Transcripts For CSPAN3 Key Capitol Hill Hearings 20171114

Regulations. Yeah, were going to need lots of regs, based on these proposals, correct . Is that correct, mr. Barthold, theres going to be a lot of regulations with these proposals . Presumably some things go away but there would have to be new notices and new regses to effectuate policies in the mark. In the areas you have mentioned, the new passthrough regime and the shift to a territorial regime with the base erosion protections. And what about deductions. Those are pretty complex also. Theres going to be regs there, right . Actually, theres a number of regulations related to interest deductions now. So that might be a net wash. A net wash. So if you and i were having a friendly beer in a bar, and i wanted to lay a bet with you on whether or not there would be a new book or whether or not we would take away a book, im willing to bet theres a new book. Based on this proposal. Would you take that bet against me . Well, if i may be a little light in answer, the publishers tend to like to leave the footnotes with the old prior law, so that i would agree with you that there would almost certainly be a new book. So were not going to simplify here. Were going to add a book what happened to the postcard . This is not simplification. This is incredibly complex. Is there anything in this proposal that will touch all the various regulations and laws that allow very wealthy people to avoid this state tax under trust law . Did anybody touch any of that . All of the crumby trusts, the dynasty trusts, all the ways that trust lawyers, frankly, gary cohn has publicly said a number of times that people who have 10 million generally have trust lawyers, and theyre not worried about estate taxes. Do we touch any of that in this bill . As i noted in the walkthrough, the only change in the estate tax is the doubling of the present law exemption. So nothing that defines the base changes. The individual income tax rates have conforming rates on for trust income. But, again, the definitions of income or qualifying trusts are not changed. And i want to make sure on my next rounds, i want to talk about the passthrough. Understanding that the passthrough is about 95 of the businesses in america, correct . In terms of total entities, thats probably correct. I would have to doublecheck. But definitely a very, very high percentage. So 95 of the businesses in america are going to be looking at the new passthrough provisions as their tax planning guide. They certainly like to look at it to see if they could take advantage of the if they would qualify for the 17. 4 deduction. And its my understanding, and correct me if i am wrong, but at this point in time, jct and the finance staff dont even agree on how thats going to be calculated, based on what w 2 . Whether there is aggregation or not aggregation, whether its an individual w2 or a businesswide w2. Is it my understanding that right at this moment theres not even agreement between the finance staff and jct on how thats going to work . The Ranking Member widen asked an initial question, and my friend ryan i mean, sarah, disagreed with the analysis that i presented. Okay. So im a little panicky that were going to have tax planning for 95 of businesses in america, and you guys cant even decide how it works together . And agree on it . I would say that is the definition of complexity and complexity is the playground for loopholes and tax avoidance. Thank you, mr. Chairman. Thank you, senator. Let me just make a point here, that i think needs to be made. Will fewer people wait will fewer people want to itemize and instead claim the standard deduction . Am i right on that . Yes. So fewer people will not want to itemize, right . That is correct. Now, they want to claim the standard deduction. Now, will that be simplified . Yes, that would offer a simplification. That would be a massive simplification. Were talking about 90 of the people in this country, right . Thats right. Okay. Mr. Chairman, if i might. The senator from missouri was talking about businesses. Im not talking about the senator from missouri. I just wanted to ask that question, because i think its been kind of misrepresented throughout this hearing. But i think, mr. Chairman, if i could just continue, the senator from missouri, as i was trying to do, was highlighting the enormous complexity associated with these passthrough changes that involve business. And the chairman, my friend, is talking about individuals. Well, yeah, im talking about individuals. And how simple this is working out. And what a break it is going to be for individuals in this country. And, you know, i think its time people understood that. This is a major, mainly seachange in tax law. And it certainly is a seachange for the wealthy, who are going to have, as senator mccaskill said, a bonanza of new opportunities to game the system particularly in the area of business, when we cant even get the people at the table to agree to the passthrough changes. Thats what i call bulkhorn. Let me just turn to let me see who is next. Senator warner. Thank you, mr. Chairman. Just echoing about what senator mccaskill said. And as someone who falls into those categories and has Tax Accountants and planners, i was going to ask everyone who is in the room that was a lawyer or accountant to stand but i can assure you that, because were rushing this, were going to create a bonanza of new loopholes and i hope in later rounds to get into this. One of the ways that we have seen repeatedly to mask the cost of tax plan and both sides have used this tool repeatedly, is to make some tax provisions only temporary. Meaning that the provision terminates or only applies to a certain period of time. Dr. Barthold, tom, can you how long have you worked at jct . A little over 30 years, sir. Gives you a great deal of experience. In all that time, how many times would you say that Congress Passed a tax package that had an Expiration Date and then, when it got close to that Expiration Date, we would go ahead and extend that tax provision . Thats happened on a large number of occasions, senator. We can call them. We have a name for it. We call them extenders. And so history has suggested that, as a provision thats enacted is temporary, congress often comes back when the rubber hits the road and extends those provisions, so all this does is actually hide the real longterm costs so that a tenyear estimate, you know, provided by jct or cbo oftentimes does not accurately reflect how much revenue is lost when we go ahead and extend these provisions. For example, the bill before us sunsets expensing for Large Businesses after five years. Hopefully well get into this in a later round where it actually shows by ending after five years, it generates additional revenue in the second five. Its a little complicated but i hope to get into it in the next round. I know that Senate Finance staff has asked for a while for a score so that, if we could assume what, tom, you have said has been congress behavior over the last 30 years, that oftentimes when we set these provisions to expire we then extend them. I would hope, and ill offer an amendment that would make all the provisions in this proposal permanent because thats what history has been shown us to do, so that we could actually know the real cost of this bill before we vote on it. Do you know if jct has completed that score yet . I can tell you that we have not. We have had a large number of requests. And actually its not quite as simple as looking at one line as a general matter because that affects a number of other. A number of the other provisions. Expensing would be a classic case. Ten years would be about 128 million. Youve got it down to 61 billion and revenue gainer, thats because people would expense immediately and then not take those provisions later. But its not really an additional 63 billion in revenue. Again, both sides used these games for years. Before we do this kind of massive tax overhaul, i think we ought to have this data. One of the areas that i think all of us realized an interesting intent was amt. Amt was the notion that those of us who have done really well with the system ought to pay at least a minimum tax, hard for somebody making runs of millions of dollars as president has complained at times and complains about amt. Amt crept up and started hitting middle class tax. There was room for reform on amt. Is there any amt provision in this bill . Both individual and corporate amt are revealed. Some of the features some of the aspects of amt you see in the bill, for example, under amt there was a limitation on net operating losses. The chairmans mark would modify their recovery of net operating losses under present law. So you might say thats a i guess, and my time is running out. I dont want to offend the chairman because i want to make sure i get my full five minutes on the next round. Is there any even guesstimate that those folks who are paying amt at this point, when that is eliminated, any guesstimate how many of them will pay any tax at all or will we not arrive. Originally came in where people who do very, very well can end up paying zero taxes on a personal basis . Weve not made an estimate of that particular point, sir. Thank you, mr. Chairman. Okay. Thank you. Okay. Well go to senator carper at this point t excuse me, senator grassley is next. I apologize. You are next. Before i ask a question, i want to comment on the discussion just done. Original intent of the tax in 1969 was there was about 120 people werent paying any individual income tax. Youre relatively rich, take advantage of getting out of pay income tax, you ought to pay a little bit. 120 people at that time. It was never indexed. It was never intended to cover millions and millions and millions of upper middle income people. If you want something to apply to just a few rich people, it might have some legitimacy but it got out of control. Doing away with it is justified. Would expensing my question comes from the fact were hearing from the other side what were putting into this. My question comes from the fact i think were simplifying. Would expensing be simplifying for business . Yes. It would be substantial simplification just by virtue of the fact youre reducing the corporate rate and providing expensing that mitigates the incentive for costly tax planning. I think maybe you partly answered my last question. Would a much lower Corporate Tax rate mean corporations will engage in much less complex tax planning . Yes, thats right. It takes some of those incentives away when you have a lower rate. Thats oftentimes referred to as the most effective form of antibase erosion. I assume as an expert in this area, youre flabbergasted with people that say were making the system more complicated . I believe there are certain features that do provide simplification. Thank you. I yield back. Ill reserve my time, mr. Chairman. All right. Go to senator at this time. To your right. Good morning. Good morning, everybody. Thanks so much for joining us. Senator roberts, thank you for joining us. This is encouraging. I can assure you its just temporary. All right. Im sitting here this morning, folks, thinking back a month or two ago, im not on the Health Pension committee but became an honorary member there for several weeks. Senators alexander and murray held a series of bipartisan hearings. Two weeks in a row, two hearings per peek and they invited to talk about how to stabilize the exchanges, how to stabilize health exchanges. Governors in, democrat, republicans from all over the country, health providers, health economists. Those four hearings at 10 00 a. M. , four of them over the span of two weeks. Before they had the hearings to deal with this issue, stabilizing the exchanges, they had roundtables. Folks, members of the senate, democrats and republicans who are not on the Health Committee were invited to the roundtables to have a conversation for an hour or so with the witnesses. It was extraordinary. Out of that process came Bipartisan Legislation which has 12 democratic cosponsors and 12 republican cosponsors. I have a friend, ask him how hes doing, he always says compared to what, compared to what. What im doing is comparing this process were going through to what i thought was a good process that led to Bipartisan Legislation, which i think has a good shot of being active. I have a question i want i was elected state treasurer when i was 29, i was elected state treasurer the worst state in the country, tied with puerto rico, dead last, dead last. We could not balance our budget we could not balance our budgets at all. We were good at overstating revenues, underestimating spending. Overestimating revenues, underestimating spend, year over year, thats how we got the worst credit rating. We were tried with puerto rico. Puerto rico was embarrassed to be in the same company with us. I have a question for mr. Barthold, give us an idea if we enact legislation what is it likely to do to our budget over the next decade. The conventional estimate we provided to the committee jcx 52 projects that the chairmans mark would reduce revenues by 1 trillion 496 billion. How much 1 trillion 496 billion. 1. 5 trillion over the next 10 years. Beyond that, is the expectation that the deficit would go down. The next ten years things would get better . Under the baseline projections that we used, we dont actually have a baseline to measure against. If your question is are there, you know, provisions that reverse that. Ill interrupt you. Affordable care act, when we passed Affordable Care act, expectation according to cbo was i think jct expectations first 10 years deficit would be reduced by 100 billion, second 10 years a trillion dollars. Thats what im looking for. The Affordable Care act had some provisions that changed at the end of the initial budget period and actually changed further in the second budget period. What im trying to get at. No similar provisions. If expected to go up by 1. 5 trillion first 10 years, should we expect it to go more than that or less than that in the second. Thats what i was saying. We havent made a projection, with the deficits projected here, would it be the same rate, bigger or smaller . We havent made that projection. Any idea on Interest Rates for borrowing, increasing federal deficits by this magnitude . I have not undertaken that analysis. I believe the Congressional Budget Office has made some analysis of may have been with respect to house legislation. My time has expired. Thank you. Senator cassidy. Let me just follow up where senator carper was. Based on those projections that there would be an increase in deficit, obviously youre basing that upon gdp growth. And the more the gdp grows, or whatever rate it grows, will grow federal revenues, what is the average gdp growth projected to come up with the baseline for those deficit numbers. As we noted a little earlier, all joint committee estimates, all congressional estimates made relative to Budget Office Macro Economic baseline. Budget office Macro Economic baseline projects gdp 1. 9 , 2 per year. This may have been covered earlier. I apologize. I was in another Committee Hearing. If growth goes up to 2. 5 , do you have a sense of what that would do to federal revenue . It would compounded basis. It would substantially increase federal revenue. If it substantially increases federal revenue, would it be sufficient to cover this projected deficit when gdp growth is projected to be 1. 9 . If the current growth rate suddenly jumps from where we are today to next year 2. 5 , yes, it would probably cover be sufficient to cover that deficit. You misspoke, if i may, someone whose hair is grayer than mine to a little youre misspoken where we are today is 3. 0 growth over the last two quarters. The growth what we would jump from is the projected 1. 9, weve seen graphs regulatory policies grow to 3. 0 over the last two quarters. Just to point that, youre welcome to dispute that, but i think thats where i would go with that . No, i wasnt disputing it. I was reporting the projected growth rate and making the change relative to the projected growth rate. Got it. I understand earlier senator casey was suggested repeal of the state and local taxes. Let me ask, if you double the standard deduction, to what extent does the repeal of the salt, the state and local Tax Deduction, which means obviously people can no longer deduct that from their taxes. To what extent would it affect middle income people and higher income people, assuming we double the standard deduction. Senator casey, starting from the base of present law, under present law approximately 30 of taxpayers itemize their deductions. 70 claim present law standard deduction. The 30 pours of taxpayers who itemize tend to be in the top half of the income distribution. If you increase the standard deduction, you take people from the bottom of that bottom incomes of those 30 and they would be more likely to choose the standard deduction. Thats where most of the initial benefit from increasing standard deduction would follow. Besides what youre saying if not outright stated the tax plan we put forward would benefit middle income folks. Those who would pay a little bit more because of the repeal of the state and local Tax Deduction would be those who would be upper income . Thats generally so. I should qualify a little bit because there are many other things changing in the plan. I get that. In a country of 310 Million People youre going to have some complexity. Im okay with that. Theres going to be some folks that win and some that dont win quite as much. So lets see if theres anything else. Now, senator mccaskills line of questioning i found very intriguing but ill wait for a later opportunity to speak to that and ill reserve the balance of my time. Senator. Thank you. Id like to direct questions to mr. Abraham. Thank you for anticipating that and moving up there. Our trade and tax policy as we all know and all perhaps both sides talked about this has encouraged a corporate Business Model fairly new to world economics. A corporate Business Model that shuts down factories in toledo or dayton, cashes in on a tax credit fundamentally at the expense of americans, shifts to reynosa, then sells those goods back to the United States. Far too many of those jobs that remain dont pay enough in wages and benefits from what they put in. The goal is to put dollars, as we said yesterday, if were going to give a tax break to the middle class, were going to give tax break to the middle class, we all to give a tax break to the middle class directly. The other goal is stop outsourcing. Weve all paid homage, said that in this committee but im not sure this bill does this. My question is this. The bill by Senate Republicans minimum tax rate, mr. Abraham, for profit attributed to intangible assets, intellectual property, trade secrets kept offshore. As i read it, theres no minimum tax rate no minimum rate for real Business Activity overseas. That means every u. S. Corporation would have an incentive to keep properties overseas, is that correct . Yes, theres no tax on routine returns for Companies Operating u. S. Companies operating overseas. So really does incent those companies to keep their profits overseas, correct . Yes. Thats Pretty Amazing considering the speeches weve heard and the position of the president and the position of my colleagues at the white house from this committee. So the minimum tax in this bill doesnt tax routine overall does not tax routine overseas returns at all. In other words, theres zero rate of taxation on profits held overseas. Is that right . Yes. So with that same u. S. Corporation get to exclude a routine return on the investment made in the u. S. . No. So a large u. S. Multinational corporation could shut down a factory in st. Louis or cleveland, deduct the cost of the move, build a new factory in the low tax in asia and pay no further u. S. Tax on that factory assuming its only earning routine returns. Is that correct . Yes. So those same earnings but those same earnings contrast this. Same earnings would be subject to full u. S. Tax if that same factory was built in akron, ohio. Yes. The u. S. Rate dropped to 20 . If that same facility is in a foreign jurisdiction and only earning routine rushes, theres no further tax under territorial system. So theres an investor in summit county, ohio, home of akron and barberton, two cities in summit county, and the investor decides to build in akron, that investor is paying 20 on his taxes under republican plan. Moving that plan overseas, the investor would pay zero. Thats my understanding. Under the senate bill what statutory u. S. Tax rate for corporations that hires American Workers, again, what is the statutory tax rate for a u. S. Company that hires American Workers to manufacture products in akron and sell them around the world . What is their statutory rate . Its 20 . Theres the loss of the 199 manufacturing deduction, so its a 20 top rate, top corporate rate. Under this bill. Now, what would the statutory u. S. Tax rate be for u. S. Multinationals, instead of manufacturers in the u. S. Decides to incorporate a tax haven like ireland or even lower rate tax haven and starts manufacturing let me stick to that. They inCorporate Tax haven like ireland, start manufacturing in lower or no Tax Jurisdiction area. My understanding under the chairmans mark is there would be no u. S. Tax on that earnings and profits assuming only routine returns associated with that manufacturing. So there is, in fact, a tax incentive on the bill for manufacturing but the tax incentive is to move the jobs out of the u. S. Under this bill incentivizing. So one of the outcomes of the bill, this bill incentivizes outsourcing, correct . Under the situations that youve described, there seems to be incentive under the chairmans mark to achieve a lower tax rate by having manufacturing outside the u. S. That is just incredible. When we have the time ive been in the senate, senator wyden, and my friends on the committee, the years senator mccaskill and i have been in senate, one of the things weve been most unhappy about is a tax code that encourages outsourcing of jobs. The president won an election talking about that. The president and senator after senator after senator at the white house and both parties said we have to do something about that. What this bill does is encourages corporations to keep jobs overseas, encourages corporations to send jobs overseas. Once again, mr. Chairman, if we want to cut taxes for the middle class, lets cut taxes for the middle class. This 3 tax reduction, 43 cut in Corporate Taxes under the guise of some of it will trickle down for lower tax rate for workers and some of it they say 4,000 will mean higher wages. Why idot that way . Why not cut out the middleman . If were going to give a tax break to middle class, lets give tax break to the middle class. Patriot corporation act, why working family relief act, put in the pockets of people making 25 and 50 and 75,000 works. Thank you, mr. Chairman. Okay. Senator portland, i guess youre next. Thank you, mr. Chairman. I was here earlier. I had to run out to another couple markups. I appreciate mr. Barthold your work with joint tax to try to give us a good analysis of this bill. I am concerned by some of the back and forth, including with the minority staff that i think inaccurately portrays this bill. I think its amazing that were sitting here talking about how great the current tax system is when we see jobs and investment going overseas constantly. 4700 companies would be American Companies today if we had this kind of proposal in place as we have before us. Thats based on ernst and young analysis. Its quite simple. Right now, there is an incentive to go overseas. Outsourcing is happening. For someone to defend whats going on and say we shouldnt change it, i just again refer you to the working group that i cochaired with Chuck Schumer. We reported two years ago we had to lower the business rate and we had to go to a Competitive International system, territorial system because otherwise we would continue to lose jobs and investment overseas. You know, three times as many Foreign Companies buying u. S. Companies now as u. S. Companies buying foreign. Thats whats happening. I would just ask you, mr. Barthold to tell us not from a partisan point of view but joint tax point of view, do you believe this bill changes the incentives. Does it for this person who was just referred to, who is a manufacturer in my home state of ohio, who now unfortunately is often in the position because of our tax code of being incentivized to move production overseas, how does this legislation change that incentive . Senator portman, in our analysis in part to produce the revenue estimates and for initiating our Macro Economic analysis required by congress, we see multiple incentives in the bill, not all of which necessarily go in the same direction. A lower the increased Cost Recovery in the United States, 100 bonus depreciation as a clear incentive for both domestic investors and Foreign Investors to invest in the United States. Lets stop there for a second. Lets say that you are a company that is finding the market expanding and want to increase production. Trite now lets say you produce globally. Lets say that company is headquartered in japan like honda, that has a huge facility in ohio. In fact, the biggest auto complex in ohio, i guess, most workers is honda. How do your incentives change in terms of whether you decide to invest in japan, in china, germany, or in the United States based on what you just said . The expensing provision by itself, absent other changes, immediately makes the United States more attractive tomorrow than it is today. So its more likely youre going to see Foreign Investment coming into ohio because of that change you mentioned but also obviously the lower rate also creates an incentive. One of the other factors i was going to mention was the lower tax rate is also an incentive to locate in the United States. Thats good. We want more jobs in the United States. I didnt mean to interrupt you, but continue to talk about the u. S. Company, the example of a multinational u. S. Company manufacturing in the United States now, manufacturing overseas now, which is the case of many of our companies. Currently they are in a situation where if they make money overseas and dont bring them back because of the deferral, they are not paying the taxes. At least the taxes are deferred. This why theres 2. 5 to 3 trillion locked out overseas, money that could come back. Talk to me about what the incentives are in this bill . What changes with current law . First of all, whether it be a foreign or domestic company, 20 domestic rate, the expensing in the United States are incentives to locate in the United States. Your next question really goes to changing to the territorial system. Theres some pluses and minuses. One of the pluses you alluded to is to the extent that u. S. Multinationals currently hold some earnings that they have earned abroad rather than pay residual tax upon repatriation, 100 dividends received deduction makes it easier. Theres not a tax cost to redeploying those earnings wherever they may choose. Again, the United States could be one such location. Territorial systems lets just for a second pause there. So the situation you mentioned earlier, you said a company that has a lot of technology and might now be moving its intellectual property to ireland, you didnt say apple, but you were describing apple as i heard you talk about it. Now, what is their incentive . Right now their incentive is to keep the money overseas. They dont bring it back. As you know, its in the area of hundreds of billions of dollars. What would be their incentive under this legislation . Remember, for whats already abroad, you have repatriation. Setting that aside and accounting of future earnings that that enterprise would be able to freely move the earnings back for reinvestment in the United States, or any other location in the world. Right. Now they are not doing that, dont have the ability to do that and invest in america. Tell me a little, if you would, maybe you could jump in here, too, because i know youre an expert on this. What are the other incentives in this bill to create product here in america and export it rather than what they are currently doing which Companies Take their intellectual property overseas to lower class jurisdiction, ireland, singapore, lux switzerland, use that export therefore creating jobs in america. Senator, your time is up. Very briefly, provision in the chairmans mark i think youre asking about, senator portman receipts to whats derived at foreign intangible income. That would be income attributable to Economic Activity in the United States but based on foreign sales. So it would be incentive. Lower tax rate to main export it here rather than making it overseas. Thats correct, sir. I think these are all incentives that go the right way because we want more jobs in america. Senator cantwell. We do want more jobs in america. If you wanted more jobs in ohio, you would make sure Export Import Bank was reauthorized. Ge jobs have left ohio because we dont have a functioning Export Import Bank. That should be number one. Well talk to your colleagues and this administration. If i could, mr. Chairman, we had this discussion yesterday, which was about middle class individuals. Now, im all for having the broad discussion my colleague from ohio just wanted to have but im not willing to have it at the expense of washington taxpayers. That is this chart shows two earning families, an average salary for Elementary School teacher and police officer. They have two kids under the age of 17. So they are trying to live the american dream. Yet under this proposal they will pay 900 more in taxes than they currently do. 900 more, which is less money for college education, less money for groceries, less money for rainy day. So when we started this debate, it was about how we were going to close corporate loopholes and make sure that the tax bill paid for itself or that we were going to close loopholes and maybe add, but not that we were going to do it on the backs of my constituents. So this number right here, 927 more for this family, which is average. Now, i think some of my colleagues think that must be an anomaly. That must be this mythical person that you came up with. No, i read charts, things pointed out by joint tax, my estimate in my state, is 20 of my middle class is what youre saying this affects, its more than 300,000 or could be 300,000 people in the state of washington this could affect. So am i reading the charts right joint tax estimating 20 . Im going to ask mr. Barthold the second question. Thats correct. Youve come up with the number you think could be the number across the United States. Your number is 13 million. Is that correct . Senator cantwell, i believe youre referring to in analysis we did at the request of senator wyden. I think i have that here but it will take a moment. Is that right . Estimating 13 Million People . Thats correct. I hardly call 13 million americans inconsequential. I hardly call it a random thing where were raising taxes on a few people. 13 Million People and certainly 300,000 in my state arent just a few people. So the point is, mr. Chairman, when we started this exercise we were going to close other loopholes. We talked about businesses were telling they wanted simplification. They were willing to do things in order to get these. We havent done those things. I dont know in the process of this markup if were going to continue. But did we i dont want to distract you, mr. Barthold, from your looking at these. Are you verifying the 13 million . I cant immediately verify 13 million. The information we provided to senator wydens staff was percentage calculation of percentage of taxpayers in different income categories that would have tax increase, no tax change or tax decrease. So i assume the 13 million was calculated by my friend mr. Abraham or one of his colleagues. I think its actually 13. 8 million. My point is people are talking about letting states do what they want to do. Our state has a unique tax code. Weve grown economy faster than the National Average since world war ii. Now youre taking that away from us. People said they would close these loopholes. Ceo of at t said he would give up expensing perks on the books for 20 corporate rate. Does this eliminate accelerated depreciation or other expensing . After five years. So were going to take it from my constituents in the meantime. So mr. Chairman, i want us to understand that these are states like nevada, texas, florida that all have tax codes that are, i would say, efficient tax codes. A lot of people have debates about them, about whether they should have a different tax structure like the rest of the country. But this is our tax system. We do not appreciate a lot of these corporations are right in our state, too. They are doing very, very, very well. When you ask them what have they dealt with here, they say i want immigration policy dealt with, trained and skilled workforce, affordable housing, i want the infrastructure to work. Thats what they want. I guarantee you none of them is going to call me up and say please gouge middle class taxpayers in king county and make them pay 1,000 more and please open arctic life refuge because by god i cant be competitive without it. I guarantee you they arent going to say that. I hope ill be happy to send my colleague from louisiana the details here. So i hope that we can come to some resolution. Because the day thank you switched over to making state and local deductions, major pay for in this bill along with this huge deficit is the day you made a mistake. Gouging middle class families to pay for the corporation breaks you want to give is just wrong. Thank you, mr. Chairman. Thank you. Senator roberts, youre next. Thank you, mr. Chairman. Excuse me, senator heller is next. Im sorry. Please. Okay. Senator roberts, go ahead. Thank you, senator heller, thats very kind of you. To staff who are persevering and being very patient with all of the questions, slings, arrows and plaudits, thank you. Thank you for your patience, perseverance and what youre doing. Mr. Barthold, especially you, tom, youve been here 30 years. Is that right . Thats correct, senator roberts. Ive got you by seven. Im not counting the two years when i was administrative extent for senator carlson who was on the finance committee and was the Ranking Member at that particular time, 12 years in the house. The reason im saying, this not asking a question, which ill do in just a minute, but im not going to keep you long. Because i found out real quick youre only as good as your staff. I want to thank all of you for your insights and being able to respond at least to some degree to the questions. Some of these questions are not questions but sort of a conclusion and then asking you to agree with it. So im going to talk about agriculture just a minute. Senator and i visiting here, not that were not interested in everybodys questions but we were talking about the farm bill and what well have to do down the road. This bill is pro growth with regard to agriculture. I want to thank senator thune, our budget director or budget chairman for efforts of treating agriculture in a fair way. Its so terribly important now because were in a pretty rough patch. We have a lot of problems a lot of challenges there. But to mr. Barthold, can you describe the Cost Recovery provision relating to farm property . Yes. The chairmans mark provides a fiveyear recovery period, senator roberts. When you do your macro score on this provision, could we accurately describe this as a pro growth policy . As my colleagues and i have written on several occasions things we view, things that accelerate Cost Recovery, pro growth economic incentives. This is a perfect example, i believe, of what were doing right in this bill, thats to induce investment, more particular for agriculture and for our farmers and ranchers and growers going through a tough time. Again, i want to thank colleagues for producing i think doing a wonderful job on behalf of these folks. And again, i want to thank the staff for your perseverance and for your expertise. I yield back. Senator heller. Mr. Chairman, thank you. Thanks for this hearing. I want to thank those that are here with us today for your efforts and patience with all of us. Mr. Barthold, i want to go back to something i heard earlier in the hearing. That had to do with the White House Council of economic advisers chaired by hassett, also Boston University talking about the reduction of 15 points of your Corporate Tax rate and the impact it would have in increasing wages. I believe those numbers are somewhere between 3500 to 4,000 a year. Is that accurate . I have seen chairman hassett quoted as saying 4,000 a year . What are you doing about those studies . Excuse me . What do you know about those studies . Well, frankly, i havent had a chance to read some of them recently. Ive been doing some other work . I understand. I understand. So youve not had a chance to review those . I have not personally. Some of my colleagues i know have tried to take some time to read some but i havent had a chance to talk with them yet. Do you have any reason to believe they are inaccurate . I know that some of them were peer reviewed. I know some other people have raised questions about the methodology, applicability, some are crosscountry studies rather than studies that are based on u. S. Economic experience or based solely on u. S. Data. So i know theres some questions that one could call to mind. Again, i have not looked in detail. All right. To mr. Barthold to change subjects for a minute. The real Median Household Income in nevada is 55,000 a year, according to u. S. Census bureau. For that income group, from i guess 50 to 75,000, what percentage does this bill cut those taxes . Just a moment, senator. From the analysis referring in answer to senator cantwell, we had estimated in calendar year 2027 that lets see, that would be about a little over threequarters of taxpayers will have a tax decrease of 100 or greater. What do you get in year 2027 . That was year 2027. That was year 2027. What is your definition of middle class . I dont define middle class, senator. It means a lot of Different Things to a lot of different people . Have you ever tried . I guess i found it unwise in my position to define it. Does this bill provide a tax cut to every income group . Yes. On average theres tax reduction across all income groups. Im looking at the 2027 chart. 50 to 75,000 income category, im looking at 6. 1 . Is that accurate . Okay. I think youre looking at e. The wrong thing . Not the wrong thing at all. Are you looking at jcx 53 . Okay. We want to look at 2027. Okay. Yes. 6. 1 is the change in federal taxes of the aggregate taxes paid to the federal government it will be a reduction by that income group of 6. 1 of the taxes. I want to make sure that was clarified. Mr. Barthold, thank you for your time. Thank you for answering my questions. Mr. Chairman, thank you. Thank you. Senator nelson. Mr. Chairman, thank you again for your courtesies. Yesterday you and the Ranking Member so that i could give my opening statement. Thank you very much. We appreciate the hardships youve had down there and appreciate all the good work youre doing . Thank you. Mr. Barthold. If you were a lawyer for someone a tax lawyer for someone well off, how would you advise them to gain the tax system and avoid taxes under this bill . First of all, senator nelson, you know youre asking me to play make believe because im not a tax lawyer. I do not have a good answer for you at this time. I guess it also goes a little bit into what you call lets talk about loopholes. Well, theres certainly advantages to doing some things than other things. So what loopholes would you want to use . Or the flip side of that, what loopholes should we close . Well, again, there are things there might be provisions of present law that are unchanged by the chairmans mark that you might like to address. Some things that the chairmans mark addresses, change relative advantage of aggressive pricing. I know the city has been concerned about aggressive transfer pricing in the past on both sides of the aisle. But thats in a business context. Let me ask mr. Abram. Senator, your colleagues have raised a few ideas earlier in the markup talking about areas where theres rate differentials. The Ranking Member was talking about the potential ability between a 35 corporate rate and 20 corporate rate. Theres been a discussion on the International Side of some of the interaction between the global low taxed income provision might work and different treatment between active and passive, or in tangible income. Off the top of my head, thats some of what weve talked about. Let me go back to mr. Barthold. Your Tax Committee on taxation memo shows that most middle income tax payers would see less than 100 change in this tax bill under this plan. But around 21 million middle class households would actually see a tax increase by 2025. So of those americans that make under 200,000 a year and would see a tax increase under the bill, do you have can you point out what in the tax bill were facing are the reasons why, why that middle income group would see a tax increase . Senator nelson, under the individual income tax, as i noted in the walkthrough, theres a lot of different significant changes. One significant change, of course, is the change to disallow certain itemized deductions, absent anything else that could create more taxable income for other households. On the other hand theres an expansion in the value of the child tax credits. That for any household leads it a potential decrease. Theres a loss of personal exemptions. That can lead to increase in personal income and greater Tax Liability for some households. On the other hand theres a change in the overall rate structure by lowering some of the rates and moving up the breakpoint so youre actually have a look for any given amount of income you might have lower Tax Liability had you not made any of the base changes. So its a weighing of those different factors and different individual circumstances. The biggest ones are probably the loss of some itemized deductions by some taxpayers and the loss of personal exemptions relative to the tradeoff of rates and child credit. Mr. Chairman, may i ask one more question . Sure. The chairmans mark has a passthrough deduction worth 17. 4 of a Small Business owners income. Why wouldnt you apply the 20 tax rates that corporations get under this tax bill, why wouldnt it be equalized as opposed to giving them a 17 deduction . Well, thats the answer would be a question for you and your colleagues, of course, to debate. The effect of the deduction is to reduce the effective marginal tax rate that would otherwise be provided by the statutory brackets. So in other words, take the 35 bracket, reduce it by 17. 4 , take the 25 bracket, reduce it by 17. 4 . Your broader question was why not have that why not have that equal to the Corporate Tax proposed Corporate Tax rate of 20 . I think that returns to sort of the question of the overall design recognizing that the Corporate Tax rate has two levels of tax that remains under chairmans mark, tax on qualified dividends and Capital Gains, so a tax paying owner of a Corporation Receives distribution such as a dividend, theres a tax at the corporate level at 20 and plus the dividend tax rate at the individual level. So it appears that the mark is making a balancing of the businesses that are organized such if theres two levels of tax as opposed to businesses that are organized where theres only one level of tax. Mr. Chairman, may i submit a question for the record about puerto rico . Of course. Senator. Thank you, mr. Chairman. Ive been listening all morning to these questions and trying to figure out how it all fits in with what were going to do, which is have an open process where people can propose amendments to correct any of the things they see here. But having worked in both state revenue and federal revenue for some time, i know its a complicated situation and i appreciate all that youve done with it. In the Budget Committee weve held hearings that affect what were doing here. One of those things is determine what gdp is and would be and how that would affect any tax proposals. And we agreed to go with a static scoring with a trillion and a half deficit, because we didnt want to argue. The dynamic effect of the whole thing would be but we held hearings on it anyway and found out that apparently the average is about 3. 2 growth. As was mentioned earlier by senator cassidy, weve been through two quarters of 3 growth. But the Congressional Budget Office relies on 1. 9 . We thought 2. 6 was pretty reasonable. Thats mostly affected by what happens with private businesses. The Corporate Tax and passthrough entities, that would be the private sector that were talking about here. I had the opportunity to talk to Prime Minister netanyahu. Ive talked several times to people in similar situations in israel about how they got their budget to balance. He made it clearer than any of the other treasure remembers i talked to that have phenomenal formulas we might have to dont and dont at some point in time, he made it Pretty Simple. Youve got to make sure the private sector grows twice as fact as government. That has not been the case. Thats what were trying to do with this bill. And i think what were talking about is the private sector here with the Corporate Tax and the passthrough entities. Mr. Barthold, would that be a correct assumption . Nonprofits are excluded from the tax system or we wouldnt call them nonprofit. Pass through entities are private entity as are c corporations. And thats who were relying on primarily for growth and gdp. Is that correct . That is where the economic incentives embedded the chairmans mark are targeted. Thank you. Weve finished the first round, so well start the second round at this attack point. At this particular point. Is it fair to say the great majority of individuals with less than 200,000 of income will have a tax cut, or at least no tax increase. Yes, thats correct. Okay. Again, is the trend to transition from worldwide tax system like the u. S. Currently has to territorial system like the mark provides. Is that the trend in the organized world . Yes, it is. The u. S. Is very much an outlier with its worldwide system. Were stupid to keep the system we have, if we dont make a change, right . No comment. I think could comment we are stupid. Were not competing with the rest of the world. Lets turn to senator wyden for the second round. Thank you very much, mr. Chairman. I think its appropriate to start the second round talking about the two tax systems in america. Theres one for a cop and a nurse, and they have to pay on a compulsory basis. It comes right out of their paycheck. Then theres another one for the people that can hire good accountants. They are high flyers. They know how to run the system. They can pretty much pay what they want when they want to. And nothing illustrates the Second System more than the carried interest loophole in the tax code today, because this essentially allows that second group to take ordinary income, call it a capital gain, and pay a lower tax rate. Question for you, mr. Barthold, candidate trump said he was going to close the interest loophole. Mr. Mnuchin promised at his confirmation hearing to close the carried interest loophole as part of the republican tax plan. Does this proposal close the carried interest loophole . The chairmans mark does not address carried interest. Thank you. Second, the secretary said the trump tax plan would provide no absolute tax cut for the wealthy. This strikes me to be really preposterous. So my question to you is, does this proposal provide no net tax cut for the wealthy . As i pointed out, our distribution Analysis Shows on average tax reductions in all income categories. So the wealthy would get a tax cut is what mr. Barthold has told us, contrary to what secretary mnuchin said to the committee. And third, secretary mnuchin has claimed that tax cuts dont just pay for themselves but raise an additional 1 trillion above and beyond their cost. That strikes me as really hocus pocus arithmetic. Mr. Barthold does jct believe republican tax cuts will pay for themselves, or frankly even come close . Senator wyden, congress has requested that for major tax legislation we provide a Macro Economic estimate to that legislation. We have not begun that analysis yet, so it would really be inappropriate to prejudge an answer for an analysis we havent completed. Well, what ill tell you is all the economists who came before the Senate Finance Committee Said tax cuts will not pay for themselves. Ive been of the view that you generally felt that there was some modest effect as it relates to behavior. We will await your final judgment. I want to close this round of questioning by setting something straight with respect to republicans saying the democrats are not interested in bipartisanship. They have been citing a letter that almost all of us signed. The very first sentence, the first sentence out of the gate, and i quote, is we are writing to express our interest in working with you on a bipartisan tax reform. That was the very first thing. As the chairman knows, i and others have actually laid out proposals for a bipartisan tax reform bill, something we shared with republicans, looked at specific tax. Now, i will tell you, our letter must sure be considered a doozy by republicans, because it caused them so much dismay they locked themselves into a room and refused to invite us to work on actual text of a bipartisan bill. I guess they thought wed come bearing our superpowerful letter and id ask unanimous consent, mr. Chairman, to put this superpowerful letter that describes our great interest in bipartisan ship into the letter at this point. Put whatever the letter is . Mr. Chairman, im not quite done here. Im going to use the remainder of my time to point out that this socalled extraordinary letter, which as ive said focuses on our desire for bipartisanship doesnt go as far as Ronald Reagan went in 1986 when he said we ought to treat income and wages as the same from a tax standpoint. And i think it just goes to show that these principles, and ill close with this, which the president of the United States has said he agrees with he said that point plank at the white house ought to be the basis for what we should be doing, which is working together in a bipartisan way as Ronald Reagan did with a big group of democrats. I yield back. I yield back. Were going to be tough on time limits here in the second round. Well turn to senator stabenow. I want people to live within the time constraints. Thank you, mr. Chairman. I have some specific questions on impact, but i wanted to start, mr. Abraham, i wanted to be clear on what we have said today, that based on the joint tax analysis that you have looked at, 14 Million People would get a tax increase . Thats my understanding from the documents. 14 Million People would get a tax increase. Then the number of people getting a tax increase would go up over time. Is that correct . Thats correct. Okay. So were looking at millions of people getting a tax increase on something that we would like very much to see everybody getting a tax decrease. Mr. Barthold, i wanted to ask some questions on specific provisions. What percentage of taxpayers would take the standard deduction under this legislation . Senator stabenow, we estimate that under the chairmans mark, 95 of individual taxpayers will claim the standard deduction. Thank you. So 95 of the taxpayers then would not be essentially would be barred from receiving literally any tax benefits for charitable giving. They would not be well, claiming the standard deduction is an elective choice. Right. But its usually in the taxpayers interest if the circumstances warrant that they do in fact choose standard deduction. So 95 of people would lose that, the tax incentive, not that they might not want to give, certainly, but i know the charitable organizations are extremely concerned about the impact of that. Lets talk about homeownership. The percentage of taxpayers who would no longer benefit, essentially, from home ownership. Homeownership in terms of using the mortgage Tax Deduction. How many people would qualify for that, if weve got 95 of the taxpayers using the new standard deduction . What does that mean in terms of homeownership . In 2018, the number of itemizers we project to be approximately 9. 5 million. So that would be 9. 5 million who might avail themselves of the mortgage interest deduction, although it would not necessarily be all of them. Okay. So great concern in terms of that incentive for homeownership. Let me ask about the provisions in the house bill as it compares to the senate bill. Because we know that in the end, well have a house bill, and then well have a senate bill, and then the differences will be reconciled. So provisions in the house bill may be in the final bill. Thats how it works in a conference committee, correct . So we dont know for sure what will be in the final bill. So in light of that, let me ask some questions on the House Republican bill as well. Would the house bill eliminate the medical expense deduction for seniors . It eliminates the medical expense deduction for all taxpayers. For everyone, not just seniors. Its parents who have a child with disabilities or seniors or others. Okay. Would it eliminate the medical expense deduction, and i assume, for people with alzheimers disease . All taxpayers. And a person with cancer, someone with special needs and so on. Mr. West, does the Administration Support eliminating this important deduction . Thank you, senator. Im here to talk for the administration about the adminstrability of some of these provisions. I really wasnt prepared today to speak to the administrations position on any particular provision. We know, though, that in a conference committee, there will be the house, the senate, and the administration. So the trump administrations opinion, what you advocate for, will be very, very important. And we ask that you be here to speak about the administrations position. So im surprised that you dont feel you can do that. Senator, your time is up. Thank you very much, mr. Chairman. Lets go to senator enzi. Okay. I thought i was next. Senator grassley will be next. Mr. Barthold, you have heard from my colleagues expressing concerns about the distribution of the tax burden under the bill. Doesnt your analysis of the mark show that those with incomes above 1 million will shoulder a greater share of the tax burden under the chairmans mark than under the current law . Senator grassley, this is a point that senator thune was making earlier, that when you look at the middle we present multiple takes on in our distribution analysis. When you look at the percentage of all federal taxes paid and you make a comparison, present law as opposed to under the proposal in the category of a million and over in all years, that percentage increases. At least modestly in all years. And the table that i think this is jcx53. Over a million, present law would have them paying 19. 3 of the total income tax. It would go up to 19. 4 . Thats correct for calendar year 2019. Okay. Also, how does the individual amt impact affected taxpayers s. A. L. T. Deductions, thats state and local income Tax Deductions . Under present law, the amt does not permit you to claim state and local income tax or sales Tax Deduction. Its added back into the amt base. So then by repealing the state and local Tax Deduction, are we not achieving some of the effects of the amt but without all of that complexity . Well, certainly its the case that it has some of the same effect. Okay. I yield, senator. All right, thank you. Senator bennet, well go to you next. Thank you, mr. Chairman. Thanks so much for having a second round of questions. Ms. Acuna, i would like to know if the lack of energy title in the Senate Markup implies an endorsement of the house bill which undercuts the permanent extension of the itc for solar and reduces the credit for the wind ptc, or does the Committee Plan on honoring the itc ptc commitment we made two years ago in a bipartisan way during reconciliation that conference, do you expect to maintain that in the conference . And is that our position . Thank you. Im not at liberty to speak whether or not the markup presents an endorsement or lack of endorsement of the house bill. With respect to the energy provisions, that rests with our members. And ill leave it at that. So can silence be read to be acquiescence to the house bill . How should we understand it . Whats the administrations position, mr. West, on this question . Im not here to speak to the administrations position today, senator, on that particular provision. If the senator would yield, i can speak. Sure. I would yield to my colleague. You are at the heart of those negotiations. From this standpoint, both in the privacy of my office premnuchin nomination and at this hearing, i asked that very question about the administrations or at least his view on preserving it. I dont know whether he got into the pros and cons of the tax, but i brought it up from the standpoint that two years ago, we established a Transition Rule phasing out the Wind Energy Credit in 2020. And thats three years through that process. That Transition Rule ought to be maintained. And he said yes. Well, let me say im grateful for your leadership, as i always have been. That is not the position that the house has taken in their bill. Well, they have done great damage to our Transition Rule. I would agree. Now we dont know what the administrations position is. What about with respect, this was going to be a question, but it occurred to me, with respect to the difference between the house and Senate Versions of the bill with respect to the exemption for property tax and state and local . Is that something that the administration has a position on . Mr. West . Senator, i was here today to speak to the adminstrability of the provisions in the chairmans mark. And the administration to date is leaving it to the tax writing committee. I appreciate that. Thank you. Ms. Acuna, can you assure the committee that all of the tax policy in your bill will eventually comply with the byrd rule . I the committee will be responsive and meet its requirements under the reconciliation instruction. So is your answer to my question yes . I would be happy to repeat it again. Can you assure us that all of the tax policy in this bill will eventually comply with the byrd rule . Im not at liberty to make those assumptions or assurances at the moment. This is just incredible. This is so unfair to the people that i represent. This process and these answers. Mr. Barthold, at a time when were nearing full employment, is permanent tax policy more supportive of growth than temporary tax policy, all else held equal . Permanent policy is generally better in any economic environment because of the uncertainty of the temporary policy, sir. What about a permanent Corporate Tax rate versus a temporary tax rate cut . I would actually like to work with my colleagues to run the analysis on it rather than wing it from the table. I dont think it would be winging it asking that question. I mean, the answer to that question is obviously it would significantly deter growth if tax cuts are to sunset, dont you agree with that . As i said, permanent policy is always better in any environment. I thought you were asking for a relative magnitude. No, i wasnt. So i appreciate your answer. Im sorry i wasnt clear. Mr. Chairman, thank you for the opportunity. Thank you. Senator crapo. Thank you very much, mr. Chairman. Mr. Barthold, with regard to jcts distributional analysis, to what extent does the benefit to workers of the reduction in the Corporate Tax rate show up in your distributional analysis . Senator crapo, thank you for the opportunity to explain a little bit more the detail. The analysis that we present to the committees incorporates both tax changes that reduce liabilities of businesses and reduce the direct liabilities of individuals as they fill out their form 1040, for example. But we believe as most economists that fundamentally business entities dont pay taxes, people do. And then its a question of what people and in what form. And thats the question of economic incidence. And theres a fair body of economic empirical work as well as theory that suggests that taxes imposed on capital income or Business Enterprises can in part be born by workers. Or in the opposite case, tax reductions can lead to a benefit by workers. The process in relatively simple terms is that investment means increases in tangible property, intangible property, research, all of which can lead to either increased demands for employment or it can lead to increased Labor Productivity, and its Labor Productivity, higher Labor Productivity generates higher wages. Higher demand for labor generates higher wages. Its in that way that theres transmission of benefit in economic incidence from business taxes to labor. Thats reflected in our analysis. To try to put this into laymans terms, a reduction in the Corporate Tax rate will yield more jobs, greater income for workers, and growth in the economy . Our analysis is that there will be benefit for workers, yes, sir. Have you identified, for example, what portion of the burden or reduction of burden would benefit the workers as opposed to owners . Reflected in the analysis that we provided to the committees, because as i explained, its a process of increasing capital, which increases Labor Productivity, its a process that builds up through time. Our analysis in the very short run takes the stance, again, based on empirical evidence, that the owner of the enterprise essentially would receive the full benefit, like in the first year. But as there is increase in capital, theres more benefit to labor so that by the end of the tenth year, our projections based on 25 of the effective Corporate Tax change be it an increase or decrease is born as a detriment or benefit by workers. So has your analysis taken into consideration that an ever increasing portion of the corporate ownership is held by Pension Funds or other personal Retirement Funds . Yes, thats part of how labor can labor in the form of an owner of pension assets in a defined Contribution Plan can benefit directly as an owner, as well as perhaps benefit in the longer run process that i was describing by an increased demand for labor. So an individual could benefit both as an owner through a pension plan and as a laborer as an employee . Very definitely, and also as a direct owner outside of a pension plan. And outside of a pension plan. And how about to the extent that our doubling of the standard deduction could save millions of families potentially hundreds of dollars if they dont any longer have to pay someone else to do their taxes . Has that been calculated into your distributional models . Well, we calculate compliance and administrative effects into all of the basic revenue analysis, and the distributional analysis is based off the revenue analysis. So in that sort of chain of events, the answer is yes. Although i could not point you to a direct line. Okay, one last question, and that is im looking at a study done by the Tax Foundation back to our earlier questions that indicate that the growth and the impact in the corporate rate or the reduction of the corporate rate could lead to 2. 9 higher wages and 925,000 new fulltime equivalent jobs. Does that sound accurate to you . I have not read the Tax Foundations analysis, and as i was suggesting earlier in response to question, i prefer to wait to undertake our own analysis and report to the committee. All right, thank you. Let me just make something clear here. We intend to comply with our reconciliation instruction and budget rules. I think its a bit unfair to task our staff to make assurances about member decisions. We have to be careful about that. Senator burr. And then senator mccaskill. Thank you mr. Chairman. I dont know ill have time to go into the details of the passthrough provisions in this mark, but its nuts. The way this is done. And let me just ask some specific questions, mr. Barthold, that will expose this. Mr. Barthold, would a local dentist that is not married and earns 110,000 a year be eligible for the passthrough deduction . No, senator. And would a casino developer that reports business income of a Million Dollars annually be eligible for the passthrough deduction . Yes, senator. And would an engineer earning 200,000 be eligible for the passthrough, mr. Barthold . Is the engineer selfemployed Sole Proprietor . Yes. Earning 200,000. Correct. No. No, he wouldnt. How about the owner of a massage parlor earning 750,000 a year, would he be eligible for the passthrough . Yes, senator. And would a husband and wife that own a small Accounting Firm and have a combined net income of 200,000 be eligible for the passthrough . No, they would be phased out of the income limitation. Because theyre making 200,000 a year, they would not be entitled. If the 200,000 is taxable. The massage parlor owner would be entitled to it . Thats correct, senator. Would the owner of a golf course, let me say that again, would the owner of a golf course reporting passthrough earnings of 3 million a year be eligible for the passthrough . Subject to the other limitations on the provision, yes. And how about a single lawyer running a legal clinic in st. Louis making 95,000 a year . Would they be eligible for the passthrough . Single individual, at that level of income generally would not. What about a venture capitalist who earns millions on wall street by buying bakeries up around the country. Would they benefit from the passthrough deduction . Probably not because Financial Services are also excluded. Okay, so a venture capitalist, somebody who is just investing . That would if theyre just investing, then the other provisions of chairmans mark with respect to Capital Gains qualify dividends because passive income is included in this, right . Not in the passthrough deduction calculation. Passive income is not included in the passthrough deduction . No, its not. Okay. But what about a bakery thats operating at a breakeven their bakery, their llc thats a bakery is at a breakeven with no net business income, but picking up shifts at the local super market to make ends meet. Would they see a benefit from the passthrough deduction . Im sorry, i was trying to make sure i answered your prior question. Could you quickly repeat . A bakery, somebody who started a bakery that they have no net business income but theyre working another parttime job to try to make their business work, do they see any benefit from the passthrough . If theyre not earning any if theyre not at present earning any income from the passthrough entity, there would be no benefit conferred. And that dentist i talked about in the beginning, hes not eligible for any passthrough deductions if hes earning 110,000 a year. What if he created three llcs . And he had one for cleaning and checkups. One for orthodontics, and one for oral surgery and fillings . And each one of those three separate llcs made less than 75,000 a year . Then he would qualify, wouldnt he . All three of them. I think not because, again, as i noted once before, we look at related parties. So were going to aggregate them . Its the calculation is ultimately done at the individuals return. Okay. So what youre saying is a Real Estate Developer that has lots and lots of llcs is not going to take advantage of this . Because youre going to aggregate them all . I dont think i said that. Theres not a prohibition against real estate as qualifying. Oh, so the real estate guy gets them all but the dentist doesnt . In each case, its in each case, its aggregated, and youre tested against in the one case, the dentist is service income, a service provider, Labor Service provider, which is generally excluded except in the case of the incomes less than the designated levels. In the case of other enterprises that are not in professional services, they are generally qualified, regardless of their size and in both cases, all the entities, however they organize themselves, flow to the individual return. I think those examples just show how crazy this is. This is nuts. The massage parlor guy gets a break. The golf course guy gets a break, but a couple who has an accounting business doesnt get a break . That makes no sense, mr. Chairman. I have more questions about the passive versus active, more questions about how this is designed. I will save that for the next round, then we have to get to the incredible complexity of the International Taxation scheme thats laid out in this mark. Thank you, mr. Chairman. Senator enzi. Thank you, mr. Chairman. In light of the questions that were just asked there, under the present tax system, is there any variation within the cohort between the people in that cohort . Do they all pay the same . Senator enzi, of course, theres substantial variation within our income classifications. So there are a lot of moving parts to it then. In the version that the chairman has put up as a mark, would there be any difference within a cohort and what the people would be paying on . Of course, senator enzi, as we talked about before, theres a number of reasons why there might be different outcomes at same income levels depending upon marital status, number of children, age of children, other personal circumstances. Ill be interested to see the amendments that apparently the other side can fix within a cohort so that all people get a tax break regardless of what kind of business theyre working for or in or make or how many jobs they hold. I think well still wind up with a variation within a cohort where some people will get less than 100. Some will get more than 100. Some people wont get any break at all. Ill be interested to see the solutions the other side has. This isnt my first time legislating. I was in the legislature for ten years, and clear back then, i discovered its easier to kill a bill than it is to pass one. And all you have to do during any one of the several steps, and here we have committee work, we have floor work, we have conference. Well have then a reaffirmation of the conference votes. And at any one of those points, if you can create a little confusion, you can kill a bill. But to pass a bill, you have to get a positive vote at every one of those. So i hope there will be some effort, and well see through the amendments whether its an attempt to kill a bill or whether its an attempt to improve the bill. So i havent seen so far much effort to pass a bill. But well look at the amendments. I yield. Okay, senator crapo, you can take over. And senator heller. Mr. Chairman. Ranking member. Thank you, mr. Chairman. A couple additional questions for you, mr. Barthold. The administration majority promised that if the 1. 5 trillion deficit busting bill is passed, households can expect average wages to rise by 4,000. Based on the tax provisions and the debt its going to rack up, does the joint committee or the Congressional Budget Office forecasting average wages to rise 4,000 any time over these next five years . I dont know what the congressional budget Macro Economic baseline forecast for employment Income Growth as part of the baseline. The 4,000 figure that you attribute to the administration i believe is the figure cited by the council of economic advisers chairman, kevin hassett. And as to the joint committee staff, as i noted earlier, with respect to the mark before us, i would prefer to wait to do our economic analysis. I understand. Let me ask it this way. I would like to know whether you think that there is any possibility of Something Like this, because my understanding listening to you over the years, the senate bill provisions are unlikely to produce that sort of increase in household incomes, at least within the tenyear forecast. Is that off base given your history . We have on our website, as i know you well know, analysis that we have done, we have done in the past. They have all been in the context of bills that do not make as many and as substantial changes as this bill. But it would be fair to characterize them as probably not having as big an increase as chairman hassett has suggested. Colleagues, i hope everybody gets the significance of that before lunch. Mr. Barthold does it by the book. He doesnt do it by politics. He said, and i respect economic speak, he said it was unlikely that youre going to see what the heart of the administrations proposal for these Corporate Tax breaks is about. That workers are going to see a 4,000 increase, and i appreciate the answer. Let me ask about one other matter. Mr. Barthold, there have been press reports indicating that the president recently called a group of Democratic Senators and said that he would personally get killed financially under this senate bill. Now, i find that hard to believe. And i also very much respect that you cant comment on the president. But lets just set that aside. Thats not what my question is about. What i would like to do, though, is talk and have you walk us through a hypothetical billionaire Real Estate Investor who, say, has investments in more than 500 partnerships. This is a hypothetical example. I want to underline it, hypothetical billionaire example. Do you think that a taxpayer in this hypothetical billionaire example im talking about would get, quote, killed under the senate bill . Senator wyden, just with the exchange with senator mccaskill, regardless of the size of the enterprise or the number of entities that an owner might own, if were not an enterprise thats a professional Service Enterprise can generally claim the benefit of the 17. 4 deduction for your business income. Subject to the limitations of 50 of the w2 wages that you pay your employee. So there is a limit on that. So in your hypothetical example, i guess we dont know how many or how much the employees are paid. That would be a limiter. Just for, again, for the general awareness of this, what might our hypothetical billionaire benefit from . Because it strikes me there are a host of past provisions, the lower rate for people at the top of the top and the estate tax and the like, but just tick off what might this hypothetical real estate billionaire benefit from . Well, aside i guess we should start with the rate. Youre saying the person is a billionaire, so youre thinking they probably have a fair probably have an income in excess of 500,000 or a Million Dollars. Those are the single and joint threshold taxable incomes for the 38. 5 rate under the chairmans mark. On the qualified business income, the bill would allow a 17. 4 deduction, which hoping one of my colleagues has quickly figured out the deduction amount for the effective marginal rate. Reduction from 38 . Let me say its roughly not quite a sixth, so maybe six points down. It would mean instead of having a 38. 5 rate on the qualified business income, you would have something around a 32 marginal tax rate. So that person got a significant reduction based on your marginal rate calculation on the top rate as well . And that was independent of real estate, manufacturing, retail, whatever the enterprise might be. Anything else they would be eligible for . I know im over my time. I assume the estate tax reduction. There are changes in since you mentioned real estate, theres changes in the Cost Recovery lives of residential and nonresidential real estate. And so that could prove beneficial. Im over my time. Senator stabenow. Thank you, mr. Chairman. I do want to note that its very possible to do bipartisan tax reform that really benefits our Small Businesses, middle class families, makes us Competitive Internationally, lowers a tax rate while closing loopholes. We started working on that last year. Senator enzi and i cochaired a bipartisan working group. And its disappointing, very, very disappointing, to see this bills moving with reckless haste through the process and at the initial numbers, what we see is within a year, this bill would raise actually raise taxes on 14 Million People and in seven years raise taxes on 21 Million People. So thats the concern that i have. And other colleagues have. But let me talk a little more about specifics. Again, back to the fact that we have house, senate, administration. All will be coming together in a room to decide the final bill. So i want to talk a little more, again, about the house. Mr. Barthold, would the house bill eliminate the ability of a teacher who buys books and supplies for their classroom out of their own pocket to deduct those costs on their taxes . Hr1 has ordered reported by the committee on ways and means would repeal the above the line deduction for classroom expenses incurred by teachers. Thank you, mr. West, when chairman hatch introduced you this morning, he said mr. West is here to give the administrations position on the tax proposal being discussed. So i would ask does the Administration Support eliminating this important deduction for teachers . I understand the introduction this morning, senator. I was invited up here to talk about the administration and the potential adminstrability of these provisions. I would be happy to help with questions about that. Otherwise, im not here to discuss the position of the administration on any particular provision. Thats unfortunate. Because that would be very helpful to know where the president and the Administration Stands on these bills. Mr. Barthold, would the house bill eliminate tax exempt bonds for nonprofit rural hospitals . The house bill would eliminate the ability to issue private activity bonds. So that would include nonprofits. Thank you very much. Mr. West, do you know where the president stands on this . Again, im not going to talk about the position of the administration on any particular provision. Thank you. Mr. Barthold, would the house bill end the deduction for student Loan Interest raising taxes on millions of young people who are struggling to pay off Student Loan Debt . The student Loan Interest deduction in present law is one of several nonitemized deductions and itemized deductions that hr1 is reported by the ways and Means Committee would repeal. Yes. Any idea on where the president stands on supporting students that are going to college . Again, senator, im not going to speak to the administrations position on any of these particular provisions. Okay. Let me talk about another provision that relates to tax loopholes. I thought we were supposed to be closing tax loopholes, and i support doing that. Bringing jobs home, making the tax system more fair for all businesses, as well as individuals. But looking at things, mr. Barthold, as you we look at the tax provisions for Oil Companies, could you speak about the current tax provisions that Oil Companies enjoy in the current code . Income of Oil Companies is measured with a number of special industry specific rules that the congress has passed through time. Among them are the treatment generally, expensing for smaller producers, amortization for larger producers for intangible drilling costs. Theres amortization of geological and geophysical costs. Theres percentage depletion allowed for small producers. So theres a lot. Just in that time. Several. A number of things. Some starting as far back as 1916 or 1917. Theres a current part of the tax code called foreignbased company oil related income that as i understand it, keeps companies from gaming our international system. Is that correct . Its actually basketing of foreign tax credits on foreign income taxes. On income taxes that foreign governments impose on oil operations. The genesis of it is that oil, particularly moving it and trading across seas was seen as mobile income, and the congress in im not sure when decided to wall off that source of foreign tax credits to diminish whats referred to as cross crediting. I understand, so it relates to minimum taxes, but as i understand it, both the house and senate bills eliminate this provision. Is that correct . Thats correct. So were going to actually see a new loophole being put in . Well, that might be for Oil Companies. That actually might be hard to judge. Without speaking for the chairman, in moving to a territorial regime in general, there will be very there will not Many Companies will not be claiming foreign tax credits on active business activities. I understand, but actually repealing this loses money, correct . Repealing this provision would lose money. Relative to present law. So relative to present law. Thank you very much. Senator cardin. Thank you very much, mr. Chairman. Mr. Barthold, i want to concentrate this round on one of our objectives here, thats to make the tax code simpler and to provide more certainty, which is one of the issues i hear a great deal, particularly from those who have the burdens of trying to comply with our tax laws. Now, as you went through the explanation of foreign intangible income and base erosion provisions, i doubt whether many people fully understood what you were saying, not your fault, but because it is anything but simple or easy to understand. I want to get to the foreign and intangible income because i served in the house of representatives in the ways and Means Committee when we went through the fiscal debates and the problems we had because we felt we passed a Pretty Simple provision for manufacturing only to find out it was wto illegal. What were trying to do here is encourage imports exports at a lower rate, which seems to me is going to be a red light for the wto. Do we have a plan b or are we going to potentially go through many years of uncertainty in regards to this provisions legality under the World Trade Organization . Well, senator cardin, its the chairmans mark. I am not a trade expert. My colleagues on staff are not trade experts. So we cant really opine on the important issue that youre raising. If trade people think that theres, you know, some uncertainty there, you know, as you say, the uncertainty is unfortunate for business. And mr. Chairman, i would just urge us. We went through years of debate on trying to fix something that we thought was well intended to encourage exports only to find out because of wto rules we couldnt do. My guess is that this is going to be an issue that will be challenged in the wto, which means that were not going to have the certainty that we want to encourage u. S. Exports. Its just another uncertainty that we would be baked into the law. Another reason why you need time to make sure what were doing is right. Let me, if i could, go over a second issue that could run into problems. That is our International Trade International Tax treaties. And how youre trying to deal with the deductibility of certain expenses that may run contrary to tax treaties that we have entered into. Do you have somebody on staff thats an expert on treaties to make sure were not violating any of the treaties . Obviously, treaties would be i would think take precedent, but im not sure if the tax law requires one result and a treaty is a different result. Well, to answer the simple part of your question is several of my colleagues are quite expert on treaties that we help advise the Senate Foreign Relations Committee in their review of income tax treaties as a regular matter. And i believe you were talking about the proposed base erosion antiabuse provision of the chairmans mark. And its structured as an alternative tax compared to the income tax. So i think our view is that theres not a treaty override inherent in that design. So you believe even though its circumventing a treaty, it will be acknowledged by our trading partners as a clever way to avoid the treaty . I think thats what you just said. I dont think i used quite those words. I wonder whether we would take the same view if our treaty partner used a circumvention to get around their obligations under a tax treaty. I wonder whether we would take the same attitude. Let me im trying to figure out how were going to force the passthrough limitations that you have on getting the reduction that you have to the antiprofessional service rule. You have the w2 income rule. Are we how would the taxpayer know what they can deduct and what they cant deduct . Will this revise the k1s if its a Partnership Type of entity . Is this really enforceable . In terms of thinking about the deduction, senator, you first start with taxable income as you would compute it today. So compute taxable income i understand that, but i have a k1 im a passive the deduction is then taken against the individual returns rate. But would i get the information about whether how would i know . Youre asking so how does the taxpayer know. I guess your question is how to apply the wage limitation. A wage limitation. I dont know the workings of an underlying company. I just have income. I think youre correct that we envision that there would be reporting of wage information so that taxpayers can comply. A taxpayer wouldnt know, so theyre using thirdparty information. Thats right. They could be if that gets audited later which is the same as present law. If there are errors, be they unintentional or intentional, report it to the tax company. That is true, but today some of this is a little bit more subjective and more removed than what we have on k1s today. I just point out, i think youre creating an enforcement challenge because some of this was personal service is another area that may be subject to different interpretation, and youre going to have taxpayers relying on information received from third parties that may or may not be accurate. Senator casey. Thank you, mr. Chairman. Ill be focused on outsourcing. Mr. Chairman, i realize that this panel has not had a break, and its the lunch hour, so ill stay within my limits here. I wanted to focus on outsourcing because one of the concerns we have about the bill is it could actually encourage outsourcing, which would be devastating to American Families who have already endured the adverse impact of that over many years. The bill includes a complicated calculation which may actually allow companies who outsource manufacturing to avoid paying any tax on these on those foreign profits. At best, the senate plan the senate bill, i should say, will tax foreign profits at a rate that is 7. 5 less than profits earned in the United States. 7. 5 less than that earned in the u. S. So if youre a company that moved a manufacturing plant overseas to take advantage of cheap labor, you get a tax cut under this proposal. Our workers have lived for decades under the constant threat of jobs leaving to go to mexico or other places and its been a terrible pall or dark cloud thats hung over so many communities. I guess ill start with mr. Abraham. I would ask you, is four days enough time to fully understand the impact of the changes being proposed in this bill as it relates to how we tax profits of Global Corporations . Yeah, we have started analyzing it since thursday evening. So were still trying to understand the broader effects, ramifications of the bill. Im assuming you could use more time. That would be helpful to better understand the implications, yes. So were concerned about encouraging outsourcing, as i said. From what you know about the bill so far, can you explain how this bill may actually encourage outsourcing as well as how it may reward companies who actually have already outsourced jobs . Yes, senator. So based on my understanding of the bill, of the chairmans mark for us, maybe ill handle the second part first. There is a Transition Rule in the bill having to do with previously untaxed earnings and profits of controlled foreign corporations. Normally that would be subject to 35 u. S. Rate and the chairmans mark provides both a 5 and 10 rate bifurcated rate on that income. Some have said, other proposals have had a higher rate on the previous income. That might be an issue. And then on the first part of your question as far as sort of permanent tax relief or tax incentive comparing the u. S. Manufacturing facility, i believe was your example, to a foreign, as you said, theres potentially a 7. 5 meaning a 20 versus a 12. 5 rate differential. And you can achieve that because the highest rate that would be paid on the intangible portion of the income will be 12. 5 , but on normal routines, you could potentially be paying nothing. As compared to a 20 rate in the u. S. Thats my understanding of the legislation. So is it correct that if youre a u. S. Company with a manufacturing facility in china, is it likely that your profits are, quote i should say it is likely your profits are, quote, routine returns, and you will likely pay a zero percent rate on u. S. Tax on the profits. And at most, youre paying 37. 5 less than if those profits were in the United States . Is that correct . Yes. Assuming its a manufacturing facility, as i understand your example, thats my understanding of the chairmans mark and how it would be treated. And this is just my assessment of it, but that means a company who has outsourced jobs will be paying less tax on profits than a company that kept their jobs here. Mr. Chairman, thank you. Okay. Senator portman. Thank you, mr. Chairman. Weve had this discussion already so i wont belabor it except to say the incentives in the bill are to stop what is happening now, which is jobs and investment going overseas. Mr. Abraham, you talked about you think the repatriation will cause more jobs to go overseas. I dont get that. Were saying were going to tax you for earnings you already earned and for the investments you already made. Its not going to help in terms of companies that want to send their profits overseas. It will do just the opposite. Its going to require them to pay taxes that are going to be owed in order to shift to a territorial type system. Again, we have looked at this for years. We just had a working group, Chuck Schumer and i cochaired it. We said a territorial system is a way to go, a lower rate to stop the current system, which is moving jobs and investment overseas. We did an investigation of this and the permanent subcommittee investigations i chair, we found out these companies are taking their jobs with them and money with them. I would just say that what i think my colleagues are recommending on the democratic side of the aisle is a worldwide system thats going to have even more jobs going overseas and having even more companies that are foreign buying u. S. Companies. Because if you tell Procter Gamble thats in ohio that they have to make diapers in america only, guess what. You cant make diapers in america and sell them all over the world like they do, and be able to be competitive. You make the diapers where the market is. And by telling them theyre going to have a higher tax than anybody else on that, Procter Gamble becomes a Foreign Company because a Foreign Company can pay a premium. Thats the problem we have now. Theres also an argument made earlier that somehow this is going to be violative of the wto, that the World Trade Organization is going to step in and say this is something that is inconsistent with their rules. Senator cardin talked about, it senator wyden talked about it earlier. Let me say what were talking about here has been carefully crafted to avoid that very problem. The provision targets intellectual property, wto subsidy rules do not apply to intellectual property. To the extent the lower rate applies to intellectual property income, which is the intent of this, thats the end of the analysis right there. In addition, this 10 rate is not export independent. Yes, its to bring ip back here and export it, thats the carrot, but theres also a stick so that its not dependent on whether its exported or not. Its a rate on intangible income. Including cfc intangible income, which also deals with any potential wto problems. So i would just ask you, i know mr. Barthold, you are the joint Tax Committee, not the joint trade committee, and you said youre not a trade lawyer expert, but has anything i have said with regard to the International Trade elements of this been incorrect . Well, not to my knowledge, but again, im not a trade expert. Yeah. Well, its drafted in a way that avoids the wto problems that were raised. Let me ask you something you can talk about, which is the tax side of this. Again, democrats have called our international plan, quote, today, a multibillion dollar tax break for u. S. Multinationals. Can you tell me what the revenue cost of the International Tax system in this bill are . Does it raise revenue or lose revenue . Is it a big tax cut . Im looking at page 6 right now of your revenue title, thats this table, page 6 of your revenue tables. Does the international provision as was said earlier provide for a big tax cut for Multinational Companies . Its fairly much break even across the tenyear budget period, senator. So its break even. I see actually 104 billion razor. Thats correct. I guess by washington standards, 104 billion one way or the other its not a big loser. Its positive. It raises money. Theres no tax cut here. So i appreciate the back and forth, but i think we have to go back to the facts. And look at whats happening. And let me ask ms. Acuna, who hasnt gotten a chance to talk much today, but shes been involved in a lot of this base erosion, antiabuse stuff that we have been trying to do to insure were not going to lose out on our revenue were due here in this country. You have been involved in this issue trying to be sure that this is fair and balanced. Can you talk to us a little bit about why its so important to move to these kinds of incentives to keep jobs here in america . Well, as you mentioned, one of the biggest problems that were facing is international competition, and our global competitors do provide preferential rates in their countries. And in recent years, now those rates have to be paired with nexus requirements. That means they actually have to move bodies and jobs overseas in order to take advantage of those rates. What this is designed to do is to level the playing field. In that respect. To provide a preferential rate with respect to your foreign earnings and a similar rate with respect to your u. S. Earnings. So that there isnt a large tax difference between being u. S. And foreign. So to keep the jobs from going overseas, and as you indicate, its an increasing problem. Now countries are saying you can take advantage of our patent box and lower rate but only if you bring the r d with you. You have to do the r d in those countries. Thats the future. If we dont do this, well find ourselves losing out even more. Is that accurate, ms. Acuna . That is accurate. Thanks, mr. Chairman. Mr. Chairman. On the point you and i have been talking about, and i want to, again, express my appreciation for our working a working relationship. Senators on our side are not filibust filibustering. Weve got real questions that go right to the heart of making 10 trillion worth of changes in tax law. I mean, on the last round, i got at what i think is a key question where the white house said as a result of this tax reform people were going to see their wages rise 4,000. Mr. Barthold, professional that he is, used economic speak and said that that was very unlikely. So i appreciate youre saying were going to come back at 2 30. My colleagues have very real questions when you and i talked about it and i appreciate it. You said as long as theyre not filibustering, as long as theyre asking real questions, and we are not yet even on the bill thats the bill. We should continue. And i want to say that im going to work with you, and well discuss it with our colleagues. Okay. Well recess until 2 30. The Senate Finance Committee Hearing returned from that recess and continued debate on the republican tax reform bill. Just as the committee gavelled back in, members learned republican members will now include a repeal of the individual mandate in the tax plan. The individual mandate is part of the Health Care Law that creates penalties for americans who dont currently have health insurance. Committee members discussed this latest edition and where the bill goes from here. Well show you that final portion of todays hearing, starting with comments from Committee Chair orrin hatch. This is 40 minutes. Ready to come to order. The purpose of this afternoons session is to discuss the details of the chairmans mark. Were not here to speculate about items that may or may not end up in the house bill. Were not here to debate items that are not currently part of the chairmans mark because as of now, there is no official or final version of the modification. As i made clear this morning, we are still working to finalize the details of the modification. When that work is done, the details