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70–882 2011

THE NEED FOR COMPREHENSIVE TAX 

REFORM TO HELP AMERICAN COMPANIES 

COMPETE IN THE GLOBAL MARKET AND 

CREATE JOBS FOR AMERICAN WORKERS 

HEARING 

BEFORE THE

COMMITTEE ON WAYS AND MEANS 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED TWELFTH CONGRESS 

FIRST SESSION 

MAY 12, 2011

Serial No. 112–11 

Printed for the use of the Committee on Ways and Means 

( 


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COMMITTEE ON WAYS AND MEANS 

DAVE CAMP, Michigan, Chairman 

WALLY HERGER, California 

SAM JOHNSON, Texas 

KEVIN BRADY, Texas 

PAUL RYAN, Wisconsin 

DEVIN NUNES, California 

PATRICK J. TIBERI, Ohio 

GEOFF DAVIS, Kentucky 

DAVID G. REICHERT, Washington 

CHARLES W. BOUSTANY, JR., Louisiana 

PETER J. ROSKAM, Illinois 

JIM GERLACH, Pennsylvania 

TOM PRICE, Georgia 

VERN BUCHANAN, Florida 

ADRIAN SMITH, Nebraska 

AARON SCHOCK, Illinois 

LYNN JENKINS, Kansas 

ERIK PAULSEN, Minnesota 

KENNY MARCHANT, Texas 

RICK BERG, North Dakota 

DIANE BLACK, Tennessee 

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 

JON TRAUB, Staff Director 

JANICE MAYS, Minority Staff Director 


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C O N T E N T S 

Page 

Advisory of May 12, 2011, announcing the hearing ............................................. 2 

WITNESSES 

Greg Hayes, Senior Vice President and Chief Financial Officer, United Technologies Corporation ............................................................................................ 7 

Edward J. Rapp, Group President & Chief Financial Officer, Caterpillar Inc. .. 16 

James T. Crines, Executive Vice President, Finance, and Chief Financial 

Officer, Zimmer Holdings, Inc. ............................................................................ 24 

Mark A. Buthman, Senior Vice President and Chief Financial Officer, Kimberly-Clark Corporation ....................................................................................... 31 

James R. Hines, Jr., L. Hart Wright Collegiate Professor of Law, University 

of Michigan Law School ....................................................................................... 84 

Dirk J.J. Suringa, Partner, Covington & Burling LLP ........................................ 102 

Jane Gravelle, Senior Specialist in Economic Policy, Congressional Research 

Service ................................................................................................................... 106 

SUBMISSIONS FOR THE RECORD 

Roger Conklin, Retired International Sales and Marketing Executive, Statement ...................................................................................................................... 138 

Brian Garst, Director of Government Affairs, Center for Freedom and Prosperity, Statement ................................................................................................. 142 

Chairman David Camp and Congressman Sander M. Levin, Joint Statement . 146 

U.S. Chamber of Commerce, Statement ................................................................ 152 

Matthew Lykken, Director, SharedEconomicGrowth.org, Statement ................. 158 

MATERIAL SUBMITTED FOR THE RECORD 

Questions for the Record: 

Hon. Bill Pascrell, Jr. and Hon. Jim McDermott .............................................. 162 


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THE NEED FOR COMPREHENSIVE TAX 

REFORM TO HELP AMERICAN COMPANIES 

COMPETE IN THE GLOBAL MARKET AND 

CREATE JOBS FOR AMERICAN WORKERS 

THURSDAY, MAY 12, 2011 

U.S. HOUSE OF REPRESENTATIVES, 

COMMITTEE ON WAYS AND MEANS, 

Washington, DC. 

The Committee met, pursuant to notice, at 9:02 a.m., in Room 

1100, Longworth House Office Building, the Honorable Dave Camp 

[chairman of the committee] presiding. 

[The advisory of the hearing follows:] 


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HEARING ADVISORY 

FROM THE COMMITTEE ON WAYS AND MEANS 

Chairman Camp Announces Hearing on the Need 

for Comprehensive Tax Reform to Help American Companies Compete in the Global Market 

and Create Jobs for American Workers 

Thursday, May 05, 2011 

Congressman Dave Camp (R–MI), Chairman of the Committee on Ways and 

Means, today announced that the Committee will hold a hearing on the burdens 

that the Tax Code imposes on American companies and how such burdens place 

them at a competitive disadvantage as they try to sell goods and services around 

the world. The hearing will explore the potential economic and job creation benefits 

of comprehensive tax reform. The hearing will take place on Thursday, May 

12, 2011, in Room 1100 of the Longworth House Office Building, beginning 

at 9:00 A.M. 

In view of the limited time available to hear witnesses, oral testimony at this 

hearing will be from invited witnesses only. However, any individual or organization 

not scheduled for an oral appearance may submit a written statement for consideration by the Committee and for inclusion in the printed record of the hearing. A 

list of invited witnesses will follow. 

BACKGROUND: 

It has been almost 50 years since the last time Congress fundamentally reformed 

the tax rules governing international business and cross-border transactions. During 

that time, the nature of the global economy and the position of the United States 

within it have changed dramatically. There is a growing concern among employers, 

practitioners, economists, and academics that international tax laws that made 

sense when the United States accounted for 50 percent of the world’s gross domestic 

product (GDP) might no longer make sense in today’s increasingly competitive and 

global economy. According to recent testimony from the Chairman of the Business 

Roundtable’s Fiscal Policy Initiative, the U.S. corporate tax system results in American companies being less globally competitive, less investment in the United States, 

fewer jobs for American workers and less economic growth. 

In announcing this hearing, Chairman Camp said, ‘‘It’s been 25 years since we 

reformed the Tax Code, and almost 50 years since we undertook a bottomup review of our international tax laws. During that time, our foreign competitors have lowered their corporate tax rates and updated their international tax regimes to reflect the realties of the global economy. As we 

pursue tax reform, we need to consider how to make American companies 

more competitive and how to make the United States a more attractive 

place to invest and create jobs.’’ 

FOCUS OF THE HEARING: 

The hearing will examine how the current structure of the international tax rules 

might distort economic decisions and the allocation of resources in ways that reduce 

employment for American workers and hamper the efforts of American employers 

to compete with foreign companies in global markets. In the context of comprehensive tax reform that substantially lowers marginal rates on individuals and corporations, the hearing will investigate which reforms to the international tax rules 

might improve the ability of American companies to compete and create jobs. 


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DETAILS FOR SUBMISSION OF WRITTEN COMMENTS: 

Please Note: Any person(s) and/or organization(s) wishing to submit written comments for the hearing record must follow the appropriate link on the hearing page 

of the Committee website and complete the informational forms. From the Committee homepage, http://waysandmeans.house.gov, select ‘‘Hearings.’’ Select the hearing for which you would like to submit, and click on the link entitled, ‘‘Click here 

to provide a submission for the record.’’ Once you have followed the online instructions, submit all requested information. ATTACH your submission as a Word document, in compliance with the formatting requirements listed below, by the close 

of business on Thursday, May 26, 2011. Finally, please note that due to the 

change in House mail policy, the U.S. Capitol Police will refuse sealed-package deliveries to all House Office Buildings. For questions, or if you encounter technical 

problems, please call (202) 225–3625 or (202) 225–2610. 

FORMATTING REQUIREMENTS: 

The Committee relies on electronic submissions for printing the official hearing record. As always, submissions will be included in the record according to the discretion of the Committee. 

The Committee will not alter the content of your submission, but we reserve the right to format 

it according to our guidelines. Any submission provided to the Committee by a witness, any supplementary materials submitted for the printed record, and any written comments in response 

to a request for written comments must conform to the guidelines listed below. Any submission 

or supplementary item not in compliance with these guidelines will not be printed, but will be 

maintained in the Committee files for review and use by the Committee. 

1. All submissions and supplementary materials must be provided in Word format and MUST 

NOT exceed a total of 10 pages, including attachments. Witnesses and submitters are advised 

that the Committee relies on electronic submissions for printing the official hearing record. 

2. Copies of whole documents submitted as exhibit material will not be accepted for printing. 

Instead, exhibit material should be referenced and quoted or paraphrased. All exhibit material 

not meeting these specifications will be maintained in the Committee files for review and use 

by the Committee. 

3. All submissions must include a list of all clients, persons and/or organizations on whose 

behalf the witness appears. A supplemental sheet must accompany each submission listing the 

name, company, address, telephone, and fax numbers of each witness. 

The Committee seeks to make its facilities accessible to persons with disabilities. 

If you are in need of special accommodations, please call 202–225–1721 or 202–226– 

3411 TTD/TTY in advance of the event (four business days notice is requested). 

Questions with regard to special accommodation needs in general (including availability of Committee materials in alternative formats) may be directed to the Committee as noted above. 

Note: All Committee advisories and news releases are available on the World 

Wide Web at http://waysandmeans.house.gov/

f 

. 

Chairman CAMP. Good morning, and thank you for joining us 

today for the latest in a series of hearings the Ways and Means 

Committee has convened to discuss comprehensive tax reform. 

Today we will examine the impact of the Tax Code on American 

companies that operate in the global economy, both here and 

abroad. In a future hearing I expect we will examine the opposite 

side of the international tax coin, namely the way the U.S. treats 

inbound investments by companies headquartered abroad. 

But today, through the testimony of both our CFO panel and our 

panel of academics and practitioners, we hope to gain insight into 

how the current structure of the international tax rules affects the 

ability of U.S.-based businesses operating in a global environment 

to invest, grow, and create jobs. 


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It has been 25 years since we reformed the Tax Code, and almost 

50 years since we undertook a bottom-up review of our international tax laws. In those five decades, the global marketplace has 

changed dramatically. So, too, has America’s role in that marketplace. 

To illustrate the intersection between America’s tax environment 

and the global landscape, consider this single data point. In 1960, 

the largest worldwide companies were nearly all American companies. U.S.-headquartered companies comprised 17 of the world’s 

largest 20 companies. That is 85 percent. By 1985, there were only 

13, and by 2010 just 6, or a mere 30 percent U.S.-headquartered 

companies ranked among the top 20. And there are many reasons 

for this trend, and certainly some of that has to do with the emergence of other strong economies around the world. But without a 

doubt, a common complaint that we hear from American companies 

trying to compete abroad is that our Tax Code, with its complexity 

and its high corporate rates, acts as a hindrance. 

The Tax Code’s antiquated features have diminished the 

attractiveness of the U.S. as the premier country in which to locate 

a business. So, while the promise of the American Dream, having 

the ability to succeed and prosper might attract individuals to this 

country, too many employers and investors are finding that our 

Tax Code stands as a barrier to America being an attractive platform from which to grow abroad in ways that create jobs at home. 

In our current economic environment in which our recovery remains in such a fragile state, our Tax Code ought to be helping create jobs. America’s combined federal tax corporate rate at 39.2 percent is only outpaced by Japan’s rate of 39.5 percent, and Japan 

has already indicated its intent to lower its rate. Such action will 

leave America with the highest corporate tax rate in the world, 50 

percent higher than the 26 percent average for OECD countries. 

As if that were not enough, the U.S. is one of the last major 

economies to operate a worldwide system for active business income, which many believe is a further barrier to the growth of 

American companies. Capital will find its way to the most profitable opportunities around the world. But when U.S. companies 

must pay an additional U.S. tax on top of the tax they pay in the 

foreign market, then that capital is more likely to be invested 

through foreign companies who do not face this additional tax. As 

a consequence, American workers lose out on the jobs that would 

have been created to support those opportunities. 

Simply put, the international tax laws that were in place when 

the United States accounted for 50 percent of the world’s gross domestic product may have made sense 50 years ago. But today, 

those same laws are causing America to lag further and further behind. Ensuring long-term prosperity in the face of increasing global 

competition requires Congress to re-examine the Tax Code. As we 

pursue comprehensive tax reform, this committee intends to develop solutions that empower American companies to become more 

competitive, and make the U.S. a more attractive place to invest 

and create the jobs this country needs. 

Again, thanks to all of our witnesses for being here today. I will 

now yield to the ranking member, Mr. Levin, for his opening statement. 


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Mr. LEVIN. Thank you, Mr. Chairman. 

Welcome. We are glad you are here, and thanks for coming. 

It is important for us to consider corporate tax reform. It is also 

important for us to dig beneath the surface of the many issues it 

presents. International tax issues are inherently complicated. That 

is an understatement. 

Some years ago, my colleague, Amo Houghton, and I sat down 

with the staff of the Joint Committee on Taxation, and essentially 

had a seminar on international corporate taxation for several days. 

We introduced a bill with a number of provisions designed to better 

reflect the realities of international competition, and a number of 

them became law. It was clear that some of the larger issues, like 

deferral and worldwide versus territorial systems, required further 

consideration and work, because there was no consensus about the 

effect of potential changes. 

Unfortunately, in the next years, those issues remained dormant. 

In the meantime, the pace of globalization has only increased, 

heightening the need to restart the effort. I have said before that 

tax reform needs to start with an agreement regarding basic principles. When it comes to corporate tax reform, a key principle 

should be that reform must encourage job creation here in the 

United States. 

Over the last 14 months, the economy has created more than 2 

million private sector jobs. And economic recovery is slowly taking 

hold, in part because of the efforts of this Administration, and the 

then-Democratic majority. 

But we still have a long way to go before we make up the nearly 

nine million jobs destroyed by the financial crisis and recession. So 

we must be extremely sensitive to the effect tax reform has on jobs. 

I would be concerned about any change to our tax laws that would 

create new incentives to move corporate profits and American jobs 

offshore. 

My staff and I have spoken to many large, multinational corporations that are advocating a transition from our present worldwide 

tax system to a territorial system. We will hear from some of these 

corporations today. 

It is important, I think, to recognize that there is no pure worldwide system or pure territorial system. The details matter a great 

deal, and there are many versions of territorial tax systems. 

We also need to recognize that our current system does include 

incentives for job creation that we should be sensitive to as we consider reform. The three largest corporate tax expenditures are the 

Section 199 domestic manufacturing deduction, accelerated appreciation, and the R&D tax credit. All of these provisions are designed to encourage job creation here at home. 

Finally, we must remember that there are many other factors 

that determine where a company does business in a global economy. Taxation is certainly an important factor, but it is just one 

factor companies use when deciding where to locate production, 

R&D, and even their headquarters. Workforce matters. Infrastructure matters. Rule of law matters. 

So, I especially look forward to hearing our witnesses’ testimony 

today. And, again, a warm welcome. 


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Chairman CAMP. Well, thank you, Mr. Levin. Today we will 

hear from two distinguished panels of witnesses. Our first panel is 

comprised of four chief financial officers from major U.S. companies 

United Technologies, Caterpillar, Zimmer, and Kimberly-Clark that 

operate around the world, and that, all together, provide nearly 

150,000 jobs for hard-working Americans here at home. Each of 

these companies is headquartered or has a major presence in districts represented by Members of the Committee, and I will ask 

those members to formally introduce their constituents when it is 

their turn to testify. 

Later we will hear from a panel of well-respected experts on our 

international tax rules, including an academic, a practitioner, and 

a staff member from the Congressional Research Service. 

But we begin with our CFOs, each of whom has a front-row seat 

in seeing how our international tax rules affect the competitiveness 

of large American employers with substantial operations around 

the globe. 

So, let me turn first to Mr. Larson of Connecticut to introduce 

the chief financial officer of UTC, Mr. Hayes. And then, after Mr. 

Hayes testifies, I will recognize Mr. Schock to introduce Mr. Rapp 

of Caterpillar, and so on. 

So, Mr. Larson, you are recognized. 

Mr. LARSON. Thank you, Chairman Camp, for providing me the 

opportunity to introduce Greg Hayes, the chief financial officer of 

United Technologies, a company located in Hartford, Connecticut, 

and in my hometown, the home of Pratt & Whitney Aircraft that 

flies the most dependable engines created anywhere, and built anywhere in the world. 

[Laughter.] 

Mr. LARSON. Greg joined the United Technologies team more 

than 11 years ago, when Hamilton Standard moved with 

Sundstrand Corporation to form what we now know as Hamilton 

Sundstrand. Over the years, he has risen through the ranks, and 

now has global responsibility for UTC’s finances, and directs communications and interactions with UTC’s board of directors and its 

investors. 

I am happy that he is able to be here today to provide the committee with UTC’s thoughts on international tax reform. Greg is 

often referred to as UTC’s chief reality officer. We could use one of 

those here, in Congress. And because of this, and his straightforward, tell-it-like-it-is style, I am sure that the testimony here 

today will be no different. 

It is an honor for me to introduce him to the committee, and I 

thank you, Mr. Camp, and look forward to the testimony. 

Chairman CAMP. Well, thank you, Mr. Larson. Mr. Hayes, you 

and all of today’s witnesses will be recognized for five minutes for 

your oral remarks. And each of your full written statements will 

be made part of the official record. 

So, Mr. Hayes, you may proceed. Thank you, and welcome. 


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STATEMENT OF GREGORY J. HAYES, SENIOR VICE PRESIDENT 

AND CHIEF FINANCIAL OFFICER, UNITED TECHNOLOGIES 

CORPORATION, HARTFORD, CONNECTICUT 

Mr. HAYES. Thank you, Congressman Larson, for that very kind 

introduction, and I will certainly try and keep reality front and 

center this morning in my comments. And also, thank you, Chairman Camp, Ranking Member Levin, and Members of the Committee on Ways and Means. It is a privilege to be here to testify 

on the need for a pro-growth tax reform agenda. 

I am here as the chief financial officer of an established American manufacturing firm that does business around the world. Most 

people know United Technologies by our business units and our 

products: Otis elevators; Carrier air conditioners, Pratt & Whitney 

jet engines; Sikorsky Blackhawk helicopters, Hamilton Sundstrand 

aerospace systems, and UTC fire and security products. 

United Technologies has employees in all 50 states. We have facilities, however, in 71 countries around the world, and we do business in 180 countries around the world. About 40 percent of our 

$57 billion of sales are earned right here in the United States, and 

the remaining 60 percent are outside, in other countries. Our split 

of employees roughly tracks sales, about 75,000 employees here, in 

the United States. 

But we also do most of our research and development right here in the U.S. About 70 percent, in fact, of the $3.7 billion of annual 

R&D investment occurs right here. And we are a net exporter. Approximately $7 billion of our products and services are exported on 

an annual basis. 

I was asked to testify to shed light on some of the problems 

American-based companies face with the current tax system. My 

written testimony details several of these, but in my five minutes 

I would like to highlight one problem: in particular, the tax impediment U.S. companies face when we try and grow through acquisitions. 

I was recently asked on an analyst call about a rumor that UTC 

would acquire a company that was headquartered in Switzerland. 

And the answer to that analyst question was obvious. It wasn’t a 

great answer, but it was a true answer. Because of the high U.S. 

corporate tax rates, and the U.S. worldwide approach to taxing foreign income, UTC is at a serious disadvantage in trying to buy any 

foreign company. This is especially true as we compete against 

other bidders who are not domiciled here in the U.S. 

Switzerland’s income tax rates are 18 points lower than the 

United States. Switzerland also has a territorial system, unlike our 

worldwide system. Because of these tax disadvantages, it is much 

more likely that a foreign buyer would win the opportunity and 

they, not the American firm, would reap the benefits of a consolidation. That is a problem. 

At UTC we like to focus on solutions. And from the perspective 

of a chief financial officer, there are three general areas of advice 

from business decision-making that may be useful in making decisions on how to improve the Tax Code for American worldwide 

firms. 

First of all, remember economic fundamentals. Secondly, we need 

to benchmark against our competition—that is, other countries 


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around the world. And, lastly, we need to take a measured approach to tax reform. 

First, on economic fundamentals, it is the way business decisions 

are made. In my world, business decisions must rest on economic 

fundamentals. We cannot ignore economics if we are going to plan 

for the long term. The defects in our current system are not conducive to job creation. It follows that fixing these problems will make 

American companies more competitive. 

The second recommendation is benchmarking. When our businesses are trying to solve a problem, or improve a process, we 

benchmark against other companies for best-in-class results. Then 

we try to emulate them with adjustments for our own facts, cultures, values, and circumstances. The same thing should be done 

in developing and adopting a territorial tax system, and tax rates 

that are in line with international norms, but still responsive to 

American policy concerns. 

Finally, I would urge the Congress to take a measured or balanced approach. UTC is aligned with the broader business community when we say we don’t want tax reform to break the back of 

the U.S. Treasury. We are committed to tax reform that is fiscally 

responsible, and we oppose tax evasion. But please don’t punish 

American companies for serving global customers or succeeding in 

global markets. 

The tax laws should not single out certain industries for better 

or worse treatment. The Tax Code needs to be agnostic, and not 

pick winners and losers. 

In conclusion, we look forward to working with policy makers to 

continue to be a resource on the way forward that allows old and 

new companies with American headquarters to succeed today and 

into the future. Thank you. 

[The prepared statement of Mr. Hayes follows:] 


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f 

Chairman CAMP. Thank you, Mr. Hayes. I will now yield to Mr. 

Schock of Illinois to introduce Mr. Rapp of Caterpillar. 

Mr. SCHOCK. Thank you, Chairman Camp, and thank you for 

hosting this very important hearing. It is my honor to introduce to 

the committee Mr. Ed Rapp, the chief financial officer of Caterpillar, Incorporated, located in my hometown of Peoria, Illinois. 

Mr. Rapp joined Caterpillar in 1979, and has held a variety of 

positions related to pricing, production scheduling, marketing, dealer development, manufacturing, and product development. Additionally, he worked for Cat Around the World, in such places like 


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Johannesburg, South Africa and Geneva, Switzerland, where he 

was the Europe region manager. 

In 2000, Ed became an officer of Caterpillar, as the vice president of the Europe, Africa, Middle East marketing division, and he 

became a Caterpillar group president in 2007. Mr. Rapp has a 

bachelor’s in finance from the University of Missouri, Columbia, 

and is a graduate of the University of Illinois executive development program. 

Ed, it is great to have you in Washington. On behalf of the committee, welcome. We look forward to your testimony. 

Chairman CAMP. Thank you, Mr. Schock. 

Mr. Rapp, you are recognized for five minutes. 

STATEMENT OF EDWARD J. RAPP, GROUP PRESIDENT & 

CHIEF FINANCIAL OFFICER, CATERPILLAR, INC., PEORIA, ILLINOIS 

Mr. RAPP. Thank you. Chairman Camp, Ranking Member Levin, 

and Members of the Committee, it is really a pleasure to be here, 

and have the opportunity to talk about tax reform. 

Just as background on Caterpillar, in 2010 our sales and revenues were about $42.6 billion, and we expect that number to exceed $50 billion in 2010. Foreign markets account for about 70 percent of our revenues, and are the fastest growing. Our success 

stems from our ability to compete globally from a significant U.S. 

production base. In 2010 our exports exceeded $13 billion, which 

was roughly equal to our total U.S. sales. And half of the $3 billion 

that we are spending this year in capacity expansion will be invested in the United States. 

We directly employ about 47,000 employees, after adding 7,000 

over the last 12 months. Our dealer network employs another 

34,000. And in 2010 we invested $4 billion with about 4,900 small 

and medium-sized businesses, making them a key part of our exports and our global supply chain. 

Before I explain more, let me just say up front I didn’t come here 

asking for a free lunch. What we are asking for is a level playing 

field as we compete with foreign competitors. 

We believe a key to our nation’s competitiveness is the success 

of American companies with worldwide operations. Numerous studies indicate that U.S.-based companies with worldwide operations 

are critical to the health and growth and potential of the U.S. economy. We also believe that Americans cannot enjoy a high standard 

of living without manufacturing being a pillar of the U.S. economy. 

To continue to win in worldwide markets we need a level playing 

field. Unfortunately, the U.S. Tax Code too often tilts the field 

against us. Other OECD nations that have dropped their tax rates 

an average of 19 points since the 1986 reform. 

What does it mean for Caterpillar? Let me just give you a couple 

of examples. In China, the corporate tax rate is 25 percent. If Caterpillar earns $1,000 there, we pay $250 in taxes. And if we bring 

the money back to the U.S. we pay another $100 in taxes. A UK 

competitor selling in China would pay the $250 in taxes, and the 

balance, that $100, they can use to price discount for market share 

or invest in R&D. 


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But perhaps the biggest challenge we have is just the lack of consistency over time. We have had to deal with 14 extensions to the 

R&D tax credit over the past 30 years. We commit to financing contracts over periods of four to five years, but can’t predict our tax 

cost over that time, due to the continually expiring active financing 

exception. And while our global competitors freely move capital between countries, we have to deal with incredible complexity and 

the potential of added tax costs. 

You know, my intent here is to be constructive. And I would like 

to provide an outline of what we think are some of the key opportunities. 

You know, in our business, when we have to assess our competitiveness versus a key competitor, we take a simple approach. We 

buy their machine, we run it through its paces, and we tear it 

down. We gain a complete understanding of how it compares to our 

equipment, and what we have to do to maintain our competitive 

edge. 

Mr. Chairman, I would encourage you to do a foreign Tax Code 

tear-down. There are valuable lessons to be learned that would be 

instructive as you look to make improvements to the U.S. system. 

As we look around the world, we see common characteristics that 

we believe ought to be part of any tax reform. First, lower the corporate tax rate, which encourages businesses both at home and 

abroad to invest in the U.S. Second is implementation of a territorial tax system like the rest of the industrialized nations. Third, 

provide the incentives for the development and retention of intellectual property. And, lastly, give serious thought to the types of 

jobs you want. 

You know, other countries have given this serious consideration, 

and built their tax structures around the desire to maintain manufacturing as a base, versus moving strictly to services-based economies. 

Mr. Chairman we are really betting on you and your colleagues 

to get this right. Although we have opportunities around the world, 

we are heavily invested in the United States through bricks and 

mortar, through R&D, and more importantly, through our American workforce. We believe that we can compete and win in the 

global markets against any competitor, foreign or domestic. We just 

need the level playing field that only you can provide. 

Thank you for the opportunity to present my views, and I look 

forward to the discussions and questions from Members of the 

Committee. 

[The prepared statement of Mr. Rapp follows:] 


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Chairman CAMP. Well, thank you very much, Mr. Rapp. I will 

now yield to Mr. Paulsen of Minnesota to introduce Mr. Crines of 

Zimmer. 

Mr. PAULSEN. Thank you, Chairman Camp. I appreciate the 

opportunity also to introduce one of our witnesses, Jim Crines, who 

is the CFO of Zimmer, a medical technology company whose spine 

division is actually headquartered in Minnesota, in my district. 

Over the years, Zimmer has gone through much change, from 

being spun off from Bristol-Myers Squibb to acquiring a large foreign competitor. And since 2001, Zimmer grew U.S.-based jobs by 

80 percent. And I believe we do need a Tax Code that is going to 

allow companies like Zimmer to continue to grow and be internationally competitive. 

Mr. Crines has been with the company since 1997. I look forward 

to his testimony, his ideas, his thoughts, and advice. And I thank 

him for being here today, Mr. Chairman. 

Chairman CAMP. Thank you very much. You are recognized for 

five minutes, Mr. Crines. 

STATEMENT OF JAMES T. CRINES, EXECUTIVE VICE PRESIDENT, FINANCE, AND CHIEF FINANCIAL OFFICER, ZIMMER 

HOLDINGS, INC., WARSAW, INDIANA 

Mr. CRINES. Congressman Paulsen, thank you for the introduction and your support for the medical device industry. Mr. Chairman, Ranking Member Levin, and distinguished members of the 

Ways and Means Committee, I appreciate the opportunity to 

present the views of Zimmer Holdings, Inc. on the need for reform 

of our nation’s corporate tax laws. 

Zimmer is a global leader in the design, development, manufacturing, and marketing of orthopedic reconstructive devices, spinal 

and trauma devices, dental implants, and related surgical products. 

Zimmer is a member of the medical device competitiveness coalition, which consists of seven U.S.-based medical device manufacturers that have been working together the last 18 months on the very 

topic of this hearing: comprehensive tax reform to help American 

companies compete in the global market, so that U.S. multinational 

firms are no longer placed at a competitive disadvantage to their 

foreign counterparts. And the U.S. will be a more attractive location for investment. 

While the United States is currently the world leader in medical 

device innovation and manufacturing, the U.S.-based medical device industry faces both immediate and longer-term challenges 

from foreign competitors. Many foreign countries offer significant 

incentives to attract research and development, as well as manufacturing. Additionally, most of our foreign competitors are 

headquartered in countries with both lower tax rates and territorial tax systems. 

Growing overseas has a positive impact on the U.S. economy and 

U.S. jobs. For example, as Zimmer expanded overseas from 2001 to 

2010, we increased U.S.-based employment by 80 percent. These 

laws should be designed to support the global growth and competitiveness of American companies, and encourage those companies to 

reinvest their foreign profits in the United States without additional taxation. 


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We believe the following principles should guide any reform: the 

U.S. tax system should transition to a territorial tax system; reform should focus on simplicity; tax reform should retain incentives 

that encourage research and development, as well as manufacturing in the U.S. 

To accomplish these goals, we recommend the adoption of tax 

laws, again, that move the U.S. system towards a territorial tax regime consistent with the approach utilized by the overwhelming 

majority of our major trading partners. Under a territorial tax system, U.S. companies like Zimmer will have the ability to access our 

foreign resources for investment here, in our home country. This 

would eliminate the so-called lock-out effect inherent in today’s 

U.S. tax system. 

We realize that the development of a territorial tax system in the 

United States raises numerous design issues. Additionally, it is important that policy makers modernize our current system, while retaining safeguards to prevent erosion of the U.S. tax base. We support a simplified approach that ensures the appropriate level of expenses are allocated to repatriated foreign earnings. Our approach 

would provide for a proxy in place of complex expensive allocation 

rules. Most countries with territorial tax regimes have adopted this 

approach, which imposes a tax on a small portion of repatriated 

foreign earnings. Such an approach would simplify the U.S. Tax 

Code. 

Another important issue that must be considered in the context 

of moving towards a territorial tax system is the retention of incentives for U.S.-based research and development, as well as manufacturing. A number of countries in Europe have begun to implement 

such incentives, in addition to having lower corporate tax rates 

within their territorial systems. Appropriately designed incentives 

could create a meaningful carrot for U.S. companies to retain highpaying and important research and development jobs in the United 

States. 

On behalf of Zimmer, I would like to thank the Ways and Means 

Committee for the opportunity to provide views on proposals to 

modernize this country’s corporate tax laws by beginning a comprehensive examination of our nation’s corporate tax laws and the 

impact they have on our global competitiveness. Your committee is 

undertaking a difficult, controversial, but fundamentally important 

task. We look forward to working with the committee and other tax 

policy makers as this effort moves forward. 

[The prepared statement of Mr. Crines follows:] 


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Chairman CAMP. Well, thank you very much, Mr. Crines. 

I will now yield to Mr. Marchant of Texas to introduce Mr. 

Buthman of Kimberly-Clark. 

Mr. MARCHANT. Thank you, Mr. Chairman. Mr. Mark 

Buthman is the senior vice president and chief financial officer of 

Kimberly-Clark Corporation in Irving, Texas. Kimberly-Clark has 

its world headquarters in my district in Irving, Texas, and employs 

140 people there. 

I am also very proud to represent Mark as a constituent of South 

Lake, Texas, his hometown. 

And Kimberly-Clark also employs another 930 people in Texas. 


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Mr. Buthman joined Kimberly-Clark in 1982. Throughout his 

tenure he has held a wide range of leadership roles, and is an active participant in the Dallas area CFO roundtable. 

I am very pleased to introduce Mr. Buthman and have KimberlyClark represented regarding these very important issues before the 

committee this morning. 

Thank you, Mr. Chairman, and I yield back. 

Chairman CAMP. Thank you. Mr. Buthman, you are recognized 

for five minutes. 

STATEMENT OF MARK A. BUTHMAN, SENIOR VICE PRESIDENT 

AND CHIEF FINANCIAL OFFICER, KIMBERLY-CLARK CORPORATION, IRVING, TEXAS 

Mr. BUTHMAN. Thank you, Congressman Marchant, for that introduction. Good morning, Chairman Camp, Ranking Member 

Levin, and distinguished Members of the Committee. Thank you 

for this opportunity to share our views on the need for comprehensive U.S. tax reform. 

First I want to start with a brief overview of Kimberly-Clark, 

and then I want to address three key opportunities to improve the 

U.S. tax system to increase the competitiveness of American companies as we compete in the global marketplace. 

For nearly 140 years, Kimberly-Clark has been providing consumers with essentials for a better life. With brands like Kleenex, 

Kotex, Scott, Huggies, and Depend, we estimate that one out of 

every four people in the world use a Kimberly-Clark product every 

day. 

Due to the nature of the products that we sell, which are bulky 

and costly to ship, our manufacturing operations need to be close 

to our consumers. Our products are sold in 150 countries around 

the world, we operate more than 100 facilities, and we employ 

57,000 people worldwide. Over 15,000 of those employees are based 

here in the United States, with production facilities across 20 different states. 

Most of the products we sell in the U.S. are developed and manufactured here. In fact, the majority of our $300 million research 

and development budget is spent in the United States. The U.S. is 

by far our largest market, representing more than half of our sales, 

but the categories in which we compete are relatively mature in 

our country. In addition, Kimberly-Clark has a long-standing presence outside the United States, and given relatively low consumer 

usage of our products in those developing markets, we view this as 

an important growth opportunity. 

Kimberly-Clark has a strong track record of investing in the U.S. 

through research and development, capital investment, and by paying dividends to our shareholders. In addition to supporting jobs at 

Kimberly-Clark, our investment generates jobs and economic activity through our suppliers and in the communities in which we operate. 

To be able to effectively compete in today’s global market, we 

need to expand and grow in the U.S. and abroad and we need a 

tax system that enables us to compete in the global marketplace. 

There are three key ways we believe our tax system could do more 


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to encourage investment, job creation, and economic growth in the 

United States. 

First, we need to have a more competitive tax rate. Second, we 

need to move to a territorial system of taxation. And, third, we 

need to simplify our tax rules. 

American companies have a terrific base of talent, an unrivaled 

track record of innovation, and some of the greatest products and 

brands in the world. Unfortunately, American companies face a 

clear disadvantage as a result of our U.S. tax system. A good first 

step to improving the competitiveness of the U.S. tax system would 

be to reduce the combined federal and state tax rate to a level comparable to the combined rates of the rest of the OECD countries. 

As you know, the current combined U.S. federal and state tax rate 

is more than 50 percent higher than the average of other OECD 

countries. 

The second step would be to adopt a so-called territorial system 

which does not layer U.S. tax on the income earned overseas that 

has already been subject to tax in the country in which it was 

earned. This includes taxing dividends being returned to the U.S. 

and taxing royalties that are paid by foreign affiliates for U.S.- 

based technology and intellectual property. By eliminating this 

extra layer of tax, the disincentive for American companies to reinvest their foreign earnings in the U.S. would be significantly reduced. 

The third way to improve our tax system would be to simplify 

our tax rules. The current international tax system is highly complex. This requires companies to devote significant resources to 

compliance activities rather than product innovation and growth. 

We need a system that reduces the cost of administration, reduces 

the risk of inadvertent error, and is easier to monitor. 

To continue to prosper and be relevant for the next 140 years, 

Kimberly-Clark must grow our business at home and around the 

world. We have to be responsive to the needs and desires of our diverse global consumers, we must continue to innovate and reinvest 

for future growth. To do all this, we need a tax system that is competitive with global norms; which is less complex and easier to administer, a system which gives us the flexibility to manage global 

operations in the most efficient manner, and finally, which 

incentivizes the deployment of capital to the U.S., and which promotes U.S. economic growth and job creation. 

This is an important debate, and I commend you for tackling it. 

Thank you for giving us the opportunity to share our views on tax 

reform, and I look forward to the question and answers session. 

[The prepared statement of Mr. Buthman follows:] 


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Chairman CAMP. Well, thank you. And thank you all very much 

for taking time out of your busy schedules to come and talk to us 

today about international tax issues. 

I have a question I would like each member of the panel to address. We often hear that there are sort of two sides to this debate. 

Some people feel that the global economy is a zero-sum game, and 

that as a U.S. company expands overseas, it must be contracting 

at home. And others argue that when U.S. companies compete 

overseas, it leads to more jobs for American workers who are needed to support the foreign operations, and that leads to more tax 

revenue for the U.S. Government. 


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In your company’s experience, have your foreign operations benefitted your domestic operations, or have they come at the expense 

of your domestic operations? And if we just want to start with Mr. 

Hayes, and each of you take a shot at answering the question, I 

would appreciate it. 

Mr. HAYES. Thank you, Chairman Camp. I would say that, in 

general, the expansion that we have seen overseas has been a significant benefit to the domestic operations. And I say that—as you 

think about United Technologies, about 20 percent of our revenues 

today come from the emerging markets. That has more than doubled in the last 10 years. That growth overseas is allowing us to 

grow domestically, and allowing us to invest in R&D at home. Think about the Otis elevator company. Otis is a $12.5 billion 

worldwide company. The R&D for Otis elevators happens right 

here, in the United States. It happens, in fact, in Bloomington, Indiana, and it happens in Farmington, Connecticut. That R&D, 

then, is shared with our operations around the world, and allows 

us to compete globally. 

Unfortunately, you can’t build an elevator in Hartford, Connecticut, and ship it to Shanghai. You have to be in these local 

markets. You cannot service an elevator—and we service 1.7 million elevators around the world—you can’t do that from the U.S. 

You have to be in these local markets. But the earnings associated 

with those foreign operations drives growth here. It drives growth 

in the professional ranks, growth in the engineering ranks, and allows us to continue to invest to grow the business globally. 

And Otis is just one example. I would tell you that happens with 

our Carrier air conditioning. Again, the R&D for Carrier happens 

in Syracuse, New York. That technology is exported around the 

world, and we use that technology to grow the business globally. Pratt & Whitney, again, a very large company, $13 billion in revenue. We have some of the best technology in the world today. We 

have a new, very efficient jet engine called the geared turbofan. It 

is going to reduce energy costs by 15 percent for airlines. That 

technology, which was developed in East Hartford, Connecticut, is 

going to allow us to expand globally. 

So, I would tell you, you know, taking advantage of global markets requires investment at home. Expansion in the global economy 

also allows us to reinvest at home in the things that are important, 

like research and development. And it is that R&D that ultimately 

creates jobs back here in the United States. 

Chairman CAMP. Thank you. Mr. Rapp. 

Mr. RAPP. Yes. Chairman Camp it has been a key driver for 

U.S. jobs growth since we started back in 1925. And I think there 

is probably no better example of that than what we have experienced over the last 12 months. 

In spite of a U.S. economy that is still weak, as we have all seen, 

in terms of the recent statistics, we have added 7,000 jobs over the 

last 12 months. And that is based on the strength that we have in 

global markets. Because for us, as we grow globally, a lot of the 

central services that we provide, in terms of support, are 

headquartered here. 

I have the responsibility of our IT organization, headquartered in 

Peoria, Illinois. I have a responsibility for our purchasing organizaVerDate Mar 15 2010 00:05 Dec 21, 2011 Jkt 070882 PO 00000 Frm 00043 Fmt 6633 Sfmt 6602 I:\WAYS\OUT\70882.XXX GPO1 PsN: 70882

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tion headquartered in Peoria, Illinois. HR is in Peoria, Illinois. We 

are financing product around the world, headquartered in Nashville, Tennessee. Our corporate treasury services, tax services—you 

can just go down the list—are all headquartered out of the U.S. 

And as we grow globally, it drives growth and employment. 

And, of course, a key driver for us is R&D. We will invest about $2 billion this year in R&D. And the vast majority of that is going 

to be invested in the U.S. We have a great research and development center just outside of Peoria. 

The other place that it benefits U.S. jobs is with our growth over- seas, and the exports, about $13 billion last year, 8 out of 10 tractors that we built at our East Peoria plant go export. If you go to 

the plant, you walk down the aisle, and you look at each tractor, 

and it designates where it is being shipped. I mean it is like going 

to the United Nations. If you go to Decatur, Illinois, 9 out of 10 of 

our mining trucks go export. 

So, our ability to compete and win in export markets, for us, has 

always driven jobs back here, in the U.S. 

Chairman CAMP. Thank you. Mr. Crines. 

Mr. CRINES. Mr. Chairman, I would go back to maybe 10 years 

ago, when I joined the company. At that time, the company was 

about a quarter of its current size. So, about $1 billion in revenue, 

globally, most of that then was coming from our U.S. market. 

And then, as a consequence of an acquisition, a transformational 

acquisition that took place in 2003, where the company prevailed 

in a competition for a European-based manufacturer, the company 

has been able to grow, and grow significantly to where we are 

today, with $4 billion in revenues and 8,000 employees, globally. 

That revenue today, that $4 billion in revenue, is predominantly 

sourced out of our U.S. manufacturing facilities. Seventy percent of 

our foreign revenues are sourced either out of our manufacturing 

facilities in Warsaw, Indiana, in Carlsbad, California, in Parsippany, New Jersey. 

And, as well, today we now have approximately, out of the 8,000 

employees, about 1,000 employees dedicated to research and development. Innovation really is the life blood of this industry. And 75 

percent of those research and development employees are based in 

our U.S. development operations. 

So, there is no doubt in my mind that the expansion of our business overseas has led to growth in jobs here in the U.S. 

Chairman CAMP. Mr. Buthman. 

Mr. BUTHMAN. Thank you, Mr. Chairman. I will take a little 

different spin. I think there are two key elements for KimberlyClark. One is research and new ideas and innovation, and the 

other is cash flow. I worked most of my adult life at KimberlyClark. When I first joined the company back in the early 1980s, we 

were largely a U.S.-based company. Our growth internationally has 

increased dramatically over that time. In the last 10 years it is particularly true in developing and emerging markets. 

Ten years ago, about twenty percent of our business was in developing and emerging markets outside of the United States and 

Europe. That is where 80 percent of the world’s population resides. 

And for our company, many things that we take for granted in the 

United States—things we use every day—either are not used, or 


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are used in very rudimentary forms. So today more than one-third 

of our top-line growth is in those developing and emerging markets. 

So, our ability to export technology and U.S.-based ideas around 

the world is an important part of the growth opportunity for our 

business. In fact, Kimberly-Clark invented five of the eight categories in which we compete, things that I am sure many of you 

may have used today, as a matter of fact. And so, our opportunity 

to bring ideas from around the world—which is increasing, the 

pace of innovation is increasing around the world—our ability to 

bring those ideas to the United States, developing them in our research and development facilities here, which are principally based 

in Neenah, Wisconsin and Roswell, Georgia, where we have—between those 2 locations, about 1,400 research and development employees. It is a great opportunity for us to grow. 

And I will just conclude by saying outside the United States we 

generate far more cash than we have opportunities to invest overseas. We have great opportunities to invest. But we constantly battle excess cash flow. We would like to return more cash to the U.S., 

both to invest in research, to invest in capital, and also to use as 

dividends to our shareholders, which can be redeployed elsewhere 

in the economy. 

Chairman CAMP. All right, thank you. Mr. Levin may inquire. 

Mr. LEVIN. Thank you. Interesting testimony. I think the testimony of the four of you, with all of your expertise and background, 

illustrates in each case the need for our committee, Mr. Chairman, 

to try to dig out the facts and see if we can find a common basis 

from which we can proceed. 

For example, I think we need to explore the issue of effective tax 

rates, and make sure that we really understand what are the effective tax rates in the U.S. and, for example, the OECD countries. 

We will have some testimony later on that indicates that, in terms 

of effective tax rates, there is not the differential that there would 

first appear to be. 

Secondly, and you have testified to this, to some extent, we need 

to understand more clearly the pattern of job growth here and 

overseas for the multinational corporations, because this is often 

something that becomes very, very significant and very controversial. 

For example, just last month in the Wall Street Journal there 

was an article by Dave Wessel April 19, 2011, it was headlined, 

‘‘Big U.S. Firms Shift Hiring Abroad, Workforces Shrink at Home, 

Sharpening the Debate on Economic Impact of Globalization.’’ You 

have touched on this, but I think, Mr. Chairman, we need to try 

to dig out the facts. 

Thirdly, a number of you have mentioned the issue of permanence. I think everybody on the committee would agree that it has 

been a real problem that many of these provisions are simply renewed year after year, that there has not been anything close to 

permanence. We use the word ‘‘permanence,’’ but these provisions 

are temporary. And it is difficult, I think, for companies to plan. 

And I think we really need to dig out what the impact has been, 

because there are many different views of that. 

And, fourthly, I think we need to have an honest discussion 

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nant in corporate taxation: Section 199, the accelerated depreciation, the R&D tax credit. I would simply urge that we beware of 

some of the rhetoric we sometimes use. For example, ‘‘picking winners and losers.’’ Because one of the criticisms of the R&D tax credit is that we are doing exactly that. 

I think the more we look at it, the less valid that designation is. 

But I think we need to look at the importance of these tax expenditures because shifting to a territorial system has some major revenue implications. And there are some who think that the answer 

is to eliminate these tax expenditures in return for a lower rate. 

But I think in the case of each of your companies there has been 

effective use of these tax expenditures. And to simply propose their 

elimination would have a major impact. For example, Caterpillar 

has effectively used these, and Section 48C has been effectively 

used in some cases. 

And I think if we are worried about the impact on jobs in the 

United States, Mr. Chairman, we have to have a very full discussion of the impact of each of these. Thank you very much. 

Chairman CAMP. Thank you. Mr. Herger is recognized. 

Mr. HERGER. Thank you, Mr. Chairman. I want to join in 

thanking our witnesses for your testimony. It is always very important to hear from those individuals who were actually being affected by the tax policies that we in Congress pass. 

It is very important for us to get this area of international taxation right, because it seems like the United States is falling behind in global economy. As Chairman Camp mentioned in his opening testimony—and I think it bears repeating—in 1960, 17 of the 

20 largest companies were headquartered in the United States. But 

in 2010 only 6 of the top 20 are U.S.-headquartered companies. 

I would like to ask a question for each of our witnesses with 

whatever time we have. In our world of increasingly mobile capital, 

how does the very high corporate tax rate make business investment and job creation in the U.S. less attractive? And I would like 

to begin with you, Mr. Hayes. 

Mr. HAYES. Thank you, sir. I guess, just to start out, as we look 

at the investment horizon, we all understand that capital is mobile 

on a global basis. I mean we can make investments anywhere 

around the world. 

And the question for us is, on a long-term basis, where is the 

most efficient place to put those investment dollars? And tax policy 

plays a part, although it is not the end-all, in terms of the investment decisions. Clearly, having a 35 percent statutory tax rate is 

an impediment, versus the OECD, which has an average tax rate 

of about 25 percent. So the U.S. is at a disadvantage as we begin 

each of the analyses. It is not the ending point, though, it is simply 

one of the factors that we have to consider. 

Ranking Member Levin talked about our effective tax rates and 

how they are lower than the statutory rates, and that is obviously 

clear. Our effective tax rate is just under 28 percent. But at the 

end of the day, we make investment decisions based upon the statutory rates that are in effect in the countries as they stand today. 

And the same goes with the R&D tax credit. To the extent that the 

R&D tax credit is not going to be renewed, you can’t make decisions based upon the hope that you are going to have a short-term 


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renewal of each of these tax expenditures. And I think permanence 

is critically important. 

And so, as we think about the long-term rate, the 35 percent rate 

here, it puts us essentially 50 percent higher on the tax cost than 

any other OECD country, and certainly lower than any of the 

emerging market economies where we had opportunities to make 

investments. At the end of the day, we are going to make investments where the customers are, and where it makes the most economic sense. 

Mr. HERGER. Mr. Rapp. 

Mr. RAPP. Yes, Congressman, I would maybe touch on two 

points relative to the kind of the impact it has in terms of the 

attractiveness of the investments that we make. 

I think, first of all, if you look at the dynamics of the world that 

we operate in today, I don’t have to explain to you just how dynamic and how volatile it is. Different markets growing at different 

rates around the world, and the ability to freely move capital to 

take advantage of those opportunities that drive those jobs back in 

the U.S., for me, is absolutely critical. Today our ability to do that 

relative to the foreign competitors that want our customers, want 

our jobs we are hamstrung, based on the current code. 

The other one—the nature of our business, when we make a decision to put down a plant, it is a 25 to 30-year type investment. 

Major facilities, big cap-ex, R&D. And when we make that, we are 

making it off of that view of what that statutory rate is going to 

be. 

So, as we look at that investment decision today, we are looking 

at a 35 percent rate here, versus if we make that investment to 

pursue opportunities in other parts of the world—with on average, 

a 25 percent rate. So it does, you know, skew it toward other opportunities to invest in other parts of the world. 

Mr. HERGER. Good. Mr. Crines. 

Mr. CRINES. Yes, sir, I would tell you that if tax rates were the 

only factor considered in where to locate, we would move most of 

our manufacturing operations offshore. 

The fact of the matter is that there are a number of factors, you 

know, that weigh into decisions around where to locate manufacturing operations. Zimmer operates in a highly regulated industry, 

and it is very important to us to be able to produce the highest 

quality products. We need to have access to people who have an 

understanding of quality systems regulations. We need to have access to highly-skilled labor. We are very fortunate in having access 

to a large skilled labor pool in northeastern Indiana, where we 

have been located since 1927. 

We also like to locate our facilities—we have a preference, if we 

can, to locate them near our research and development functions, 

because our research and development people are not only focused 

on product innovation, but also process innovation. 

Chairman CAMP. All right, thank you. 

Mr. HERGER. Thank you. 

Chairman CAMP. Mr. Rangel is recognized. 

Mr. RANGEL. Thank you, Mr. Chairman, and let me thank you 

for you and staff for picking such an outstanding panel for us to 

learn a lot from today. I think it is abundantly clear that we read 


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from the same page. We are so proud of the genius of our private 

sector in maintaining a leadership position throughout the world. 

And you should know we don’t want anything that we do to impede 

that, because it affects not just your companies, but it affects our 

constituents. 

Let me first ask, since five minutes is just too short, I assume 

that all of you have a representative in Washington that represents 

the thoughts that you expressed today? 

Mr. HAYES. Yes. 

Mr. RAPP. Yes. 

Mr. CRINES. Yes. 

Mr. BUTHMAN. Yes. 

Mr. RANGEL. Good. Okay. Well, we have to find out their 

names—at least I do—so that the chair and the leadership here 

can continue this discussion. 

Now, I think you all agree that 35 percent is too high of a corporate rate, and it does not make us competitive internationally. 

Who at this table pays 35 percent corporate taxes? Who pays 30 

percent corporate taxes? Okay. There are people at the table that 

pay no taxes. 

Mr. HAYES. No, sir. 

Mr. RAPP. No, sir. 

Mr. RANGEL. I don’t mean at this table. People who are not at 

this table—little or no taxes. 

[Laughter.] 

Mr. RANGEL. And so, what we have to do is to determine how 

we can bring equity because there is some outrageous incentives 

that we have in the Tax Codes. Billions of dollars are there with 

hundreds of incentives, loopholes, credits, waivers. And if we all 

could agree, of course we could dramatically bring down the tax 

rate. 

Now, when Richard Neal and I and certainly our distinguished 

chairman here talks about it, or when we started moving forward, 

bringing what we call equity, a lot of people started screaming that 

we were increasing taxes. And technically, if you are not paying 

any tax, and we say, ‘‘Pay a fair tax,’’ we are doing what, increasing taxes. 

So, you know and we know that the problem is going to be: 

Whose ox is being gored? 

Now, is there—I am going to make certain that your representatives talk with us. Because being candid and frank as to how far 

we can go is the key to this whole thing. And you are not going 

to find someone that has an unfair advantage over you looking for 

reform. He or she, the company, wants it the way it is. 

So, I assume that the business roundtable does not speak for all 

of you. 

Mr. HAYES. That is correct. 

Mr. RANGEL. I assume that the Chamber of Commerce does not 

speak for all of you, because their members have divided opinions 

as to what we should do. 

But if we did have some way of finding out what is painful, but 

fair, what gives you maybe not an unfair advantage, but certainly 

puts American in a very competitive way, which we would really 

want within the restrictions of the WTO, then that is what we 


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want, and we are not ashamed of that. We have to find out what 

happens with sales when our people know it is made in the USA? 

Hey, that has to count for something, even though our wages may 

be higher than some other competitive countries. 

And so, I want the names of the people that we can extend this 

to, because doesn’t our national efforts in education mean something to you, besides just research and development? Doesn’t our 

health system, in terms of your employees here, mean something? 

Not just morally, but in dollars and sense? And so, you are not 

going to find problems with those people that agree with you. It is 

those people who are not at the table that have to be brought on 

board, because it is going to cause problems for all of us. 

I think that you make an outstanding contribution to make 

American great. And we support what you have. And I assume all 

of you think that it is a good idea to continue this discussion 

through your representatives here in Washington. 

Mr. RAPP. Absolutely. That is why we are sitting here in front 

of you today. 

Mr. RANGEL. Do all of you want—— 

Mr. HAYES. Yes, sir. 

Mr. BUTHMAN. Yes, we do. 

Mr. CRINES. Absolutely. 

Mr. RAPP. We are not Washington-based, we have got a lot 

going on. But this is important to our competitiveness, it is important to the growth of our company and countries—— 

Mr. RANGEL. Well, I am not going to—— 

Mr. RAPP. We will engage. 

Mr. RANGEL. I am not going to let you leave until we get who 

you have anchored here. 

Mr. RAPP. You know what? He is sitting right behind me. 

[Laughter.] 

Chairman CAMP. I think I see many of them right from where 

I am sitting. 

Mr. RANGEL. Well, I yield back the balance. I want to thank 

you, Mr. Chairman, and Chairman Levin, because being honest 

and fair, rather than just public and talking about—you know that 

if we took away a whole lot of these expensive exceptions and preferential treatment, that would be no problem, and no profile and 

courage for us to reduce the corporate rate. Right? 

And so, let’s get together and let’s do it. And it is going to take 

courage, but we need some political cover from those people that 

want to be competitive with foreigners. 

Chairman CAMP. All right, thank you. 

Mr. RANGEL. Thank you. 

Chairman CAMP. Mr. Brady is recognized. 

Mr. BRADY. Thank you, Mr. Chairman. When Chairman Rangel 

speaks and asks questions, I never know whether I am supposed 

to answer them or not. 

[Laughter.] 

Mr. BRADY. But I appreciate the approach you take. 

You know, our panel makes a compelling argument that, to grow 

America’s economy, it is simply not enough to buy American, we 

have to sell American, and that our Tax Code is a hindrance to 

competing and winning abroad, in its design, its rate, and its unreVerDate Mar 15 2010 00:05 Dec 21, 2011 Jkt 070882 PO 00000 Frm 00049 Fmt 6633 Sfmt 6602 I:\WAYS\OUT\70882.XXX GPO1 PsN: 70882

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liable incentives to research and development. It is a discouragement to bring U.S. profits back home to invest in America. All that 

contributes to the anti-competitive Tax Code we have today. 

I want to ask each of you, starting with Mr. Buthman and working our way down, this question. We hear two claims in Washington these days. One is that our current Tax Code is filled our 

international Tax Code is filled—with corporate loopholes like deferral that encourage companies, American companies, to ship our 

jobs overseas. 

We also hear that if America moves to match our competitors 

with a territorial tax system, that that will also encourage you to 

ship American jobs overseas. Is either of those claims accurate? 

And, if not, why? 

Mr. BUTHMAN. That is a great question, Congressman. I would 

say certainly today the complexity of our Tax Code influences behavior in the corporate community for the reasons we talked about. 

We make long-term investments. A tissue machine goes in, and it 

is around for 100 years. And we have to think about tax as not the 

only driver, for sure, but it is a very important component of that 

decision. 

So, I think the idea of moving to a simpler system, where you 

have more transparency coupled with a lower rate, is a good idea. 

Congressman Rangel made a great point. This is a very challenging 

problem to solve, and I think it should be only based on thoughtful 

reflection. But I think, in general, moving to a simpler system with 

a lower tax rate makes a lot of sense. 

The fact that we are—the more competitive we are overseas, the 

more cash we generate overseas—today, the fact is that it is very 

difficult to bring it back to this country. If we can eliminate that 

obstacle, there is no question that much of the cash we refer to as 

‘‘trapped’’ overseas would return here, to be invested in some way, 

shape, or form in the United States. 

Mr. BRADY. Yes. 

Mr. CRINES. I would just point out that, with respect to deferral, Congressman Brady, I mentioned earlier that Zimmer prevailed in a bid for a large, European-based orthopedic manufacturer in 2003. I don’t know that Zimmer would have prevailed. We 

were competing against a UK-based competitor of ours who was— 

also had expressed interest in buying that same business. Deferral 

is what allowed us to compete effectively, and win, ultimately, in 

that battle. 

So Zimmer is very much in favor of reform that leads to less 

complexity and a more simpler system. If deferral were to be eliminated, in our view, it would have to be replaced by a lower tax rate, 

such that we are in a position to compete on a level playing field 

with our foreign-based competitors. 

Mr. RAPP. Yes. Congressman Brady, I would look at it—if we 

leveled the playing field around the world, I think a lot of the motivation, in terms of arbitrage, goes away. And there you really get 

down to the fundamentals of what does it take to compete, and 

when, the customers that you are trying to draw to your business, 

to grow your business. 

We build skidsteer loaders in Sanford, North Carolina, because 

a customer won’t wait eight weeks for it to be shipped from an 


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overseas location. The shipping cost relative to the total price, it 

doesn’t make sense. 

So, I think it really gets down to get a level playing field, and 

then allow companies to compete for that customer base. And, as 

I said earlier, we are absolutely convinced, given that level playing 

field, we can compete with anybody around the world. 

Mr. HAYES. Yes, Congressman, I would just add I think, you 

know, as we look at deferral—and I mean we can call it a loophole, 

we can call it a tax expenditure—I think any of the changes that 

we are talking about half to be done in the context of global reform. 

To Congressman Rangel’s point, these tax expenditures have to 

be looked at holistically. We have to look at each one, and trade 

off the impact on job creation in the U.S. versus the cost of the U.S. 

Treasury. And I think we, as we sit here today, as well as many 

other of the large companies with large, export businesses, we 

would support this broad type of tax reform, which takes a look at 

all of these tax expenditures, and would be willing to put all of it 

on the table. 

Mr. BRADY. Thank you. 

Chairman CAMP. Thank you. Mr. Lewis is recognized. 

Mr. LEWIS. Mr. Chairman, I came in late, and I—— 

Chairman CAMP. I have you here as here at the gavel, so—— 

Mr. NEAL. Want to switch? 

Mr. LEWIS. Yes. 

Mr. NEAL. Mr. Chairman. 

Chairman CAMP. Okay. Mr. Neal is recognized. Are you—— 

Mr. LEWIS. Yes, yes. 

Chairman CAMP [continuing]. Wishing Mr. Neal to question?—— 

Mr. NEAL. Thank you, Mr. Chairman. And these hearings are 

very instructed. I am delighted with the panel. And I hope that the 

testimony can lead to a conversation. 

And on one point, where Mr. Rangel is right on target, is that 

in Washington a conversation about tax reform generally begins 

with histrionics, and it moves to fact shopping, and then it moves 

to intransigence. And it is very hard to have this conversation, but 

let me throw something out to you which I think is something that, 

by way of definition, we all ought to be able to agree to, and that 

is, what tax system will improve the quality of life for the American people? I mean that ought to be the fundamental goal, the cornerstone of the conversation that we are having. 

Pleased that Mr. Hayes raised that example of the Otis elevator, 

because that certainly unites the four panelists. I don’t have to tell 

you, Mr. Rapp, what the R&D tax credit means in Massachusetts, 

where so much research is done every single day with terrific companies. But a couple of questions, and the panelists should feel free 

to give their views. 

One, wage pressure in China, and what is happening as to how 

the anxiety level that the American people currently feel about 

their job stature might be enhanced down the road because of the 

changes that you are witnessing on a firsthand business. 

And, secondly, given my lead-in question on R&D and the issue 

that you have raised with deferral, another thought that I think is 


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very important, and that is what preferences in the code might you 

be willing to concede to lower the corporate rate? 

So, you are free to take your best shot. 

Mr. HAYES. Let me start with the China question if I can, Congressman Neal. I think, you know, there has been much rhetoric 

about the yuan, and the way that the Chinese have held down the 

value, relative to the U.S. dollar. 

But, as I said, we have 16,000 employees in China. And China 

is not the low-wage country that it was 10 years ago. As I look at 

the wages that we pay in China today, they have more than doubled in the last five years. And with inflation running at more than 

double digits, we expect wages to double again in the next five 

years. In fact, to have an aircraft mechanic in Shanghai at our 

overhaul repair facility, where we had a 75 percent cost advantage 

5 years ago, that advantage is less than 30 percent today. 

So, the fact is, we have to be in China, because that is where the 

customers are. But they are not taking jobs away from the U.S. We 

don’t export product from China to the U.S. We build product in 

China for the Chinese market, and you have to be there. 

And, again, I think the Chinese are having to deal with a very 

difficult problem around inflation, and they are having to do the 

same things that we have done in the states for the last 50 years, 

which is find productivity in their factories, and adopt lean manufacturing technologies, and put technology to work in their factories, just as we have done here. 

You know, China is really not the threat, I believe, that people 

make it out to be, from a low-wage jurisdiction any long. 

Mr. RAPP. Yes, Congressman, I would agree. We have got more 

than 5,000 employees there, and it is really to build product to sell 

to China. In fact, we are an importer to China. In spite of the large 

manufacturing base there, and a lot of people there, that serves 

that local market. And we see it as a natural, if you would, migration of a society. The mass urbanization that has taken place, people searching for that higher quality of life, standard of living that 

only comes through the build-out of infrastructure. 

And so, we think that pressure on wages is going to be there, 

and we are going to be there with factories to serve the opportunities in China. 

On preferences in the code and what we would be willing to give 

up, I think, for us, back to the earlier discussion—and I think you 

described the emotions around this topic up front very well—that 

is why we try to do, in our business, take emotion out of it. If somebody says we are not competing with a competitor, as I said earlier, 

we just tear it down. We do the tests with independent people who 

really know how equipment operates, and then we have a very objective assessment of our competitiveness versus theirs. I think if 

we get to a low enough rate that is based on making us competitive, I think everything is on the table. 

Mr. CRINES. Congressman Neal, with respect to China, I agree 

with the other witnesses here that, over time, wage inflation will 

eliminate that comparative advantage that the Chinese have had 

over the past several years. 

We, Zimmer, is a net exporter to China. And with respect to 

medical devices the market there is tiered. At the high end of the 


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market there is a great deal of interest in Western technology, and 

we compete very successfully in that end of the market. There is 

a growing middle-tier market that is serviced by some local manufacturers, smaller European-based manufacturers. Zimmer did 

complete an acquisition in the fourth quarter of last year to acquire 

a local manufacturer that will service that segment of the market. 

So, over time, we are going to compete in the high end of the 

market with the products that we develop and produce here, in the 

U.S., and we will be competing in that mid-tier by sourcing product 

out of the local manufacturer that we acquired in the fourth quarter. 

Mr. BUTHMAN. Congressman, just—I would echo the—— 

Chairman CAMP. Thank you. I am afraid time has expired, so 

we will need to go on. Mr. Nunes is recognized. 

Mr. NUNES. Thank you, Mr. Camp. I am going to ask this question of all of the panelists. And maybe we will start on the right 

here, so that Mr. Buthman gets a chance to go. 

If we were to—if this committee was to get rid of all of the corporate tax deductions, every single one of them, if every one was 

on the table and we got rid of all of them, what rate would you like 

to see? And would you support that policy out of this committee? 

Mr. BUTHMAN. It is a challenging question, and a complex one. 

I think a place to start is our incremental rates, which are about 

50 percent higher than the average of the OECD, which is something like the mid-twenties. So I think, if you wanted a place to 

start, that would be a good place. I think Congressman Rangel 

makes a great point. To unravel the behaviors that have been created over the last 50 and 25 years with our Tax Code is going to 

be complex. But from a base rate, that is where I would start. I 

would think about—— 

Mr. NUNES. Low twenties? Mid-twenties? 

Mr. BUTHMAN. Mid-twenties. 

Mr. NUNES. Would be sufficient enough for you to give up all 

of the different—corporate tax deductions? 

Mr. BUTHMAN. I think we would love a simpler Tax Code with 

a lower rate. I think that objective is a good one. 

Mr. NUNES. Thank you. Mr. Crines? 

Mr. CRINES. Our effective tax rate, first of all, was just over 30 

percent in 2010, as a consequence of accruing tax on our U.S. earnings and profits at around 40 percent, including what we have to 

accrue for state taxes, and accruing tax at a rate of about 15 percent on our foreign earnings and profits. 

A rate in the mid-twenties would provide us with opportunity to 

invest more aggressively in innovation, given the fact that we are 

paying and accruing taxes at a higher rate than that today, even 

though we will be competing against European-based medical device manufacturers that, in some cases, are accruing and paying 

taxes at a rate of around 15 or 16 percent. 

Mr. NUNES. So if we were to get rid of all the deductions, would 

you prefer to see a rate at 15 or 16, or 20, or—— 

Mr. CRINES. If you can do that, absolutely. 

[Laughter.] 

Mr. NUNES. So you are in the mid-twenties. 

Mr. CRINES. Yes. 


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Mr. NUNES. All right. 

Mr. RAPP. And I would say we would be in the mid-twenties, as 

well, but all inclusive, including state income tax. And I think that 

is an important distinction. So that leaves you with the federal rate 

somewhere probably in the 20 percent range 

On getting rid of—— 

Mr. NUNES. You may be moving states, then? No offense to Mr. 

Schock here, but—— 

Mr. RAPP. We have such a good relationship locally, I don’t 

see—— 

Mr. NUNES. Just joking. 

Mr. RAPP. The other one, on getting rid of all the deductions, I 

will go back to the comment I made earlier. I do think—and it tails 

back to the earlier discussion about quality of life. If you look 

around the world at Tax Code, in most cases countries have determined what industries do they want to drive their local economy. 

I mean you can move to a low rate with no preference for manufacturing or anything else. You do run the risk in that kind of environment that you end up with just a services-based industry. And 

I think, if you do that, you just need to understand what the implications are for quality of life and what kind of economy you build. 

That would be my only caution on that one. 

Mr. HAYES. I would say just again, as we talk about taxes, obviously, deductions for payroll, deductions for cost of goods sold, 

those types of things that, you know, we all are—deductions I 

think everybody agrees that are relevant, and is part of a GAAP 

income statement—but as you think about the tax preference 

items, I think accelerated depreciation is one of those things that 

ought to be on the table. I think the domestic production allowance 

should be on the table. R&D tax credit ought to be on the table. 

Again, I think what we need to do is to benchmark our corporate 

tax rate versus what the other OECD does. And we don’t have to 

have the lowest rate. I think if we have a rate in the mid-twenties 

that promotes job growth in this country, that takes away these deductions—I have a tax return, a federal tax return, of 19,000 pages, 

19,000. I mean that is crazy. The fact is, we need to simplify the 

Tax Code. We need to make it more agnostic. 

Again, I talked about not picking winners and losers. You can 

pick any industry, and everybody has got, as Chairman Rangel 

said, an ox to gore here. But I think it all has to be on the table. 

What we need to have is a simplified tax system that taxes us the 

same way everybody else is taxed. And that way, as we compete 

globally, we are not at a disadvantage. 

Mr. NUNES. Thank you. I thank the panel, and I yield back, Mr. 

Chairman. 

Chairman CAMP. Thank you. Mr. Becerra is recognized. 

Mr. BECERRA. Mr. Chairman, thank you. And to the four of 

you, thank you very much for your testimony. I think we all want 

to get to a point where we can get to some place where you all will 

come to us and say—at this stage—just try to help us find those 

new minds that are going to create those new inventions or come 

up with the latest type of technology and not have to deal with the 

Tax Code in 19,000 pages of a filing. 


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The good news is, from everything I have heard, you are all very 

normal. You come here, and you want your tax burden reduced. I 

have never seen a witness come before this committee and ask that 

his or her tax burden be increased. So you all are very, very normal. 

The bad news is—actually, the only bad news is if you happen 

to be one of those people who believes that America’s best days are 

behind it, that America is broke, and therefore, we are in chaos 

and we have to make some decisions that are going to hurt you and 

going to hurt the average American. 

I don’t think most people yet believe that about this country. I 

think most people still believe that, in the 21st century, we are still 

the country to model yourself after if you are an emerging nation, 

that America is still the place where you find innovation, where 

you find the kind of companies that can hire the best engineers and 

still help a guy like my father, who got to the sixth grade, get a 

chance to make a decent living and get to see his kids go on to college. 

So, I sense that there is a lot of good news here. Not only are 

you very normal, but you are very successful. And I suspect that 

you will find that each and every member of this committee is looking for ways to make you even more successful, because the more 

wildly successful you are, the more people you are going to hire. 

And I think, if we take that perspective, we will have a better understanding of what is going on. 

Let me give you some quick statistics. Because the prism looks 

very different from the eyes of differing Americans. 

In 2009, pretty much when we were feeling the effects of this recession hardest, most American multinational corporations, folks 

like you here, decreased the size of your workforce by about 5.3 

percent, 1.2 million Americans lost their jobs in your companies. At 

the same time, about 100,000 foreigners who worked for your companies, U.S. multinational corporations, lost their jobs, about 1.5 

percent. 

And so, the perspective of many Americans, including those 13 

or so million Americans who are still not back at work is that we 

are not doing something right because too many Americans aren’t 

working. 

Another statistic. During the 1990s, U.S. multinational companies reduced their workforce by—I am sorry, you increased—strike 

that. 

U.S. multinational companies cut their workforce by 2.9 million 

in this past decade, 2000 to 2010. At the same time, these multinational companies from the U.S. increased their employment overseas by 2.4 million. Now, that is a switch from the 1990s, when 

these same multinational companies added 4.4 million jobs in the 

U.S. and 2.7 million jobs abroad. 

And so, from the perspective of a lot of Americans, the constituents that we hear from, we are not seeing the job growth in the 

U.S., and we are seeing a lot of very successful U.S. companies increase jobs abroad. 

So, when we have to deal with policy, it is not just the nuts and 

bolts of a 19,000-page tax return. It is dealing with a guy who says, 


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‘‘Wait a minute. I used to have a job that allowed me to send my 

kids to college. I am on the verge of losing that and my home.’’ 

So, we have to deal with an issue that is very complex, and come 

up with a simple solution, not just for you, but for the guy who we 

see back home. And so there I have a—I would then pose a couple 

of questions. And I don’t know if you will have a chance to respond 

to it, but maybe later on, because I know, as Mr Rangel said, you 

will come back and talk to us. 

If you want to see us move to, say, a territorial system that our 

OECD competitors have, are you interested in seeing the other aspects of their system: a VAT tax, a higher income tax, more regulatory structures over your operations? If you like one aspect of 

what they do, do you like the rest of what they do? And so that 

we don’t just cherry-pick what we like from all the rest of them and 

leave behind what we don’t. 

The other—then the final point is—I hope you will consider giving us further advice and good counsel—is the issue of competitiveness. All things being equal, are you still hiring an American to do 

the job versus a foreigner with the same level of skill, the same 

title? And I think to the degree that you are coming back to us and 

saying, ‘‘Absolutely, all things being equal, it is the American we 

look for,’’ then guess what, we are going to be right there behind 

you, because at the end of the day it is that American who gets the 

job who is our constituent. So thank you very much. 

Chairman CAMP. Thank you. Mr. Tiberi is recognized. 

Mr. TIBERI. Thank you, Mr. Chairman. And thank you all for 

providing excellent testimony today. 

Mr. Crines, the so-called lock-out effect, a combination of the deferral regime that you have talked about, and a relatively high corporate tax rate that we have in America, does it prevent you, as 

a CFO for a company that does business overseas, does it prevent 

you from making investments in the United States that you otherwise would make if it weren’t for that? 

Mr. CRINES. Congressman, we, like many other U.S. multinationals, accumulate earnings and profits offshore. We have asserted that we intend to reinvest those earnings and profits offshore, understanding that if we were to return those earnings and 

profits back to the U.S., we would pay a significant toll tax to do 

that. 

Mr. TIBERI. So, to go to Mr. Becerra’s point that he just made, 

the Tax Code is causing your company to make investments that 

it otherwise wouldn’t make overseas, it would make them here, because of the current Tax Code. 

Mr. CRINES. Well, the Tax Code certainly is structured in a way 

where there is significant disincentive to bringing those earnings 

and profits back here to the U.S. So if we are looking to invest in 

the U.S., we have to find alternative sources of capital to make 

those investments. 

Mr. TIBERI. But it would almost encourage you to make investments that you otherwise wouldn’t make overseas. Is that correct? 

Mr. CRINES. I would agree with that, Congressman, yes. 

Mr. TIBERI. Do others agree with that? Yes or no answer. 

Mr. BUTHMAN. Yes. 

Mr. RAPP. Yes. 


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Mr. HAYES. Yes. 

Mr. TIBERI. Now, I am not going to ask you about your own 

companies, but—if you could give me a quick answer—talking to 

CFOs around the country, American CFOs who do business internationally—I assume you guys get together for a pop every once in 

a while and talk about the Tax Code—do you feel there is a risk 

that some of your CFOs and CEOs, not competitors in the United 

States, but peer companies who do business overseas, are talking 

about potentially, in the future, if we do nothing, if Rome continues 

to burn with respect to the Tax Code, that it would make sense for 

them to put their beer company in Belgium, for instance? 

Mr. HAYES. I think that is actually the issue here, Congressman. I think the fact is we are at such a competitive disadvantage 

that a company in France can buy a company in the United States, 

and because of the tax arbitrage alone, pay for whatever premium 

is required to make that acquisition. 

We saw it with InBev and Anheuser-Busch. And again, as UTC is a $60 billion business, even we are worried about the fact that 

there are foreign companies out there that could take advantage of 

the tax arbitrage to pay for a takeover of a U.S. company. And, 

again, tough to do with a UTC, but there are a lot of other midmarket companies that are going to suffer from this. 

Mr. TIBERI. And I would think you would agree with this statement, that the jobs that you provide around the world, the best 

paying jobs are at your headquarters? Is that true? 

Mr. HAYES. Yes. 

Mr. RAPP. The point you raise there is spot on. And if you take 

the combination of the tax arbitrage and a weak dollar, that risk 

has never been greater. 

I talked earlier about the jobs that we generate because we’ve got 

our HR staff, our IT staff, our R&D staff all headquartered here. 

If you get acquired by a company from another country, where do 

you think those jobs go? 

Mr. TIBERI. Well, in addition to that, then, let’s say you were 

making diapers, and you are making diapers all over the world to 

sell diapers all over the world. Unfortunately, a lot of our constituents—Mr. Becerra made this point—believe that you are making 

diapers in China to sell to America. And I think your point is—all 

of your points are—you are growing jobs overseas, not at the detriment of the United States job market, but your growth is overseas. And if you don’t grow overseas, somebody else from France 

or Germany or Belgium will grow overseas. 

And let me ask you this, as it relates to that, starting with the 

gentleman from Texas. If you grow overseas, and you sell more diapers and more Depends, and all the other things that you sell in 

Europe and China and Africa and Asia, does that help your corporate headquarters? Does that help American jobs? And how does 

it? 

Mr. BUTHMAN. Absolutely. And the fact is in our business, I 

think like in most businesses, you need to fish where the fish are. 

And the fact is, demand for our particular products are growing 

very rapidly overseas. And that is just going to be a natural evolution. The more competitive we can be overseas, the more successful we are going to be, the more successful our shareholders—— 


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Mr. TIBERI. Final question—if you could, provide this in writing 

back to the committee, because my time is about to expire—if we 

go to a territorial system, which I am for going to—are there things 

that we need to avoid? Because different countries have different 

types of territorial systems. 

Are there things that we should avoid if we go that way? And 

what are those things that we should try to avoid, to maximize the 

ability of U.S.—American companies that compete overseas to do 

better? 

Thank you. I yield back. 

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

Mr. DOGGETT. Thank you very much. Thank you for your testimony. I certainly agree with you, that we need tax policies that encourage growth of jobs here in America. But, as you know, I have 

a very different perspective about some of the particulars of how 

we get there. 

And I am going to follow Mr. Tiberi’s example, since there are 

four of you and five minutes, and ask you if you would, please, to— 

what will be narrow questions—respond with yes or no, or that you 

can’t answer yes or no, and then if there is time I will come back 

around and get you to fill in some additional testimony, and certainly welcome, as he did, your supplementing your answers with 

written updates to our committee. 

Let me begin with you, Mr. Hayes. Is it correct that you were 

quoted in Bloomberg recently as saying, ‘‘A one-time repatriation of 

profits is a bad idea. My fear is that we will have a repeat of 2004. 

If companies repatriate these profits and spend it on things like 

share buy-backs, they will create such negative connotations 

around tax reform with the public.’’ Was that an accurate statement of your quote to them? 

Mr. HAYES. Yes, it is. 

Mr. DOGGETT. Mr. Rapp, do you agree with Mr. Hayes? And I 

think IBM took the same position. 

Mr. RAPP. I agree with Mr. Hayes. 

Mr. DOGGETT. Mr. Crines, do you agree with Mr. Rapp, Mr. 

Hayes, and IBM? 

Mr. CRINES. I agree, as well. 

Mr. DOGGETT. And Mr. Buthman? 

Mr. BUTHMAN. I am in agreement. 

Mr. DOGGETT. All of you agree that repatriation is a bad idea. 

Mr. Rapp, let me ask you about the example that would apply 

to any United States company that moved jobs to China—it applies 

to others, as well, but it would apply to those companies—where 

you say that the Chinese tax rate is 25 percent. Am I correct that 

your testimony is that if an American company pays the Chinese 

$.25 on the dollar, that you think it is unfair that they should, in 

addition to that, have to pay $.10 on the dollar to the United States 

Treasury? 

Mr. RAPP. Yes, I do. 

Mr. DOGGETT. And, as I understand what you call a territorial 

system, the goal is to reduce the amount on earnings, on profits in 

China or elsewhere abroad, from $.10 on the dollar to zero to the 

United States Treasury? 

Mr. RAPP. Yes. 


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Mr. DOGGETT. And the goal here is to have in what you call 

a territorial system a permanent exemption from all U.S. taxes on 

all earnings abroad, all foreign earnings. Isn’t that the goal of a 

territorial system? 

Mr. RAPP. I think as we said earlier, you have got to do a benchmark of the territorial systems around the world. There is not one 

territorial system. What we are looking for—— 

Mr. DOGGETT. But the one you are advancing would consist of 

what you just said, of going from $.10 to $0 to the treasury. The 

goal is to not pay taxes, except where you are making the profits. 

Mr. RAPP. In that example, absolutely, that we would pay the 

$25 there. 

Mr. DOGGETT. Mr. Crines, do you agree that the goal should be 

to pay zero dollars to the United States Treasury on earnings that 

you would have in China, if you paid the Chinese tax, that it 

should be zero here, that that is the goal of a territorial system? 

Mr. CRINES. No, sir, I would not agree with that—— 

Mr. DOGGETT. Okay. And, Mr. Buthman, do you? 

Mr. BUTHMAN. Yes, I would agree with that, and I would also 

add that I would love to have access to the excess capital that we 

have overseas. 

Mr. DOGGETT. Overseas. I understand. And then, let me ask 

you, Mr. Rapp, you testified, especially in your written testimony, 

to the importance of the research and development credit to the active financing credit, which allows for extending credit abroad to 

operations without recognizing any earnings immediately from extending that credit. 

Are you saying that if the corporate tax rate were reduced, the 

statutory rate were reduced to the mid-twenties, that you would be 

willing to forego both of those? 

Mr. RAPP. As I said, if you get us to a statutory rate which includes states, that puts us competitive globally, everything is on 

the table. 

Mr. DOGGETT. And that would be—several of you have talked 

about what that rate is, but that is somewhere around 25 percent? 

Mr. RAPP. Including state. 

Mr. DOGGETT. Including state taxes, as well. 

Mr. RAPP. Right, right. 

Mr. DOGGETT. So you—the federal rate you would be looking 

for is below 25 percent. 

Mr. RAPP. Right. 

Mr. DOGGETT. But if you got it below 25 percent, you would be 

willing, consistent with the testimony here about the need for simplification and the problems of having a 19,000-page tax return—— 

Mr. RAPP. Yes. 

Mr. DOGGETT [continuing]. To eliminate the research and development credit. In fact, there are a long list of corporate deductions and exceptions and provisions that perhaps some of the team 

behind you have been successful in getting into our Tax Code in 

the past. And you would, for a flat rate of in the twenties, you 

would be willing to forego all of those? 

Mr. RAPP. What we have said—and I said it in my comment up 

front—what we are looking for is a level playing field. So what I 


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want is a territorial system that lines up with the countries that 

we compete with around the world. 

Chairman CAMP. All right. 

Mr. DOGGETT. All right. 

Chairman CAMP. Thank you. Time has expired. Mr. Reichert is 

recognized. 

Mr. REICHERT. Thank you, Mr. Chairman. Well, first of all, Mr. 

Hayes, just a quick question. You mentioned 19,000 pages of tax 

returns that you have to fill out. Would you be more comfortable 

with a 10,000 to 15,000 page range, or—— 

Mr. HAYES. I was hoping—— 

Mr. HAYES. How about a one-pager? 

Mr. REICHERT. A 1-pager, instead of the 19,000. Well, you 

know, this is really all about jobs in America. And I think all of 

us here in this committee recognize that. All of you on the panel 

recognize that. It is all about making the United States of America 

leaders in this global economy. That is where we all are headed, 

that is where we all want to go. 

But I think part of the problem that we all have is that we hear 

from our constituents consistently—I mean they all agree—‘‘Let’s 

sell American, sell American, sell American.’’ But I think most average Americans across this country believe that we can sell American within the United States borders, and I think some of us know 

and recognize that 95 percent of our market is outside of this country. 

Let’s just say that I am one of your employees. What would you 

tell an employee who is thinking that, you know, I am working for 

one of these great companies, earning a great wage, but I see all 

the sudden this expansion around the globe, and jobs blooming up 

all over the world, but not so many jobs here, in the United States. 

How do you explain this global expansion to your average worker? 

Because I think that is where we hear the most complaints. And 

I would imagine that you probably hear some of the same. 

Mr. RAPP. Congressman, I will start with that. I think you raise 

a great point. It is the responsibility of the business community to 

have that good discussion with our employees to explain it. And I 

will give you an example. 

I was recently in our East Peoria plant, talking about the importance of global competitiveness. And I asked the open-ended question, ‘‘What do you think about free trade and some of the agreements that are out there? Do you think we should promote that 

kind of activity?’’ And I was disappointed in the fact that there 

wasn’t a stronger opinion from the group. And I commented that 

8 out of the 10 tractors coming out of this factory go to export. 

And what I took away from that was that is not a failure of you, 

it is a failure of us, as a business, to engage with our employees. 

So we are aggressively going after it. We have created a speakers 

bureau, which creates presentations on tax competitiveness, trade, 

and the other key elements of our business. We are pushing it 

down our organization and expecting our leaders to communicate 

it to their employees, because we have got to do a better job of educating our employees to support the changes you know you need to 

make. 


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Mr. REICHERT. There are some companies, too, that produce 

pieces of their product in other parts of the country, ship it back 

to the United States, and add it to the product to finish the product, which, of course, creates more concern for our employees here 

in the United States. 

The rest of the witnesses, do you have similar programs to educate your employees? 

Mr. HAYES. In fact, I would tell you, Congressman, at United 

Technologies we believe that lifelong education and furthering the 

education of all of our employees is of paramount importance. We 

spent nearly $1 billion in the last 15 years on the UTC Employee 

Scholar program. More than 33,000 degrees have been earned by 

our employees. 

Because globalization, as we tell everyone, is a reality. The jobs 

that we have today are not going to be the same jobs we have 10 

years from now. We have to have a better educated workforce, we 

have to have people that have better skills. And we encourage that 

through paying for four-year college for people, we pay for books, 

we pay for fees. And we think that is the responsibility the corporations have to their employees, is to help them become better educated to deal with the globalization that is happening today. 

Mr. REICHERT. Yes. 

Mr. BUTHMAN. I would say we have the same emphasis on educating our workforce, but I also give them a lot of credit. In our 

industry, it is very competitive. We understand we have to drive 

efficiency. The best way to protect employment and growth is to 

drive efficiency and drive innovation. And our employees are actively engaged in that, and they are pretty aware. I am constantly 

amazed at how aware they are of the world around us—— 

Mr. REICHERT. My time has just about expired, but I want to 

make this point that what you see here are people that really want 

to work with you in solving this problem and making America 

great again and bringing confidence back into our economy. 

Again, our constituents are the ones that drive us. And if you can 

help us with that, I think that would be one of the, I think, largest 

hurdles that we have to overcome in looking at restructuring the 

Tax Code, and also in looking at trade agreements that we have 

with other countries around this world. 

Chairman CAMP. Okay. 

Mr. REICHERT. And I yield back. 

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

Mr. THOMPSON. Thank you, Mr. Chairman, and thank you for 

holding this hearing. I think it has been incredibly instructive and 

helpful for all of us in dealing with this issue. And thank you all 

for being here to provide the testimony. 

I have a couple things I am not clear on that I would like to just 

have you help me out on. Am I to understand that you agree that 

whatever we do in regard to corporate tax reform should be revenue-neutral, we should not increase the debt, we should not increase the deficit? And we can do the yes or no thing; that is going 

to be popular—— 

Mr. HAYES. I think that is the reality of today, a fiscally responsible—— 

Mr. THOMPSON. So you are for that. Okay. 


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Mr. RAPP. Yes, fiscally responsible. 

Mr. CRINES. Yes, sir we would support that. 

Mr. THOMPSON. No, no, not fiscally responsible. Revenue neutral doesn’t increase the debt, doesn’t increase the deficit. 

Mr. HAYES. Yes. 

Mr. THOMPSON. Okay. 

Mr. HAYES. That should be the goal. 

Mr. RAPP. Agreed. 

Mr. THOMPSON. Everybody is there? And then, on that, I think 

that Mr. Becerra started down this road, but on the issue of value 

added tax, let me be very, very clear. Many of us are either questionable of that, many of us are opposed to that. But just for the 

purpose of understanding the head nods when Mr. Becerra brought 

it up, are you saying that you would be in favor of a value-added 

tax in order to make up that difference that would come about because you—of the lower end of the corporate tax? 

Mr. HAYES. I would just say that I think that a value-added tax 

is probably the most efficient way to raise revenue, because it taxes 

consumption and not investment. And any review of taxes on a holistic basis should include a review of the potential for a valueadded tax. 

Mr. RAPP. I would agree. I think that, to the degree that you 

can make this a comprehensive review of taxes, I think it makes 

it more valid. I think we have got to be realistic about how much 

you can bite off at one time. 

Mr. CRINES. To the extent we are advocating in favor of simplicity, Congressman, I think introducing a new tax regime would 

add a lot of complexity. I would prefer reform that really is focused 

on the income tax regime. 

Mr. BUTHMAN. And we would agree, that the essence is simplicity and really thinking through the administration that would 

be layered on through a VAT, which we see in, for example, in 

many countries in Europe, is something to be seriously considered. 

Mr. THOMPSON. Well, and I just want to point out for the 

record and anybody who might be listening, that the idea of broadening the base and lowering the rate is great. And, bottom line, it 

is a math problem. But you can’t get to where you all said we 

ought to be by just eliminating the expenditures. So something else 

would have to be added in if we were, in fact, going to stay at revenue neutral. And everything on the table is different than a—saying that everything is on the table is different than stating specific 

ways for us to get there. 

A couple of other things. On Mr. Doggett’s question on repatriation, I am not certain that I understood your position. You all 

think it is a bad idea, or you think the way that it was done last 

time was—shouldn’t be duplicated? 

Mr. HAYES. I think a one-time repatriation is a bad idea. I 

think, again, it derails the idea of a comprehensive tax reform. So 

I would advocate against a one-time repatriation. 

Mr. RAPP. I would agree. We are encouraged by the type of debate that is happening here today, and we just don’t want to give 

any relief valve to getting on with this. 

Mr. CRINES. Done in isolation, I don’t believe it accomplishes 

the objective of leveling the playing field. 


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Mr. BUTHMAN. Treats the symptom, and not the underlying 

issue. 

Mr. THOMPSON. Okay. And then, if you will indulge me for just 

a second, there is a hidden tax. And it was—the Secretary of the 

Treasury pointed this out the other day. And that is in our failing 

infrastructure in this country. He has stated specifically that that 

equates to a tax on business. 

And I am just curious if you, A, agree with that, and B, when 

you are looking at your investments in other countries, do you take 

into consideration their infrastructure and their plans for increasing efficiencies and infrastructure in your overall long-term business plans? 

Mr. RAPP. Absolutely. You know, as I mentioned earlier, we ex- ported about $13 billion worth of product last year. And it is hard 

to do. I mean with the state of the U.S. infrastructure, the feeders 

into the ports, we definitely have seen a decline in infrastructure 

competitiveness in the U.S. versus other parts of the world. And as 

we invest around the world, infrastructure is one of the first things 

we look at. 

Mr. THOMPSON. So you all agree with that? 

Mr. CRINES. That is correct. 

Mr. BUTHMAN. Yes, sir. 

Mr. THOMPSON. And then, just lastly, you know, we are talking 

about this debt limit issue and how we are going to deal with that. 

And the experts tell us that if we don’t do it, it will increase the 

interest rates. Would that, not increasing the debt limit, would that 

hurt or help you guys? 

Chairman CAMP. I am afraid time has expired. 

Mr. HAYES. That would hurt us. 

Chairman CAMP. Dr. Boustany is recognized. 

Dr. BOUSTANY. Thank you, Mr. Chairman. This is a great 

hearing, and I appreciate the panelists being here and providing 

testimony. 

Given our current tax system, worldwide taxation with deferral, 

foreign tax credits, and the fact that we have seen the international marketplace change, you have gone to regional management structures, as opposed to country-by-country. We have some 

provisions in our Tax Code that have to be renewed annually, or 

maybe once every two years. 

And one of those, Mr. Hayes, you mentioned, was the CFC lookthrough. And could you give us a little more background for the 

committee on why this is important, as you try to compete in this 

international environment? 

Mr. HAYES. Yes, Congressman. As I mentioned in my opening 

statement, about 60 percent of our revenues are earned outside of 

the United States. And about 60 percent of the cash that is generated is also earned outside of the United States. The CFC lookthrough rules allow us to move that cash to the various pools 

where it is most efficiently put to use without having to pay a U.S. 

tax on the interest income earned in the jurisdiction that is potentially lending that money. 

Again, I think this is simply a question of efficiency, and the 

CFC look-through rules provide a very efficient way for us to manage our foreign cash. 


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Dr. BOUSTANY. And so, when we have a tax provision like this 

that comes up for renewal once a year or maybe every two years, 

depending on the circumstances, this creates a significant problem 

for you to predict your future tax liability and make business decisions. Is that correct? 

Mr. HAYES. That is correct. 

Dr. BOUSTANY. Thank you. With regard to compliance, I want 

to ask everybody on the panel. And I think, Mr. Hayes, you mentioned that you have 19,000 pages in your tax return. Obviously, 

this is very complex. Talk to us a little bit about your interactions 

with the IRS. How difficult is this process? I understand there are 

ongoing audits. You probably have IRS folks embedded. Is that a 

process that works? What would you do differently? 

Mr. HAYES. You know, I would tell you we have 12 full-time internal IRS agents that are on site at United Technologies in Hartford, Connecticut every single day. We have complete open books 

with the IRS. We share with them all of the information. As I mentioned, the 19,000-page tax return, that is just one year. We currently have five years open under examination. That is a lot of 

work. 

Again, I think the attitude with the agency is cooperative, that 

we try and be open book. And we think—we take compliance very 

seriously. It is very important to us not to have to go to tax court. 

We want to be fair and open. 

Mr. RAPP. I think the point you raise is why we have all talked 

about the need for simplicity. Because the high level of interaction 

we have is based on the complexity of the systems that we have 

to deal with. 

And so, I would say the process today, painful would be the description that comes to mind. 

Mr. CRINES. Congressman, it does take about six months for the 

company to prepare its consolidated tax return. It takes at least 

another six months for those returns to be audited by a team of 

auditors from the IRS that is larger in size than the size of our tax 

department. So I think that says it all. 

Mr. BUTHMAN. Yes. You know, I would say we have a cooperative relationship. But the complexity of the Tax Code does mean 

you have to share a lot of information. You have to have very 

skilled people at understanding the Tax Code. 

I feel a little bit better. Our tax return is only about 4,000 pages 

long. So I come away from this hearing a little bit encouraged. 

Dr. BOUSTANY. It is my understanding that the IRS auditors 

rotate in and out as a team, and that there is some lack of continuity, and this creates some repetition and duplication of effort 

on your part. Is that a fair statement? 

Mr. HAYES. That is correct. Every two years or so. 

Mr. BUTHMAN. I think in any service organization, the quality 

of the individual is very important. And when we have good folks 

from the IRS working with us, it makes the process a lot easier. 

Dr. BOUSTANY. Thank you. I see my time is about to expire, 

so I will yield back. Thank you. 

Chairman CAMP. Mr. Larson is recognized. 

Mr. LARSON. Thank you very much, Mr. Camp, for holding this 

hearing, and I want to thank all of our witnesses. And let me start 


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with a point that Mr. Hayes had made, and I hope all of you can 

answer that. It centers around the idea and concept of 

benchmarking. 

And in as much as this is a global economy, what, in your opinion, if your companies are benchmarking, and I assume all of them 

are, who would be the top benchmark in the world right now? 

What system in the world would you say would best advantage 

American companies if they were subscribing to it? 

Mr. HAYES. Congressman Larson, let me start there. I think, 

again, as we look across the globe and the OECD, I think there is 

probably no one system that is perfect. And I would hate to hold 

out France as the paragon of efficiency, but the fact is I think the 

French territorial system probably has merits that should be considered as part of this benchmarking. 

The fact is, under their territorial system, there is no expense 

disallowance, but there is a small toll tax of, I believe, five percent, 

as companies repatriate earnings back into France. But it is a very 

open system and, again, it does not focus on worldwide income, it 

focuses on income earned in France. And then French companies 

are simply taxed at a significantly lower rate than the statutory 

rate, as they bring earnings back. 

But again, it is just one of many systems that is out there that 

I think is worth studying. 

Mr. LARSON. Yes. Thank you. Mr. Hayes, you also realize—and 

I want to put this in the context—I understand you frame that in 

the context of both having sound economic fundamentals and also 

recognizing that benchmarking would have to go along with reform. 

This is not—I am just trying to get your sense so that, as we are 

looking at this—— 

Mr. HAYES. Yes. 

Mr. LARSON [continuing]. We can point to those best practices, 

or try to benchmark to those as to what might enhance our capability, globally. 

Mr. HAYES. Yes. 

Mr. RAPP. Yes, and one I would add to it is I think the thing 

that is interesting that shows why this is so timely is the UK and 

Japan have just gone through this very same process. And they did 

an extensive amount of benchmarking, asking what does it take to 

be competitive, what type of system and structure that has to be 

out there. I think that is—would be another source to look at, in 

terms of how they walk through the process, how they determine 

to make the changes that they have made. 

Mr. CRINES. And, Congressman, we believe the European territorial systems have made significant progress in simplifying their 

Tax Codes. And among those—and we have significant market 

share in Europe—would include the UK, Germany, and France. 

Mr. BUTHMAN. I have nothing to add to the discussion. I do 

think a comprehensive review—I think that the process the UK 

and Japan just went through would be a great place to start. 

Mr. LARSON. Following up on the line of questioning that a couple of my colleagues had, and Mr. Thompson, specifically, in knowing that the United States is currently—and this Congress is currently—dealing with raising the debt limit, what is your feeling on 

that? 


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Do you think that there should be a—what are the ramifications 

of not acting on this in a timely basis for your companies? 

Mr. HAYES. You know, Congressman Larson, I think it would be 

devastating to the world economy, not just to the U.S. economy and 

not just to UTC, if the Congress failed to raise the debt limit. The 

full faith and credit of the U.S. Government is the basis upon 

which the entire world financial system revolves. 

If we think that the problems back in 2008 with the Lehman crisis were devastating, a default by the U.S. Government would have 

repercussions beyond anything we saw in 2008 and 2009. So, we 

would encourage the Congress to raise the debt ceiling. 

Mr. LARSON. This is in a process, then, from the perspective of 

business, of dealing with a credit card. This is a matter of default. 

That is how critical this is? 

Mr. HAYES. That is correct. 

Mr. RAPP. Yes. You know, for us, we are seeing improvements 

in our business around the world, but it is still a pretty fragile 

economy. The last thing we need now is another, if you would, shot 

across the bow that creates disruption, in terms of the global financial markets. 

So, we are counting on the fact that Congress is going to come 

together and figure out the right thing to do here. 

Mr. CRINES. I don’t think I could say it any better than Mr. 

Hayes, Congressman. I would agree with his remarks. 

Mr. BUTHMAN. Confidence in the quality of our U.S. Government debt and the U.S. dollar are critical to running our business 

and, really, are a worldwide issue. I agree. 

Mr. LARSON. Thank you all for your expert testimony. 

Chairman CAMP. Thank you. Mr. Buchanan is recognized. 

Mr. BUCHANAN. Yes. Thank you, Mr. Chairman, for this important hearing. I appreciate the witnesses being here, and I applaud 

your companies because, at the end of the day, to me, it is about 

free enterprise. And the more we can help you be successful, it is 

in the best interest of the country, in terms of providing good jobs. 

I would like to get your opinions, and I don’t know if you have 

given much thought about this, but I am thinking down the road 

as someone that has been in business for 30 years. I think there 

is a mindset in Washington that they are seriously looking at lowering the tax rate, you know, and cutting out deductions, maybe 25 

percent, 28. I have heard the President express that interest, you 

know, when he talks to CEO roundtables and others. 

But help me understand. We are looking at one part of it. But 

as we look down the road, if we move down this road, you have a 

lot of competitors that might compete with your divisions or with 

other aspects of your business. They might not be the Fortune 

500—in fact, they are not—the Fortune 500. But these are middlemarket companies, these are small companies that compete with 

some of your divisions. They are called, as you know, pass-through 

entities. I am sure all of you are CPAs or work with a lot of accountants. 

How do we cut your rate a third, ideally, and eliminate deductions—how do we—how do you do that without addressing the 

LLCs, the subchapter S corporations? I used to be a C corp, and 

you know, over the years they moved me to an S corp in the 1980s 


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and an LLC in the 1990s. How do you do that when you have a 

mentality with some people that, they want to tax the rich? Well, 

the rich are a lot of those job providers. They are people that make 

over $250,000. A lot of them are my friends that have maybe 100 

employees, 500 employees, but they happen to make $2 million a 

year. 

How can they give you a tax cut, which I would like to see go 

to 25 percent, but how do you do that and not address the LLCs 

and the other pass-throughs when you have got this political rhetoric that talks about taxing people over $250,000 at a higher bracket? 

And you might say, ‘‘Well, that is your problem,’’ but I would like 

to get your thought on that. How do you deal—how do you propose 

that we consider something like that, as we move down the road? 

And Mr. Hayes, I am going to put you on the spot. 

Mr. HAYES. Okay. Well, again, I think, again, that the fact that 

there are many American companies, if not corporations, that don’t 

pay tax is an issue that has to be dealt with. It is just a matter 

of law, the fact that if you are a company with less than 500 share 

owners you can be a pass-through entity, and you are not subject 

to corporate income tax, you are not subject to the same compliance 

rules, you are not subject to the 35 percent, and the income, in fact, 

is passed on to the individual owners of the business. 

And so, how do you reconcile that with not wanting to raise taxes 

on America, and how do you deal with the fact that you do not 

want to kill job creation by small businesses? 

I think, again, it goes back to, in our view, a holistic view of taxation in this country. What is the most efficient way to raise revenues? And, again, I think taxing capital, taxing investment is, at 

the end of the day, destructive to value creation, to job creation. 

And again, I know that the value-added tax is a very difficult—— 

Mr. BUCHANAN. My time is limited. Let me go back, though. 

But can you imagine if we lowered your taxes to 35, corporate 

America, Fortune 1000, and then somehow the sub-S’s and the 

LLCs either stayed at 35 or moved to 40? I don’t see how that 

works. I mean am I missing something? 

Mr. HAYES. Well, I think, again, it is the issue of double-taxation. Our share owners are taxed twice. They are taxed at the 35 

percent statutory rate, and they are taxed again when we pay them 

dividends, whereas the pass-through entities are only taxed once. 

Mr. BUCHANAN. Yes. That is why they are pass-through, as 

you know. 

Mr. Rapp, do you have any thought on that? 

Mr. RAPP. Yes. We have talked about VAT earlier that involves 

the consumers. Now we bring another one into it. And I think the 

reality of the situation is if we throw all these issues on the table 

at one time, we are probably not going to move forward on any of 

them. 

The other thing I would say is, to the degree that we become 

more successful and more competitive, it has tremendous positive 

benefits to some of those very companies that you referenced. We 

are supported by about 4,900 small and medium-sized businesses 

in the U.S. who are suppliers to us, as an example. 


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Mr. BUCHANAN. And let me shift. I am going to shift gears, because my time is limited. On this territorial tax—I am not saying 

I agree or disagree with it, but, you know, I like less taxes. But 

the bottom line is if you are in a tax area—we said 25 percent, but 

let’s say you are in a tax area that provides 10 percent. I was just 

talking to people from Hong Kong, they are at 16. Then you have 

a 20 percent tax incentive to do business there, instead of in the 

States. 

Chairman CAMP. Time has expired. 

Mr. BUCHANAN. Thank you. I yield back. 

Chairman CAMP. And what we will do is move to Mr. Smith. 

Mr. SMITH. Thank you, Mr. Chairman, and thank you to our 

witnesses. We have heard a little bit about wage pressures here 

this morning. And I am intrigued by how diverse the panel is. And 

yet, when it comes to so many policies, whether it is energy policy 

or tax policy, I mean, there is so much interconnectivity. And, you 

know, with wage pressures around the world, those are very real 

issues. 

I was wondering if you could elaborate, perhaps, the effect of tax 

policy on wage pressures, or wage pressure the other way around. 

So, if any of you could, elaborate. 

Mr. BUTHMAN. Let me take a crack at it. You know, I am not 

sure that the two interact. As we look at an investment, where to 

set up a manufacturing plant, again, typically for our products 

you’ve got to be close to the consumer. And you consider tax policy, 

you consider wage rates, you consider infrastructure, you consider 

certainty, political and economic risk, I think, from our point of 

view, we don’t see that interaction with tax policy driving wage 

rates lower or higher. It is just a fact of the local market. 

I think with regard to the reference to China earlier, we are seeing how rapidly things change around the world. A low labor cost 

jurisdiction in a very rapid time can get to global averages with a 

lot of factors. So, we would say there are two separate and distinct 

factors that we would consider in making an investment decision. 

Mr. CRINES. Congressman, the thing that we have to pay attention to with respect to our employee base is what is happening with 

disposable income and tax policy can certainly have an effect on 

that. 

I would tell you that a more significant source of pressure with 

respect to our domestic employees has been health care, and the 

rising cost of health care over the last many years. And as we look 

at those pressures, and decisions around whether or not to locate 

in the U.S. or OUS, I wouldn’t say we are seeing significant differences in tax policies that are causing us to choose OUS locations 

over U.S. locations. 

Mr. RAPP. Yes, I would agree. I think the reality of the competitive world that we operate in today, you have got to be competitive 

in every part of your business. You have got to be competitive, relative to your tax structure. You have got to be competitive, relative 

to your wage rate. We have to build the best products, provided by 

the best services. 

So, there is no free lunch in the competitive world we deal with. 

And so I wouldn’t draw a direct cause and effect between the effecVerDate Mar 15 2010 00:05 Dec 21, 2011 Jkt 070882 PO 00000 Frm 00068 Fmt 6633 Sfmt 6602 I:\WAYS\OUT\70882.XXX GPO1 PsN: 70882

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tive tax rate and our wages. I would say that we look at how are 

we going to be competitive across the full spectrum of our business. 

Mr. HAYES. Yes, I would just add, as we look at long-term investment decisions, taxes is probably the biggest single cost, in 

terms of that investment decision. You know, direct labor, in our 

business, is less than 10 percent of our cost. So difference in wage 

rates really don’t have a dramatic impact on investment decisions. 

It goes more to where are the customers, and where do the logistics 

costs—and then what are the tax costs associated with those investments. 

Mr. SMITH. Okay. Now, when you mention your labor costs, Mr. 

Hayes, so you said 10 percent of your overall costs are labor costs? 

Mr. HAYES. That is correct. 

Mr. SMITH. So then it is quite obvious that you are not locating 

overseas to avoid wage pressures or anything. 

Mr. HAYES. No, you locate in the markets where the customers 

are. And I think, again, you—I bring back the example of the Otis 

elevator. You cannot service an elevator in Shanghai from East 

Hartford, Connecticut. It is just not possible. You have to be in the 

markets where the customers are. 

Mr. SMITH. Okay. Very well. Thank you, Mr. Chairman. I yield 

back. 

Chairman CAMP. Thank you. Mr. Blumenauer. 

Mr. BLUMENAUER. Thank you very much. I really appreciate 

the frank and clear testimony that you are giving us, in terms of 

some of the complexities that you are facing. I know I had similar 

feedback, but frankly, not as eloquently, from some of the businesses back home of late. 

I also appreciated your clear and unequivocal statement about 

playing Russian roulette with the debt ceiling. I hope that—we 

have got all sorts of things we can argue about around here. We 

have got lots of leverage points that we can take hostages and push 

each other around. I hope that this is one that is not in that category. And your testimony, I think, helps add to the record that 

maybe will make that a little less likely, and I appreciate it. 

I am—and I think you have made clear that you have got to deal 

with the reality—I think, Mr. Rapp, you talked about making investments based on what your—what the costs are going to be for 

you, not the aggregate, but what the costs will be, marginally, for 

the deal that you are looking at, posing problems. 

One of the things that you have started to get at, and I would 

like you to elaborate on—because you have been clear, you are not 

interested in draining the treasury. You understand that there is 

investments, and several of your businesses would benefit, for example, if we were doing a better job of investing in infrastructure 

and some of the user fees that are—were—are worldwide, and we 

used to do here. 

But you know, you look at the data. We are not a high-tax country, compared to the other developed countries around the world. 

All the information suggests we are at the bottom end. France, that 

you mentioned a moment ago, has much higher total taxes. We put 

aside for a second the personal income tax. 

But, Mr. Hayes, I think you were starting to get into the valueadded tax, which is a glaring omission. All our competitors have a 


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value-added tax. Hard to evade, reasonably simple to administer, 

people have figured it out. It is part of this level playing field. And, 

Mr. Rapp, I know you were starting—maybe if you two gentlemen 

would, just comment on where you would like to put that on the 

record, in terms of our deliberation of deconstructing the Tax Code 

and putting it back together. 

Mr. HAYES. Again, I think I would say, as we look at the struc- tural deficits in this country, which are approaching $1.5 trillion 

annually, the fact is we know we have to figure out a way to raise 

revenue, as well as to cut expenditures. 

I think as we look at the OECD, we recognize that, you know, 

corporate taxes are perhaps not the most efficient place to raise 

revenue. And I think that is what we are talking about here today. 

Obviously, it should take a holistic view of how do we most efficiently raise revenue to meet the needs of the country. I think the 

value-added tax is one of those things that needs to be on the table. 

I think the deficit commission last year addressed this as a potential. 

And I think you can’t simply ignore the fact that it is an efficient 

way, it is very compliant. It is compliant because every step along 

the way everyone is incentivized to have compliance, because they 

have to get a refund from the taxes that they paid. 

So, again, I am not saying it is the solution. I just think it has 

to be out there as a potential for us, as we have this debate on how 

do we deal with the structural deficits in the country. 

Mr. BLUMENAUER. Yes, I appreciate your reference about the 

deficit commission that also talked about maybe a gas tax, a user 

fee. 

Mr. Rapp, you have any thoughts? 

Mr. RAPP. Yes. I just echo what Greg said. To me it really gets 

back to this issue of what do you want to be as a country. And you 

have really got to be careful of the unintended consequences. 

I think a lot of the other OECD countries have decided that a 

good corporate, good manufacturing base is important, in terms of 

the long-term competitiveness, standard of living, and other things, 

and so they incent that type of behavior through their Tax Code. 

And they raise revenues through other mechanisms. Yes, I think 

it is clear. 

The challenge, I think, before you is how much change can you 

take on at one point in time. 

Mr. BLUMENAUER. Well, and I appreciate what our chairman 

has done, in terms of trying to lay a foundation for a broader conversation, having a variety of viewpoints. Because all those structural problems you talked about, actually it is the direction. We 

have got to bend the curve, we have got to send signals to business, 

to the bond market, to ourselves, as policy-makers. And I think you 

have given, I think, a very useful viewpoint about what we need 

to do to do that right. Thank you very much. 

Thank you, Mr. Chairman. 

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

Mr. SCHOCK. Well, thank you for all of your great testimony 

and answers to some important questions. You know, a lot of the 

good questions have already been asked, a lot of the issues I was 

going to raise have already been addressed. 


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One thing I want to make clear, though, that some of my friends 

on the other side of the aisle continue to point to, and that is this 

issue of deficit neutrality. 

I think it is important to point out—and I would be interested 

in your comment—to the degree we become more competitive as a 

country, you know, one of the things we struggle with when we 

talk about budget scoring is that our budget scores base it on a 

static business environment. In other words, based on current activity in the United States or in foreign countries. 

Would a more competitive—and this is a softball, I think—would 

a more competitive rate warrant you to invest more in the United 

States, or less, or would it be static, in terms of the amount of investment you would make in the United States if we had a more 

competitive tax rate? 

Mr. RAPP. On that one I would say as we talked throughout the 

discussion today, I think the four of us strongly support the principle that our global growth drives employment in the U.S. So the 

degree that you make us more competitive, it is going to lead to 

jobs and investment back here. 

I think the thing on the scoring that you just have to keep in 

mind is the scoring would tell you that if we maintain status quo 

there is no change in revenue. Chairman Camp, I think you pointed out some interesting statistics earlier about the decline of U.S. 

competitiveness, and what it has meant in terms of share of global 

GDP, share of investment, all those things. 

So, to assume that you can address the competitive issue and 

maintain a status quo may be a flawed assumption. 

Mr. HAYES. I would also add as we think about the amount of 

cash that sits offshore with U.S. companies—over $1 trillion, and 

at UTC that is over $4 billion that is trapped overseas—a simplified tax system, one with a territorial system that would allow 

us to bring cash more freely back into this country, even if that 

cash is returned to share owners, those share owners have the opportunity to invest, as do we, back in this country. 

And I think that is the key, is the free movement of capital here. 

And, right now, capital is stuck overseas, which forces us to make 

an investment overseas. To the extent that we have a territorial 

system, even one with a small toll tax, we will be encouraged to 

bring that cash back to make investments here, to give to our 

share owners, to invest in America. 

Mr. CRINES. We have to compete, not only for customers, but 

also have to compete for capital. And to the extent that we have 

foreign-based competitors that have an opportunity to earn higher 

after-tax returns on the capital that they have entrusted to them, 

that puts us at a competitive disadvantage, clearly. 

So, anything that can be done to reduce that disadvantage will 

put us in a position to invest more aggressively in innovation and 

grow our businesses on a global basis. 

Mr. BUTHMAN. And I would agree. It is just like our business. 

When we are faced with a profit shortfall, as you are faced with 

dealing with a deficit, we can drive cost efficiency, we can raise 

revenue through pricing, or we can try to drive volume. 

And, from our perspective, raising prices is sort of the last lever 

we pull, because we are in a competitive marketplace. And our conVerDate Mar 15 2010 00:05 Dec 21, 2011 Jkt 070882 PO 00000 Frm 00071 Fmt 6633 Sfmt 6602 I:\WAYS\OUT\70882.XXX GPO1 PsN: 70882

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sumers shift very rapidly to competing products, even if we think 

we have the best performing, most attractive product on the shelf. 

And to me, this is about creating more competitiveness. If we are 

more competitive, we will drive more volume. 

I think Greg makes a great point. There is a lot of capital 

trapped overseas that ought to be on shore, being deployed somehow, either through us, in research and capital, or deployed back 

to our shareholders to reinvest in other industries. 

Mr. SCHOCK. Thank you all. I appreciate it. 

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

Ms. JENKINS. Thank you, Mr. Chair. Thank you for holding this 

hearing. And thank you all for being here. I think we probably 

have covered most everything. So if—maybe just comment briefly 

for me Because all of you do represent companies worldwide, and 

I have understood from the comments and your testimony this 

morning that for most of your companies, intellectual property and 

R&D takes place in the U.S. 

So, I would just appreciate it if you might just reiterate for us 

the relationship between your domestic operations and your foreign 

operations, particularly how they support one another and how important your foreign earnings are to your domestic operations and 

our growth, here in the United States. 

Mr. BUTHMAN. Yes, let me take a shot at that first. The vast 

majority of our R&D investment is done today in the United 

States. Increasingly in our markets, though, the pace of change and 

the amount of innovation around the world is an important source 

of ideas. So I see that shifting over time. We are going to have 

more ideas come to the U.S., we are going to bring them to these 

markets, we are going to be able to use those ideas to enhance the 

lives of our consumers. 

But, by and large, and for the foreseeable future, the vast bulk 

of our technology and innovation investment is going to happen in 

the United States. The more capital we have to return here and deploy, the stronger that domestic base is, it strengthens our business 

here and around the world. 

Mr. CRINES. Congresswoman, approximately 75 percent of our 

research and development employees are based in the U.S. Seventy 

percent of our foreign source revenues are sourced out of manufacturing operations that are U.S.-based. 

So, as a consequence of being successful competing for business 

overseas, we have been able to increase U.S.-based employment 

over a 10-year period by 80 percent. 

So, we continue to look for opportunities to expand our innovation programs, hire more engineers out of some of the terrific universities that we have here in this country. 

Mr. RAPP. Yes, I would—Congresswoman, I would say our foreign operations have a tremendous impact on our domestic operations in a number of ways. One is—consistent here—is the R&D. 

We have got a tremendous investment on very complex sales systems and all that to test out the product that we have got to do. 

So a big part of it is R&D. 

Another key driver is the corporate services. The amount of resources that we apply here—we are doing a global deployment of 

a new IT system right now worldwide led by the IT resources in 


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the U.S. We have got about a $30 billion global portfolio on financing equipment for our customers headquartered treasury management, all out of the U.S. And the same goes for purchasing, IT. So 

those corporate services support our global operations, and it is 

really good for the U.S. 

And then the last one of our foreign business really being a positive impact on the domestic aide is just the exports that we drive, 

about $13 billion. You know, it is an interesting number. We have 

exported last year the equivalency of our total U.S. sales. And so 

people in our organization understand winning in China matters. 

So those would be the places that it would have the most direct 

impact. 

Mr. HAYES. Yes, Congresswoman, maybe just a couple of numbers here, because that is what we do every day. About 60 percent 

of our revenues come from outside of the U.S., and 60 percent of 

our profits. And so, last year we made about $5 billion after tax 

at UTC. So $3 billion of earnings came from our overseas operations. We spent $3.7 billion on R&D last year. About a billion of 

that was overseas. 

But for the overseas earnings, that $3 billion that we were able to earn overseas, we wouldn’t have been able to fund the $2.7 billion that we invested in this country in R&D. 

So, I look at this as, again, we are a global company. We serve 

global customers. But at the end of the day the big investments 

that we are making in R&D are coming in this country, and that 

is what creates the intellectual property that allows us to be successful around the world. 

Ms. JENKINS. Thank you all. Mr. Chairman, I will yield back. 

Chairman CAMP. Thank you. Mr. Pascrell is recognized. I think, 

under the rule of presence at the gavel, Mr. Pascrell is recognized. 

Mr. PASCRELL. Thank you, Mr. Chairman. Listened very, very 

carefully to this discussion this morning. I don’t know of a person 

that sits in the Congress that doesn’t want tax fairness. Of course 

that is perceived in different ways by different people. We understand that. And it would be foolish to take a position of anti-business, particularly in a time when so many of our own people are 

out of work throughout the nation—not in any one particular state, 

but throughout the nation. 

There is a—we lose approximately $100 billion in tax revenues 

every year, due to corporations and individuals moving money to 

offshore tax savings. Now, how do we make up for that lost revenue? Here is how we make up for the lost revenue. The average 

U.S. tax filer pays $434 that he doesn’t even know he is paying. 

So that is how we make up that slack. That will feed a family for 

about three weeks, by the way. 

So that is a very serious problem in us trying to get equity. And, 

by the way, the thousands of pages that you complain about in the 

Tax Code were not written by the average guy on Main Street. 

Those pages—and every president in the past 30 years has promised us a simpler form and a shorter amount of pages, every president—but most of those pages are written by your lawyers. And 

you know it, and I know it. But the people of New Jersey better 

know that they are paying, each individual, $752 more in taxes because of what corporations do to us day in and day out. 


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You have hundreds of lawyers. GE has 1,000 lawyers doing tax 

stuff. The average American has no one to turn to, usually, and is 

a victim. So let’s get it straight. Who are the victims, and who are 

the perpetrators? 

Mr. Crines, I have waited a long time—it was quite by accident, 

I didn’t even know you guys were going to testify today—Zimmer 

Holdings. You are here to advise us on tax policy. Your company, 

your corporation, was accused of Medicare fraud in 2007. In fact, 

your company paid $310 million in a fine. It has become part of 

how we do business nowadays. 

Let’s talk about competitive advantage. Here is what your corporation was, in terms of corporate advantage: bribing doctors in 

hospitals to use your device. In fact, the person who was appointed 

the federal moderator of that case was the former attorney general, 

Ashcroft, who got a $52 million contract to oversee you to get you 

to fly straight to keep you from going to court in—not you, personally—so nobody would go to jail. So you made the agreement. 

I want to know one thing, first of all, is how much was your fine, 

as stated in that settlement? Did you engage in a monitoring agreement with Mr. Ashcroft, Mr. Crines, your company? 

Mr. CRINES. The company entered into a deferred prosecution 

agreement with the U.S. attorney’s office. It was effective from September of 2007, expired in March of 2009, after the company had 

successfully complied with all the terms of that agreement, sir. 

Mr. PASCRELL. Were you able to deduct your tax liability from 

your—were you able to deduct that from your tax liability, the cost 

of the monitoring agreement which you made with the Federal 

Government? 

Mr. CRINES. As a result of a submission to the IRS requesting 

a ruling as to how we should handle the fine on our tax return, 

we were able to deduct one-half of the fine that we paid. 

Chairman CAMP. Time has expired. Mr. Paulsen is recognized. 

Mr. PASCRELL. May I ask one more question, Mr. Chairman? 

Chairman CAMP. I am afraid, Mr. Pascrell, time has expired. I 

have treated everyone the same way in the hearing today, and it 

is Mr. Paulsen’s time. 

Mr. PASCRELL. Okay, thank you. 

Mr. PAULSEN. Thank you, Mr. Chairman, and thank you for— 

all of you—for taking the time to be here today. And we certainly 

heard some common messages in terms of competitiveness and 

what you have to do to create jobs here in the United States. 

I want to ask one quick question, too, of Mr. Crines, and then 

I will open it up. You know, one of the issues that I really do have 

a strong concern with that we have touched on in a couple of hearings is this new medical device tax that is going to be a tax on innovation, a tax on R&D. You talked about 75 percent of the R&D 

in your company is here, in the United States. 

Can you just maybe reflect how this is going to—this new tax, 

which starts in about a year-and-a-half, this new excise tax, doesn’t 

matter if you are profitable or not—how is that going to affect your 

competitiveness in general, and will that come out of R&D? 

Mr. CRINES. Well, as a matter of fact, Congressman, the company announced at the beginning of this year a restructuring, in 

part, to get the company in a position to be able to afford the inVerDate Mar 15 2010 00:05 Dec 21, 2011 Jkt 070882 PO 00000 Frm 00074 Fmt 6633 Sfmt 6602 I:\WAYS\OUT\70882.XXX GPO1 PsN: 70882

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creased tax and still continue to produce returns on the capital 

that we have invested that are aligned with what our peers both 

our U.S. multinational peers, as well as our foreign-based multinational peers, can earn for their investors. 

So, the—as I said, the excise tax, which, for Zimmer, will result 

in additional expense of somewhere in the neighborhood of $50 million to $60 million, beginning in 2013, has forced us to take steps 

to—that have resulted in the reduction of about 450 management 

and staff jobs at the company. 

And again, those reductions are taking place over the course of 

this year, and will put us in a position such that we can afford that 

tax. And those reductions did include, in some cases, research and 

development positions that are U.S.-based. 

Mr. PAULSEN. Thank you for that. Without a doubt, I have 

heard this similar story from other medical technology device companies, that this industry has been very successful. It is an American success story, got a strong presence in Minnesota. It is in New 

Jersey, it is in Boston, it is in California. And we want to keep it 

in the United States. And there are definitely threats that this is 

moving towards Europe. And the tax is just one component of that. 

But I think all of the witnesses here today also have just, really 

given a message that it is better to have a simpler system that you 

can all focus on with certainty, because you are allocating capital 

10, 25 years out. 

And one of my observations with Congress is Congress’s longterm thinking is six months or two years. And so, you know, we 

have the R&D tax credit, are we going to extend it for another 

year, are we going to extend it for six months. And you are thinking 10, 25 years out. So if you are going to create jobs, you have 

to be thinking down the long term. 

And wouldn’t it be better to have that certainty and that predictability in your tax department, so you don’t have to have 50 people, 

100 people, 100 lawyers, 100 attorneys working for you, how to 

comply with the Tax Code or find deductions or loopholes, et cetera, 

and really put those people’s knowledge and expertise to start their 

own company, to create their own jobs, to really harness that energy? 

I mean, feel free to just walk that line, share any thoughts. 

Mr. RAPP. I would just say yes. I think a lot of times I get the 

question, ‘‘What does it take to get the U.S. growth engine moving,’’ 

and I think you touched on the key issue, and that is certainty. 

And if you look at our company and the customers we serve, 

major contractors in the U.S., with absolutely no line of sight to are 

we going to get a highway bill or not, are not going to make the 

decision to make the investment to buy the equipment that generates the jobs. 

As we make decisions about the opportunities in terms of the export markets, but yet while we are encouraged by the recent 

progress, we have tremendous uncertainty relative to what is going 

on in trade. And then, of course, the debate we are having here 

today, with taxes. 

Business is all about confidence. And when you have confidence 

in a system that is going to yield a good investment, you are willVerDate Mar 15 2010 00:05 Dec 21, 2011 Jkt 070882 PO 00000 Frm 00075 Fmt 6633 Sfmt 6602 I:\WAYS\OUT\70882.XXX GPO1 PsN: 70882

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ing to put the money on the table. I think today, the uncertainty 

that exists makes that really difficult. 

Mr. PAULSEN. Mr. Hayes. 

Mr. HAYES. Yes. I would just add I think certainty is really the 

issue here. And the fact that we passed an R&D tax credit that 

was retroactive to the beginning of 2010 in December of 2010, 

while it was a nice Christmas gift, as I have told my people, ‘‘It 

is hard to plan, waiting for Santa Claus.’’ 

And I think what we need here is long-term certainty that either 

the R&D tax credit is going to be here or it is not, so that we can 

make decisions, long-term, that are the best for the share owners 

and best for our employees. And that is all we are really talking 

about here, is simplicity, fairness, and competitiveness. 

Mr. PAULSEN. Mr. Buthman, final comments before my time 

runs out? 

Mr. BUTHMAN. Yes. I would say, as we look overseas, the degree of uncertainty, political and economic instability, is a key part 

of our cost of capital. And I think that is an advantage that the 

United States has. To the extent we can reduce it, maintain that 

advantage, it is to all our benefit. 

Mr. PAULSEN. Thank you. 

Chairman CAMP. Ms. Berkley has the time. 

Ms. BERKLEY. Thank you, Mr. Chairman. I appreciate this 

hearing very much. The longer I stay on this committee, the more 

I realize I don’t know as much about these issues as I should. 

Mr. Buthman, it gives me—as I go further from Huggies and 

closer to Depends, it gives me great comfort to know that I am 

going to be a lifetime customer of your company. 

[Laughter.] 

Mr. BUTHMAN. We want to take care of you, cradle to grave. 

Ms. BERKLEY. Womb to tomb, yes. I represent Las Vegas. And 

up until very recently, we didn’t have any multinational corporations doing business overseas, just very local. And because of the 

gaming laws, most of my companies—and I have one major industry in my state—they couldn’t even do business in another state, 

and retain their gaming license. Now, of course, gaming is located 

in almost all 50 states, and we are doing heavy-duty business overseas, particularly in the Asian market. So, all of a sudden this is 

a very important issue for me. 

This is my question. I have a number of gaming companies, but 

I am going to highlight two without naming names. One of them 

pays over 30 percent corporate tax. The other pays eight percent. 

Now, if I go over to the corporation doing business overseas that 

is paying over 30 percent corporate tax rate, and tell them, ‘‘In the 

interest of simplicity and certainty, we are going to lower the corporate tax rate to 26 percent,’’ let’s say, argument’s sake, but they 

will have to lose whatever deductions and credits, they will probably think I am brilliant and beautiful, and wise to boot. But if I 

walk across the street and go over to the company that is only paying eight percent corporate tax, and I tell them in the interest of 

simplicity and certainty, that we are going to have a 26 percent tax 

rate and they will lose all of their deductions in the interest of revenue neutrality, they are going to think I am Satan on a horse and 

I am a moron, to boot. 


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Now, how would you counsel me to address that corporation 

doing business overseas that I am going to be voting to—for stability and certainty and simplicity, and I am going to jack up their 

corporate tax rate like crazy? I would love some counsel from you. 

Mr. HAYES. Well, let me start. First of all, I think there are 

really two different discussions here. One is around the effective 

tax rate, which you are referring to might be 8 percent for one company and 30 percent for the other, versus the statutory tax rate, 

which is really what we are after here. 

And I think the fact is that, by leveling the playing field, and 

eliminating some of the preference items that are in the Tax Code, 

everybody is on the same basis, whether you were paying 30 percent or whether you were paying 8 percent or no tax, or 35 percent. 

The fact is what we are trying to do is to advocate for a system 

that is globally competitive for everyone. 

And, yes, there will be winners, there will be losers. I think all 

of us, as we sit here today, understand that we are going to have 

to give up things like accelerated depreciation. We are going to 

have to perhaps go to capitalizing some R&D, or capitalizing advertising costs to make this bill revenue neutral. And I think all of us 

understand that there is a shared sacrifice amongst corporations in 

the short run, to make a globally competitive system which will 

help drive jobs back to this country, and free up capital to come 

back to this country. 

So, again, I think we have to divorce ourselves from effective tax 

rates, which is really just an accounting question. And effective tax 

rates vary quarter to quarter, year to year, and circumstances by 

circumstances. But, really, we are talking about statutory tax rates 

and long-term competitiveness here. 

Ms. BERKLEY. Do you think my gaming company that pays 

eight percent is going to be happy with that answer? 

Mr. HAYES. I suspect not. 

[Laughter.] 

Mr. RAPP. And I would add trust me, within Caterpillar not all 

decisions we make make all of our employees happy. Tough decisions in tough times, and I think that is exactly where we are at. 

U.S. competitiveness, I think, is in question. Our share of global 

GDP has gone from close to 50 percent down to somewhere in the 

neighborhood of 20 over the last 50 years. And we have got a 

choice. We make those tough decisions, get ourselves competitive, 

compete and win globally. I think if you do that, you will have 

more people coming to Las Vegas. 

Ms. BERKLEY. That is my goal. Well, thank you very much. I 

appreciate it. 

Chairman CAMP. Thank you. Mr. Marchant is recognized. 

Mr. MARCHANT. Thank you, Mr. Chairman. You have all testified earlier that you would be willing to have a lowered tax rate, 

and it could be revenue neutral. 

But, in fact, wouldn’t that put you in a position to ultimately 

make a higher profit, and ultimately pay more money into the 

treasury than you are paying now? I mean, isn’t lowering the tax 

rate ultimately—doesn’t it have a dynamic effect, because it will 

allow you to make more profit and then, ultimately, over the years, 


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the treasury will actually net more money because of the lower tax 

rate? 

Mr. RAPP. We would welcome the opportunity, through having 

a simpler system and globally competitive, to grow our company, 

to grow our profits, and, as a result of that, send more money to 

the treasury. And we think that is one of the opportunities that exists. 

U.S. companies and their ability, their ingenuity, their entrepreneurial spirit, we are absolutely convinced we can compete and win 

around the world. And to the degree we do that, I think you are 

absolutely right, you have the opportunity to increase your revenue. 

Mr. HAYES. I really think it is one of the fallacies of the static 

scoring system we have today is the fact that it doesn’t take into 

consideration the impact of repatriation into this country when you 

have a simplified tax system, when you have a territorial tax system and the free movement of capital that will drive job creation 

here in the United States, that will drive investment here in the 

United States. 

And, unfortunately, as the Congressional Budget Office scores 

tax reform, I think we miss that piece of the economic growth that 

is going to result from tax reform and simplification. 

Mr. CRINES. I mentioned earlier that Zimmer has grown as a 

consequence of being able to expand its operations overseas. And 

it was able to do that, in part, by taking advantage of deferral 

rules. That is what enabled the company to prevail in a competitive 

bid for a European-based manufacturer. 

Several years later our company is four times larger, the amount 

of pre-tax earnings that we earn is four times larger. I mentioned 

that our effective tax rate is 30.6 percent as a consequence of paying about 40 percent in the U.S. in federal and state taxes on half 

our earnings and 15 percent on our foreign earnings. 

So, in fact, we are paying more money into the U.S. treasury, as 

a consequence of being able to compete in that particular situation. 

Mr. BUTHMAN. And I would say for Kimberly-Clark—and I suspect most or all of the companies on the panel, and business in 

general, we welcome the opportunity to compete on the basis of 

having the best product in the marketplace at a fair price every 

day. The less noise, the less uncertainty, the less leakage we have, 

in terms of the resources we deploy toward innovation, toward 

manufacturing, toward driving efficiency and productivity, I think 

the better off we are. 

The more competitive we are, the more volume we drive, the 

more profit we generate. And that gives us the opportunity to generate—we are happy to pay more taxes for every incremental dollar 

of profit that we generate. 

Mr. MARCHANT. Your compliance cost is significant, I assume. 

A simpler system—a lower rate with a less complex code—it would 

lower your compliance cost, of course. How about your cost to minimize your tax? Every company incurs additional cost, simply to 

minimize their actual tax, because the rate is too high. 

Mr. HAYES. Well, I think that is clearly—all of us have tax departments, we have very talented people that understand the tax 

rules, not just in the U.S., but around the world. And I would tell 


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you, at the end of the day, while it is a value to our share owners 

today to do this type of tax planning, it is not truly value added 

to the economy to do this type of tax planning. 

And I think we would all welcome the opportunity, with a simplified Tax Code—again, 19,000 pages will never go to 1. But to the 

extent that we can reduce complexity, reduce compliance costs, reduce the cost associated with trying to plan around what is a prohibitively high tax rate, is going to be a benefit to the economy. 

Mr. MARCHANT. Thank you very much. 

Chairman CAMP. Thank you. Mr. Lewis is recognized. 

Mr. LEWIS. Thank you very much, Mr. Chairman, for holding 

this hearing. I want to thank each of you for being here today. 

At our first hearing on tax reform, a CEO testified on behalf of 

the Business Roundtable, and said that corporate tax reform does 

not need to be revenue neutral. In other words, we do not need to 

pay for this, we should just add it on to the deficit, and shift the 

burden to American families, working families. 

For the past 10 years or so, we have seen an increased willingness to shift the burden of government on to the middle class and 

the working poor. This give me great concern. And, in my estimation, it is not right, it is not fair, and it is not just. 

Each of you represent corporation that do business in countries 

with lower corporate tax rates. Those countries compensate for 

those lower corporate tax rates by raising personal income taxes on 

families, and by adding a VAT tax on the things that they buy at 

the store. 

Now, tell me. I want each one of you to tell me, and tell Members 

of the Committee, what do you say to American families struggling 

to make ends meet who hear that their taxes are going up, to go 

up so multinational corporation can get a tax break? Why should 

they give more? Why should the middle class, why should working 

families, why should the poor, those at the bottom, give more so 

you can get less? 

Mr. HAYES. Congressman, just let me start. I think, as—— 

Mr. LEWIS. So that you can give less. 

Mr. HAYES. I think the panel has all testified, and we would all 

agree that, you know, revenue neutrality is ultimately the goal of 

corporate tax reform. And while we talk about fiscal responsibility—and I think, as you heard from the Business Roundtable, we 

are looking for, originally, corporate tax reform that was fiscally responsible. But we would tell you that we understand the need for 

revenue neutrality with corporate tax reform. 

What I would tell you, and what I think we should tell the American people, is corporate tax reform is not a giveaway. We are not 

here looking for a gift from the government. We are not looking for 

a gift from the American taxpayers. What we are looking for is the 

ability to be competitive, globally, so that we can drive investment 

to this country and drive job growth into this country. 

And I think that is the way we need to frame this debate. It is 

not about taking away from the middle class, it is not about giving 

to corporate America—— 

Mr. LEWIS. There is a perception abroad in America that the average taxpayer, middle class, working poor, they pay more than 


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their fair share, and corporate America are not paying enough. So 

I want you to respond to that. 

Mr. HAYES. Again, I think as we sit here today, we look at the 

corporate taxes that we pay, the 35 percent statutory rate, what we 

are talking about is how do we drive job growth into this country. 

And we would tell you that the corporate tax structure that we 

have today is anti-competitive and anti-jobs. 

At the end of the day we can argue about what is the right rate 

for everyone to pay across the economic spectrum, and the fact is 

we are not advocating for a giveaway. We think we need to have 

a fair and reasonable corporate tax rate, but one that is globally 

competitive. Because, at the end of the day, capital is mobile. Capital will move to where it is most efficiently put to use. And that 

means if we cannot put it to use here in a tax-efficient manner, 

jobs will be created overseas. And I think that is all we are advocating for here today, Congressman. 

Mr. LEWIS. Thank you. 

Mr. RAPP. And my argument would be that it is not a question 

of transferring from one pocket to another. It is a question of how 

do you grow the economy. And I am absolutely convinced of that. 

We have done it since 1925. We can compete and win against people from all over the world. And to the degree we get a level playing field, we are able to do that. 

As we have talked throughout this discussion this morning, it 

generates jobs back here. And I think that is really what this country wants to do. They don’t want to debate the issue of do I transfer tax from one pocket to the other. They want to debate how do 

we generate jobs here. 

Mr. LEWIS. Thank you. 

Mr. CRINES. Congressman, as I indicated earlier, the company 

accrues and pays taxes at a rate of about 40 percent on our U.S. 

earnings and profits. That includes both federal and state income 

tax. To increase that burden, I do believe, would put the company 

at a competitive disadvantage, relative to our foreign-based competitors. 

We are advocating as we have indicated, in favor of reform that 

would be revenue neutral, and believe that can be accomplished by 

lowering the rate and eliminating some of the deductions, as we 

have discussed. 

Chairman CAMP. All right. Time has expired. Mr. Berg is recognized. 

Mr. BERG. Thank you, Mr. Chairman. And thank you for being 

here today. A long hearing, but this has been very fruitful for me. 

I come from a state where, a few years ago, we lowered income 

tax and we lowered corporate income tax, and revenue came up, 

went higher. So, last month we did the same thing. We lowered 

corporate tax, we lowered income tax, and actually lowered property tax. You know, I think it is trying to find that sweet spot. 

And—as I sit here, I think about what really strikes me is when 

at one time 17 out of 20, or 85 percent of the top 20 companies in 

the world, were U.S.-based, and today it is less than 30 percent. 

And when we look at historical corporate tax, at one time we were 

kind of middle of the road, globally, and now we are, highest. 


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And so, it seems to me if we want to grow business here and create jobs, that we have to figure out a way for companies to grow 

within America or acquire companies and do that expansion. 

And so, we kind of talked about repatriation a little bit, and I 

think the position that I have heard is if we bring our corporate 

rate down to 25 percent, it is clean. That will kind of serve as repatriation of funds as we go forward. 

So, could each of you just respond to that just a minute? 

Mr. HAYES. Yes, I think that is exactly the idea here, with— 

there is no need for a one-time special repatriation if we have a territorial system which gives us some certainty. And, again, assuming there would be some toll tax associated with repatriating, at 

least we would have certainty around that. It is not a once every 

third or fourth congress that we do that. 

Mr. RAPP. And just one point on the 25 percent. As I said earlier, we look at the 25 percent benchmark relative to the other 

parts of the world as being a combination of federal and state. And 

I just wanted—— 

Mr. BERG. I was very clear on that. I heard that. 

Mr. RAPP. I just wanted to make sure we were clear, no 

miscommunication here. 

And to me, it really gets down to what does it take to be competitive over the long haul. And that is why a one time only bring back 

just doesn’t give the vision, long term, on where we are going to 

be at. And we would prefer to see this tough discussion through. 

We are very encouraged by the dialogue you are debating here 

today. Let’s flog through this. 

Outside the United States today there are a lot of economies that 

are growing. And it is a tremendous opportunity for American companies to go compete and win in that. So I think the timing of what 

you are putting on the table is good, and we just want to see it 

through. 

Mr. BERG. Okay, thanks. 

Mr. CRINES. There are significant disincentives today towards 

bringing the earnings and profits that are being earned offshore 

back into the U.S. and deploying that capital here in the U.S. 

I do believe any reform that allows us to deploy capital more efficiently will ultimately lead to growth, growth in jobs here in the 

U.S., growth in employment, and growth in our businesses, globally. 

Mr. BUTHMAN. Yes, and I would echo the other panelists’ comments. And just to be clear, in fact, in our accounting, in our financial statements, in our tax returns, we actually have to commit 

that we do not intend to return that cash home. Otherwise, we 

have to provide tax on it at some point. 

So, there is actually—it is very clear, the encouragement to leave 

that cash overseas, unless we can find a vehicle to bring it home. 

And there is no doubt in my mind that, if we can solve this problem, it is a huge source of capital for the U.S. economy that ultimately is going to make its way into our local market to drive technology, to drive manufacturing, to drive job creation. 

You are faced with a very difficult challenge. We have a fiscal 

deficit that we have got to tackle. Tax policy is an important part 

of that. Fiscal reform is an important part of that. So, again, I 


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would echo the other panel members. I am happy to participate 

here, and I am very glad to see you tackling this issue, collectively. 

Mr. BERG. Well, thank you. Just one other quick issue, and that 

is when you acquire a property, or acquire a company, or a company competing with another company, how, again, there is a tax 

disadvantage, because you are working on two different levels. 

And I am just wondering if you had any examples of—public examples of where a foreign company was able to acquire something 

that an American company was not, because of that disparity in 

the corporate tax. 

Mr. BUTHMAN. I don’t have a specific example, but I do have 

a number of examples of companies that we compete with around 

the world in, again, an increasingly global marketplace. 

As we look at a geography to buy a diaper business or a tissue 

business, to the extent we are competing in that, either with a local 

company or, let’s just say, a European-based company—we have a 

number of competitors in Europe and northern Europe—there is a 

clear advantage, in terms of the cost of the capital that they are 

able to deploy, in terms of their after-tax cost of that acquisition. 

We hope we can overcome that in terms of efficiencies, our market power, et cetera, and in other ways, but there is a clear structural advantage when we are competing for acquisitions on a global 

basis. 

Chairman CAMP. Thank you. Mr. Kind is recognized. 

Mr. KIND. Thank you, Mr. Chairman. I want to thank our panelists for your testimony and your presence here today. One of the 

advantages to being one of the last ones to ask questions, you get 

to hear a lot of testimony, which I think has been very candid and 

very helpful today. You also get to cross off a lot of items on your 

own sheet with good questions that have been asked beforehand. 

But at the risk of being the skunk at the picnic here, let me just 

illuminate the discussion a little bit further. We have been fortunate enough, with the chairman’s leadership, to have some closed 

door, bipartisan sessions, talking about this, getting various options in front of us, exploring the complexity of the Tax Code. 

And the truth is—and I think there is wide agreement—that the 

goal ought to be trying to lower the rates, broaden the base, 

through the eyes of international competitiveness issues, something 

you have all been talking eloquently about today, the importance 

of that, domestically. But most of the tax expenditures aren’t on 

the corporate side, they are on the individual side. In fact, only 8 

percent of the total tax expenditures that exist in the code today 

are on the corporate side; 92 percent are on the individual or passthrough side. 

Now, if we were to get rid of all of them on the corporate side, 

every tax expenditure that exists from accelerated depreciation to 

R&D to everything else, we would be able to lower the rate down 

to 28 percent. Getting rid of all of them. And if we get rid of all 

of them except for accelerated depreciation, that is 31 percent. And 

yet, all of you are testifying today that we ought to do this in a 

deficit neutral fashion, which I appreciate and I agree with. 

But getting at that mid-20—or, Mr. Rapp, in your eyes, the lower 

20 percent range, it means we are going to have to look elsewhere. 

And I guess that is the question I would pose to you is, where else 


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can we look to make up the revenue shortfall, as far as paying for 

a lowering of the rate, overall? 

And you get into the individual side, the pass-through side, and 

Mr. Buchanan was talking about it a little bit earlier. The majority 

of the businesses right now in the United States are pass-through 

entities. They are not going to be too happy if we are going to be 

after them, and reducing their expenditures that they are currently 

enjoying in order to lower the overall corporate tax rate here. 

And, Mr. Hayes, I appreciate your candidness, too, about having 

the VAT as a part of the overall discussion. But, to be honest, given 

the political dynamics, and especially my friends on the other side, 

that is a non-starter. They are not going to want to talk about a 

VAT on top of or in addition to any kind of corporate tax structure 

that we have in our country today. That is just a non-starter, as 

far as a conversation. 

This is where it gets difficult. This is where it gets real complicated. And the fact that, as some of my other colleagues pointed 

out, there are going to be some clear winners, some clear losers in 

anything that we do. 

And maybe you can help me. You don’t have to cite specifically 

what—your effective tax rate, but I think I am correct in my assumption that all of you are paying an effective tax rate that is 

north of 25 percent right now, is that right? 

Mr. HAYES. That is right. 

Mr. RAPP. That is correct. 

Mr. CRINES. That’s correct. 

Mr. BUTHMAN. That is correct. 

Mr. KIND. You are all agreeing with that. Well, I think we 

might hear a little different testimony from some representative 

from GE today, in light of the news that they have just garnered 

in the last month or so. And that is really the point of this exercise. 

You talk about the statutory tax rate. We are high, 35 percent. 

The effective tax rate, we are about average, as far as the rest of 

the developed world is concerned. The marginal rate on new investment in this country, we are slightly above average. So your perspective, and the testimony that you might bring to this issue is 

certainly going to depend on what seat you are viewing this issue 

from. And that is going to be very wide, and it is going to get very 

complicated and very difficult for us, then, to have to navigate 

through that. 

But if you have thoughts on where we can go, as far as additional offsets, in order to lower the rate down to the levels that you 

all are testifying about, mid to low 20 percent, obviously we are all 

going to be—have a lot of ears for that. 

But this, I think, is what is going to be very difficult with the 

exercise that we have before our committee, and your guidance on 

this issue will be crucial. 

Mr. Rapp, let me also just quickly congratulate you in recognizing that your leadership in the corporate world, as it relates to 

the workers, will be important with these trade agreements. I got 

a company in Lacrosse, Wisconsin, 60 percent of what they are 

making there is exported overseas. The machinist union there is 

some of the fierce critics of any type of trade agreement. And your 

help, as far as educating the workers, will be important. 


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And let me just leave you with this thought. And I was hoping 

to get testimony, but our time has limited. But something else is 

bothering me with our economy today. And if you have any ideas, 

we would be—we would welcome that. 

But in typical recoveries, you get an increase in worker productivity, and it has been true the last couple of years. About a 6.8 

percent jump. But in the typical recovery, a majority of that increase in worker productivity goes back in the form of wages to 

workers. That is not happening. We have had wage stagnation in 

this country for the last 10 years. And in this last couple of years, 

of that 6.8 percent, roughly—a little less than 10 percent of that 

growth is going back into wage increase. And when the U.S. economy is 70 percent consumer-driven, we got a problem, and we get 

the economy that we have here today. 

I don’t know what, policy-wise, we can do to incent companies— 

and I am not citing you specifically—to recognize the key role that 

wages play in our economically domestically, too, but we are kind 

of stuck right now. And I think the reason why Wisconsin has received so much attention, it wasn’t just about pensions and health 

care, I think it is the middle income, working-class families feeling 

that no one is looking out for them. And they are working harder 

and running faster just to keep up, and they are not keeping up. 

Chairman CAMP. Thank you. 

Mr. KIND. And that is the frustration that so many people feel 

today. Thank you for your—— 

Chairman CAMP. Thank you. Ms. Black is recognized. 

Mrs. BLACK. Thank you, Mr. Chairman, and thank all of you for 

being here today. It has been very enlightening. 

All of you have talked about having your operations worldwide. 

And Mr. Hayes in particular, your one statement, ‘‘capital is mobile,’’ is certainly a truth here that we have to recognize as we are 

dealing with this very important issue. 

And one of the pieces that I liked hearing is that most of your 

companies have your intellectual property and your research and 

development right here in the United States. Because, obviously, 

the United States has always been known for being the innovator 

of so much that is bought around the world. 

And so, can you briefly explain the relationship between your domestic operations and your foreign operations, in particular, how 

they support one another? And then, how important are these foreign earnings to our domestic operations and your growth in the 

United States? 

So, Mr. Hayes, if you could, speak to that. 

Mr. HAYES. Certainly. Yes. As I mentioned earlier, as we were 

speaking, I think it is important to understand that UTC is a global company. Most of our research and development is spent right 

here, in the United States. 

So, as we think about developing the next generation of jet engine, that is work that is being done in East Hartford, Connecticut. 

That work will support export sales to Airbus in Toulouse and in 

Frankfurt. It will support export sales to Japan for the Mitsubishi 

regional jet, to Russia, as well as to Canada, for the Bombardier 

C series. 


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And again, I think it is critically important to understand that, 

as we keep R&D in this country, those are the types of jobs and 

the type of growth that will ultimately bring prosperity back to this 

country. Those are the great jobs. We are going to hire about 300 

engineers this year in East Hartford, Connecticut, as we ramp up 

the spending on R&D. 

And again, most of the R&D, as I mentioned before, happens 

here in the U.S. And we use that to support development of products around the world and introductions of products around the 

world. 

Mrs. BLACK. And could I also draw the conclusion, then, that 

what you then sell around the world also helps to bring money 

back to the United States, so that we can have more research and 

development, and continue to be the leader in innovation in this 

country? 

Mr. HAYES. It certainly brings earnings, if not cash. Again, the 

cash, as we have said earlier, is still trapped overseas. 

Mrs. BLACK. Sure. 

Mr. HAYES. But the earnings, from an accounting standpoint, 

certainly supports the R&D efforts that we have in this country. 

Mr. RAPP. Yes. Congresswoman Black, let me give you an example of that. If you look at our business, the industries we serve in 

the U.S. market is still about 50 percent of what it was at the end 

of first quarter 2006. However, this year we will have an all-time 

record high spend in R&D, the majority of that coming into the 

United States. That is not because of the strength of the U.S. economy or what is going on here. It is based on the strength of our 

businesses around the world. 

So, I think it is a great example of the point you are poking at. 

Our success, winning in China, Brazil, Latin America—the other 

parts of the world we compete in—definitely, positively impacts 

what goes on here, in the U.S. 

Mrs. BLACK. Mr. Crines. 

Mr. CRINES. Congresswoman, 45 percent of our revenues are 

coming from our foreign markets. And, as I said earlier, 70 percent 

of the revenues are sourced out of our U.S.-based manufacturing 

facilities. Three-quarters of our research and development efforts 

are based in our U.S.-based facilities. 

So, clearly, very similar to the other companies represented here, 

we have been able to grow employment here in the U.S., on the 

basis of our success in competing for business overseas. 

And it is the case that much of that growth now is taking place 

in places like China, Brazil, Russia, India, Eastern Europe, because 

those economies are growing at a faster clip than the more developed economies of the world, because those governments are investing in a pretty significant way in building out infrastructure—in 

our case, health care infrastructure that is giving access to health 

care to their citizens that they have not in the past had access to. 

Mr. BUTHMAN. And we are similar. We export not only technology, but brands. So you can find a Kleenex box, a Kleenex facial 

tissue around the world. And every box of facial tissue that is sold 

in a country around the world, we get a royalty as a result of that. 

We pay income tax on that today. So it is—to your point, Congresswoman, it is a source of income and cash, in our perspective. 


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I think there is a reality that, as the economy gets increasingly 

global, we are going to build our R&D footprint here, which is almost exclusively U.S., I think more and more we are going to keep 

that base, we are going to grow that base. We are also going to 

bring ideas in from around the world, which will benefit U.S. consumers, if not just the cash flow that comes back—— 

Chairman CAMP. Thank you. Mr. McDermott is recognized. 

Mr. MCDERMOTT. Thank you, Mr. Chairman. Let me thank 

you for having this hearing, because hearings are always interesting to learn from. 

Before I came to the Congress, I was a state legislator and was 

Ways and Means chairman in the state senate for five years, ran 

a state budget. And then I got here in 1988. Old, wise guy in the 

State of Washington said to me one time, ‘‘Business doesn’t give a 

damn what the rate is, as long as they can count on it. They want 

certainty. They want to know how long it is going to last.’’ And I 

hear some of that from you, Mr. Hayes. 

I look out in this audience, there is a lot of empty seats. But I 

know there are a lot of people sitting in their offices, watching this 

on television. And when I got here in 1988, just after tax reform 

had passed in 1986, my office in 1989 was loaded with folks coming 

in, telling me they wanted to make a little adjustment in the tax 

reform. And I have had a steady stream of those people for the 23 

years that I have been in the state legislature—or in this—in the 

Congress. 

Now, my question to you is, how long a moratorium do you think 

we could put into the law that says we have done tax reform, and 

nobody is going to get a change for—six months? A year? Two 

years? How long would you sign up for, if we gave you this new 

rate? 

Mr. RAPP. I would probably sign up for a moratorium with a 

quid pro quo that we won’t come ask for any special exceptions, if 

you don’t come and ask for more, in terms of the tax rate. 

I think the key issue is how do we maintain competitiveness. 

And to the degree you give us that competitive rate, then it turns 

over to our responsibility to compete and win against our global 

competitors. And so, I think if we get that right, then it is up to 

us. I think you hold the rate, I think we hold off on asking for the 

exceptions. 

Mr. MCDERMOTT. You think the whole business community 

would be willing to accept that? Because, you see, in 1986 we did 

that once, right? We made all these careful compromises between 

reinvestment trusts and, oh God, real estate industry, and everybody. And all that was done—bingo, as soon as it was passed—— 

Mr. RAPP. But what I would say about the business community 

in that regard is you are engaging the business community in this 

debate. We had a request earlier, in terms of continuing the discussion after this session. I think we all realize that this has gone far 

enough, and it is in the long-term interest of the business community, as well as the country, that we get this issue on the table, 

find a solution that gets us to a competitive playing field around 

the world, and then we get on with what this country is best at, 

and that is competing and winning. 


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Mr. MCDERMOTT. Could I ask one question further, then? We 

talk about competitiveness. Because this is like a spider web. We 

are talking about one little piece of the spider web, and there is all 

kinds of things related to your competitiveness. Your decisions 

aren’t made simply on tax rates. They are made on a whole lot of 

other things. 

Do you support, as a group, the President’s Affordable Care Act, 

as passed by the Congress? Mr. Hayes. 

Mr. HAYES. I think the need for health care reform is paramount in this country, because health care costs are one of the 

things that will bankrupt the economy sooner than anything else. 

And we certainly support the effort, if not the specifics, of everything that is in the health care bill. 

Mr. RAPP. We support the effort, but we think private enterprise 

is a good place to solve the solutions. 

I mean if you look at, from 2002 to 2010, as a company, our 

health care costs have tracked below CPI. 

Mr. MCDERMOTT. So you think leaving it in the private insurance industry, as the President’s bill does, and including more people into the private insurance industry, is competitive? That is a 

good way to go to control costs? 

Mr. RAPP. As Greg said, we need absolute reform. And I think 

private enterprise is a better place to solve that. 

Mr. MCDERMOTT. You mean the government should get out 

and let you on your own? 

Mr. RAPP. As we said earlier, I think there is some reform that 

is required. But, in terms of private enterprise, addressing the 

issue, that is where we found the best result. 

Mr. MCDERMOTT. So I can’t tell whether you would be for a repeal or not. How about you? 

Mr. CRINES. The company supported the health care reform efforts, certainly support providing access to health insurance to 

what was 46 million Americans, now 50 million uninsured Americans. We did, however, object to the way that it is being paid for, 

in particular—— 

Mr. MCDERMOTT. The 2.3 percent—— 

Mr. CRINES [continuing]. 2.3 percent excise tax that is being imposed on the company. 

Mr. MCDERMOTT. Okay. 

Mr. BUTHMAN. I am not convinced—I am all for health care reform. I am not convinced we really solved the underlying issue of 

rising costs. 

Chairman CAMP. All right, thank you. 

Mr. MCDERMOTT. So you think repeal would be a good—that 

would make you more competitive? 

Chairman CAMP. I have to tell the gentleman his time has expired. And I want to thank this panel for their participation this 

morning. Your testimony today has been very helpful as we consider these critical issues, and I want to thank you all for listening 

to every Member who wanted to talk to you today, and trying to 

answer their questions. And I hope we will be able, as others have 

said, to continue this discussion as it unfolds. 


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And Members may wish to submit some additional questions to 

you, in writing, and I hope you would respond, so we could include 

those in the formal record, if that were to occur. 

Again, let me thank you for being here. 

And I now invite our second panel to come forward to the witness 

table. 

Thanks again. 

[Brief Recess.] 

Chairman CAMP. Thank you. We are pleased to welcome our 

second panel which features three experts in the field of international tax law. All three witnesses on our second panel have previously testified before the Ways and Means Committee, and we 

welcome you all back today. 

First, I would like to welcome and introduce a fellow Michigander, Jim Hines. Mr. Hines is the L. Hart Wright Collegiate Professor of Law at the University of Michigan Law School, and a research associate of the National Bureau of Economic Research. 

Second, we will hear from Dirk Suringa, a partner at Covington 

& Burling, specializing in international tax law here, in Washington, D.C. Mr. Suringa previously served in the Department of 

the Treasury’s office of international tax counsel from 2000 to 2003. 

And finally, we will hear from Jane Gravelle, a senior specialist in 

economic policy from the Congressional Research Service. 

Thank you all again for your time today. The committee has received each of your written statements, and they will be made part 

of the formal hearing record. Each of you will be recognized for five 

minutes for your oral remarks. And Mr. Hines, we will begin with 

you, and you are recognized for five minutes. Thank you for being 

here. 

STATEMENT OF JAMES R. HINES, JR., L. HART WRIGHT COLLEGIATE PROFESSOR OF LAW, UNIVERSITY OF Michigan LAW 

SCHOOL, ANN ARBOR, MICHIGAN 

Mr. HINES. Thank you, Chairman Camp, Representative Levin, 

and Members of the Committee. As you know, the United States 

has a different tax system than any other major capital exporting 

country and any other G7 nation. The consequence of our tax system is that it distorts business activity around the world, it distorts 

asset ownership, and it erodes the productivity of American businesses. 

It is an interesting fact that 50 years ago the prevailing theory 

was that the United States should have a tax system like the one 

we do now. But what has happened in the intervening 50 years is 

we have come to realize it is a mistake. Countries around the world 

that used to have tax systems like the United States have abandoned them. The United States is, as I mentioned, the only remaining major capital exporter that taxes the active foreign income of 

its residents’ businesses. 

As a consequence of this system, American firms are less productive than they otherwise would be. And that feeds back to the 

American labor market. In order for American workers to get high 

wages and have good jobs that produce good lifestyles, they have 

to be productive. And in order for them to be productive, they have 

to work for companies that make them productive. The way for 


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companies to make workers productive is for the companies to be 

efficient and effective in deploying their labor and other productive 

assets. And the tax system has the opportunity to help companies 

do that, or, unfortunately, the tax system can get in the way. 

Now, this is a challenging time for labor markets in high-income 

countries like the United States. If you think about what the impact of moving to a territorial tax system would be, if it makes 

American labor more productive, then it will increase employment 

opportunities in the United States, and it will increase wages in 

the United States. 

There are two separate effects that territoriality and offshore 

business activity would have on American labor. One is substitution. And that is a concern of people. It is an appropriate concern. The concern is that American firms—or for that matter, German firms or other foreign firms—would employ labor in other 

countries, rather than the United States, and, as a result erode the 

employment opportunities of Americans. 

There is a separate effect, and that is what you heard from some 

of the witnesses this morning about, which is the productivity effect of offshore business activities. If offshore business activities enhance the productivity of American workers, then it increases demand for them, and increases the wages that they earn. 

There are examples of cases where foreign business activities 

substitute for domestic business activities. And, as a result, there 

is less demand for American workers. That happens. What also 

happens is that there are many cases in which foreign business activities enhance the productivity of American workers. The question, I think, for Congress is: What happens mostly in the American economy? 

If we look at the business sector, the American economy as a 

whole, what is the predominant effect? Is it this substitution, or is 

it the productivity effect? The statistical evidence that we have, not 

just from the United States, but from around the world, suggests 

very strongly that the productivity effect is more potent than the 

substitution effect, that the foreign business activities of American 

firms enhance the productivity of their domestic operations, and 

thereby increase demand for American labor. 

The evidence that we have for the United States is that, for multinational firms, 10 percent expansions of foreign employment are 

associated with 3.7 percent expansions of domestic employment by 

the same firms at the same time. Now, that is an average effect. 

It doesn’t apply in every single case. 

However, if the question is, for the American economy, is foreign 

business activity productive from the standpoint of generating demand for American labor, the answer is yes. 

We know that these productivity effects are important. If they 

were unimportant, one might entertain the possibility of passing a 

law that would make it illegal for American companies to employ 

workers abroad. Nobody contemplates such a law. But why don’t 

we contemplate that law? Because we know it would not be good 

for the American economy, and ultimately, would not be good for 

American workers. American workers benefit when their work is 

productive. And their work is productive when American companies 


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help them make it productive. And so, that is why we need a tax 

system that doesn’t distort the activities of American companies. 

The United States has a serious budgetary problem. There are 

things that we need to do about it. Mr. Becerra this morning said 

that he never heard a witness testify that their tax burden should 

be increased. Mr. Chairman, you should increase my tax burden. 

And I think you should increase the tax burdens of others, too, because we are not on a fiscally sustainable path right now. 

Let me quickly add we also need spending reduction. 

But when we think about our fiscal problems, taxing the foreign 

incomes of American business is not a good way to address them. 

[The prepared statement of Mr. Hines follows:] 


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Chairman CAMP. All right, thank you. 

Mr. Suringa, you have five minutes, as well. And your written 

statement is part of the record, as well. 

STATEMENT OF DIRK J.J. SURINGA, PARTNER, COVINGTON & 

BURLING LLP, WASHINGTON, D.C. 

Mr. SURINGA. Thank you, Mr. Chairman. Chairman Camp, 

Ranking Member Levin, and Members of the Committee, my name 

is Dirk Suringa. I am a partner with the law firm of Covington & 

Burling. From 2000 to 2003 I was an attorney advisor in the office 

of international tax counsel at the Treasury Department. I appreciate very much the opportunity to testify before the committee 

today. I appear before you today on my own behalf, and not on behalf of my firm or any firm client. 


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I would like to make three basic points today, and I make these 

points as a practitioner who advises clients on a daily basis about 

how to work with and how to comply with the existing U.S. foreign 

tax credit rules. 

First, those rules are widely—and I think correctly—regarded as 

highly complex and unstable. We started in the early days of the 

Internal Revenue Code with a very simple principle, that the 

United States should provide a credit for foreign taxes paid by U.S. 

businesses on their overseas operations. That simple principle has 

become, over the last 90 years, a thicket of rules and restrictions 

that now occupies about 35 pages of the Internal Revenue Code, 

and almost 190 pages of Treasury regulations. 

What is more, this highly complex set of rules is a moving target. 

Virtually every major piece of international tax legislation in the 

history of the code has changed the foreign tax credit rules. The 

most recent examples are the enactment just last year of new code 

sections 909, 901(m), 960(c), and 904(d)(6). This instability not only 

creates a significant compliance burden, but also makes it difficult 

for U.S. companies to engage in the type of long-term business 

planning that is necessary for them to compete internationally. 

Second, the main cause for this complexity, from at least a tax 

practitioner’s perspective, is what could be called the continual pursuit of technical perfection. Now, trying to ensure that the rules on 

the books operate as intended is, of course, a worthy and important 

goal. But in the case of the foreign tax credit, it has led, over time, 

to a system that makes comprehensive compliance and administration nearly impossible. 

What we have, in effect, is a feedback loop that has been in place 

over many decades. Each change to the rules raises difficult interpretative questions, including how that particular change interacts 

with existing rules, what specific transactions were meant to be 

covered, and what specific structures were meant to be impacted. 

Those types of questions often lead to another round of fixes, or 

even wholesale revisions, which, in turn, raise their own sets of 

questions. The result, over time, is a tangle of rules and regulations that are full of traps for the unwary. 

Therefore, third and finally, as you consider international tax reform, I urge you to keep in mind simplicity, stability, and, not 

least, support for U.S. businesses trying to compete abroad. International tax reform offers the opportunity to clear away the thicket 

of rules we now have to live with. But in the design of any new 

system, there will arise many choices about how to structure the 

rules. In dealing with such questions, we can learn a great deal 

about the very recent experience from some of our major trading 

partners, like Canada and the UK. These countries have been very 

up front about the importance of making their systems competitive, 

simpler, and stabler. We can learn from their example. 

Now, it is something of a statement against self interest to say 

it, but I think our rules really should be simpler. There should be 

less economic opportunity for people like me, who practice in this 

area, and more economic opportunity for working Americans who 

are trying to bring home a living. We can, I think, in order to 

achieve that objective, resist the impulse to let the technically perfect system become the enemy of the perfectly good system. 


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So, with the objectives of simplicity and stability, and with a 

frank analysis of what our system needs to be competitive with the 

systems of other countries and our major trading partners, I think 

we can create a system of international taxation that supports U.S. 

business and attracts capital to our markets. 

Once again, I would like to thank the committee for the opportunity to testify today, and I look forward to your questions. 

[The prepared statement of Mr. Suringa follows:] 


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Chairman CAMP. Thank you. 

Ms. Gravelle, you are recognized for five minutes, and your written statement is also part of the record. 

STATEMENT OF JANE G. GRAVELLE, SENIOR SPECIALIST IN 

ECONOMIC POLICY, CONGRESSIONAL RESEARCH SERVICE, 

WASHINGTON, D.C. 

Ms. GRAVELLE. Thank you, Chairman. Many proposals for tax 

revision argue that our corporate tax system should be revised to 

improve our ‘‘international competitiveness’’ by moving from the 

current deferral regime to an exemption of foreign source income 


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or a territorial tax. Related policies we have heard discussed today 

include another repatriation holiday or corporate rate cut. 

International tax policy could also move in the opposite direction, 

by eliminating or restricting deferral, as the President has proposed. Deferral means that the U.S. system has territorial elements. It encourages firms to conduct activities and retain earnings 

abroad. A territorial tax would further encourage firms to operate 

abroad. But both a territorial tax and eliminating deferral would 

remove the retention incentive. 

Although competitiveness has been invoked in this debate, it is 

not countries that are competitive, it is companies that are. A country’s firms cannot be competitive in all areas. Even if firms in our 

country are more productive than firms in all other countries, a 

country would still produce those goods in which its relative advantage is greatest, and trade with other countries for other goods. 

The other countries need to produce goods with their resources, as 

well. 

So, competitiveness, in economic terms, is not a very helpful concept here. When you do economic analysis of international tax policy, the issues are really of either efficient tax policy or optimal tax 

policy. Efficiency refers to allocating capital to uses around the 

world with the highest pre-tax or social yield. And it maximizes 

world welfare. Optimal policy maximizes U.S. welfare. 

Concepts that relate to these two goals are a term called capital 

export neutrality and a term called national neutrality. Capital export neutrality is efficient, and requires a country to apply the 

same tax rate to its firm’s investments, regardless of where they 

are located. It is embodied in a residence-based system. National 

neutrality requires only allowing a deduction for foreign taxes paid. 

A third concept, called capital import neutrality is achieved with 

territorial taxation. This approach will cause a misallocation of capital to low-tax countries, lowering the wages of workers in high-tax 

countries, and raising them in low-tax countries. 

Although capital import neutrality appears to be fair, a level 

playing field, it is not efficient because firms make choices based 

not on the options facing each country’s firm, but their own returns 

to investments in different locations. 

Although this discussion focuses on the allocation of investment, 

another consequence, an important consequence of the choice of tax 

regime, is the ability to shift profits artificially from high-tax to 

low-tax countries, which occurs with deferral, and would likely increase with a territorial tax. 

Now, arguments have been made that these concepts are outmoded because they assume that U.S. firms are constrained by 

U.S. rules. The firms can shift their nationality, or if investors can 

shift their portfolios to foreign firms, capital export neutrality cannot be achieved. Evidence indicates, however, that these options 

are not available or important, and they could also be further restricted. 

Our anti-inversion rules seem to be working very effectively. Recent research suggests that headquarters locations are not very 

sensitive to tax, and that new firms rarely incorporate abroad— 

new U.S. firms. The increasing portfolio investment by U.S. citiVerDate Mar 15 2010 00:05 Dec 21, 2011 Jkt 070882 PO 00000 Frm 00111 Fmt 6633 Sfmt 6602 I:\WAYS\OUT\70882.XXX GPO1 PsN: 70882

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zens in foreign firms appears motivated by portfolio diversification, 

and not tax issues. 

While moving to a territorial tax would reduce any existing incentive to headquarter abroad, it is not clear that this issue would 

be important enough, considering revenues, to—compared with the 

increase incentive for profit shifting. That is, I think it is a lot easier to shift profits than to shift headquarters. 

Another proposal that has been made is to cut the corporate tax 

rate. I don’t have a lot of time to talk about that, although I mention it in my testimony. It would be opposite from the effect of a 

territorial tax. My own research finds that cutting the corporate 

tax rate by 10 percentage points would increase output on a 1-time 

basis by only 2/10 of 1 percent of income, and will increase national 

income, the income we own, by only 2/100 of 1 percent of income. 

So it is important to growth, but certainly not important to things 

like getting the deficit under control. Thank you. 

[The prepared statement of Ms. Gravelle follows:] 


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f 

Chairman CAMP. Thank you very much. Thank you all for your 

testimony. We have heard that there are different territorial systems, and we know there are. But let me ask you, Mr. Suringa, if 

there was a properly designed territorial system. What advantages 

to the U.S. economy would there be from adopting such a system? 

And I realize we are talking in a generality here, and there are 

specifics, but—— 

Mr. SURINGA. Yes, I think that is right. The main advantage 

of territoriality, is as a way to end the lock-out effect on capital 

that is abroad, the earnings and profits that are now, in essence, 

trapped in foreign subsidiaries. 


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The notion is that if a company is looking for how to use its capital or its earnings in a foreign jurisdiction, its choice about bringing those back to the United States is handicapped by the hurdle 

rate that is imposed by the tax on repatriation. 

So, let’s assume you get a foreign tax credit to offset the U.S. tax 

on some piece of a distribution to the United States. You are still 

talking about playing with, you know, $.65, $.75 on the dollar if 

you bring the money back home. And if you are looking at what 

kind of investment do I make, do I make the investment abroad, 

where I am starting with 100 cents on the dollar, do I make the 

investment in the United States, when I am talking about $.65, 

$.75 on the dollar? That is just a very basic sort of dollars and 

cents problem that territoriality helps to address by, essentially, 

taking away the tax cost of bringing the money back home. I think 

that is the main advantage of a territorial system, relative to the 

current system. 

In addition, I think a properly designed territorial system gives 

the opportunity to reduce a lot of the complexity associated with 

our current rules, in particular, the foreign tax credit limitation, 

which is incredibly complex, and has pages and pages of rules. I 

mean it is fun for people like me, but it is not fun for American 

businesses. And these types of rules are much less significant if 

you move to a territorial system. 

Chairman CAMP. And, Mr. Hines, what are the important— 

some of the most important decisions that policy makers should 

consider when trying to design a territorial system? 

Mr. HINES. One of the big issues is how you think about expense deductions associated with a territorial system, because 

American firms will have general expenses like interest expense in 

the United States or general and administrative expense. And the 

question is whether you want to permit those expenses to be fully 

deductible if the foreign income earned by those companies is not 

taxed by the U.S. 

It seems intuitive that if a company is doing 20 percent of its 

business abroad and has administrative expenses in the United 

States that cover both its domestic and foreign activities, then perhaps only 80 percent of those administrative expenses should be 

deductible in the United States. 

However, that is not really the right answer to that question. 

This expense deductibility question is a very important one. If you 

look at what other countries do—like the example of France was 

given earlier today generally do permit full domestic deductibility 

of the associated expenses, and that is the right way to run a territorial system. If you don’t, then you are implicitly taxing the foreign income again, and that is a mistake. 

Chairman CAMP. Okay. Mr. Suringa, do you have anything to 

add to that? 

Mr. SURINGA. Well, I think also on the deductibility of interest 

expense and other costs, I would agree with Professor Hines. One 

of the things to think about is if you are disallowing a portion of 

the interest and other expenses that are allocable to foreign source 

income, and you make an investment in the U.S.—let’s say you borrow to build a factory in the U.S.—if you have just a general expense allocation rule that allocates a piece of that to foreign source 


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income, you are going to actually lose your interest expense deduction for borrowing to build something in the U.S. 

I think that a lot of the complexity that people talk about in existing territorial systems is related to expense allocation. And that 

is why, in countries like Canada and the UK and France, as well, 

they have basically said, ‘‘We are not going to get into that game,’’ 

just for competitiveness reasons. 

Chairman CAMP. All right, thank you. Mr. Levin is recognized. 

Mr. LEVIN. You know, in a way, one should hesitate to ask 

questions because the answers often aren’t what we want. 

[Laughter.] 

Mr. LEVIN. I think we found that out today with a repatriation 

holiday because the witnesses who were here before very much articulated the reasons why we should not do it on a one-year basis, 

or a periodic basis. And I am not sure, Professor Hines, that my 

colleagues to my right here like your answer, in terms of raising 

taxes on individuals. 

So, maybe there should be some hesitation to ask questions, but 

I will anyway. 

Chairman CAMP. I would just say the committee doesn’t normally do rifle shots, but we might make an exception in his case. 

[Laughter.] 

Mr. LEVIN. I remember how previous chairs—myself, for a period of time, and those before us—talked rather negatively about 

rifle shots. But anyway, I can just look on the wall, and hear Dan 

Rostenkowski talking about rifle shots. 

But let’s have some discussion back and forth among the three 

of you, because you don’t agree, I don’t think. And I think the more 

discussion we have, the better. Your response on interest allocation, I think we need to spend some time on it. Because with territorial, you can very much escape taxation by an unfair allocation. 

And to simply say, ‘‘Let anybody do whatever they want,’’ is an 

open door to abuse of the tax system. And so, if you avoid complexity, you may increase undermining the integrity of a Tax Code. 

So, let me ask you, Ms. Gravelle, to bring you into this discussion, your view of the adoption of a territorial tax system and what 

impact it would have on wage income, labor income, what is your 

judgement there? 

Ms. GRAVELLE. I think it would cause—although we have got 

a lot—we are very close to a territorial system already, but it 

would make foreign investment more attractive. That would cause 

investment to flow abroad, and that would reduce the capital with 

which workers in the United States have, so it should reduce 

wages. A capital flow reduces wages in the United States, increases 

wages abroad. 

Mr. LEVIN. Okay, because on page eight of your testimony you 

say that a territorial tax encourages the flow of capital out of the 

U.S. 

Ms. GRAVELLE. That is right. 

Mr. LEVIN. Why don’t you elaborate on that? And then, because, 

Mr. Chairman, we need to have some discussion here—this is not 

an easy issue—— 

Ms. GRAVELLE. Well—— 


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Mr. LEVIN [continuing]. Maybe those who disagree with Ms. 

Gravelle, who has a long history with these issues, chime in if I 

have the time. Ms. Gravelle? 

Ms. GRAVELLE. Well, I mean, basically, if you lower the tax, either the perceived tax, because of eliminating, you know, any prospect of tax, with a territorial system, you will increase the aftertax rate of return that firms see abroad, so they will want to move 

their investments—they would want to make investments abroad, 

instead of the United States. 

I mean it is a very straightforward idea. And the more capital 

abroad, the less capital in the United States, that is going to lower 

wages in the United States. So that is just a very standard notion 

of where investment flows, and capital output—capital stock versus 

worker ratios in different countries. 

Mr. LEVIN. I—— 

Ms. GRAVELLE. I also think, though, an equally important issue 

is profit shifting. I think profit shifting is a problem that you have 

to be concerned about that is going to grow with territorial tax. 

Mr. LEVIN. Professor. 

Mr. HINES. I have been disagreeing with Dr. Gravelle for 25 

years, and I disagree with her right now. 

Mr. LEVIN. You are not old enough to have disagreed with her 

for 25 years. 

Mr. HINES. Oh, I guess you are right about that. 

[Laughter.] 

Mr. HINES. A territorial system would encourage business activity abroad, and that would stimulate greater and more productive 

business activity in the United States. The mistake in Dr. 

Gravelle’s logic is the assumption that there is one piece of capital, 

and it can either go to the United States or it can go abroad. 

The fact is, in the world there is lots of capital. And if business 

is more productive abroad, they can also be more productive and 

expand at home. 

Mr. LEVIN. All right. 

Chairman CAMP. Thank you. Dr. Boustany is recognized. 

Dr. BOUSTANY. Thank you, Mr. Chairman. Thank you all for 

appearing before the committee today. 

Mr. Suringa, in your testimony you warned us against the pursuit of perfection as we go about looking at this. And if we go to 

a territorial system, and we move to exempt active foreign income, 

we will only need the foreign tax credit for passive income. Is that 

correct? 

So would this allow us to really simplify the use of foreign tax 

credits? You mentioned the complexity in the code and in the regulations. Could you elaborate on that? 

Mr. SURINGA. Sure. I think it would certainly reduce the pressure on the foreign tax credit rules. It depends a lot on what type 

of system you go to. So, for example, if you choose a system like 

the Netherlands, which exempts both dividends and also branch income, then you are really not talking about much scope for application for the foreign tax credit rules, because double taxation is 

being relieved through the exemption system across the board. 

If you, on the other hand, go to a system like the UK has gone 

to, where you exempt dividend income but do not exempt branch 


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income, you rely on treaties for whatever exemption you are going 

to get in that context, then the foreign tax credit rules would still 

play a role. 

So I think it really depends a lot on the type of system you adopt. 

And I think that that type of dialogue about whether to adopt that 

system wholesale or piecemeal, that is sort of an ongoing dialogue 

that those countries are having internally. 

For example, there has been discussion in the UK and in Canada 

about going from a participation exemption system for dividends 

only to a system in which they also exempt branch income as well. 

And I think the motivation for that is, in part, simplicity of application, and not having to deal with the foreign tax credit rules very 

much at all. 

Dr. BOUSTANY. Thank you. Mr. Tiberi asked the first panel 

earlier, ‘‘What pitfalls should we look for, as we move forward?’’ 

And let’s say we go forward with a territorial system. 

So, Mr. Hines, I know we talked a little bit about the expense 

allocation issue just a moment ago. I don’t know if there is any— 

if you want to add more to that. But could you also talk a little 

bit about pitfall, just in general terms? I know it is beyond the 

scope of the time we have here, but give us some guidelines. 

Mr. HINES. Well, certainly, expense allocation is a pitfall, because it is very easy to talk yourself into propositions about limiting deductibility that would be mistakes in a territorial system. 

A second issue is you have to think about the tax treaties that 

we have. I realize that is not the House’s responsibility, but we 

have a lot of treaties, and they are based on the tax system we currently have. And so we would need to think about a number of our 

treaty arrangements. *Dr. Boustany. Thank you. Mr. Suringa, you 

want to comment there? 

Mr. SURINGA. There are various sorts of design elements. So an 

example is in Canada. Their participation exemption is an exemption for what is referred to as ‘‘exempt surplus’’. Exempt surplus 

is a portion of the earnings that are basically active earnings that 

are earned in jurisdiction with which Canada has a treaty or a tax 

information exchange agreement, and that has certain other similarities to the Canadian tax system. 

If you have active earnings in a jurisdiction that is outside that 

set of parameters, it is called ‘‘taxable surplus’’. And so when a Canadian company brings home a dividend, they have to figure out, 

okay, is this out of the taxable surplus account or the exempt surplus account, or is it under the foreign accrual property income regime, which is their anti-deferral regime. And you have to maintain all these sorts of complex accounts for how to deal with that. 

Because of the distinction between taxable and exempt surplus, 

you get discontinuities. For example, they have a treaty with the 

Bahamas. So you can earn active income in the Bahamas in Canada that is going to be treated as exempt surplus. They don’t have 

a treaty with Hong Kong. So you have an active manufacturing operation in Hong Kong. That is all taxable surplus. 

You get these sort of odd discontinuities, in terms of where you 

would expect to see an exemption apply, versus where you would 

expect to see residual taxation apply. For that reason, I think they 

are leaning towards trying to adopt a reform in which they would 


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not make those types of distinctions, that they would treat all active foreign business income as exempt surplus. And I think those 

are the types of design criteria that the U.S. should think about if 

we are going to move to a territorial system. 

Dr. BOUSTANY. Thank you. I yield back, Mr. Chairman. 

Chairman CAMP. Thank you. Mr. Rangel is recognized. 

Mr. RANGEL. Thank you, Mr. Chairman. Assuming that we all 

agree that our foreign tax system is overly complicated, and it has 

to be simplified, your mission today is to make certain that we provide whatever incentives is necessary to encourage our multinationals to invest in the United States of America without doing 

violence to their competitive position, as relates to transportation 

and other reasons that encourage them to do business and invest 

abroad. 

But your jobs, collectively, is to tell us what we can do with the 

existing code so that, at the end of the day, you know, as tax writers, that we did the best we could to encourage foreign—strike 

that—multinationals to bring that money and invest it—invest it, 

not just give it out in dividends—into American business, expansion of business opportunities to create more jobs in the USA. 

If you three can find some area of agreement, we will be way 

ahead with our problem. Mr. Hines. 

Mr. HINES. Well, I don’t know about agreement, but I will start 

with what I think the answer is, which is American companies will 

invest in the United States if it is profitable to do so, and if it is 

feasible to do so. 

Mr. RANGEL. What can we do? 

Mr. HINES. To make it profitable, I think we should exempt foreign business income from U.S. taxation, and allow companies to 

structure their businesses in the most profitable way. 

If it is in their interest to invest in the United States, they will 

do it. And the current tax system puts impediments in the way to 

the most productive business structuring. 

Mr. RANGEL. Suppose it is in their interest just to pay off debts 

and to increase dividends and to do things that are not directly related to creating jobs here. 

Mr. HINES. But we need to have confidence in the American 

economy. This is a great economy, we just need to get the tax system out of the way of the economy. And that has been our history, 

and there is no reason—— 

Mr. RANGEL [continuing]. Depend on them to do the job creating thing here by improving the economy generally? 

Mr. HINES. Yes. 

Mr. RANGEL. Okay. Mr. Suringa. 

Mr. SURINGA. Well, I think my perspective is one of as a practitioner, and this may be a little bit above my pay grade. But I think 

where I would start with is the rules that create complexity in the 

existing code. And, you know, I would probably start, you know, 

with last year’s bill and work backwards. I mean I just—— 

Mr. RANGEL. There is no question that is a done deal. We promise you that we will simplify the system, based on your recommendations. 

Now, what can we do to get that investment money here to create jobs here? 


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Mr. SURINGA. Well, I think moving to a participation exemption 

is going to simplify things and improve the ability of U.S. businesses to bring their money back home. So I think it is just a question of—— 

Mr. RANGEL. Bringing it back home is not the issue. Getting 

them to invest here and create jobs is the problem. 

Mr. SURINGA. Well, that is a very difficult problem. I think it 

really ultimately ends up being a matter of faith, as the—— 

Mr. RANGEL. Faith? 

Mr. SURINGA [continuing]. As Professor Hines has said, in the 

sense that—— 

Mr. RANGEL. Faith in the economists and multinationals is at 

an all-time low. 

Mr. SURINGA. Well, that is—I understand. The issue is that if 

you—the extent to which you put restrictions on their ability to use 

the money when they come back home, that is either going to discourage them from bringing the money back home, or they are 

going to bring it back home and use it in the right way, or they 

are going to bring it back home and try to figure out a way to work 

around those rules. So—— 

Mr. RANGEL. Thank you for your contribution. 

Mr. SURINGA. Well, that—— 

Mr. RANGEL. Ms. Gravelle. 

Ms. GRAVELLE. Well, I think the answer to moving that direction is simple. We could have a tax reform that increases the tax 

on foreign source income and reduces the tax rate in the United 

States. One example of that is in the Wyden-Gregg Bill, which was 

introduced last year. It is now the Wyden-Coats Bill. 

But basically, I don’t see that cutting taxes abroad is going to 

help bring capital here. I think it will do the opposite. And I do 

think we have a fixed pot of capital that belongs to U.S. companies. 

And if you move it one place it can’t be another place. So I think 

that is a very straightforward answer. 

But I think we should think about efficiency, and we should 

think about tax administration, too. I actually think a system that 

ends deferral would be easier to administer, because there wouldn’t 

be all these incentives to have profit shifting. 

Mr. RANGEL. Thank you. Mr. Chairman, what is your idea? 

Chairman CAMP. Well, I think my idea, if you are yielding back 

your time, is to recognize Ms. Black for five minutes. 

[Laughter.] 

Mrs. BLACK. Thank you, Mr. Chairman. And thank you for 

being here today, panel. 

I want to go back to something that was talked about in our first 

panel. I think you may have all been in the audience at that point 

in time, but let me just go back and remind you what was said. 

I think it actually was my colleague, Mr. Berg, who made the observation that in 1960, 17 of the 20 largest companies were 

headquartered here in the United States. And we are now down in 

2010 to just 6 of those top 20 businesses being headquartered here, 

in the United States. 

And given the fact that both on this panel and also the previous 

panel it was noted that capital is mobile, and in our world of increasingly mobile capital, how do these very high corporate taxes 


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make business investment and job creation in the United States attractive? Or, in the other case, not attractive? 

Mr. HINES. So the question is how do high tax rates make investment attractive? 

Mrs. BLACK. Well, I am trying to see can if we draw a conclusion about these businesses being headquartered and going to another country where the tax rate is, frankly, just more attractive. 

Would you draw that conclusion? And if so, what makes that happen? 

Mr. HINES. Oh, there is ample evidence that investment is attracted to lower tax locations. That is clear, and virtually every statistical study shows that. Furthermore, if taxes discourage certain 

kinds of industries, then you get fewer of those industries. 

There have been, in the past, expatriations, where companies actually pick up and move their headquarters, move their site of incorporation outside of their home country if the home country imposes a punishing tax burden. 

The United States had a spate of expatriations in the late 1990s, 

although subsequent legislation made it very difficult for companies to do that. Part of what motivated Great Britain’s recent tax 

reform move to a territorial system was concern about expatriating 

British companies that were moving elsewhere in Europe. 

So, expatriation is not itself quantitatively a large problem, but 

it is a little bit the canary in the coal mine, in that it illustrates 

the problem that your tax system has, that it makes your companies less competitive and discourages investment which, alas, is 

what we have had. 

Mrs. BLACK. Mr. Suringa. 

Mr. SURINGA. Yes. I think in the planning context you see this 

very much in what are referred to as sandwich structures, where 

you have got a foreign parent above a U.S. parent above a foreign 

subsidiary. And in that circumstance, the U.S. company ends up 

becoming a significant tax driver for that series of corporations. It 

leads to a lot of incentives on the part of the foreign company to 

actually move those operations out of the U.S. and align them 

under the foreign group, because the top tier foreign group can 

benefit from an exemption system, from concessions that are offered in its jurisdiction of incorporation. 

That is an example in which you see a direct incentive, in terms 

of business planning, for moving operations out of the U.S. And, obviously, to the extent that we can create a much more attractive 

environment for corporations to be headquartered in the U.S., you 

would expect to see that to stop. People would want to put operations underneath the U.S., because they are expecting to be able 

to get exempt dividends back up to their U.S. operations, and then 

to be able to redeploy them into our market, and into other markets, as well. 

Ms. GRAVELLE. Well, I think that most of the expatriations 

that occurred before 2004, and I think our legislation there pretty 

much took care of that problem. Most people felt that was the purpose of moving abroad, so you could strip earnings out of the 

United States. In other words, you would move your headquarters 

abroad, and then you would engage in some sort of interactions 


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with your related companies in the United States, particularly 

leveraging for earnings stripping. 

Every country has thin capitalization rules to prevent that, but 

ours are pretty weak. So, and that is what the evidence has 

showed, is the firms that inverted before 2004 moving mainly to 

places like Bermuda, used that as a way to reduce income that 

properly belongs in the United States, which is why you have this 

issue with allocation of deductions. That is another way you do 

earnings stripping. 

Mrs. BLACK. So if we have a territorial system where we equalize the competitiveness, would it not seem, by just reasonablethinking people, that if you have an American-owned company and 

you are apples-to-apples on the taxes that you would not want to 

be headquarters here in the United States, and grow your business 

here in the United States? 

As I talk to those companies that I go to visit that do have operations offshore, and then they have them here, they tell me if they 

could just have a more equal footing, it would be more attractive 

for them to be here. 

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

Mr. DOGGETT. Dr. Gravelle, if we move to a territorial system 

that eliminates taxes on foreign investment, or makes it nominal, 

won’t that have the effect of incentivizing investment overseas, instead of investing here, in America? 

Ms. GRAVELLE. I think that is pretty obvious. 

Mr. DOGGETT. I think it is pretty obvious—— 

Ms. GRAVELLE. I mean if you lower the tax abroad, capital is 

going to go abroad. I don’t know where the extra capital that Jim 

is talking about comes from. But, you know, unless we have a savings response, there is no reason to have more capital. So if you 

put capital in one place, it is not going to be in another place. 

Mr. DOGGETT. I agree with you, that—— 

Ms. GRAVELLE. So that is just logic. 

Mr. DOGGETT [continuing]. It is extremely obvious, despite all 

those who claim it is a panacea, that if you want to encourage economic growth overseas, adopt a territorial system. It is not aimed 

at creating jobs in America—— 

Ms. GRAVELLE. Absolutely. 

Mr. DOGGETT. And, in fact, won’t the economic effect of adopting a territorial system—over time, won’t American workers actually see their wages go down? 

Ms. GRAVELLE. That is what you would expect if you moved 

capital out of the United States elsewhere. You would expect wages 

to go down in the United States. 

Mr. DOGGETT. So, American workers that are already struggling will pay a price if we adopt the Republican panacea approach. 

And let me discuss more specifically a matter that all of you have 

referred to, and those are these rules that few people on this committee, much less the American people, fully understand. And I 

will admit to being one of those. 

As I understand moving to a territorial system, if you tell any 

of the corporations that were here today that they pay zero on their 

investments overseas, but they will pay—according to their standard—20, 25 percent on their income that they earn in the United 


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States, isn’t there a rather dramatic incentive that that provides to 

characterize as much of your American income as foreign income 

as possible? 

Ms. GRAVELLE. There is. In fact, there already is, under 

the—— 

Mr. DOGGETT. There is, because—— 

Ms. GRAVELLE [continuing]. Territorial elements of our system—— 

Mr. DOGGETT [continuing]. As you point out, in many ways a 

company like General Electric, that doesn’t really believe in paying 

taxes, they practically have a territorial system now. 

Ms. GRAVELLE. Yes. 

Mr. DOGGETT. But the same rules that are a problem today are 

the same rules we would have to use in a territorial system. We 

would be saying to any of these corporations, ‘‘These are the rules 

that apply.’’ And the problem referenced to some degree by all of 

the witnesses here, though clearly disagreeing on how severe it is, 

but the point is that the—those rules apply. 

And we are not just talking about the income they earn in China, 

we are talking about the income that they earn in Detroit or in 

Hartford or in Austin, and that there is an incentive to categorize, 

under the rules that haven’t worked very well in the past, to categorize as much of that American-earned income paid by American 

consumers as foreign income, because they won’t have to pay any 

tax on that, whatsoever. 

Ms. GRAVELLE. That is correct. And I think that problem becomes a little more serious. These guys wouldn’t have been here before if they didn’t think there was a value in a territorial tax. So 

I think it would—by removing any possibility of paying tax, it will 

increase the incentive—nobody knows how much—to engage in 

more of the schemes like you saw with Google and Forest Labs and 

GE—— 

Mr. DOGGETT. More tax-dodging, more cheating, more avoidance—— 

Ms. GRAVELLE. Right, there is a big incentive to shift paper 

profits. 

Mr. DOGGETT. More not playing by the rules that would apply 

to the distributor of one of these companies down in Texas that 

may be paying near a full 35 percent. So you distort and disadvantage domestic companies versus these multinationals. 

You mentioned, of course, the anti-inversion rules we have. But 

is it also your belief that, for a company like Transocean that didn’t 

only drill for BP in the Gulf, but drilled the Tax Code by claiming 

that it was no longer—renouncing its American citizenship and 

claiming that it was a Swiss corporation, do you believe we should 

have a rule that if you are managed and controlled in the United 

States, as Transocean still is, it ought to pay taxes, just like every 

other American corporation, instead of dodging them in Zug, Switzerland? 

Ms. GRAVELLE. Well, I think it would probably be helpful. I 

wouldn’t abandon the anti-inversion rules, which work well. 

Mr. DOGGETT. Of course not. 


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Ms. GRAVELLE. But I think it would be helpful to have a facts 

and circumstances approach to enforcing these tax rules, because 

why should just a piece of paper determine—— 

Mr. DOGGETT. Allow you, if you have management and control 

here—— 

Ms. GRAVELLE [continuing]. Determine all of this? 

Mr. DOGGETT. And—— 

Ms. GRAVELLE. I know there is a concern that people would 

move their headquarters, but I have heard some recent research by 

Kimberly Clausing that suggested that the headquarters themselves are not very sensitive to taxes—— 

Mr. DOGGETT. But there is no merit to that job export—— 

Ms. GRAVELLE. Well, you know, there is always some effect. 

Mr. DOGGETT. But no substantial merit—— 

Ms. GRAVELLE. But I don’t think it would be a serious problem. 

Mr. DOGGETT. And specifically, finally, on your point about 

even the—lowering the corporate tax rate, which may have some 

merit, but your feeling is lowering the corporate tax rate from 35 

to, say, 25 percent, as has been advanced as a panacea, will have 

very modest impact on any type of economic growth. We would be 

much better to address the size of the deficits—— 

Ms. GRAVELLE. Yes. 

Mr. DOGGETT [continuing]. And the national debt than focusing 

on that one aspect. 

Ms. GRAVELLE. Yes. My estimates, and I am one of the people 

who have one of the only international corporate tax models in the 

country, with a colleague from Wharton—using those estimates, 

capital is just not all that mobile. It is constrained by all sorts of 

effects. And most of the income that comes in from abroad isn’t 

going to belong to us. 

Chairman CAMP. All right, thank you. 

Ms. GRAVELLE. It is going to belong to foreigners. 

Chairman CAMP. Time has expired. 

Mr. DOGGETT. Thank you. 

Chairman CAMP. I do think, though, that it is important to note 

that we are hearing about capital as if it is U.S.-based, and that 

is it. And if there is an investment opportunity around the world, 

the question isn’t: ‘‘Is it just U.S. capital?’’ It is: ‘‘What capital is 

going to be taking advantage of that opportunity?’’ 

And what we have been hearing from the other panel is we need 

to make sure that American-based companies are competitive when 

it comes to that investment. So will the U.S. and U.S. workers reap 

the benefit from that investment, or will it be a foreign entity, and 

foreign workers? And I think we just need to understand, it is not 

just this limited issue of: ‘‘Is it U.S. capital?’’ 

But Mr. Pascrell is recognized. 

Mr. PASCRELL. Yes. Thank you, Mr. Chairman. Mr. Hines, you 

aren’t suggesting, are you, in reviewing the Tax Code that we are 

examining today, you aren’t suggesting, when you said—your 

words were the tax system is in the way of these multi—you 

weren’t suggesting that we—there not be any taxes on the deliberations between companies and between countries. You weren’t suggesting—you were just suggesting that we need a new system. 

Mr. HINES. That is right. 


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Mr. PASCRELL. Yes. Do we need a new system for middle class 

taxes, people on their income? Do we need a new system for that, 

too? 

Mr. HINES. I think we could all agree that the tax system, as 

a whole, could be improved. 

Mr. PASCRELL. Okay. We all agree that it could be improved. 

But how would you pay for the recommendations that you are making today, and how would you pay for what the consequences—because as soon as you change one part of that code, you are affecting 

a—many different parts of the code. Are we not? 

Mr. HINES. That is right. 

Mr. PASCRELL. Well, how would you pay for it? 

Mr. HINES. There are many things that need to be paid for. 

I—— 

Mr. PASCRELL. No, how would you pay for your changes that 

you are recommending to us today? 

Mr. HINES. The territorial system? 

Mr. PASCRELL. Yes. 

Mr. HINES. I think you have a couple of options of things that 

would be improvements, if we adopted a territorial system, and we 

eliminated the section 199—— 

Mr. PASCRELL. How would you pay for it? 

Mr. HINES. You eliminate Section 199, you more than pay for 

it. 

Mr. PASCRELL. And what would that do? 

Mr. HINES. That is the domestic, you know, production activities 

deduction. 

Mr. PASCRELL. All right. 

Mr. HINES. And so you generate revenue that way. And it would 

increase the efficiency of businesses in America, and thereby increase the productivity of American workers. 

Mr. PASCRELL. Well, that doesn’t make sense to me. You know 

what else doesn’t make sense to me? What we saw in the Republican budget this year. That budget gave—reduced the corporate 

tax 10 percent, did it not, over the next 10 years? 

Mr. HINES. There was a reduction. I don’t remember the 

amount. 

Mr. PASCRELL. It was 10 percent. That was the rate reduction. 

And you know how it was paid for? You do agree that we have to 

pay for these things. You are not saying that we simply reduce the 

rates, reduce the taxes, and just move on. Because everything that 

will happen after that will produce, and therefore, will cover the 

gap that—we are missing revenue here. 

Mr. HINES. The country has a serious problem with the deficit, 

as it is. 

Mr. PASCRELL. Yes. 

Mr. HINES. So, I agree, we don’t want to be fiscally irresponsible. 

Mr. PASCRELL. You want to pay for it. 

Mr. HINES. Oh, yes. 

Mr. PASCRELL. You know how we paid for it in the budget? 

Mr. HINES. Please tell me. 


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Mr. PASCRELL. Well, we paid for it by ending Medicare and 

Medicaid as we know it. Want me to tell you how we did that? You 

got my idea? What is your response? 

Mr. HINES. I think these are entirely separate issues, actually. 

Mr. PASCRELL. They sure are. But one affects the other, don’t 

they? 

Mr. HINES. We need to put our fiscal house in order across the 

board. 

Mr. PASCRELL. We all agree with that. I have heard that four 

million times and you have heard it five million. 

Ms. Gravelle, let me ask you this question. The system is broken. 

Okay, we agree that we need some changes. In your opinion, what 

effect would a move to a pure territorial system have? 

Ms. GRAVELLE. Well, as I said, I think it would cause capital 

flow out of the United States to abroad. That has consequences for 

wages in the United States falling, wages abroad rising. 

I think it would also exacerbate our problems with profit-shifting, companies like Google or GE that we have all read about in 

the newspapers that managed to move their income abroad. 

And I also think it is very important to not abandon the notion 

of allocating deductions, because debt—— 

Mr. PASCRELL. How much more revenue in wages could we lose 

under a territorial system in the United States of America? 

Ms. GRAVELLE. I don’t know. I mean I think it would be small, 

because I think all of these things are small. I mean I don’t think 

it would be a big effect, because it is not a big—we don’t collect 

very much tax already. 

Mr. PASCRELL. Certainly not compared to the $100 billion that 

we lose in revenue in offshoring most of our business dealings—— 

Ms. GRAVELLE. It would certainly be small compared to the 

revenue loss and the deficits. And in my corporate paper I show 

that the effects on growth from the deficit, if you cut the corporate 

tax rate or made any of these changes—— 

Mr. PASCRELL. Mr. Chairman, in—thank you, all three of you. 

In conclusion, simply let me say this. The amount of business investment under three presidents, three prior presidents—President 

Carter, President Reagan—four actually—President Bush and 

President Clinton—is very eye-opening. The amount of business investment under President Clinton was 10.3 percent, under Ronald 

Reagan was 3.7 percent, under George Bush I was 3.8 percent. 

Mr. RANGEL. Mr. Chairman. 

Chairman CAMP. Yes. 

Mr. PASCRELL. So all of the philosophical discussions that we 

have about private enterprise, and how we help business grow— 

let’s look at the facts and the detail, rather than the myths. 

Chairman CAMP. All right. And I do want to just say, as the witnesses have pointed out, it isn’t clear that a territorial system 

would lose revenue. It depends how it is designed. It could very 

easily be designed in a way—— 

Mr. PASCRELL. That is correct. 

Chairman Camp.—that it would not lose revenue. And I would 

just point out that the tax reform in our budget was revenue neutral, it did not lose revenue. But Mr. Becerra—— 


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Mr. PASCRELL. Well, it did—you did it in cutting Medicaid and 

Medicare. 

Chairman CAMP. No, the tax reform piece—— 

Mr. PASCRELL. Right. 

Chairman Camp.—in and of itself, did not have a cost to it. 

Mr. PASCRELL. Well, how did you pay for it, then? Tell me. 

Chairman CAMP. Well, we designed it in a way that it was revenue neutral. 

Mr. PASCRELL. Well, what did you design? 

Chairman CAMP. Well, Mr. Becerra is recognized for five minutes. 

Mr. BECERRA. Thank you, Mr. Chairman. And you obviously 

need to have more of these hearings, Mr. Chairman. They are stimulating. 

Thank you all for your testimony. Actually, I would love to pick 

up on something the chairman just mentioned, the design of the 

system. It really is all in the design. You could make a system, 

whether territorial or worldwide, that collects a whole bunch of revenue, or not enough revenue. It is all in the design. And when we 

talk about the design, it is not just the design of the elements of 

the Tax Code or your revenue-collecting system, it is everything 

that impacts it, as well. 

So, how do you treat your personal income tax issues in your— 

in that host country? What type of infrastructure do you have? 

What are the—what is the wage rate in your country? What level 

of exportation or importation do you have in your country? So all 

of those things come into play. 

Dr. Gravelle, I was wondering if you could give me a sense. 

What—so many of the CFOs who testified were attracted to a territorial system, I think, because they saw a simplicity in it, in that 

it meant that they knew what would be taxed if it was domestically 

produced. And if it wasn’t, then chances are they wouldn’t have to 

worry so much about the U.S. Tax Code. 

But there—as far as I know—and we have had several private 

sessions with experts on this within the committee, which I am 

very appreciative of, because they have been very learning experiences, is that no one has a purely territorial system. 

And so, if you can, give us your sense of what you see goes into 

coming up with a system, whether territorial or not. 

Ms. GRAVELLE. Well, there is several different elements, some 

we see in other countries, and some we could just do. I mean you 

have heard the talk about the haircut, the five percent tax. Or you 

could do more than that, if you wanted to. 

France has a system where they don’t extend their territorial 

treatment to tax haven countries with very low taxes, and I think 

some other countries might have that. But I know France does. 

There is a proposal that—it is in the CBO budget options, actually—that has floated around for years that would allow a territorial tax with an allocation of deductions, of parent company deductions. Would actually raise revenue. 

And I think one other feature of that proposal is to source, for 

purposes of the foreign tax credit—because you would still have the 

foreign tax credit, because you have flow-through income, you 


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would still have anti-abuse rules, like sub-part F—but one of the 

things that has been proposed. 

And this was an idea that came from people at Treasury, is to 

resource royalties from things produced in the United States, consider that U.S. source income. Because right now, people can deduct royalties abroad and use the excess, and then shelter them 

from U.S. income with foreign tax credits—you don’t ever pay any 

taxes on them. So that was an important proposal. That did split 

the multinational community. 

Mr. BECERRA. My—— 

Ms. GRAVELLE. As to whether they wanted that system or not. 

Mr. BECERRA. My sense is that when we speak of moving towards a different system, it is because that system that we speak 

of brings down our rates, whoever the definition of ‘‘our’’ is, my 

rates. 

But if you take a look at the entire system—take France, for example, which does have a territorial system. Its social systems are 

far different than our social systems. 

Ms. GRAVELLE. Right. 

Mr. BECERRA. So that if their taxation system, along with their 

different systems towards manufacturing and so forth lead to high 

levels of export or import, they have in place an infrastructure that 

helps catch any French workers that might be impacted—— 

Ms. GRAVELLE. Right. 

Mr. BECERRA [continuing]. Detrimentally by whatever industrial policy they have in place, far better than we do. We have a 

whole bunch of American workers who, right now, don’t even get 

trade adjustment assistance, because Congress hasn’t reauthorized 

the monies for American workers impacted negatively, losing their 

jobs, because of trade. 

And so, if you are going to talk about a territorial system that 

you might like, whether it is France or any other countries, you 

have to also be willing to talk about the other things those countries do to be able to absorb that type of tax regime, instead of 

what we might have. 

Because everybody, at the end of the day, still has to collect 

enough revenue to do all of the welfare activities—and by that I 

mean general welfare of your population, not a welfare program— 

the general welfare activities that are required of any sovereign nation. 

And so, I am wondering, then. Have you found any particular 

country that fits the U.S. condition, circumstance today, that has 

a—or has an exclusively territorial system as it can get? 

Ms. GRAVELLE. No. 

Chairman CAMP. All right—— 

Ms. GRAVELLE. No. 

Chairman CAMP. Thank you. 

Mr. BECERRA. Thank you very much. Thank you, Mr. Chairman. 

Chairman CAMP. Time has expired. I want to thank our panel 

of witnesses for being here, and thank you for responding to questions. And this hearing is now adjourned. 

[Whereupon, at 1:04 p.m., the committee was adjourned.] 


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[Submissions for the Record follow:] 

Roger Conklin, Retired International 

Sales and Marketing Executive, Statement 


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Brian Garst, Director of Government Affairs, 

Center for Freedom and Prosperity, Statement 


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Chairman David Camp and Congressman Sander M. Levin, Joint Statement 


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U.S. Chamber of Commerce, Statement 


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Matthew Lykken, Director, SharedEconomicGrowth.org, Statement 


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MATERIAL SUBMITTED FOR THE RECORD 

Questions for the Record: 

Hon. Bill Pascrell, Jr. and Hon. Jim McDermott 


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Æ 


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