Transcripts For CSPAN3 Hearing Examines Overhaul Of Tax Code 20170920

We will discuss ways to improve the business provisions of the u. S. Tax code. With an eye towards creating jobs and boosting wages for American Workers and improving over all business climate. This part of the ongoing effort following years of tax hearings and last weeks hearing on individual reform. To draft and report tax reform legislation later this year. Members of both paerts recognize the need to reform the way we tax business in the United States. As a former president obama noted when discussing his own frame work, the Current System quote does too little to encourage job creation and investment in the United States while allowing firms to benefit from incentives to low cat production and shift profit over sea. Unquote. Many elements of a particular business tax burden depend on the companies organizational forum. For example, sea corporations are taxed at Corporate Tax rate. The top federal statutory Corporate Income tax rate has been 35 . Since 1993. And with state taxes added the United States average corporate statutory rate is the highest in the industrialized world. At more than 39. 1 . While some noted not al corporations pay the full rate, the average effective tax rate of u. S. Comp rations is the fourth highest among g 20 countries. According to to a recent analysis by young, when you integrate corporate level taxes and investor level taxes such as those on dividend and capitol gains. U. S. Tack rates are the second highest among developed country. Thats important given the United States taxes most corporate earnings that are distributed to shareholders twice. Both at the corporate and shareholder level. From the past few years i have been working on a corporate integration proposal that among other things will allow businesses to deduct their dividends pay to help alleviate the double tax problem. I view this as a compliment to a statutory reduction. Not a substitute. We held a few hearing last year. I wont delve too deeply. For now just say i continue to believe this idea whether it applies full lil or some other limited way can help and address a number of the problems where trying to solve with comprehensive tax reform. I look forward to continuing this conversation as the process moves forward. It is also porpt to note that while the u. S. Corporate tax rate remained unchanged for decades. The trend among foreign competitors has been to lower corporate rates, making american businesses increaseingly less competitive. This not just a republican talking point, this problem is widely acknowledged on both side of the aisle. Even former president bill clinton has signed into law the rate increase to 35 . Recently argued the rates should be lowered. I agree. Current business tax system in the disparity between the u. S. Comp corporate rate and foreign competitors corporate rates has created number of problems in the distortion. For example the Current Systems slows Economic Growth by impeding capitol formation hindering wage growth and job creation. Reducing productive capacity and lowering the standard of living in the United States. All of which directly harmed middle class families and individuals. The Current System lowers returns on investment, creating a bias against savings and investment. This hinders the creation of well across the economic spectrum. Including the middle class p the Current System encourageS Corporations to finance operations using debt rather than equity. Which increases risk. Particularly during time of economic weakness. The Current System giveS Corporations incentive to shift income production and intangible assets from the u. S. To lower tax foreign jurisdictions. Erodes roding our tax base. In tax reform we need to address all problems and distortions and many others as well. In particular we need to lower the Corporate Tax rate to relieve the burdens of tax imposes on American Workers. Who according to to many economists vary a significant part of the Corporate Tax. We need to reduce the burden on businesses whose earnings are reported and taxed on individual tax returns. These type of businesses include sole proprior tor ship, limited liability, partnership and corporations. We need to fix our International Tax system. So that american businesses can compete in the global marketplace without facing significant disadvantages simply because they are headquartered in the United States. Each of these propositions is supported by people in both parties. Of course when politics enter the equation the story sounds much different. According to to some all republicans want to do is in tax rerm is drive tax or gif tax breaks to the super rich. And more hand outs for greedy corporations at the expense of middle class workers and families. Those may play well to political bases but they dont align with reality. As i noted in the hearing last week, all of the current tax reform ideas are aimed squarely at helping the middle class as well as low income families. Our chief goals particularly in business tax said reform are to increase Economic Growth, create new jobs, grow wages for the employees of both large and Small Businesses. Expand opportunities for all americans and improve standards of living for everyone in the United States. The proof i suppose will be in the pudding. As the Committee Works through this process with those goals in mind, i believe we will be able to demonstrate why those in the middle class should feel as though they have a stake in the discussion. And how these ideas to reform our Current System will help. Lets keep in mind that the status quo sluggish Economic Growth. Stagnant wages and decrease Work Force Participation hasnt exactly been doing the middle class any favors. The case for tax reform should be easy to make. I want to reiterate bha i said last week. Mainly this committee will be the starting point for any tax reform legislation. That is considered in the senate. I expect will continue to hear more arguments about secret tax plans written behind closed doors. This committee is going to consider tax reform to regular order. That applies to both the drafting and the reporting of any tax reform bill. As i said last week i hope this process is by partisan. As with individual tax reform there are many areas of Business Tax Reform where thought ands interests of both republicans and democrats over lap. There is Fertile Ground for by partisan agreement on this. I hope we can take advantage of this historic opportunity together. I know my friend Ranking Member share these broad objectives. I appreciate that. In fact he has put forward his own proposals in the past. Likely with the same goals in mind. At the end of the day, we should all at the very least agree that the current tax system broken. And the current state of our economy shouldnt be accepted as the new normal. I look forward to a robust discussion of the issues here today. As well as some acknowledgment of the by partisan agreement that exists on the matters. With that ill turn to senator wyden. Thank you, mr. Chairman. Ill have to do committee hopping here in the next hour. Ill be brief. And before i get to the substance of todays hearing. I just need to talk broefly about whats coming down the pipe for this committee. Both here and on the floor. And as i told you the remarks im going make now do not in any way reflect my add mirgs for you. Our friendship. The fact we just moved ahead on a very important ship bill at Childrens Health insurance bill. I want to set out my comments about what happened last night. Last night, the majority announced without consulting the minority that the finance committee will hold a hearing on the cass di gram helder healthcare bill. I want to make clear, i believe that this is an abomination. Its an abomination of the process, abomination of the substance, and an abomination of the history of this storied committee. First of all, this bill is a prescription for suffering and disasterous consequences for millions of people. Second, the Budget Office has informed the congress that it will be several weeks at the very least before it can provide real estimates for the bill. So this means the majority is going to charge ahead. With a rad cat, destructive transformation of american healthcare. With the American People in the dark. This bill will be a few roll call votes away from the president s desk. Yet republicans do not have answers to the key gut questions. Whats going to happen to the premiums . Paid by the American People. What will happen to their coverage . The idea the proposition that a bill this destructive, this far reaching, can swing through the Senate Finance committee for a single hearing on a monday morning, hit the senate floor a day or two later, makes a mockery of the legislative process that senator mccain so eloquently urged us to return to. Further more the abomb nax in sharp contrast to what we have been able to achieve with respect to the Childrens Health insurance program. And what a sad commentary on the times that when the committee ought to be celebrating a big victory for Something Like 9 million kids. For millions of families. The bill threatens the healthcare of millions of children and families. Second point reconciliation relies on secrecy, brute power, and speed. To ram purely partisan bills through the senate and it is a train wreck. To do it on healthcare. I think we have to note as we start this hearing, that leader mcconnell is committed to reconciliation round two on tax reform. When we want on this side of the aisle to have colleagues working together and in a by partisan way, and as the chairman noted graciously. I have written two bills. Leader mcconnell says well have another partisan bill. Another completely partisan bill with respect to tax reform. I think that, too is a prescription for trouble. The details that leak out of these big six meetings in my view suggest that whats under way is unprecedented tax give away for the most fortunate and the biggest corporations in the country. The center piece could be a 2 trillion loophole. Dealing with something called pass through status. Pass through status is supposed to be all about Small Businesses. The person whos running a cleaner or running a restaurant. Theres no question those Small Businesses fuel local economy. Higher the most workers. They sure need a boost in tax reform. But any tax change that allows cheats tax cheepts to abuse pass through status by selfdeclaring to avoid paying their fair share, and dodge Social Security taxes would be worse than whats on the tax books today. The day the pass through loophole becomes law, would be Christmas Morning in america for the tax cheats. It would make a mockery of the trump pledge that the rich arent going to gain at all with the plan. And thats just one element of what is on offer. Bottom line for me is we move to this crucial discussion, it is time for the congress to take the lies out of the Corporate Tax rate in america. Many of the biggest corporations in the country employ armies of lawyers and accounts who know every single one of the tax tricks. And they use them all to win know down the tax rate. To the low teens to single digits, even zero. So the congress cannot pair a big corporate rate cut with a planned inshrine a vast array of loopholes that letS Corporations off the hook for paying their fair share. That is in my view, a sure fire way to heap an even heavier burden on the middle class. So i look forward to discussing these issues. Mr. Chairman, as i indicated ill have to be out for a few minutes. But i look forward to the discussion. I thank you for the chance to make the statement. Thank you, senator wyden. Many members requested a public hearing to examine details of the gram cass di. Healthcare proposal. A hearing will allow members on both sides to delve deeper into the policy and gain a better understanding of what the proposal is intended to achieve. Well have a hearing next week on this matter. I believe members will benefit from a public discussion and examination of the issues. Yet en though the requests have been heard, and a hearing is on schedule. Some members are still unsatisfied. Im not sure what else we can do on the matter to address every complaint. For today our hearing is on the Business Tax Reform. I hope we can focus proceedings on that issue. Having said that, i would like to welcome each of the witnesses to our hearing today. We all appreciate your willingness to testify and answer questions today. Hearing each of your perspectives on tax reform will be critical to our process. First well hear from mr. Hoj. The president of the Tax Foundation in washington dc. We had has worked for 25 years. Before joining the Tax Foundation, he was director of tax and budget policy at citizens for a sound economy. He spent ten years at the Heritage Foundation as a fellow analyzing budget and tax policy. Before that, mr. Hoj started his career in chicago. Where he helped fund the heart Land Institute in 1984. He owns a degree in Political Science from the university of illinois. At chicago. Second we will hear from mr. R marronon. Led the urban brookings tax center. Prior to joining urban, he served as a member of the counsel of economy advisors and acting director of a congressional Budget Office. He has also taught at the georgetown Public Policy institute. And the university of Chicago Graduate School of business. Doctor marron studied mathematics at Harvard College and received his phd in economics. Next well hear from troy k louis. The immediate past chair of the Tax Executive Committee of the American Institute of Certified Public Accountants in washington dc. Mr. Louis currently teaches at in utah. He is in practice as a manager member of the louis and associates. Cpa, llc in utah. Obtained masters in bachelors of science in account si. Hes also Certified Public Accountant and a chartered Global Management accountant. Last but not least well hear from mr. Jeff debore. The founding president and ceo of the real estate round table. Where he served since 1997. He serves at chairman of the Real Estate Industry information sharing. And Analysis Center as well as chairman of the National Real estate organization. Mr. Debore has served as cochairman of the Advisory Board of the center for terrorism, Risk Management policy. And was a Founding Member of the Steering Committee of the coalition to ensure against terrorism. Mr. Debore holds degrees from washington and lee university. School of law. And hes a member of the Virginia Bar Association and the american bar association. We want to thank you each of you and all of you for coming today. I look forward to hearing your remarks. If youll please begin, thatll be great. Thank you, mr. Chairman. And Ranking Member. Good to see you. I dmend commend you for taking on the the challenge of reforms americans tax code. Especially the Corporate Tax system. The most important thing congress can do to boost Economic Growth, lift wages, create jobs and make the u. S. Economy more competitive globalli globally, is over haul the business system. Suggest the committee should have four priorities in mind when youre reforming the Corporate Tax system. We call these the four pillars of Corporate Tax reform. First, provide full expensing for capitol investments. Second cut the corporal tax rate to a globally come pettive level such as 20 . Move to a competitive territorial system. Make all three of the priorities permanent. And while many of you and many in the Business Community may see the policies in conflict or competing for space in the tax plan, we see these pieces as complementary and essential not in conflict. In our view cutting the Corporate Tax rate and moving to a territorial system are essential for restoring u. S. Competitive and reducing the incentives for Profit Shifting and corporate inversion. These measures are important for defining and reclaiming the u. S. Tax base. Right now the European Union are proposing policies such as new turn over tax on Digital Companies that are directly aimed at raising taxesen u. S. Multinationals. Expensing we believe is key to reducing the cost of capitol in order to revitalize u. S. Capital investment. Which in turn will boost productivity and wages. Thus a good tax plan should include all three policies. Because they will not only boost Economic Growth, theyll do so in way that leads to higher wages and Living Standards for working americans. However these gains are not possible if the policies are made temporary. Temporary tax cuts deliver temporary results. Permanent tax reform delivers permanent economic benefit. Its hard to generate support. Because moe people dont see thousand benefits them. It may not put cash in peoples pockets in the same way a tax credit might, but it can have a powerful effect on spurring Economic Growth, while lifting after tax incomes and Living Standards. We use our tax sdp growth dynamic tax model to simulate the long Term Economic effects of cutting the Corporate Tax rate to 20 and moving to full expense for corporation. Indicates these two policies combined would increase the level of gdp by 3. 4 . Lif wages by an average of 3. 8 and create more than 860,000 new jobs. When we account for all of these economic factors, we find that the lower Corporate Tax rate and full expensing combined would boost the after tax income of all americans by an average of 5. 2 . Pretty good. One last thing to consider about expensing. It does something that no rate cut can. It eliminates pages and sections from the tax code. Saving businesses more than 448 million hours of compliance time and 23 billion in compliance cost each year. The great economist said there are no solutions. There are only trade offs. Im sure youre all discovering that now and look at Corporate Tax reform. First the math is hard. Contrary to what some believe theres not as many loopholes in the Corporate Tax code flt youll likely have to think outside the box if you want to Corporate Tax reform to be revenue neutral. The economic of tax reform must be at the forefront of your decision making. If you make the wrong choice, in the base broadeners you choose to offset tax cuts. You can neutralize the benefits youre trying to achieve through the remp. These are the challenges. Theyll be hard choices ahead of you. Corporate tax reform done right is key to growing the economy. Boosting family income, and making the u. S. A better place to do business in, and do business from. So remember the four pillars of Corporate Tax reform. Full expensing, lower Corporate Tax rate, territorial system, and permanence. Those are the right policies to make tax reform this tax reform effort a lasting success. So mr. Chairman thank you very much for the opportunity to share the ideas. I look forward to any questions that you may have. Thank you. Well turn to you. Okay, thank wyden, members of the committee, thank you very much for inviting me to discuss Business Tax Reform. Americas business tax system is needlessly complex and economically harmful. Thoughtful reform can make it simpler, boost american competitiveness, create better jobs, and can promote shared prosperity, but tax reform is hard. Meaningful reforms create winners and losers. And you likely hear more complaints from the latter than praise from the former. I feel your pain. But at the risk of adding to it, my testimony today makes eight points about Business Tax Reform. First, thoughtful reform can promote Economic Growth, but we should be realistic about how much. More and better investment boosts Economic Activity over time. The largest effects will occur beyond the tenyear budget window. If reform is revenue neutral, revenue raisers may temper future growth. If it turns into tax cuts deficits may crowd out investment. Either way, the boost in near term growth may be modest. Dynamic scoring will thus play only a small role in paying for tax reform. Second, the Corporate Income tax makes our tax system more progressive. The Corporate Income tax falls on shareholders, investors more generally, and workers. Economists debate how much each group bears. Workers are clearly the most economically diverse. But they include highly paid executives, professionals, and managers as well as rank and file employees. The bulk of the Corporate Tax burden thus falls on people with high incomes even if workers bear a substantial portion. Third, workers would benefit from reforms that encourage more and better investment in the United States. In the long run wages, salaries, and benefits depend on worker productivity. Reforms that encourage investment and boost productivity would thus do more to help workers than those that merely increase shareholder profit. Fourth, taxing passthrough business income at preferential rates would inspire a new tax avoidance. When taxpayers can switch from a higher tax rate to a lower one, they often do so. Kansasns did so when their state stopped taxing passthrough income. Professionals use S Corporations to avoid payroll taxes. Investment managers convert labor income into longterm gantz. Congress and the irs can try to limit tax avoidance but the cost will be new complexities, arbitrary distinctions and new administrative burdens. Fifth, capping the top tax rate on passthrough business income would benefit only high income people. To benefit taxpayers must have qualifying business income and be in a high tax bracket. Creating a complete schedule of passthrough rates could reduce this inequity, but it would expand the pool of taxpayers tempted by tax avoidance. Sixth, taxing passthrough business income at the corporate rate would not create a level playing field. Passthrough income faces one layer of tax. But Corporate Income faces two, at the company and again at taxable shareholders. Taxing passthroughs and corporations at the same rate would favor passthroughs over corporations. To get true tax parity, you could apply a higher tax rate on business income. You could levy a new tax on passthrough distributions or get rid of shareholder taxes. Seventh, it is difficult to pay for large tax cuts and business tax rates by limited tax breaks and deductions. Eliminating all Corporate Tax expenditures except for deferral, for example, might be able to get a corporate rate down to 26 . You could try to go lower by cutting other business deductions such as interest payments, but deductions lose their value as tax rates fall. To pay for large rate reductions you will need to raise other taxes or introduce new ones. Options include raising taxes on shareholders, a valueadded tax or close variant like the destinationbased cash flow tax, or a carbon tax. Finally, making business tax cuts retroactive to january 1st, 2017, would not promote growth. Retroactive tax cuts would give a windfall to profitable businesses. That does little or nothing to encourage productive investment. Indeed it could weaken growth by leaving less budget room for more progrowth reforms. Another down side is all the benefits would go to shareholders, not workers. Thank you again. I look forward to your questions. Thank you. Thank you so much. Okay. Well go to the next one, mr. Lewis. Thank you for the opportunity to testify on behalf of the to testify on behalf of the aicpa. As the committee tackles this opportunity to enact bold progrowth tax reform, we urge congress to take a holistic approach, to provide tax reform to all of americas businesses. Fair and equitable tax reform will drive Economic Growth and enhance the competitiveness of all types of american businesses, not only in the u. S. But also abroad. The aicpa is a longtime advocate for an efficient and progrowth tax system. We need a tax system that is fair, stimulates Economic Growth, has minimal Compliance Costs and allows taxpayers to understand their tax obligations. These features of a tax system are achievable if principles of good tax policy are considered. Today, wed like to highlight a few tax reform issues that directly impact businesses and their owners. First, were concerned with and oppose any new limitations on the use of the cash method of accounting. The cash method is simpler in application, has fewer Compliance Costs, and doesnt require taxpayers to pay tax before receiving their income. Forcing businesses to switch to the accrual method unnecessarily discourages business growth, increases Compliance Costs, and imposes financial hardships on cashstrapped businesses. Next, tax relief should not mean a rate reduction for only c corporations. Congress should encourage or at least not discourage the formation of passthrough entities. Inequities would also arise from having significantly different income tax rates for business income based on an overly simplistic approach such as one centered solely around the structure, sector or general nature of the businesses activities. For example, excluding professional Service Firms from the benefit of a lower business rate reflects a view of the Service Industry that does not represent the current global environment. In todays economy, professional Service Firms are increasingly competing on an international level, with businesses organized aS Corporations. They also require a significant investment and rely on the contribution of employees to generate a substantial portion of their revenue. Artificially limiting the use of a lower business rate regardless of the industry would penalize a business for operating as a passthrough entity. Professional service forms heavily contribute to the nations goals of creating jobs and better wages. Without the benefit of a fair and consistent rate reduction for all businesses, including passthrough entities, the incentive to start or grow a business is diminished. With a corresponding loss of sxwro jobs and reduction in wages. We recognize that producing a reduced rate on active business income will place additional pressure on the distinction between profits of the business and compensation of the owner operators. We recommend codifying traditional definitions of reasonable compensation and provide if necessary Additional Guidance from treasury and the irs. If Congress Moves forward with a fixed percentage split for business income such as treating 70 of passthrough earnings as employment income and 30 as return of capital, we recommend making a proposal a safe harbor rather than a hard and fast rule. A safe harbor would promote simplicity for many businesses without sacrificing fairness for others. It would also provide a uniform treatment among closely held business entity types. Another important issue is the ability to deduct interest expense. Business owners borrow to fund operations, working capital needs, equipment acquisition and even to build credit for future loans. These businesses rely on financing to survive. Equity financing for many startup businesses is simply not available. At a minimum, we should not take away or limit this critical deduction for many small and midsized businesses who with little or no access to Equity Capital are often forced to rely on debt financing. Finally, we encourage you to enact mobile workforce legislation, such as the bill introduced by senator thune. The burden of tracking and complying with all the different state payroll tax laws is complex and costly, particularly for small employers. The mobile workforce legislation provides a uniform National Standard for nonresident state income withholder and a de minimis deduction for nonresident employees. Thank you for the opportunity to testify, and ill be happy to answer any questions you may have. Thank you. Were grateful for your testimony. Lets go to our final witness, mr. Deboer and well listen to you. Good morning. Tax reforms impact on the commercial Real Estate Industry will have wide ranging effects on the economy and job creation and the overall gdp. Im honored to be here today to talk with you about this issue. But its not the first time that our industry has been before this committee and talked about tax reform. In 1981, congress provided our industry with very aggressive tax incentives. These tax incentives spawned a robust tax shelter industry and resulted in the development of millions of buildings that had no tenants. In 1986 congress rightly eliminated these tax shelter provisions. However, the combination of these actions caused severe dislocation in real estate markets nationwide, caused great numbers of lost jobs, resulted in countless bankruptcies and many people believe that it ultimately led to the demise of the savings and loan industry. It took years for the economic pain to work through the system. Our industry steadily has recovered, and with congressional assistance, the federal taxation of Real Estate Investment today is much closer to matching the economics of the investment. As a result, commercial Real Estate Industry today is estimated to provide about 20 of the nations gdp. Our industry now employs millions of americans, provides local governments with its largest revenue source, and plays a key role in the Retirement Savings and Wealth Creation of americans. Importantly, commercial real estate markets today are largely imbalanced where supply only modestly exceeds demand. Despite our industrys relative positive health, we know the underlying economy can and should grow more rapidly. Properly designed tax reform can spur overall job creation, encourage more robust business expansion, improve the standard of living for all americans, and result in sustainable gdp increase. The first step should be reducing the tax on all job creating businesses. This action should not be limited to Corporate Income but also should include income through passthrough businesses, and i want to pledge to senator wyden that our industry and our Organization Work very hard to make sure there are not games played on compensation earned. A progrowth tax reform should also encourage and reward risk through capital gain, and capital gain should continue to recognize that its not just cash that is put in investment that should be rewarded. Some concepts, however, may have unintended consequences. For example, our Capital Markets today are the envy of the world, and theyre able to access debt amounts needed to provide their businesses with flexibility to build, operate, and grow their businesses. We should continue that and not end the deduction for business expense. The proposal to expense assets is troubling to us because it is suggested to apply to structures. We thing that carries Great Potential negative consequences. Expensing structures would obviously encourage a lot of development, but were concerned that this development would not be supported by underlying demand, and such uneconomic development is a false indicator of economic strength and will badly distort markets. This is not to say, however, that the current Cost Recovery system is correct for our industry. We think it should be shortened. And m. I. T. Has reviewed a wealth of data regarding buildings can their findings suggest that the properly Economic Life of buildings is 20 years. We believe a 20year life twinned with a continuation of the Interest Deduction will spur Sustainable Development and gdp expansion. The deduction for state and local property tax payments should continue. We think that will cause many businesses to leave our urban areas, and we reject that idea. We believe the Lifetime Exchange rules also should be continued. We think theyre a positive part of the economy. I would like to say in 2015, Congress Took a very positive step in the path act regarding the taxation of Foreign Investment in u. S. Real property. We urge you to now take another step and repeal that entirely. One final item that i would like to add. And that is that we would urge you to consider an Infrastructure Initiative of some type in tax reform. Action in this area is badly needed. It would create jobs, and if its done correctly, and by correctly, i mean to understand the transportation revolution that is going on in our country and where we will be going as far as Transportation Needs and mobility in the future. If we do it with congress and policymakers do it the correct way, it not only would create jobs but increase productivity for workers and our businesses. And i would be happy, we have submitted a detailed statement. I would be happy to respond to any questions about it or my comments today. Thank you. Well, thank you. Thank you so much. All four of you. We really appreciate you taking the time and putting in the effort to come and testify to us today. And well pay strict attention to your statements. I might add that today is senator tim scotts birthday. I dont think he looks a day over 29. And makes the rest of us look pretty old, ill tell you. Im very appreciative for your contact lens, sir. I wish i could wear contact lenses. Well, were grateful to have you on the committee. You add a great deal to our committee, as do the other members. So let me start with you, mr. Hodge. In your testimony, you note that the Tax Foundation is generally supportive of corporate integration. Of course, corporate integration is an idea that i along with my staff have been exploring for several years now. In your written testimony, you note that reducing the Corporate Tax rate to 20 increases Economic Growth in the long run by 3. 1 . And results in 592,000 fulltime equivalent jobs and corporate only expensing achieves a very similar result. An increase in Economic Growth by 3 , resulting in 575,000 fulltime equivalent jobs. These projections are impressive. What struck me is very interesting is that in the Tax Foundations 2016 book options for reforming americas tax code, almost identical Economic Growth and job projections occur with corporate integration, that is, allowing the corporation to deduct dividends. The Tax Foundation estimated an Economic Growth of almost 3 in the long run, 2. 9 to be precise. And 535,000 fulltime equivalent jobs. And of course, corporate integration would eliminate the two levels of tax on corporate earnings and bring the tax treatment of debt and equity closer in alignment, which would reduce if not eliminate a lot of the distortions and inefficiencies of the Current System. Would you share with us the Tax Foundations views on corporate intd graigs in general, dividends paid production approach in particular. Thank you, mr. Chairman. You know, i was looking through the Tax Foundations archives and came across a 1977 Tax Foundation publication by marty feldstein, who i think you know well, on corporate integration. Since that time, there have been no fewer than a dozen corporate integration proposals that have come out of either congress or the white house. This is an issue of long standing study, and unfortunately, we have yet to see the kind of action that i think is necessary to remove the double taxation of Corporate Income and make business taxation more equitable. We believe that business income should be taxed only once. And at the same rate. As you noted in our analysis, it has the dramatic effect of lowering the effective Corporate Tax rate and having a substantial impact on longterm Economic Growth. But as you mentioned rightly, i think, it also improves or equalizes the treatment of debt and Equity Financing, as a result, makes the economy much, much more efficient. And i think a dividends paid deduction is a very thoughtful way to approach this. After all, Companies Get to deduct their interest costs. Why shouldnt they get to deduct the dividends they pay to shareholders . I think its certainly an approach that ought to deserve the attention and consideration of the committee, but also as you face or move forward on fundamental tax reform, ought to be a nice complement to the broader Corporate Tax reform efforts. Thank you. Mr. Lewis and mr. Deboer, you have both included in your written statements concerns on the interest expense. Mr. Lewis, your testimony laid out concerns for Small Businesses and services businesses. Mr. Deboer, your testimony laid out the potential and significant negative effects on the Real Estate Industry of such a limitation. However, we frequently hear how the current tax treatment of debt and Equity Financing leads to overleveraging of businesses and limiting the deductibility of interest expense brings the tax treatment of the two more in sync. Id like your respective thoughts on that, mr. Lewis and mr. Deboer, if you could do it for us wp. Ill take a crack at it first. Equity financing for many startups and small midsized businesses is simply not available. I think you have to start with that notion. So while the points that you just made are there, the combination, though, of taking away of taking away an interest expense deduction will put more burden on the Small Businesses. The reality is that Large Businesses have access to the equity markets. The Capital Markets, and Small Businesses dont. So many of our businesses, particularly the growth businesses, the entrepreneurial businesses are those businesses that rely on debt financing. Tax laws shouldnt discourage the formation of businesses. So the formations of new businesses is one of the best aspects we have in the u. S. Economic system, and i think it should continue. Thank you. Mr. Chairman, the issue of overleverage, i think, is really one that should be examined on an individual by individual basis. If theres overleverage, its a problem with the regulators that were supposed to be determining whether someone had too much leverage, and we would prefer the issue be dealt with there, not through the tax code. The use of debt is very, very important for all businesses. Not just startup businesses, and not just Small Businesses. But all businesses that need this kind of flexibility to use debt. Debt, by the way, allows entrepreneurs to retain more control over their business operation. If they have equity, they give up control of some of their business. They retain more control over their Business Operations by using debt. Its something that historically has been recognized as a cost of doing business like other costs of doing business. And we really see no reason to adjust it through the tax code. Thats not to say that we think that people should be overleveraged or that businesses should be overleveraged. They shouldnt be. There should be governors on that, and other parts of the government should act. By the way, in the Real Estate Industry from a macro point of view, i believe our industry is now levered at about 60 of publicly traded reits, for example, are levered at even lower amounts, 40 to 45 on average. Were very mindful of the problems with overleverage. But its really a problem of whether the borrower itself is able to repay the amount. And it might be a low amount of leverage that they cant handle while others can handle higher amounts. Thank you for the question, though, sir. Its very important for the economy to continue to grow to have access to debt. Thanks to both of you. Senator grassley. For anybody or all of you, as part of a progrowth tax reform, theres been considerable debate over whats more important, lower rates or expensing. Mr. Hodge and dr. Marron, could you both elaborate on how you see the tradeoff between expensing of depreciation and lower rates. For example, do you view it as acceptable to lengthen the appreciation to help finance lower rates . Ill start out with the first part of that, mr. Grassley. We see expensing as the most powerful policy change that you can make to improve Economic Growth. And on an apples to apples basis, our models show that full expensing delivers twice the Economic Growth than a comparable rate cut. And thats because it really affects new investment, whereas a rate cut, a corporate rate cut, affects both new and old capital. New and old investment. So its benefits get distributed a little more broadly. But to the second point, i think we have to look back at the tax reform proposal that chairman camp put forward a few years ago, which lengthened depreciation lives in order to finance or offset the revenue lost from a corporate rate cut. And what we found, all the models showed this, the joint Committee Taxation model, showed lengthening deprecation lives raised the cost of capital to such an extent that it offset the benefits of the lower Corporate Tax rate on the other hand. And it ended up as an economic wash. I think you need to be extremely careful in looking at your offsets when youre looking to offset the corporate rate cut. My thoughts are going to be very, very similar. If you focus on expensing, youre providing incentives for new investment, which is most beneficial for the economy. I want to emphasize, its also going to be most beneficial for workers. The research that my colleagues at the Tax Policy Center have done suggests that if you focus on reductions that encourage investment you get more of the benefits flowing to workers and relatively less of it being focused on shareholders. That said, with a 35 top rate, you can make very good arguments for bringing that down as well as part of concerns about the competitiveness of our tax system. But as scott just said, if your strategy is reduce the corporate rate and then actually make the depreciation and writeoffs less favorable, what youre going to see in all the macro models is thats going to very much limit any growth benefit you get. Im going to ask the same two people something that senator hatch discussed with the others, because i want your opinions on it. Thats consideration of restrictions whether they should be imposed on the ability to deduct interest. As you know, the house blueprint generally eliminates interest as a business expense in exchange for going to full expensing on capital assets. So for the two of you, should any restriction on the deductibility of interest be considered to finance lower rates or faster depreciation . Ill go first on this one. There are two Great Schools of how you should tax. Right . Theres the Income Tax School and the consumption tax school. In the Income Tax School Interest Deductibility is an expense. You ought to be able to deduct it and depreciation ought to be able to follow the economic depreciation of assets over time. In the consumption tax view of the world, you should be able to tax everything immediately and you should not get a writeoff for deductibilities. We have a system thats somewhere in between those where we have accelerated depreciation but we allow Interest Deductibility and the challenge you have there is that you can actually overencourage investment. You can create negative effective tax rates on investment. You can have some of the problems that jeff mentioned that happened in the 80s if you go too far of making investment favorable but allowing full deduction of interest. You can end up with excessive investment in certain sectors. Im very open to reducing Interest Deductibility if its paired with making depreciation more favorable. That moves in the direction of a consumption tax. Thats a logical and consistent way to design a tax system. I would echo much of what donald has said. I think that our models show that when you eliminate Interest Deductibility, it not only raises about 1. 2 trillion, but it does so in perhaps a less harmful way than other options. And thus, when paired with a corporate rate cut or full expensing, you get the maximum benefit from those policies with the least amount of harm on the other side. There is also other advantages to eliminating the Interest Deductibility when it comes to perhaps reducing the amount of earnings stripping that we see, where foreign multinationals load up debt here on their domestic subsidiaries and then strip income out of the u. S. Tax base. There are other issues that we have talked about in terms of overleveraging and so forth, so there are many advantages to it. But we do understand that some industries are perhaps overreliant on it and it could be disruptive. But it is one of the tradeoffs that will have to be made in order to get Economic Growth on the other side of the equation. Thanks to both of you. Thank you, senator. Senator carper. Thanks, mr. Chairman. I want to add to your birthday wishes to tim scott. Its great to serve with you, tim, and happy birthday. Youre too young to remember a great song by Conway Twitty, and last weekend, i happened to be listening to the radio driving around and i heard a song by Conway Twitty i havent heard in years. It goes, its only make believe. And i was trying to think what he was singing about. He was singing about a relationship with another person, but it could just as easily have been dynamic scoring. You know will the senator yield . Im happy to yield. Are you sure that was Conway Twitty and the twitty birds he sang that . Same guy. Youre pretty good. I know you reclaiming my time. Before this goes any further down, i just want to say weve been down this road before. We did it in early 81 with tax cuts for higher income people. Didnt work. We did it in 2001. We ended up with more debt, and frankly not the kind of Economic Growth we had hoped for. The idea of trying it again, theres a saying, third times a charm. Im not sure the first two times were charms. I would be careful about going down this road again. So my question, dr. Marron, can you lay out for our committee ed what effect the largely deficit financed tax cut would have on the longterm Economic Growth for the u. S. And on our deficits . Thank you. Sure. My pleasure. Thanks. So if you look at the cbo baseline forecast of where we are in fiscal terms today, were on track over the next decade in round numbers to spend around 50 trillion to bring in tax revenue around 40 trillion, therefore, to have deficits that accumulate over the decade of about 10 trillion. So that will build the debt from around 75 of gdp today to up around 90 of gdp by the end of the budget window. Thats problematic in its own way, right . We ought to be where the debt isnt rising faster than the economy. We want it to flatten out and eventually come down. If you did deficit finance tax cuts today, what you would have is more of that. We would have depending on the scenario, 1 trillion, 2 trillion of Additional Debt over the decade, adding 12 trillion to the debt over that period, and the financing of that would have to come from somewhere. One way it might be financed is by reducing the amount of private investment in the United States, that would therefore weaken the amount of growth from a tax reform. You should always think about these tax reform proposals as being a raise between the effects you get from the tax changes youre doing and any effects on the budget balance. If youre increasing deficits over this time period, theres going to be an offset. Typically in the models i have seen, typically the offset ends up overwhelming eventually so you end up losing your growth effects. There are some scenarios in which that doesnt happen, where foreign capital is available. It comes in and offsets the hit to private investment. But then youre left in a situation where yes, the u. S. Economy is being more productive but more of the benefits are going overseas rather than staying here. Either way, theres a cost to deficit financing. Let me ask a related question if i could. Could you show us what the evidence shows regarding who really bears the cost of Corporate Tax and your assessment of the assumptions used in models claiming that a rate cuss would allegedly help workers. Certainly. This is an area that economists have studied a lot in recent decades. I would say the consensus you see from the cbos and jcts and office of tax analysis and similar to what my friends at the Tax Policy Center do, is that clearly workers pay some of the Corporate Income tax. One unfortunate side effect of the Corporate Income tax is to discourage investment in the United States. The mainstream estimates of that are around 20 . You know, kind of in the 20 to 25 for the Corporate Tax system as a whole. At the Tax Policy Center, my colleagues emphasize it differences depending on what tax provision youre looking at, and if youre talking about just provisions focused directly on investment you can make an argument that about 50 of that is borne by workers. But for the Corporate Tax system as a whole kind of the mainstream view is around 20, 25. All right. Im all for reducing our Corporate Tax rate, were not competitive with the rest of the world. There needs to be a reduction. I hope that as we address that concern, well keep in mind four questions. As we address more broadly, comprehensive tax reform. Number one, is it fair . Number two, does it foster Economic Growth or impede it . Number three, does it make the tax code more complex or less complex . And number four, what is the fiscal impact . Were six, seven years into the longest running economic expansion in the history of our country. Usually at this point in time, i would think we would be interested in addressing Corporate Tax problems, so were competitive with the rest of the world, but so do in a way thats fiscally sustainable. This deficit is going to exceed 700 billion. Thats seven years into an economic expansion. The economics i studied as an undergraduate and graduate student say that deficits when youre trying to stimulate the economy, deficit spend when youre in a recession or in a war but when youre six, seven years into an economic expansion the idea is somehow doing it all over again and increasing the deficit, i dont think we should do that. Thank you so much. Thanks, senator. Senator toomey. Thank you. Im going to follow up briefly on the senator from delawares comments. But let me start with a question. Is there anybody on the panel who believes that Economic Growth and output is completely unaffected by all incentives and penalties in the tax code that theyre completely independent and the economys uninfluenced by good or bad tax policies . Anybody hold that view . Nobody holds that view. Doesnt it follow logically if you have better incentives and fewer policies and a tax code that creates the right incentives for growth, you have more growth than you would otherwise . And if we achieve that, then its not a question of whether or not the economy grows more. Its a legitimate question about how much. And i think we all agree that if we have a bigger economy than we would otherwise have, then theres more Economic Activity to tax. So the logic behind dynamically scoring tax policy seems to me can only be a question of extent but not whether or not we do it. If you think the tax reform is actually counterproductive to growth, if you think its going to create disincentives and penalties for growth, then it should be scored accordingly, but isnt there a basic, mr. Hodge, isnt there a fundamental unavoidable logic that if you get the incentives rights, youll have more growth. If you have more growth, you can generate more revenue, and its a question of magnitude. Thats correct. And what we try to tell people about dynamic scoring is that by and large, most tax cuts dont pay for themselves. But depending on the type of tax cut, it can have Macro Economic effects which will have feedback effects on revenues and will minimize their longterm cost. A couple other things i want to get to quickly. Mr. Deboer, your point, you seem to be skeptical about the wisdom of allowing full expensing for structures. But that skepticism, i didnt hear that applied to other kinds of assets like vehicles, equipment, machinery, other sorts of things. And you acknowledge that expensing of those types of things, nonstructures, can be beneficial for Economic Growth, is that correct . Well, i dont necessarily disagree with that. But the facts are, i believe, that under the current law of depreciation and bonus depreciation that is in place, i believe roughly 60 of all Business Investments today are recovered within 18 months. I got very limited time. I appreciate that. So i am a little skeptical about the bump you would get from that. Okay. That was not my question. I appreciate that, sir. Does show that thank you very much. Increase in gdp would be it would be nice if we could move on, sir. Thank you very much. Mr. Lewis, you had made a point about the accrual method versus the cash method of accounting. Is it true that a fastgrowing company thats investing significantly in capital and maybe growing its inventory could be in a position where their Tax Liability exceeds their Free Cash Flow . Under an accrual system. Certainly, they could. And so allowing companies to take the cash method has the great virtue of tremendous simplicity, but it also tends to align their cash flow better with their tax obligations. Is that true . Yeah. Cash method accounting tends to be simpler like you said, and it does provide a lot of incentive for your compliance cost. You put more money into doing what they do best which is growing their business. Right. Would you be supportive of raising the threshold that is currently in law that allowed for cash a cash basis for tax purposes . Yeah. We the aicpa has supported senator thunes invest act that had a provision in there to increase it to make it more available to smaller businesses. Thanks. Mr. Hodge, you had mentioned that dollar for dollar expensing has more impact on growth than lower marginal rates. Maybe more than other ideas weve been talking about. Could you briefly explain how that benefit translates to workers. How does that help average workers . How does that help wages . The key point here is by lowering the cost of capital, youre improving the opportunities for businesses to invest in tools which make their workers much more productive. Much more productive workers earn more over their lifetimes. And their standard of living rises as a result. So the key here is to incentivize new investment, to increase productivity which ultimately makes everyone better off in the long run. Thanks very much. Thanks, mr. Chairman. Mr. Chairman, thank you. I know my colleagues have been in the panel discussing dynamic scoring and the deficit. So i guess i definitely believe as we had our last hearing that dynamic scoring doesnt definitely lead to dramatic growth. It might, it might not. Mr. Deboer, one of the things im most interested in before we launch into this discussion about the tax code just as any business person would do, they take an assessment of the environment and what are the needs and opportunities of that company and what are the needs and opportunities of our nation. One of those things that i think has been missing in this equation as it relates to our discussion are what are those needs and opportunities as it relates to housing. Could you comment on that as it relates to the tax code and what we need to be doing . Certainly. I think, you know, most people, most Business People that operate certainly in urban areas recognize that theres a tremendous and growing shortage of what we would call a Workforce Housing. And so people that are middle american citizens, firemen, teachers, what have you, combined incomes working very, very hard are being priced out of our nations cities. And we need to focus on ways to incentivize affordable house. Not just lowIncome Housing which is obviously needed, but Workforce Housing as well. And we shouldnt lose sight of that. I dont have any solutions to share with you, but it is certainly a growing and troubling problem. And as we go forward, that part of our nation has to be included in whatever is done in Economic Growth. So do you think just cutting the Corporate Tax rate gets us Affordable Housing . Well, no, i dont think it really will have anything to do with Affordable Housing. It would put hopefully more people to work and it would provide more money in peoples paychecks and perhaps they would have more money to buy Workforce Housing, but it wouldnt directly stimulate it. Do you think Affordable Housing is a crisis in america . Im not sure i would call it a crisis. I think theres an awful lot of multifamily housing being constructed today, meeting a demand for it, but its not meeting that segment of the economy. And people need to understand land is land and its going to cost the same thing regardless of its use almost. And Construction Costs are quite high. And so when people construct assets, multifamily, retail, office buildings, what have you, theyre paying roughly the same cost to construct them. And so its hard to understand why they would then provide low Income Housing or Workforce Housing because it doesnt pencil out for them from an economic point of view. So there does have to be assistance there, we think, whether thats zoning assistance or local tax break assistance or something from the federal. Or expansion of low Income Housing tax credit. Well or keep in mind as tax reform goes forward and rates lower, and im not suggesting we dont want lower rates, but the market for the low income tax credit is made more robust and more positive because of what rates are. As rates go down, those will become less valuable. Again, im not suggesting the rates dont come down. Im simply suggesting that if you keep the low Income Housing program as it is the incentive will naturally be reduced and perhaps a rethinking of that incentive is in order. Well, i think you said something very important there, but im not sure everybody understood it. Basically i may not have understood it, but it was fun saying it. I think you said it technically correct, but the translation is that basically because a lot of people whove invested in Affordable Housing as we have given them incentives for investing in it through the program, as theyre sitting there waiting to see whats going to happen with the tax rates overall, theyre sitting on capital or actually suppressing the amount of availability investment at the same time we have a crisis. So to me as we ponder this big question, particularly as it relates to this issue of dynamic scoring and whether youre going to get Dynamic Growth from it, i want to make sure everybody clearly understands that housing somehow has lost its way. It used to be in the 60s, 70s, 80s you would say when you want to stimulate the economy, the cheer would go up for housing. But you havent heard that cheer for a long time. Its time for us to focus on the fact that Affordable Housing is a crisis and its certainly a crisis in my state. Its certainly a crisis in seattle. And we need to make sure that were putting the right incentives in place. This is just as important as the rest of the discussion were having here. So thank you, mr. Deboer. If i may just add one thing. If you look at and it was referenced how long we are into the economic recovery and you looked at where forget about affordable or low Income Housing but simply Home Building in general is, it is off where it typically would be at this point in the recovery anyway. And if it was only where it should normally historically be, our gdp would be a point higher, some suggest. And i just throw that out. Thank you. Those solutions thank you. Now, i call that growth. Thank you. Thank you, mr. Chairman. Thank you, mr. Chairman. Ill make my questions quick because i have to go vote before we close that vote out. I was a Small Business owner for 15 to 16 years and i will tell you that the question that seems to be unanswered about senator toomey did a very good job of delineating the importance of from a competitive perspective lower rates equals a better Competitive Position against your folks in other countries. A lower rate also will encourage Economic Activity in a way that can be scored dynamically. The question is can we score dynamically accurately. The fact of the matter is theres no question the dynamic impact will be measurable, which means it will be positive. Another very important factor is the complexity of the code and the amount of time the Small Business owners spend preparing for the dreaded season of march 15th, august 15th, and the time the extensions run out. Can you speak for a few minutes on the costs born by u. S. Small businesses under the current code and what that means longterm for our Competitive Position and the ability to grow jobs and make future investments. Well, i can just give you some overviews. Weve looked at the overall complexity of code and tried to measure it. Americans spend close to 9 billion hours complying with the u. S. Tax system. The corporate part of that code is the most complex and the most costly. Things like the depreciation schedules among that as i mentioned earlier in my testimony cost u. S. Businesses about 23 billion a year in Compliance Costs. This is money thats not only drained from businesses but its time taken away from entrepreneurs. Instead of writing tax code, theyre trying to comply with or writing computer code, theyre complying with the tax code. This is wasted energy, wasted time, wasted resources that go to well, complying with the irs rather than trying to build a business. And thats simply unfair. Thank you, sir. Mr. Lewis . Thank you for the question. The aicpa has 12 Guiding Principles we believe should be considered as any part of any tax reform discussion. Theres many of them but you hit on a couple of them i think are important. The first is equity and fairness on the one side. The other side is simplicity. The thing about it is often one principle in these 12 Guiding Principles has to be compromised at the expense of another to achieve the common objective. Its the tradeoff youre debating now where the rubber hits the road. Regarding reconciling the Guiding Principles of each can be difficult. You know, the thing about it is the code will probably never be simple. But, man, it sure could be a lot less complex. Anything you can do along those lines to make it less complex will benefit all businesses in our country. Thank you, sir. Thank you, mr. Chairman. I like shane in the movie some time back i realize twothirds of the audience dont even know what im talking about. But at least shane never came back. Chairman hatch will come back. I remember 1986 the last time we did tax reform, we have pictures of those, when i review the tax proposal at that particular time, farmers in my district i was then a member of the house, said they were going to take a pretty big hit. Real estate also said listen, this is really not what we think is appropriate. And then the s l business was very worried. Rightly so. They went out of business. One of my best friends went broke who had a cow calf operation. So i listen to those people and i voted no. I was only one of in a several state area that did that. I think the most important thing in that regard is bob dole did not speak to me for six months. That wasnt all bad, but that was probably a very good relationship. I have a theory were all wrapped around the actual with regards to offsets so on and so forth. Youve been talking about expensing and depreciation. State and local taxes, you havent mentioned that. Im surprised you havent. The deduction of interest for various things. Your Health Insurance so on and so forth. When you do that, i have a red ant theory. Every time you touch something thats in the tax code its been there on purpose even though its nine feet tall and we have to do something. But i would prefer to see us do the big things. Not worry so much about the dynamic scoring although that is a big issue for many. Just from my personal preference. Lower the corporate rate, we have to do that. The business rate. I would prefer we call it a business rate. And also go from 7 to 3 in the bracket. Same with the middle class. I would fix amt. I would do something with estate tax. Theres one more that im missing. But oh. Repatriation, but obviously if you lower that rate, that supposedly takes care of that. And call it good. And not go into all these other details. I know some members in the house do not buy that argument at all, but it sure would save us a lot of time. And all these other things ive mentioned have different interests coming in and its the red ant theory based on experience when a senator from kansas tried to give a speech when he was standing on a hill of red ants. That didnt work out well. They crawl up your leg and bite you pretty good. How do you feel about that . More especially with the 1986 example. Anybody want to take that on . Will yield to him, but ill and the chairman is back and i will yield to him, but ill listen. But not for very long because i have to go vote. Very quickly. The 86 act got a lot of mythology over the years. We went back and modeled the effects of the 86 act. We found it raised the cost of capital mainly by shifting the tax burden onto businesses at the expense of giving tax cuts to individuals. As a consequence we found it had a modest effect on actually slowing Economic Growth, not boosting growth well, and four years later our friends across the aisle simply raised taxes and there was a lot of blood on the ground. And i dont see the need for doing that again. So i hope we can stick to the big items and i know the distinguished chairman is back. Thank you. Thanks, senator. Senator cardin. Thank you, mr. Chairman. I thank all the witnesses. Mr. Deboer, im sorry i wasnt here when you were talking about incentives for Energy Efficiency. Were strongly going to work to make sure we can preserve those issues. I want to ask a question about the passthroughs as to what is a fair way to handle this. Passthrough companies do not have to pay double taxation, that is true. However, when you look at global competition, they are still paying a much higher rate than their global competitors because of the marginal tax rates in the United States. And the overwhelming majority of american businesses do not pay the c rate. I believe it amounts to 5 of the companies, somewhere in that level. So as we look for reform in order to make our business tax structure more competitive, thats one of our goals for growth. What do we do about making sure we dont have the unintended consequences of hurting those companies that have the current status on pass throughs. How do we effect them if we dont do c rate, how do you deal with that issue . Senator cardin, ill take the first swing at that. And we do appreciate your work on Energy Efficiency for buildings. Its a very important topic Going Forward and hopefully it can be included. Pass throughs certainly for our industry, very, very few real estate businesses are operated in corporate format. Almost all are llcs, publicly traded or privately traded reits or partnerships, in fact, real estate consists of almost half of all partnerships in america. So were highly concerned and focused on how we can achieve a lower tax rate for those entities. Right now theres a 5 spread between corporate and the ordinary rate. We see no reason if the corporate rate is coming down that a comparable spread couldnt be the result of tax reform this time. Or you are going to put pass through entities which really drive the economy in many ways in the United States at a disadvantage not only globally but visavis their competitors in the corporate world here. So we want to work very, very much. I mentioned to senator wyden that we share the concern about potential shifting of what is Service Related income in a pass through into that lower bucket and weve worked very, very hard internally to try to come up with a way to deal with that. I thank you for that response. I think we all have to keep our eyes on this issue. It could get lost in the proposals being made. I agree with the point that you made particularly in the real estate sector. The pass throughs are critically important in my state. I know that the senator carper talked about being fiscally responsible. One of the worst things we could do is add to the deficit. That would be an anchor on our Economic Growth. I know he talked about how we score and i hope we would use the joint tax traditional scoring. That one of the proposals thats been out there is talking about timing of the 401 k s. That does little to produce that scores as a revenue gainer even though over the long term its neutral. And i think were going to have to be very careful, mr. Chairman, as we look at these issues. Theres also, of course, the Retirement Security issue which is very important to make sure we not only maintain but strengthen those needs. I want to get to the fundamental point and that is if you really want to deal with competitive rates, if thats your issue on the business side of tax reform, i think its impossible to do unless you bring different revenues into the equation. Every industrial nation in the world except the United States uses consumption revenues in addition to income revenues. Were the only country that does not. How do we expect to have competitive Business Rates if we dont harmonize with the International Community as to the source of our revenues . So ive introduced a progressive consumption tax because one of my major objectives is to make sure that the tax code is at least is fair to the current code as it relates to middle income families and theres a way of doing it. But how do you get to competitive rates globally with industrial nations if we continue to be stubborn and use only income revenues to the exclusion of consumption revenues when the rest of the world is doing that . So i think youre left with a lot of bad choices, right . You could run much bigger deficits as a way to get the rate down, but thats not going to be good in the long run. I end up mentally in the same place where you are. If you want to get down to the rates, you know, below the high 20s, if you want to get lower on the rate youll need to go shopping for a new revenue source. The destinationbased cash flow tax was a species of consumption tax that had some of those attributes, bring in more revenue. Seems to have gone by the wayside. Theres more traditional value added taxes you could do. I personally am a fan of the yfd a carbon tax which could provide significant revenue and encourage clean sxrechb help combat pollution would be a strategy. Then of course another strategy is also to look to shareholders. If youre reducing Corporate Taxes, you should keep in mind that one of the beneficiaries are going to be taxable shareholders. And its perfectly reasonable to look to them to think about ways of increasing taxes on shareholders to partly offset or fully offset the gain that they get. Ill give you credit for the progressive tax reform plan that you put forward. We modeled your plan and found it to be exceptionally progrowth. Not only i think progrowth but i think it was revenue positive. To i believe 17 . And that had a pretty powerful effect on boosting Economic Growth with that lower corporate rate. Yeah. I appreciate that. My objective is that since america among industrial nationsize near the bottom on the percentage of our economy and government we should have a competitive advantage, not disadvantage on our business taxes. Senator brown. Thank you, mr. Chairman. My question is for dr. Marron. Thank you to all four witnesses. Good to see all of you. Weve heard a lot of talk about whats good for large u. S. Companies. Weve heard frankly far too much talk about whats good for corporations and not enough talk about whats best for American Workers. And its American Workers who have been hurt most by our tax policy in the last 20 years. We need to encourage companies to invest in their greatest asset, the american worker. We do it with a carrot and a stick. This month along with senator durbin i introduced a patriot employer tax credit act. Pay good wages of 15 an hour and provide benefits and dont outsource their jobs and buy america, basically, that those companies would get a tax cut. Conversely, when corporations pay Poverty Level wages, someone has to pick up the tab. Its american taxpayers. Food stamps, housing vouchers, paying for medicaid, paying earned income tax credit. Taxpayers pick that up. So if youre a Huge Corporation under our proposal and you choose to pay your workers so little that they are disproportionately forced onto government assistance, you need to reimburse american taxpayers. That is our corporate free loader act. The debate over tax reform is a chance for us to reconsider how we have been told to think about this economy. You dont build the economy by doing a tax cut for corporations and hope it trickles down. We know from comparing the 90s to the next decade, that simply doesnt work. You build the economy by investoring in the middle class and build the economy outward. So doctor, offer suggestions for other ways we safeguard against Corporate Tax reform that overwhelmingly helps Corporate America at the expense of American Workers. Sure. I think you want to look through the lens of if youre doing Business Tax Reforms and business tax cuts, do they encourage more investment here . Because thats the one channel thats going to primarily that will have significant benefit for workers. And you want to deemphasize the cuts that are going to accrue to shareholders and not provide that competitive advantage. I think the other is you want to think about other aspects, you know, beyond the business tax code. Theres been a lot of discussion about expanding the eitc, the earned income tax credit. Things like that that could provide support and encouragement to a broader array of workers, boost take home pay. Make them more attractive to employers. And i think thats very worthy to consider as part of an overall tax reform package. Thank you. Thank you, mr. Chairman. Thank you. Senator heller. Thank you. Thanks for holding this hearing and to the Ranking Member also. To those on the panel, thank you very much for taking time being with us today. For too long nerks Small Businesses and companies have been at a competitive disadvantage due to our outdated tax code. A nevada Business Owner recently told me the nevada tax code makes it difficult for him to compete. Another nevadan wrote me and said we need to fix our tax code in order to attract businesses to our country, drive up wages for our American Workers. Our current tax code distorts the marketplace, drags down the economy, prevents american job creators from staying and hiring at home. Just last month i hosted treasury secretary mnuchin in a tax reform round table in my home state of nevada. There we met with some of the states top job creators and time and time again we heard the same thing. Nevada needs lower tax rates on its businesses. Lower rates means a faster growing economy, increased international competitiveness. Lower rates also mean more jobs, better jobs, and higher wages. All of which the middle class desperately needs right now. Just last week it was announced that nevada leads the nation in private job sector job growth at 3. 6 . Imagine what our state and for that matter the country if we unleashed and delivered on tax relief. So after eight years of historically low growth, under the Previous Administration its time to get our economy back on track, help our workers and Small Businesses win on the international playing field. I look forward to working with all my colleagues here as we move forward on business tax and individual tax relief. I want to speak real briefly here on Corporate Tax rate and its impact on labor. Mr. Hodge, i missed your opening testimony, but i assume you talked about this a little bit. The empirical evidence shows workers bear a large percentage. At least 45 of the Corporate Tax burden. Is that an accurate comment . Yes. In fact, we have a paper coming out in the next week or so surveying the economic literature, and it shows that a substantial portion of the Corporate Tax does fall on workers in some fashion. Roughly about half. And in some cases it can be as much as 100 . For instance, the factory i work for moves from dublin, ohio to dublin, ireland to take advantage of the irish 12. 5 Corporate Tax rate, ive borne 100 of that differential between the irish rate and the United States rate. An overwhelming influence on hiring and wages and the economic literature shows that pretty clearly. I have a table here that comes from your organization and a quote on it shows a 20 Corporate Tax rate would lift after tax incomes by 3. 5 . Do you stand behind that . Yes. Its because the combination of the Economic Growth and increase in productivity will ultimately lift both wages and aftertax income. Your model also estimates that the combination of a 20 Corporate Tax rate and full expensing would boost aftertax income by an average of 5. 2 . Do you still stand behind that . Absolutely. Can you expand on any of this information . And what were trying to do is get to individual tax relief. How can we boost. And starting here with these numbers you show in this model. Tax relief for individuals is important, but if you havent had a raise in more than a decade a tax cut doesnt really benefit you. What we want to do is have policies that lift wages, lift productivity, and ultimately lift aftertax incomes. Real Living Standards. And the kind of tax reform weve outlined here with the lower Corporate Tax rate and full expensing will do that. And i think thats the strongest approach to making People Better off. What would the average household prefer . A tax cut . Or a raise in income . I think most people want a tax cut. They dont really see the connection between Corporate Tax reform and the improvement in their daily lives. And we need to convince them that ultimately Corporate Tax reform will boost their standard of living in the longterm. Its just a hard sell. Mr. Hodge, thank you. Mr. Chairman, thank you for my time. Thank you, senator. Senator thune. Thank you, mr. Chairman. I want to thank each of our witnesses for being here this morning. I think we have a historic opportunity with tax reform to reform our antiquated tax code. And last week we had the opportunity to focus on individual aspects of tax reform and the importance of making sure it provides tax relief for middle income taxpayers. Today we have an opportunity to look at the business tax components of this effort as well. Theres significant overlap i think between the two hearings. Because we can if we can streamline and modernize our outdated tax on to reinvest, expand, create new jobs and increase benefits and that means real benefits for middle income families in south dakota and across the country through the businesses that employ them and for many through 9 Small Businesses farms and ranches that they also own. This is a strong panel. I want to ask get into the questions here if i can. Ill begin with you, mr. Hodge. In your testimony you make an important point when you note that Corporate Tax reform may not put cash in peoples pockets in the same way as cuts in the individual rates but that it can have a powerful effect on lifting aftertax incomes and Living Standards. And im just wondering maybe if you could elaborate on that connection between Business Tax Reform and tax relief for middleclass workers and families, especially if we assume that a reduction in the Corporate Tax rate would be accompanied by reductions in the individual tax rates that affect working individuals in this country. When economists at the oecd studied which taxes were most harmful for growth they found the Corporate Income tax is the most harmful tax for Economic Growth. And in large measure because capital is the most mobile factor in the economy. And so when we lower the tax on capital, we find that the economy is much more productive. People have better tools to work with and their standards of living rise. That ought to be the primary goal of tax reform, is to lift peoples real standard of living. You can try to do it through just cutting their income taxes. To lift peoples standard of living. Thank you. Mr. Deboer, in your testimony you make the case against the immediate expensing of real estate given the unique nature of these assets. Your testimony also notes the recent m. I. T. Study that suggests the Recovery Periods for commercial real estate under the current tax code are out of sync with the economic Recovery Period of such property. Since were trying to build a tax code that will promote sustained Economic Growth would shortening the Recovery Period for commercial buildings for 39 years and rental housing from 27 1 2 years be a reasonable alternative to immediate expensing . Yes, we strongly believe that. And i dont disagree at all with whats been said about the power of expensing. Im simply saying that sustainability in our industry, it will incent our industry to build. But we see no benefit to building buildings that are ahead of the demand in the economy. It puts stress on local markets. It puts stress on lenders balance sheets. And ultimately its not good for the longterm growth of the economy. And so we are more from our industry, more interested in economic lives and assets, and real estate as m. I. T. Has studied, real estates proper Economic Life is closer to 20 years than 39 or 27 1 2 years. And by the way, there is some misunderstanding about real estate. Why would you depreciate a building that people see building that people see standing for many, many years . Captions Copyright National cable satellite corp. 2008 captioning performed by vitac