Dwight d. Eyisenhower as a military man and president. For a complete schedule go to cspan. Org. Business owners, policy writers, and an accountant testify before the Senate Finance committee on the future of u. S. Business tax law. They talked about the latest research into ways United States tax law could be changed to be more competitive in the Global Economy. This is just over an hour 45 minutes. Good morning. Its a pleasure to welcome everyone to todays hearing, which weve entitled navigating Business Tax Reform. Its a big title. I think this title accurately describes the challenges we have before us. Moving forward on Business Tax Reform specifically and on comprehensive tax reform more generally. In the recent past identifying and developing certain bipartisan policy proposals and moving them through the legislative process has proven especially difficult. But im an optimist, and i believe we can and should find Common Ground on a path forward for comprehensive tax reform. Of course, as ive said in the past, successful tax reform will take aw president who truly makes it a priority and works closely with congress to get it over the finish line. Currently i think its safe to say that we havent met that prerequisite with this administration, which most acknowledge means that for now we have to wait. But in the interim this community will continue to lay the foundation and develop progrowth proposals for when the appropriate opportunity arises. That is why last year senator wyden and i asked members of our committee to work on various Tax Reform Working Groups to help identify issues and develop consensus if possible around tax policy proposals. Today we will focus our attention on Business Tax Reform issues, including topics that were covered in the report issued by the bipartisan business income tax working group. I want to thank the cochairs of that working group, senator soon and cardin as well as other members of the working group, senators roberts, burr, toomey, coats, stabenow, carper, casey, warner, menendez and nelson. A lot of time and effort went into examining these issues and compiling this report. I appreciate everyones willingness to help advance this cause. Tom barthold, the chief of staff for the joint committee on taxation, is with us today to provide background on Business Tax Reform issues and highlight some of the major topics reviewed in the working groups report. We appreciate his work, and we appreciate him being with us. We have a great group of additional witnesses here today as well that will provide important insights and recommendations about broad design issues of the business tax system and practical on the ground issues that are important for us to keep in mind as we further develop and refine proposals in the business tax space. I want to take a minute to discuss one particular business tax issue that was discussed in the working group report that i believe warrants real consideration by everyone here today. Corporate integration. In very general terms corporate integration means eliminating double taxation of certain corporate business earnings. Under current law the corporations earnings are taxed once at the corporate entity level and then again at the shareholder level when those earnings are distributed to the shareholders as dividends. In other words, under our system if a business is organized as a C Corporation we tax the earnings of the corporation itself and those same earnings when paid out to the individual owners of the business. This creates a number of inequities and distortions. My staff and i have been working for a few years now to develop a proposal to address there problem. I was glad to see that the Business Tax Working Group addressed corporate integration in its report, noting that eliminating the double taxation of Corporate Income would reduce or eliminate at least four distortions built into the current tax code. One, the incentive to invest in noncorporate businesses rather than corporate businesses. Two, the incentive to finance corporations with debt rather than equity. Three, the incentive to retain rather than distribute earnings. And four, the incentive to distribute earnings in a manner that avoids or significantly reduces the second layer of tax, unquote. Depending on its design, corporate integration could have the effect of reducing the effective Corporate Tax rate and help address some of the strong incentives were seeing today for companies to relocate their headquarters outside of the United States . In fact, i think it would make a big dent in the reversions of companies that arent even considering that now. It would also have the likely effect of making the United States a more attractive place to invest and do business. Ill have much more to say on this topic in the coming weeks and months, but i plan to raise this issue in several terms in general terms here today. Once again i want to welcome our witnesses. I look forward to a robust and formative discussion. With that im glad to turn over the time over to senator wyden for his opening remarks, and then well hear from the two cochairs of the Business Tax Working Group who will give brief opening remarks. Well start with senator thune and then senator cardin after senator wyden completes his remarks. Thank you very much, mr. Chairman. I very much look forward to working with you and our colleagues, and i too want to commend senator thune and senator cardin for their outstanding work. We have just the right people heading that part of the working group. And i appreciate it. Colleagues, if you own a Small Business in america today, often you go to bed at night believing that you are in danger of being ensnared by an outdated, overgrown tax code that americans spend 6. 1 billion hours and more than 100 billion complying with each year. That tax system is punishing to those who dont have a fleet of accountants and the luxury of time to Plan Investments around taxes. The american tax code tells Small Businesses that their dollar is worth less compared to sophisticated firms that can afford to make the rules work for them. Thats why today i have released the Cost Recovery reform and simplification act of 2016. This proposal is all about making the tax code more attractive for the risk takers who go out and start a Small Business. People who are more often than ever before going to be minorities or women. So this proposal would modernize the tax code and strip away much of the unfairness to Small Business by radically simplified our system of depreciation. For the small cashstrapped firms to grow and create jobs, they need to invest in basic priorities like a new cash register, an office computer, or Farm Equipment when it makes business serngs not when it makes tax sense. Today to figure out the Tax Deductions on these investments a Small Business person has to navigate more than sets of tax rules. My proposal dumps that headache and lays out six categories for depreciation that are far easier for a Small Businessperson to work with. Today youve got to do the math as many as three separate times under different programs for each and every asset. My proposal says one round of math is enough, Small Businesses shouldnt have to do individual calculations for every car on the lot, every computer in the lab, or every machine in the shop. Todays rules come frommest year year, from the last century. Theyre stuck in an era of fax machines and vcrs that predate the Technology Boom that has transformed the way in which americans live and work. My proposal says our business tax rules should reflect a 21st century economy and help our cutting edge entrepreneurs thrive, not hold them back. It makes no sense to cling to an outdated system that taxes some hightech investments such as computer servers and mri machines at more than double the rate of other investments. A startup shouldnt be told that theyre not allowed to use a work laptop in a coffee shop or otherwise theyre going to face a big financial hit on their taxes. And in my view the tax code shouldnt get in the way of publicprivate partnerships that want to build new roads, bridges, and highways across the country. So my proposal would fix these issues with new rules grounded in common sense and a realistic appreciation of how our businesses, particularly the Small Businesses, operate again on a bipartisan basis how to bring our tax ococode up to date. Im especially pleased that gale gauchy in silverten, oregon is with us today. The hundreds of acres of hops they grow at gauchy farms are a big part of what makes oregon beer the best that money can buy. And just for those kind of historians in the room. Goschie farms just celebrated their 112th hop harvest. We couldnt have a better witness. And mr. Chairman, again, like you id like to show our appreciation. Senator, well hear your remarks. Thank you for the opportunity to make an Opening Statement today and for the opportunity to co chair the business income Tax Reform Working Group with senator cardinal last year. While there are undoubtedly differences between the political parties, i believe that our working group demonstrated that theres bipartisan agreement in a number of areas. Senators in both parties understand the importance of reforming our tax system and how we face the most vexing challenges of Business Tax Reform. Our report had a wide range of issues to simp luification reforms to biases in the tax code. However, given that my time is limited this morning, i want to speak about two issues. Senator, could i interrupt you for a second. I have to go open up the senate, id like you to continue chairing this until i get back. First, our working Group Recognized a more competitive u. S. Corporate tax rate is going to be integral. America is losing ground as other nations continue to lower their Corporate Tax rates, over tlo 39 is the highest tax rate in the developed world. This is not sustainable if we want our country to continue to be an attractive location for foreign investors. Lowering the Corporate Tax rate is achievable. Our working group reinforces that a lower Corporate Tax rate remanlz at the center of any bipartisan approach to tax reform. And secondly, our business discussed that it needs to be about all businesses, both large and small. The reality is those businesses taxed at the individual tax rates earn more than 60 of all net business income. If you include sole pripriterships, and our report found and i quote clearly Business Tax Reform needs to insure that these businesses are not ignored in an effort to reduce the Corporate Tax rate. They need to benefit for any such effort to be consider a success. I believe we need to keep this perspective foremost in mind as we move forward. So, i would say our working group found that a modern, more efficient system is critical to raise incomes and increase wages p. It will require leadership both in congress and from the white house. But i believe that we should remain optimistic because with each passing day it becomes more a question of when and how. Our out dated tax code is without question Holding America back. And thats one of the most important elements to come out of last years working group progress. Thank you for their input and for helping us lay the ground work. I look forward for the continuation of the robust debate on how best to reform our business tax systemcyssystem. Thank you so much for your leadership on the work class working group. And i want to join you in thanking senator hatch and establishing the working groups p. Our working group produced a report of 140 pagepages. I particularly want to thank the joint committee on tax for their extraordinary work. I said at the conclusion that i learned a lot. I thought we were gaining senate continuing Education Credits and didnt have to pay any tuition for it. I agree that high tax rates on businesses in america is making america not competitive. We are definitely at a disadvantage in International Competition because of the high business tax rates and that i think democrats and republicans agree we got to do something about is it. The ccorporation rate at 35 is not competitive. And senator hatch and others have brought forward proposals in this regard and its an area that we certainly need to take a look at so that the business entity form doesnt discriminate against a business and thats clear lee an issue we need to deal with. But 90 of american businesses dont pay the c rate. We need to deal with the realities of both the c rate and the individual rate in dealing with business taxes in our country. Although, we want to talk about major tax reform, we shouldnt lose sight that there are socalled smaller reform issues that we should do and we should r try to get that done as quickly as possible to help americas businesses. The challenges in dealing with the high rates are incredible. I want to put this on the table so our colleagues understand if were going to do a major are eform for business taxes in america. First, its a huge revenue issue. If we use the existing structure, for every 1 point reduction in the c rate, estimated it would cost 100 billion over 10 years. Most people want to reduce it by a trillion dollars and that doesnt deal with the individual rate. And we need to understand that theres need for help on the it individual rate with business income and that could add anywhere between 60 to 80 more to the cost of any proposal that deals with reducing the rates p. So, if we say threalets do wha did in 1986, that lasted until 1987. Politically, im not sure thats possible for us to leave the tax code alone for any snipping amount of time. I just want to challenge the committee. The United States, among is one of the lowest on its reliance on the governmental sector for its services. So, why should we have the highest marginal rates, we should have the lowest in the oecd countries. And the reason is were the only country that doesnt have a National Consumption tax. There are about 150 countries globally that have a National Consumption tax. It dramatically simplifies our tax code by simplifying it and starting it at 100 thousand of taxable income with the highest rate being 28 for the taxable income for families over fiv 50 thousand. And reduce the Corporate Tax rate to 16 , giving us a significantly lower Corporate Tax rate and a National Consumption tax at 10 using the credit invoicing system. Its progressive. And cashing out the earned income tax credit are crashed out. And its revenue neutral and contains a Circuit Breaker that if we produce more revenue, there would be a trigger system to return the excess to the taxpayers. We would have on average five Percentage Points lower than the countries, giving us anned a va advantage. I think we can be in the leadership of tax reform and i think the work that was done by the working groups we have become, i think, understanding of the challenges we have and i urge us to Work Together for america, in fact, can have a tax code thats a lot easier and simpler and efficient on capital and growth than our current tax code. Thank you, senator carden. If i take a couple of minutes and introduce our panel of if i ever witnesses. The chief of staff for the joint committee on taxation. Tom is no stranger here and shouldnt need much of an introduction. Hes worked since 1987 when he started as a staff economist and worked his way to become acting chief of staff before being named in his current position in 2009. Prior, he was a member of the economics faculty at Dartmouth College and later received his doctorate in economics from harvard and indespenceable in term terms of providing insight and counsel in the working groups. So, good having you here, tom. And second, the musgrave professor and currently serves as the Research Director at the university of michigan. He is a Research Associate of the International Tax forum. And once long ago was an economist in the u. S. Department of commerce. He has held appointments at the London School of berkley and graduated from yale and a ph. D. From harvard, all in economics. Third, dr. Erick toter. His recent work includes papers on what the u. S. Can learn from u. S. Territorial tax systems Corporate Tax reform, net benefits of expenditures and many other issues. He had service as the Deputy Assistant deputy at the treasury department. Deputy assistant drexer at the National Budget office. He received his ph. D. Of economics from the university of rochester. Our next witness is zenman in new york. He is looauthors, child care providers, real estate, medical professionals and retail operations. He provides tax services for businesses and individuals. A member of the National Conference of cpa practitioners. Hes also a member of the american . Institute of certified public accou accountants. Other words, he hangs outwith a lot of accountants. He graduated with an mba in public accountant from layola. And next ms. Goeschie is works with the two brothers to manage the operation of the family farm that specializes in hops and grapes and the farm grows wine, grapes and more, grass, seed, corn, and wheat. Theyve been an innovator in Sustainable Farming techniques. She was the first hop woman to be named the order of the hop 2009. And were grateful to have your expertise to inform us on business tax issues and we will look forward to hearing from all of you and hopefully you can come up with a way to make this all a little bit more understandable and hopefully easier. No, i dont think its going to be easier for us to get this done. Its a subject that we need to tackle and as noted earlier, the it sooner the better. So, well proceed from left to right. My left and your right, starting with mr. Bartal. Tom, please proceed. Thank you, members of the committee for todays hearing, chairman hatch and widen have asked me to briefly review some of the tax revoou issues. My colleagues prepared for you more detailed Background Information that was released last friday in our joint committee document. In assessing any tax system or reform, theres four key dimensions. First, does the tax system promote economic efficiency . Does the tax system promote Economic Growth . Is the tax system fair . Anded a min strbl both for the taxpayer and the Internal Revenue service . There may be other policy considerations but invaryaebl, its the case that these different policy goals are in conflict. Policy designed to promote economic neutrality, may conflict with fairness. And so, those were issues that the Business Working Group was always grappling with when thinking about the issues before them. Some of the proposals broaden the base and lowering rate rate. To lower the top rate of the Corporate Income tax by one percentage point from 35 to 44 , we have estimated against the current policy base line would cost 1 100 billion over the 10year period. By comparison, by our staff estimates of the largest Corporate Tax expenditures, only a handful exceed 50 billion. So, if we broaden the base, it takes elimination of a lot of other ideas. This was an approach taken by ways and Means Committee dave camp in his hr 1. Which reduced the Corporate Income tax rate and did so by generally reducing appreciation. And repealed lower cost or market methods of accounting, phased out section 199 deduction for manufacturing activities. And a number of other base broadners. I think its also important when we talk about conflicting goals to recognize that some of the trade offs are aexhibited in hr 1. If we lower Corporate Tax rates, thats good for investment but if we slow Cost Recovery of investment, thats bad for investment. So, theres inherently always a trade off. Other issues that the working group looked at as noted in your Opening Statements were the differences between entities and the United States as a business form and ccorporations. A substantial amount of net business income in the United States is earned by enterprises that are not C Corporations p. So, some have been proposed with maintaining a sense of pairty through past entities. However, the working group found its not clear what parody they should mean. C generally bare two levels of tax that can exceed 52 . And if you look at earnings not distribut distributed, the current tax burden is 35 . On the other hand, owners of pass through entities generally do not bare a tax rate greater than 34 but that may apply regardless of whether the earnings are distributed or retaped. The slide before you gives you a more detailed analysis. Its not a simple comparison, a consequence of some of the other complexities for business taxation. And its led some to propose whats called corporate intu integration. One approach is complete integration and partial. You eliminate double taxation by including in share holder income the distributed and undistributed earnings. This is how we tax scorporation under present law. Reducing double taxation on distributed earnings only with no change in tax on retained earnings. You may characterize our lower rate of tax on qualified divdends as a form of partial integration. I know im exceeding my time here and that you want to hear from your other experts. But let me just make a brief note of one other important area that the working group looked at and that was the role of inovati inovation. And they have established patent boxes as they call which offer the goal here has been to increase domestic investment in research and development or encourage Business Enterprises to locate the ownership of that intellectual property in that particular company. In the United States we do have incentives and significant incentives for research and development. The path act modified and made permane permanent, our section 31 research effort. The working group explored the notion of creating a patentbox type cyst foreman the United States. And this presents some unique policy design anded a m ministrative issues for the members to consider, including what is in the box . Is it just patents . Is it a broader range of entelectual property . And how do we applies those . Other questions are whats the role of nexus, which has been important in term oz of the european consideration of these patent box proposals and how would the income be taxed . Well, the working group did review a number of uth r plu proposals, including some offered by this committee. With but i know you want to take more time to deal with the distinguished witnesses you have to your left and ill conclude and im happy to answer any questions that the members might have. Good morning. Its terrific that the committee is looking into business tax eiss issues. These tax burdens depress Business Activity and create fewer Economic Opportunities for americans, especially american workers. The challenge you face is the ulu following if you want it to be neutral, its going to be impossible to lower business tax burdens very much. If you retain if you implement a reform that is revenue neutral, it will not greatly change the average tax rate that businesses face. So, there is good that can be done by revenue neutral reform but lets be clear that theres a limit to how effective that is going to be in addressing the problems of heavy tax burdens opu. S. Businesses. Because any reform thats revenue neutral will lower the tax on some activities and raise the tax on others and as a result doesnt that greatly change the burdens. Now, within the constraints of revenue neutrality, or for any business taxes set up, there are smarter ways to tax business income. Those efforts should be guided by principals and economic theory says there are two principals we should apply. One, we want lighter tax burdens opactivities that generate positive economic spill overs and lighter sta er tax burdens things responsible for taxation. When you tax income, you discourage the production of income and our goal should be to try to do the least damage to the economy we can while raising the tax revenue we need to fund government. On the spill overs question, some of this has already been discussed this morning. There are very strong reasons to have a favorable tax Research Expenditures because it contributes to economic groelwt. Low incoming housing and to other activities that generate positive benefits that are not entirely captured by the people who undertake the activities. The second principal is that you want lower tax rates on activities that there highly responsive to taxation. Ang examp an example might be domestic manufacturing. We currently have the deduction that offer as favorable tax treatment of qualifying activities. Theres pretty good evidence that has been successful in stimulating other manufacturing investment than we others with have and futher evidence that its further effective to its tax treatment than investment in other industries. As a result, tax reform thad would be directed at low thrg statutory tax rate and financing some of that reduction by eliminating the section 199 reduction. Based on the evidence we have, probably would have the effect of reduszing t effect in the overall economy. Its true that the statutory rate lowers investment. But if you remove the deduction, then on net you discourage so much manufacturing investment by removing the deduction that you dont make the entirely back the low r statutory rate. The issue of corporate integration has come up again as well. Economic theory does not actually say that we wantual tax treatment but it says that the difference in the taxation of these two forms of investment should be related to the responsiveness of this teev taxation. We currently have a quite different treatment of tax debt. Its taxed much more mevally. Efforts to integrate the corporate and personal tax systems and thereby reduce the heavy burden would surely be a movement in the direction of economic efficiency p. The general implication of economic theory is that you do not actually want equal taxation of every Economic Activity and the reason is that our tax system will discourage Economic Activity. Thats part of the cost of government. Thats the way it goes. We want to discourage it as little as possible while raising the revenue as often as we can. So, we should decide to design theistsome with responsive activities in mind. It will be a system with dinchshs. But if we do it right, we will preserve as much as possible of the economic vibrancy of the country and the whole country will benefit and in particular american workers. Chairmans back. Thank you, dr. Hines. Chairman hatch, Ranking Member widen and members of the committee, thank you for inviting me to appear today for Business Tax Reform. The views are my own and should not be attributed to the Tax Policy Center or the urban institute its board or its funders. They discourage domestic investment, place u. S. Based firm at a competitive disadvantage and have encouraged them to acrew over 2 trillion in overseas assets. And pass through businesses over companies that must pay Corporate Income tax. The corporate rate needs to be cut. There is less agreement on how to pay for rate reduction and avoid tax avoid arance. 1986style tax reform that pays for lower rates by eliminating business preferences is not sufficient to pay for the needed rates in the long run. And some of the broader considerations are would not necessarily make them more productive or efficient. I suggest, therefore, that Congress Look beyond businessonly tax reforms to other Revenue Sources to pay for corporate rate cuts. One approach would raise taxes on Share Holders to help pay for corporate rates. Better in todays Global Economy than those based on Corporate Income. A corporations tax residence may bear little relationship to the sales, share hoerlds or even top management and the source of its income is difficult to determi determine. In contrast because the share holder level tax only depends on the residence hof share holder, neither the residence of the corporation or the source of its income would effect tax liabilities. Alternatives are to rate tax rates, shift the taxation of share holder or had tegreat the corporate and personal income taxes. I discussed the advantages and disadvantages of each of these approaches. Another would replace the corporate or individual income tax with a new consumption tax. Such as that in use in over 150 countries around the world. Aunlike the Corporate Income tax, it would not effect firms choice of tax residence or location of production. A final alternative would have a karp carbon tax and use a large share of the new revenue for corporate rate reduction. This could appeal to boelth beth business and environmental groups. All of these options can be designed to raise the same revenue and make the tax burden as progressive or more aggressive than it is now. I conclooude that paying for th Major Corporate rate cut, we look to the tax base for additional are revenues. And ill take your statement. Chairman hatch, Ranking Member widen, members of the committee, thank you for inviting me to discuss this topic. Im the Vice President of the cpa of practitioners. Served more than 1 million business clients and has long advocated for tax equality and simpluification. When they understand the laws, theyre more accepting of the rules p. Ill address the current and its impact on the microbusinesses. I work with anded a vi ed advic of these businesses. Small businesses make upperan overwhelming majority of the the businesses in our country. According to a report published in june 2015, Small Businesses, as define bide less than 1 million in total revenue 69 of those Small Businesses are individual taxpayers while 31 come from prpz and corporations. The report also indicates that they hire at least one employee and produce at least 71 of total Small Business income. The Small Business community is vital to america. Many mom and pop businesses, which i call microbusinesses operate the same way they did years ago. Many are sole prupriteres or scorporations. Gist as often gets the opinion of a qualified tax advisor, usually a cpa. The form of organization is often irrelevant to the Business Owners. They just want to make some money. These microBusiness Owners want to bz better their lives and keep as much of their prauofitss much as they can. The first thing they want to knoekn know is what is the simplest business they can open . Of course, this is never a standard C Corporation. Life was simpler 50 or 60 years ago but were not there anymore. Each one has putexal businesses and pit falls. The cpa will explain the nuance differences between an llc, a an s. Theyre not extremely significant in the big picture but the differences can cause unnecessary ercomplications in the Decision Making process. In the interview process, the cpa tries to determine the Business Owners understanding of the business law and tax regulations and only after a conversation can a cpa provide meaningful guidance. Yet, issues dont help in achieving the true objective, putting food on the table. Although it may meet the current needs of the owner, these needs may chask over time. Then the oo ridgeinal structure may not be correct anymore. There should be a simpler common approach to taxation of various business entities. Thank you again for allowing me to address the committee today. We know congress cant stop people of coming up with clever new forms of business organizations but they can insure a level playing field. There are complexities which effect all businesses both small and large. A simpler equitable tax structure would allow Business Owners to better understand tax relyabilities and make Better Business decisions. Allowing for a single level of tax will provide an understandable equity. Thank you again for the opportunity to present today and i welcome your questions. Ms. Goeschie, ill geto you now. Co chairs of the income bipartisan tax working group. I would like to thank you all for giving me the opportunity to testify today. Im a fourth generation farmer. Im here today to rptd Goschie Farms incorporated. Our customers include brewries located in multiple states throughout the country, some of which you would be representing here today. And we grow wine grapes for three oregon companies. The business of farming is fraught with uncertainty. A growing season can turn from a den to a loss overnight. Our customers needs ask have a unforeseen impact on our business. The agriculture industry has many uncertainties, taxes should not be one of them. Taxes influence how we invest in our business, it efelks the equipment we buy and when we buy it. The types of crops we grow and our hiring and labor decisions. Fixing the present tax code is one of the ways congress can help insure that farms like mine can be positioned to grow. Congress has already enacted sh changes that will have a positive impact on the farming sector. In december 2015, they permanently extended the Small Business sections of business 179. Prior to being made purmnt permanent, the amount was unknown and needed investments were delayed. With inequalities from one industry to the next pch a tractor inning a cuchul dhr is depreciated and it would be helpful to have uniform depreciation for similar items and allow them to be pooled together as opposed to being listed separately. It also impacts our development costs. There are a number of expensz that include pro productive coss of Land Clearing pand irrigatio system. The preproduction period of vines must be capitalized into the vines. Theyre not depreciated until their first commercial harvest, standard of three years. Farmers like me, its complicated. We do not have accountants on staff to analyze every decision as it is made or maneuver each desishz to maximize the benefits p. The work we do every day as farmers are about the products that are our livelihood. We invest practices, sustainability and energy conservation. With the hope of Consistent Energy tax incentives, these are just the beginning of ongoing environmental investments. Another tax issue that would impact farms like ours is the Craft Beverage modernization and tax reform act, which was introduced by senators widen and blunt. Through this legislation, though this legislation does not directly impact hop and grape growers, it would recalerate brat the federal exize tax. When they find relief, the grower will find expanding markets, increased demand and a bolstered confidants in continuing to work with craft producers. It should. As no surprise that ethe Oregon Wine Growers Association and the National Barley Growers asocialiation. With this unique example, a simplified tax code could bring relief to brewries, wineries, and the consumer. We appreciate all of you for being here today. I apologize, i had to go open the senate. I have two articles here by the american counsel of formation. It was printed in the wall street journal and specifically commented on the Tax Reform Working Group. The other article is was featured in Fortune Magazine and titled this is the fairest way to tax america. Mr. Broomfield is no stranger to the committee. I appreciated his comments in these articles. And ask that they be included in the record at this point. So, without objection, they will be included in the record at this point. Okay. Lets start over on that time. Dr. Hines and dr. Is it toader . Am i saying it right . The caution with which you suggest Congress Take in addressing revenue neutral Business Tax Reform by lowering tax rates and broadening the tax base. You mentioned that corporate integration could potentially be a path forward. Im preparing a corporate integration proposal that i think will help address many of the problems we see. Now, would you both elaborate to what extend corporate integration in general can strengthen the competitiveness, encourage more Business Activity in the United States and go a long way in addressing multiple tax issues that we are certainly going to be faced with and seeing today including inversions and earning stripping and i would like to hear your comments as well. Lets start with dr. Hines and then toad. Thank you. A thoughtful corporate integration reform certainly could address some of the competitiveness issues that face american businesses. But as long as the United States maintains a world wide tax system, were never going to be competitive relative to anyf o the g 7 systems. So, i sort of understand the speart of the question in that if we had corporate integration along with other beneficial reforms, would it be part of what contributes to the competitiveness and the answer would be yes. I think theyre complimentary. Both territorial changes and the corporate integration. I see it the same way. Keep going. Im sorry. So, look, the advantage of corporate integration is it lowers the taxation on equity financed investment and we have a heavy tax burden on that as it currently stands. Yes, sir. Well, one of the, i think, advantages of corporate integration are by shifting the burden of if its designed in a way that it pushes the burden at the individual level. So, individuals are taxed once on their business income, you get less determination of where the corporation earns money or invests, as effecting its tax liability. That depends on the corporation being interested. So, one of the advantages of the australian system is if they dont pay australian tax, then credits dont go out the Share Holders when they pay dividends. So, people can see that as one way of reducing some of the income shifting problems while maintaining a territorial system, which is what they have. I think there are several challenges that you have to deal with. One is youre still going to have a high tax on corporate earnings. So, theyre not necessarily going to get the benefit of that system and thats going to be a tax at the corporate level, which could raise the cost of capital. A second problem is how to deal with the tax exempts. In the United States, by our calculation, only about a quarter of dividends actually go to taxable u. S. Share holders. The rest go to tax exempts or foreign Share Holders or pension funds, retirement funds. So, essentially what youre doing, what you have to do is maintain currently you are taxing those funds because theyre paying the Corporate Tax before it comes out. You have to deal with the issue that you might have to make that taxation a little more explicit or face a very large rev nigh loss. So, it would bow a mat of communicating with them, look, were not really raising your taxes but thats an issue youre going to have to wrestle with. Riltits been an excellent p. I want to start with you, msms. Ms. Goeschie is, Small Business is where you have most of the jobs in america. Thalt thats the litmus test of real tax reform and the wall street journal said the number of businesses owned by asians, hispanics and African American women grew faster than almost any other group during and after the recession. So, what were talking about is what the American Economy is really all about. Thats our priority when we talk about Small Business. And it seems to me there are really two tax codes in america. One is for the large multitax corp rashzs that have this fleet to manipulate the bizzen teen rules of the tax system. And the other is what you described, this lala land and youre trying to make the best decisions for your businesses and the like. And i think what youre saying is that Small Businesses really do not have much specifics about what the tax consequences are going to be when they invest in new equipment. Thats what i read in your testimony . Exactly. We dont have those accountants on staff. So, it does take a phone coal to be able to desiefer the consequences of a decision and sometimes business gets in the way and we just need to make that decision. If you make the decision and kind of keep your fingers crossed, you make the decision, you keep your fingers crossed and you go to bed that night where you made this call without all the accountants saying i sure i hope i dont hear from the irs in the future. Thats correct. Mr. Zenman, is that a Fair Assessment in your view with respects to what Small Businesses are dealing with when wrestling with their taxes . Its a very Fair Assessment. Shes absolutely right. If you dont have a staff of accountants with you look, if you had a room of accountants here and asking questions about tax code and depreciation schedules and theyd say thats why god made computers and tax softwa software. But as a business, youre wrestling with do i have enough money today . The i conskntly have at thoebdf the year, businesses with a successful business and theyre falling within the tax guide lines and yet had of a sudden their business shows a profit. They have fant phantom income. They have to pay taxes on the inkmnt that was unexpected and they havent drawn out the money at that moment and they have to wrestle with understanding the tax code and the complexities of what is supposed to be a simple scorporation and what to do with it. So, youve each had a chance to look that proposaproposal. And the whole point is to end the water torture for Small Businesses. Thats, in a nutshell, how i think we ought to look at this question and in particular, to make sure that we end the day when Small Businesses face a situation where their dollar is worth less compared to sophisticated firms that can afford to make the rules wurlk f work for them. I know the staff has talked to you. In the time remaining, id like your take on whether the proposal we released today as least begins to respond. Absolutely it addresses my concerns. Its simpluification. It puts us on a fair playing field. Years ago i went through hours and hours of training and achesers and acres and trying to explain about accelerated depreciation, section 179 and how it plays into the tax return. And we wind up as accountants doing a lot of work in the appreciation area and in projections for our clientsz because of the complexity of the depreciation. Any kind of simpluification is welcome by Business Owners. They dont maik mind making a couple of extrarr bucks doing analysis work. Thank you both and the point of this really is and i know yuv rr had multiple generations on the farm but the point of this particular part of the proposal, the big guys are go strg a lot of advocates. The ccorporations. Im so glad both of you have focussed your remarks on the Small Business people. Thats going to be my top priority in the debate and i thank you for being here. I want to thank you and senator widen for pulling us together. We thank our witnesses for joining us from across the country. In the past four years this committee has attempted not once, but twice reform our out dated and inefficient tax systems. I dont think we should give up. I especially want to thank my colleague to the right for their leadership on the Business Tax Reform initiative the last year. One thing that this process has made clear is the enormity of the complexity and the obstacles to reform. And if were going to lower business tax rate said and i think is most of us on both sides of the aisle are interested in doing that, then we need to find enough permanent revenue to offset the current rate reduction. That leaves uses with a chase of base broadening. Such as value added tax. Neither are easy. Top even my persistent optimism is tested when i try to see the likelihood of a tax overall. What do we do until then . And in the mean time, while the Business Community waits for congress, to achieve tax reform, u. S. Companies, in some cases being ford forced to choose between aversions and raprofit system. Its one of the main reasons i continue to support the efforts of our colleagues to enact a rifle shot International Tax reform. While we look forward to broader form re form to occur, i think it makes sense to first tackle some of ourmost pressing International Tax challenges. I want to direct questions to two of our wnlss. Toader and hines. Must tax reform be accomplished in one foul swoop or given political obstacles, is it pausesable to envision a multisfaj process. One bite at a time. And i would welcome your comments on that, both of you. I have two responses to that. One is theres a lot of complexity we have in the tax law, which, unfortunately is going to be there because the world is complicated. But theres also what i call gratuitous complexity. You can make things a lot simpler. I think of senator widens as one that accomplishes that. That doesnt require a large agreement. So, a lot of pete pieces where that could be done. And ive always been encouraging that for years. Taxpayer advocate has written a lot about things like that. The other area is interingsal reform wrl there seems to be a conceptual agreement and having a onetime tax on atss abroad and some minimum tax going forward. I think that would make our Current International system a little more efficient, because you wouldnt have this incentive to repateriate. But i dont think solves it the problem of shifting of income overseas. So, i dont i think you need to go forward. Was your term gratuitous . Yes, i used the term gratuitous. There were two words. Complengsty. I would say theres complexity we have to have because the world is complicated. If you want an income tax. You dont want me to deduct the personal use. For. Thank you. Dr. Hines, same question, please. Yes, we can do international only reform and we should if the alternative is to do nothing. But i think everyone in this room adpreeed it would be nice to do nor than pat. And the commexty thatd small s Business Owners face. Im again, im not sure that everybody agrees on the details, such as the need for minimum taxes abroad anding thes like that. In fact, im sure they dont agree on that but this committee, im sure, would do a great job hammering outthe details. Your confidence in us is appreciated. Thank you, mr. Chairman. And our group produced this little document id recommend for night time reading. But staff did a great job breaking down the issues and we had a number of overlapping working groups. So, a number of these issues were dealt with. Wut one of the issues we got out was this tension trade off, if you will when it comes to faster Cost Recovery versus base broadening and what is the best way to achieve Economic Growth and there are different proposals out there, some smat call for full expensing right away. And last year slowed appreciation in an effort to raise rates. So, of those two approaches, in your view, whats the best way to generate Economic Growth . And if they could choose a plan that lengthened depreciation schedules or aloaed businesses to write off their investments more quickly and and i have another question. If you give me your best answer on whats the best way to get growth. The capital Cost Recovery, if you have more generous capical Cost Recovery provisions, you have more. And on the Capital Investment side, will do so much les than dollar for dollar than you get by capital Cost Recovery. The thing about the lower statutory rate is it has effects on all sorts of other things too. And so you sort of have to add them together. I think the thrust of almost all of the Economic Analysis is that its not a very Cost Effective bargain to finance lower statutory rates with reduced capital Cost Recovery because you get a lot less investment and its true you get benefits on other margins of benefit Decision Making but the margin is pretty substantial. Anyone agree generally . I agree as far as what jim said but i would caution you against going the other way to full expensing as well. Because that creates sheltering opportunities unless you restrict interest deductions and then if you move towards whaurt might be called a consumption tax model at the business level, you have contradictions in how youre treating businesses and individuals. So, theres no real simple answer to this. I dont think moving one direction or another is going to improve matters much. I did mention that addressing the challenge of reforming the taxation of past businesses is going to be key if were going to get this done and it seems to me at least that we want to do everything we can to increase the top individual tax rates but its going to be a difficult proposition in this environment. There was a eequibbleancy rate and pass throughs with cash accounting limits or third, a flow through business reductions where past businesses receive a deduction on so as to lower their effective tax rate. Which do you think would be the most effective . In also cutting the tax rate . Im i guess you know, im never a fan of targeted benefits but i think thats probably the best way given the alternatives to approach this situation. Meaning, more generous expensing and other Capital Recovery benefits for Small Businesses. The difficulty with a rate differential is its very hard to tell whats the difference between a Small Business and an employee when you get to closely Held Companies and youre going to have a lot of gaming between the rates on compensation and on business profits. I would not go in the direction of the special rate. I think also i would point out that theres an advantage to being pass through, even if you pay a higher rate because youre not paying two levels of tax. Youre not paying a second tax on distributions. So, the real tax has to be with Smaller Companies who, if the corporate rate were lowered relative to the paz through rate, might incorporate. So, yowlver to have rules that notify what could be pass throughs is and what could be corporations. I agree with mr. Toader. The targeted benefits make more sense than the targeted rate differential. People can become self employed and take advantage of the lower rate if its available. We should really apply the principals. Where you want the more favorable tax treatment is where activities are highly responsive to taxation and i think they both point in the direction of more favorable deductions in Small Businesses. Thank you, mr. Chairman. Thank you, all. Well, thank you, mr. Chairman. I want to thank the panel. I found this extremely helpful. I appreciate you mentioning the american counsel for capital formation. It has worked in a bipartisan manner bringing together many of us on both sides of the aisle to look at better ways to do our tax policy and i remember his predecessor Charles Walker very well as a person who provided a great deal of information to us. And all of us are interested in make thing profit whaerv we can. We ntsds its unlikely in the next month or two were going to pass tax reform. And we explored what can lead to significant improves. I mentioned the reform the scorp. Its not controversial. It would help. We should get it done. But the fundamental points, which is high tax rates on business, which is not competitive. The lack of simpliification, so you need have an accountant in order to get information because you just cant figure out this. And i would add the predi predictability of our tax code, all were the goals of the 1986 tax reform and i remember our predecessor saying we accomplished it and obviously did not. It led to the tax code that we have today. So, i really want to get to the proposal that i brought forward that was discussed in our working group. That if we were able to substitute part of our Income Tax Revenues with a National Consumption tax at least as progressive as our tax, it gives us rates 5 loweren the countries. What impact would that have on the toip type of questions weve been raising on american competitiveness, globely, on complexity and predictability for investment america. Dr. Hines. It would do all of that. You know, a move like that would reduce the inefficiencies in the current system, stimulate investment in growth and make the system more competitive. I agree with dr. Hines on all of his points. I would add though that you are comparing a system that is designed perfectly with no exemptions in the value added tax and when you get through the process, you might have some exemptions, it might not look as good. So, thats just a caution