" ! COMMITTEE PRINT 113th Congress 

2d Session 

S. PRT. 

113–31 

STAFF REPORT ON COMPREHENSIVE 

TAX REFORM FOR 2015 AND BEYOND 

PREPARED BY THE REPUBLICAN STAFF OF THE

COMMITTEE ON FINANCE 

UNITED STATES SENATE 

DECEMBER 2014 

Printed for the use of the Committee on Finance 


congress.#13
STAFF REPORT ON COMPREHENSIVE TAX REFORM FOR 2015 AND BEYOND 

U.S. GOVERNMENT PRINTING OFFICE

WASHINGTON : 

For sale by the Superintendent of Documents, U.S. Government Printing Office

Internet: bookstore.gpo.gov Phone: toll free (866) 512–1800; DC area (202) 512–1800

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1 

91–797 

" ! COMMITTEE PRINT 113th Congress 

2d Session 

S. PRT. 

2014

113–31 

STAFF REPORT ON COMPREHENSIVE 

TAX REFORM FOR 2015 AND BEYOND 

PREPARED BY THE REPUBLICAN STAFF OF THE

COMMITTEE ON FINANCE 

UNITED STATES SENATE 

DECEMBER 2014 

Printed for the use of the Committee on Finance 


congress.#13
COMMITTEE ON FINANCE 

RON WYDEN, Oregon, Chairman 

JOHN D. ROCKEFELLER IV, West Virginia 

CHARLES E. SCHUMER, New York 

DEBBIE STABENOW, Michigan 

MARIA CANTWELL, Washington 

BILL NELSON, Florida 

ROBERT MENENDEZ, New Jersey 

THOMAS R. CARPER, Delaware 

BENJAMIN L. CARDIN, Maryland 

SHERROD BROWN, Ohio 

MICHAEL F. BENNET, Colorado 

ROBERT P. CASEY, Jr., Pennsylvania 

MARK R. WARNER, Virginia 

ORRIN G. HATCH, Utah 

CHUCK GRASSLEY, Iowa 

MIKE CRAPO, Idaho 

PAT ROBERTS, Kansas 

MICHAEL B. ENZI, Wyoming 

JOHN CORNYN, Texas 

JOHN THUNE, South Dakota 

RICHARD BURR, North Carolina 

JOHNNY ISAKSON, Georgia 

ROB PORTMAN, Ohio 

PATRICK J. TOOMEY, Pennsylvania 

JOSHUA SHEINKMAN, Staff Director 

CHRIS CAMPBELL, Republican Staff Director 

(II) 

(III) 

C O N T E N T S 

Page 

List of Figures .......................................................................................................... V 

List of Tables ............................................................................................................ VI 

Foreword (Senator Orrin G. Hatch) ....................................................................... IX 

Chapter 1: Introduction to Tax Reform ................................................................. 1 

Chapter 2: Where Have We Been? ......................................................................... 9 

Chapter 3: Where Are We and Where Are We Going? ......................................... 30 

Chapter 4: Individual Tax Reform ......................................................................... 42 

A. Base of Taxation ............................................................................................ 42 

B. Distribution of the Tax Burden .................................................................... 60 

C. Tax Expenditures ........................................................................................... 71 

D. Economic Growth Resulting from Tax Reform ............................................ 79 

E. Simplification ................................................................................................. 91 

F. Itemized Deductions ...................................................................................... 95 

G. Employer-Provided Health Insurance .......................................................... 100 

H. Alternative Minimum Tax ............................................................................ 102 

I. Standard Deduction, Personal Exemptions, Dependency Exemptions, 

Head of Household Status and the Child Tax Credit ............................. 106 

J. Earned Income Tax Credit (EITC) and the Additional Child Tax Credit 109 

K. Retirement Plans ........................................................................................... 112 

L. Education Tax Incentives .............................................................................. 115 

Chapter 5: Business Tax Reform ............................................................................ 123 

A. Background on Corporate Tax Integration .................................................. 126 

B. Summary of Hearings Involving Corporate Tax Integration ..................... 136 

C. Description of Current Law .......................................................................... 139 

D. Distortions Created by a Classical System of Taxing Corporate Earnings 150 

E. Why Have Corporate Income Taxes ............................................................. 158 

F. The Need for Corporate Tax Integration ..................................................... 161 

G. Who Bears the Burden of the Corporate Income Tax ................................. 164 

H. The Corporate Tax as a Revenue Source ..................................................... 172 

I. Corporate Tax Expenditures ......................................................................... 176 

J. Corporate Tax Rates ...................................................................................... 180 

K. Methods of Partial or Complete Integration ................................................ 185 

L. Equivalence Between Dividends Paid Deduction and Imputation Credit 202 

M. Integration Regimes Under Current Law .................................................... 204 

N. Corporate Integration in Other Countries ................................................... 208 

O. Financial Accounting Treatment .................................................................. 211 

P. Tax-Exempt Shareholders ............................................................................. 213 

Q. Foreign Shareholders .................................................................................... 219 

R. Preferences ..................................................................................................... 224 

S. Retained Earnings and Sales of Stock ......................................................... 228 

T. Corporate Dividend Policy Response to Integration ................................... 230 

U. Pass-Through Business Entities ................................................................... 235 

Chapter 6: International Tax Reform .................................................................... 239 

A. Summary of Hearings Involving International Tax Reform ...................... 243 

Page

IV 

B. Theories of International Taxation .............................................................. 246 

C. Revenues from the U.S. International Tax System .................................... 251 

D. The Need for a Territorial Tax System ........................................................ 252 

E. Concerns Regarding a Territorial Tax System ............................................ 265 

F. Patent or Innovation Box .............................................................................. 271 

G. Worldwide Tax System with No Deferral .................................................... 274 

H. Minimum Tax ................................................................................................. 278 

I. Foreign Corporations ..................................................................................... 279 

J. Non-Resident U.S. Citizens ........................................................................... 282 

Chapter 7: Conclusion ............................................................................................. 284 

Bibliography ............................................................................................................. 286 

Appendix ................................................................................................................... 313

Exhibit 1—Memorandum from Thomas A. Barthold (no date) ..................... 314 

Exhibit 2—Memorandum from Thomas A. Barthold (Apr. 29, 2011) .......... 315 

Exhibit 3—Memorandum from Thomas A. Barthold (no date) ..................... 317 

List of Figures 

Page 

Figure 3.1 Total Deficits or Surpluses, 1974–2024 .............................................. 31 

Figure 3.2 Total Revenues and Outlays, 1974–2024 ........................................... 33 

Figure 5.1 Taxation under the Classical System ................................................. 141 

Figure 5.2 Percentage of Total Income Paid to Foreign Persons by Income 

Type, 2007 and 2008 ............................................................................ 221 

Figure 5.3 Percentage of Total Taxes Withheld on Foreign Persons by Income 

Type, 2007 and 2008 ............................................................................ 222 

Figure 5.4 Dividend Changes at U.S. Companies ................................................ 232 

Figure 5.5 Stock Buybacks and Dividends: Aggregates for U.S. Firms, 1988– 

2013 ....................................................................................................... 234 

Figure 6.1 Profits from Overseas Operations Growing as a Percentage of 

Total Profits .......................................................................................... 239 

Figure 6.2 Competition to Buy or Construct a Foreign Manufacturing Plant .. 277 

(V) 

(VI) 

List of Tables 

Page 

Table 2.1 Internal Revenue Receipts by Principal Sources, 1913–1945 ........... 15 

Table 2.2 Individual Income Tax Returns, 1913–1945 ...................................... 15 

Table 2.3 Internal Revenue Receipts by Principal Sources, 1946–1985 (in 

Thousands) ............................................................................................ 20 

Table 2.4 Internal Revenue Receipts by Principal Sources, 1986–2013 (in 

Thousands) ............................................................................................ 29 

Table 3.1 Deficits Projected in CBO’s Baseline Budget Projections (Billions 

of Dollars) ............................................................................................. 34 

Table 3.2 Deficits Projected in CBO’s Baseline (as a Percentage of Gross 

Domestic Product) ................................................................................ 34 

Table 3.3 Actual Revenues for 2007 to 2013 (Billions of Dollars) ..................... 35 

Table 3.4 Projected Revenues for 2014 to 2024 (Billions of Dollars) ................ 35 

Table 3.5 Projected Revenues for 2014 to 2024 (as a Percentage of Gross 

Domestic Product) ................................................................................ 36 

Table 4.1 VAT Rates in 2014 in OECD Countries ............................................. 53 

Table 4.2 Summary of Federal Income Tax Data, 2011 .................................... 61 

Table 4.3 Total Income Tax Shares, 1980–2011 (Percent of Federal Income 

Tax Paid by Each Group) .................................................................... 62 

Table 4.4 Average Tax Rate, 1980–2011 (Percent of AGI Paid in Federal 

Income Taxes) ....................................................................................... 63 

Table 4.5 Federal Individual Income Tax Returns with Zero or Negative 

Tax Liability ......................................................................................... 65 

Table 4.6 Number of Returns with Refundable Tax Credits in Excess of 

Payroll Taxes ........................................................................................ 67 

Table 4.7 Number of Returns with Refundable Tax Credits in Excess of 

Payroll Taxes ........................................................................................ 68 

Table 4.8 Tax Units With and Without Income Tax Liability in 2011 ............ 69 

Table 4.9 Tax Units Without Income Tax ........................................................... 70 

Table 4.10 Sum of Tax Expenditure Estimates by Type of Taxpayer, Fiscal 

Years 2014–2018 .................................................................................. 73 

Table 4.11 Ten Largest Tax Expenditures, 2014: Individuals ............................ 74 

Table 4.12 Taxes on Long-Term Capital Gains and Qualified Dividends— 

2011 ....................................................................................................... 78 

Table 4.13 Statutory Tax Rates Under Present Law and Proposals .................. 80 

Table 4.14 Percent Change in Real GDP Relative to Present Law (Percent 

Change for the Period) ......................................................................... 81 

Table 4.15 Percent Change in Receipts Due to Change in GDP (Percent 

Change for the Period) ......................................................................... 82 

Table 4.16 Percent Change in Real Producers’ Capital Relative to Present 

Law (Percent Change for the Period) ................................................. 83 

Table 4.17 Percent Change in Real Residential Capital Relative to Present 

Law (Percent Change for the Period) ................................................. 84 

Table 4.18 Change in Interest Rates Relative to Present Law (Change in 

Basis Points) ......................................................................................... 85 

Table 4.19 Percent Change in Private Sector Employment Relative to Present 

Law (Percent Change for the Period) ................................................. 86 

Page

VII 

Table 4.20 Percent Change in Consumption Relative to Present Law (Percent 

Change for the Period) ......................................................................... 87 

Table 4.21 Percent Change in Real GDP Relative to Present Law (Percent 

Change for the Period) ......................................................................... 91 

Table 4.22 Employer-Sponsored Retirement Plans .............................................. 113 

Table 4.23 Education Tax Incentives .................................................................... 117 

Table 5.1 Percentage Shares of Net Income, 1980–2008 ................................... 151 

Table 5.2 Marginal Effective Tax Rates on New Investment ........................... 153 

Table 5.3 Shares of Business Returns as a Percentage, 1980–2008 ................. 162 

Table 5.4 Percentage Composition of Receipts by Source, 1940–2013 ............. 173 

Table 5.5 Returns of Active Corporations, Other Than S Corporations, 

REITs and RICs Tax Year 2011 ......................................................... 175 

Table 5.6 Sum of Tax Expenditure Estimates by Type of Taxpayer, Fiscal 

Years 2014–2018 .................................................................................. 176 

Table 5.7 Ten Largest Tax Expenditures, 2014: Corporations ......................... 177 

Table 5.8 U.S. Statutory Corporate Tax Rates ................................................... 180 

Table 5.9 U.S. Statutory Corporate Tax Rates (Including Surtaxes) ............... 180 

Table 5.10 OECD Countries—Statutory Corporate Tax Rates ........................... 181 

Table 5.11 Tax Rates (%) of OECD Countries, 2009 and 2010 ........................... 184 

Table 5.12 Equivalence of Dividends Paid Deduction and Imputation Credit .. 203 

Table 5.13 Equivalence of Dividends Paid Deduction with Withholding Tax 

and Imputation Credit ......................................................................... 204 

Table 5.14 Corporate Integration in the OECD Countries .................................. 209 

Table 5.15 Dividends Paid Deduction and Financial Accounting ....................... 212 

Table 5.16 Holdings of Corporate Equities in Billions of Nominal Dollars, 

1990–2010 ............................................................................................. 214 

Table 5.17 Holdings of Corporate Bonds in Billions of Nominal Dollars, 1990– 

2010 ....................................................................................................... 215 

Table 6.1 Foreign Share of Worldwide Profits of Some U.S. Multinationals ... 240 

Table 6.2 Foreign Tax Payments and Credits, 2007, 2008 and 2009 ............... 252 

Table 6.3 Tax Treatment of Foreign Source Dividends ..................................... 254 

Table 6.4 Effective Tax Rate (%) Per Dollar of Income Deferred by a 35 

Percent Rate Taxpayer for Different Deferral Periods and Interest 

Rates ...................................................................................................... 257 

Table 6.5 Percentage of Dividend Exemption ..................................................... 262 

Table 6.6 Comparison of EU Patent Box Regimes and U.K. Proposal ............. 272 

(IX)

Foreword 

We live in very partisan times. Indeed, it’s become almost cliche ́

for politicians, like myself, to comment on the rank partisanship 

that pervades in Washington, D.C. and to lament the lack of 

progress or agreement on even the most simple and fundamental 

issues of the day. But, make no mistake, that’s the world we’re living in. However, despite partisan gridlock in Congress on many 

issues, there is bipartisan agreement on the need to fix our nation’s 

broken tax code. Virtually everyone—in Washington and elsewhere—agrees that, when it comes to our tax system, the status 

quo is unacceptable. Everyone agrees that our economy has stagnated, and too many Americans are out of work or underemployed. 

And, our broken tax code is holding back economic progress and job 

creation. That is why I have made tax reform my highest priority, 

and I’m not alone. 

Republicans and Democrats, representatives and senators have 

all expressed a desire to move this effort forward. In just the past 

few years, some, like Chairman Dave Camp of the House Ways and 

Means Committee and Chairman Ron Wyden of the Senate Finance Committee, have gone so far as to introduce tax reform legislation. Others, like former Finance Committee Chairman Max Baucus, have unveiled tax reform frameworks that specify the direction 

they believe this effort should take. There are ideas proposed by 

others as well. While I do not believe that any of those efforts have 

cracked the proverbial code when it comes to tax reform, I applaud 

them all. 

Too often, when people talk about reforming our tax code, they 

reduce the entire endeavor to a set of talking points—‘‘we just need 

to broaden the base and lower the rates’’—as if it were a simple 

exercise. That may work in the context of a political campaign, but, 

as I’m sure my colleagues who have actually put forward specific 

proposals can attest, tax reform will be far more difficult and complicated than anything that can be boiled down to a simple slogan. 

It will involve balancing countless interests and making difficult 

choices among numerous competing priorities. In fact, despite the 

number of specific proposals that are out there, I don’t know that 

we’ve even scratched the surface on the degree of difficulty we face 

when it comes to tax reform. Part of the difficulty is natural, given 

that we live in a complex world with a complex economy. The key 

is to understand the complexities and wade through them to engineer a tax system that enhances efficiency, fairness, and simplicity. 

Living in a complex world does not mean that we should accept or 

promote additional complexities from the tax system. 

Despite the difficulties, I believe that reform is vital and necessary to our nation’s economic well-being. Our tax code is a huge 

obstacle standing between us and continued prosperity. The costs 

X

of compliance alone are staggering. And, those costs are nothing 

compared to the economic distortions created by a tax system that, 

far too often, picks winners and losers. I believe this is true of both 

the individual tax system as well as the business tax system. That 

is why I have repeatedly called for a comprehensive approach that 

fixes the tax code for individuals and families as well as corporations and small businesses. 

Once again, I commend those who have introduced specific proposals for their contributions to the overall tax reform debate. To 

continue this conversation and, hopefully, set the stage for an even 

more robust discussion in the near future, I asked my Senate Finance Committee staff to compile this report, titled ‘‘Comprehensive Tax Reform for 2015 and Beyond.’’ The report is intended 

to provide background on where we are and where we have been 

with regard to our tax system as well as some possible direction 

on where our reform efforts should go in the near future. I believe 

it will be helpful both to tax experts and academics, as well as 

those who do not spend all their days steeped in these issues. 

I want to thank my staff for their efforts in putting this report 

together, particularly Chris Campbell, my Staff Director for his 

leadership and counsel; Mark Prater, my Chief Tax Counsel and 

Deputy Staff Director for his leadership and unparalleled expertise 

on these matters; and Christopher Hanna, my Senior Policy Advisor for Tax Reform, for taking the lead as principal drafter of the 

report. I also want to thank Tony Coughlan, Jim Lyons, Jeff Wrase, 

Preston Rutledge and Bryan Hickman for their substantial contributions. Additional assistance was provided by Shawn Novak, 

Peter Russo, Caleb Wiley, Nick Wyatt, Robert Chun and Abegail 

Cave. 

In conclusion, I want to stress that, if we are ever going to make 

tax reform a reality, both parties will have to come together to get 

it done. That will mean Republicans and Democrats in both the 

Congress and the White House working together toward a common 

goal that will benefit the American people and help get our economy moving on a better course. To some, that may sound like a 

fairy tale. But, at this point, I do not believe we can consider tax 

reform to be an optional exercise—it is a matter of necessity. That 

is why I am optimistic that there is enough goodwill in Washington 

and throughout our country to make this effort successful. I won’t 

speak for anyone else, but, I want to be clear: I am willing to work 

with anyone—Republican or Democrat—to fix our country’s tax 

code. I hope others will view this report as an invitation to work 

together on these issues. 

Senator Orrin G. Hatch 

Ranking Member 

U.S. Senate Committee on Finance 

(1) 


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