**Statement of Pamela Olson**

**to the**

**Tax Reform Advisory Panel**

**May 17^th^**

Mr. Chairman, Mr. Vice Chairman, distinguished members of the advisory
panel, thank you for taking on the challenge of finding a better tax
system. The country needs one. I want to echo Mark Weinberger\'s urging
you to be bold. In the words of a western expression: \"Aim for the
stars, you may hit the trees. Aim for the trees, you may shoot yourself
in the foot.\"

I was asked to address international tax issues this morning, an area
that received considerable attention during my tenure at Treasury.

Perhaps more than any other area of the tax code, the U.S. international
tax regime appears -- at least to the uninitiated -- to have been
designed by a modern day Ptolemy. As the years have passed, we have
augmented the system with epicycles, but left its fundamental premises
largely intact. Those fundamental premises date to a time when the
global economy and the U.S. role in it were very different than they are
today. Fifty years ago, the U.S. was economically dominant, accounting
for over half of all foreign investment in the world. The U.S. was a net
exporter and headquarters for the largest companies in the world. Today,
the U.S. is far less dominant, but much more dependent on foreign
markets to sell our goods and services. In 2002, trade in goods and
services represented more than 25% of GDP, nearly quadruple the trade in
goods of four decades earlier.

The 21^st^ century competition for capital is global and multi‑leveled ‑
many foreign governments have gotten into the act in an effort to
increase domestic investments and create opportunities for their
citizenry. As a result, U.S. workers and U.S. companies face a whole new
wave of competitive challenges and opportunities because global markets
make the rewards of invention and innovation greater. If we hope to meet
the challenges and seize the opportunities, it is critical that we get
our international tax rules right.

Our international tax rules are premised on the sovereign right of the
country in which income is earned to tax that income. The general rule,
with exceptions, is that the U.S. does not tax the foreign income until
the funds are repatriated and then allows a tax credit for the taxes
paid, but again there are exceptions. This is referred to as
\"deferral\" because the tax is deferred until the foreign income is
brought home. The effect of the U.S. tax on income at the time of
repatriation is effectively an additional hurdle to investment of
foreign profits in the U.S. relative to investments abroad -- what a
former tax director of a multinational company referred to as the \"35%
tax credit to keep my profits offshore.\"

The late Treasury Secretary William Simon once observed, \"The United
States should have a tax system which looks like someone designed it on
purpose.\" Nobody, I believe, would purposely create a hurdle to U.S.
companies reinvesting profits in the U.S. The system may not adversely
affect companies whose investment opportunities are growing foreign
operations, but for those with opportunities in the U.S. and abroad, the
system can distort investment decisions with its high hurdle to domestic
reinvestment. It is worth noting that this tax investment hurdle is not
faced by foreign competitors investing in the U.S., which may give them
a competitive edge.

There are few fans of the current system; nevertheless, there is
considerable disagreement over whether or how to change it. As you have
heard, there are advocates of a territorial system, used by many of our
major trade partners, which would not tax active foreign business
operations at all. A territorial system would end the current bias to
domestic reinvestment and could simplify the tax system. There are
advocates of repealing deferral, which would also end the domestic
reinvestment disincentive. Unless accompanied by a significant reduction
in U.S. tax rates, however, I believe such a change would significantly
disadvantage U.S. companies competing in the global marketplace whenever
foreign tax rates are considerably lower than those in the U.S. No
country has such a system today. As a consequence, none of their
competitors would be currently subject to higher rates, which would
leave U.S. companies alone with a higher tax cost on current operations.

There is evidence -- in particular, inversions and the increase in
foreign investor acquisitions of U. S. companies relative to U.S.
acquisitions of foreign companies -- that our international tax rules
systematically encourage a move abroad. Moreover, it has become common
for the well-advised start-up to incorporate its operations offshore and
the well-advised established company to avoid entanglements that might
subject their foreign operations to the reach of the U.S. tax laws.

I want to turn back to the exceptions to deferral for a minute in the
event that the proposals the Advisory Panel advances in the
international area are modifications of the current system. When enacted
the exceptions to deferral were essentially anti-avoidance rules,
intended to capture passive and so-called mobile income. The exceptions
have grown while the make up of the economy has changed, but the
exceptions generally have not been tailored in a positive manner to
reflect changes in the economy. The result is that many U.S.-based
companies are taxed currently on foreign source income. The only escape
from current taxation is inefficient business structures that may defer
the tax. This is particularly the case for the service sector, including
the financial services industry, which has a temporary measure providing
relief of current U.S. taxation.

These provisions distort business and investment decisions. Attempting
to plan around them is a waste of valuable resources. We would do well
to move to a system that eliminates these distortions and leave
businesses competing solely on the basis of the best product or service,
not the best tax planning.

Thank you.