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Hearing on Fundamental Tax Reform

January 20, 2011











January 20, 2011

SERIAL 112-01

Printed for the use of the Committee on Ways and Means





DAVE CAMP, Michigan, Chairman

WALLY HERGER, California                         
PAUL RYAN, Wisconsin
DEVIN NUNES, California
JIM GERLACH, Pennsylvania
TOM PRICE, Georgia
RICK BERG, North Dakota
DIANE BLACK, Tennessee

RICHARD E. NEAL, Massachusetts
JOHN B. LARSON, Connecticut
RON KIND, Wisconsin

JON TRAUB, Staff Director
JANICE MAYS, Minority Staff Director


Advisory of January 19, 2011 announcing the hearing


The Honorable Nina E. Olson, National Taxpayer Advocate
Robert A. McDonald,
Chairman of the Board, President and Chief Executive Officer, The Procter & Gamble Company
Warren S. Hudak
, President, Hudak & Company, LLC
Kevin A. Hassett
, Ph.D., Senior Fellow & Director of Economic Policy Studies, American Enterprise Institute
Martin A. Sullivan
, Ph.D., Contributing Editor, Tax Analysts



  Thursday, January 20, 2011
  U.S. House of Representatives,
Committee on Ways and Means,
Washington, D.C.

The committee met, pursuant to call, at 9:03 a.m., in Room 1100, Longworth House Office Building, Hon. Dave Camp [chairman of the committee] presiding.

[The advisory of the hearing follows:]

Chairman Camp.  The committee will come to order. 

We meet today in our first hearing of the 112th Congress to begin what I expect will be a long discussion, and one I hope will be bipartisan, on the need to reform our Federal income tax system.  As I did on Tuesday, I again want to extend my appreciation to Ranking Member Levin for agreeing to allow this hearing to move forward today even though the committee did not officially organize it until two days ago. 

Twenty-five years ago, a Democrat House and a Republican Senate sent to the White House, and the President signed, landmark legislation known today as the 1986 Act.  This is where we started in 1913.  This is the entire Tax Code of the United States of America and all the regulations, this pamphlet.  This is where we are today.  This is the Tax Code and all of the regulations that Americans have to deal with today. 

The law in 1986, which marked the successful culmination of years of work, broadened the tax base and lowered tax rates; and it remains the basis of our system of taxation.  But, in some sense, it is a shell of its former self.  In the intervening years, Members of Congress from both sides of the aisle have loaded the Tax Code with a dizzying array of credits, deductions, exclusions, and exemptions. 

The late economist, David Bradford, once provided a tongue-in-cheek example to illustrate the concept of tax expenditures and why they are little more than disguised spending. 

Bradford proposed to cut the defense budget for weapons procurement to zero, while creating a new weapons supply tax credit that could be claimed by defense contractors for appropriate weapons “donated” to the Pentagon.  And under this regime it would appear to the untrained eye that both spending and taxes would be reduced, thus allowing elected officials to claim the government was smaller.  But, in reality, nothing would have changed.  A spending program would still exist.  It would just be cleverly disguised as a tax credit. 

Bradford’s cautionary tale seems all too real to those who have parsed the Tax Code and its mysterious tax expenditures for congressionally blessed industries and activities, both big and small. And, regardless of the merits of any individual tax expenditure, the broader picture is not a pretty one.  The President’s deficit commission which I served on, along with the gentleman from Wisconsin, Mr. Ryan, and the gentleman from California, Mr. Becerra, measured the impact of these expenditures in terms of higher tax rates. 

The Bowles‑Simpson report makes clear that taxpayers foot the bill for those expenditures in the form of higher tax rates.  The Bowles‑Simpson report called for eliminating all tax expenditures and would have moved individual rates to 8, 14, and 23 and dropped the corporate rate to just 26 percent. And if their plan used all of the higher revenue from eliminating tax expenditures to push down rates, those numbers would have been even lower. 

As we will hear from Nina Olson, the Taxpayer Advocate, the impact of the changes to the Tax Code to create, expand, and extend these expenditures can be measured by the thousands of additional pages added to the Code or the thousands of changes enacted in the last decade alone.  Clearly, the Tax Code is too complex, it is too costly, and it takes too much time to comply with.  All of this adds more burdens on our families, and on our employers, making it more difficult to create jobs in this country. 

I am under no illusion that the task before us will be easy.  To really reform the Tax Code in a way that lowers the tax rate, broadens the base, and promotes the competitiveness of American employers, we will need to make some tough choices.  I don’t think this can be or should be a partisan exercise, and it can’t just happen because one Chamber passes a bill.  It will require the active participation of all members of this committee, and it will require us to work with the administration, and, yes, we will even have to talk to the Senate now and again.  But, more importantly, we will talk to the American people ‑‑ individuals, families, employers large and small ‑‑ who are actually impacted by the laws we pass here in Washington. 

So this is just the first hearing of many.  I have asked our witnesses to confine their remarks at this first hearing to defining the problems of the current tax system.  I look forward to hearing from many other witnesses and working with all of you as we undertake this enormous challenge.  As we do so, we will have many further opportunities to consider various solutions, but today our focus should be on making sure we begin to understand the scope of the challenge. 

And with that, I yield to my friend and Ranking Member, Mr. Levin. 

Mr. Levin.  Thank you, Mr. Chairman.  We welcome this opportunity. 

Clearly, there is a need for tax reform.  Clearly, any tax reform, which was true in 1986, will have to be bipartisan, it will have to be bicameral, and also it will require leadership from the executive, which I am sure will be forthcoming. 

In a way, this hearing is a pickup of an effort some years ago.  Next to me, Mr. Rangel was chairing the committee, introduced legislation to try to move ahead this issue of tax reform. 

I am not going to be here for a bit because I think Kevin Brady and I will be going to meet with President Hu of China.  I hope this hearing will indeed move the ball forward, though let’s not expect any touchdowns.  It is a long way from the goal line. 

I do think we need to keep in mind some basic principles, including the need for our tax system to help create jobs, to help promote economic growth. 

I also think ‑‑ and this may be somewhat controversial and difficult ‑‑ that also we need to make sure that reform is fiscally responsible. 

Another principle that we need to keep in mind is that any tax reform has to benefit the working families of America. 

Also, let’s keep in mind that the Code is complex.  Answering it through tax reform will not be easy. 

Mr. Chairman, you have referred to the testimony of the National Taxpayer Advocate, who is here with us; and I join in welcoming all of you.  As we looked at the materials last night of all of your testimony, which I am glad we received in time to review, on Page 10, Ms. Olson, you list the tax expenditures under the caption, on page 9, “The Dirty Little Secret: Tax Breaks Generally Benefit the Masses.  That is your language”. 

I just urge that everybody go through the list of tax expenditures on page 10 to understand why some have advocated their being there, the breadth of their coverage, and the need for us on a responsible, bipartisan basis to have, as you have said, Mr. Chairman, an intelligent, forthright discussion as to each and every one of them. 

So this is the kickoff.  The field will not be easy.  There may be snow, rain.  We are used to that in Michigan on fields.  But I think we need to pursue this, and we Democrats look forward to our working together to tackle this issue. 

Thank you, Mr. Chair.

Chairman Camp.  Thank you very much. 

Today, we are joined by five witnesses.  Our first witness will be the Honorable Nina Olson, the National Taxpayer Advocate; and we welcome you back to the committee. 

After her, we will hear from Bob McDonald.  Mr. McDonald is the Chief Executive Officer of Procter & Gamble and is testifying today in his capacity as the Chairman of the Business Roundtable’s Fiscal Policy Initiative.  I should note that Mr. McDonald will need to leave promptly at 11 a.m.  But given the schedule of votes that we are going to have today, I don’t think that will be an issue. 

Our third witness will be Warren Hudak, who is the President of Hudak and Company, a small business that provides tax services to other small businesses. 

And, fourth, we will hear from Dr. Kevin Hassett, a Senior Fellow and Director of Economic Policy Studies at the American Enterprise Institute. 

And, last, we will hear from Dr. Martin Sullivan, a contributing editor for Tax Analysts. 

We welcome all of you, and we look forward to hearing your testimony. 

Before recognizing our first witness, let me just note that our time this morning is limited, so I will not be asking questions today.  And with the concurrence of the, questions by Members will be limited to 3 minutes in the hopes of giving more Members the opportunity to be recognized.  But each of the witnesses will have five minutes. 

So, Ms. Olson, your written statement, like those of all of the witnesses, will be made part of the record; and you are recognized for five minutes.  Welcome and good morning.



Ms. Olson.  Thank you, Chairman Camp, Ranking Member Levin, and distinguished members of the committee.  Thank you for inviting me to testify today about the subject of tax reform. 

Let me begin by saying bluntly that, in my view, the Tax Code today is a mess.  Since the last major reform 25 years ago, the Code has become an ever‑expanding patchwork of provisions with little logical connection and it has become unreasonably difficult for taxpayers to understand and comply with. 

In my 2010 annual report to Congress, I identified the complexity of the Tax Code and the confusion and distrust it engenders as the number one most serious problem facing taxpayers and the IRS.  I titled that section The Time for Tax Reform is Now, because, while there has been a lot of talk of tax reform in recent years, experience has shown that it will require a sustained bipartisan effort with the support of an engaged public to make tax reform a reality. 

I start by noting that the Tax Code as it stands today imposes excessive compliance burdens on individual taxpayers and businesses. 

It is rife with complexity and special tax breaks, helping taxpayers who can forward expensive tax advice and discriminating against those who cannot. 

The complexity obscures understanding and creates a sense of distance between taxpayers and the government, undermining taxpayer morale and leading to lower levels of voluntary compliance. 

The complexity of the Tax Code is also burdensome for the IRS, making it more difficult for the agency to meet taxpayer needs and probably resulting in more audits and enforcement actions than a simpler code would require. 

Now, despite the existence of many narrow special interest attacks break, it is important to recognize that the overwhelming majority of tax breaks by dollar value accrue to large segments of the taxpaying public.  In short, we are the special interests.  If tax rates are to be lowered substantially and overall tax liabilities on average are to remain unchanged, virtually every taxpayer will have to give up cherished tax breaks.  There is simply no free lunch.  Yet I am convinced that what I call the “busy majority” of taxpayers wants fundamental tax simplification and will support it.  Lower tax rates will offset the loss of tax breaks; and, at the same time, taxpayers will understand how their taxes are computed and will save time and money on return preparation. 

To assist Congress in deciding which tax breaks and IRS‑administered social programs to retain and which to eliminate, I suggest utilizing a zero‑based budgeting approach.  Under that methodology, the starting point for discussion would be a Tax Code without exclusions or reductions in income or tax.  A tax break or IRS‑administered social program would be added only if lawmakers, you, decide on balance that the public policy benefits of running the provision or program through the Tax Code outweigh the tax complexity challenges that doing so creates for taxpayers and the IRS. 

In my view, tax reform will have a better chance to succeed if it proceeds on a revenue‑neutral basis.  Although there is widespread recognition that we ultimately must take steps to reduce our current deficit level, I am concerned that if we attempt to solve those issues through tax reform we may never achieve structural tax reform.  Rather, we are likely to get stuck in partisan debate precisely when we need a calm and civil analysis of the structure of the Tax Code. 

For all of these reasons, I believe that fundamental reform must be made a priority.  A simpler, more transparent Tax Code will substantially reduce the estimated 6.1 billion hours and $163 billion that taxpayers spend on return preparation.  It will increase the likelihood that taxpayers will claim all benefits to which they are entitled.  It will reduce the likelihood that sophisticated taxpayers can exploit arcane provisions to avoid paying their fair share of tax.  It will enable taxpayers to understand how their tax liabilities are computed and prepare their own tax returns, improve taxpayer morale and tax compliance and perhaps even the level of connection that taxpayers feel with the government.  And it will enable the IRS to administer the tax system more effectively and better meet taxpayer needs.  I am confident that, in the end, public support for a simpler code will be strong and deep. 

Thank you.

[The statement of Nina E. Olson follows:]

Chairman Camp.  Thank you very much. 

Mr. McDonald, your written statement is also part of the record; and you have five minutes.  Thank you very much.


Mr. McDonald.  Chairman Camp, Ranking Member Levin, and distinguished members of the committee, my name is Bob McDonald; and I am the Chairman, President and Chief Executive Officer of the Procter & Gamble Company.  I am here today in my capacity as Chairman of the Business Roundtable’s fiscal policy initiative. 

I appreciate the opportunity to discuss the importance of corporate tax reform to competitiveness, U.S. investment, and U.S. job growth.  The world has changed dramatically since the basic operating rules of our international tax system were adopted.  The spread of free markets around the world has opened up new opportunities for America’s businesses and workers to sell their products to the 95 percent of the world’s population that live outside the United States.  At the same time, American companies and workers face heightened competition from foreign competitors as they seek out these new markets. 

The time in which multinational corporation was synonymous with American corporation has long passed.  As just one example, in 1960, the largest worldwide companies were nearly all American companies.  U.S.‑headquartered companies compromised 17 of the world’s largest 20 companies.  By 1985, there were only 13; and, by 2010, just 6 U.S.‑headquartered companies rank among the top 20. 

In this hypercompetitive environment, many factors can disadvantage American companies and cause them to lose out in this competition to the detriment of the U.S. economy and American workers.  Taxes are a very important factor.  American companies seeking to expand in markets at home and abroad are working with one of the least competitive tax systems in the world.  Let me explain why. 

As this slide shows, the United States has the second‑highest corporate tax rate among advanced economies.  After Japan adopts its proposed 5 percentage point corporate rate reduction this spring, the U.S. will have the highest corporate tax rate in the OECD, 14 percentage points above the average. 

This next slide shows that it was not always the case that the U.S. tax system was so uncompetitive.  In 1986, when the last major tax reform was undertaken, the U.S. went from among the highest corporate tax rates to among the lowest.  But, since that time, the tax systems of the rest of the world have caught up and surpassed us. 

As this next slide shows, the United States is also one of the few remaining advanced economies that taxes its companies on foreign earnings from active business operations when remitted home.  Most other OECD countries have adopted territorial tax systems that largely exempt these active earnings from home country taxation. 

Recently, both Japan and the United Kingdom have switched to territorial tax systems.  They have chosen these territorial systems to improve the competitiveness of their businesses and their economies. 

This tilted playing field created by the U.S. tax system hurts the competitiveness of American companies and American workers.  First, diminished sales around the world directly reduce U.S. exports of goods and services along with investments and jobs in the United States.  Second, high taxes imposed on American companies that bring foreign earnings back to the United States discourage use of these funds to expand U.S. operations.  Third, a high U.S. corporate tax rate on domestic profits discourages investment here in America by both U.S.‑based and foreign‑based companies.  And, fourth, the highest price paid is paid by the American worker in the form of lower wages and a more slowly growing economy. 

On behalf of the Business Roundtable, I look forward to working closely with this committee, the Congress, and the administration on this incredibly important issue. 

Thank you, Chairman Camp.

[The statement of Robert A. McDonald follows:]

******** INSERT 1‑2 ********

Chairman Camp.  Thank you very much, Mr. McDonald. 

Mr. Hudak, you also have five minutes; and your written statement will be part of the record. 


Mr. Hudak.  Good morning, Chairman Camp, Ranking Member Levin, and members of the committee.  I am pleased to be here as a small business owner and as a tax professional assisting small businesses. 

My business, Hudak and Company, provides a full range of tax services for small businesses, So I know firsthand the challenges that my clients and our company face in complying with the Tax Code.  The complexities of the Tax Code are especially onerous on small businesses.  They can’t afford staffs, HR staffs, tax professionals on hand.  They have to outsource all of that at a tremendous price.  They spend about 1.9 billion hours $19 million in costs in complying with the Tax Code.  It is a staggering amount of money. 

I am also a member of NFIB, which has 350,000 members; and we recently surveyed our members.  Two of the top, top priorities for small businesses is the Federal Tax Code and its complexity. 

One thing to be very sure of from a small business perspective, the business can’t be separated from the owner.  Most small businesses are structured as a pass‑through company.  The earnings are taxed at the individual company rate.  They select this for simplification.  It is a simplified way of being able to understand their taxes. 

The best example I can give in understanding the small business is two examples from this year.  We had two companies that were getting ready to retire, they wanted to use ‑‑ they counted on their business to be their retirement plan.  They were regular corporations and in order to avoid the double taxation of C Corp they switched to an S Corporation.  Because of the onerous 10‑year built‑in capital gain provision, they actually lost 50 percent of all of their earnings that they worked their whole life for, 18 hours a day.  Some of these businesses are second generations and losing that kind of money is staggering, preventing them from investing in other business, starting a new venture, pursuing a new idea; and for one owner it meant he had to continue working into retirement.  So we are all struggling with the Tax Code. 

To speak to the complexity of the Tax Code, the IRS recently sent out a postcard to all small business owners saying they were no longer going to accept payroll taxes to be remitted using a paper voucher.  They were no longer allowing them to submit that.  And some of my most sophisticated clients, who have been clients for a long period of time, e‑mailed me and said, what have we been doing wrong?  Why did I get this notice?  They didn’t even understand the very nature of the notice. 

What was even more mind‑blowing for me was the fact that we have always submitted their taxes electronically.  For 8, 9 years we have been submitting their taxes electronically.  To get a simple postcard in the mail saying we will no longer accept paper vouchers and they are panicked, what are we doing wrong, what is going on.  They didn’t understand the very fact that we were already doing it electronically. 

That is a very simple example of the misunderstanding about what is actually going on.  My clients, as hard as we try, try to get them to understand the Tax Code, this leads to terrible compliance problems.  The Tax Code definitely has to be simplified. 

Thank you.

[The statement of Warren S. Hudak follows:]

Chairman Camp.  Well, thank you very much. 

Dr. Hassett, you also have 5 minutes; and your written statement will be part of the record.  Welcome.


Mr. Hassett.  Thank you very much, Chairman Camp.  Ranking Member Levin is not here, so perhaps Mr. Rangel is the highest ranking.  But thank you so much for having me here.  It is a real pleasure and honor to be here and to talk to you about this important topic. 

The first part of my testimony discusses recent research by Carmen and Vincent Reinhart that looks at the long‑run economic impact of a financial crisis.  They find that one can expect to have slower growth for a good long period after a financial crisis, perhaps as long as a decade.  And if we have the typical experience of an economy after a severe financial crisis, then we will grow about a percent a year slower over the next 8 years, and the unemployment rate 8 years from now will be about 8 percent.  This is an unacceptable outcome to everyone. 

But I note at the outset of my testimony that this is a medium‑term problem, and a short‑term stimulus is of little use.  More fundamental changes must be considered, which is why I celebrate this hearing. 

The first part of my testimony talks about the complexity of the Tax Code.  It provides a chart of the marginal tax rates under the current system that account for all of the phase outs, for all of the different targeted tax policies that we have.  It shows that the marginal tax rate as we go up with income goes up and down sort of like a city skyline. 

Now, progressives generally favor tax rates that increase with incomes and others favor rates that are flat across incomes.  And I don’t think anybody thinks that the marginal tax rate schedule should look like a city skyline, but that is what we have.  This is really logically indefensible and the reason why fundamental tax reform could have a very large impact. 

Now, sound reform should not only fix the rates but also should reform the definition of the tax base as well.  If we do this, we can accomplish a lot. 

A well‑designed reform could easily produce significant growth effects.  Just to sketch the terrain, a survey of 69 public finance economists conducted by Victor Fuchs, Alan Krueger, and James Poterba in 1998 found that the median of respondents believed that the 1986 tax reform produced about 1 percentage point of higher growth over a long period.  My review of the literature with Alan Auerbach suggested that this is a consensus that is a fair reading of the broader tax reform literature. 

Now, there are many possible reforms that would broaden or modify the base, but the key point is that they can conceivably have effects that are just about big enough to offset the growth shortfall that we have inherited because of the financial crisis. 

In the first part of my system, I make these points, but then I move on to look specifically at the case of the corporate tax.  While there is a broad consensus that the high statutory corporate tax in the U.S. makes investments in the U.S. uncompetitive relative to other OECD economies, some question the extent to which effective taxes paid by corporations are equally high. 

As there will be much discussion of these factors in coming months, the remainder of my testimony looks specifically at the question of effective rates.  I begin with the statutory rate analysis that is very similar to what you have just seen.  The statutory rate, though, is an imperfect measure of tax competitiveness, because it does not take into account the breadth of the tax base.  This causes countries with high rates and a narrow base, such as the United States, perhaps to appear more uncompetitive than they really are.  Effective tax rates resolve this issue by taking into account offsets, the present value, depreciations, and other deductions that narrow the base. 

There are two measures of effective rates that are really the industry standard, the effective average tax rate, which you can think of as being the rate that affects something like a plant location decision, and the effective marginal rate, which affects decisions like should I buy a new machine for the plant that is already there. 

Now, in the forthcoming study that I have done with my colleague, Aparna Mathur, we looked at national rankings of statutory rates and of these effective rates.  Our analysis finds that the United States’ performance in the global economy does not look much better when scored with effective rates than when scored with top statutory rates. 

In 2010, for example, the U.S. effective average rate, which is again the rate that is marginal when you are trying to locate a plant somewhere, was 29 percent, while the average for all OECD economies was 20.5 percent.  This is the second‑highest effective average rate in the OECD.  The United States compares slightly more favorably to other OECD countries when we look at the effective marginal rate, which is the rate which influences the decision to buy a machine. 

Even with the effective marginal rate, however, we are not doing so well.  In 2010, the U.S. effective marginal tax rate was 23.6 percent relative to the non‑U.S. OECD average of 17.2 percent.  This was the fifth‑highest in the OECD. 

Any discussion of tax rates is incomplete without analysis of trends in corporate tax revenues.  With one of the highest corporate tax rates in the world, one might expect the share of revenues from corporate capital to be higher in the U.S. than other OECD economies, but this is not the case.  In fact, in the U.S., our revenue is lower than the OECD average. 

This pattern is consistent with the literature that explores the responses of tax revenue to changes in the corporate rate.  Alex Brill and I found significant evidence that a reduction of the corporate tax rate in the U.S. would increase the corporate tax revenue by looking at the changes in revenue in response to other nations’ reductions in corporate rates.  There is a large literature that generally finds a Laffer curve in the corporate tax base. 

Given the significant headwinds that the economy faces, the indefensible state of the current Code, and the horrifyingly high U.S. corporate tax rate, I am glad we are considering reform at this moment. 

Thank you.

[The statement of Kevin A. Hassett follows:]

Chairman Camp.  Thank you very much.  Thank you, Dr. Hassett. 

Dr. Sullivan, you also have 5 minutes; and your testimony will also be part of the record, your written testimony.  Thank you.  Welcome. 


Mr. Sullivan.  Mr. Chairman, members of the committee, thank you for this opportunity to testify. 

A quarter of a century ago, President Reagan defied all the sceptics and provided the leadership for a bipartisan overhaul of the tax system.  He lowered the tax rates.  He cut the tax breaks.  It was a victory for the public over the special interests. 

Twenty‑five years later, the need for tax reform is greater than ever.  Tax complexity costs businesses billions.  Families endure endless hours of anxiety and paperwork.  The perception of unfairness, whether it is due to outright cheating by investors hiding funds in Caribbean havens or to special interests who lobby their way to lower taxes, is an insult to Americans paying their fair share. 

On top of all this, our Tax Code is deadweight on the shoulders of the American economy.  The Tax Code’s long list of subsidies defies any notion of a free market. 

My focus today will be on the corporation tax, which is in particular need of reform.  As we have just heard, Japan has announced its intention to cut its corporate rate by 5 percentage points.  This leaves the United States with the dubious distinction of having the highest corporate tax rate in the world.  Cutting the corporate tax rate is no longer just a good idea.  It is an absolutely necessity. 

At the same time, we must recognize our dire budget problems.  We are on the road to fiscal catastrophe; and, so far, Congress has done nothing to remedy the problem.  To put the Nation’s finances on a sustainable path, that is, just to get our debt to GDP level to stabilize, far, far away from balancing the budget, that will require annual deficit reduction of $500 billion a year. 

In this environment, with these unprecedented budget pressures, it seems reasonable to assume necessary corporate tax cuts must be accompanied by corporate base broadening.  Mr. Chairman, a fundamental feature of U.S. international tax law is that it favors foreign job creation over domestic job creation.  If an American corporation opens a factory in Indiana, it pays a 35 percent tax rate.  If the same corporation opens a factory in Ireland, it pays a 12.5 percent tax rate.  Let us say the factory generates $100 of profit.  The choice is between after‑tax profit of $65 in the United States or $87.50 in Ireland.  Obviously, the U.S. tax law provides a strong incentive for building factories in low tax countries. 

Now, it is essential at this point to discuss transfer pricing.  It should be front and center of any discussion of a corporate tax reform.  Transfer pricing is not a detail.  Data from a variety of sources indicate any inappropriate profit shifting occurring on a large scale. 

What I would particularly like to bring to the committee’s attention is that, over the last decade, the transfer pricing problem has gone from bad to worse.  When you work out the math, what you discover is that transfer pricing is not just a revenue problem, which could be 30, 40, $50 billion a year, but it also a job creation problem.  The effective tax rate for a typical investment in Ireland is not just 12.5 percent.  It is actually negative.  This means that the U.S. Treasury Department is subsidizing investment in Ireland.  It is no different than, say, the Commerce Department directly sending checks to companies.  This is corporate welfare only available to businesses investing abroad. 

So, irrespective of one’s views about whether the United States should move to a territorial system, we should all be able to agree that the inefficiency of subsidies provided through aggressive transfer pricing is a drag on the economic growth and job creation and that any tax reform should include strong measures through use of inappropriate profit shifting. 

Multinationals record on domestic job creation is not good, as indicated on the screen.  Between 1999 and 2008, they reduced domestic employment by 1.9 million jobs and at the same time increased foreign employment by 2.4 million. 

In conclusion, let me just say this.  The essence of an efficient and competitive tax system is a level playing field.  Government should not attempt to outguess the market and pick winners and losers.  As you can see from this slide, our corporate Tax Code has created winners and losers.  The winners are those companies that are able to locate profits and offshore tax havens.  The losers are companies that did not have that opportunity. 

Of course, multinational corporations are important to the U.S. economy.  They are research intensive, they are export intensive, and America wants strong multinationals.  But multinationals competitiveness and overall competitiveness are not the same things.  Yes, U.S. multinationals create jobs but so do purely domestic companies, so do small businesses, and so do foreign headquartered companies in the United States. 

Thank you, Mr. Chairman.

[The statement of Martin A. Sullivan follows:]

Chairman Camp.  Thank you.  Thank you very much, Dr. Sullivan.  Thank you to our entire panel. 

Now we will go to questions, and the chair recognizes Mr. Rangel for the opportunity to question. 

Mr. Rangel.  Thank you, Mr. Chairman.  Richard Neal and I will attempt to fill the absence of our Ranking Member. 

But I think it is generally agreed with this panel as relates to corporate taxes that if we were to exclude the credits, the deductions, the exemptions, as Dr. Sullivan referred to, we could have a dramatic decrease in the corporate tax rate.  But everybody wants to cut the loophole for the other guy but not the incentive that he or she or the corporation enjoys. 

Dr. Sullivan, in your dealing with the corporate world, do you find any tremendous objection to starting with ground zero in terms of the loopholes that we have in the corporate system so that we can more easily, dramatically reduce the statutory rate for corporations? 

Mr. Sullivan.  Just as Chairman Camp was saying, we should think of tax expenditures just like direct expenditures.  We need to go through our tax expenditures with a fine‑tooth comb and look for abuse and inefficiency; and I think, as we say on the direct spending side, everything should be on the table.  I think when you start picking through the details you will see that most of the tax breaks in our Code could be trimmed and made much more efficient.

Mr. Rangel.  So what you are saying is there is no big target out there.  If we were talking about individual tax rates and start talking about mortgage deductions and charitable contributions and local and State deductions, that is the big mountain that we would have to climb.  In the corporate area, however, what would be our biggest obstacle, in your opinion, if we started off with no exemptions at all?  What would we have to overcome politically in order to do that? 

Mr. Sullivan.  We would have to eliminate the tax incentives for offshore job creation that is intrinsic in our international tax rules. 

Mr. Rangel.  So you don’t think that our corporate leaders would not think that it would be competitive if we reduced the rate and then they can decide where to make the investment and remove the subsidy for encouraging investment abroad? 

Mr. Sullivan.  I think it depends on which corporate leader you are speaking to.  Because some corporations under current law do not have opportunity ‑‑ frankly, they don’t have a lot of tax breaks available to them, while others do.  So the companies that do not have those tax breaks available to them are going to be in much more in favor of lowering the rates across the board. 

Mr. Rangel.  Thank you.  I yield back. 

Chairman Camp.  Thank you very much, and now the chair recognizes Mr. Herger for three minutes. 

Mr. Herger.  Thank you, and I would like to thank the chairman for this very important hearing. 

There are a number of reasons for Congress to seriously consider tax reform, but I would like to focus on the impact on jobs.  Mr. Hudak, you expressed concern about the expiring tax provisions and the uncertainty that creates.  This is something that has long been a concern of mine as well.  As someone from a small business background, I recognize that business owners have to plan for the future when they make investment decisions.  Tax relief that lasts only one or two years isn’t all that helpful when you are planning an investment that will pay off five or ten years down the road.  Could you elaborate further on how the uncertainty of temporary tax provisions affects some of the businesses to which you provide services? 

Mr. Hudak.  Absolutely.  The Tax Code causes businesses to think tactically instead of strategically.  When provisions are temporary or when provisions are put in place to incentivize, oftentimes we miss the mark because of their complexities.  The Section 179 deduction, the AMT fix that we wait until the very last moment at the end of the year might be the difference between a 5 or $10,000 tax bill going into the next year.  And that could mean the difference between a new truck, maybe an on‑line marketing initiative, or maybe even a new employee.  It has a direct impact, the temporary provisions and the last‑minute uncertainty that we have been seeing increasingly over the last decade.  It is very important that businesses think strategically and not tactically. 

I had a situation where, for instance, we had a complicated provision that allowed people who bought a certain kind of truck, a certain size truck, were able to get a deduction.  So he went out and talked to his accountant and bought a truck.  It was the wrong truck.  It was a massive truck.  He was hoping to grow into it.  He was in a paper products company, and that truck became his warehouse.  He used it to pick up his paper products, put it in the truck, and why bother unloading it.  He just drove around with his warehouse in his back.  He was thinking tactically and not strategically, and the Tax Code does that continuously. 

Mr. Herger.  Thank you. 

Thank you, Mr. Chairman. 

Chairman Camp.  Thank you very much. 

Mr. Johnson is recognized. 

Mr. Johnson.  Thank you, Mr. Chairman. 

Mr. McDonald, I would like to have your comments.  I think we have got IRS people in darn near every corporation now.  And what they do is sit there and keep you out of trouble, theoretically, and then turn around and come back at you when you make a mistake which they are there to prevent, theoretically.  I think that is a waste of effort, frankly. 

I think you probably know that the IRS Commissioner, Douglas Shulman, does not file his own taxes in part because he believes the Tax Code is too complex.  He says ‑‑ and I will quote him – “I have used a tax preparer for years.  I find it convenient.  I find the Tax Code complex so I use a preparer,” he said.  That means to me that the average American can’t fathom this Tax Code and we need to do something to fix it. 

But, basically, I want to thank you for being here and ask you to what extent has our corporate tax system adversely affected investment and job creation in America? 

Mr. McDonald.  Well, Congressman Johnson, the issue we have talked is that the corporate tax rate of the United States, both the rate itself being the ‑‑ soon to be the highest in the world as well as the worldwide system disadvantages American corporations. 

In the case of the Procter & Gamble company, the company I am the CEO of, most of our competition is international competition; and, on average, we pay about 2 percentage points higher corporate tax than those international competitors.  Plus, we face the higher tax rate if we repatriate money that we earn overseas.  That is a disincentive for any company to invest in the United States. 

In our case, because we are a global company and because we can’t export our product, we can’t make a disposable diaper in Mehoopany, Pennsylvania, and ship it to China and make any money on it.  We do have an organization around the world, and we do have 150 plants around the world.  So for us there is never really a decision as a company that we invest either here or there.  We have to invest everywhere in order to sell to the 4 billion people we reach every single day with our products. 

Mr. Johnson.  Does that make you think that some of the corporate structure might move overseas just to get out from under our Tax Code? 

Mr. McDonald.  Certainly it could be possible.  What we are attempting to do is provide a competitive system for this country so that businesses stay here and flourish here the way they have for years. 

Mr. Johnson.  Thank you. 

All right, Mr. Chairman. 

Chairman Camp.  Thank you.  Thank you very much. 

Mr. Stark is recognized. 

Mr. Stark.  Mr. Chairman, I yield to Mr. Neal. 

Chairman Camp.  All right.  Mr. Neal. 

Mr. Neal.  Thank you, Mr. Chairman.  Thanks for holding this hearing.  Thanks to Mr. Stark. 

A couple of questions that I would like to direct to the panelists, because this is complicated work and oftentimes in this town it is reduced to jargon, as you know.  I think there are reasonable arguments. 

I have been to that Gillette plant, Mr. McDonald, in Boston.  It is a remarkable story about domestic manufacturing.  And perhaps you can let us in on how many blades are going to be added during the Super Bowl to that razor.  I know that is a closely held secret. 

But is it possible, Mr. McDonald, to focus on growth and keep the initiative revenue neutral? 

Mr. McDonald.  Congressman Neal, it is a great question.  We believe it is best to take a look at getting a competitive system first. 

Many of our CFOs had meetings with Secretary Geithner last week, and, revenue neutrality, we ask to take that off the table for now and let’s just agree that what we want to do is to do something that is fiscally responsible the way the chairman and I think the Ranking Member talked about.  I think if we work together we can develop a competitive tax system for this country and do it in a fiscally responsible way, and that is what we are setting out to do. 

Mr. Neal.  When Mr. Rangel kicked out his proposal, if you recall, the critics jumped on it.  It was a starting point in the conversation.  That is all it was.  It was an opportunity to shed some light on the needless complexity of the current Code. 

Now, let me use an example of how I think we got burned here. 

A few years back, the former chairman of the committee argued for repatriation; and, right now, American companies are estimated to be sitting on more than $300 billion in revenue offshore.  But recall that when money was repatriated at 5.25 percent, and there were no jobs created.  In fact, in one instance, one company laid off I believe 6,000 people in the next few weeks after the money had been repatriated.  So I share the argument that getting that money back for job creation is a good idea, but what assurance do we have that as the money is returned that in fact domestic job creation would occur? 

Mr. McDonald.  I think if we start with the premise that we have a noncompetitive system, we set up that competitive system, that will lead to economic growth, that will lead to business growth, and that will lead to job creation.  So, as a Business Roundtable, we have encouraged our members to not look for a one‑time repatriation but rather to work on ‑‑ with us ‑‑ getting a competitive rate, going to a territorial system so that we can grow the economy and create jobs in this country.  Obviously, if we are in a territorial system, the repatriation takes care of itself and we create jobs here. 

Mr. Neal.  How many people wake up every morning and use a Gillette razor? 

Mr. McDonald.  Not enough. 

Chairman Camp.  With that answer, the gentleman’s time has expired. 

Mr. Neal.  Mr. Camp, I believe Mr. Stark yielded the time to me.  Would you allow me to pursue the next three minutes that I have along the same line? 

Chairman Camp.  Well, it is now time to go to the other side of the dais, but then we will come back to you. 

So Mr. Nunes is recognized for 3 minutes. 

Mr. Nunes.  Thank you, Mr. Chairman.  I will be very brief.  I want to thank the panelists for coming.  But I want to just take this time, Mr. Chairman, to encourage you to move forward with fundamental tax reform.  I think that last year President Obama’s Commission, the Debt Commission that you served on and some of the Members of the committee served on, really undermined the power of this Committee and undermined our Constitutional duties that we have in this Committee.  So I hope that you will work with Ranking Member Levin in a bipartisan manner and that we can move real tax reform legislation through this House this year.  I think it would be great if we could do it in a bipartisan way, and I yield back. 

Chairman Camp.  All right.  Mr. Tiberi is recognized. 

Mr. Tiberi.  Thank you, Mr. Chairman.  Thank you all for coming. 

Mr. McDonald, following along what Mr. Neal was talking about, I am from Columbus, Ohio.  And during the last campaign season in Columbus and I am sure in Cincinnati we saw a lot of ads regarding trade and regarding taxes and regarding incentives.  In fact, in the Governor’s race, which was all about jobs, we saw the current Governor attacked for a vote or votes in Congress, that he voted for tax breaks to “send American jobs overseas,” and most of that was targeted to American worldwide companies that were expanding into different markets. 

Obviously, Procter & Gamble has a huge presence overseas.  Can you tell me what those tax breaks are that “send jobs overseas,” in your mind? 

Mr. McDonald.  Congressman Tiberi, as I said, we invest everywhere.  Our investment decisions are not we invest here or there.  In fact, our international business is about 60 percent of our total sales.  Our U.S. business is about 40 percent of our total sales.  Yet we pay 60 percent of our taxes in the United States.  We are one of the largest taxpayers here in the United States. 

What is important is, as we grow overseas, that creates jobs in the United States.  Twenty percent of our jobs in the United States depend upon our international business.  Forty percent of our jobs in Ohio depend upon our international business.  So even though we may be the largest consumer goods company in China with 7,000 Chinese employees, we have got a lot of people in Columbus, Ohio, and in Cincinnati, Ohio, who depend upon the strength of that business for their jobs; and we take that very, very seriously. 

Mr. Tiberi.  Is it fair to say then ‑‑ and others have said this to me, CFOs and tax accountants ‑‑ that if we aren’t proactive here in the United States with respect to tax policy and competitiveness, even though Procter & Gamble, for instance, has been in Ohio for over 100 years, you don’t have to be headquartered in Ohio or the United States; and other countries would love to have you.  Is that a fair statement? 

Mr. McDonald.  I think the chart that I showed earlier that showed how statutory tax rates have gone down over time is suggestive of the fact that countries around the world are competing for investment and they are competing for companies like ours to move outside of their home country.  We have got to get into that game, and we have got to be competitive, and we have got to get people to invest here in the United States. 

Mr. Tiberi.  And, ultimately, the more diapers you sell in China or the more toothpaste you sell in Europe is going to mean more jobs in Ohio? 

Mr. McDonald.  Yes, sir.  More jobs in Ohio.

Mr. Tiberi.  Thank you.

Chairman Camp.  Thank you. 

Mr. Neal is recognized. 

Mr. Neal.  Thank you, Mr. Chairman. 

I want to come back to the point that I was raising earlier. 

Dr. Sullivan, I was caught by the statement that Dr. Hassett made that cutting corporate tax rates increased tax revenues.  It sounds a lot to me like tax cuts pay for themselves.  I think tax reform is a worthy pursuit and very sensitive to the international arguments that are being made here today, but in some measure didn’t America get into trouble based upon that notion, that tax cuts pay for themselves? 

Mr. Sullivan.  Certainly the idea that tax cuts pay for themselves is very attractive politically and appears to make the issue very easy ‑‑ for example, in the 1980s, that notion was very popular, the Laffer curve.  And there are some dynamic aspects to the revenue estimates.  But to think that tax cuts pay for themselves, except in very extraordinary circumstances, is mostly wishful thinking. 

If you look back at the 1986 Tax Reform Act, we lowered the rates and broadened the base; and immediately after the 1986 Act there was a whole set of hearings in the Senate finance about where did the corporate revenue go.  There was actually less corporate revenue collected than expected. 

And, also, if you follow the efforts of the joint committee and the Treasury Department, the official revenue estimator, I don’t think they would ever score it that way. 

Mr. Neal.  Part of the problem then in some measure is the fact that we are fighting two wars and we have cut taxes by $2.3 trillion and that has been a drain on the Federal Treasury.  In the course of this conversation, based upon what you have said, would you argue that tax cuts pay for themselves? 

Mr. Sullivan.  No, certainly not ‑‑ no, I would not argue that corporate tax cuts pay for themselves. 

Mr. Neal.  So that invites the next question.  As we go forward, how do we devise a system, as Mr. McDonald said, that perhaps can be revenue neutral and at the same time keep our companies competitive in a global economy?

Mr. McDonald, do you want to weigh in on that as well? 

Mr. McDonald.  Congressmen, I think that is the challenge; and what we have said is let us prioritize getting to the competitive system and make sure we do it in a fiscally responsive way.  I am not sure we will be exactly revenue neutral, but let us do it in a fiscally responsible way. 

Mr. Neal.  And the last question ‑‑ Ms. Olson, I appreciate your good work.  My time is running out quickly, but I do want to thank for your parallel pursuit of my career, doing something about alternative minimum tax. 

Ms. Olson.  Thank you, sir. 

Mr. Neal.  Thank you, Mr. Chairman. 

Chairman Camp.  Thank you very much. 

Mr. Davis is recognized. 

Mr. Davis.  Thank you, Mr. Chairman. 

When we talk about international business and its reach and impact domestically, I harken back to being deployed in the Middle East in the 82nd Airborne Division and taking a walk through the desert one night.  Under the moonlight, a wrapper blew up to my feet, and it was an Arabic‑labeled Pampers package, and I began to understand the reach of our economy. 

Mr. McDonald, P&G has about 1,300 employees, 1,200 of whom live across the river in our district.  That created $138 million in wages.  And your company also purchased $160 million in goods from over 260 suppliers that are in our region in Kentucky.  Those are real numbers.  Those are real jobs that impact a lot of lives and a much broader supply chain that is multiplied in the economy. 

At a time when the economy is struggling to regain its footing, we have looked at job creators, small businesses but also, very much so, large businesses like P&G, as a means to put Americans back to work.  Companies want to manufacture in the United States, but they are currently faced with a tax and regulatory structure that encourages them to do otherwise.  As you try to grow P&G and invest in Kentucky, Ohio, Indiana versus foreign markets, do you factor tax liability into your decisions?  And if you do, do you look more at the corporate marginal tax rate, your overall effective tax rate, and why? 

Mr. McDonald.  We certainly do look at tax rate, Congressman Davis.  Whenever we site an operation anywhere in the world, we look at tax rate. 

As I said earlier, because we do sell to 4 billion people a day around the world, we really do have to invest everywhere.  And normally what happens is when we invest in the United States it becomes a decision of where to put the operation in the United States.  Right now, we are building a factory in Utah, in Box Elder, Utah.  It is a $300 million investment.  It will employ about 300 people.  We did that because it is a paper factory and we need to get our paper products more efficiently on the west coast. 

One of the things you see today going on which is very different than it was in the 1980s, in the 1980s when I joined Procter & Gamble, the manufacturing expense of a product was more important than the logistics cost.  But because of the cost of fuel today and for other reasons, the logistics costs are much higher than the manufacturing expense.  So it becomes much more difficult to produce a product in the United States, for example, particularly something as low cost as a diaper, and ship it somewhere overseas. 

But what we have in Cincinnati, what we have in Kentucky are high‑paying technical jobs.  Our research and development operations are there, our corporate headquarters is there, and those really have a lot of very highly skilled people who are running our businesses around the world. 

Mr. Davis.  Do you have a sense, just in closing, when you create or open a new market or expand in an overseas market, what is the multiplier effect back home on jobs generally? 

Mr. McDonald.  It can generally be anywhere from 6 to 10, depending upon the supply chain.  We work very hard to develop suppliers who can be global suppliers for us.  In fact, today we are recognized as one of the top companies in the United States for developing minority owned suppliers.  We will take a minority owned supplier, and we will work to develop them into a global supplier, and today we do about $2 billion a year of business with minority owned suppliers in the United States, many of them located in Kentucky or in Ohio. 

Chairman Camp.  Thank you.

Chairman Camp.  Mr. Reichert is recognized. 

Mr. Reichert.  Thank you, Mr. Chairman.  I want to thank Mr. Camp for holding this hearing.  And I think all of us in this room have recognized for many years that the Tax Code is complicated. That’s an understatement.  But I think that the testimony and the questions that we have heard today and the testimony from Ms. Olson saying, it is a patchwork, it has no logical connections, it is confusing, and it creates mistrust; And Mr. Hudak, saying it is onerous.  I mean, these are words that all of you on the panel have used over and over again. 

So I hope that we can come together in a bipartisan way to begin to address some of these issues.  Yesterday we had the opportunity to meet ‑‑ some of us did ‑‑ with Mr. Ballmer from Microsoft and, Mr. McDonald, he was saying some of the same things that you were saying about corporate structure.  But I think that one of the things that really struck me as he spoke to us yesterday was, he urged us to think not just about a corporate tax rate, but the competitive tax system, as is the point that all of you have been making today. 

And, of course, one of our big concerns is ‑‑ at least one of mine– is the small businesses.  So my question is for Mr. Hudak.  What challenges does the amount of business income taxed at the individual level present for reforming the Tax Code in a way that helps American businesses grow and create jobs and compete? 

Mr. Hudak.  Well, 70 percent of small businesses are pass‑through companies.  They are taxed at the individual rate.  So taxing anything beyond what a business owner is due as wages for his work is really taxing capital formation.  It is really hitting on his ability to invest, create jobs.  Certainly everybody should be subject to the full force of employment taxes for the value of their work.  But beyond that, because of the corporate structure of the small business, when you tax beyond that, you are really hitting on the small business owner’s ability to form capital, dream dreams, invest, innovate.  And that is a very important point. 

Mr. Reichert.  I appreciate the answer.  And I yield back.  Thank you, Mr. Chairman.

Chairman Camp.  Thank you.  Mr. Doggett is recognized. 

Mr. Doggett.  Thank you, Mr. Chairman.  Let it be remembered that Congress began this debate on whether or not to reduce corporate tax revenues to pay for our national security on the same day that our committee leadership, like our President, is meeting with the Chinese.  Because the first question that needs to be answered in this debate is how much more America will borrow from the Chinese so that some corporations can pay less.  To say, as the representative of the Business Roundtable has done here, that “revenue neutrality should be off the table” may be consistent with the misguided holiday tax deal that added another almost $1 trillion to the national debt.  But it is just another way of saying, Go borrow from the Chinese. 

Of course, there may well be some merit to lowering the statutory corporate tax rate.  All of our witnesses are suggesting that there is.  One should realize, of course, that to the extent that we lower the statutory rate, if all corporations were paying that, that would represent a substantial tax increase for many of our multinationals.  You have noted General Electric, for one, that would be paying many times the effective rate if it paid the lowered statutory rate that is being proposed. 

To call for a pure territorial system is really just another way of saying, We want a permanent repatriation of profits holiday like the one that didn’t produce more jobs for Americans last time, and it is a surefire way to encourage the continued export of more American jobs. 

I would ask you, Dr. Sullivan, when we talk about competitiveness, which all of us are for, shouldn’t we be concerned about promoting a level playing field so that our smaller American corporations, the ones that are the real engine for economic growth who don’t have subsidiaries and tax havens, whose lobbyists haven’t come up here to this committee to add hundreds, if not thousands, of pages to the Tax Code and regulations that Chairman Camp showed at the beginning of this meeting and to make it so complex, have a level playing field and aren’t at a disadvantage against their larger multinational competitors? 

Mr. Sullivan.  Thank you, Mr. Doggett.  Yes, the most important thing that we can do to improve the competitiveness of our tax system is to make the tax system neutral across all types of companies.  We need to look for pockets of over subsidization.  And that is what we find in certain areas of the international tax law.  So we want a level playing field so that job creation can be uniform across the economy, particularly when our deficit problem is at these incredible levels. 

Chairman Camp.  Thank you.  The gentleman’s time has expired.  Mr. Roskam is recognized. 

Mr. Roskam.  Thank you, Mr. Chairman.  Mr. McDonald, an observation and a question.  The observation ‑‑ I am from suburban Chicago.  And I am sometimes kind of amazed at conversations that I will have with folks in the Chicagoland area who are working for worldwide American companies who have not had a sense of clarity about the fact that their very employment is dependent upon the success of that company in overseas markets. 

So my statement to you, as the leadership of the Business Roundtable, I think that there is a lot of advocacy that is left on the table because businesses are somehow reluctant to engage in substantive philosophical conversations because they feel like they are going to be perceived as donkeys and elephants and get into partisan issues when you are really talking about a world view that says capital markets are good, competition is good.  And I am telling you, I am amazed at the level of conversation.  So that is my observation. 

Mr. McDonald.  I agree with you, Congressman.  All of our members would agree.  We have to do a better job. 

Mr. Roskam.  Terrific.  To amplify Mr. Tiberi’s point, there has been, you know, the slogan, Shipping jobs overseas is a bright and shiny bumper sticker, which is very, very catchy.  And it seems like the more subtle but more robust argument is a five‑paragraph economics essay which makes lots of sense, but you have got to get through all five paragraphs.  And if you do get through all five paragraphs, you say, “Oh, makes sense”.  I get it.  But we and many on both sides of the aisle– have done a very bad job of communicating about overseas markets and their relationship to American prosperity. 

And I would just encourage you, and we want to be part of this conversation with you– about how to communicate more effectively to American citizens that prosperity overseas for U.S. companies means prosperity at home. 

Mr. McDonald.  Absolutely, Congressman.  In fact, I wanted to clear up a potential misrepresentation of a territorial tax system.  A territorial tax system, which I discussed earlier, says that we pay the same tax, as a U.S. company in a foreign market, that our competitors pay, that our foreign‑based competitors pay.  It is not a tax break.  We are not talking about a tax break.  What we are talking about is paying the same as our foreign‑based competition.  Our foreign‑based competition doesn’t have to pay tax ‑‑ incremental tax on the repatriation of funds to their home market.  That is the difference.  It is very simple. 

Mr. Roskam.  I yield back. 

Chairman Camp.  Mr. Gerlach is recognized. 

Mr. Gerlach.  Thank you.  Following up on that point, Mr. McDonald, and also on what Mr. Neal raised a few moments ago, from your perspective, given your domestic business activities as well as your foreign business activities, from a perspective of what it would take from a Tax Code change to have you consider investing more in domestic job creation rather than foreign job creation, would that then be just a general reduction in the corporate tax rate itself?  Or should there be more specific targeted language for the repatriated dollars that we would want to have you bring back to the United States and hopefully invest, and not as you raised, Mr. Neal, brought back but not have any jobs created? 

So from your perspective, is a general tax rate reduction more favorable to you in that job creation here domestically or language that would say, if you brought those dollars back domestically, you would get a lower rate if you specifically invested that in R&D activities or manufacturing activities, something very specific and targeted that you would get that tax benefit by doing that?  What, in your mind, would be the better way from a Tax Code standpoint to encourage you, Procter & Gamble, to invest more in the United States? 

Mr. McDonald.  Congressman, our principle would be, Let’s come up with a competitive system, and that would be both the rate and moving from a worldwide to a territorial system.  And what I would suggest is, let’s benchmark the other countries that we are competing with.  Because we are also not just talking about American companies investing here.  We are talking about Chinese companies.  I have met with Chinese CEOs who say, Help me figure out how to invest in the United States.  And they are struggling with our Tax Code as well.  And that is part of President Hu’s visit and the reason I will need to leave too is because we are trying to get Chinese companies to invest here.  And if we can get to a competitive system like those other OECD countries that have improved their systems, then I am sure we will succeed. 

Mr. Gerlach.  Thank you. 

Mr. McDonald.  Yes, sir.

Mr. Gerlach.  Thank you, Chairman.

Chairman Camp.  Thank you.  Mr. Thompson is recognized. 

Mr. Thompson.  Thank you, Mr. Chairman.  Thank you for holding this hearing.  I think it is an important discussion that we have to have.  I think we need to simplify our Tax Codes, all the Tax Codes.  And I would like to just ask the chairman for his help and cooperation this year on expanding that.  I am going to reintroduce my bill on estate tax reform.  I think it is a sad day when family farms have to be sold in order to pay estate tax on those family farms.  And hopefully, we will be able to create a situation where if you inherit the family farm and you keep farming it, you will be able to get a postponement in any estate tax.  So I hope we would expand it to that. 

I don’t think the idea of a tax policy that encourages jobs in this country, rather than overseas, is a bumper sticker.  We received this sheet that shows the number of foreign jobs that were created between 1999 and 2008 versus domestic jobs that were lost.  I think we need to have a Tax Code that, in fact, does encourage job growth here in the United States of America.  And I understand that businesses consider all of their investments, foreign and domestic, when they figure out their bottom line.  But I think we have to pay particular attention to creating jobs here. 

And then lastly ‑‑ and kind of a statement but also a question ‑‑ there has been a lot of talk about deficit neutrality when we work on reforming the Tax Code.  I just don’t think you can take that off the table or take care of it later on.  I think this is a real, really important issue not only because of the growing debt, but the impact it is going to have on companies like Procter & Gamble. 

There was discussion just this last year of lowering the U.S. credit rate because of our big deficit and our big debt.  And I think that would impact U.S. competitiveness and U.S. corporate profits, if that were to happen. 

So I don’t think this is something that we can ignore.  I would like to hear from both Dr. Sullivan and Mr. McDonald on that specific thing.  How would that hurt U.S. companies both here and abroad if our credit rating was lowered because we don’t pay attention to the deficit of our tax reform. 

Chairman Camp.  We need short answers. 

Mr. McDonald.  Well, I think, Congressman Thompson, we have already seen somewhat the impact of that if we look at what is going on in Europe right now in places like Greece and places like Spain and places like Ireland.  So we know what will happen.  It will be a higher interest rate.  It will be harder to get capital.  The chart that you referenced, while a good chart, we have to get into the detail of that because the businesses and the economies are growing much faster in places like Asia and Africa than they are in places like Europe and the United States.  So, of course, any time you have global business, you are going to be hiring more people in those geographies.  So I just think we need to get into the details and understand why those jobs were being created abroad. 

Chairman Camp.  The gentleman’s time has expired.  But, Dr. Sullivan, if you would just answer briefly.  Thank you. 

Mr. Sullivan.  Thank you, Mr. Chairman.  The deficit problems we face are unprecedented.  They slowly weaken the foundations of our economy by sapping capital formation, and we risk financial collapse.  So these are very serious problems for our competitiveness.  Thank you. 

Chairman Camp.  Mr. Heller is recognized. 

Mr. Heller.  Thank you, Mr. Chairman.  I appreciate you having this hearing.  I apologize that I missed some of what was said here this morning because I was on the radio.  And the timing of it and the discussion had specifically to do with our tax structure and what is going on here in Washington, D.C. and what we are trying to do.  I told them that it is great that we are able to get the Republicans and Democrats together and actually start talking about some tax reform ‑‑ long overdue, long overdue tax reform.  And there isn’t a small businessman or a manufacturer in my district that isn’t talking about how complicated this tax system and the taxes are. 

We have 14.4 percent unemployment in Nevada, and I have to believe that our current tax structure has something to do with that.  And I am pleased to hear about the administration, talking about their desire and eagerness to look at some tax reform.  There are Commissions out there.  There are committees out there, Leadership on both sides of the aisle, as we are seeing here in this Committee meeting.  But I think what we are missing and what is important to concentrate on is that it is the constituency out there, these small businesses and manufacturers, that are talking about the need for fundamental change in our Tax Code so that they can be competitive not only here in this country but abroad. 

And we are hearing stories after stories ‑‑ and I don’t know if this was brought up ‑‑ Microsoft talking about having to borrow in this country because they cannot bring money back from overseas.  They have billions of dollars overseas.  They can’t bring it back to America to create jobs.  Their only choice is to borrow because that is what is best for their shareholders.  Those kinds of stories, those kinds of issues that we have right now are fundamentally flawed with the process that we have. 

So, Mr. Chairman, I certainly do appreciate this hearing.  I saw a couple of charts yesterday that were talking about deflation now here in this country.  I know gasoline prices are going up.  I know food prices are going up.  But you get past those two obstacles, and then we start looking at the deflation of other goods and services.  We are looking at falling wage growth here in this country, and I believe that that has a lot to do with the Tax Code we have here in this country.  And I guess quickly ‑‑ and I don’t know how much time I have left — but you talked about a simpler code, Ms. Olson.  Have we gotten to the point that our Code has run its course; our current Tax Codes has run its course?  And are there alternatives out there to the current code as opposed to just making it simpler? 

Ms. Olson.  Well, as I said in my testimony, I really think you need to, on the individual side, really just put everything on the table and then go through it ‑‑ not first from a cost benefit but say, Is this a policy that we should run through the Internal Revenue Code?  First, is it a policy that we want?  Second, is it a policy that we should run through the Internal Revenue Code?  If it is a policy you want, then when you answer that second question, you have to think, what is the burden that you are putting on individual taxpayers to have to document this thing, to tie their businesses up into knots in order to meet the requirements for it.

And then what are you making the IRS do?  How are they going to treat taxpayers, whether they are businesses or individuals?  Right now, you have just heard a morning of testimony about the difficulties that taxpayers are facing. 

Mr. Heller.  Thank you, Chairman. 

Chairman Camp.  Thank you.  Dr. Price is recognized. 

Mr. Price.  Thank you, Mr. Chairman.  And I want to congratulate you on obtaining the gavel for this Committee.  I want to congratulate you and commend you for your passion for fundamental tax reform which is so necessary.  I, frankly, am struck by the unanimity of the panel, especially as it relates to the corporate tax rate and the need to decrease the corporate tax rate. 

I think it is imperative that we not punish the job creators.  And I think, as the charts have shown, a high corporate tax rate does, in fact, punish job creators because we live in a global economy. 

I was struck, however, Dr. Hassett, by comments about any decrease in corporate taxes, not increasing revenue necessarily to the Federal Government.  I wonder if you would comment about what many of us believe:  a decrease in corporate tax rates actually increases revenue to the Federal Government. 

Mr. Hassett.  Thank you very much, Mr. Price, for the question.  And Mr. Neal, I welcomed the opportunity also to respond to the earlier exchange. 

The thing is that there is a well‑developed literature, including, you know, a fairly recent Brookings paper a paper by a German economist who is definitely not Republican or Democrat. That shows that really a lot of the lessons in Mr. Sullivan’s testimony are apparent in the data that if you are high tax place, and it is relatively easy for companies to move their profits to a low tax place.  That is why you saw the lower average rates in Mr. Sullivan’s testimony for some companies.  It is that they have been very adept at locating activity in lower tax places. 

If we reduce the tax here in the U.S., then they have less of an incentive to locate their profits and their activity abroad, and then it is just an empirical question. Is the change in incentive enough so that you could actually reduce the rate and get more revenue?  It is almost never the case with taxes ‑‑ at least in the near term ‑‑ that when you reduce the rate, you get more revenue.  But in the corporate tax space, there are actually academic papers that find that result.  I would say a rough reading of the literature is that the revenue maximizing tax rate in the corporate tax space is maybe around 30 percent.  So if we are above that, then it means we are actually losing revenue.  And in part, it is because it is so easy to transfer

 to lower tax jurisdictions.  And I put a reference in my testimony, inside that reference that ‑‑

Mr. Price.  Thank you.  A quick comment as well on something that has also been an area of disagreement and that is the repatriation of dollars.  It seems that our friends on the other side think that would be a nasty thing to do, to allow that money to come back because they don’t have any proof that there are jobs created.  But the converse of that is that if you just leave the money over there, then it actually is better for the United States.  Isn’t it better for American workers and our American economy to, in some way, allow for that repatriation of resources? 

Mr. Hassett.  Right.  We need to allow firms to put their money where it can be best put to use, regardless of taxes; and repatriation shouldn’t be relevant.  I would counsel against a temporary measure.  It should be a permanent measure. 

Mr. Price.  All right.  Thank you.  I yield back

Chairman Camp.  Thank you.  Mr. Larson is recognized. 

Mr. Larson.  I want to thank the chairman and thank him for this opportunity.  I have three quick questions for the panelists.  One for Ms. Olson.  In your testimony, it said, If tax compliance were an industry, it would be one of the largest in the United States.  It consumes 6.1 billion hours.  The tax industry requires the equivalent of more than 3 million full‑time workers.  These are a pretty amazing statistics.  I would like you to expand upon that, noting that it seems to me that our current tax system is broken.  It was antiquated in the last century.  We are already a decade into this century, and we still haven’t made much gains in terms of straightening it out. 

Second question, to any of the panelists, with regard to transaction taxes, noted on 60 Minutes that more than $60 trillion takes place in transactions over the counter that are unregulated.  And in terms of looking at revenue that takes place in the EpisPhere or done algorithmically or whatever the case may be, it just seems to me like this is an opportunity that is worth looking at as opposed to taxing one’s labor.  So I would be interested in answers to those questions.  Ms. Olson, I will start with you. 

Ms. Olson.  I think what those numbers point out ‑‑ and I must note that those numbers include business taxes as well as individual ‑‑ but I urge this committee to not forget the individual taxpayers, the 132 million individual taxpayers who are your constituents, who are suffering under the current, you know, burden of this Code.  And as we talk about businesses making decisions about where to place their profits or their activities, that very ability to make those decisions leads to a great distrust of your constituents of the Internal Revenue Code and of government.  And it leads to the sense that they are being discriminated against by the Code and by their government because they cannot afford or do not have those kinds of breaks.  So that was some of the things that we were trying to get across in our testimony. 

Mr. Larson.  Over the counter transaction taxes, anyone?  Dr. Sullivan, Dr. Hassett? 

Mr. Sullivan.  I do think it is important we re‑evaluate our Tax Code in light of the financial crisis to remove the elements of the Code that contributed to it.  For example, the deductibility of debt.  However, a transactions tax has been tried in many countries around the world, and it is very hard to administer.  So I think its initial appeal wears off the more you look at it. 

Mr. Hassett.  I concur with Dr. Sullivan. 

Mr. Larson.  So there is no way to regulate an over-the-counter trade in a way that it produces significant revenue? 

Mr. Sullivan.  Unless we went to a multilateral ‑‑ where all countries agreed to do this, the trading activity, because it is so mobile, would shift to other countries.  Sweden tried this several years ago, and other countries have tried it, and they had to repeal it because they just couldn’t administer it effectively. 

Chairman Camp.  Thank you.  The gentleman’s time has expired.  Mr. Buchanan is recognized. 

Mr. Buchanan.  Thank you, Mr. Chairman.  Someone mentioned earlier ‑‑ it is interesting, we are having a tax debate, and the President of China is in town at the same time.  As someone who has been in business for himself for 35 years, I can tell you that it is not Florida — I represent Sarasota, Florida against Alabama and Mississippi competing for business.  The fact of the matter is that we are competing around the world.  And one of our biggest competitors today by far, the 800‑pound gorilla, in my mind, is China.  I have done business overseas as well. 

So when I think about this and the fact that we haven’t touched the Tax Code in a material way since 1986, I think it is appropriate we have these discussions today because I always personally believe what makes America special and great is free enterprise. 

So let me jump over, Mr. McDonald, quickly to you.  When you talk in terms of Business Roundtable, the fact of the matter is ‑‑ and I was a C corporation and moved to an S, and now I have a bunch of LLCs that my family runs — but the bottom line is, half the tax revenue, I understand, is through pass-through entities.  So when you look at earners lowering the tax rate or the discussion of the tax rate for corporations, what are you going to do about all those employers that have 500, 100 employees, 50 employees that are LLCs? 

I hope that will be taken into consideration.  You can’t do one without the other because otherwise you end up with a competitive advantage over someone else that happens to be a large family‑run business.  Could you comment on that quickly? 

Mr. McDonald.  I agree with you, Congressman Buchanan.  And you are right.  It is about half. 

Mr. Buchanan.  Yes.  So what would you suggest?  When you are having discussions around the Business Roundtable, hopefully ‑‑ are you guys talking about C corps?  Or are you looking at all the other entities, the LLCs and sub‑S’s and partnerships and everything else? 

Mr. McDonald.  Well, as I suggested earlier, my comments were about creating a competitive Code for everyone, not just our members, which tend to be the larger corporations.  But we realize that 50 percent or so are the smaller companies, and we think that the Code has got to be competitive for all of them. 

Mr. Buchanan.  Thank you. 

Mr. Hudak, let me just ask you quickly.  When you look at it in terms of jobs, the fact of the matter is that 70 percent of the jobs created in America are created by small‑ and medium‑sized businesses.  In the State of Florida, Tallahassee, 99 percent of all companies registered in Tallahassee, whether they are LLCs or partnerships, are small‑ and medium‑sized businesses.  What is the biggest one or two things ‑‑ because you primarily work with small businesses ‑‑ we can do or should consider to help small businesses in terms of cost and complexity?  What do you think are the two biggest things we could do in terms of having an impact? 

Mr. Hudak.  Simplification on all levels of the Tax Code.  For instance, a sole proprietor, just to take the home office deduction, it is a one‑page form that refers to the instructions 13 times.  Something you shouldn’t do is like the 1099 provision.  Right now, as a tax practitioner, I feel more like a paper pusher.  I don’t know who is going to collect all the W‑9s to collect that information, but we don’t have the staff to do it. 

Mr. Buchanan.  Thank you.  I yield back. 

Chairman Camp.  Thank you.  Mr. Schock is recognized. 

Mr. Schock.  Thank you, Mr. Chairman.  And thank you, once again, for hosting this very important first hearing. 

Mr. McDonald, has your group studied approximately how much money among your member companies and companies at large could be repatriated if Congress does act to allow for either permanent or temporary repatriation at either zero or some small amount? 

Mr. McDonald.  I don’t have that number right now, Congressman, but we can get back to you with that number.  We have chosen, as a group, to prioritize the whole discussion of getting to a competitive system and a system which is territorial rather than worldwide, which would allow for the repatriation.  But we can get you that number. 

Mr. Schock.  Okay.  And since that is your focus, what is the rate that you have decided would be necessary here in the United States that would not incentivize the sourcing of a multinational from a foreign source? 

Mr. McDonald.  Right.  We haven’t chosen a single rate.  Again, I think the exercise we all need to do together to be fiscally responsible is to look at those OECD countries that we are competing with and see what effective rate we would need in order to compete effectively with them.  But we haven’t chosen the number yet.  We look forward to working with you to do that. 

Mr. Schock.  Yeah.  I think this is a very important action that we can take sooner rather than later and doesn’t have to be a part of the larger discussion of Tax Code simplification.  I find it hard to believe that some of my colleagues think that if we repatriate this money, no jobs will be created.  We met with a CEO of a large publicly traded company yesterday who estimated $30 to $40 billion just in that company alone that would be repatriated.  I would have to think it would be in the trillions of dollars with all companies and that no jobs would be created here if that money came to our economy seems a bit crazy. 

Dr. Sullivan, in your estimation, your opinion, which seems to vary a little bit from the rest of our panel, do you have a number in mind in terms of what you think the corporate rate in America needs to be to disincentive foreign sourcing when the customer is of equal distance? 

Mr. Sullivan.  Thank you for the question.  Obviously, we want the rate as low as possible.  Let’s talk about what realistically can happen.  Based on Treasury estimates, if we just do revenue‑neutral corporate tax reform and get rid of most of the major incentives ‑‑ we are talking about research credit, production credit, accelerated depreciation, we go full throttle, we would be lucky to get down to 30 percent, if we want to be revenue‑neutral.  If we want to go below that, but we need to ‑‑

Mr. Schock.  Let me ask you this:  Are you making the assumption that the level of investment would remain static regardless of what the rate would be? 

Mr. Sullivan.  No.  No, I am not.  I think investment would increase as a result of the lower rate. 

Mr. Schock.  And you stated earlier that obviously there is some risk reward based on that.  So do you have a number in mind? 

Mr. Sullivan.  A number for ‑‑

Mr. Schock.  What the rate should be.

Mr. Sullivan.  As low as possible. 

Mr. Schock.  Like 0 percent? 

Chairman Camp.  Thank you.  The gentleman’s time has expired.  Mr. Blumenauer is recognized. 

Mr. Blumenauer.  Mr. Chairman, let me begin by expressing, as a number of our colleagues have, an appreciation for your starting our deliberations dealing with the Tax Code.  I think you have taken the right direction and, I will say, the right tone.  I have appreciated that and look forward to working with you on it, because this is, clearly, a unique opportunity.  Part of the opportunity is just simply the value that is wasted, that you have documented, Ms. Olson.  Part of our difficulty in having a productive conversation about the Tax Code is that it is so hopelessly complex that everybody is right.  Every generalization, every complaint, right, left, center, they are right.  They can find an example. 

I am a tax junkie, as a revenue committee chair and a State legislator eons ago.  I went to law school and took tax classes because I wanted to learn more about the job.  I could not do my taxes today under torture with weeks worth of time, and I am not Warren Buffett.  It is a scandal, and it is approaching a crisis point.  The cost of compliance, the disconnection from tax provisions with what they were intended to do, the alternative minimum tax, the tax on millionaires who evaded taxes has morphed into a tax on the near rich who pay their taxes.  And no billionaire hedge fund is ever touched by it. 

I hope, Mr. Chairman, that we will be able to move forward with this with dispatch because I think it is a symbol of whether or not government itself can respond to something which is universally agreed that is in need of fixing, but whether we can follow that path.  And in that connection, I guess I just have one question that I would offer to Ms. Olson and Mr. McDonald:  Can we do this successfully if we disconnect the individual tax provisions from business?  Or do they need to be done concurrently? 

Ms. Olson.  Well, I think that although the business and the individual issue ‑‑ they present different issues and different questions, but I do not think you can do them separately, in part because so many businesses are pass‑through entities, and you still have to deal with the individual side. 

Mr. Blumenauer.  Mr. McDonald? 

Mr. McDonald.  Yes, sir.  I would agree with that as well.  Many of those pass‑through entities are suppliers of ours, and they are very critical to our business all over the world, so it has to be done together.

Mr. Blumenauer.  Thank you. 

Chairman Camp.  In an effort to continue everyone’s opportunities, Mr. Rangel and I have had a discussion, and we are now going to move to 2 minutes per member.  So with that, Mr. Lee is recognized. 

Mr. Lee.  Thank you, Mr. Chairman.  With shortness of time, I will just make a brief statement.  But really, what I heard here today, and as a former businessman, what we hear with regard to the Tax Code — does not bring a lot of confidence for businesses to want to invest in this country with all things being equal.  With regards to labor, the cost of building a facility, when you have this differential in the Tax Code, it is mind‑boggling.  And Ms. Olson talked about 6.1 billion hours with regards to compliance costs.  The only area of this economy where I know we spend more time is debating health care.  So that is a frightening number because that is a cost that is an impediment to job growth in this country. 

Some of the recent statistics, The Wall Street Journal reported just a few weeks ago that literally $2 trillion in liquid assets are sitting on the sideline primarily because we do not have enough certainty.  Our Tax Code over the last decade ‑‑ literally, 10 years ago there were very few pieces of tax legislation that would be considered temporary, less than 12 to 18 months.  Today that number has grown exponentially; thereby, again, making decisions on long-term investments in capital.  We want to attract the other multinationals to the United States. 

So we said, the Fortune 500 ‑‑ we look now on the position of U.S. corporations.  There are many other countries around the world.  We want those jobs here.  Unless we do something about our Tax Code and make it a priority, we won’t see the significant job growth that all Americans, frankly, deserve to have.  I appreciate you being here today and look forward to moving forward on the subject. 

Chairman Camp.  Thank you.  Ms. Jenkins is recognized. 

Ms. Jenkins.  Thank you, Mr. Chairman, and thank you for holding the hearing. 

I join my colleagues in having a passion for this particular topic.  In particular, I have a keen interest in it. I spent, in my real life, many years practicing public accounting on the tax side of things.  And I recall the last time Congress discussed tax simplification was a wonderful time in my career because there was job security.

So every time Congress begins a discussion about job security, I think every CPA firm in the tax department holds a party that day.  And so with that in mind ‑‑ I know we don’t have enough time.  I could spend hours with you folks.  But does anybody want to just try to prioritize for us, if you could change three things, what they might be?  Keeping in mind, I guess, the priority would be job creation and economic growth, if anybody wants to tee that up.  And then I would just love to know your two second thoughts on the flat tax, and the Fair Tax. 

Mr. McDonald.  I would certainly prioritize, Congresswoman Jenkins, getting to a competitive tax system because, as you saw, we are uncompetitive with our foreign competition today. 

Mr. Hassett.  I think that the main thing is the corporate rate just has to come down to make us more competitive.  So that is all three of my things. 

Mr. Sullivan.  Ms. Jenkins, what I would just add to that is, this tax reform has to take into account our two credible deficit problems, which I don’t think this Congress has fully comes to grips with yet.  Thank you. 

Chairman Camp.  All right.  Thank you.  Thank you very much.  Mr. Kind is recognized. 

Mr. Kind.  Thank you, Mr. Chairman.  I want to thank you for holding this hearing, which I hope will be the beginning of many hearings that we have in this session.  And one recommendation, Mr. Chairman, is perhaps getting the co‑chairs of the Fiscal Commission, upon which you and others serve, to testify with some of their recommendations.  Is it effective for the Tax Code and deficit reduction.  But, Ms. Olson, let me first start with you and thank you for the work that the National Taxpayer Advocate office does and your recommendations that you submit to us from time to time. 

And I hope all of us do heed your admonition that we don’t lose sight of the individual tax implications because ‑‑ and I think you are right.  I think there is a sense of fundamental unfairness for average working families, individuals, small business owners who feel that unless they have got their team of accountants, team of tax lawyers, that they are not able to take advantage of the great complexity and the loopholes that do exist.  I think this does affect the compliance issue of tax filing and the underreporting and the cheating and the tax gap that has grown, just given the complexity of this Code. 

So as we move forward, I hope that we can marry the issues of corporate reduction along with the individual rate, which I think is going to be imperative.  My guess is that most of the folks in the audience today are more focused on the corporate rate and what is going to happen there and not the individual rate. 

But back to Mr. Hudak raised with us today in his testimony and written testimony, most of the business in this country are pass‑through entities.  They are not C corps.  They are S corps.  They are sole proprietors.  They are partnerships.  And that is why getting to the individual rate is going to be so important for most of the job growth that does occur in all of our individual districts, which are small business‑oriented, rather than the larger multinational businesses and the implication. 

But I also agree with the rest of your testimony that, as we get into the corporate tax rate, this should be done through the prism of international competitiveness issues in light of the changes that have happened with the Tax Code in other countries, and to make us as competitive as we need to be.  But it is one of the reasons ‑‑ back to you, Mr. Hudak, why I have had legislation, the S corp modernization bill, to try to simplify and make easier the compliance and also to get at the built‑in gains issue that we have to work on.  So working with you and others, hopefully we will have a chance to get into that.  Thank you again, Mr. Chairman. 

Chairman Camp.  Thank you.  Mr. Paulsen is recognized. 

Mr. Paulsen.  Thank you, Mr. Chairman.  And a lot of the conversation ‑‑ I know whenever tax reform is brought up — it surrounds simplicity, fairness, the complex arguments that we heard about today.  But I am pleased that a lot of the conversation today, obviously, is about economic growth and competitiveness, without a doubt.  And I am wondering ‑‑ maybe Mr. McDonald first — if you can just expand a little bit and talk a little bit about debt versus equity and the concept of how we encourage businesses and individuals to borrow and to finance their operations through debt rather than through asset creation or capital formation.  And why that is important?  Why we should be focused on that? 

Mr. McDonald.  Well, I understand that Steve Ballmer was here yesterday talking about the amount of money that Microsoft has overseas.  And obviously with that money overseas and the inability to repatriate it without paying more tax ‑‑ again, I want to, again, underscore the fact that we all pay tax in overseas markets.  The difference with the United States and a very few countries that I showed on the chart was, you have to pay an additional tax when you repatriate the money to your home country.  There are very few countries in the world that do that.  The United States is one.  This causes them to have to borrow money here. 

At the Procter & Gamble Company, we pay almost half of our profits in dividends, and most of our shareholders are our employees, our retirees, are people in this room.  They are not institutions.  Less than half of our shareholders are institutions.  We have to have that cash in order to pay those dividends, and it becomes a burden to create that cash when you have to pay a higher tax rate on that money coming back.  You are, in a sense, taxing the shareholder, taxing the common person. 

Mr. Paulsen.  Thank you, Mr. Chairman. 

Chairman Camp.  Mr. Berg is recognized. 

Mr. Berg.  Thank you, Mr. Chairman.  This is my first hearing, and I can’t think of a better topic.  I am just tickled pink hearing all of the people that have presented.  And you know, an issue like this is just so critical.  I am a small businessman.  It is good to hear that my colleagues, both Republicans and Democrats, have the same frustration with their taxes as I do.  So again, I don’t want to take any more time here.  But just thank you for being here, and I thank the chairman for holding this meeting. 

Chairman Camp.  Thank you.  Mr. Pascrell is recognized. 

Mr. Pascrell.  Thank you, Mr. Chairman.  And thanking you for bringing us together on this critical issue.  Ms. Olson, it is always an honor and a pleasure to listen to you because you make sense.  You are a true advocate, and I am glad you brought up the subject of the average taxpayer because frequently, as has happened frequently, that person is forgotten.  So while we are maybe trying to prioritize the cutting of corporate taxes, which I think is important and we need to address and it will be addressed, you cannot ‑‑ and I want to know if you disagree with me ‑‑ you cannot address, for instance, that issue in a vacuum without talking about what the trials and tribulations are of folks who are making $25,000, $30,000, $35,000.  Do you agree or disagree with me? 

Ms. Olson.  I absolutely agree with that. 

Mr. Pascrell.  Now do you think then that systemic change is doable? 

Ms. Olson.  Yes.  I think it is entirely possible.  And it will take great courage and dedication.  And I think you have to educate the public.  We were talking about educating the public about businesses, but we need to educate the public about what they get as benefits through the Code and what will happen if we get rid of some of those benefits but lower rates. 

Mr. Pascrell.  And educating the public is critical? 

Ms. Olson.  Absolutely.

Mr. Pascrell.  And ourselves.  Because take, for instance, and I don’t make this a centerpiece.  Take, for instance, do you think most Americans know that most of the folks, the great folks that are on the panel with you, that Federal, State, and local income taxes consumed 9.2 percent of all personal income in 2009 which is the lowest rate since 1951? 

Ms. Olson.  Probably. 

Mr. Pascrell.  Yes or no? 

Ms. Olson.  No. 

Mr. Pascrell.  Do you think that is important in looking at this thing in context? 

Ms. Olson.  Yes, absolutely. 

Mr. Pascrell.  Do we know what we are talking about on this side of the aisle, on this side of the barrier here about taxes? 

Ms. Olson.  Do you know what you are talking about? 

Mr. Pascrell.  Yes.

Ms. Olson.  Absolutely. 

Mr. Pascrell.  Thank you. 

Ms. Olson.  You are welcome. 

Chairman Camp.  The gentleman’s time is expired.  Ms. Black is recognized. 

Mrs. Black.  Thank you, Mr. Chairman.  And likewise, as has already been said, this is certainly a very important topic.  I know in consideration of the time, it may be that we won’t be able to answer these two questions that I have, and perhaps more in writing.  And I am not sure that you will have an immediate answer to them. 

But Ms. Olson, for you, I am looking at individuals.  I am curious, if we were to simplify the system — because you have testified that people don’t trust and they try to evade has there been any study done to show that if there were a more simplified system that we would, perhaps, collect more revenue because of so much evasion?  And that would be one question that I would have. 

Ms. Olson.  I think it depends on how you structure the system.  We know when people have withholding and the income is reported to the IRS that 99 percent of the taxes, their incomes is reported.  And so the taxes are paid on that income.  When you don’t have that kind of reporting and you have lots of opportunity to take deductions and claim special benefits, then that increases the opportunity to, you know, avoid an underreport. 

So if you structure the system right, you can minimize noncompliance.  The more complexity you have in the system, the more opportunity you have to have noncompliance. 

Mrs. Black.  Thank you.  Mr. Chairman, my understanding is that we are able to submit questions that then can be answered separately.  Am I correct on that? 

Chairman Camp.  Yes.  Members are able to submit questions for the record.  And if they do, I hope our panel will respond promptly. 

Mrs. Black.  Thank you. 

Chairman Camp.  Thank you.  And now Ms. Berkley is recognized. 

Ms. Berkley.  Thank you.  I want to thank you, Mr. Chairman.  I think this was a wonderful hearing and I am glad it is just the beginning of a process.  I would like to submit for the record my opening statement, which I wasn’t able to make. 

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Ms. Berkley.  I am very glad, Ms. Olson, that you talked about that we need to do the individual reforms with the corporate reforms.  In my family, when I was growing up, my father was a waiter in one of the Las Vegas hotels.  The way we did our taxes is we waited for my Uncle Nattie to come from New York once a year to do the taxes for us.  And I don’t think that is a good process for any American family, and I am sure, least of all, my own.

We just passed a massive tax package last month and in it, it had all the tax extenders, every one of them I supported.  And I felt that I had friends in the race car track world.  And the taxi companies that use propane gas, they kind of camped out in my office and explained how important all of these tax credits and tax breaks were to their business and how much they created jobs. 

Now let me ask you something.  If we actually lower the tax rates for corporations and companies throughout the United States, is that going to be enough?  Are they going to be willing to give up all of these individual tax credits and breaks that are in our Tax Code?  Or are they still going to be coming to me, explaining how they still can’t make ends meet, they are going to go under, and they need have additional tax breaks?  Because that is going to kill us when it comes to our deficit.  There has to be revenue coming in somehow to support this country. 

Ms. Olson.  Can I make a point about that?  I think that that goes to the need for education so that people understand that at least on average, maybe their bill won’t increase.  But on the other hand, I think it is very important that we will never get rid of everything.  And so when you decide to put something in the Internal Revenue Code, you have to make sure that you all have the information to be able to evaluate. 

Chairman Camp.  And the witnesses can submit their answers in writing. 

Ms. Berkley.  And let me ask one other question that I was going to submit about repatriation. 

Chairman Camp.  But Mr. McDermott and Mr. Levin would like to question.  So Mr. McDermott is recognized. 

Mr. McDermott.  Thank you, Mr. Chairman.  I ask unanimous consent to enter into the record an article by David Cay Johnston called Johnston’s Take, Reasons, Rules, and Riots:  Our Societal Panic.

Chairman Camp.  Without objection.

[The information follows:]

Mr. McDermott.  Talks about the history of taxation and that we establish progressive taxation along the Greek lines because we realize the people at the top got most of the benefits, so they ought to pay most of the taxes.  And the Republicans, when they took over the Congress, last week, passed a rule which got no ripple in the press.  Nobody even mentions it.  They said that if we cut taxes, we don’t have to replace the money.  It is not a loss to the budget. 

Now, I find it very hard, when we have been operating under PAYGO rules, to think that we are going to do any kind of reduction in corporate taxation and not replace the money, unless this is simply a hearing on, how do we cut spending?  How do we cut investment in education?  In higher education?  In infrastructure?  I would like to hear from you, Mr. Sullivan.  Do I understand correctly what that rule means? 

Mr. Sullivan.  If I understand what it means, it is that tax cuts do not have to be paid for, which I think is ‑‑ again, in this fiscal environment, is absolutely outrageous and it is dangerous to the long‑term health of this economy. 

Mr. McDermott.  So it is saying we are really going to make these tax cuts and the only place we will get the money is by borrowing it internationally to continue the level of services that we have in this country.  Otherwise, we are going to reduce the level of services? 

Mr. Sullivan.  Obviously, the choice between whether it should be tax increases or spending cuts is a political decision, but I think the rule should be neutral, and these rules are not neutral. 

Mr. McDermott.  Thank you.  I yield back the balance of my time. 

Chairman Camp.  Thank you.  Mr. Levin is recognized. 

Mr. Levin.  We have to vote.  But I just wanted to take the opportunity, Dr. Hassett.  If it isn’t directly related ‑‑ it was in your materials.  Or at least I saw them.  You talked about the President, “his obsession with manufacturing and his policy of nationalizing GM and Chrysler.”  I don’t think he has an obsession.  I think manufacturing matters.  And we have not nationalized GM and Chrysler. 

Mr. Hassett.  Would you like me to respond? 

Mr. Levin.  Well, let’s talk about it another time.  But I want us to proceed in a rational bipartisan basis.  And when I saw your article, I just wanted to say to you, I think that is not accurate.  There is no obsession.  There is a concern.  And there is no nationalization, sir.  We have met with the CEOs, and the last thing they would say is that they have been nationalized.  So go out and buy one of their cars. 

Chairman Camp.  Dr. Hassett, if you wanted to comment?  You don’t need to. 

Mr. Hassett.  I look forward to having the exchange with Mr. Levin. 

Chairman Camp.  This hearing was really about the burdens of the Federal tax system: the compliance burdens the administrative problems, the difficulties for families and small businesses, the problems of creating economic growth under the current system, as well as the high corporate tax rate and the international tax system being increasingly out of step with the rest of the world.  But I want to thank our witnesses for their testimony.  This schedule has really been a difficult one this morning for us.  Thank you for bearing with us through that.  Again, members can submit questions to you, and I hope you will respond.  And obviously you have made it very clear that our Code is a complex mess.  It is frustrating to families and to businesses big and small.  It encourages inefficient behavior.  These points were actually made in an opinion piece published by Minority Whip Steny Hoyer.  And while I don’t necessarily subscribe to everything in that article, his comments about the need to act on a bipartisan basis to reform the Tax Code were right on point.  I look forward to continuing this dialogue at future hearings.  But for now, the committee is adjourned.

[Whereupon, at 10:55 a.m., the committee was adjourned.]


Nina E. Olson
Robert A. McDonald
Warren S. Hudak

Kevin A. Hassett

Martin A. Sullivan


John Pettengill
John W. McClelland

Geoffrey Burr
Georgia Crowell

Michael D. Warlick

Katherine G. Lugar

Novogradac & Company LLP

Phillip J. Bond
John Pettengill

Bobby L. Austin
Neil G. Rogers

Alvin S. Brown
Matt Lykken
American Citizens Abroad (ACA)