Hearing on Tax Reform and the U.S. Manufacturing Sector
COMMITTEE ON WAYS AND MEANS
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED TWELFTH CONGRESS
COMMITTEE ON WAYS AND MEANS
WALLY HERGER, California
|SANDER M. LEVIN, Michigan
CHARLES B. RANGEL, New York
FORTNEY PETE STARK, California
JIM MCDERMOTT, Washington
JOHN LEWIS, Georgia
RICHARD E. NEAL, Massachusetts
XAVIER BECERRA, California
LLOYD DOGGETT, Texas
MIKE THOMPSON, California
JOHN B. LARSON, Connecticut
EARL BLUMENAUER, Oregon
RON KIND, Wisconsin
BILL PASCRELL, JR., New Jersey
SHELLEY BERKLEY, Nevada
JOSEPH CROWLEY, New York
JENNIFER M. SAFAVIAN, Staff Director and General Counsel
Ms. Diane Dossin
Chief Tax Officer, Ford Motor Company
Mr. Henry W. Gjersdal, Jr.
Vice President of Tax and Real Estate, 3M
Mr. Kim Beck
President and CEO, Automatic Feed Company, on behalf of the Association for Manufacturing Technology
Mr. Hugh Spinks
Vice President of Tax, Air Liquide USA Inc.
Ms. Heather Boushey, Ph. D.
Senior Economist, Center for American Progress
Hearing on Tax Reform and the U.S. Manufacturing Sector
U.S. House of Representatives,
Committee on Ways and Means,
The committee met, pursuant to call, at 9:43 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. Good morning, thank you for joining us for another in a series of hearings examining how comprehensive tax reform can help stir economic growth. Today’s hearing is an opportunity to look more closely at the manufacturing industry. Specifically, we will examine how the current tax system affects U.S. manufacturers, including U.S.‑based public companies, small and closely‑held manufacturers, and foreign‑owned U.S. manufacturers. We will also explore how comprehensive tax reform might affect manufacturers’ ability to expand and create jobs.
The importance of the manufacturing sector to the U.S. economy has been well‑established. In 2011, manufacturing accounted for 12.2 percent of the country’s gross domestic product, and approximately $1.27 trillion in exported goods according to the Commerce Department’s of Bureau of Economic Research. With a long and treasured history in America, manufacturing touches every aspect of our lives. From the food we eat, to the cars we drive, to the clothes we wear, the impact of manufacturing is felt each and every day.
Supporting about one in six private sector jobs, the manufacturing industry is a cornerstone of our economy that provides high‑paying and high‑quality jobs to approximately 12 million people according to June’s Labor Department data. Manufacturing is closely connected with research and innovation which improves our lives and our standard of living.
Whether small, medium, or large, whether publicly traded or closely held, manufacturing companies contribute to the American economy every day. Nowhere is that more evident than in my home State of Michigan, the heart of the auto industry and the engine of the industrial Midwest. Manufacturers have been hit particularly hard in this country.
Since the President took office, we have lost over one‑half million American manufacturing jobs. According to the Department of Labor, the precise number is 590,000. So as we examine the effect of our current Tax Code as well as the implications of comprehensive tax reform, the importance of understanding how tax reform can make America a more attractive place for the industry to hire and invest can’t be overstated.
A recent op ed offered by the National Association of Manufacturers sums up the challenges posed by today’s Tax Code, stating manufacturers have added 13 percent of the net new jobs gained since the end of 2009. And we have made larger than normal contributions to gross domestic product. But there is a black cloud looming with much uncertainty ahead. The op ed goes on to describe the impact that those looming tax increases will have on manufacturers, both for individual and corporate taxpayers. Citing a recent survey, 64 percent of manufacturers describe the tax and regulatory environment as their top concern.
The concern expressed by the manufacturing community is well founded, and it is a concern shared by many on this committee and in the Congress. We are all familiar with the statistics. The United States has the highest corporate tax rate in the world at 39.2 percent if you combine Federal and State. The high corporate rate in our outdated worldwide system of taxation do little to attract the investment and hiring we need to help get America back to work.
Similarly, as the NAM‑authored op ed reminds us, businesses paying at the individual rate are also affected by today’s broken Tax Code; not to mention its December 31st expiration date.
If the tax relief originally enacted in 2001 and 2003 expires, then 2/3s of manufacturers that operate as pass‑through entities and pay taxes at the individual rate, will face even higher tax bills. The bottom line is that today’s Tax Code isn’t working. It is not working for the manufacturers that are organized as pass‑through entities because it is too complex, too costly, and too expensive to comply with. It isn’t working for manufacturers who operate internationally because it is outdated, and leaves America uncompetitive in the global marketplace.
Most of all, it is not working because it is not helping families struggling in a weak economy get back to work. It is time America’s Tax Code puts the America economy first. We know that what doesn’t work and now it is time for a comprehensive tax reform plan that will work. Since this Congress convened in January of 2011, the Ways and Means Committee has had more than 20 hearings focused on the steps Congress might take to transform our broken Tax Code into a pro‑growth Code that will provide employers the certainty, the flexibility and freedom they need to invest and hire. At the request of the Ways and Means Committee, the last two House‑passed budgets have outlined a framework for comprehensive tax reform that lowers rates for individuals and corporate taxpayers, repeals the AMT for 31 million households and transitions America to a more competitive territorial system of taxation, which even the Obama administration pointed to as a “hopeful area of consensus.”
The framework is a good start, but more must be done. Today we will hear directly from stakeholders in the manufacturing community as they share their ideas for what Congress can do to help and what we ought to avoid that might hurt.
Your voices are critical to this discussion and after all, it is not enough simply to write a plan that reads well in Washington. It has to be a plan that works in the real world, the world where you run your businesses. Thank you for taking the time to be here today and I look forward to your testimony. I will now yield to Ranking Member Levin for his opening statement.
Mr. Levin. Thank you, and welcome to each and every one of you. Thank you for coming.
During the 2000s, we experienced a crisis in manufacturing employment. During the 8 years of the Bush administration, we lost 4.5 million manufacturing jobs. Now, since the recovery has taken hold, the manufacturing sector has added about a half a million jobs. We have seen that gain in manufacturing employment over the last 2 years. And now we hear talk about a resurgence of American manufacturing in part because of the policies of this President.
The President took the difficult but vital step of providing assistance to the domestic auto industry. If he hadn’t done that, it would have devastated the manufacturing sector well beyond the Big Three, and even beyond their suppliers.
The Recovery Act Included key provisions like the 48C credit to encourage investment in advanced energy manufacturing. The tax agreement at the end of 2010 included 100 percent bonus depreciation for capital investments. But more needs to be done, clearly. We are still below where we were at the end of the Clinton administration by about 5 million manufacturing jobs. Ways and Means Democrats, we here have introduced a no‑excuses agenda of items like bonus depreciation, the Wind Credit, R&D, 48C, Build America Jobs, and a provision to reduce the incentive to ship jobs overseas that this committee should act on immediately to promote job creation, especially in the manufacturing sector.
This committee should act on these provisions as soon as possible. Today we are considering how manufacturing fits into tax reform. Tax reform must fit into support for manufacturing. Eliminating every corporate tax expenditure including the domestic manufacturing deduction, R&D, and accelerated depreciation, would not pay for reducing the corporate rate to 25 percent, and could work against further support for manufacturing.
The President and Democrats in Congress view, in terms of tax reform, the larger goal as one of economic growth and job creation. Just setting a rate and not saying how you will get there doesn’t really tell you whether you are achieving those goals or not.
We think manufacturing should be at the heart of our goals for tax reform. Manufacturing still provides millions of middle‑class jobs, conduct more than 2/3 of private R&D, accounts for 60 percent of exports, and has vital positive spillover effects in the broader economy.
Secretary Geithner said this very well before this committee in February. He said, and I quote, “I would say we would look at any proposal through that simple test which is relative to what you face today, are we making it more likely that the next factory by a U.S. company or a foreign company will be built here?”
Republicans often say that they don’t want to pick winners and losers. It is not picking winners or losers, it is picking what side you are on. Being on the side of those who want to build things in America is not picking winners and losers, but winners for the American public.
That is why we think tax reform needs to mean a great deal for manufacturing sector. That is a major purpose of the hearing today, and we look forward to hearing our witnesses’ thoughts on how we achieve that goal. Thank you.
Chairman Camp. Thank you, Mr. Levin.
Chairman Camp. And we are pleased to welcome our excellent panel of experts who have extensive experience running both large and small manufacturers. I believe that their experience and insight will be helpful as we focus on tax reform as it relates to their industry. First, I would like to welcome and introduce Ms. Diane Dossin. Ms. Dossin is the chief tax officer and a long‑time employee of Ford Motor Company. Ms. Dossin, thank you for being here today.
To introduce our second witness I yield to the gentleman from Minnesota, Mr. Paulsen.
Mr. Paulsen. Thank you, Mr. Chairman, it is my privilege to welcome also Mr. Skip Gjersdal, from 3M who is the vice president of Tax and Real Estate who we will hear from in just a little bit. Skip has worked in the tax department actually at 3M for over 12 years. He has a strong background in tax, and also has worked previously at Cargill, which is also based in Minnesota. He brings a strong wealth of knowledge from a manufacturing perspective on tax policy, and the impacts that U.S. companies have in competing in the global marketplace. He was born and raised in my district in the third district in Minnesota, and I am proud to welcome him here. He has been a good advisor to me from a corporate tax standpoint as well, Mr. Chairman.
Chairman Camp. Well, thank you very much, Mr. Paulsen. And now to introduce our witness from New York, I will yield to Mr. Reed.
Mr. Reed. Thank you, Mr. Chairman. It is my pleasure, and I am pleased to introduce Susan Ford, the vice president of Tax at Corning Incorporated. As you know, Corning Incorporated is headquartered my district in Corning, New York. This company has been around for 161 years. It is the world’s leading manufacturer of high technology glass, and glass ceramic components. It was founded by Amory Houghton the great‑great grandfather of former Congressman Amo Houghton who, as you know, was a member of the committee for many years and a good friend to many of us here on this panel.
Corning is proud to have invented a number of technologies with significant impact on the world, including optical fiber, ceramic substrates for catalytic converters, and is the world’s largest produce of glass for LCD‑TVs and a lot of our phones and other materials have that material on them.
So I am proud to be here. I am proud to introduce Ms. Ford, and I look forward to her testimony, and I welcome her and yield back the balance of my time.
Chairman Camp. Well, thank you, Mr. Reed. Our fourth witness, Ralph Hardt, the President of Jagemann Stamping Company in Manitowoc, Wisconsin. Aside from his work at Jagemann, Mr. Hardt brings a wealth of experience from managing several other small manufacturing businesses.
And fifth, we will hear from in Kim Beck, the President and CEO of Automatic Feed Company in Toledo, Ohio. Mr. Beck had so much good information to share with us that last night after his flight from Toledo to Washington was canceled, he hopped in his car and made what I imagine must have been close to an 8‑hour drive to Washington, D.C. So Mr. Beck, thank you for your commitment and fortitude in making the effort to be with us here today.
Our sixth witness will be Mr. Hugh Spinks. Mr. Spinks is the vice president of Tax for Air Liquide USA, located in Houston, Texas. Additionally, Mr. Spinks is on the tax committee of the American Chemistry Council and serves on the board of directors to the Organization for International Investment.
And finally, we will hear from Miss Heather Boushey. Ms. Boushey is a senior economist at the Center for American Progress here in Washington, D.C.
Thank you all again for your time today. The committee has received each of your written statements. They will be made part of the formal hearing record. Each of you will being recognized for 5 minutes for your oral remarks and Ms. Dossin, we will begin with you. You are recognized for 5 minutes. Thank you.
STATEMENT OF DIANE DOSSIN, CHIEF TAX OFFICER, FORD MOTOR COMPANY
Ms. Dossin. Thank you. Good morning, Chairman Camp, Ranking Member Levin, and members of the committee. I am the Chief Tax Officer of Ford Motor Company, a manufacturer of cars and trucks, headquartered in Dearborn, Michigan. We employ over 66,000 at 25 manufacturing facilities and other office buildings. And we thank you for holding this hearing on tax reform in the manufacturing sector, which you all understand is the most important sector in the American economy.
Ford has manufactured cars and trucks for over 100 years, but not that long ago, we were fighting for survival. And we stood up in that moment and developed a plan to aggressively restructure the company. We rationalized our brands. We leveraged our global strengths to build high‑quality products more efficiently. We revised labor contracts. We funded post‑retirement healthcare. We funded pensions. We restructured the dealer network. And to fund all of that, we took out what everyone described as the largest home‑improvement loan that was secured by all of the assets of Ford, including the trademark blue oval. And over the last couple of years, we have repaid over $20 billion of that debt, and the blue oval belongs to us again.
And we did all of that against the backdrop of the severe economic conditions at the time, and we did it outside of bankruptcy.
In short, we have restructured every element of the business that we could, and we have returned to profitability in the U.S., but our tax expense does remain internationally uncompetitive. We are grateful that Republicans and Democrats have recognized that the U.S. corporate tax rate is simply too high. Chairman Camp’s discussion draft and the President’s framework for business tax reform both suggest much lower rates.
We are very hopeful that the time for reforming America’s uncompetitive corporate Tax Code has arrived, and we believe that lowering the corporate tax rate is the single most important and efficient and simple way to relieve the burden on U.S. companies.
Ford understands that in the current fiscal climate, it is likely impossible to achieve a lower rate without broadening the base. We also understand that base‑broadening comes with costs that must be weighed against the value of the lower rate. As an American manufacturer, Ford is interested in several tax provisions of broad applicability that do encourage important U.S. investment. First, the research credit. Many other countries have both a low rate, and incentives for research. The U.S. should not put itself at a competitive disadvantage by heading too far in the opposite direction.
Second, depreciation, reasonable cost recovery periods at least consistent with expected economic wear or obsolescence are critical to support continued U.S. capital investment, and third, the domestic manufacturing deduction, which recognize the special advantages manufacturing activity provides to the U.S. economy.
We are hopeful that a lower rate and a reformed U.S. corporate Tax Code will be a net positive for American manufacturers to permit us to continue strong U.S. investment.
Ford does operate globally, and builds vehicles where its customers live. We earn a large part of our income in the U.S. Abroad, Ford generally operates in relatively high tax countries, and we do not have substantial foreign earnings that have been taxed at very low foreign rates, and that only come back to the U.S. at a very high U.S. tax cost.
And for that reason, Ford does not have a particular position on how the U.S. taxes foreign earnings. Whatever the method, Ford believes it is appropriate for corporate tax reform to provide some minimum level of U.S. tax when corporations shift income to tax‑savings countries.
We see value in all three anti‑base erosion options included in Chairman Camp’s proposal, and that lawmakers need not necessarily choose a single approach to combat tax‑base erosion. The transition to a reformed code is also important to Ford. In particular, we are interested in how transition rules will apply to foreign earnings and profits deficits, to foreign tax credit carryovers, to foreign taxes that have been paid but not yet claimed on tax returns, and to overall domestic losses.
In summary, for over a century, the United States has been Ford’s home, and its most important market. Ford wants to remain profitable in the U.S., and to pay income tax at a reasonable rate, similar to the rates now levied by other countries. The stakes for corporate tax reform are high, and the consequences of failure are serious. We know it won’t be easy, and appreciate all the more your willingness to tackle this important task. We at Ford stand ready to help you in any way we can. On behalf of Ford, thank you for the opportunity to testify, and I look forward to answering your questions.
Chairman Camp. Thank you very much, Ms. Dossin.
[The statement of Ms. Dossin follows:]
Chairman Camp. Mr. Gjersdal, you are recognized for 5 minutes.
STATEMENT OF HENRY W. GJERSDAL, JR., VICE PRESIDENT OF TAX AND REAL ESTATE, 3M
Mr. Gjersdal. Good morning, Chairman Camp, Ranking Member Levin and members of the committee.
Chairman Camp. You need to push the button on the microphone.
Mr. Gjersdal. Good morning, Chairman Camp, Ranking Member Levin, and members of the committee. My name is Skip Gjersdal and I am the vice president of Tax and Real Estate at 3M Company. I thank the committee today for the opportunity to address the important issue of tax reform. As you know, the U.S. corporate tax rate is the highest tax rate of any country in the world. In some cases, the high U.S. tax rate is mitigated by tax credits and deductions. These credits and deductions, however, often fail to adequately encourage the behavior they are intended to incentivize, and create competitive imbalances between U.S. companies. In addition, the Internal Revenue Code has not kept up with the rapidly changing international business environment.
Virtually, every developed country has responded to these changes by adopting tax systems that provide their domestic corporations the tools to compete in the global marketplace. Also, part of this new global reality is that nearly 50 percent of the world’s public companies, and frankly many of our competitors, are now based outside the U.S. in Western Europe. They start with the competitive advantage in the marketplace because of the lower tax rates they enjoy.
3M submits that the U.S. could take a few key steps to address these competitive imbalances while simultaneously creating greater simplicity and predictability for its domestic corporations. First and foremost, we recommend that the corporate tax rate be reduced. We support the chairman’s proposal to reduce the rate to 25 percent, a rate which is more in line with other developed countries that view a lower corporate tax rate as a competitive advantage.
We recognize that a large reduction of the corporate tax rate would require substantial offsets from existing deductions and credits. For example, 3M utilizes the Section 199 manufacturer’s deduction, accelerated and bonus depreciation, and the R&D credit.
The manufacturer’s deduction, provides a significant benefit to our company, since 3M has half of its manufacturing base in the United States. However, lowering the rate to 25 percent would offset the benefit of this deduction, and would also eliminate the complex and time‑consuming record requirements required by the Section 199.
3M would also support the repeal of accelerated and bonus depreciation to partially pay for a significantly lower tax rate. While depreciation provisions provide a significant benefit to the company, these rules merely change the timing deductions and result in an upfront cash flow benefit. Importantly, they do not impact the tax rate reported by the company in its financial statements.
Finally, 3M would also forego the current R&D credit for a significantly lower rate. As one of the most innovating companies in the world, 3M believes that intellectual property development must remain a cornerstone of American business. 3M spends over $1.6 billion a year on R&D. However, today’s R&D credit provides insufficient incentives to encourage R&D investment in the U.S. because it is based on incremental spending on a limited portion of R&D expenditures. And of course, its temporary nature limits its effectiveness. If Congress wishes to continue to encourage R&D here in the United States, there are numerous ways to substantially improve the incentives for research development and the ownership of intellectual property.
For example, a so‑called patent box could provide a low rate of tax on income generated from intellectual property developed and owned in the United States. This would not only encourage investment in IP, but it would also encourage its retention in the U.S.
Lastly, 3M applauds the chairman’s inclusion of a territoriality system in his proposal. We agree with the 95 percent exemption system rather than the alternative systems that would create unnecessary complexity. The territorial system would bring the U.S. in line with most developed countries, including the U.K., Canada, Germany and Japan. In addition, such a change would facilitate a partial or full repeal of many international tax rules, which are amongst the most complex and controversial rules in the Code. Replacing those rules with the territorial system would greatly enhance simplification and transparency.
Again, we thank the committee for inviting 3M to speak today. We support its efforts to achieve comprehensive reform with a substantially lower rate and territoriality, field a simpler and more transparent Code, and to help American companies compete in a global economy.
Chairman Camp. Well, thank you, Mr. Gjersdal.
[The statement of Gjersdal follows:]
Chairman Camp. Ms. Ford, you are recognized for 5 minutes.
STATEMENT OF SUSAN L. FORD, VICE PRESIDENT OF TAX, CORNING INC.
Ms. Ford. Good morning, Chairman Camp, Ranking Member Levin and members of the committee. My name is Susan Ford and I am the vice president of Tax for Corning Incorporated. We are a glass technology and research company located in Upstate New York. Mr. Reed gave a great background for Corning, so I won’t cover most of that, but I do want to hit a couple of points to give us context for our discussion.
Corning does have approximately $7.8 billion in sales as of 2011, and we have 29,000 employees worldwide, of which more than half of that payroll is located in the United States. Corning takes a tremendous amount of pride in its heritage as one of America’s oldest and most innovative companies, the company that has been said to recreate itself. Corning spends about 10 percent of our global revenues in R&D, about 98 percent of which is conducted within the United States, and mostly in Upstate New York. We have manufacturing in 11 of the 26 States in which we operate in this country.
Corning is also a global company, however, approximately 79 percent of our sales are to foreign customers. Corning operates in many industries where the customers and competitors are predominantly or entirely located outside of the United States. To survive and prosper, Corning must operate there as well. I will give you an example in our display business. Display is our largest segment at Corning and it is segment that makes the LCD glass in the televisions. The glass that we actually make is formed in sheets that are about the size of a king‑size bed and about the width of four times the human hair. So you can imagine that shipping that kind of glass, nothing good happens when you ship it thousands of miles.
For that reason, we often located our manufacturing facilities in the same, obviously on the same ‑‑ frequently, excuse me, on the same piece of land as our customers. Because foreign markets are a larger proportion of the global consumer demand, we must be able to grow both not just domestically, but internationally. This is true for Corning and many other U.S. manufacturers working to compete in an intense global market. We need tax policy that is competitive while continuing to incentivize innovation and job creation in the United States. The current Tax Codes, manufacturing and R&D incentives, tax rates, and worldwide system taxation are complex and simply no longer globally competitive in our view.
I will give you a brief example for Corning. Our U.S. effective tax rate in 2011 was approximately 36, 37 percent. And our foreign rate was approximately 17 percent. This was principally due to the fact that some of the foreign jurisdictions in which we operate provided significant incentives for capital investment. Again, these are business decisions that were made to be close to our customers because our product is difficult to ship, but additionally, it receives some incentives that allowed us to earn income at some lower foreign rates, particularly in Asia. It is very common in Asia. For this reason we are very heartened by the growing consensus among U.S. policymakers in general for the need to reform the U.S. Tax Code.
Some of the points, I will make are a bit repetitive to the prior two witnesses, but I think they are important enough to have another mention. Two principal points. I think the lower rate is very key. The lower rate will allow for a couple of things. One is its universal applicability, right. It will help domestic manufacturers. It will help companies that export from the U.S. It will help companies who are competing with foreign importers, for example. And secondarily, I think that the lower the rate can go, the less likely companies are incented to move income offshore.
The second part of Mr. Camp’s proposal that I think is a principle that improves competitiveness is the territorial system. This is particularly important to multinationals like Corning who are based in the U.S., have significant employment in the U.S., but must compete with foreign companies abroad in their home countries.
We believe the territorial system ‑‑ the nonterritorial system currently is a disadvantage to U.S. companies because it costs more for us to repatriate trade income, versus our competitors.
We do acknowledge that moving to a territorial system presents some transition challenges and we acknowledge Mr. Camp’s proposal of a foreign earnings inclusion as an appropriate response to that. We appreciate the reduced rate on those earnings because companies like Corning often have earnings abroad that are in capital and in buildings and infrastructure that can’t be returned. This presents a particular hardship for companies like Corning when tax is on all of the income but the cash cannot be returned to pay those taxes.
I think as a final point, it is important to note that base erosion principles, I agree with Ford in the sense there are three of them there and a balance can be used. We do believe that option C encourages companies to keep their innovation here in the United States, and their IP here in the United States because it does tax that income at a lower rate. It allows us to be more competitive with other companies, again, who have these intangibles offshore, and pay lower rates on their royalty income.
As patent laws around the world become more sophisticated and the enforceability improves, historic benefits of having U.S. technology ownership just no longer serve as sufficient compensation for a higher U.S. tax burden on the related income.
In summary, we do believe tax reform is a necessary action for the competitiveness and economic health of the United States and the manufacturers in it. For U.S. headquartered companies competing at home or abroad, the current system is cumbersome and inefficient. Many developed nations have modified their policies to facilitate competition and encourage domestic investment. The United States should not allow its trading partners to gain an advantage through tax policy modernization. Moving to a competitive territorial system with a competitive tax rate will result in benefits both to the United States and its manufacturers. Thank you, very much for the opportunity to participate today.
Chairman Camp. Thank you, Ms. Ford.
[The statement of Ms. Ford follows:]
Chairman Camp. Mr. Hardt, you are recognized for 5 minutes.
STATEMENT OF RALPH E. HARDT, PRESIDENT, JAGEMANN STAMPING COMPANY
Mr. Hardt. Good morning, Chairman Camp, Ranking Member Levin, and all committee members. Thank you for the opportunity to testify before you today on an issue that impacts manufacturers of all sizes, especially small businesses like ours.
I am Ralph Hardt, President of Jagemann Stamping based in Manitowoc, Wisconsin. Chairman Camp got it pretty close in your introduction, thank you.
Chairman Camp. All right.
Mr. Hardt. It is a family‑owned business, with 300 employees, where we manufacture precision metal parts and export 22 percent of our products over 15 different countries. We have a subsidiary in Nashville, Tennessee with 33 personnel as well. I am also chairman and owner of another small manufacturing company in South Carolina, with 31 employees in precision grinding and finishing. My involvement with these three small businesses located in very different parts of the country, gives me an excellent understanding of how to compete globally and grow investments in our equipment and our employees. We are also members of the Precision Metal Forming Association, and National Tooling Machines Association, which together have about 3,000 companies averaging 50 employees per business. Most are family owned and about 2/3s of these companies are structured as Subchapter S corps with some more pass‑throughs. How our businesses are organized and the way we pay taxes has the single greatest impact on our companies, and how much we can reinvest in our businesses.
For example, one of our members, a New England based manufacturer with roughly 200 employees will see a 6 percent effective tax rate increase this year compared to 2011, assuming no congressional action will take place, and could jump as much as 15 percent.
With so much uncertainty over upcoming tax increases and changes, small companies and small manufacturers like us are becoming very conservative right now, are frozen in place and possibly not making significant investment in our business. This is a very important point. The uncertainty in a Tax Code and what the future holds keeps many manufacturers from investing as much as they should or could to grow their business, purchase new equipment, and hire new employees.
In fact, even the Federal Reserve chairman when testifying recently before Congress, said, “The global and other uncertainties are slowing the demand for capital investment.” This is simply the wrong thing needed for our country right now.
In order for manufacturing to succeed in this country, we need stability and transparency in our Tax Code. In our industry, we often have to investment millions of dollars annually into new equipment, research and training for our employees to remain globally competitive. We therefore fully support expanded bonus depreciation, Section 179, domestic production activity deductions as tools manufacturers use to create jobs and compete globally.
For example, our precision grinding company in South Carolina with barely 30 employees just bought a new machine for $270,000, that require three additional new employees to operate; a 10 percent increase in our workforce.
What many policymakers in Washington do not understand, is unlike larger corporations, small manufacturers like us are required to provide a personal guarantee for most loans when purchasing capital equipment, or expanding our facilities. I just recently signed a personal guarantee for the new $270,000 grinder I just mentioned. This means as a small business owner, I have to put even my family’s home on the line and take significant risk if I want to grow my business and compete globally.
In Wisconsin, our investment over the years come up to 147,000 per employee and we spent over half a million in research and development. There is a lot of noise in Washington right now about only raising taxes on wealthy to pay for government programs and hopefully balance our federal budget. However, small businesses, we may report 250,000 or more in profit, but few manufacturers actually take those profits home. They will overwhelmingly reinvest it in the business and our employees manufacturing in America. Based upon an industry survey, most small manufacturing business owners pay a combined tax rate of 36 percent, distribute 18 percent; however, reinvestment between 46 and 50 percent back into the business.
Tax increases also result in reduced cash flow potential, further limiting access to capital which is already difficult enough for small business lenders to secure. Lenders and other investors in a new business look at the tax implications as closely as we do whether deciding, or not, to funding manufacturing investments.
We, again, need a reformed tax structure in this country, which encouraging Americans to start, and I emphasize this is important, to be compelled to start or expand any manufacturing businesses here and hire new employees here in the U.S. Comprehensive tax reform to us means fixing the problem for both traditional C corps and S corp pass‑throughs at the same time; the vast majority which are family‑owned.
With over 70 percent of all U.S. manufacturers structured as pass‑throughs, companies like ours contributing the overwhelming economic activity in the sector which accounts for a substantial portion of our GDP.
However, small manufacturers are ready to step up to the plate on tax reform, and will forego some tax credits and deductions if it means a lower effective rate for all manufacturers in solving our Nation’s budget crisis. However, we cannot afford to fix the problems on the backs of family‑owned businesses and only address larger corporations or multinationals without remembering that again, 70 percent of us in manufacturing are structured this way.
I strongly urge politicians to move beyond labels, rich versus poor, employer versus employee. No manufacturing company can succeed without strongly investing in their employees and equipment. Tax reform needs to happen for everyone.
On behalf of Jagemann Stamping, Jagemann Precision Plastics, Labtech Industries, and all of our employee associates, I thank you very much for the opportunity to testify before you today, and I look forward to answering any questions you may have.
Chairman Camp. Thank you very much, Mr. Hardt.
[The statement of Mr. Hardt follows:]
Chairman Camp. Mr. Beck, you are recognized for 5 minutes.
STATEMENT OF KIM BECK, PRESIDENT AND CEO, AUTOMATIC FEED COMPANY, ON BEHALF OF THE ASSOCIATION FOR MANUFACTURING TECHNOLOGY
Mr. Beck. Thank you, Chairman Camp, and Mr. Levin, and members of the committee for holding this hearing today and giving me an opportunity to participate. I am here representing small manufacturers, even smaller than Mr. Hardt’s here, on behalf of AMT, The Association For Manufacturing Technology, a trade association made up of 600 manufacturers across the United States, most of them with sales of less than $10 million.
I am here to convey to you the toll the great recession has had on this Nation’s small business, particularly small manufacturers like Automatic Feed Company, and I want to tell you that small business owners have great concerns about the words and actions coming out of the Federal Government. This year marks 63 years of continuous operation of Automatic Feed Company in Napoleon, Ohio. We were devastated by the recession. We almost didn’t survive. In just 12 months, our revenues dropped by 90 percent. Our sales went from $30 million down to $4 million. Prior to the recession, we had 110 employees. They were highly‑skilled engineers, welders, machinists, and machine assemblers. 48 of them were skilled union employees. Over the next 2 years, our workforce dwindled to 25. Wages were cut an average of 40% while the top management took 60 percent pay cuts that still haven’t been restored.
I have spent the last 4 years trying to save our company. We survived only because we made the necessary sacrifices, and we had very little debt. The banks were under such scrutiny that they were not lending, especially to small manufacturers tied to the automobile industry.
Today, small manufacturers are angry that after they made such great sacrifices, they are now being asked once again to finance a government that is too large, too inefficient and fiscally irresponsible. The rhetoric out of Washington against small businesses is getting louder every day. Why would the government punish small manufacturers with higher taxes and other imposed cost burdens when we are the ones creating jobs? It is illogical and unfair. Often it seems as though the largest impediment to our growth is our U.S. Government. Higher taxes, more regulations, increased health care, and energy costs, outdated policies, and a complicated broken tax code all contribute to a significant competitive disadvantage American manufacturers face when compared to foreign counterparts.
In 1975 when I came into this business as a young man out of college, U.S. manufacturing and machine tools were number one in the world. Today, we are number seven behind China, Japan, Germany, Italy, Korea, and Taiwan. Automatic Feed Company has no U.S. competition. Our competition comes from companies that are 100 times larger than we are. They are German, Korean, Japanese, Spanish, and Chinese. For us to consistently outpace our competition, we need to have a lower cost structure. Part of that lower cost structure has to be lower regulations, lower taxes, and support that helps us compete worldwide.
One of the biggest obstacles is our own tax code. Today, the United States now has the highest corporate tax rate in the industrialized world. It significantly contributes to an unlevel playing field for American manufacturers. Bad tax policy is not only anticompetitive, but it also leads to less tax receipts collected by the Federal Government. Bad tax policy outsources jobs.
The President proposed letting the Bush tax cuts expire for those making over $250,000 a year. When are our elected leaders going to realize that a tax increase on those who report higher incomes is a direct tax increase on manufacturers like me. Partnerships, LLCs, sole proprietorships, and Subchapter S corporations are a significant share of those that are considered “wealthy” under this tax law, because we file individual income taxes. When in actuality, none of us bring $1 million into our own homes each year. We take that money that we make and we reinvest it into salaries for our people, for R&D, and for modernizing our plants and facilities.
The 3 or 4 percent tax increase means a lot to small manufacturers that were starved of profits during the last recession. Today, we could use that money for reinvestment and help rebuild this economy.
100 percent bonus depreciation, increased Section 179, expensing levels, and the R&D tax credit should be extended now. The R&D tax credit has helped us in developing a new product line that we have been working on for 5 years. We haven’t made a cent on it yet. It hasn’t hit the market, but without the credit, we would not even have tried. In the long term, we need to tackle tax reform across the board. We need to increase the cash flow to our companies through investment, and also free up more days of operation for covering our processes.
And also, we need to keep our current estate tax rates. I want to thank you for this opportunity and I urge you to take the action necessary to help strengthen small businesses and small manufacturers.
Chairman Camp. Thank you, Mr. Beck.
[The statement of Mr. Beck follows:]
Chairman Camp. Mr. Spinks, you are recognized for 5 minutes.
STATEMENT OF HUGH SPINKS, VICE PRESIDENT OF TAX, AIR LIQUIDE USA, INC.
Mr. Spinks. Mr. Chairman, and members of the committee, I appreciate the opportunity to testify today on the issue of corporate tax reform to produce a more simple, predictable, and competitive tax environment in the U.S.
My name is Hugh Spinks and I appear today on behalf of Air Liquide USA, one of the Nation’s leading industrial and medical gas companies. Air Liquide is the world leader in industrial medical gases. We operate in 80 countries around the world, employing over 46,000 world citizens. Headquartered in Houston, Texas, Air Liquide USA, has over 5,000 American employees, in more than 200 locations throughout the country, and actually a physical presence in all 50 States. For decades, Air Liquide has offered industrial and medical gases and related services to the Nation’s largest industries, including manufacturing, electronic, and health care. Air Liquide is focused on technological innovation to help make our Nation’s manufacturing and industrial sectors more efficient, environmentally friendly, and productive.
The industrial gases business is an essential and thriving cornerstone of American manufacturing and technology, reaching into every conceivable sector of the economy. Air Liquide, is committed to significant growth and domestic expansion, and in fact, has doubled its investment in the United States during the last 5 years.
This investment has created new jobs, and access to critical products and technologies in communities throughout the Nation; from Texas to North Dakota, from California, to Delaware.
We see the future for U.S. manufacturing as bright, and rich with opportunities, but we are also pragmatists in the distribution of our resources. In deciding where Air Liquide will make its investments, we examine all of the potential costs, including taxes. With such a large and capital‑intensive operation, we oftentimes have more potential projects than capital on a worldwide basis, forcing difficult decisions about where to allocate scarce resources. Corporate tax reform should be designed in a manner that encourages global companies like Air Liquide to make increased capital investment in the United States.
This requires, among other things, a level‑playing field, one that is not punitive or discriminatory based upon where a company is headquartered.
Over the last couple of decades, many countries have significantly lowered their corporate tax rates to attract new business investment and create jobs. For example, U.S. competitors in such diverse geographies as Canada, the United Kingdom, and recently Japan, have significantly lowered corporate tax rates and passed legislation to simplify their taxation of business.
With Japan’s 2012 corporate rate cut, the Federal plus State income tax rate of about 39 percent in the U.S. is the highest in the OECD. This puts the U.S. in a position of trying to compete for new investment projects with countries whose corporate tax rates are often 7 to 10 percentage points lower.
In spite of the many advantages that the U.S. offers as a premier location to do business, trying to achieve an equivalent after‑tax return on investment under these circumstances is challenging. With a lower corporate tax rate of 25 percent as suggested by Chairman Camp, the U.S. would be better able to compete for new projects.
As an internationally headquartered company, Air Liquide is part of the dynamic business community of global companies that play a critical role in the health of the U.S. economy, particularly in the manufacturing sector. The U.S. subsidiaries of global companies employ over 5 million American workers directly nationwide, including 2 million in the manufacturing industry. These companies produce 21 percent of total U.S. exports, conduct 14 percent of domestic research and development spending, and account for 17 percent of U.S. corporate income tax payments.
I applaud the committee’s recognition of the important link between tax reform and inbound business investment. To conclude, we support comprehensive tax reform, and we understand there will be trade‑offs in the pursuit of a lower rate as well as greater certainty and simplicity in the Tax Code. I thank the committee for inviting me to testify, and I will be pleased to answer any questions that you have.
Chairman Camp. Well, thank you, Mr. Spinks.
[The statement of Mr. Spinks follows:]
Chairman Camp. Ms. Boushey, you are recognized for 5 minutes.
STATEMENT OF HEATHER BOUSHEY, PH.D., SENIOR ECONOMIST, CENTER FOR AMERICAN PROGRESS
Ms. Boushey. Thank you, Chairman Camp, and Ranking Member Levin and members of the committee for inviting me here to testify on the effects of tax policy on the U.S. manufacturing sector. My name is Heather Boushey, I am a Senior Economist at the Center for American Progress Action Fund.
I want to make two points in my remarks this morning, which I expand upon in my written testimony, which I have submitted for the record. First, manufacturing is not only a key part of our economy, but moving forward, it will remain critical to our Nation’s economic vitality. Economic research is increasingly showing that manufacturing is critical to our future. A strong manufacturing industry supports solid middle‑class jobs, it enables our Nation to be a leader in technology and innovation, and can help us address our trade deficit.
Second, there are a variety of ways that policymakers can support manufacturing, of which reforming the corporate Tax Code, is one piece of the puzzle. The research is clear, that any set of policies aimed at supporting U.S. manufacturing should include investments in education and training, infrastructure, basic and applied research and development, and improvements to basic data collection. In terms of tax policy to support manufacturing, I recommend that this Congress focus on a few key items.
First, pass comprehensive business tax reform that both eliminates loopholes and inefficient business tax expenditures without disadvantaging domestic manufacturing. Currently, loopholes allow companies to avoid paying U.S. taxes by artificially shifting their profits offshore. Closing these loopholes, by adopting strong provisions to prevent base erosion that will promote job growth in the United States and ensure businesses are both competitive and fairly taxed.
Along these lines, we need to introduce a minimum tax on foreign earnings to prevent production from going to tax savings overseas, as the President has proposed. This would also ease the Tax Code’s current bias towards foreign as opposed to domestic investment, and to level the playing field among competing businesses.
We also need to find a fiscally responsible way to make the research and experimentation tax credit permanent in other to boost and attract domestic private investment in R&D. Studies have shown that the R&D tax credit stimulates as much research and development investment as a direct subsidy, and that the social returns on R&D are greater than returns for private investors who finance R&D.
I want to stress that the level of taxation is only one piece of the puzzle and the statutory corporate rate is only one aspect of the corporate Tax Code and how it affects businesses as we have heard already this morning.
But I also urge you to keep in mind the reason that we tax. Tax revenues fund public goods that U.S. manufacturing and global corporations that manufacture in the United States benefit from and which otherwise would not exist.
For that reason, when considering levels of taxation, it is equally important to weigh the benefits of the public goods and services made possible with taxpayer dollars. When it comes to creating good manufacturing jobs in the United States, government spending plays a critical role in setting the stage for economic growth. To promote manufacturing and innovation in the United States, or at least to not disadvantage it relative to other industries, we recommend improving infrastructure so that U.S. goods can be more easily transported and marketed at home and abroad. This should include addressing our aging and overwhelmed electrical grid as we have all learned about here in the District of Columbia over the past few weeks; implementing the Obama administration’s proposal to start an $8 billion community‑college‑to‑career fund to encourage collaboration and partnerships between community colleges and businesses in training our future workforce.
Two million workers would learn skills vital to working in burgeoning industries like advanced manufacturing and health care. A highly skilled workforce would also give the U.S. and its regional economies further advantages over its global competitors.
In addition, we should increase government investment in advanced manufacturing and establish a national network for manufacturing innovation. Having a strong manufacturing industry in the United States should be at the top of our national economic agenda. We will not be a global leader for long without a vibrant and innovative manufacturing base.
The industrial commons matters for innovation and the extent to which we allow manufacturing processes to continue to go overseas, we only make it that much harder to regain our place as a global leader.
Moreover, as more of our energy future will rely on high‑tech manufacturing, our economic competitiveness, and in fact, our future trade deficits will be even more closely aligned with our ability to be an innovator and producer of manufacturing goods, especially in the energy sector.
I want to thank you for inviting me here to testify and I would be happy to take any questions.
[The statement of Ms. Boushey follows:]
Chairman Camp. Well, thank you, Ms. Boushey. Thank you all for your testimony. I do have a question for Ms. Dossin, Mr. Gjersdal, and Ms. Ford.
Several witnesses at the table as manufacturers have testified that lowering the statutory rate is so critical to America’s ability to compete, that it is worth giving up substantial deductions and credits. And some have also talked about the importance of encouraging domestic innovation, moving to a territorial system with anti‑abuse rules.
Now, would a 25 percent rate, a territorial system with reasonable safeguards to prevent shifting to low tax havens and adequate incentives to conduct R&D, and locate intellectual property in the U.S. be attractive enough to you, that even as manufacturers who benefit from numerous deductions and credits, you would be willing to put all of your tax preferences on the table? And why don’t I start with Ms. Dossin.
Ms. Dossin. Sure. I think the very fact that you have called this hearing means that you recognize those provisions do have power in the economy, and I don’t think it is time quite yet to choose which ones stay, and which ones go, but I am here to say that when that time does come, they will be all on the table, and we will want to be at that table helping choose what helps the U.S. economy go forward.
And for Ford’s business to go forward in the U.S., I will say again, we think the low rate is the single‑most important thing, and beyond that, we would look for more stability, simplicity, so that whatever is in there is something that I can communicate to management to help decision‑making and hopefully that would support decision‑making that keeps investment in this country.
Chairman Camp. All right, thank you. Mr. Gjersdal.
Mr. Gjersdal. We would certainly be willing to put every preference on the line. There is no question that a lower tax rate not only would be evening the playing field for all companies here in the U.S., the other thing it would do is, it would really simplify things and create transparency. Right now, the Tax Code simply is not believable, and that is not only to the public at large, that is to the executives at 3M. I find it almost impossible to explain the Tax Code to them these days. They don’t believe me it is so complicated. So frankly going to a lower rate ‑‑
Chairman Camp. I am familiar with that problem.
Mr. Gjersdal. It is a very difficult proposition. But frankly, putting all of the preferences on the line for a lower tax rate is definitely the way to go.
Chairman Camp. All right. Thank you, Ms. Ford.
Ms. Ford. I would echo the comments made. I think everything should be considered, particularly when you start to get towards the 25 percent rate. It does make us more competitive. I think the overriding concern, of course, is that rates can have a very easy tendency to creep back up. So I think it is really important that we think through the other provisions that we remove is they are incentivizing particular behaviors, and then avoid a subsequent kind of rate creep up over time.
Chairman Camp. Thank you. I have a question for Mr. Hardt and Mr. Beck. Earlier this week Ernst & Young released a report that analyzed what would happen if we would adopt the administration’s proposal to let taxes on small businesses go up at the end of the year. Roughly, it is the $200,000 for individuals, $250,000 for couples. And among other conclusions, the report finds if that were enacted, that it would destroy over 700,000 jobs and that wages would fall by 2 percent. Now, I would just ask both of our small manufacturers, how would this proposal affect your businesses specifically?
Mr. Hardt. Thank you for the question. As I mentioned earlier, approximately 70 percent of the manufacturers in the United States are structured as S corps, or pass‑through entities. And there is only so much of the pie. You have taxes to pay out of the pie, reinvestment in your business, which is by far the overwhelming portion where our profits goes. I just mentioned that yesterday we were installing a $270,000 grinder, which is in excess of the $250,000 you just mentioned, which comes out of profits of the business. And of course, to repay borrowings to our banks. And again, they are wanting more profits in the business as well to justify borrowings these days. Borrowing money has been a little tougher the last couple years.
So to me, it would directly impact investment, if you switch up the pie, shall we say, and it would be negative for us. The real issue we have today is uncertainty. I need to mention that again, that we are making decisions, borrowing money, personally guaranteeing loans, hiring people, and the uncertainty with that proposal also is very concerning to us.
Chairman Camp. All right. Mr. Beck.
Mr. Beck. I agree with Mr. Hardt. When you take a look at a company like ours, basically my brother and I own the company. If the company makes $1 million, that means as a subchapter S company, I pay ‑‑ would pay the taxes on half of that, $500,000, and my brother would pay the other half. The money comes from the company, but we are not taking that as revenue into our own pockets. That money that we make has to be reinvested in the business.
If you take 3 or 4 percent more intakes, we have already gone through a great recession. We have been starved for profits. We are hoping to make some profits this year. We would like to hold onto whatever we can, and not have to give it back as taxes. We need to reinvest in training our people, because now we have had to hire back a lot of people. We haven’t put investment back in our company because we haven’t been able to. We would like to do what Mr. Hardt is doing and upgrade our machinery. And 3 or 4 percent to a small company like ours I think has a lot more impact than the revenue that you are going to be generating for the Federal Government.
Chairman Camp. All right. Thank you. Mr. Levin is recognized for 5 minutes.
Mr. Levin. Well, I think if we can, we should resist using this hearing to have an overall discussion of the very basic disagreement as to the high income tax cuts. I am not sure of the situation for the two of you, but Joint Tax has told us that only 3 percent of small businesses have income over $250,000 a year. So the Ernst & Young report is deeply flawed in terms of its methodology, assuming that none of the tax cut, the end of the tax cut for high income would go for deficit reduction. It has other deep flaws. But if we spend our time today arguing over this, I think it will be a mistake.
I thought the focus was the importance of manufacturing. And what has happened in these last years is there has been a resurgence in understanding of the importance of manufacturing in this country. The language became that we were in a post‑industrial era. And it turns out, as shown by what has happened in the last couple of years, that manufacturing remains a very key part of our economy. And it has helped to lead us back from the pit, and helped to create jobs. And the difference of opinion about that was crystallized in our reaction to whether we would let a couple of the domestic auto companies go under and not be able to come back.
So I would hope we could have a focus today on the importance of manufacturing, and how our Tax Code relates to it, and how we approach tax reform, keeping in mind the importance of manufacturing. And I think this panel illustrates the challenge for us to do that. And to simply say let’s have a goal or a policy of reducing to a certain level, without taking into account what would be the impact on manufacturing, I think is misguided.
There are differences of opinion among all of you as to what would be the impact of the focus only on the rate, without determining its impact on manufacturing. And I understand that difference of opinion. Your companies are in different positions. To say that everything should be on the table, that is, I think, okay, provided you keep in mind the objective of what you look at when everything is on the table. And I think the testimony, if I might say so, on manufacturing by the two of you illustrates that. And so Mr. Hardt, without discussing larger issues of taxation and upper income taxation, I think it is revealing when you say on page ‑‑ our pages I guess aren’t numbered ‑‑ but you do refer to it, and I think it was important. You said we fully support expanded bonus depreciation, Section 179 expensing, and Section 199, domestic production activity deduction as tools manufacturers use to create jobs and compete globally.
And I think it is important to remember that, because if you eliminate those, you don’t get down to 25 percent eliminate everything. And the question becomes, what happens to these incentives for manufacturing? Should we have them? And then Mr. Beck, you say I think very compellingly on page three, “Bonus depreciation and increased 179 expensing can be deciding factors for businesses considering equipment upgrades or company expansions. These two incentives most assuredly contributed to the impressive growth in manufacturing technology orders in 2011.”
And then you go on to say, “There is no question,” on page 4, “R&D leads to new technologies and innovation.” And you conclude on page 4, “Without the credit, we may not have made the investment.” So I think that illustrates how we need to approach this, not with a simple mantra, but with a question, is manufacturing and the Tax Code supporting that an important criterion in terms of tax reform? And I think the answer clearly has to be yes, it is a major priority.
Chairman Camp. Thank you. Time has expired. Mr. Johnson is recognized for 5 minutes.
Mr. Johnson. Thank you, Mr. Chairman. Mr. Hardt, you know, it is a testimony to the great entrepreneurial spirit that has helped make this country as great as it is. It is too bad the President and others are attacking this spirit. I am sure you heard by now President Obama say, “If you got a business, you didn’t build that. Somebody else made that happen.” Mr. Hardt, did somebody else build your business?
Mr. Hardt. It was a team effort with myself, my partner, and a lot of our employees, but we took the risk, that is a fact, and continue to.
Mr. Johnson. And government didn’t build your business either, did it?
Mr. Hardt. Government can assist. Government can assist with certain incentives to help invest in what we do, to make sure we are globally competitive. But we took the majority of the risk, that is a fact.
Mr. Johnson. You bet. Mr. Hardt, with respect to tax reform, would you be willing to put all the various deductions and credits on the table for a top rate of 25 percent?
Mr. Hardt. It is a little bit difficult for me to answer that, to be honest with you. The reason I say that is I do believe that in small manufacturers like ourselves, cash flow is a key priority to what we do. And that some of the incentives to recognize investing in the U.S., to spending capital, to taking risks, for encouraging people to get into the business, such as e, mentioned, the depreciation deductions, are beneficial. However, saying such, looking at the total effective tax rate, and looking at lowering the total effective tax rate to allow us to put more into our business is very critical, and would be very welcome. And I am sure both of us, two small guys here, would do that.
Mr. Johnson. That is close. So tell me, what key three points would you like to leave with us when it comes to tax reform?
Mr. Hardt. First of all, that manufacturing is very important to our economy. And we do need to look at manufacturers, both large and small, C Corps and pass‑throughs, as being very vital to our economy. And I need to support my brethren to my right here, the larger companies, because they are my customers, and so they need to remain competitive too. And we need to make sure that we make all manufacturers competitive.
Secondly, I encourage us to continue to look to incentivizing people to get into business, to start businesses, to build businesses that are vibrant to the backbone of the country and to feel confident that they can take the risk, and they know with some certainty what is going to happen if they take the risk. I need to mention again, uncertainty is very difficult when running a small business or a family business. So those are really my two key points that I need to leave you with.
Mr. Johnson. Thank you. Mr. Gjersdal, as you may know, earlier this year the administration released its framework for business tax reform, which calls for a minimum tax on foreign earnings. What are your thoughts about that proposal?
Mr. Gjersdal. Well, that is a difficult question to answer because, first of all, we don’t know what that rate might be. Secondly, we don’t know how the foreign tax credit mechanism may work with it. At a high level, though, it concerns me. First of all, it just suggests to me that this will increase complexity, not decrease complexity. And furthermore, I don’t see it really helping us compete in the global marketplace. I still believe territoriality is a much better answer.
Mr. Johnson. So you more or less think that we need to have a less complex system?
Mr. Gjersdal. Simplicity, simplicity, simplicity.
Mr. Johnson. Okay. And such a proposal that we are hearing could cost jobs in America, could it not?
Mr. Gjersdal. Pardon me?
Mr. Johnson. If we try to stick with a high rate of overseas.
Mr. Gjersdal. Absolutely. Absolutely.
Mr. Johnson. Thank you for your testimony. Thank you, Mr. Chairman.
Chairman Camp. Thank you. Mr. Nunes is recognized.
Mr. Nunes. I have no questions at this time.
Chairman Camp. All right. Mr. Tiberi is recognized.
Mr. Tiberi. Thank you, Mr. Chairman. To the two manufacturers, the pass‑throughs, Mr. Hardt and Mr. Beck, I don’t remember which one of you in your written testimony talked about buying a piece of machinery over $250,000. But the question is to both of you.
Mr. Hardt. $270,139 to be exact.
Mr. Tiberi. Okay. My question to both of you is, I can’t imagine how frustrating it is in Napoleon ‑‑ I am from Ohio, where you are from ‑‑ to hear the President or others talk about the fact that you are obligated, you should pay more because of how much money you make. And I think your testimony is so very good to try to help educate policymakers and the rest of America that if you make $250,000, I think you mentioned that, as a business owner who is a pass‑through entity, or an owner of a business, talk a little bit more to us today, both of you, real quick, what that means in terms of reinvesting in your business. Out of that $250,000, you have to buy machinery, you have to employ more employees. There are training costs. So it is not like you are pocketing it and saving money to go buy an island in Hawaii.
Mr. Beck. As a pass‑through, such as a subchapter S or a sole proprietorship and you have $250,000 of income from your company, you pay the taxes through your own personal tax forms. And it appears to most people that it would be your salary. But it is not your salary.
Mr. Tiberi. Can you say that again?
Mr. Beck. It is not your salary. It is what your company made, which means that out of that $250,000,a large portion goes to taxes. You may take a salary of $50,000, $60,000, $100,000, I don’t know what people take. A Small businessowner might take a $50,000 annual salary. The other $200,000 (less taxes) would be reinvested. What is not paid in taxes would be reinvested in their businesses.
Mr. Tiberi. So if the rate is 35 today and it goes to almost 41, the top rate tomorrow, 6 percent, that is pretty significant.
Mr. Beck. I want you to know, 2 weeks ago I met with my joint venture partner in Germany, and I asked him if he wanted to invest in a company in the United States. So we compared corporate rates. And he said, “Your corporate rates are too high.” He said, “The most I will invest with you is maybe 20 percent,” when I was hoping to have him coming in and doing a 50 percent investment into a venture together. That is Germany.
Mr. Tiberi. Mr. Hardt, anything to add to that?
Mr. Hardt. Yeah, I agree. The majority of the profits that we make are reinvested into the business. And that is not just us, the surveys show it. So there is only so much of the pie to go around. Secondly, we need to leave a lot of our profits and our cash flows in the business today to keep our banking brethren happier, because it is tougher to borrow money today without a profitable business.
Mr. Tiberi. So if the rates are increased, that is less that is reinvested?
Mr. Hardt. Less that is reinvested, and it is less that can be potentially borrowed as well, because the banks aren’t as happy with our cash flows.
Mr. Tiberi. Thank you. To the three on the far left, all three of you American, large companies, do business overseas. I will start with Ms. Dossin, if you could all answer this question. You are competing, when you are selling a Ford in Italy, you are competing with German companies, you are competing with Korean companies, you are competing with Italian companies, and you as well. So the three of you, how difficult is it today to compete when their rates are lower and we have a worldwide system? And how does it benefit us as Americans when you are expanding in Europe or expanding in Asia? How does that benefit America? Does it benefit the corporate headquarters? Do you have more employees at the corporate headquarters? Can you just comment on that rather than this thought of shipping jobs overseas, which is a mantra of some?
Ms. Dossin. Well, that is a little bit of a complex question, because, of course, wherever you compete, in Italy let’s say, in Italy your profits in Italy are subject to the same tax whether you are BMW or Ford. It is where the more movable profit is, right? It is where the entrepreneurial profit is. It is where maybe the profit from intellectual property resides.
Mr. Tiberi. But if you repatriate your profits from Italy back to the United States, versus if the German company repatriates it back to Germany, there is a disadvantage for you.
Ms. Dossin. It tends not to be our issue. That repatriation issue tends not to be our issue. But I would say, it is correct that where the residual profit resides, for us it is headquarters, for us it is the U.S., and that is the pain that other companies headquartered elsewhere do not suffer, I will say, on that type of profit, on their entrepreneurial profit.
Chairman Camp. Just quickly, time has expired. Other two, just answer very quickly.
Mr. Gjersdal. Just a very quick example. Let’s assume we make $100, our competitor that is overseas makes $100. We pay a tax rate of 35, they pay a tax rate of 24. We have $65 left, they have $76. It is just not a matter of making extra money, they now can reduce their prices by $10, $11 and beat us in the marketplace and hurt competition.
In terms of jobs, yes, jobs can be created. Fifty percent of our manufacturing is in the U.S. A healthy company will promote HQ jobs. And most of our core R&D is here in the U.S., so, of course, expansion of R&D would create jobs in the U.S.
Chairman Camp. All right. Thank you. Very quickly, if you could.
Ms. Ford. I would just echo briefly that I think the job situation is not a zero sum game, it is not U.S. jobs versus foreign jobs. It is if you have to have foreign locations and increase your foreign jobs, your U.S. jobs will increase as well. We found that in both our R&D center, our IT world, and our corporate headquarters as well.
Chairman Camp. All right. Thank you. Mr. Rangel is recognized.
Mr. Rangel. Thank you, Mr. Chairman. And thank you all for sharing your views with us. My questions are basic. I want to thank you once again. Territorial taxes. How does it affect, or how does it create jobs or any benefits to the United States? If U.S. businesses decide to go overseas and pay no taxes to the United States, but whatever the tax rates in a foreign country, how does America benefit? Ms. Dossin?
Ms. Dossin. Well, we are not particularly a proponent of one system or another. But if it was pure territorial, with no anti‑base erosion provisions, that could be a worry. I think that is where the anti‑base erosion ‑‑
Mr. Rangel. Is anyone supporting a pure territorial tax? How can America get some taxation out of business people that were trained and enjoyed the benefit of being American and not pay any taxes at all? Paying the taxes to the foreign government at their lower rates? Anybody here support any type of territorial tax? Come on. All of you said you supported it. I just want to know how does our country benefit by your support for it?
Mr. Gjersdal. We support a territorial tax system primarily because it helps us compete with our international partners.
Mr. Rangel. How does it help the United States of America? It helps your stockholders. Is that it?
Mr. Gjersdal. No, it just doesn’t help our stockholders.
Mr. Rangel. How does it help the United States of America that you can effectively compete with ‑‑
Mr. Gjersdal. Well, 50 percent of our manufacturing base is in the U.S. So if we can compete on an international scale with our international competitors, it will help our manufacturing base.
Mr. Rangel. So you are saying that the profits you make overseas by not paying U.S. taxes helps the base back here, where you hope that you will be paying a lower corporate tax?
Mr. Gjersdal. It certainly will help the base back here both in terms of our manufacturing ‑‑
Mr. Rangel. But if you have no base back here?
Mr. Gjersdal. We would never be at that point.
Mr. Rangel. Strike that. Suppose we create that you don’t have to have a base here to have a U.S. business abroad. And so I would think under that hypothetical, we won’t benefit at all, no jobs, no taxes, you are just a foreign company with a U.S. base with no jobs. That is possible too. We have to do a lot of work on this territorial thing. And the chairman is an advocate, so I think you do better explain it than they do. Not at this time.
Chairman Camp. We do have base erosion provisions in the draft.
Mr. Rangel. Okay. Okay. Let’s get to the corporate tax. You tell me what the one impediment it is for us not to reform the tax system where liberals, conservatives, Republicans, and Democrats and others all agree that it is loaded with provisions that should be eliminated, that there is no problem in reducing the tax and paying for it by broadening the base. And yet when all of you get together at the country clubs and the cocktail parties you know what it is that stops this Congress, Republicans and Democrats alike, from not taking up this sensible reform that has us as the highest corporate tax provisions in the entire world.
Now, you don’t ‑‑ I don’t need all of you, because I am convinced that there is one thing that all of you have agreed upon that stops this from doing the right thing, economically and politically. Now, what is it that you believe it is?
Okay. The chairman says maybe my question isn’t that clear. But if everyone agrees that this is good for the country, the corporations, the stockholders of America generally, the creation of jobs that allow you to be more effective, why aren’t we doing it? Is it a question that everyone wants to protect their interests? I mean, is anyone here that believes that when we clean it up that we should get rid of research and development? No.
If we were talking about depreciation benefits, you want that. I just wonder whether it is a question that corporates want lower rates, eliminate the loopholes, but don’t bother their loopholes. And so we can’t get you guys to agree. As Ms. Dossin said, everything is on the table, and when we get there, we will tell you what we insist on and what we will, you know, but I ‑‑ if it is such a good deal for America and the Congress, and you guys pay so much for lobbyists, what reason do you hear that we have not moved on it? Not this administration, not past administrations. And we are not going to do it because of what? Why don’t you think we do it? You all are smart Americans, business people. Ms. Dossin, please.
Ms. Dossin. For myself, I will say ‑‑
Chairman Camp. If you could answer quickly, because time has expired.
Ms. Dossin. I am a chief tax officer. You know, that is my job. I would say that a reason is it is just darn hard. Before I came here, I kind of reread the story of the 1986 Act. Really, really hard. And you can only do it ‑‑
Mr. Rangel. I was here. What is the hard part of it?
Ms. Dossin. It is the hard part. And we are ready, we are here because we are ready, the chairman is ready.
Mr. Rangel. We are here to do hard work. You are here to make us do hard work. What part of the job is so hard that you can’t figure out why we refuse to do what we were sent here do?
Ms. Dossin. Well, I think the time is right and hopefully ‑‑
Mr. Rangel. The time has been right since 1986.
Chairman Camp. All right. Thank you. Time has expired. Mr. Davis is recognized for 5 minutes.
Mr. Davis. Thank you. I would point out that companies like Procter & Gamble, headquartered in my district, or across the river from my district have almost 50 percent of their employees are directly related to international business. So territorial taxation makes a lot of sense. And you know, I know there are a lot of undertones for manufacturers. I grew up around manufacturing, blue collar background, worked in manufacturing, run with manufacturing small business owners now. And you know, the only club that my friends belong to is Sam’s. And I think that is an important thing to point out. And I understand this issue, the S corp issue, the pass‑through issues.
I would like to bring some context on these issues of tax reform, particularly for the small manufacturers that make up the backbone of the supply chain feeding into the parts into my Ford F‑250 I have been driving for 15 years. And thanks for the Ford Tough. I appreciate that.
Mr. Beck, in your testimony you took particular time discussing the importance of expensing, of depreciation, and the R&D tax credit. You and Mr. Hardt are both small business owners. It is the core of what I look at as a person with a lot of experience in manufacturing. You describe these provisions as especially important to cash‑based manufacturers who face particular challenges in managing their accounts receivable and their working capital.
You guys live on accounts receivable and on that weekly cash flow, making sure that that cycle is compressed. Would you please provide the committee, starting with Mr. Beck, some examples, very specific examples of how the AR cycles and the working capital needs of small manufacturers affect your businesses, and how these tax provisions help smooth out that cash flow roller coaster?
Mr. Beck. Well, from a standpoint of a machinery builder, we have to have enough cash to float, with certain customers, $3, $4, $5, $6, and $7 million projects. Now, that is not the same as somebody that is making parts and components for an automobile company. The only way that we can possibly do that is to have profits, and to retain those profits and retain the cash in our company. And if you use some of the vehicles that you have talked about, like accelerated depreciation, you show more expense for that particular year. But what that really does for you, it does allow you to write off equipment faster, which means you have a less of a tax burden from that standpoint, which means you are not paying as much in taxes and you have more cash in your company.
Mr. Davis. Let me take that to the next level. I think that generally we spoke before the hearing for a couple of minutes when we met, but we agreed that a reduction in the tax rate and a transition, particularly for the international businesses, to a territorial system would be very helpful, in a variety of ways. And they are important reforms. But do those reforms alleviate, say, the lowering of the rate, the territorial piece, does that alleviate the need for maintaining some sort of cost recovery positions in tax reform for you as a manufacturer?
Mr. Beck. Boy, I am not a tax expert.
Mr. Davis. Let me put it this way: What I am hearing you say is that depreciation expensing and R&D as part of this process are very important to you.
Mr. Beck. Well, it is very important to us because you can recoup quicker the costs that you put out there to help develop something or to buy a piece of equipment, which allows you to expense it faster, which causes you to have less revenue in those years that you are doing that, which means that you are paying less in taxes. So you are able to hold on to your cash longer. And if you have gone through a situation like we have gone through, and banks won’t even talk to you because of the requirements that they were under, you know, we had to hold onto every single penny. So basically, it sounds very simplistic, but it is the revenues coming in, it is the expenses going out. Taxes is part of your expenses.
Mr. Davis. Not at all. I mean I had clients in the 1990s, when the Clinton tax increases, when those rates went up so significantly, literally couldn’t hire employees to do additional work because of the tax hit on them as S corporations, closely held. Would you like to comment briefly, Mr. Hardt?
Mr. Hardt. I mean the timing of cash flows is critical to a small business. When you are trying to grow your business, you have cash being tied up in receivables, money is owed from your customers. And of course, usually in a manufacturing business, you have to buy equipment as well. And of course, the banks want to see positive cash flow to lend you the money, and you have to make payroll during that whole period, including hiring new employees, planning for training dollars. We have great apprenticeship programs at all of our divisions that we fund internally.
So the timing of cash flows is key. So retaining cash into the business, investing cash into the business, you know, expense deductions for depreciation to help maximize that cash flow during investment time periods is very important to us, extremely important.
Mr. Davis. Great. Thank you. I yield back, Mr. Chairman.
Chairman Camp. Thank you. Mr. Buchanan is recognized.
Mr. Buchanan. Thank you, Mr. Chairman, for holding this important hearing. Also, I would like to thank our witnesses today. According to Enterprise Florida, which is our economic development arm in Florida, there are 17,000 manufacturers in Florida. They employ over 300,000 folks out of Florida. These skilled personnel represent about 5 percent of the State workforce in the State.
In my district, Atlantic Mold and Machine opened about 5 years ago. It is a family‑run businesses that specializes in high‑precision plastics and metal molds. And again, I grew up, I was chairman of the Florida Chamber, and I was in business for 35 years, employed a lot of folks.
I want to get back to Mr. Hardt and Mr. Beck. I got to tell you, I did a hearing where we had small business people in there about 2, 3 years ago, and I just for one reason or another started the hearing out with having people raise their hand in terms of that had challenges with their banks, either got their line of credits reduced or whatever. I thought it would be about 20 percent. About 95 percent of the people in the room raised their hand where they had challenges.
It gets back, my point I want to try to make here, when we talk about employment, or people, they talk about 3 percent of businesses I heard a gentleman say, the bottom line, there might be 3 percent of small businesses as they measure at 500 employees or less, but the reality of it is, is what is that percentage in terms of revenues and in terms of jobs? I know a lot of middle market companies that are considered small companies, but they might employ 300 employees or 400 employees.
So from a tax standpoint, what do you think would be the simplest ‑‑ what would be best in terms of helping your businesses moving forward in terms of based on where the Tax Code is at today? I mean, my sense what I hear is people want a simpler, fairer, flatter tax. The Tax Code is 73,000 pages. What would your thought be, based on where we are at today, would be the most helpful, Mr. Beck, to your business?
Mr. Beck. Well, when I was filing my taxes on a paper basis, and now it is electronic, I think I had a stack that I brought home from the accountant that was about that high. Now, you can imagine the intricacy and the amount of work that goes in to create those tax returns. To tell you exactly what the percentage ought to be, I think that needs to be worked out not by us, but by the committee, because you are looking at the revenues that the government needs.
However, a flatter tax, a simpler tax, one that doesn’t change with the wind, one that is set helps businesses plan accordingly for the long term. You know, we have to be able to plan for the long term. We have to be able to look out 2, 3, 4, 5, 6 years. You know, when I developed this product, I got the R&D tax credit. It is now 5 years into it, and we haven’t made a penny off of it yet. We are hoping in this next year that we can bring it to market. So we have to look out. And small businesses are in it for the long term. They are not in it month- to-month. Small businesses are not looking at the quarterly or the monthly return, they are looking at the long‑term viability of their company. So we need a very stable tax code. And we need one that competes internationally.
Mr. Buchanan. Mr. Hardt, I know we have touched on it quite a bit, but I think it is important for people to understand, as both of you know, that if you make 750, you don’t take home 750. And if you make 750 in a company, you end up paying a third out to taxes, you might take out 100 each or whatever you need to live in terms of your own, and the balance stays in, the banks require it. Do you want to expand on that anything more? I know you touched on it a couple times. But I don’t know that it can be touched on enough, because a lot of jobs are created through these pass‑through entities. And when you put a floor in at 250 and you have got 100 employees and the banks are requiring more and you are paying out a third of what you make to taxes, you know, that is not a great thing in terms of where we are at in terms of our country.
Mr. Hardt. I will simplify it and put it into numbers. In Wisconsin this year, our capital budget is about $2.3 million. We have already hired five new apprentices in the spring, we hope to hire five new apprentices this year, and we have some open positions for engineers, et cetera, as we grow our business. Our profit projection for this year is about $2.4 million. So 2.4 million is going to go through personal tax returns as a pass‑through entity, $2.3 million is going back into the business. I can’t simplify it any further. You cannot look at this as just money going into our pockets, going into our clubs, whatever we say here. The overwhelming majority of small business profits goes back into the business. It is our livelihood, it is the future for hopefully our families and children. And again, I also support simplification, however, because we need to plan. We need to plan how to transition our businesses to the next generation, how to plan to grow our businesses. So simplification and transparency are very important.
Mr. Beck. It is uncanny, my numbers are almost exactly as his. Almost exactly. And my salary isn’t even $100,000.
Mr. Buchanan. Thanks, gentlemen. I yield back.
Chairman Camp. Thank you. Mr. McDermott is recognized.
Mr. McDermott. Thank you, Mr. Chairman. Ms. Dossin, you said it is complicated. And I would like to enter into the record an article from the National Journal called Guns and Stethoscopes.
Chairman Camp. Without objection.
Mr. McDermott. In 1992, I had a memorable discussion with a manufacturer. He was the H.R. person from a major automobile company. And he said, you know, our costs, number one is steel, and number two is health care costs. And taxes is way down there somewhere. He said, I could look across the river into Windsor and see automobiles made for $2,000 less than they are made in the United States because of health care costs. He said, our second biggest expenditure, Blue Cross Blue Shield of Michigan. So the President has been trying to deal with making manufacturing more competitive. And one of the things he did was come out with the Accountable Care Act. Now, I would like to ask all the six of you who have companies, how many of you provide employees with health insurance?
Ms. Dossin. Ford does.
Mr. Gjersdal. 3M does.
Mr. McDermott. You can just put your hands up. All six of you do, right? How many of you support the effort at the Accountable Care Act to shift and make sure that everybody is in and try and get ahold of costs and get the free riders out of the system? How many of you supported it? Did Ford?
Ms. Dossin. I am not sure of the question, and I am not a health care expert, but I think that Ford does not have to adjust much of anything in reaction to that Act ‑‑
Mr. McDermott. Okay.
Ms. Dossin. ‑‑ because of what we already do.
Mr. Gjersdal. I am the vice president of tax. I am really not a specialist in health care. So I really cannot comment on that. If there is anything that I can do after the hearing to get you an answer, I would be happy to.
Mr. McDermott. Okay. Let me get to the guys who are buying it for themselves, the two in the middle.
Mr. Beck. All I can say to you is our that health care rep came in the other day and said he has seen the largest increases ever for health care for companies of our size. So if you ask me if I support that, I have to say no.
Mr. McDermott. And that is different from last year? Last year you didn’t have an increase?
Mr. Beck. We have increases all the time. But he said the increases are substantially higher coming.
Mr. McDermott. And you?
Mr. Hardt. Our plan increase for 2013 is over 12 percent. We spend over $12,000 for family and over $8,000 for single right now. There are certain provisions, in reading the voluminous Act, that we can support, but overall I think a simplification is what we really support.
Mr. McDermott. So what I hear you saying, all of you, is you in the corporate sector want to keep control of your own health care costs to your employees. You want to do it. You don’t want any help from us. Is that right? That is not a cost item you worry about. I guess if you are going to hide behind the silo of being a tax person, I don’t know how to deal with you, because it is so simplistic to come in here and talk about taxes as being the only issue that affects a company’s profitability.
The big issues are not taxes, they are these other personnel costs and material costs that when you buy something, you buy a machine that is $250,000, I don’t know where that ranks in terms of the costs in your company in terms of the health care costs. What is your health care bill in comparison to that?
Mr. Hardt. Our health care bill is rather substantive. It is a big part of what we do. I just mentioned the numbers per family and per individual.
Mr. McDermott. What percentage is it of your expenses every year?
Mr. Hardt. Approximately 10 percent.
Mr. McDermott. How about next? Mr. Beck?
Mr. Beck. I don’t know the number off the top of my head.
Mr. McDermott. You don’t know how much you spend on health care? You really don’t?
Mr. Beck. No, I don’t.
Mr. McDermott. Wow.
Mr. Beck. But it is a substantial amount. And I would guess it is probably about 10 percent.
Mr. McDermott. And how much are your taxes? What percent of your expenses go into taxes?
Mr. Beck. It depends on whether we are losing money or making money.
Mr. McDermott. So it could be nothing. But you still got to pay that 10 percent in health care?
Mr. Beck. Yeah. You have to pay that health care part. But you know, oftentimes when the health care has gone up, we have had to shift some of that cost back into the individual because we couldn’t cover it as a company.
Mr. McDermott. When I listened to you, I thought it is very interesting you would get involved with a guy from Germany. Germany has had a national health plan since 1883. And he comes over and he looks at your business and says to himself, why should I buy into this crazy health care system they have in the United States, which has no control? They are spending 12 percent of GDP on health care costs, we are spending 17, and you don’t have any control whatsoever. The rep comes in and says here is what it is going to cost you next year. So what I have a hard time understanding is how taxes gets all the attention, when nobody wants to talk about what happens in health care. It is like ‑‑
Chairman Camp. Time has expired.
Mr. McDermott. It is not because of taxes we have got problems in productivity.
Chairman Camp. Quick answer, please.
Mr. Beck. I prepared today for taxes, I didn’t prepare today to talk about health care. I am sorry.
Chairman Camp. All right. Thank you. Mr. Smith is recognized for 5 minutes.
Mr. Smith. Thank you, Mr. Chairman. And thank you to our witnesses today. I am wondering a little bit about temporary tax policies that we know abound, and certainly emphasis on the temporary nature. We have to renew them oftentimes on an annual basis. I was wondering if any one of the businesses could reflect a little bit how you plan for that, whether it is a business plan from the beginning, or how you plan for that for the future, on the temporary nature of so many of these tax provisions.
Mr. Gjersdal. Well, the problem is, you really can’t plan for it. Take the R&D credit, which is really the classic. We assume that eventually it will be renewed. It may or it may not be. But the fundamental question becomes with that kind of uncertainty, how could it ever go into a business person’s decision in making a decision? That is the fundamental problem. I can plan for it in my tax rate, but I can’t recommend to a businessman to take it into account in making a business decision.
Mr. Smith. And so then the cost of compliance, I mean that is slightly different, but certainly needs to be considered as well given the complexity. Do you ever put an actual number to the cost of compliance?
Mr. Gjersdal. Well, we are fortunate we are a cap audit taxpayer. And so we have reached agreements with the IRS as to how to compute the credit, how to compute the manufacturers’ deduction. So our cost of compliance in those areas has gone down substantially. But before that, it was a very, very expensive proposition both at the time of computing it, and then also at the time when you had to discuss it with the IRS, and needless to say, have a controversy.
Mr. Smith. Okay. Anyone else? Can you elaborate then on that process with the IRS that you went through?
Mr. Gjersdal. The cap audit process? It is a program that was established I think it was about 7 or 8 years ago. Basically, what it allows you to do is have a much more open relationship as a large corporation with the IRS. Through this process, we are current now on our audit. We are basically closed through 2010. Our requirement is to be much more transparent. We have to disclose all our transactions during the year as they occur. The IRS, on the other hand, their view is to get the audits done. So they don’t bring up all these frivolous issues that they used to bring up. They bring up key issues.
It is not like we don’t have controversies. We still do have controversies. But when you think about it, 5 years ago we had issues going back 10 years. That creates a lot of business uncertainty. Today, our 2010 audit is done. Think of the business certainty that creates.
So I really applaud the IRS in this effort. This has been a wonderful process we have been involved in. The other companies we know of that are involved in it also think it is a very good process.
Mr. Smith. Mr. Hardt, could you reflect on the temporary tax provisions and the cost of compliance?
Mr. Hardt. I think the uncertainty again weighs on a small business’s mind more than anything else. You pick up the paper in the morning, you hear what is going on in Europe, you are not sure what your tax bill is going to be at the end of the year. We both of us in particular, and all of us, lived through the great recession a couple years ago and how we had to struggle to get through that. The uncertainty of the current Code causes you to be cautious. It causes you to maybe not make that investment you would like to make to see if you can make it pay off, but it causes you to be cautious. That is the biggest thing I can comment on.
Mr. Smith. Mr. Beck?
Mr. Beck. I think it is basically the same thing as what Mr. Hardt said. I mean, I really can’t elaborate on it much more other than if it is simplified and more stable, then we can plan further out. And as far as the R&D tax credit, we had never taken an R&D tax credit until we started the R&D this particular machine. A small company doesn’t have ideas like this every day. Maybe in a larger company it might be used more often. But it did certainly play into our final decision whether or not the R&D tax credit would help us alleviate some of the risk going forward. So I have to admit that in this particular case, it made sense for us. But overall, just knowing what the taxes are, and knowing they will be stable over a longer period of time certainly is helpful to small businesses.
Mr. Smith. Okay. Thank you. I yield back.
Chairman Camp. Thank you. Mr. Lewis is recognized.
Mr. Lewis. Thank you very much, Mr. Chairman. Let me take this opportunity to thank all of the witnesses for being here. Dr. Boushey, I grew up in Alabama, where we once had booming manufacturing industries. Most of the south did back then. But manufacturers are gone, the jobs are gone, and left behind hundreds and thousands of families who have struggled and continue to struggle to find their place in America’s middle class.
Can you repeat for the members of this committee why keeping manufacturing here in the United States is good policy for local community and families? And I want you to feel free to speak from your heart.
Ms. Boushey. Thank you, Congressman. Thank you. This has been just a very interesting hearing. There is a couple things on that. I mean, certainly manufacturing has traditionally provided solid middle class jobs. And there is some new research by an economist Susan Helper from the Brookings Institution and her colleagues that shows that manufacturing workers are paid about 8 percent more even once you account for all of the characteristics of jobs and those workers. So even once you account for the fact that these are union workers, these workers are paid more than other nonmanufacturing workers. And the research has shown, and of course, I am not a business expert like all of you, but the research has shown this is because those workers also have specific skills.
Which gets to the second reason why manufacturing is vitally important to our economy, which is one of the key sources of innovation. There is a lot of emerging economics research that is showing, and you from Corning talked about this, I think very eloquently in your testimony and here today, that there is what economists call either industrial commons or other reasons why having different kinds of manufacturing together, both suppliers and the companies that they are working with, in one place creates innovation and vitality. And if our country wants to remain a leader in the world in terms of technology and innovation moving forward, making sure that we support that manufacturing base so that when you talked about the glass being very thin, needing to be near where the TV screens or whatever is being made, that is being done in Asia or wherever for a reason. We want those kinds of synergies to be happening here in the United States.
So it is not just having one, you know, kind of manufacturing, but having that variety is very, very important and vital, and important if we want to remain a leader in terms of technology in the next century. And then finally, manufacturing plays a vitally important role in our macro economy. I mean, over the course of the recovery, manufacturing has been a leader in terms of job gains. It has been very good. That has been very encouraging to hear. But it is also vitally important for our trade deficit. Over the long term, this is something we are going to need to address. And if we don’t start bringing manufacturing back into this country as one of the easiest ways we can address our trade deficit, and if we don’t, we are going to have to continue to borrow from abroad, and eventually we will have to pay that back.
If we don’t deal with this, we will be looking at a lower standard of living in the decades to come. And I would add that energy is a key component of this. You know, as we both deal with rising energy costs in terms of oil that we are importing, and we are all looking for new ways to produce energy, green technologies, the extent to which we can do those here will be good for our trade deficit 10, 20, 30 years down the road.
And then one just note, Congressman Smith, on your question on things about uncertainty, there is a lot of uncertainty right now about the extension of a number of the tax credits and provisions for manufacturing in the green sector, including the production tax credit and the advanced energy manufacturing tax credit, which are causing a lot of uncertainty for particularly those manufacturers.
Mr. Lewis. Dr. Boushey, one member of the panel, responding to our colleague Mr. Johnson, said that you made it on your own, that you developed your own business. Don’t we all live on this little piece of real estate we call America? And what about the roads, the bridges? Or what about the transit system? What about the clean water, the sewer system? Could you respond?
Ms. Boushey. Well, I am glad you asked that question because this is of profound importance. I was reading The New York Times this morning, and there was an article on the cover of the paper about Stockton, California, which is about to go into bankruptcy. And talking about how they don’t have any police, murders have doubled, that there is this devastation in this American city, a lot of which is because they don’t have tax revenues. And we have just lived here through in the District of Columbia this massive power failure, hundreds of thousands of people without power for over a week because of a set of storms. These are our Nation’s infrastructure. And if we don’t have safe streets, if we don’t have electricity that you can count on, if you don’t have roads and bridges and all the things, and importantly a public school system that can compete with the rest of the world, we will not be able to remain an economic powerhouse.
If we do not educate the next generation that can create the kind of workforce that all of these companies benefit from, we will not be able to do that. So while any innovator, and of course, small business owners, they take an enormous amount of risk, an enormous responsibility for moving their investment forward, but they do so because they can hire workers that had been educated in their community and because they can build on the infrastructure that is there. These are two pieces of puzzle, and we need to think of them always simultaneously.
Mr. Lewis. Thank you, Dr. Boushey. Thank you, Mr. Chairman.
Chairman Camp. Thank you. Ms. Jenkins is recognized for 5 minutes.
Ms. Jenkins. Thank you, Mr. Chairman. Good hearing. Thank you all for being here. Mr. Hardt and Mr. Beck, in your testimony, you both raised the issue of the impact of the estate tax and the effect it has on family‑owned businesses. Mr. Hardt, in your testimony, you made the point that the primary reason for structuring a business as an S corp is the hope that someday you can pass along that business to your children.
Family‑owned businesses, from farming and ranching families to family‑owned manufacturing companies such as yours deserve an opportunity to pass that business from generation to generation, and preserving these good paying jobs in our communities. I believe families shouldn’t be forced to sell their farm or their business to pay estate tax. So I am a strong supporter of a full repeal of the estate tax. But I was wondering if you could each comment or tell me personally how the estate tax has affected your business and your decision‑making, and what recommendations might you have for members of the committee on how we could treat the estate tax and any tax reform proposal.
Mr. Beck. Well, because of changes in the estate tax it would be more advantageous to plan when you die. But I can’t plan on when I am going out. And so an estate tax needs to be set so that a businessowner can have something to plan around. Because ultimately you get to the point where you can’t plan for how much cash you would have to generate to keep the business in your family.
I think that is the biggest fear that a lot of family‑owned companies have. How do you pay that estate tax burden? Do you start saving for that tax burden a the expense everything else you are trying to do – while you are trying to buy machinery, you are trying do R&D and you are trying run your business? How do you finance it if you come to the point where you have a huge tax burden to try to keep the business into your family?
Let me tell you from the standpoint of a family‑owned business, (I am not saying that large companies don’t treat their people well, because they do treat them well) there certainly is a closeness that we have in our company. It is important to us that our people are successful. When our people took 40 percent pay cuts because we were trying to survive, I was worried about those people, that they couldn’t pay their mortgages on their homes and that they were going to lose their homes. They stuck by us through that whole thing. And I truly believe that family‑owned businesses have a real closeness to their employees, and really want to try to help their employees. And when often times you have to sell your business, it gets sold to a bigger company. Then when business gets bad, they just close them up or they consolidate them down.
And that is what happens if you can’t keep the business in your family. So I think estate tax planning is very critical for keeping these family businesses for long term and for protecting employees and small enterprising companies. I also want to say is when it comes to infrastructure, I paid a lot of taxes for infrastructure. I think I paid my fair share. And I do believe we all as companies pay our fair share in infrastructure. We are part of the infrastructure of this country because we pay taxes to support it. I got a little off topic.
Ms. Jenkins. No, I totally agree. Mr. Hardt.
Mr. Hardt. I want to follow up on the infrastructure thing too, I mean, after coming through the great recession, I am glad to pay taxes. Those weren’t fun years.
Anyway, the issue of estate planning is very important, and again, I am going to put the tone on as a manufacturer. A manufacturer has to put a lot of capital back into the business. So a lot of us are faced with estate taxes, whether uncertain, or certain, with the decision if we can’t put enough money back into the business because we have the huge estate tax liability to pay for, then it results in almost an inevitable sale, and we have many second and third generation workers working within our business, just as we have four family generations.
So from a manufacturing standpoint when you have to invest so much capital back into your business, an uncertain estate tax, or the ability to plan for such, does result in a sale too often a time, and usually it is not good for the business.
Mr. Beck. No.
Ms. Jenkins. Thank you. Mr. Chairman, I yield back.
Chairman Camp. Thank you very much. Mr. Thompson is recognized.
Mr. Thompson. Thank you, Mr. Chairman, and thank you to all of the witnesses who are here today. I appreciate your coming in, and appreciate what you do, and what your companies do, and all of your employees. It is very important to our economy, and very important to our country, and I don’t think I speak for myself when I say that I want to do all that I can to help make sure that business in America is successful.
It is important to the entire country, and to our future, and I think tax reform is a very, very big part of that, but I do want to say that tax reform has got to be smart. It has got to be smart, and it has got to do a couple of other things. It has got to keep jobs in America, and it has got to bring jobs back to America. It needs to be revenue neutral, and as one of the witnesses said, it needs to pay the freight. It needs to pay the bills on everything that our country does.
I think that Mr. Lewis was very specific on those issues, and the sewer systems, the highways, et cetera. And I don’t think we can just pick a number out of the air to say that is what the corporate rate should be, and that 25 percent number has become the kind of number of the week, or the month. And I was very interested in when all of you who own and run businesses talked about what should be on the table to get to 25 percent.
This is the second hearing similar to this that we have had. The last one, I don’t remember all of the witnesses, but I know Caterpillar was here, a couple of the big corporations, and they were all very specific. They said almost to a person, take all of the other tax expenditures away. Just get us down to a number. And that was about the 25 percent number, I think.
I understand that from the people that advise us, that you can’t get to revenue neutral at 25 percent, even if you get rid of all of the tax expenditures. It gets you down to about 28 percent. So if you do that, you can’t just put it on the table. You have got to pay for it. If you don’t pay for it, we are in a bigger soup than when we started. And I think, Mr. Beck, you talked about that.
You talked specifically about how you were able to pull through this recession because you had very little debt, and that you were fiscally responsible. And I think that is an important takeaway for us, because we have to be fiscally responsible as well. And “fiscally responsible” means that we pick up the tab, or at least part of the tab for education, because you can’t educate your own workers. We pay for a Navy that keeps the shipping lanes open, that allow you to move your product overseas; a Coast Guard that responds to emergencies on the water; the medical professionals that Mr. McDermott talked about; the infrastructure that is so critically important to your companies.
Secretary Geithner was in before this committee, and told us that the infrastructure problems we have is a hidden tax on the very people that are before us today testifying. And I think we all, we all know that, and that is not ‑‑ that is not helping your business either.
I also want to mention that the American jobs stuff is critically important. And it is not all going overseas. As a, matter of fact, we are seeing a change in that. A lot of it is coming back. I visited with a person just last week in my district who has seen his business grow by about, I think, 18 percent per year. And he has got ‑‑ he is a supplier to one company. He makes stuff for snowmobiles and ATVs, and his growth is because they are not making their components in China anymore, because they have huge costs for quality control. They have to send somebody over there to make sure that it is done correctly, and they ‑‑ the cost of shipping stuff back and forth is extremely expensive.
They are better off making it, Factory Pipe in Ukiah, California. And I think it is a prime example of the sort of thing that we need to figure out how to make that more prosperous so that you and your colleagues can continue to grow jobs overseas.
But I think we need to be honest and fair about it. We can’t just pick numbers out of the air. We need to do it in a way that balances the books, and is able to pay for the things that allow all of you to run the companies that you run so well today.
So I hope we can get to that, and I hope we can have a good discussion on that. Mr. Chairman, thank you.
Chairman Camp. Thank you. Mr. Marchant is recognized.
Mr. Marchant. Thank you, Mr. Chairman. I represent a district that basically surrounds the DFW Airport. So I have a very small geographical district. So when you land at DFW Airport and you begin to drive through my district, you see the corporate headquarters of not Ford, but companies like Exxon, and Fluor, and these multinational, and you begin to get the impression that this is the main driver, business driver in my district. But the truth is, it is the small manufacturing companies that have gravitated there near the airport, near the multinational companies that are there basically to serve the needs of, to supply these larger companies.
When you begin to talk about taxing incomes over $250,000 at a higher rate, you are not talking about really taxing the large multinational companies. You are talking about talking about taxing those small manufacturing companies who rely totally on retained earnings to fund their equipment purchases, your grinder, to fund new jobs being created, the three positions that will operate that grinder, and you are talking about the physical expansion of their plant facilities.
All of these companies use their retained earnings to do that. If you raise the tax on those retained earnings an additional 5 or 6 percent, the direct result of that will, there will be 5 or 6 percent less money put into facilities, equipment, and new job creation.
So it has a very detrimental effect on it. And it is really to the advantage of the big companies who rely very heavily now on just‑in‑time inventory, rely on the efficiency of the smaller manufacturing and the smaller and mid‑sized companies that are out there that are providing all of this.
So I believe if you begin to target, what I would call the job creators in any kind of a tax reform, or any kind of a tax extension, that you will eventually end up driving costs higher at the large company level. Now, that is my comment.
My question to all of the companies here is, since an increasing number of targeted business tax expenditures are enacted on a temporary basis, is there a greater value in a permanent tax rate reduction than these temporary benefits that must be renewed by Congress every year or so? And I will start with Ms. Dossin.
Ms. Dossin. I think that is undeniable. It would be far better to have a stable system that would inform good decision‑making. That is what we would hope for.
Mr. Marchant. Thank you.
Mr. Gjersdal. Just one word, absolutely.
Ms. Ford. I would agree. I think the temporary provisions are particularly painful. Corning, in particular, benefits from the look‑through as well as the R&D credits, and having those bounce temporarily is very troublesome.
Mr. Hardt. Again, uncertainty, I think I have used the word about ten times so far. It makes it very difficult to plan when you have all of the things on your mind as a small business. I believe that a stable, longer‑term environment is what we all need. I would also, however, state that I also agree that if there is anything that can be retained or implemented to encourage investment in our country, to encouraging people to get into manufacturing, stay in manufacturing, that should be considered.
Mr. Beck. I just think a stable tax is the best tax. I probably would lean more a little bit the other way. If you had a lower tax, and you had to give up some of these other things, at least we know the playing field that we are playing on. Faster depreciation and R&D tax credits certainly are important incentives for manufacturers, and we certainly appreciate those incentives. But at what cost? I think stability to me is still the most important thing.
Mr. Spinks. In a capital‑intensive business like ours where it takes typically 2 to 3 years to build a plant, understanding what the tax result will be when the plant is finally placed in service 2 or 3 years down the road, and the predictability of that is a huge, huge advantage and a game changer, I think.
Ms. Boushey. I would like you to point you to a couple of citations in my testimony about what lowering the rate in a revenue‑neutral way would do to a variety of industries. So that would lead to the elimination of many of these deductions, and there is some work by an economist named Martin Sullivan who showed that if you reduce the rate in a revenue‑neutral way, this would be most detrimental overall to domestic manufacturing in his analysis, and that the biggest winners would be securities who would see a net reduction of 12.3 percent, insurance, credit intermediation and retail trade and bank holdings, so reducing the rate overall, but eliminating these deductions would primarily go to finance and retail, while overall, it would mean a net in aggregate increase for manufacturing, and in particular, computers and electronics would see the largest increase in their taxes under that proposal. So I do think that there is ‑‑ it seems to be that there are some concerns.
Chairman Camp. Thank you, Mr. Blumenauer is recognized.
Mr. Blumenauer. Thank you, Mr. Chairman. I would hope, just a question to Mr. Beck and Mr. Spinks at some point, not now, but if I could just get a one‑page explanation about the reinvestment in the business. You were talking about the uptick in the tax rate would be a disincentive for you to invest in the business, and my understanding is that in many instances, the reinvestment is a deductible expense.
And so if you could just explain on one page at some point, we don’t have time to go into it now, and I am probably not smart enough to understand it, if you could explain to me whether or not these are deductible expenses and how that works for your enterprise.
I am sorry, my friend, Mr. Davis, is not here because he talked about the negative consequences of employment when the Clinton tax increases were put in effect.
Because if memory serves, the 8 years of the Clinton administration, there was something like 22 million jobs created, versus less than a tenth of that during the 8 years of the Bush administration with two rounds of tax reductions. But I appreciate the range of discussions that are here, because I think there is no question, but what as a result of hearings we have had, and conversations we all have, that the tax system is broken. And the focus on manufacturing is important because as I look at the manufacturers that I represent, they are some who manufacture in the United States. They are some of the few people who actually pay that statutory rate.
As you know, that top statutory rate is not what most businesses pay. The average is much less than that. But it is manufacturing in the United States that gets hammered. And so your helping us focus on that, and think about how we protect that and move forward, I think is very, very important.
I appreciate what my colleague, Mr. Thompson, talked about in terms of how we go forward and how we are balanced. Because despite all of the rhetoric, we are collecting less in tax as a percentage of our Gross National Product, than any time since Truman was President. So tax collections are down in the aggregate. We have a growing and aging population. Something has got to give. We want to help manufacturing. We have a system that is not particularly rational, but it seems to me we need to be able to look at the big picture.
I was intrigued the reference to Germany. Germany has a total corporate hit of somewhere in the neighborhood of 49 percent when you look at all of the business costs in. When you look at the amount of money that governments collect from business, the United States is 27.3 of total revenue that come from business.
The average of the OECD is 36.2 percent. So these collect more from business and they have almost without exception, much higher personal income tax rates. So if we are going to undertake a change and pay our bills and not much less deal with what has been referenced this infrastructure deficit, we have got to figure out how to get about this.
One of the differences is all of these countries we are competing with have a value‑added tax along with the territorial system. So they make up the gap by having a substantial revenue flow. And again, there isn’t time, and I don’t want to trap anybody, but I would hope that if any of you have some thoughts about how a value‑added tax would fit into long‑term, we would welcome that.
If you have got super policy people, or you just have some random thoughts, I spend a lot of time on airplanes going back and forth every week to Oregon. So in addition to reading your testimony, I would really love if you have some thoughts about how a value‑added tax might fit into this. Thank you, Mr. Chairman.
Chairman Camp. Thank you. Mr. Reed is recognized.
Mr. Reed. Thank you, Mr. Chairman. Ms. Ford, if we could spend a little time together here. I wanted to explore a little bit more in detail your comments that you offered on the transition rules, because one thing that I have come to the conclusion, and I am glad to be at this conclusion, is that it is not a question of if we are going to do comprehensive tax reform; it is a question of when. So in order to prepare for that, I would like to have a little bit more of your comments and detail on the issues dealing with transition and transition rules and what are the pros and cons that you could offer us? What issue will be you focusing on?
Ms. Ford. Certainly, I think there are pros and cons to the general concept that in order to go to a territorial system, we have treat the cumulative foreign earnings that are have existed to date in a certain way. I think the current proposal that Chairman Camp has put forward is that all of the earnings that have accumulated abroad would be taxed immediately prior to the transition, and that they would be taxed at a reduced rate.
I think, obviously, the pros there are for companies trying to compete is that the reduction in rate helps reduce the overall liability. I think the concerns are that all of the cumulative earnings are not necessarily in the form of cash, and so to some extent there is a disparity between the actual money we could bring home under that, and the amount that we would be taxed on.
So I think that is a major concern. And then some of the things that can help address that concern are the permission to use carryover losses and foreign tax credits that have accrued over time to reduce that cash liability, and I think allowing it to be paid over time is helpful. And maybe some indication or agreement to limit the amount that is subject to tax to the extent that there is a very huge disparity between the cash available, and the actual earnings.
Mr. Reed. So as a small business owner, that was always something that was so important to me, is that cash is king.
Ms. Ford. Cash.
Mr. Reed. And if those bills are due, you have to have the resources to pay for it. So I appreciate that. And then on option C, you mentioned it as part of the base erosion protection issues. Can you also gets a little bit more in detail what the pros and cons of pursuing that option would be?
Ms. Ford. I think one of the common themes that applies to any tax reform is that the devil is always in the details. I don’t think there is anyone on the panel that will disagree with me there. I think the biggest concern with respect to option C is how broad that base becomes. The reduction in the tax rate on income from intangibles is of course very helpful. It is competitive compared to some ‑‑ compared to some of what our competitors enjoy, but I think the biggest concern is, is how will that base be defined? To the extent that there is foreign source income or foreign source intangible income in foreign locations, the challenge is how much of that would be brought into and be subject to this tax. I think that is the greatest concern.
Mr. Reed. I appreciate that. And Mr. Gjersdal, do you have any comments on option C, again, in particular, the pros and cons of what is being proposed and can you over some insight from 3M’s perspective?
Mr. Gjersdal. Well, 3M historically has had 100 percent of its IP here in the U.S. The only IP that is actually offshore is the IP that we might have acquired in acquisition, and it is simply too expensive to move back here.
So any type of option that would go after some of the abuses that do exist with IP offshore, you know, I think would be welcomed; welcomed by me. At the same time, I think we do need a kind of a carrot‑and‑stick approach, and that is that the carrot approach is why would we not do more to encourage research and development here in the U.S., and IP ownership here in the U.S. We spend a $1.6 billion each year on R&D. Our R&D credit is $20 million. Obviously, that is not going to change a whole lot of minds in terms of where we investment.
But if we did something like the patent box which is becoming quite common in Europe as a carrot, you might see a fundamental change in the way IP is developed and owned by U.S. companies.
Mr. Reed. And why is that so important to keep that IP here in America?
Mr. Gjersdal. Well, I mean certainly, the patent protection, and I am not a patent lawyer so I can’t address it in detail, but certainly the patent protection, having the IP here. The fact that where the IP is also going to encourage where it is developed. For 3M, our fundamental innovation is in the U.S., is in St. Paul. Thirty‑two percent of our products that we are selling this year have been developed in the last 5 years. We want to keep that innovation here in the U.S. We do have labs offshore. That is a necessity of our business also, but we want to keep the base innovation here.
Mr. Reed. And with that base innovation, I would assume the jobs that are associated with it, like in Corning, my hometown of Corning, those are typically your research scientists, your engineers, and others; is that correct?
Mr. Gjersdal. Correct, and then obviously, a successful company adds to the headquarters staff. Fifty percent of our manufacturing is here. And to be perfectly honest, if you look at some of the really innovative stuff that we have, for instance, we have revolutionized the abrasive industry over the last 5 years. That technology is not going anywhere. We are going to keep it here. We are going to make it here. That is simply not technology we are going to readily put offshore. Other technologies, however, that are older and less IP protected, certainly, manufacturing ends up offshore, because we are a short cycle supplier. Our customers are demanding that we be close to them, very much like the Corning example.
Mr. Reed. And I appreciate that. I know my time has expired and with that IP being here, I always keep the hope out that manufacturing would then blossom next to the IP center here in America. With that, Mr. Chairman, I yield back.
Chairman Camp. Thank you, Mr. Kind is recognized.
Mr. Kind. Thank you, Mr. Chairman. I, too, want to thank our panelists for your testimony here today. It is helpful and we have been hearing countless hearings throughout the year on what comprehensive tax reform should entail. So getting this feedback, I think, is very beneficial. But unless or until, and I have made this point in previous hearings, unless we start putting something in draft, putting something on paper, we are all dealing in a 30,000‑foot theoretical level, because we all know that at the end of the day, and the chairman knows this and every member of the committee knows this, once you put something on paper, you are immediately going to be creating winners and losers, no matter what we do. It is just going to make reform very, very difficult.
And that is why we are going to be asking you to do some pretty hard calculations, and those of who you are representatives of the manufacturing sector of this country, of what you are willing to live with, and what you are willing to give up for the sake of a shared goal of trying to lower rates, broaden the base, and simplify, simplify, and simplify.
Now, we are getting contradictory messages from some of you witnesses here today, where you are telling is, not all of you, and Mr. Gjersdal, we had a nice conversation about this, and 3M is ‑‑ you were clear with me yesterday, and you were clear in your testimony today that you are willing to give up a lot of the expenditures that you currently take for the sake of a lower rate and I appreciate that. But you can’t have both, and we are hearing from some of you that you like lower rates, but you would also like to keep R&D. You like to keep depreciation. You like to keep 199.
And that is the concern that I have. Because the goal of trying to get to 25 percent, the Congressional Budget Office already told us that in order to try to get there, we have to take away every tax expenditure that exists on the C side. And even then, the best we can do is get to 28. So if the goal is really to get to 25, then somehow you are going to have supplant that lost revenue and dip into the pass‑through side. So Mr. Hardt, Mr. Beck, that is when your ears perk up, as they should in a hurry. Because I don’t think you are going to be willing to pay more as a pass‑through entity for the sake of C corps getting a lower 25 percent rate if we are going to do this in a deficit‑neutral fashion.
And yet, most of the expenditures that are talked about being eliminated are the ones that directly benefit manufacturing. And Dr. Boushey, I want to ask your opinion in a second of what the impact would be on the manufacturing sector of our economy if we do take away R&D, if we do take away depreciation, we do take away 199 for the sake of lowering the rates and broadening the base, because I happen to believe that a country as great as ours, we have to have the ability to make things, and to produce things, and to invent things, and create things, and grow things, but we are no longer going to be a super power in this world.
And therefore, I think there would be more interest on this committee of what type of changes we have to make in the Tax Code that would benefit companies such as yours that make things, and invent things, and create things here in the United States of America.
That is why earlier this year I introduced legislation called the Promoting American Manufacturing Act, which calls for reducing the manufacturing rate from 35 to 20, for those that make things, for those manufacturers of our country. And we are not going to be able to do that for every industry, for every sector of our economy. But what is being pitted right now against each other are basically your manufacturers and your technology sector, versus everyone else, from the retailers, the wholesalers, financial corporations, the service sectors, who are paying a high rate right now, but they are not getting these deductions. They would love to have a lower rate. But in order to get there you are going to be taking away a lot of the expenditures that directly benefit manufacturers in the process.
And we need help in trying to figure this out, and you guys are going to have to make those hard calculations of what you are willing to live with for the sake of lower rates, what you are willing to give up. But maybe Dr. Boushey, I ask you first, and then Mr. Hardt, I want to go back to you to get your perspective on this, too. But what do you think will be the impact on domestic manufacturing if we take those expenditures off that directly benefit manufacturing in the high‑tech sector today just for the sake of lowering rates for everyone?
Ms. Boushey. Well, from where I sit looking at the big picture as an economist, it seems like that would be bad for U.S. manufacturing, and we already have an industry that certainly has been in trouble, that has been ‑‑ we have seen a decline in many ways in manufacturing employment, and as a shared GDP, and I think it should be a national goal to make sure that manufacturing remains a vital part of our economy and grow it.
And so these kinds of tax expenditures that seem very important to manufacturing should not be done at the expense of lowering of the rate, when a lowering of the rate, at least according to all of the analysis, if you did that in a revenue‑neutral way, would disproportionately benefit other industries like finance, and insurance, and retail, which while are, of course, certainly important, don’t have the pivotal place that manufacturing plays, both in terms of job creation, but also as a key sector for innovation.
Mr. Kind. Dr. Boushey, not to sound too crass in my analysis and listen, I don’t hold myself out as an expert, but if you take a look at the manufacturing and tech sector, these jobs are highly mobile. You guys can go anywhere around the globe, where it makes sense for you to do it. But you look at the other sectors, retailers, wholesalers, financial, the service sectors, they are less mobile. I mean, where are they going to go? They have to stay here in the United States, provide jobs here, because this is where the customer base is.
Chairman Camp. Your time is expired, so if you could just be brief.
Ms. Boushey. Okay, not only are they less mobile, but they don’t create the same kind of innovation effects that are so critical for us remaining the sort of the economic powerhouse that we have been.
Chairman Camp. Thank you. And I would just say, Mr. Kind, the tax expenditure report that you mentioned is incomplete. It does not include all of the tax expenditures and it is not necessary to get rid of every tax expenditure in order to get to 25.
So Mr. Brady is recognized for 5 minutes.
Mr. Brady. Mr. Chairman, thank you for hosting this hearing. We are hearing from iconic American companies, and to top it off, we have a company headquartered in Texas. So it doesn’t get any better than this panel.
Clearly, if America wants to have the strongest economy in the world for the next 100 years, we have to get our Tax Code right. Today, despite what you see on the campaign trail, there aren’t incentives in the Tax Code to send jobs overseas. The Tax Code itself is the problem, making it harder to locate jobs, especially manufacturing jobs here in merge.
The Ways and Means Committee led by Chairman Camp last fall laid out a draft proposal to make us competitive again, both lowering the rate, moving to a territorial system to make sure that we are not out of sync with the rest of America, allowing companies both to compete overseas and to bring those profits back to invest in America.
The President has, in a less specific way, outlined two general approaches. He, too, wants to lower the rate which I commend. But he keeps in place, or at least the White House keeps in place the territorial system, the outdated system we have today. In fact, even removes some of the provisions that would create double taxation risks for companies. Looking at those two approaches, the draft that has been laid out by this committee, and from the White House, I want to start with our business witnesses.
From a competitive standpoint, both competing around the world in the competition you face here in America, do you have a preference on which concept, which direction allows you to compete best going forward?
Ms. Dossin. My written testimony, and I think my oral today, said Ford does not have a particular position. We think a variety of different approaches could work.
Mr. Brady. So may I ask, so a territorial, you would be ‑‑ you have no problem leaving the territorial system in place, the worldwide system in place?
Ms. Dossin. Well, I mean, we have been working with that for some years. To us, the low U.S. tax rate is the single‑most powerful thing, and because of our profile, because of where we historically have operated near our customers, our profile does not suggest to us a leaning strongly one way or the other. But if it is territorial, anti‑based erosion provisions are really important.
Mr. Brady. Okay.
Mr. Gjersdal. We clearly support the chairman’s proposal, at least the outline of the chairman’s proposal. As far as the lower rate is concerned with the base broadening, we create a more even playing field here in the United States, and make the U.S. more competitive internationally. Territoriality is really a separate issue. It will enable us to compete with our foreign competitors, so both are really important. One does not go without the other. But clearly, the chairman’s proposal would be our preference.
Mr. Brady. Thank you.
Ms. Ford. I think our preference would also be to shift more towards a territorial system, because so many of our competitors and customers are located internationally and those companies have territorial systems that leaves it as an unfair advantage. We do spend some time when we look at expenses in the U.S., funding our R&D, funding our corporate headquarters. We do spend a lot of time analyzing, is it actually cheaper to borrow in the U.S. to fund those activities instead of bring money home that we already own. So I think it is a significant issue for companies like Corning and territorial would be more competitive.
Mr. Brady. Great, thank you. Mr. Hardt?
Mr. Hardt. Well, the territorial doesn’t really impact us, being a domestic manufacturer. One point to Mr. Kind, there is an exhibit in my testimony on a tax template, how the tax changes would specifically impact pass‑through manufacturers, so that is in my testimony for the review.
Again, I have to state that the ability in the Tax Code and we are a capital‑intensive business, and that is what we have to remember here. We are a capital‑intensive business, so we need profits to reinvest in our businesses; we need profits to leave in our businesses in order to borrow money. So an overall effective tax rate will clearly allow us to do that. However, I continue to encourage the fact that since we are a capital investment business, if there is anything that can be retained to assist with those incentives, it is for the best of all us.
Mr. Brady. And can I make a point there? I think this is a healthy discussion, one we have wanted to have for a long time. The reason we have held almost 20 hearings on this issue, having a discussion about the lowest rate possible, or pro‑growth Tax Code, the cost of capital and the impact, this is all part of getting to, I think, the best Tax Code we can create for our companies. So thanks for that.
Mr. Hardt. Well, working with manufacturing capital investment isn’t just about us. I mean, I have 120 suppliers to me. We have service businesses in our community that respond to our capital ‑‑
Mr. Brady. Got it. Can I hear real quick from Mr. Beck and Mr. Spinks?
Chairman Camp. Real quick, because your time is expired.
Mr. Beck. Being territorial doesn’t affect us either, but going back to accelerated depreciation, when you talked about that, I have been in this business and running it for 35 years. I bought machinery where we didn’t have accelerated depreciation, and I have bought machinery where we have had it. When you have it, it is certainly may be an incentive intended to make a decision that you may not make ordinarily because you have that advantage. It certainly can help when the economy isn’t good.
Mr. Brady. Good.
Mr. Beck. But I have lived under both.
Mr. Brady. Thanks, Mr. Beck, I have run out of time. Mr. Spinks.
Chairman Camp. Mr. Neal is recognized.
Mr. Brady. Thank you.
Mr. Neal. Thank you, Mr. Chairman. I appreciate Mr. Brady’s emphasis on the lowest possible corporate tax rate. Mr. Gjersdal, would you comment on the idea, if you had the option of a 27 percent rate, or giving up R&D, which one would it be?
Mr. Gjersdal. For the R&D credit versus 27 percent?
Mr. Neal. Yeah.
Mr. Gjersdal. 27 percent.
Mr. Neal. 27 percent. We would be assured that you would never have anybody come back for looking for the R&D afterwards?
Mr. Gjersdal. Well, I mean, right now, it is such a small number that it really doesn’t affect our decision‑making process right now.
Mr. Neal. It is a big issue in Massachusetts, to be very frank, as you might expect.
Mr. Gjersdal. And obviously, every corporation is in a different position.
Mr. Neal. And we have had these conversations back and forth. I appreciate the testimony. It is really very, very helpful. The problem is, that at this stage of the question and answer period, every question either has been asked or exhausted. So what is the ‑‑ after the issue of taxation, what for manufacturers is the next big issue? Any member of the panel.
Mr. Gjersdal. Well, if I could, I have noticed today that there is violent agreement to do something, and that is really encouraging. The problem is, is what we do has to recognize that we are now in a global economy, and a global economy ‑‑ and a globe that is becoming smaller and smaller every day. We can’t look at the past as to how we might do manufacturing. We have to look at the future as to how we might do manufacturing and where can the U.S. succeed. Everyone wants the U.S. to succeed. There is no doubt about that. But you have to go overseas and see what is going on in other places to see how much we have to learn how to compete in this economy.
Mr. Neal. And the other panelists, what other considerations would you have just besides the issue of taxes?
Mr. Hardt. Definitely a skilled workforce is very important to us. It takes skilled and talented employees to innovate.
Mr. Neal. Are we falling down on that front?
Mr. Hardt. To be very honest, we usually have to take young apprentices and send them to community colleges for basic skills in mathematics and everything else just to get them into our apprenticeship programs. We are falling down a little bit on the basics.
Mr. Neal. Okay, the other panelists?
Mr. Spinks. To be honest, I think as an internationally headquartered company, we still see the United States as probably the premier place in the world to do business. But when we compare the tax rates that we see in other industrialized countries to the United States, there is a serious disadvantage here.
Mr. Neal. Okay, Ms. Boushey?
Ms. Boushey. I would like to direct your attention, there was an article yesterday in The Wall Street Journal that talks about a number of firms that are insourcing, in‑shoring back to the United States, and they cite a number of examples for why they are doing it. Some of it has to do with patent protection, some of it has to do with education, and a skilled workforce, but there is a long list of things that is not just about taxes that is very ‑‑ I will get this to you.
Mr. Neal. I saw the article and you gave me the run‑up. Any of the panelists, are you considering bringing jobs back right now for those of who you have international interests?
Ms. Ford. I think as a general rule, our view is if we grow internationally, we grow domestically as well. And I think since the recession, I believe we added about 1,500 jobs in China, because many of our businesses sell to Chinese markets and we added 2,000 in the U.S. So but I don’t think it is a zero sum game. I think we continue to add in both.
Mr. Neal. Fair enough, Mr. Hardt.
Mr. Hardt. We have added jobs back, and again, exports are a big part of our business, 22 percent overseas. So you know, international and globalization is part of what we have to deal with every day.
Mr. Neal. Okay, Mr. Gjersdal?
Mr. Gjersdal. Well, as a short‑cycle material supplier, if our customers come back to the U.S., we will be coming back to the U.S.
Mr. Neal. Any immediate plans to?
Mr. Gjersdal. We are not seeing that great of an increase in U.S. manufacturing at this point in terms of our customers, but as I say, when they do come back, I mean, we will be right next to them.
Mr. Neal. Great. Ms. Dossin?
Ms. Dossin. We locate where our customers are. So I will just channel Alan Mulally and say profitable growth for all is what we want for all parts of the world. So U.S. included.
Mr. Neal. Okay, just a last comment, Mr. Chairman. One of the frequent concerns that I hear from the manufactures where I live, it really is the issue of skills. I hear it all of the time. And the fact that they are subsidizing additional education, remedial education, and then on to the community college, which is a very important part of the economic discussion in America. But it is a frequent topic of discussion now. And again, particularly with the high‑end manufacturers.
Chairman Camp. I couldn’t agree more. I mean, it is an issue and obviously, that is something that the workforce committee and Chairman Kline are trying to address. And this committee’s general focus is tax policies and tax issues, but understanding there are a variety of issues that affect our ability of our businesses to compete, and grow, and create jobs. But at this time, I recognize Mr. Schock.
Mr. Schock. Thank you, Mr. Chairman. I am specifically interested in the several small business owners that are represented on the panel here today. Are you guys aware of the President’s comment this past week about business owners? And if so, I am just curious your perspective.
Mr. Beck. Yes, I am. And it is interesting. I talked to a number of small business owners, and they weren’t, needless to say, very happy. They said, “I am sure glad you are going to speak to the House Ways and Means Committee because you won’t use any uncivil swear words in front of them, but we would because of the feelings that the small business people have back in our communities about those types of words,” about what President Obama had said. And I said to myself, you know, these people are really upset.
Mr. Schock. Anyone else wish to comment? I am just curious because I will tell you, as an entrepreneur before I came to Congress, maybe I was foolish to think that it was my hard work that helped me be successful, and the businesses that I had worked in that I thought I was building, but I know some of you are a little bit older than I am and perhaps been in business longer than I was. And I thought maybe I would like to get your perspective, because I found them very spellbinding when I read them first, and then saw them, that as we talk about jobs, we talk about a President with a record of unemployment for the longest period of consistency in my lifetime, and we are all throwing up our hands here in Washington, D.C. wondering why people won’t hire.
And the Commander‑in‑Chief, the leader of the free world, says things like, if you built a business, if you have a successful business, you didn’t build it. Somebody else did. Somebody else made that happen.
Mr. Beck. Every one of us wants to see our business grow. Every one of us wants to be profitable. Every one of us when we are profitable, we pay taxes. When we pay taxes, we pay for the infrastructure. We are part of the infrastructure of this country.
Mr. Schock. I just thought that you had a perspective on who made you guys successful if it wasn’t, in fact, you and your ‑‑
Mr. Beck. I think my colleague over here already said it. We, along with our team, and those people that work with us each day, made our company successful. We never asked for a penny from anybody. And we have paid our fair share in taxes.
When I went from 110 people down to 25, I couldn’t ask for a government bailout. There were no loans that were going to keep my doors open. We had to figure it out ourselves. And our people took great sacrifice in salaries and worked really hard to help pull the company back out of the hole. We are now seeing some real strength in our company as we have come back from it. But to ‑‑ but we would never have received any help from any place. We would have just gone away. We are only 110 people. We would have just gone away.
Mr. Schock. Well, as one elected official, I want to say thank you, because I believe you guys are the ones who create jobs. And I believe that you are successful as businesses because of your work ethic, your ability to take risk, your willingness to put in the time, talent, and energy necessary to be able to do so. So know that there are some of us on Capitol Hill who recognize why small businesses and entrepreneurs are successful.
With that, I want to ask some specifics on tax reform as it relates to manufacturers. I am curious if anybody up here represented small or large, currently utilizes LIFO in their accounting practices. Ms. Dossin, could you maybe please speak to this, because I know we have had scores of businesses small and large come to my office, and we have had testimony here from big companies, small companies, and most of them say what you have said, which is get rid of the credits, get rid of the deductions.
I know Caterpillar, which is in my hometown said, look, we will give up R&D even though we use it. Get us down to 25 percent, and we will give it all up. LIFO seems to be one that, because of its retroactivity in terms of the tax collection, it is not moving forward, that has the potential to really put some businesses out of business.
And I am just curious to what degree it would affect you if LIFO was repealed moving forward, but also the retroactivity in terms of the liability it would mean for you? Have you guys looked at that?
Ms. Dossin. We have, but you will notice it was not part of my testimony because it wouldn’t have been effective for me to come here and say I want to lower rate and A, B, C, D, E, F, G, right? So I didn’t list it as one. It will be painful to lose it, but I think the degree of pain is not what you hear from some others.
Mr. Schock. Would you agree that it is important for us to try and, when eliminating deductions, accounting practices, whatever you want to call them, that we do it moving proactively, and that we limit what is retroactive? In other words, I would assume if we tried to get back all of the depreciation retroactively that the bonus depreciation has awarded over the last couple of years, there might be some screaming and gnashing of teeth if we tried to do that. LIFO seems to me to be a similar mechanism where going forward is one discussion, proactive, but retroactivity seems a lot more harmful.
Ms. Dossin. Well, once ‑‑
Chairman Camp. Your time is expired, so if you could just answer as fast as you can.
Ms. Dossin. I will just say, once you have the bones of an idea of a tax package, transition rules are going to be really important, and you won’t want to cause harm in the transition.
Mr. Schock. Thank you.
Chairman Camp. Thank you. Mr. Pascrell.
Mr. Pascrell. Yes, Mr. Chairman, we are now 19 months into this Congress. We have yet to see comprehensive jobs agenda, let alone a comprehensive manufacturing plan.
We have already established, I think, reestablished today that while we complain about regulations and taxes, they apparently were not the cause of what happened beginning in 2006 to the manufacturing sector going back 20 years. What concerns me is that from January of 2000 to January 2010, we lost ‑‑ the United States of America lost 5.5 million manufacturing jobs. In my home State of New Jersey, we lost 11 percent of our manufacturing base.
A recent study by Alan Blinder and Alan Krueger, who is the chairman of the President’s Council of Economic Advisors has shown 1/4 of American jobs ‑‑ this is what really concerns me ‑‑ are potentially offshoreable, with 80 percent or over 600,000 of these jobs in manufacturing.
That is almost 150,000 manufacturing jobs in New Jersey, 300,000 in Michigan, over half a million in Texas, and 365,000 in Ohio. The light of our economic recovery is powered by domestic production. You are right. Over the past 2 years, the manufacturing sector has added 400,000 jobs. Who would have thought 2 years ago that this would be the lead factor in getting the economy started and starting to get the economy back on its feet.
The first period of sustained growth since the 1990s, we need to enact policies to keep up the momentum, and that is why the gentleman and ladies are here today. The recently released nonpartisan Congressional Budget Office report entitled “Fiscal Policy Options for Increasing Economic Growth and Employment in 2012 and 2013” has made it clear that what we can be doing is reducing cost of adding employees and investing.
Those are two things that are available to us if we have the urge to do that. Yet, we have great legislation to do just that; we have been unable to move it, including bipartisan legislation with 100 percent expensing for capital expenditures.
To me, that is a no‑brainer. I think it is a no‑brainer to all of you. Today the Senate will block action on legislation that I have introduced, the Bring Jobs Home Act aimed and lowering the cost for companies looking to in‑source jobs back to America.
Ms. Boushey, I even had to battle some of my own party about my belief that manufacturing provides a substantial economic impact. Can you elaborate on how it helps drive our economy in your eyes?
Ms. Boushey. Well, it drives it in a number of ways. I mean, looking immediately at the short‑term certainly manufacturing as a sector has one of the biggest multipliers of other industries, so when you create a job in manufacturing, you create many more other jobs in other sectors than you do if you create a retail or a service‑sector job. So certainly, in the short‑term, the fact that the recovery has been led by gains in manufacturing has certainly been something that has been optimistic, that certainly we could gain on.
But second, I think that one of the key ways that manufacturing is vital for our economy, is because it is ‑‑ manufacturing is where innovation happens. And so if we want to be the kind of economy that creates the next great inventions, we need to be the kind of economy that supports the kinds of sectors in our economy that employee engineers, that employee the innovators of the future, and manufacturing certainly does that.
So it has both the big multiplier effect, it has the innovation effect. And I would just add that it is also critically important for our macro economy.
Mr. Pascrell. So we made a big mistake in listening to corporate America 30 years ago, in moving towards a service economy while we have lost millions and millions of manufacturing jobs, and really reviving the old Jefferson‑Hamilton debate that we did not have to have a multifaceted economy. And Jefferson, the great hero of America, told us, let’s keep on our path, and agriculture will see to the conclusion. Hamilton was correct.
Can you compare how the 20 percent tax credit for insourcing in the Bring Jobs Home Act would help employment in the United States as opposed to proposals to exempt overseas profits from U.S. taxes?
Ms. Boushey. That is a long question.
Chairman Camp. And if you could respond in writing because time is expired, the committee would appreciate that.
Mr. Pascrell. Can she give a short answer, Mr. Chairman?
Chairman Camp. If you can give a few‑second answer.
Mr. Pascrell. Thank you.
Ms. Boushey. Certainly, I think would it be better to encourage firms to relocate to the United States than to stop taxing their ventures overseas. But I will ‑‑
Chairman Camp. You can elaborate in writing to the committee. Thank you, Mr. Berg is recognized.
Mr. Berg. Thank you, Mr. Chairman. I really appreciate you being here. I am from North Dakota, and North Dakota a long time, our manufacturing has been a core passion of mine. You know, I come out here and our challenge as a country is, quite frankly, we need more revenue. And manufacturing, we always used to use the term “primary sector.”
Manufacturing creates new wealth in America. And I mean, that is a core fundamental of our economy, and it has worked for a long time. I look at a lot of the rhetoric out here and, you know, 95 percent of our consumers live outside the United States.
What we should be doing is not focused on, worried about foreign competition as much as we should say, how can our manufacturers be that competitor in all of these foreign markets? And very clearly, as you have talked today, we have heard about that.
One question, Mr. Hardt, I mean, obviously you don’t have a lot of foreign ‑‑ my understanding is you don’t do much business outside of the United States.
Mr. Hardt. We export to 15 different countries, about 22 percent of our sales.
Mr. Berg. So it is big.
Mr. Hardt. A big part of our business.
Mr. Berg. My question really was, you know, even if there are companies that aren’t exporting out of our country they are still facing that foreign competition from their customers, they are making different choices. Let me just ‑‑ I had a thought the other day, and we heard it today. And the thought is, your profit, you have got a partner that is taking 1/3 of your net profit. That partner is the Federal Government. They are not putting $1 of capital in, but kind of, they are your partner. And what we are here sitting here today, this is like a different board of directors for that silent partner.
I am just frustrated because the Federal Government should be doing everything it can do to help you increase your revenue, increase your profits. And I am sitting here thinking, it can’t be for American manufacturing, at the same time, increase the cost on that manufacturing and increase the uncertainty on that manufacturing. You know, and that is kind of what we have heard over and over again.
My question really gets down to, we are talking about a flatter, fairer tax, and we heard some comments that that is bad for manufacturing. I guess my question here is, if we go with a flat tax, flat or fair tax, 25 and 10 percent like we have talked, got rid of some of the exemptions, not all of the exemptions, there are some key ones we talked about, research, et cetera, but it was a net dollar equal, would your company do better in that environment? Would they make more money, which obviously, the great comment about making $1.4 million and investing $1.3 back in capital.
So I would just like to ask the manufacturers here, if it was a flat tax or a flatter tax from what we have got, would that generate more revenue for your company?
Ms. Dossin. I will give you a quick answer, but I might have to think about that one a little bit, because I suspect what it would do is allow business decisions to be made on the basis of business factors more than tax factors. And we hope that is good everywhere we operate. So I think it is directionally correct.
Mr. Gjersdal. Devil is in the details, but rough math would tell me we would do a lot better.
Ms. Ford. Similarly, we would also do better because our competitors are more international and their tax costs are much lower.
Mr. Hardt. A stable longer‑term system would help us with better business decisions.
Mr. Beck. And it would be the same for us. You normally make a decision based upon the business first, and then the tax second.
Mr. Spinks. I completely agree that a more competitive rate versus the other countries in the world would achieve, go a long way towards the real goal which is to increase investment in the United States.
Mr. Berg. Again, Ms. Boushey, you mentioned that report that said the exact opposite, and we are hearing from manufacturers, and I couldn’t agree with you more. So anyway, this along with some stability in your regulatory environment, I think would help American manufacturers be more competitive, and would bring more manufacturing jobs in America. So thank you for being here today.
Chairman Camp. Well, thank you. Mr. Crowley is recognized.
Mr. Crowley. I thank the chairman. I am going to go right to questioning. Ms. Dossin, would you agree that the U.S. manufacturing industry, and more specifically, the U.S. auto industry, is in far better shape than it was on January 19, 2009?
Ms. Dossin. I guess so, yes.
Mr. Crowley. You would agree with that. I would agree as well. I think that the deal that was worked out by Ford’s CEO, Alan Mulally, as well as with President Obama, and working with Democrats here in the House on a rescue package for the U.S. auto industry, and it worked, and literally saved millions of jobs, and created new jobs in our economy.
Would you, Ms. Dossin ‑‑ Ford received a Federal loan guarantee from the Department of Energy through the advanced technology vehicles manufacturing loan program in the amount of $5.9 billion. The goal of the loan was to provide capital to the U.S. auto industry for the purpose of funding projects that help vehicles that are manufactured in the United States. Did this program benefit Ford and saved jobs here in the United States?
Ms. Dossin. In my testimony, I talked about all of the things Ford did to restructure itself. And that included, you know, completely overhauling a great deal of the business, and once we did that and reached a point of financial viability, we were in a position to go look for funding to accelerate the plan. And when we do that we will go to the lowest cost source of funding. And we did go to the government for those ‑‑
Mr. Crowley. So you would agree that that particular loan program ‑‑
Ms. Dossin. ‑‑ for the loans, and it did support jobs in many facilities. Probably ‑‑
Mr. Crowley. Ms. Dossin, my time is very limited, so that specific loan program was beneficial to your company, was it not?
Ms. Dossin. It was.
Mr. Crowley. Okay, so you would agree that these loan programs are generally beneficial to job creation, would you not?
Ms. Dossin. They were a good low‑cost source of borrowing at the time.
Mr. Crowley. Thank you. Mr. Beck, if President Obama did not create a rescue package for the U.S. auto industry, a package championed and crafted with the support of Ford CEO Alan Mulally, where would your business be today?
Mr. Beck. Well, I think Ford would have probably survived.
Mr. Crowley. Where would your business be today?
Mr. Beck. Very good.
Mr. Crowley. You would be good if GE ‑‑ I am sorry, if Chrysler and GM had gone under?
Mr. Beck. Right now, most of my work is with Ford.
Mr. Crowley. So you think that overall ‑‑ do you think that Ford would have survived had the others gone down?
Mr. Beck. I think Ford would have survived.
Mr. Crowley. I think many economists would disagree, including Mr. Mulally ‑‑
Mr. Beck. I just gave you my opinion.
Mr. Crowley. And I am going to ‑‑ it is my time, so I am going to take it back, and I am going to say that many economists would disagree with your position, and would suggest that the entire industry would have collapsed and therefore, your business, had we taken the Romney approach of let Detroit go bankrupt, I think your business would have gone the way of the Studebaker.
Finally, I just want to follow up on what my colleagues Mr. Johnson and Mr. Schock were talking about before in terms of interpreting what President Obama’s comments on how no one is an island, and America is a society. And so that behind every successful small business is another hand to help them get there.
I would like to think that I didn’t get to Congress on my own; that the fact that my parents saw to it that I had the right kind of education, helped along the way, that people helped get me elected, helped me get here as well. So people are ridiculing him because they are parsing the words, distorting his words, but I think the President was right.
Mr. Hardt, do you think that we as a Nation, that we owe a debt of gratitude to our veterans? Do you think that you would be where you are today without the work and sacrifice of our veterans and the men and women who died to protect the interests of this country?
Mr. Hardt. That is clearly an important part of our society.
Mr. Crowley. You would agree, would you not? An important part of our society, people dying to maintain our way of life is an important part of society?
Mr. Hardt. Correct.
Mr. Crowley. That is the level of enthusiasm you give to that?
Mr. Hardt. I am not here to have political labels.
Mr. Crowley. Again, I am surprised by the lack of fervency there.
Do you think that we owe a debt to those individuals? Do you think that your company could have survived had America not survived, had those soldiers failed in their attempt to maintain our way of life, our capitalist way of life?
Mr. Hardt. No way we could have survived.
Mr. Crowley. I am glad that you agree that your business would not have survived had those sacrifices not been made.
Chairman Camp. Mr. Crowley, I have to say that this line of questioning is really not on topic.
Mr. Crowley. Mr. Chairman, it is on topic.
Chairman Camp. You have a few seconds. Why don’t you conclude.
Mr. Crowley. With all due respect, Mr. Schock raised this point and I am clarifying the point Mr. Schock raised.
Chairman Camp. Complete your questioning.
Mr. Crowley. I will. Thank you, Mr. Chairman. None of us would be here, none of us without the patriotism and dedication, and sacrifices of our veterans. So I urge all of my colleagues to stop questioning the patriotism and dedication of our military, our veterans, and stop playing politics with the President’s remarks.
Chairman Camp. The gentleman’s time has expired.
Mr. Crowley. No man or woman is an island.
Chairman Camp. The gentleman’s time has expired. Ms. Black is recognized.
Mr. Crowley. Thank you, Mr. Chairman.
Mr. Pascrell. You can hit the gavel all you want.
Mrs. Black. Thank you, Mr. Chairman, and I want to thank the panel for being here today. It is a very good conversation on topic about our tax reform and the necessity for that, and I want to thank you all of you, both the large companies and also the smaller companies. Having been a business owner who started a business, I can say that I know those challenges that we have. But I want to turn our attention to one area that has not really been explored fully, is to look at why foreign companies invest in the United States.
And we know that nearly 40 percent of all of those foreign direct investments by global companies into the United States are connected to manufacturing, which statistics show, directly translate into about 2 million jobs, which is pretty important.
Mr. Spinks, probably this question is best for you. How does the United States tax system affect those choices that are made by those foreign‑based manufacturers when they evaluate whether to invest in the United States or to go to another country?
Mr. Spinks. Thanks. As I said in my testimony, we do look. We are in many, many countries around the world. We evaluate our projects on an after‑tax cash basis. And when we look at the other industrialized nations, particularly in the OECD, what we are seeing now is a U.S. tax rate that is the highest in the world. So what it means is that the mathematics of getting to an after‑tax return on investment, it is very, very difficult when you have got corporate rate differences of 7 to 10 percentage points.
In the particular case of Air Liquide over the last 5 years, even with the global recession, we basically doubled down on the U.S. economy. We have doubled our investment in the United States in the last 5 years. We would like to continue to do that. And we think that a system that is more predictable, more simple, and with a more competitive tax rate will allow us as well as a lot of other global companies to do exactly that.
Mrs. Black. Thank you. I want to now just talk about the fact that we need to have all of this. We need to have the global investment into our country, the smaller businesses, and then also the larger corporate businesses that do worldwide work as well.
And Ms. Ford, I want to turn to you, because you noted that the major of the Corning’s employees are located right here in the United States, but 80 percent of those sales are to customers located abroad and that Corning also has extensive foreign operations.
How do you, or how, excuse me, how do your worldwide operations affect your U.S. operations in employment, such as areas of R&D, and headquarter jobs?
Ms. Ford. Thank you for the question. Because we conduct probably 99 percent of our research and development here in the United States, and we are a technology manufacturer, we send our engineers all over the world to our plants where we are located close to our customers, and there is a very strong exchange there. So when ‑‑ at the location they need a certain development piece and they need something done, much of that comes back to the U.S., and we add R&D jobs to support it.
And certainly our corporate headquarters is here in the U.S., as well as our IP is maintained here in the U.S., and so we have our fill of lawyers and accountants, and corporate folks, and they are also all located in the U.S. So, you know, I have stated previously that it is not, you know, it is not a zero sum game. It is not U.S. jobs versus foreign jobs. As our foreign markets grow and we are able to continue to compete there, we add U.S. jobs as well.
Mrs. Black. I think the importance here is to say that it takes all of this to make a vibrant economy. It is not one. It is not just the small businesses. It is not just the large businesses. It is not the investments that come from foreign entities, but it is the combination of, and I really appreciate you all being here today and sharing what it is from your individual perspective that would be good for moving the United States forward in our taxing area to be able to continue to have and grow a more vibrant economy. So I thank you all so much, because I think this dialogue is so good as we move forward.
I think the time, and several of you mentioned this, that you believe that the time is here. I believe the time is here. Obviously, the chairman believes the time is here, and I want to commend him for putting a draft out of the territorial so that you all will have the input, and it is with us all working together as partners that are going to bring us to the conclusion of doing good tax reform that will continue to move this country forward to be the strongest economic country in the world.
So thank you so much, and thank you, Mr. Chairman, for this very interesting hearing.
Chairman Camp. Well, thank you. And this concludes our hearing. I want to thank all of our witnesses for taking time away from your usual responsibilities to come here and give us the benefit of your expertise.
And let me just say that we have been trying to conduct over the last 20 hearings an open process where we actually hear from those who are in industries, and in this case, manufacturing, academics, experts, economists, so that we can make the best decision as we try to move the issue forward of fundamental and comprehensive tax reform, because the fact is, our economy is not recovering as quickly as we would like it to be.
We still have unemployment that is far too high, and I believe that if we can move the issue of comprehensive tax reform, we will see a pro‑growth tax policy that is adopted by this country that helps us do better here in the United States, and also that we can help those companies who are U.S.‑based doing business around the world.
As you have all so articulately stated, we are in a global economy and we need to make sure that we compete in that way. So I just want to, again, thank you for being here on a very long day, giving the opportunity for members to get the benefit of your experience and advice. And with that, this hearing is now adjourned.
[Whereupon, at 12:40 p.m., the committee was adjourned.]
Public Submissions For The Record
American Chemistry Council
Hanes Brands Inc
R and D Credit Coalition
Stephen Entin IRET 1
Stephen Entin IRET 2
Stephen Entin IRET 3
US Chamber of Commerce
US Steel Corporation