Responses to Questions for the Record submitted to Robert McDonald for the Committee on Ways and Means hearing on Fundamental Tax Reform, held January 20, 2011
Questions from Rep. Diane Black
1. Evasion at the Individual Tax Payer Level: What are the statistics regarding tax evasion at the individual level?
A: We do not have data independent of that compiled by the IRS on this matter. I believe the Taxpayer Advocate, Nina Olson, who testified on this panel is best able to provide you the appropriate information or refer you to the office within IRS who has studied the data.
2. Corporate Tax: We know the high U.S. corporate tax rate is not the only factor that U.S. companies consider when deciding where to locate future investments and that companies also consider such things as the workforce, ease of access to raw materials, quality of the infrastructure, stability of the legal and political environment, the location of customers and the cost of shipping finished goods to them, etc. Can you help explain how companies weigh these factors and how large — or small — a factor the U.S. statutory tax rate is?
A: All of these factors are important and the relative importance of each factor will differ from product to product based on the attributes of the product. For many products, transportation costs can be a significant component of the total cost of manufacturing, so production needs to be located near the customer and consumer. More generally, each of these factors has to be included in an investment model in order to determine whether acompany can deliver the final product to the consumer at a competitive price. For some investments, U.S. taxes — at about 39 percent of net income — can represent a sizable share of the return on investment and will weigh heavily in the investment decision.
One clear example of how taxes can affect the investment decision is when a foreign company is considering investing in North America. The company will soon be able to invest in Canada with a tax rate of about 25 percent or it can invest in the United States with a 39 percent tax rate. In many cases, this tax difference will outweigh other factors and drive the investment decision to Canada.
The high U.S. rate affects other decisions that can also be counterproductive to the United States. The high U.S. rate in conjunction with our worldwide system of taxation also discourages repatriating foreign earnings to the United States because of the U.S. tax imposed on these remittances