part of an overall tax reform package. Thank you. Thank you, mr. Chairman. Thank you. Senator heller. Thank you. Thanks for holding this hearing and to the Ranking Member also. To those on the panel, thank you very much for taking time being with us today. For too long americas Small Businesses and companies have been at a competitive disadvantage due to our outdated tax cold. Our taxes makes it difficult for them to compete. Another nevadan wrote me and said we need to fix our tax code in order to attract businesses to our country, drive up wages for our American Workers. Our current tax code drags down the economy, prevents job creators from staying and hiring at home. Just last month i hosted treasury secretary mnuchin in a tax reform round table in my home state of nevada. There we met with some of the top job creators. Time and time again we heard the same thing. Nevada needs lower tax rates on its businesses. Lower rates means a faster growing economy, increased international competitiveness. Lower rates also mean more jobs, better jobs, and higher wages. All of which the middle class desperately needs right now. Just last week it was announced that nevada leads the nation in private job sector job growth at 3. 6 . Imagine what our state and for that matter the country if we unleashed and delivered on tax relief. So after eight years of historically low growth, under the Previous Administration its time to get our economy back on track, help our workers and Small Businesses win on the international playing field. I look forward to working with all my colleagues here as we move forward on individual tax and business tax relief. I want to speak real briefly here on Corporate Tax rate and its impact on labor. Mr. Hodge, i missed your opening testimony, but i assume you wanted to talk about this. The empirical evidence showed workers bear a sizable percentage, at least 45 of the Corporate Tax burden. Is that an accurate comment . Yes. In fact, we have a paper coming out in the next week or so surveying the economic literature, and it shows that a substantial portion of the Corporate Tax does fall on workers in some fashion. Roughly about half. In some cases, it can be as much as 100 . For instance, the factory i work for moves from dublin, ohio, to dublin, ireland, to take advantage of the irish 12. 5 Corporate Tax rate, ive borne 100 of that differential between the rates. So Corporate Taxation can have an influence on hiring and wages and the economic literature shows that pretty clearly. I have a table here that comes from your organization and a quote on it shows a 20 Corporate Tax rate would lift after tax incomes by 3. 5 . Do you stand behind that . Yes. Our model shows that. Its because the combination of the Economic Growth and increase in productivity will ultimately lift both wages and aftertax income. Your model also estimates that the combination of a 20 Corporate Tax rate and full expensing would boost aftertax income by an average of 5. 2 . Do you still stand behind that . Absolutely. Can you expand on any of this information . And what were trying to do is get to individual tax relief. How can we boost. An individuals income, takehome income by perhaps a tax policy that works for all americans. And starting here with these numbers you show in this model. What we want to do is have policies that lift wages, lift productivity, and ultimately lift aftertax incomes. Real Living Standards. And the kind of tax reform weve outlined here with the lower Corporate Tax rate and full expensing will do that. And i think thats the strongest approach to making People Better off. What would the average household prefer . A tax cut . Or a raise in income . I think most people want a tax cut. They dont really see the connection between Corporate Tax reform and the improvement in their daily lives. And we need to convince them that ultimately Corporate Tax reform will boost their standard of living in the longterm. Its just a hard sell. Mr. Hodge, thank you. Mr. Chairman, thank you for my time. Thank you, senator. Senator thune. Thank you, mr. Chairman. I want to thank each of our witnesses for being here this morning. I think we have a historic opportunity with tax reform to reform our antiquated tax code. To solve the concerns i continually hear. And last week we had the opportunity to focus on individual aspects of tax reform and the importance of making sure it provides tax relief for middle income taxpayers. Today we have an opportunity to look at the business tax components of this effort as well. Theres significant overlap i think between the two hearings. Because we can if we can streamline and modernize our outdated tax code on the business side, it will enable businesses small and large to reinvest, ek pand, create new jobs and wages. Through the businesses that employ them. And for many through the Small Businesses and farms and ranches that they also own. This is a strong panel. I want to get into questions if i can here. Ill begin with you mr. Hodge. In your testimony you make an important point that Corporate Tax reform may not put people in cash in peoples pockets in the same ways as cuts and individual rates but that it can have a powerful effect on lifting aftertax incomes and Living Standards. I wonder if you could elaborate on tax reform and relief for middle class workers especially if we assume a reduction in the Corporate Tax rate would be accompanied by reductions in the individual tax rates that affect working individuals in this country. When economists study which taxes were more harmful for growth they found the Corporate Income tax is the most harmful tax for Economic Growth. And in large measure because capital is the most mobile factor in the economy. And so when we lower the tax on capital, we find that the economy is much more productive. People have better tools to work with and their standards of living rise. That ought to be the primary goal of tax reform to lift peoples real standard of living. You can try to do it through just cutting their income taxes. But i think the right kind of Business Tax Reform does the most to lift peoples aftertax incomes and ultimately their standard of living. Thank you. Mr. Deboer, your testimony you make the case against the immediate expensing of reals tate given the unique nature of these assets. Your testimony also notes the recent m. I. T. Study that suggests the Recovery Periods for commercial reals tate in with the tax code are out of sync to with the economic recover period of such property. Since were trying to build a tax code that will promote sustained Economic Growth would shortening the Recovery Period for commercial buildings from 39 years and rental housing from 27 1 2 years to immediate expensing . Yes. We strongly believe that and i dont disagree at all with whats been said about the power of expensing. Im simply saying that sustainability in our industry, it will incent our industry to build. But we see no benefit to building buildings ahead of the demand in the economy. It puts stress on local markets. It puts stress on lenders Balance Sheets. Ultimately its not good for the longterm growth of the economy. And so we are more from our industry more interested in Economic Life of assets. Real e estate, as m. I. T. Has studied, real estates proper Economic Life is closer to 20 years than 39 or 27 1 2 years. By the way, there is some misunderstanding about real estate. Why would you dpreesht a building that people see standing more many, many years, and these buildings are capital intensive. Its not just that they fall down. People invest money into these buildings to keep them a competitive part of our economy. And allow these to accommodate business as it changes over time. I dont think anyone here would want to move into an apartment or work in an office that hasnt been rehabbed and updated for 30 or 40 years. Thats what this depreciation is about. Its both physical wear and tear and economic obsolescence. So, yes, i agree with what youre saying. You suggest, i think, a 20year Recovery Period. Would you apply that to both residential and nonresidential property . I would. But i would state an argument based on what senator cantwell suggested earlier, you may want to have a different life for residential versus nonresidential which is in current law today. And lastly, should we consider expanding the 15year Recovery Period that applies to improvements to certain types of Real Property and or shorten that period as well . Well, if tax reform adopts an expensing policy for all assets other than longer lived and thats what i would define it like a structure, then i would say leasehold improvements to accommodate the Business Needs should be expensed like any other business investment. If thats the direction that congress goes. Thank you. Thank you, mr. Chairman. Thank you. Senator wyden. Thank you very much, mr. Chairman. Let me start with you, doctor. Theres a lot of discussion about the president s proposal to create a special passthrough business income rate which strikes me as a giant tax giveaway for the top 1 masquerading under the guise of helping Small Businesses. I was trying to look through your various charts. We have a history in this committee of doing a lot of charts. How much of the benefit goes to the top 1 in the special pass through . I dont have the chart right in front of me, but as the result as you saw is if you do a maximum rate like that, so by definition all the benefit has to go to those with qualifying income who would be in a higher tax bracket, so the overwhelming majority of it goes to the top 20 . And a large amount to the top 1 . Okay. And the administration has said although it has been months since they said they were going to get this corrected, i asked secretary mnuchin, theyve never done anything to correct it. I just would be curious what you think of this argument that there are ways to ensure unscrupulous individuals arent going to turn this tax break into a massive loophole. So its a race. If you create a very large tax benefits to being declaring your income as a certain favored form, youre going to create a lot of people all along the scrupulousness dimension. Im a scrupulous guy, but i would llc myself if it gave the right incentives and didnt ruin my political viability. And to people who bend the rules and break the rules. If youre talking about a tax gap thats, you know, 30something for ordinary income and 15 for passthroughs, that is a giant incentives for people to figure out how to get around it. The irs legislators will try to write rules to limit that. But my view of this is you should view it as an ongoing iterative game and the folks out there in the Business World are looking for ways to find to get the lower rate are going the keep working on that. Well, youre right. And of course they have, you know, vast arrays of talent to help them find those kind of holes. Your point is especially important. Mr. Hodge, lets talk a little bit about the history on retroactive and temporary tax cuts. You all have done a lot of research on this. We talked to you on our bills in 2001 and 2003 there were the bush tax cuts, the advocate said well this is going to be a panacea of Economic Growth. And what we saw was really a mountain of debt and a windfall for the affluent. There are some in congress who want to bring back temporary dip finance tax cuts and theyre making pretty much the same kind of grandiose promises. And my sense is and you all have done a lot of work on this, that weve seen this movie before. You all have done a lot on this topic lately demonstrating what i think really ought to be called the sugar high effect where you get a small bump in the shortterm followed by a longer period of lagging Economic Growth. So if you would, tell me in your view based on the work that yall are doing there, what happens when you go after another temporary, you know, tax cut . And i think your Research Shows most of the temporary tax cut goes to the corporate shareholder. Give us your thoughts on that. Sure. Temporary tax cut can be sort of a tax equivalent of cash for clunkers where it can draw activity from the future to the present and ultimately future activity declines below baseline. We analyzed lowering the Corporate Tax rate for a short period of time, say, even a tenyear window. And we found that it did have a boost in Economic Growth in the shortterm, but since it pulled activity from the future, longterm Economic Activity declined below baseline. So it ultimately slowed growth at the expense of having growth in the near term. And your colleagues do seem to suggest that most of the benefit from these temporary cuts goes to the corporate shareholders disproportionate number of whom are wealthy. In part because the again, youre pulling activity forward that can have a temporary boost in corporate profits. And that in the shortterm will flow to shareholders and owners of capital rather than workers. I want to continue this discussion because it seems to me the debt financed tax cuts particularly temporary ones is a prescription for more trouble in the American Economy in the longterm. Thats why over the years what i tried to do most recently with a member of the president s cabinet was to try to break that kind of cycle. So we appreciate the scholarship in your answers. Thank you, mr. Chairman. Thank you. Senator warner. Thank you, mr. Chairman. Appreciate the panel. I want to go back to the opening comments where he i think acknowledged and i will acknowledge as well the United States corporate rates are some of the highest in the world. The effective rates arent as high. I guess id like for the whole panel if theres any disagreement at least on the factual basis i work on is that america has statutorily the second highest rate. All of our competitive countries that we compete against all who have substantially lower corporate rates, all have a different Revenue Source structure than we do. There is you know, when we look at particularly some of our european competitors who have cut rates and continue to cut rates, the way they make up for that is they have a vat or a gst. And when you actually compare within that same kind of corporate comparison, apples to apples and you look at where america ranks in terms of its total tax burden, state, local and federal as a percent of our gdp, we actually rank 31st out of 34. So remarkably the countries that have much lower corporate rates have actually raised a much greater share of their gdp in taxes, a much higher tax burden. Does anyone want to counter or contradict that . I dont want to go down the whole list here, but i would think its important when were thinking about how we lower corporate rates which i think makes sense that youve got to pay for it. And one of the things im going to start with dr. Marron. I see today because were not part of this process yet in the wall street journal that were talking about a the majority is talking about a 1. 5 trillion tax cut. The question i have when youre talking about a 1. 5 trillion tax cut in a country thats already got 20 trillion in accumulated debt created by both parties for a long time, when you also have based upon some of the growth assumptions, some of the growth assumptions is a 3 growth rate while cbo has 1. 8 growth rate. That just the growth rate differential creates 3 trillion of potentially fictional revenue. If youve got 3 trillion of fictional revenue there and 1. 5 trillion of unpaid tax cuts, adding that 4. 5 at a minimum of additional deficit financed tax cuts, dr. Marron, what effect do you think that would have on the economy . Right. So as you know, as you look at cbos forecast were on to add 10 trillion to the debt over the next ten years. Adding another trillion or trillion and a half would make that a nor severe challenge. Debt is rising faster than the economy at the moment. Despite the fact were well into an economic recovery, Unemployment Rate is below 5 . You know, in normal times this would be a period in which you think about bringing deficits down. Strengthening the fiscal Balance Sheet so well be well positioned for challenges in the future. If you expand the deficits now, with an unfinanced tax cut or only partly financed tax cuts, you have the traditional problems the money has to come from somewhere. Its about the resources underlying that. The resources have to come from somewhere. It would either crowd out private investment or attract a lot of overseas investment, what it would mean is more of economic output in the United States in the future would be go to foreigners rather than americans. So either way you slice that, you end up in a situation where theres a significant economic drag from substantial increase in deficits. I would point out again to the majority is back in 2013 when we thought about starting this exercise again, my republican colleagues started with a unified letter saying the tax form needs to be revenue neutral. And it just its curious to me now when were talking about even before we get to dynamic scoring somehow baking into a budget resolution the allowance for 1. 5 trillion of unpaid tax cuts, the growth assumption numbers. You add on some of the scoring issues. And when you think about one of the concerns i have and im not going to get to my other question is that you the challenge we have as well the aggregate amount of debt, if this was starting with a clean Balance Sheet, itd be problematic. But it is exponentially more problematic when you think about an era where i think most economists assume were going to see rising level of Interest Rates so that interest Debt Service Payments alone will squeeze out our countrys ability to make other investments. Well have an Entitlement Program and an army and not much else. Comments . Weve been fortunate in that the dramatic increase in debt weve seen in the last decade or so has been accompanied by incredibly low Interest Rates. So the immediate interest burden is relatively small or normal by historical standards. But if as cbo anticipates, Interest Rates go back up to what we think of what is a more normal level, you see a increase over time as our debt and last comment. My times up. But roughly and if anybody would counter this. For every 100 basis point increase with the debt weve got now arent we talking roughly 160 billion a year of Additional Debt service per hundred basis point increase in Interest Rates roughly . Roughly. Yeah. Once it rolls over. 15 trillion in outstanding held debt and you multiply that and get that number. Senator mccaskill. Thank you, mr. Chairman. Although passthrough businesses represent 95 of the businesses, the income is not so evenly distributed among the business owners. More than half of all passthrough income in the United States goes to the top 1 of all taxpayers. So the data would suggest that a simple rate cut for passthroughs is a huge tax cut to the 1 . Theres no question about that. It seems this would be an opportunity for more loopholes. You know, mr. Marron, your testimony warned us that the changes to the passthrough rates could create incentives for gaming the tax system. Could you speak to that . I appreciate the fact that senator warner mentioned that we are the only developed nation that has no kind of consumption tax. Were it. Were the only one. If were going to follow them down the path of a lower rate not just for corporate but also for pass through, we are asking for a real hit on prosperity in this country in terms of debt. And i would like you to speak to that. And i particularly would like you to speak to i remember the days when kansas was going to be a mecca for job creation. They did this massive tax cut and it was going to rain prosperity and wage increase. Could you explain how things went so awry in kansas because of the pressures they felt in terms of funding Public Education and all the other needs they had in kansas . And frankly it has been an unmitigated disaster in kansas. Great. So thank you. I guess ill do first first. Right. So as you describe, right, if we go down the path of creating a new special passthrough business income tax rate thats lower than ordinary rates, just by construction that is systemically going to high income folks. Both because the business income is concentrated at the high end and that maximum rate is going to help those people in higher tax brackets. So mechanically its going have that effect of focusing on the high end. And it creates this loophole concern that theyll qualify for that lower rate by restructuring their activities. What we saw in restructured their activities to move to passthrough entities. Why weve seen explosive growth in pass throughs in the last decade. Absolutely. There are a lot of good things about pass throughs. I have nothing against them. The challenge is you dont want the tax code to overreward them. Right. The situation we saw in kansas was so extreme that a lot of otherwise normal people and other high income but otherwise normal people would solely qualify for that not create new Economic Activity. Then the state had less revenue, and there was no benefit from that. And so what weve seen is the state is now walking back from that. Thats a nonsensical approach to taxing passthroughs at the state level. The larger point that both of you and senator warner raised is how our tax system compares to the rest of the world. Now, we do have states that have retail sales taxes. We do a little layer of consumption tax across the states, but we are as you described, very different from the rest of the world. The rest of the developed world has significant consumption taxes, value added tax. Its a tax you know how to administer. Its an efficient way to raise revenue. People worry those taxes are regre regressive. The way the rest of the world deals with that is they have substantial value added taxes and then they spend some of the money in such a way it offsets the regressivity. Lets talk about complexity for a minute. How much and any of you can address this. How much how much more prosperity would we have . How much more Economic Activity would we have if we could just agree on how to define a child and how to define a Small Business in the tax code . You know, it is unbelievable how complicated it is for Small Businesses because theres not a consistency within the code in terms of what a Small Business actually is. I cant imagine the productivity that is lost in terms of tax decisions that are being made just because of that added layer of complexity. Thats a great question. As i mentioned just a moment ago, the tax code will probably never be simple. We live in a complicated world. But it sure should be a lot less complex. The message you just sent about how we define a child or how we do some of these other things, i think you have to look back historically at how we got there. We have a situation where wellmeaning legislators over time for one reason or another put something in and we simply never take anything out. So the question is how do we end up with so many retirement plans. Thats confusing to the average american taxpayer. So i think thats why this opportunity today for tax reform is so wonderful. Were 31 next month. 31 years since the last time we did this. This is a time to look at it and clean it up. American taxpayers need more time to worry about running their businesses and less time about how to comply with the code. Do you think its realistic that congress can do that part of it well in 60 days . Well come on. You know, lets tell the truth here. Can we actually provide permanency, stability, predictability, and less complexity out of this congressional body in 60 days . I will say this. The effort for tax reform has been happening for a long time. I harken back to chairman camps hr1 in 2014. There has been a lot of work thats gone into that effort and got us to this point. Whether or not youre close enough to the finish line, i think thats something that youll have to decide. But in terms of effort, you know, three or four years of constant talking and going back and forth, i know, is welcomed relief for taxpayers. I wish you well in that process. Thank you. Thank you, senator. Senator . Thank you very much, mr. Chairman. First let me say i support tax reform that puts money in the pockets of hardworking people in michigan and across the country. I want to make sure the tax code incentivizes american jobs. And when we look at what we need to be doing, its also important that we are critically analyzing subsidies that dont make any sense anymore. And at the top of the list for me are the subsidies provided to the top five Big Oil Companies through the tax code. Those may have made sense 100 years ago when they were created. They make absolutely no sense now. These in many cases these tax breaks are really ridiculous. Saying Oil Companies are treated as manufacturers for purposes of the domestic manufacturing deduction, for example. Oil companies have enjoyed billions of dollars in special tax breaks totaling 470 billion and while receiving those tax benefits they have enormous profits. To keep the tax incentives, they then turn around, the top five companies, and spend a lot of money on lobby dog that, and im sure theyre doing that right now. So my question is and dr. Marron i would say to you, does the evidence show that these Oil Company Subsidies provide benefits to consumers that would warrant keeping them in place as we do tax reform . I would say i havent seen evidence that suggests that. Thank you. What should we be doing when were talking about effective ways to target tax dollars to create american jobs and put more money back in the pockets of the majority of americans . On the business side, i think you want to encourage investment in the United States. And you want to encourage the kind of investment that has the most benefits. So things Like Research and development can have spillover benefits to the rest of the economy. And you would like to encourage that. You know, basically capital accumulation, equipment and whatnot in the United States makes workers more productive. And over time i know weve had issues with this in recent years, but over time the evidence is still very strong that if workers have more and Better Capital to work with, that eventually shows up in their wages, salaries, and benefits. Well, my concern as we are debating right now and various proposals weve seen would do away with manufacturing incentives, cut Interest Deductibility, maybe cutting Cost Recovery. And using the money simply to reduce rates. Thats one of the big debates right now. My concern is that means youre incentivizing new manufacturing facility in michigan the same way you would be if it was in mumbai or incentivizing an american job the same way youd be incentivizing a job being created in china. And i think thats a big problem as were having this debate right now. And so how would reducing the tax incentives that encourage companies to invest here impact their decision as to whether they would invest and create jobs in the United States . This goes a little bit back to senator roberts discussion. I dont know if you were here about the red ant problem. Right . So there are a lot of moving parts that effect Business Decisions on where and how to invest. The challenge for you this is why i said in opening remarks that i feel your pain. Its hard to balance all those. The rate matters, the treatment of depreciation and expensing matter, e the treatment of deductibility matters, and the things focused on particular Industries Like manufacturing all matter. And the challenge is how do you put together a package of those that puts us on a trajectory of more growth . And i think the answer is that there are good arguments for bringing the top rate down because its so out of line with the rest of the world. There are good arguments for making some amount of depreciation even more favorable and treating investment in the u. S. More favorable, but then youre left with the situation of how do you pay for that. Limiting Interest Deductibility is the first thing that comes to mind. Then we get into the discussion about other potential Revenue Sources. But when were looking at things like cutting Interest Deductibility, were actually seeing the possibility of raising taxes on Small Business by doing that. And by others that are actually growing and creating jobs in our country. Yes. One of the big challenges is there are some portions of our economy particularly Small Business where weve already given them expensing. So they already have full expensing for their investments. A tax reform proposal that would move toward expensing but limit e Interest Deductibility wont help them 37. This is one of the corners you find ourself painted into, that while a move towards expensing deductibility could be attractive for many larger businesses and could encourage more investment in the United States, it doesnt do anything for the Small Businesses that already get to take advantage of expensing. Thank you. Mr. Chairman, i hope we can come together and do something that actually does more than a trickle down tax cut for the top 1 or that would tackle the subsidies that dont make sense in the tax code and reinvest those in the incentives that are going to create jobs in america. Thank you. Its been a particularly good panel. Ive really enjoyed each and every one of you and your comments. Ive heard from my colleagues across the isle, the parade of horrible s that will ensue if Congress Enacts a proposal to provide a lower business income tax rate for passthrough entities. That it will only benefit the rich and that it will according to doctor marron inspire tax avoidance. Which it may do. And yet two of our Witnesses Today have come to the table with what i consider to be thoughtful approaches on how to address the concerns, the compensation or wage income that is taxed at ordinary income tax rates will be inappropriately recharacterized as business income subject to the preferential income tax rate. Id like to have mr. Lewis and then mr. Deboer comment on their proposals. Whether the concerns raised are legitimate but perhaps overblown and provide us with thoughts on administrative issues associated with your proposals. E if you would. Thank you for the question, senator. The reality, and i think the panel has indicated this today, so much of our business is conducted through passthrough form in this country. And were competing globally with companies that are structured in different ways. One thing you need to keep in mind is that a passthrough entity has the same kind of demands that a C Corporation has. They have to have the investment, tangible and intangible property. Real estate, technology, intellectual property and human capital. All businesses have uncertainty and risk and there should be a consistency and fair treatment of all. Now to the point about the gamesmanship and the potential here. Theres a lot of different issues that entrepreneurs make that they consider when they make the decision as to what entity to form. Like income tax is important, and i dont want to diminish that. But thats only one of about a dozen. They also consider implications of losing ones tax benefits. Like fringe benefits. Losing unemployment coverage. Covering ones own Health Insurance now because they of formed their own business. And then also the cost of managing a business. Malpractice insurance. Training, technology, software. This is not just a flip the switch and walk across the street type proposal. Thats why we have proposed an antiabusetype regime, because i think youre right. And the proposal weve come up with is codifying the standards administered now just through the courts. If we go further, some of the proposals hr1 from chairman camp for instance. And come up with some sort of a i think some have called it a rough justice. A split between earnings as an employee versus earnings from investment. Make that a safe harbor so that its more administerable. I think you want to focus on create some sort of a rule into the law to make sure that we try to get at the gamesmanship but then also provide an easily administered provision for the irs. Thank you. Couple of maybe Bigger Picture points, first, if i may, mr. Chairman. Senator stabenow talked about how we can help americans and american businesses. I think the first thing to keep in mind is not to do any harm to them. And some of the proposals particularly on the revenue offset side dramatically impact domesticallybased Capital Intensive Industries that are conducted in passthrough format. And thats why were so interested in this passthrough rate. I understand senator mccaskill on the income to the top 1 , id like to look at that data. I think that may include compensation for services to the entity which we are very, very interested as mr. Lewis is in making sure that that income does not come down and be taxed at the new at a new lower rate. We have done a significant amount of work here to try and look at the relationship between partners in a passthrough entity. And how much service is provided to the entity itself. Our proposal at first blush is a little bit complicated. Were starting to reach out to staff and flesh it out, and i guess for purposes of this hearing, i simply want to repeat what i said earlier in my opening statement. We are pledged to work with the committee, senator wyden, senator mccaskill and others, to make sure that true compensation to the entity does not theres no gamesmanship and comes down. The fact of the matter is these passthrough entities do earn income and that income should the income, whether its from rents in the real estate business or Development Fees or what have you, that income should be taxed lower if, in fact, Corporate Taxes are going to come down. One other item that i would say, these passthrough entities are the vehicle of choice for startup businesses. Theyre the vehicle of choice for minorityowned businesses, and this is how most americans who are interested in using their business acumen to develop jobs and expand our economy, this is the format that they do. So encouraging activity in this area is very much commendable and thank you for looking at this. Its a complicated issue but one that i have no doubt you and your staff can tackle. Thanks to all four of you. This has been a really interesting hearing. I want to thank you all for your attendance and for your contributions here today. As i noted last week, this committee suppressed the tax reform would be methodical and inclusive. That is why hearings like the one we have just had today will be critically important as we continue to evaluate the tax code and continue with marking up a bill that will enact meaningful, durable and efficient reforms. My strong preference is that our evaluations, determinations and the final language of any bill we come up with will be bipartisan, and i intend to work towards that end. That means we have a lot of work to do. Im optimistic we can get it done. For any of my colleagues who have written questions for the record, i ask that you submit them by the close of business on september 28th. With that, again, i want to thank all four of you for being here and for your excellent testimony, and well recess until further notice. President trump tweeting this morning. This weekend on American History tv on cspan3, saturday at 8 00 p. M. Eastern on lectures in history, Temple University professor Andrew Eisenberg on the Environmental Movement in the 1970s. And what i want to argue here is that the noble savage environmentalist was a kind of product that was sold to American Consumers just like big macs or cars. Then at 10 30 p. M. , father and daughter pilots yon pen any, former United Airlines captain, and health personny, a former d. C. Air National Guard f16 pilot, talk about their experiences during 9 11. And we take off and we head northeast into a serene and peaceful and silent sky. Theres no one airborne. We head out to the northwest and we never find anything. Sass and i were not heroes that day. The passengers on flight 93 were the heroes. On sunday at 6 00 p. M. Eastern on american artifacts, tour Harriet Tubman underground railroad visitor center. That was a horrific physical injury for a Young Harriet tubm tubman, but it e opened up a world for her. She mad amazing visions and direct connection to gd. She heard voices. She heard people singing. She saw these Amazing Things and had these very vivid dreams. So it was terrible on the physical side but absolutely amazing for her faith. Then at 7 00 on oral histories, her series on photojournalism continues with eric draper. That image that shows dan bartlett, the communications director, pointing to the ctv, that was the first time we started seeing the replay of the second tower getting hit. American history tv all weekend every weekend only on cspan3. Congress is back in session next week and faces several deadlines at the end of the month. The senate is planning to vote on the latest fwoil bill to repe Affordable Care act. The house and senate are also expected to take up legislation, reauthorizing funding for Childrens Health insurance program. And we also expect congress to take up the federal aviation programs and policy bill. Both the Childrens Health insurance and federal aviation programs laws expire at the end of the month. When congress is back in session, the house is live on cspan and the senate is live on cspan2. Its that time of year to announce our 2018 student cam video documentary competition. Help us spread the word to middle school and High School Students and their teachers. This years theme is the constitution and you. And were asking students to choose a provision of the u. S. Constitution and create a video illustrating why it is important. Our competition is open to all middle school and High School Students, grades six through 12. Students can work alone or in a group of up to three and produce a five to seven minute documentary on the provision selected. Include some cspan programming and also explore opposing opinionses. 100,000 will be awarded in cash prizes. Grand prize of 5,000 will go to the student or team with the best overall entry. The deadline is january 18th, 2018 so, mark your calendars and help us spread the word to student filmmakers. For more information, go to our web site, studentcam. Org. The house energy and commerce subcommittee on health recently held a hearing on the food and drug administrations regulation of overthecounter drugs. At the hearing, well hear from dr. Janet woodcock from the drug evaluation and research and also representatives from the pharmaceutical industry. To order. I recognize for five minutes for opening statement. Todays hearing marks the Health Subcommittees first public discussion on modernizing the Current System at the United States
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