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

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22–331 2017

THE PRESIDENT’S FISCAL YEAR 2016 BUDGET 

PROPOSAL WITH U.S. DEPARTMENT OF THE 

TREASURY SECRETARY JACOB J. LEW 

HEARING 

BEFORE THE

COMMITTEE ON WAYS AND MEANS 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED FOURTEENTH CONGRESS 

FIRST SESSION 

FEBRUARY 3, 2015 

Serial No. 114–FC03 

Printed for the use of the Committee on Ways and Means 

( 


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COMMITTEE ON WAYS AND MEANS 

PAUL RYAN, Wisconsin, Chairman 

SAM JOHNSON, Texas 

KEVIN BRADY, Texas 

DEVIN NUNES, California 

PATRICK J. TIBERI, Ohio 

DAVID G. REICHERT, Washington 

CHARLES W. BOUSTANY, JR., Louisiana 

PETER J. ROSKAM, Illinois 

TOM PRICE, Georgia 

VERN BUCHANAN, Florida 

ADRIAN SMITH, Nebraska 

AARON SCHOCK, Illinois 

LYNN JENKINS, Kansas 

ERIK PAULSEN, Minnesota 

KENNY MARCHANT, Texas 

DIANE BLACK, Tennessee 

TOM REED, New York 

TODD YOUNG, Indiana 

MIKE KELLY, Pennsylvania 

JIM RENACCI, Ohio 

PAT MEEHAN, Pennsylvania 

KRISTI NOEM, South Dakota 

GEORGE HOLDING, North Carolina 

JASON SMITH, Missouri 

SANDER M. LEVIN, Michigan 

CHARLES B. RANGEL, New York 

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 

JOSEPH CROWLEY, New York 

DANNY DAVIS, Illinois 

LINDA SA ́ NCHEZ, California 

JOYCE MYER, Staff Director 

JANICE MAYS, Minority Chief Counsel 


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C O N T E N T S 

Page 

Advisory of February 3, 2015 announcing the hearing ........................................ 2 

WITNESS 

The Honorable Jacob J. Lew, Secretary, U.S. Department of the Treasury, 

Washington, DC ................................................................................................... 6 

SUBMISSIONS FOR THE RECORD 

Family Business Estate Tax Coalition (FBETC) ................................................... 96 

Puerto Rico Manufacturers Association (PRMA) .................................................. 102 


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THE PRESIDENT’S FISCAL YEAR 2016 BUDGET 

PROPOSAL WITH U.S. DEPARTMENT OF THE 

TREASURY SECRETARY JACOB J. LEW 

TUESDAY, FEBRUARY 3, 2015 

U.S. HOUSE OF REPRESENTATIVES, COMMITTEE ON WAYS AND MEANS, Washington, DC. 

The Committee met, pursuant to call, at 10:03 a.m., in Room 

1300, Longworth House Office Building, Hon. Paul Ryan [Chairman of the Committee] presiding. 

[The advisory announcing the hearing follows:] 


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ADVISORY 

FROM THE COMMITTEE ON WAYS AND MEANS 

FOR IMMEDIATE RELEASE CONTACT: (202) 225–3625 

Tuesday, January 27, 2015 

No. FC–03 

Chairman Ryan Announces Hearing on 

the President’s Fiscal Year 2016 Budget 

Proposal with U.S. Department of the 

Treasury Secretary Jacob J. Lew 

House Committee on Ways and Means Chairman Paul Ryan (R–WI) today announced that the Committee on Ways and Means will hold a hearing on President 

Obama’s budget proposals for fiscal year 2016. The hearing will take place Tuesday, February 3, 2015, at 10:00 a.m. in Room 1300 of the Longworth House 

Office Building. 

Oral testimony at this hearing will be from the invited witness only. The sole witness will be the Honorable Jacob J. Lew, Secretary, U.S. Department of the Treasury. However, any individual or organization may submit a written statement for 

consideration by the Committee and for inclusion in the printed record of the hearing. 

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 make a submission, 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 Tuesday, February 17, 2015. 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 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 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 submitted in a single 

document via email, provided in Word format and must not exceed a total of 10 

pages. Witnesses and submitters are advised that the Committee relies on electronic 

submissions for printing the official hearing record. 

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

on whose behalf the witness appears. The name, company, address, telephone, and 

fax numbers of each witness must be included in the body of the email. Please exclude any personal identifiable information in the attached submission. 

3. Failure to follow the formatting requirements may result in the exclusion of a 

submission. All submissions for the record are final. 


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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 TDD/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 online at 

http://www.waysandmeans.house.gov

f 

/. 

Chairman RYAN. All right. The Committee will come to order. 

The hearing will come to order. 

Welcome to the Committee on Ways and Means hearing. This is 

not the Agriculture hearing. Welcome to the Committee on Ways 

and Means hearing on President Obama’s budget proposal with our 

U.S. Treasury Secretary, who is sitting far away down there, Secretary Lew. Our hearing room is under construction. So these are 

the temporary quarters for us. So we are not necessarily used to 

the room. 

Before we get started, I want everyone to please be advised that 

Members may submit written questions to the Treasury Secretary 

to be answered later in writing. Those questions and your answers 

will be made part of the formal record. 

We also understand that Secretary Lew has a hard stop at 1 

o’clock. So I am going to run this tight so we can get to as many 

people as possible, but wherever we cut off, we will start with that 

Member in the queue the next time we pick up with the next hearing, just to make sure, just to try and play it fair like that. 

So Secretary, I want to say something. We got your budget yesterday. I have to say, as a former Budget Chairman, I am a little 

miffed. Four years in a row, which was when I was Chair of the 

Budget Committee, 4 years in a row, you are late with your budget, 

and the minute I leave, you produce it on time. What gives? 

In all seriousness, the one positive thing I would like to say is 

that the budget is finally on time. And to those of us in the budget 

world, that clock means a lot. It sets the tempo for Congress. It 

means a lot of things, and so congratulations on finally giving us 

a budget on time. 

That said, the irony wasn’t lost on me that the Administration 

submitted their budget on Groundhog Day, because it is the same 

thing every year, even a little worse. You have raised taxes by $1.7 

trillion over the past 6 years. Now you want to raise them again 

by $2.1 trillion. You want to tax savings and investment in small 

businesses. Sooner or later, you are going to start looking for 

money in the couch cushions. 

So I just want to take an opportunity here to make something 

really clear. We are not going to raise taxes on the American people. They are working harder and harder to get ahead and they are 

falling behind. Wages are stagnating. They deserve a break, not 

another tax increase. The last thing this economy needs is another 

whopping tax increase. The kicker is, with even all of these tax increases, you don’t even balance the budget, not even in 10 years, 

because you don’t get spending under control. 


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So I am disappointed in this proposal, but as far as I am concerned, I would rather spend time not focusing on our differences. 

Let’s instead try to find some time and a way to see if there is 

some common ground. I think there may be some opportunities to 

do that. 

The first thing that comes to my mind is trade. We all agree that 

trade is good for America, because more trade means higher pay. 

And so our top priority is to put in place Trade Promotion Authority. To get the best trade deals possible, we have to be in the best 

position possible, and that is what TPA helps us do. So I will be 

interested to hear how the Administration is helping us get TPA 

across the finish line. 

Next, we have to fix this broken Tax Code. We want to fix it for 

everybody, but with this Administration, in the past, we haven’t 

had very high hopes, but you have gradually, grudgingly taken a 

few steps, in my opinion, in the right direction, though, in my opinion, you also need to move it a little farther. 

For years you talked about fixing the Tax Code for corporations 

but not for families and small businesses. More recently, after this 

Committee’s constant insistence that tax reform cannot give an unfair advantage to big public companies over closely-held, familyowned businesses, the Administration is now finally talking about 

helping small businesses as well. Even though your specific proposals have been far from adequate, at least it is a step in the right 

direction. 

Now the Administration is taking a few more baby steps in the 

right direction by proposing a few ways to simplify the Tax Code 

for middle class families. So it is progress, not a lot, but we will 

take it. So I would be interested to hear what you have to say 

about tax reform. If we can find common ground, we need to explore it, but I will tell you right now, what the President is proposing for small businesses organized as pass-throughs, you know, 

sole proprietorships, partnerships, S corporations, it just doesn’t go 

far enough. It just doesn’t cut it. Small businesses, they are the engine of our economy, and this Committee is not going to do just 

anything. This Committee is not going to leave them behind. This 

Committee has to make sure that they are part of the solution. 

The Tax Code has to work for everybody, especially families and 

small businesses. We need to make it simpler, we need to make it 

fair, and we need to make it flatter. We need to make it more globally competitive. We need to create more jobs. That is the way to 

create jobs and build a healthy economy. So we want to work with 

this Administration. We want to explore common ground. We have 

two big opportunities here potentially on tax and on trade, and so 

we would like to get this done. Let’s see if we can find a way of 

working together, and with that I would like to yield to the distinguished Ranking Member, Mr. Levin. 

Mr. LEVIN. Thank you very much, Mr. Chairman. 

Welcome, Mr. Secretary. As the Chairman said, you are further 

away. We will try to make this more personal, though. 

I wanted to start on a personal note to recognize the fact that 

someone who has served as our staff director on Health, Cybele 

Bjorklund, this is her last hearing. I don’t know where Cybele is. 

Are you here? 


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Ms. BJORKLUND. I am here. 

Mr. LEVIN. You are back here. Cybele, thank you for all of your 

work. 

Again, welcome, Mr. Secretary. This Administration first presented a budget to Congress 6 years ago. Back then, in the months 

of February and March of 2009, just weeks after President Obama 

took office, the economy lost more than 1.5 million jobs; the most 

in any 2-month period since World War II. Today the economy has 

experienced significant growth with 58 consecutive months of private sector job gains. Over the past 4 years, the United States has 

put more people back to work than Europe, Japan, and all of the 

world’s major advanced economies combined. That is hardly a ‘‘stagnant economy.’’ Republicans try to minimize that dramatic turnaround, but are instructed to revisit what their party’s Presidential 

nominee in 2012 promised to achieve by the end of his first term 

in office. Mitt Romney said, ‘‘I can tell you that over a period of 

4 years, by virtue of the policies that we put in place, we would 

get the unemployment rate down to 6 percent and perhaps a little 

lower.’’ 

Today, nearly 2 years before that deadline, the unemployment 

rate has dropped to 5.6 percent. The ongoing challenge that we confront, a challenge that has persisted for the last three decades, dating back to the Reagan years, is how to ensure that middle class 

families are not left out of the growth of our economy that is now 

being experienced and will be experienced in the future. 

The President’s budget takes direct aim at that challenge. It includes proposals to support working families by making child care 

more accessible, guaranteeing paid sick leave, and making permanent extensions of vital provisions, including the EITC, the Child 

Tax Credit, and the American Opportunity Tax Credit. It combines 

changes in the international tax structure and provisions for the 

long-term needs of our Nation’s infrastructure. It closes tax loopholes that predominantly benefit a select few. 

These proposals are not envy economics. They are everyone’s economics. They are not the economics of envy. They are the economics of working for all, not just the very wealthy. Through a fiscally 

responsible replacement for the sequester, the President’s budget 

would allow us to invest in education, medical research, and other 

domestic priorities, as well as provide the resources that Social Security, Medicare, and the IRS need to serve the American people, 

and would provide for the ever-changing needs of our military as 

it confronts new challenges. 

I hope the Republicans give these and other proposals presented 

within the President’s budget, Mr. Chairman, the full and serious 

consideration that they deserve. 

One of the many outstanding issues in the Trans-Pacific negotiations, currency manipulation, is mainly in the purview of Treasury. 

Over the past decade, currency manipulation by foreign governments has resulted in an increase in unfairly traded imports into 

the United States. It has made it more difficult for U.S. exporters 

to compete in foreign markets. It has cost us millions of middle 

class jobs. The TPP includes a number of former currency manipulators, such as Japan and other countries, including China, Korea, 

and Taiwan, who have been in the past manipulating their curVerDate Sep 11 2014 06:01 Apr 10, 2017 Jkt 022331 PO 00000 Frm 00009 Fmt 6633 Sfmt 6602 I:\WAYS\WAYSPS\22331\22331.XXX 22331

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rencies. Each of these countries is party to the IMF, which already 

prohibits currency manipulation, and has developed deadlines to 

define when it occurs. The problem is that the IMF lacks any enforcement provision. That is why I propose taking the existing IMF 

guidelines and building on them so they can be addressed through 

the TPP. 

I have heard concerns that the U.S. monetary policy might be at 

risk if we put such a provision in the TPP. The IMF guidelines 

clearly spell out that U.S. monetary policy, including quantitative 

easing, is not currency manipulation. The first factor is protracted 

large-scale interventions in currency markets, and the United 

States has not engaged in that. The second factors have in it an 

excessive amount of foreign exchange reserves. I could go through 

each factor, but suffice it to say, that the IMF has explicitly supported each round of U.S. quantitative easement since the great recession. U.S. monetary policy would not be put at risk by addressing currency through the TPP. 

I look forward to discussing with my colleagues, Mr. Chairman, 

on a bipartisan and bicameral basis, and with the Administration, 

how to include a strong and enforceable currency manipulation provision as well as tackling the other major outstanding issues in the 

TPP that I outlined late last month in a document that I called A 

Path Toward an Effective TPP Agreement. 

Thank you, Mr. Secretary, for your dedication and your service 

to our Nation for many years, going back to the days when you 

were still much younger working for Tip O’Neill, and I am very 

happy to welcome you back before this Committee. 

Thank you, Mr. Chairman. 

Chairman RYAN. Thank you. Thank you, Mr. Levin. 

Secretary Lew, thank you for your time today. Your entire written testimony will be included in the record. If you could try to 

summarize it in 5 minutes so we can—because we know you have 

a hard stop at—try to summarize it in 5 minutes so we can get to 

our questioning, we would appreciate it. The time is yours. 

STATEMENT OF THE HONORABLE JACOB J. LEW, SECRETARY, 

U.S. DEPARTMENT OF THE TREASURY, WASHINGTON, DC 

Secretary LEW. Thank you very much, Chairman Ryan, Ranking 

Member Levin, Members of the Committee. It is good to be with 

you here this morning to discuss the President’s budget, and Mr. 

Chairman, I know this is the first time I have appeared since you 

have taken over the gavel of this Committee. I congratulate you 

and look forward to working together on a bipartisan basis to get 

things done. 

A year ago, President Obama said that 2014 would be a breakthrough year for our economy, and the evidence is now clear that 

over the past 12 months, America has made great strides. We are 

seeing real progress in job creation, economic growth, family 

wealth, energy independence, manufacturing, exports, retirement 

accounts, the stock market, healthcare costs, graduation rates, and 

the deficit. The fact is our businesses created nearly 3 million jobs 

last year, the most jobs in any year since the late 1990s. This 

capped off roughly 5 years of jobs growth, the longest stretch of 


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jobs growth in our Nation’s history, and the creation of 11 million 

new jobs. 

In addition, the unemployment rate dropped to its lowest rate in 

61⁄2 years, and our economy continued to expand with healthy 

growth in the second, third and fourth quarters of 2014 and forecasts projecting above-trend growth in 2015. 

From a global perspective, we continue to outperform our trading 

partners, many of which are still trying to climb out of the vast 

hole created by the global economic crisis. At the same time, with 

the Affordable Care Act in place, about 10 million Americans now 

know the financial security of health insurance and healthcare 

prices rose at their lowest rates in decades. 

The automobile industry continued its rebound in 2014, even as 

we marked the official end to the auto industry rescue, and American taxpayers recovered more money than we invested. 

Finally, thanks to the Administration’s all-of-the-above energy 

strategy, we moved closer to energy independence than we have 

been in decades, and gas prices fell, providing a shot in the arm 

for families and small businesses. So today our Nation has turned 

the corner on a number of fronts. As we know, this resurgence has 

not reached every American. For too many hard-working men and 

women in this country, it is still too hard to get ahead and earn 

enough to raise a family, afford child care, pay for college, buy a 

home, and secure retirement. 

The President’s budget meets these challenges by offering real 

solutions to grow the economy, strengthen the middle class, and 

make paychecks go farther. 

This budget is built around the basic idea that hard work should 

pay off. It is practical, not partisan, and it lays out clear steps to 

reign in spending and eliminate wasteful tax breaks so we can reduce taxes for working families as well as many businesses and 

manufacturers. 

What is more, this budget replaces the across-the-board cuts 

from sequestration and makes sensible investments to increase our 

economy’s competitiveness while maintaining a responsible fiscal 

path. 

As we know, not long ago some were predicting that the President’s policies would explode our deficits. A little history, though, 

makes clear the opposite is true. In the 1990’s, when I was Budget 

Director, I oversaw three budget surpluses in a row, and we were 

on a path to pay down our national debt, but when this Administration took office in 2009, there was a very different reality. After 

years of runaway spending, including tax cuts for the most well off 

and two wars that were not paid for, and then the financial crisis, 

our deficits reached a post-World War II high. The President 

moved to right our Nation’s fiscal shift. With his balanced economic 

approach, the agreements forged with Congress and a growing 

economy, the deficit has fallen by almost three-quarters, the swiftest downward arc since the period of demobilization following 

World War II. 

The deficit is projected to decline even further in the next fiscal 

year, and today we are putting forward a plan to lower our deficits 

to about 21⁄2 percent of GDP over the 10-year budget window. 


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Our Nation’s improved financial footing has occurred even as 

Congress was able to undo a portion of sequestration in recent 

years, replacing these cuts with more sensible and balanced savings. Still nothing has been done to address these dangerous cuts 

in 2016. Without Congressional action, vital funding for our national defense and key priorities like education, infrastructure, and 

research will be severely cut back. 

The President’s budget provides a path to eliminate sequestration while achieving the President’s longstanding commitment to a 

responsible and balanced fiscal approach. In other words, it charts 

a specific way forward to not only keep our fiscal house in order, 

but to also create room for pro-growth economic policies which are 

needed to keep our Nation stronger in the future. 

One pro-growth strategy of tax reform is to restore basic fairness 

and efficiency to our system. By scrapping loopholes and tax breaks 

that reduce the taxes for the most fortunate Americans but do not 

help our economy, we can provide critical tax relief for the middle 

class and those struggling to join the middle class. Our economy 

should work for everyone, and everyone should shoulder their fair 

share to maintain our Nation’s fiscal health. 

This budget also places a serious focus on achieving bipartisan 

business tax reform so that America is the best place in the world 

for businesses to locate, grow, and create the kind of good high-paying jobs that support middle class families. 

This plan shows how Members of both parties can reach a common ground and realize the shared objectives of simplifying the 

system, removing wasteful tax preferences and distortions, and 

lowering tax rates so that we no longer have a system in which 

some businesses pay nothing while others pay the highest rates in 

the developed world. It is time to stop rewarding corporations and 

industries that have the best lobbyists and most creative accountants, and start strengthening businesses that build, hire, and invest here in the United States. 

It is also time to make inversions, a loophole that allows U.S. 

companies to lower their taxes after they buy foreign businesses, 

a thing of the past, and this budget does that. A more fair and efficient tax system will help create good middle class jobs and grow 

our economy. 

We know that with business tax reform, there will be one-time 

transition revenues. The President wants to use some of these onetime revenues to make long overdue repairs to our Nation’s roads, 

bridges, ports, and airports. The need to rebuild our infrastructure 

is irrefutable, and that is why this budget tackles our infrastructure challenges by creating an extended period of sustained 

funding for a 6-year Surface Transportation bill and starting an innovative new bond program that will ignite more public/private 

partnerships in cities and States across the country. 

Of course, keeping our comeback on track, building on the momentum we have made and making it possible for every American to get ahead is going to require strategies that are both bold 

and effective, and that is what this budget is about. It proposes a 

series of targeted investments that have been proven to make a 

difference. It invests in education by expanding student loans, 

strengthening tax incentives, and making community college free 


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for those who earn it. It invests in America’s workers by starting 

apprenticeship grants, enhancing job-training programs, and boosting the Earned Income Tax Credit. It invests in working families 

by increasing the Child Care Tax Credit, providing tax relief for 

families when both parents are holding down jobs, and allowing 

more working Americans to earn paid leave. It invests in retirement security by making it easier for employees to automatically 

save for the future, and businesses to provide 401(k)s to their employees, and invests in innovation by creating more advanced manufacturing institutes, starting cutting-edge medical research initiatives, and bringing broadband access to more communities. 

In concert with these pro-growth strategies, this budget calls on 

Congress to send measures to the President’s desk that will help 

our economy now and far into the future. This includes raising the 

minimum wage, fixing our broken immigration system, and passing 

Trade Promotion Authority. 

The strategies I have described are part of the President’s plan 

to help improve the lives of millions of hard-working Americans 

while meeting our responsibilities to future generations. The task 

before us now is to put political brinksmanship aside and find 

areas of compromise and common ground, and I am certain that we 

can get this done. 

I look forward to working with each and every Member of this 

Committee so we can deliver for the American people, and I look 

forward to answering your questions today. 

Thank you very much. 

[The prepared statement of Secretary Lew follows:] 


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*** EMBARGOED FOR DELIVERY*** 

Written Testimony of Treasury Secretary Jacob J. Lew 

before the House Committee on Ways and Means 

on the President's Fiscal Year 2016 Budget Proposal 

Februar-y 3, 2015 

Chaim1an Ryan, Ranking Member Levin, and Members of the Committee, thank you for the 

opportunity to appear before you today to discuss the President's Fiscal Year 2016 Budget. 

The President's Budget invests in the American people and our country by promoting inclusive 

economic growth, increasing job creation, and expanding opportunity. While our economic 

recovery is well established, we have more work to do to make sure the gains are shared more 

broadly - what we call Middle Class Economics. 

The President's Budget achieves $1.8 trillion of deficit reduction over I 0 years, primarily from 

much-needed refonns to our health, tax, and immigration systems. Under this Budget, deficits 

decline to about 2.5 percent ofGDP over the 10-year budget window, down 75 percent from the 

Great Recession peak of9.8 percent ofGDP. At the same time, this Budget shows that investing 

in growth and opportunity go band in hand with putting the nation's fmanc-es on a strong and 

sustainable path. The President strongly believes that now is the time to invest in America's 

future in order to drive inclusive economic growth and opportunity, secure the nation's safety, 

and put the nation's finances on the road to a more sustainable fiscal outlook. We believe our 

Budget does just that. 
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This Budget makes needed investments in key priorities while maintaining a responsible fiscal 

course. For a stronger economic future, we propose a fully paid-for increase in the discretionary 

budget caps to make room for a range of domestic and security investments, including increased 

investments in education, job training, research, manufacturing, infrastntcture and national 

defense. At the same time, we want to simplify and improve our tax code to make the paychecks 

of working £,milies go f11rtber, ensure the wealthiest pay their fair share, and fix our broken 

business tax system in order to promote long-tenn growth and broad-based prosperity while 

using one-time transition revenue to pay for much needed investments in our nation's 

infrastructure. 

lnh·oduction 

When the President took office six years ago, the federal govemment's fiscal outlook was bleak. 

The economy was shrinking at its fastest rate in 50 years and shedding more than 800,000 

private sector jobs per month. Unemployment peaked at 10 perceot in 2009, a level not seen in 

over 25 years. Health care spending was on an unsustainable path, and the deficit hit a postWorld War II high. 

Since that time, the policies put in place by th is Administration and Congress have helped 

produce a sustained economic recovery and unprecedented decline in the deficit, putting us on a 

sustainable fiscal path. In 2014, our economy achieved a number of important milestones. We 

have seen nearly five years of private sector job growth - a new record. In 2014, we added 

more jobs than any year since the late 1990s. For the first time in rwo decades, the United States 

is producing more oil than it imports, and we are now the world's leading producer of petroleum 

2 
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and natural gas. The manufacturing sector continues the strongest period of job growth since the 

1990s. And rising home prices have restored nearly $5 trillion in home equity to homeowners. 

By virtually any metric, our economy is stronger and continuing to gain strength. 

From fisca l year 2009 to 2014, the deficit as a share of GOP fell by two-thirds, a rapid decline by 

historical standards. Over the past several decades, only the period of demobilization following 

the end of World War II saw a faster pace of fiscal consolidation. ln fact, the deficit for fiscal 

year 2014 came in almost one percentage point lower than we anticipated in our Budget one year 

ago. This year's Budget expects that the deficit will decline to 2.5 percent of GOP in fiscal year 

2016 and achieve primary balance in 2022. 

Strong growth combined with the Administration's policy choices have dramatically improved 

our fiscal trajectory. Unfortunately, the political environment in Washington in the early part of 

this decade, governing from crisis to crisis, has held back the recovery that otherwise would have 

created more jobs for working Americans. When Congress allowed the sequestration cuts to 

become law, they caused a notable drag on the economy - those that took effect in March 2013 

reduced the Gross Domestic Product by 0.6 percentage points and cost 750,000 jobs, according 

to the Congressional Budget Office. In 2011 and again in 2013, the full faith and credit of the 

United States was used as a bargaining chip, driving down consumer confidence and driving up 

uncertainty in the business and international communities. Over the past year, we have seen real 

progress in returning to regular order in conducting fiscal policy. 1 am hopeful that the bipartisan 

progress will continue with the kind of compromise that nurtures growth and preserves our 

sustainable fiscal path. 

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The U.S. economy appears to have entered a period of self-sustaining growth. The economy 

grew 2.5 percent last year. Private sector forecasters expect the economy will grow roughly 3 

percent this year, while the International Monetary Fund recently revised its U.S. growth 

estimate higher, expecting 3.4 percent growth iu 2016. This is substantially faster than all of the 

other advanced economies combined. 

Despite significant progress, we have more to do to fully address our nation's ongoing 

challenges. The benefits of the growth are not being shared by all Americans. Wl1ile more 

Americans have jobs than ever before, there are still millions of Americans in search of work as 

well as millions of part-time workers in search of full-time opportunities. Despite the drop in the 

unemployment rate, average hourly earnings have been rising only slowly, and the income of the 

typical American family has not kept up with inflation - in fact it has trended down for the last 

15 years. 

With the recovery now well-established, we need to ensure that bard working Americans share 

the gains. The President's Budget encourages growth and opportunity in the short-mn and 

makes investments that will promote broadly shared growth over the longer temJ, while 

remaining dedicated to maintaining fiscal responsibility. While the recovery in the U.S. 

economy has helped to drive global growth, the rest of the world cannot depend on the United 

States to be the sole engine of growth. At the recent G-20 meeting in Brisbane, there was 

agreement that more needs to be done to stimulate domestic demand around the world. Our 

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strength allows us to maintain our leadership in the global community, and while we must lead 

by example, we cannot do it alone. 

The Bipartisan Budget Act of2013 reversed a portion of sequestration and allowed for higher 

investment levels in 2014 and 2015, but it did nothing to alleviate sequestration in 2016. 

Sequestration imposed arbitrary spending cuts that arc bad for our economy and our security. 

These across-the-board cuts were never even i.ntended to go into effect; rather, they were 

purposely unpalatable to create pressure to pass balanced, responsible deficit reduction. 

Congress should not repeat the mistakes of the past by allowing further sequestration cuts in 

20 16. In the absence of congressional action, non-defense discretionary funding in 20 16 will be 

at its lowest level since 2006, adjusted lor inflation, even as the need for pro-growth investments 

in infrastmcture, education, and innovation has only increased due to the Great Recession and its 

aftennath. Inflation-adjusted defense funding will also be at its lowest level since 2006. 

The President's Budget makes needed investments in key priorities, even while setting the nation 

on a fiscally responsible course. The Budget proposes increasing the discretionary caps in the 

context of a balanced fiscal plan, while making room for a range of domestic investments that 

will help move the nation forward. These include investments to strengthen the economy by 

improving the education and skills of the U.S. workforce, accelerating scientific discovery, and 

continuing to bolster manufacturing. 

The proposals in the President's Budget aim to strike a balance between achieving long-mn 

fiscal responsibility and helping working families get ahead. Among the proposals to help 

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families, tlus Budget simplifies and expands child care tax benefits; enhances educational 

opportunities by partnering with states to make community college and career and technical 

schools free for responsible students and consolidating and expanding education tax incentives: 

makes it easy and automatic for workers to save for retirement; and refonns the tax system and 

raises the muumum wage to better support and reward work. These investments in the middle 

class arc fully paid for by repealing perhaps the single largest income tax loophole, called 

"stepped-up basis," raising the top capital gains and dividends rate back to 28 percent - the 

same rate during the Reagan Administration - and refonning financial sector taxation to 

discourage excessive borrowing by the largest financial institutions. 

The President's trade agenda is another important component of our strategy to grow the 

economy and strengthen the middle class. Exports account for a significant p011ion of our 

economic growth over the course of the last four years and ninety-eight percent of our exporters 

are small businesses. Expanding the reach of America's exports will create new opportunities 

for our small businesses to grow. I look forward to working with all of you to pass trade 

promotion authority legislation that creates a level playing field for our businesses and workers. 

The Budget calls for business tax reform that will be revenue-neutral in the long run, make our 

companies more competitive, and directly benefit the middle class by paying tor a plan to repair 

and expand our existing infrastructure to support our economy for the next generation with a 

one-time tax on previously untaxed foreign income. We know that investing in our nation's 

physical and human capital will provide the best long-run retum for the economy. Moreover, 

Congress should address the so-called tax extenders in a fiscally responsible manner, including 

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preventing a tax increase for 26 million working families and students by making pennanent the 

expiring tax credits that benefit them. The Budget increases the resources we are putting toward 

national security both at home and abroad because economic prosperity and fiscal responsibility 

cannot come at the expense of our safety. 

Taking the right steps today will make our fiscal challenges easier tomorrow. A stronger 

economy today will ease those fiscal challenges and improve the lives of working Americans. A 

credible plan, built on the bipartisan cooperation that we have seen recently, is the best way to 

secure long-run growth. 

Refo.-ming the Tax Code 

Our framework for business tax reform will simplify compliance for and provide tax relief to 

small businesses, while tightening our intemational tax system to close loopholes that strip tbe 

U.S. tax base by allowing multinational corporations to avoid paying U.S. taxes. 

I continue to believe the best way to achieve reform today is to start with pro-growth business 

tax reform that protects and strengthens the middle class, lowers rates, simplifies the system, 

levels the playing field, and eliminates unfair and inefficient loopholes. When we make the 

switch to a smarter business tax system, there also will be one-time revenue during the transition, 

and we can use some of that revenue to create jobs rebuilding our roads and bridges, repairing 

our tunnels, and investing in our transit systems. 

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It has been almost three years since the President laid out his framework for sweeping business 

tax reform. Making sure the system works for everybody is as urgent today as it was then. This 

year, business tax reform represents an opportunity for members of both parties and the 

Administration to work together to make progress for the American people. 

Small businesses are a source of innovations, but their growth can be discouraged by the high 

costs of complying with complex tax laws. Over 80 percent of all tax compliance costs are bome 

by small businesses, and the burdens are heaviest on the smallest of the small businesses. While 

the largest, most complex businesses spend less than one-tenth of one percent of their receipts on 

the costs of complying with the tax code, a small business with less than $100,000 in receipts on 

average spends well more than I 0 percent of its receipts on compliance costs. This is 

unacceptable. While the current tax code contains a number of provisions intended to simplify 

compliance for small businesses, more can be done. For example, small business expensing 

allows small businesses to deduct the cost of their investments in equipment and avoid the 

complexity of depreciation accounting. While the expensing limit had been $500,000 for a 

number of years, it recently reverted to $25,000 for 2015. As part of tax reform that is revenue 

neutral in the long-nm, the President proposes to extend pennanently expensing up to $1 million. 

This provides significant tax relief to America's small businesses and would allow small 

business to avoid the complexity of tracking depreciation. The President also proposes to 

dramatically simplify taxes for small businesses, by allowing all businesses with less than $25 

million in gross receipts to use cash accounting and dispense with an array of other complicated 

accounting rules. In addition, there are proposals to increase the deductibility of start-up 

expenses for new businesses and to eliminate capital gains taxation on investments in small 

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business stock. These changes will reduce compliance costs of small businesses and encourage 

investment and entrepreneurship. 

On the international side, we are proposing refonns that would fix the current broken and 

inefficient system for taxing the foreign income of U.S. multinational co1porations. The current 

system rewards U.S. companies that locate their operations and shift profits abroad and keep 

them outside the United States. In fact, as indicated in the President's Framework for Business 

Tax Refonn, certain small countries with very low tax rates have attracted profits of U.S. 

multinational companies that exceed multiples oftbe GOP of those countries. Much of the 

manipulation comes from the ability to defer U.S. tax on certain earnings of foreign subsidiaries 

until that income is repatriated. 

Tax refonn must seek to balance the need to reduce tax incentives to locate overseas with the 

need for U.S. companies to be able to compete overseas for the investments and operations 

absolutely necessary to serve and expand into foreign markets in ways that benefit U.S. jobs and 

economic growth. The core of the President's tax plan, which is detailed in this year's Budget, is 

a global minimum tax. The global minimum tax would ensure that U.S. multinational finns pay 

at least a 19-percent tax on their foreign earnings as they are earned - rather than deferring the 

tax for years or forever - while exempting from the miJtimum tax a return to real activities 

perfonned abroad. After this initial payment, foreign earnings could be reinvested in the U.S. 

without additional tax, which would level the playing field and encourage firms to create jobs 

here at home. 

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In addition to the global minimum tax, our international tax reforu1 proposals would address the 

ability under current law lor multinational firms to erode the U.S. base with excessive interest 

deductions and take further steps to stem corporate tax inversions, building on the Treasury 

Department's first, targeted action last September. 

As we have consistently said, business tax reform together with anti-inversion lcgislation is the 

only way to fully address these transactions. Our business tax refo•m will help make inversions 

less attractive by making the United States a more competitive location from which to do 

business. Specific anti-inversion measures are also needed even after the business tax system 

has been reformed, as there will always be other countries with lower tax rates and less stringent 

rules for taxing foreign earnings. 

In addition to these new detailed proposals in the reserve fund for business tax reform, this year's 

Budget includes new details on the President's plan to simplify our complex tax code for 

individuals, to make it fairer by eliminating some of the biggest loopholes, and to use the savings 

from closing loopholes to invest in helping middle class families get ahead and growing the 

economy. One of the largest loopholes in the individual income tax code is a provision known as 

stepped-up basis. Stepped-up basis refers to the fact that capital gains on assets held until death 

are never subject to income taxes. Hundreds of billions of dollars escape capital gains taxation 

each year because of this loophole that lets the wealthy pass appreciated assets onto their heirs 

tax-free. Stepped-up basis perpetuates wealth disparities and inequality of opportunity, 

particularly given that retirement accounts such as 40 1 (k)s and IRAs-which often represent a 

middle class taxpayer's only major capital asset beyond a home - do not receive this special 

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treatment. The budget closes the stepped-up basis loophole by treating bequests and gifts other 

than to charitable organizations as realization events, like other cases where assets change hands. 

By closing this loophole, we unlock resources that could be reinvested more productively 

elsewhere, making our proposal a pro-growth way to raise revenue. The budget also increases 

the total top capital gains and dividend rate to 28 percent, the rate under President Reagan. 

Since the 2008 financial crisis, the President and Congress have taken major steps to make the 

financial system safer and the broader economy more resilient, including enacting legislation that 

ensures taxpayers will not be on the hook to bail out fmancial fmns perceived to be " too big to 

fail." Recognizing that excessive leverage undertaken by major financial fi1ms was a significant 

cause of the financial crisis, the Budget builds on the reforms we have already put in place by 

proposing a financial fee that would further discourage excessive borrowing by large financial 

institutions. 

Building a 21" Century lnfra tructun~ 

Transportation is critical to the nation's economy, allowing Americans to travel safely and 

conveniently, and enabling our businesses- in particular small businesses - to move goods to 

market at competitive pri ces. As part oftransitioning to a reformed international tax system, the 

President's business tax reforn1 plan would impose a one-time transition toll charge of 14 percent 

on the up to $2 trillion of untaxed foreign earnings that U.S. companies have accumulated 

overseas - raising enough revenue to fill the projected shortfall in the Highway Tmst Fund and 

make new i.nvestments as part of the President's six-year surface transportation reauthorization. 

Unlike a voluntary repatriation holiday - which would lose revenue - the President's proposed 

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toll charge is a one-time, mandatory tax on previously untaxed foreign earnings, regardless of 

whether the earnings are repatriated. 

To spur economic growth and allow states and localities to initiate sound multi-year investments, 

the FY 2016 President's Budget request includes a 6-year expanded surface transportation 

reauthorization proposal to improve safety, support critical infrastmcturc projects, and create 

jobs whi.le improving America's roads, bridges, transit systems, and railways. This builds on the 

Administration's 4-year proposal, the Generating Renewal, Opportunity, and Work with 

Accelerated Mobility, Efficiency, and Rebuilding of lnfrastrncture and Communities throughout 

America - or the GROW AMERICA Act - which was submitted to Congress last year. 

Our Build America Investment Initiative has taken a series of new steps by federal agencies to 

support the efforts of state and local governments to access federal fmancing programs, strncture 

public-private collaboration, and attract private investment to build and improve roads, bridges, 

ports, broadband, and water systems in metropolitan and rural areas in ways that boost economic 

growth and resilience, while protecting the interests of taxpayers and workers. As part of that 

initiative we arc proposing the creation of an innovative new kind of municipal bond, Qualified 

Public Infrastructure Bonds (QPIB), an idea we have worked on with Senator Wyden. Today, 

public-private partnerships that combine public ownership with private sector management and 

operations expertise are limited in their use of municipal bonds. QPIBs will extend the benefits 

of municipal bonds to public-private partnerships, like partnerships that involve long-term 

leasing and management contracts, lowering the cost of borrowing and attracting new capital. 

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Providing Opportunity Tbt·ough Education 

The single greatest resource that our economy has is our people, and it is critical that Americans 

have the skills and knowledge to compete in the global economy. Research bas shown that the 

value of a postsecondary education is higher now than ever before. Therefore, the President has 

proposed programs that will make community college and career and technical school free for 

every responsible student as well as improve programs that provide education tax incentives for 

those who attend college. 

The higher education benefits we provide through our tax system, including the American 

Opportunity Tax Credit created in 2009, are making college more affordable for millions of 

students and their fami lies. But families have difficulty choosing among overlapping benefits 

and navigating complicated rules, and schools may not provide the infonnation fami lies need to 

claim tax benefits for which they are eligible. Building on bipartisan refonn proposals, the 

President's educatioo tax reform plan would sintplity, consolidate, and expand education tax 

credits. The plan would cut taxes for 8.5 million fami lies and students, simplify taxes for the 

more than 25 million families and students that claim education tax benefits, and provide 

students working toward a college degree with up to $2,500 of assistance each year for five 

years. These education tax refonns would complement our other proposals to make college 

more affordable, including continuing historic increases in the Pell scholarship program and 

simplitying fmancial aid forms. Together with free cotnmtmity college and career and technical 

schools, these proposals would benefit students, families, and the broader economy by helping 

more students cam a postsecondary credential, making them, and by extension our country, more 

competitive in the global marketplace. 

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Reforming the Tax System to Better Suppot·t and Reward Work 

This year's Budget proposes a number of new policies to reduce taxes on working families. 

Together, these policies will benetit over 44 million families, providing an average tax cut of 

nearly $600. 

In today's economy, having both parents in the workforce is a necessity for many families, yet 

dual-earner couples can face high penalties for working. When both spouses work, the family 

incurs additional costs in the fonn of commuting costs, professional expenses, child care, and, 

increasingly, elder care. When layered on top of other costs, including federal and local taxes, 

these work-related costs can contribute to a sense that work is not worth it, especially for parents 

of young children and couples caring for aging parents. While women, including married 

women, are increasingly the breadwinners of the family, they are still much more likely than 

their male counterparts to withdraw from the labor Ioree in these circumstances, taking a toll on 

their future job options and earnings, and hurting overall economic growth. Building on 

congressional proposals from members of both panics, the Budget proposes to address these 

challenges with a new second-earner credit that recognizes the additional costs faced by families 

in which both spouses work. A total of24 million couples would benefit from this proposal, 

which would provide a new, simple second-eamer tax credit of up to $500. 

The Eamed Income Tax Credit is among the nation's most effective tools for reducing poverty 

and encouraging people to enter the workforce. However, low-wage workers without children 

and non-custodial parents miss out on the anti-poverty and employment effects of the EITC 

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because the credit available to them is small and phases out at very low incomes. Our plan to 

help working families get ahead incorporates the proposed childless worker EITC expansion -

an idea that has bipartisan support in this Congress - reducing poverty and hardship for 13.2 

million low-iocome workers struggliog to make ends meet while boosting employment. Tlus 

proposal would double the EITC for workers without qualifying children, increase the income 

level at which the credit phases out, and make it available to workers age 21 through 66. 

The Budget also makes permanent improvements to the EITC and Child Tax Credit that augment 

wages for 16 nJ.illion families with 29 million children each year. These improvements provide 

additional benefits to low-income working parents, families with three or more children, and 

married families, but they are currently scheduled to expire at the end of2017. As we made 

clear during the extenders debate at the end of 2014, we cannot apply a double standard where 

we address extenders for business but not working families. Finally, the President continues to 

call on Congress to raise the federal minimum wage and to index it to inflation. No American 

who works fuU time should have to live in poverty, and the proposed new minimum wage would 

both help working famiJies make ends meet and add spending to the economy. 

Providing Child Ca•·e for \Vorking Families 

Over 60 percent of families with children have either two working parents or a single parent who 

works. That is why access to high-quality, affordable child care is critical for working families 

and for the broader economy; it helps parents continue working or join the workforce and 

supports healthy child development and late successes in school. But with the cost of infant and 

toddler care rivaling the cost of college in many states, many families struggle to afford quality 

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care for their children, and the average child care tax benefit of$550 falls well short of what is 

needed to provide meaningful help. The Child and Dependent Care Tax Credit and child care 

flexible spending accounts are also utmecessarily complex, often requiring significant paperwork 

and advanced platming for families to receive the full benefits. 

This year's Budget streamlines child care tax benefits and triples the maximum child care credit 

for middle-class families with young children, increasing it to $3,000 per child. The child care 

tax proposals would benefit 5.1 million families, helping them cover child care costs for 6.7 

million children. These tax proposals complement proposals to ensure that quality, affordable 

care is available to all eligible low- and moderate-income working families with young children, 

as opposed to the small share of children who receive this help today. In addition, this year's 

Budget makes critical investments that expand access to comprehensive early learning 

Encouraging Retirement Savings 

As many as 78 million working Americans- about half the workforce - do not have a 

retirement savings plan at work. Fewer than 10 percent of those without plans at work contribute 

to a plan of their own. The Budget proposes additional tax relief to small businesses that start 

offering a retirement plan, such as a 40 I (k), or that start automatically enrolling workers in their 

plan. The President's retirement proposals would give 30 million additional workers access to a 

workplace savings oppornmity and would complement the Administration's efforts over the past 

year to make saving for retirement easier by creating tl1e simple, risk-free, and no-fee myRA 

starter savings vehicle. 

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Innovation 

One of the major strengths of our country remains our ability to innovate. The Un.ited States 

competes in a global economy, and to continue to provide jobs and opportunity for Americans, 

we need to invest in American innovation, bolster our manufacturing base, and keep our nation 

at the forefront of technology. 

Afler a decade of decline, the manufacturing sector is adding jobs for the first time since the 

1990s and is poised for growth in the years ahead. Tite Budget takes steps to build on recent 

bipartisan legislation and the nine manufacturing institutes funde-d to date to support 16 institutes 

by the end of2016 and put us on pace to build 45 institutes over a decade; equip small and 

medium manufact11rers with the capabilities and access to teclmologies they need to improve 

their innovation and productivity; and, through a new $10 billion public-private Scale-Up 

Manufacturing Investment Fund for American manufacturing start-ups, ensure that what is 

invented in America can be made in America. 

The Budget calls for investing in a wide array of research and development, from the President's 

signature BRAIN Initiative (Brain Research Though Advancing Innovative Neurotechnologies), 

the Precision Medicine Initiative, and combatting antibiotic resistance to advanced 

manufacturing, clean energy technology, and agriculture. 

To secure America's energy future and to protect the planet for future generations, the Budget 

helps increase American low-carbon energy production while improving energy efficiency. The 

Administration has made combatting climate change a high priority by working hard to reduce 

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carbon pollution here in the United States and by bringing other countries along to forge an 

effective global effort to combat this problem. In the United States, our carbon pollution is near 

its lowest levels in almost two decades. We set higher standards for fuel economy, so that our 

cars will go twice as far on a gallon of gas, and we are setting a new standard for tmcks that will 

propel American manufacturing and spur the development of new technologies. Th.is strategy 

has already borne fruit - thanks to lower gas prices and higher fuel standards, the typical fami ly 

should save $750 at the pump this year. 

Ensuring Out· Nation's Safety and Security 

The Budget recognizes that while America is a world leader in domestic economic growth, it 

must also continue to promote U.S. national security interests while mobilizing the international 

commwtity to address global challenges to the nation's safety and security. That is why the 

Budget advances national security priorities by proposing the funding increases above current 

law needed to execute the President's defense strategy. The Budget includes $6 I 2 billion of total 

national defense discretionary funds, a S26 billion, or 4.5 percent, increase from the 2015 

enacted level. This reverses the decline in national defense spending of the past five years and 

proposes to transition enduring overseas contingency operations costs to the base budget, to fully 

fund and account for the costs of keeping the nation secure. 

Health Cat·e Reform 

With the Affordable Care Act in place, millions of Americans no longer have to worry that an 

unexpected illness will throw them into bankruptcy, and people with preexisting conditions are 

now guaranteed access to health insurance. We have reduced the share of uninsured Americans 

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by almost one quarter, as about I 0 million people gained the fmancial security of health coverage 

in the past year alone. And since the Afiordable Care Act became law, health care prices have 

risen at their lowest rates in decades. Had health insurance premiums kept growing at the rate 

they did in the last decade, the average annual premium for a family with an employer plan 

would be $1 ,800 higher than it is today. 

The health care cost slowdown is already yielding substantial fiscal dividends. Compared with 

the 20 I I Mid-Session Review, aggregate projected federal health care spending for 2020 bas decreased by $216 billion based on current budget estimates, savings above and beyond the deficit 

reduction directly attributable to the Affordable Care Act. Including related interest savings, the 

savings totals $262 billion. 

Comprehensive, Pt·o-growtb Immigration Refom1 

The President believes that we need to fix our broken iOllnigration system by continuing to 

strengthen border security, by cracking down on employers who hire undocumented workers, 

and by providing a pathway to citizenship for hardworking men and women who are already 

here and contribute to our nation every day. 

Immigration refom1 will encourage economic growth and help achieve better fiscal policy. ll1e 

President bas laid out principles for inllnigration reform but wants to work with Congress to craft 

specific legislation. The Congressional Budget Office estimates that the immigration bill that 

passed with bipartisan support in the Senate in 2013 - and which is largely consistent with the 

President's vision - would increase the size of the economy by over 3 percent in the next 

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decade and more than 5 percent over 20 years. Meanwhile, the immigration bill would reduce 

the deficit by about $160 billion in the first decade and by almost S I trillion over 20 years. 

Similarly, the Social Security actuaries have found that the Senate bill would reduce the Social 

Security shortfall by $300 billion over the first I 0 years. The Administration supports the Senate 

approach and calls on the House of Representatives to act on comprehensive immigration reform 

this year. 

Conclusion 

In summary, this budget puts forward a series of proposals to keep America's economic 

resurgence on track, build on the progress we have made, and help more Americans share in our 

economic gains through rising wages, higher incomes, and a growing middle class. The 

roadmap laid out in this budget includes strategies for students to begin school prepared for 

success, graduate from high-school, and attend college without amassing unaffordable debt; for 

workers to find good jobs in high-tech manufacturing; for working families to care tor a sick 

child or an aging parent; and tor states and cities to rebuild their infrastmcture and expand their 

broadband networks. 

This Budget is practical, not partisan, and it provides a comprehensive and balanced approach to 

the realities we face. It invests in long-tenn growth, while also building on the progress that has 

already been made to ensure a sustainable path for the debt and deficit. The Budget is a credible, 

conunon-sense plan that makes hard choices. It focuses on middle class economics that will help 

drive growth, create jobs, and expand opportunity for all Americans, unlocking a brighter future 

for fi.1ture generations. I believe, as does the President, that there is plenty of opportunity for 

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bipartisan cooperation and a number of areas where we can find common ground to move our 

country forward, starting with business tax refonn. I look fonvard to working with the members 

of this Committee to make progress on tax reform tllis year. Together, we can achieve 

meaningful reform that will belp America's families, boost our economy, and enable U.S. 

businesses expand and be more competitive. 

2 1 
31 

Chairman RYAN. Thank you, Secretary. 

There are basically four areas I wanted to get into. I just added 

one to it from your testimony. 

The sequester. As the author of the last agreement, bipartisan 

agreement to provide sequester relief, you know, I think the formula we reached in that bipartisan budget agreement in the last 

session was the right precedent, and so what was that precedent? 

It was that we understand that the mandatory side of the ledger 

book, the autopilot spending, is what is really not under control, is 

the source of our debt crisis coming in the future, and needs to be 

reformed. 

So what Patty Murray and I sat down to do was to find an excessive amount of savings on the mandatory side of the ledger book 

to pay for some sequester relief, and to fix the caps for the various 

concerns that I think on both sides of the aisle people have, but the 

precedence was you had more spending reductions through mandatory entitlement reforms resulting in net deficit reduction which 

also got us some sequester relief. 

So we all know it is a show stopper to say let’s, you know, raise 

taxes to pay for some sequester relief. The precedent was set, 

which is we need to do mandatory reforms so that we can do two 

things: (1) Relief from the sequester through smarter spending cuts 

in other areas of government, and (2) contribute on the net to some 

deficit reductions. So I would just argue strongly, we have a good 

formula in place, we have a good precedent, it has bipartisan origins, let’s try and stick with that formula. 

Secretary LEW. Mr. Chairman, if I might. 

Chairman RYAN. Yes. 

Secretary LEW. I think that the agreement that you and Senator 

Murray reached was important and it is one of the reasons that we 

have been operating in a more normal way these last 2 years and 

one of the reasons the budget could be on time this year. 

Chairman RYAN. Yes. 

Secretary LEW. So I think working together is important. We obviously present our view of the best way to do it in our budget, and 

we need to work on a bipartisan basis to try to reach agreement. 

Chairman RYAN. Yes, and my whole point is let’s stick with the 

formula that we have because it worked before, and I think it is 

the best way to go forward. 

Second, I want to ask you about pass-throughs. I am glad you 

say business reform instead of corporate, which is a good step in 

the right direction. Mind you, that, and I know you know this, but 

80 percent of American businesses aren’t corporations. They are 

pass-throughs. They file their taxes as individuals, sole proprietorships, LLCs, you know, Subchapter S. 

The issue that I think is of greater concern these days is that, 

unlike the big public companies with a lot of cash on their balance 

sheets, the ability to borrow at historically low interest rates, the 

post Dodd-Frank closely-held businesses have found it really hard 

to obtain credit these days as banks have restricted lending. So we 

have a cash flow issue. They need cash flow from their current operations just to meet payroll, just to keep people working, but our 

current broken Code makes it harder for them to do that. Your 

budget takes some baby steps in the right direction. I note Section 


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32 

179. I think there is some common ground there on expanding that. 

We will be doing that, marking this up tomorrow, but other proposals like expanded cash accounting are only right now helping 

small C corporations and don’t do much for the vast majority of 

small businesses organized as pass-throughs. 

So will you work with us to explore more areas in trying to help 

these closely-held family businesses that we think of as passthroughs, to help figure out their expensing issues? Because in this 

post Dodd-Frank world, they have even tighter credit. 

Secretary LEW. Mr. Chairman, I believe that our proposals reflect our commitment to making tax reform work for small businesses. We have called it business tax reform on purpose because 

we think of it as both corporate and small business tax reform. We 

have put into our plan a number of things to simplify taxes for 

small businesses to make it possible to take deductions more easily 

and more quickly, and to lower the tax burden for many small 

businesses. 

A lot of different kinds of companies organize as pass-throughs. 

Some of them are mom and pop businesses. Some of them are very 

large companies that look more like corporations. We look forward 

to working on a bipartisan basis to see what we can do to help real 

small businesses get the kind of relief that they need. 

Chairman RYAN. Big or small, it is where most of the jobs come 

from, and so let’s—all I am saying is I don’t think there is enough 

in this proposal to do justice to what needs to be done. So let’s keep 

working on that. 

Transition. I wanted to just get you down on the record on this 

idea of tax reform financing highways. Your point, just to be clear, 

is not to support a one-time repatriation holiday such as we did in, 

I think, 2004, 2005, but only as a means to permanent transition 

to a new, I think you call it a hybrid system, only under that kind 

of a scenario do you see tax reform as part of the solution to the 

highway trust fund issues. Is that correct? 

Secretary LEW. Well, Mr. Chairman, we have pointed out many 

times that we think that the one-time repatriation holiday created 

a kind of perverse incentive. It created an incentive for companies 

to keep their income overseas until the next repatriation holiday. 

We think that the right answer is to have real tax reform to 

change the structure so that companies bring their income home. 

Frankly, so they invest their income wherever it is most economically efficient. The idea of tax reform is to have the efficiency and 

economics of a business determine where you invest, not the Tax 

Code, which is skewing decisions in a way that is inefficient. 

We believe that what we have proposed in terms of the international hybrid system will create that. We think that the toll 

charge that we have put in is the right way to have a transition, 

and we do believe that the one-time revenue from the toll charge 

can fund the highway—the infrastructure program in a very effective way. 

When you talk to business leaders in this country, the two 

things—the three things that I hear most often are, one, we need 

to reform our Tax Code; two, we need to build our infrastructure 

so our economy can grow; and, three, we need to do immigration 

reform. We can take care of two of three at the same time here. 


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Chairman RYAN. Yes. So I would take issue with probably the 

rate and the style of hybrid that you are doing, but putting that 

point aside, it is a move in a constructive way. We have these— 

obviously have it—see it differently, but it is for a permanent conversion to a permanent new system. 

Secretary LEW. Right. Right. 

Chairman RYAN. Okay. The last question I want to ask you is 

about EITC. I think the data is pretty clear that the EITC is effective. It is effective at moving people from poverty into the workforce. It is effective at lowering barriers that are in front of a person who wants to get into the workforce, but it is also a program 

that is known to have a high degree of fraud. It is known to have 

a high improper payment rate. A lot of people say: ‘‘Well, just give 

the IRS more agents and they can fix that.’’ I think that is an insufficient answer. 

Will you work with us to try to figure out how we can clean up 

the management and the structure of the EITC so that we can get 

at this exceptionally high improper payment rate, and are there 

ideas you have about how it could be restructured and reformed so 

that it truly goes to those who are really truly supposed to get it 

and not to others? 

Secretary LEW. Mr. Chairman, I totally agree with you on the 

importance of the EITC as a bridge to work and to get families 

back to work in a way that makes good sense. It has been a bipartisan commitment from its inception, and I look forward to working 

with you to strengthen the EITC. I also agree that compliance 

needs to be improved. We do have resource constraints. I don’t 

think they can be dismissed. The underfunding of the IRS does 

make it very challenging in many areas to put the resources that 

are needed into compliance. So I hope we can work together to 

make sure the IRS gets the resources that it needs. You know, every year the IRS recovers or prevents about $2 bil- lion of improper EITC claims, and between $3 and $4 billion in 

total revenue through EITC-related compliance activities. We need 

to do better. We look forward to doing better, but it is related to 

the resources available. We hope there are the resources to do it 

properly. 

Chairman RYAN. Okay. So my point for asking, though, is I 

think we—many of us agree that there are other populations that 

this reform could be applied to, say childless adults. Let’s see if we 

can make the reforms pay for these improvements. So if we can 

contain it within itself, I think that would be an enormous step in 

the right direction, and that too could perhaps lead to a bipartisan 

common ground success. 

Secretary LEW. Well, we very much look forward to working together on the childless adult provisions. It is something that I 

think would fill an enormously important gap in the current system. I don’t know whether the cost would be covered by it, but I 

would be happy to look at it and work with you. 

Chairman RYAN. All right. Thank you. 

Mr. Levin is recognized. 

Mr. LEVIN. Thank you. Mr. Chairman, you and I have had a few 

discussions about these issues, and all of us want to do more of 

that. So if I might, I want to ask a broader question of the SecVerDate Sep 11 2014 06:01 Apr 10, 2017 Jkt 022331 PO 00000 Frm 00037 Fmt 6633 Sfmt 6602 I:\WAYS\WAYSPS\22331\22331.XXX 22331

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retary briefly, but let me just mention about pass-throughs. I think 

it is one of the major challenges to tax reform, as you indicated, 

and I think it has to be looked at comprehensively. We are going 

to mark up 179 and other bills tomorrow, and I think it is a mistake to take that outside of tax reform, unpaid for, permanent. 

Mr. Secretary, you have expressed your view on this before. Do 

you want to just comment briefly on that approach? 

Secretary LEW. Congressman, we have consistently opposed taking these items one by one and making them permanent in an 

unpaid-for way, even provisions that we approve of and that are 

part of our plan. I think that Section 179 should be addressed. It 

should be expanded in the context of business tax reform, and I 

think that if we can have real progress on business tax reform, 

that would be a way to get it done in a way that takes the issue 

off the table for the future and removes the uncertainty that goes 

with short-term extensions, which is where we end up if we don’t 

have business tax reform. 

Mr. LEVIN. Thank you. Mr. Chairman, also in terms of international taxation, the Secretary has mentioned how I think totally 

unsuccessful the repatriation was before, and what the Administration has come up with is kind of a hybrid system, and I think we 

need to get away from the labels and look at how it might work, 

and let me just say briefly, as we continue dialogue, I think we 

need to look at EITC in terms of its implementation. I think IRS 

help is not the only factor, but I think, as the Secretary said, cutting revenue appropriations for the IRS is not the way to go. You 

can’t get tax enforcement when you cut down the IRS appropriation. 

Mr. Secretary, if you would, I have almost 3 minutes, would you 

use them? You talked in your statement about middle class economics. Just tell us, if you would briefly sum it up, what is the vision of this Administration when it presents its budget? What is it 

all about? 

Secretary LEW. Mr. Congressman, I appreciate the question. We 

have put a lot of thought into how to design a budget that would 

address the challenge of making sure that our economy works for 

middle class families, for families that are trying to break into the 

middle class. We have identified what we think the real obstacles 

and burdens are. It includes education opportunity, it includes 

child care burdens, it includes the challenge of saving for retirement. We have put in place a series of provisions that we think will 

make a real difference to make it possible for middle class families 

to get ahead. 

We have an economy that on the whole is growing at a much better rate than most of the rest of the developed world, but we are 

seeing within the United States that it is not an economy where 

there is broad opportunity as there should be. I think that the provisions in this budget provide a first step to solving that. 

You know, some of the characterizations of this budget have, I 

think, been a bit off. It is not about being against one group and 

for another group. It is about making the system work for everyone, and the truth is we have distortions in our tax system that 

allow those with the most wealth and the most income to avoid 

paying taxes on the same basis that all of us pay taxes on. 


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Let me use an example of stepped-up basis and compare it to the 

way we pay taxes on IRAs and 401(k)s. For anyone who needs to 

use the assets that they have built up for their retirement, you pay 

income tax on that when you take it out in your retirement. If you 

never need to get access to your savings, to your accumulated earnings, you can pass it on to tax free. That is not right. Our system 

ought to treat all earnings in a similar way, and that is what our 

proposal does. It is not against anyone, it is for everyone. 

Mr. LEVIN. Thank you. 

Thank you, Mr. Chairman. 

Chairman RYAN. Mr. Johnson. 

Mr. JOHNSON. Thank you, Mr. Chairman. 

Welcome, Mr. Secretary. As you know, you are also serving as 

the Managing Trustee for Social Security, and I would like to, if 

we can get a quote up on the screen, direct you to it. However, this 

is what Obama had to say when he was first elected. ‘‘What we 

have done is kicked this can down the road. We are now at the end 

of the road and not in a position to kick it any further. We have 

to signal seriousness in this by making sure some of the hard 

decisions are made under my watch, not someone else’s.’’ That is 

President Obama in January 2009. You know, we have to signal seriousness, and my question to you is: Do you agree with what the 

President said then? Yes or no. 

Secretary LEW. You know, Congressman, I think that if you look 

at the condition of the Social Security Trust Fund, it is in stronger 

shape now. A strong economy helps drive that, and I think the 

President has many times said that we need to deal with the longterm problems in a bipartisan way, but we do have a little bit more 

time to do that. What we have proposed is a budget that will build 

a foundation that will actually help Social Security. Even our immigration policy, for example, would have the effect of lengthening 

the life of the Social Security Trust Fund. So we think that we 

have improved the conditions of Social Security—— 

Mr. JOHNSON. Well, I am going to have to disagree with you 

because the shortfall has doubled from $5.3 trillion to $10.6 trillion 

while you guys have been in office, and that means Social Security 

can’t pay the promises it has made. 

My next question, just for the record, do you agree that Social 

Security finances have continued to deteriorate since Obama took 

office? Just yes or no. 

Secretary LEW. Well, Congressman, you know, I think if you 

look at what has happened in these years, as we all knew, the baby 

boom was going to hit retirement age, and the baby boom retirement is underway. So I think if you look at the trends in Social 

Security financing, one has to take account of the fact that it was 

an entirely predictable turn that the reserves would start getting 

used to pay benefits. 

Mr. JOHNSON. Well, if you know that, then why didn’t you 

make a real plan to fix it? 

Would you agree that the disability program is in trouble? Yes 

or no. 

Secretary LEW. Well, Congressman, disability is a bit of a separate issue from the old age fund. I would just say that as someone 

who was involved in the 1983 Social Security reform, we did a lot 


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to fix Social Security’s foreseeable shortfall. The problem is that 

money was spent along the way because we ran deficits for other 

purposes. So I don’t think it is a question of what happened in the 

window of time of this Administration. It is actually what happened before. 

The disability fund is approaching its exhaustion date. We have 

proposed a number of reforms in disability. I think there is a broad 

view that there is going to need to be some reallocation of trust 

fund—the taxes between the trust fund to deal with this issue in 

the intermediate term. 

Mr. JOHNSON. Well, let’s talk about reallocation. You used that 

word. Reallocation is actually about taking money that would have 

gone to a retirement and giving it to the disability program. Is that 

true or false? 

Secretary LEW. Well, reallocation would move revenues from one 

part of the one trust—one trust fund to another. 

Mr. JOHNSON. Sounds like we are continuing to kick the can 

down the road. We have to work today to strengthen and preserve 

Social Security. 

Mr. Secretary, will the President actually follow through on the 

words he said back in 2009 and actually do something on his 

watch? 

Secretary LEW. Well, Congressman, I think that if you look at 

the history of the last several years, the President has been prepared on a number of occasions to have the conversations that have 

to happen on a bipartisan basis to deal with Social Security in the 

long term. They did not reach the kind of end that led to an agreement. I think right now we are looking at an economy that would 

benefit greatly from us working on the things where we can reach 

bipartisan agreement, and we do have a bit more time to deal with 

the long-term issues. I am not going to say they don’t need to be 

addressed, but they need to be addressed in an environment where 

there is a bipartisan atmosphere that is, you know, conducive to it. 

Let’s make some progress on the things—— 

Mr. JOHNSON. So you are saying that the President will actually do something on his watch to fix this system? 

Secretary LEW. Well, I think if we do immigration reform, that 

would be a big step, and we look forward to working together on 

that. 

Mr. JOHNSON. You know, Americans depend on Social Security, 

and they are paying hundreds if not thousands of dollars a year 

into Social Security and want and need and deserve better. 

Mr. Chairman, thank you for holding this hearing, and I look forward to working with you on this important issue. 

Chairman RYAN. Thank you. Thank you. 

Mr. Rangel is recognized. 

Mr. RANGEL. Thank you. 

I understand Mr. Johnson said the President can do something 

by himself on his watch, and I am going to advocate that he be 

more aggressive in that area. 

Having said that, though, welcome. It is so difficult for me to 

look at you, Mr. Secretary, and not think of you as the kid that 

used to work for Tip O’Neill, but you certainly make those of us 

that serve the government proud of your service. 


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I don’t see how—I am so pleased to hear that the Chairman and 

you and most all of us agree that there is a possibility in the area 

of trade and the area of tax policy that there is a possibility that 

we can find some area that we can agree on. 

Now, both of these issues, as important as they are to the country, we need to get votes for these things, and it is difficult for 

some of us to go into the community and say we are for tax reform 

or we are for trade when people are really talking about what does 

it mean to me? How is this going to affect my future? What disposable income will I have? Will I have any pension benefits? Will I 

have something to send my kids to school? Can I get a house? Can 

I pay the rent? It would seem to me that we always allocate jobs 

with trade, and certainly we can negotiate the trade—the tax bill 

so that we can be fair as it relates to what used to be called the 

middle class, but I don’t see the jobs in this bill, and it is probably 

difficult to pinpoint exactly who the winners and losers would be 

in a trade bill. 

It probably will improve the ability of all of the countries involved to improve their economy, but to find out where are these 

jobs going to be. Because if we can do this, Mr. Secretary, we get 

rid of all of this Republican and Democrat and free trade of business. People want to know if it is good for the country, how it is 

going to be good for me? 

It seems to me that if we do have a good trade bill, that we will 

need infrastructure in order to support that trade bill. I don’t see 

how anybody, regardless of their party, can go to our mayors and 

our governors and not say that infrastructure is a part of trade. 

The other thing is also education. Whatever benefits we get, we 

have to have a workforce prepared to meet the new economic challenges, if not for the current workforce, for those that will be coming into being. 

Now, I wish the Administration would be able, and Republicans 

as well, to try to give some of us a package so we are not talking 

in theory, but we are talking about jobs, and if the Republican majority can see its way clear in the Congress to attach education, job 

training, infrastructure to a trade package, I can assure you that 

trade would mean a heck of a lot more to our constituents than just 

something that foreigners are dealing with with our President. If 

we can get that concept that the President accepts it and it is a 

part of the trade agreement, then, of course, I don’t see any objection of giving the President the authority to negotiate a trade 

agreement, meaning that those things are going to be in it. But I 

find it very difficult for us to say we are giving the President the 

authority to negotiate, and when the negotiations are complete, all 

we have is up or down and no input. 

So I don’t know how much time you have to respond, but whatever it is, I do believe that trade and tax reform could bring us together for the country, for our party, and certainly to improve the 

image of our Congress. 

Secretary LEW. Look, Congressman Rangel, the basic reason 

that we support Trade Promotion Authority and good treaties is because we think it grows the U.S. economy and it grows the middle 

class jobs in this country. You look at the growth in the future, the 

growth is in emerging economies. It is in the Pacific. It is in areas 


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where other countries are going to be exporting into those markets. 

We need to be exporting into those markets too. 

TPP was designed to be an agreement that would drive standards up. The United States is already more open than most other 

countries. We already have higher labor standards and environmental standards and other important safeguards. By having an 

agreement where we make our high standards a mutually agreed 

set of high standards, and by having a world in which we have access to the growing markets, I think it will grow the U.S. employment base and create opportunities for middle class families to 

have a better future. None of this is a given. It requires negotiating 

hard. Trade Promotion Authority is actually something that puts 

guidelines on the Administration to help drive things in the right 

direction, and in the areas that I have just described, it presumably 

will address those issues. 

It is our job, then, to come back with an agreement that delivers, 

and we are not going to bring back an agreement that we can’t defend as growing the economy and middle class jobs. I think that is 

the real reason to pursue them. 

Chairman RYAN. Thank you. 

Mr. Brady. 

Mr. BRADY. Thank you, Mr. Chairman. 

Welcome, Mr. Secretary. As you know, next month the Supreme 

Court is scheduled to hear arguments on whether or not the IRS 

overstepped its authority when the agency issued regulations extending Affordable Care Act Premium Assistance Tax Credit subsidies for coverage purchased through the Federal exchanges. The 

court is expected to announce its decision sometime before the end 

of June. 

Can you tell me if the Treasury Department or the IRS is doing 

anything to prepare for the possibility that the court might rule 

against the IRS? 

Secretary LEW. Congressman, let me start by saying that the Affordable Care Act is working and the tax credits are working. Millions of Americans now have access to affordable healthcare coverage. 

Mr. BRADY. But the court will not be ruling on that aspect, the 

ACA, beyond specifically the IRS ruling. 

Secretary LEW. We believe that we have—our lawyers have 

made the arguments, the Justice Department has made arguments 

that we think are compelling to the court, and we look forward to 

a positive ruling, but the thing that we just have to recognize 

is—— 

Mr. BRADY. But, Mr. Secretary, I don’t want to interrupt, but 

I want make sure we understand. I am not asking for a prediction 

on the court ruling, but in the possibility that the court will rule 

for the plaintiffs, what planning is the Treasury Department or the 

IRS doing to deal with that type of ruling? 

Secretary LEW. Congressman, there is no question but that an 

adverse ruling would strip millions of Americans of healthcare coverage due to the loss of the tax credits. 

Mr. BRADY. So you would be, based on that, starting the work 

now to prepare for that ruling. Correct? 


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Secretary LEW. Congressman, what I am saying is the premium 

tax credits are an essential part of the Affordable Care Act. 

Mr. BRADY. Sure. 

Secretary LEW. That if they were removed, there would be serious disruption in health insurance markets in many States. 

Mr. BRADY. And to ensure that there is not serious disruption, 

is IRS or Treasury planning now to deal with the ruling in the 

other direction? 

Secretary LEW. What we are doing is we are continuing to implement the law, the law as it was written, which was to make 

sure that all American people had access to this. 

Mr. BRADY. Let me ask, as Treasury Secretary today, are you, 

in effect, guaranteeing the Supreme Court will rule for the IRS in 

this case? 

Secretary LEW. What I am doing, and what we across the Administration are doing, is implementing the law as it was written 

to provide health insurance for the American people. 

Mr. BRADY. Are you—I get the impression you are very confident they will—in effect, are you guaranteeing that they are going 

to rule for the IRS and therefore you have to do no planning—— 

Secretary LEW. I leave to the Justice Department to make our 

legal cases in court. They have made, I think, a compelling case. 

Mr. BRADY. But you certainly would not guarantee that today? 

Secretary LEW. I am sorry. I would not guarantee what? 

Mr. BRADY. You certainly would not guarantee the Supreme 

Court ruling for the IRS. 

Secretary LEW. Well, I would never presume to speak for the Supreme Court. 

Mr. BRADY. No, no, and I agree because there is a possibility 

they may rule for the plaintiffs. I guess my question to you is that 

should that occur, Republicans are already working to develop a 

thoughtful plan and a thorough plan to offer these millions of 

Americans choices to have affordable high quality health care. We 

are doing that work ahead of time. Is Treasury or the IRS doing 

the same type of work? 

Secretary LEW. Congressman, this issue, as you know, is currently before the court. I can’t comment on the pending litigation. 

Mr. BRADY. Well, I am not asking about the litigation—— 

Secretary LEW. We are confident of our interpretation. 

Mr. BRADY [continuing]. Mr. Lew, I am asking about planning 

in the possibility they might rule otherwise because, as you admitted, you can’t guarantee the outcome. So are you planning for 

that? 

Secretary LEW. We are confident that our interpretation that 

Americans in every State are eligible for premium tax credits will 

stand, and I have indicated that—— 

Mr. BRADY. Sure. But a moment ago you admitted that you 

can’t guarantee the outcome. So let me ask this: As Republicans 

work toward a thoughtful, thorough plan to address that ruling, 

will the White House work with us in that eventuality, or will you 

refuse to work with Republicans in dealing with that ruling and 

the millions of Americans that could be impacted? 

Secretary LEW. Congressman, the oral argument hasn’t taken 

place. A ruling is months away. I have indicated that if there were 


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a ruling that took away the premium tax credit from a significant 

number of people, it would be very disruptive. 

Mr. BRADY. Right. And in that case, will you work with Republicans in crafting a solution for those Americans so they can have 

high-quality affordable health care? This is simple. Will you work 

with us or refuse to work with us? 

Secretary LEW. I think that it is a mistake to think that there 

is a simple solution. 

Mr. BRADY. Oh, I am not suggesting there are simple solutions. 

Secretary LEW. The Affordable Care Act was designed to be 

based on premium—— 

Mr. BRADY. Will you work with us or refuse to work with us? 

Secretary LEW. Well, I am indicating our view that it is—it 

would be a serious disruption. You know, we obviously will look at 

what proposals are made, but I am not going to prejudge what the 

court does. 

Chairman RYAN. Thank you. 

Dr. McDermott. 

Mr. MCDERMOTT. Thank you, Mr. Chairman. 

Mr. Lew, I applaud the President’s efforts to support the middle 

class. All through this bill, whether you are talking about sick 

leave or Social Security or Medicare or student debt, the President 

has made proposals. 

What my colleague from Texas is posing is that if your next-door 

neighbor takes a bulldozer and knocks down your house, do you 

have a plan to rebuild your house, and it is about as unreasonable 

a posit of an idea as I have ever heard. The Republicans, in 51⁄2

years have not proposed any alternative to the ACA. In fact, this 

afternoon at 1:30, they are going to bring a bill out on the floor to 

repeal it for the 55th time. 

Now, it seems unreasonable to put—to waste your time planning 

for something. If they have something they want to bring forward, 

they can lay it on the table in the Ways and Means Committee or 

in the Energy and Commerce Committee or somewhere else. They 

have never put anything on the table. 

Now, I want to talk a little bit about the proposal to the President to close the loophole that Gingrich put in the Subchapter S 

collection of Social Security taxes. Could you explain to me—my 

understanding is that if you have an S Chapter—or Chapter S corporation, you don’t have to pay your employment taxes. So you 

don’t pay for Medicare. You don’t pay for Social Security. Now, 

when you get old, you turn 65, are you eligible then to go in and 

get Social Security and get Medicare on a program to which you 

haven’t paid one single dime? 

Secretary LEW. Well, Congressman, first, if I can respond to the 

point you made about the bulldozer. I have tried to indicate that 

the degree of disruption would be enormous. I also think it is important for us to recognize that what we should be working together on is how to make it more affordable and more possible for 

Americans to get health care, and we have always been open to 

working on that. I think the American people are tired of the debate about repealing the Affordable Care Act and they want to 

hear more about how to make it work. 

Mr. MCDERMOTT. I agree. 


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Secretary LEW. And on the question about eligibility for Medicare, there obviously is a significant issue. You know, the proposal 

that we have in our budget would tax all earnings of professional 

service Subchapter S corporations as labor earnings. The taxpayers 

would get Social Security and Medicare based on what they paid 

in. So we think that would address the underlying issue. 

Mr. MCDERMOTT. So those people are not now eligible for receiving benefits if they don’t pay in? 

Secretary LEW. I believe they are. They pay in, but they don’t 

pay in as much as they would. I mean, the question here is not 

whether they are eligible for benefits but whether they are paying 

in on a fair basis. 

Mr. MCDERMOTT. I think it raises $74 billion for the trust 

fund. 

Secretary LEW. I believe the issue is more a question of whether 

they are making the payments that are associated with the incomes that they have. 

Mr. MCDERMOTT. Yes. I would like to raise a question about 

student debt. Can you give me any reason why students can’t renegotiate their loans? If they took a loan out at 9 percent from a 

bank, why does it have to stay at 9 percent for the rest of their 

life? On my house, I have renegotiated my loans three, four times, 

bringing it down to a lesser rate. Why can’t students do that? 

Secretary LEW. Congressman, we have looked at this issue and 

worked with the Congress to come up with proposals that would 

give students more flexibility in terms of how to manage their student debt. 

Obviously, the student loan programs are designed to give very 

favorable access to credit, but the rates are not always at a level 

that feel competitive with what would be available if there 

were—— 

Mr. MCDERMOTT. But the prime interest rate—— 

Secretary LEW [continuing]. A different kind of creditworthy borrower there in the market. 

I think the challenge here is to work through these issues to 

make sure that students know all of the options that they have to 

repay their debt in a more affordable way, to consolidate their 

loans, to go through the process of having their payments—— 

Mr. MCDERMOTT. Did you understand the financial system 

when you were 20 years old? 

Secretary LEW. Well, the financial system was simpler when I 

was 20 years old. But probably the answer is not as much as I 

should have. 

Mr. MCDERMOTT. Thank you. 

Chairman RYAN. Thank you. 

Mr. Nunes is not here. Mr. Tiberi. On to Mr. Reichert. Is he— 

oh, there he is. 

Mr. REICHERT. Thank you, Mr. Chairman. 

Secretary, welcome. 

I think most of us are hopeful that the Administration is willing 

to work with us on tax reform, and I am hearing you say that you 

are. That is good news. From Mr. Brady’s questioning, though, I 

took away from your lack of an answer to his question as to whether 

or not you will work with us depending upon the Supreme Court’s 


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decision—that lack of a ‘‘yes’’ or ‘‘no’’ answer indicates to me that 

there is an unwillingness there, and I am hoping that that doesn’t 

transfer over into tax reform and other issues. 

I want to focus on the small-business passthrough question. And 

you made some comments that I find interesting compared to the 

language in the budget, so I just want to get to the bottom of it. 

Hard-working Americans deserve a Tax Code that works for 

them, not them working for the Tax Code. You would agree with 

that, I am sure. They need to have that consistency and that certainty in the Tax Code so they know and can plan for their businesses, which gives them the security in having that knowledge 

and hope for the future and their family and the success of their 

business. 

So when you say that you are willing to work with us in the 179 

expensing area, can you explain to me why in your budget you did 

so little in that area for passthrough entities? Why didn’t you do 

something a little bit more bold to begin with, if really that is the 

way you and the President felt about passthroughs and small businesses? 

Secretary LEW. Well, Congressman, I think that we have done 

a number of things in the budget that will help small businesses 

and passthroughs, not just with 179—— 

Mr. REICHERT. But my question, sir, is, why didn’t you do 

more? I think you agreed—— 

Secretary LEW. Well, we—— 

Mr. REICHERT. Just a moment. You agreed with the Chairman 

when you said, yes, we could do more and we will work with you. 

My question is, why didn’t you do the ‘‘more’’ part first? 

Secretary LEW. You know, Congressman, we put forward what 

we think is a good package. If there is a desire to do more, we are 

open to ideas that would do more. So I think that the challenge 

here is going to be to come up with ideas that actually work and 

that don’t have unintended consequences—— 

Mr. REICHERT. So the question that I asked you are not going 

to answer? 

Secretary LEW. Well, I—— 

Mr. REICHERT. I asked you why you didn’t—— 

Secretary LEW. I will be perfectly candid. And I have said this 

privately to the Chairman. This is a complicated area. This is an 

area where I think it will actually benefit all of us—— 

Mr. REICHERT. Okay. So—— 

Secretary LEW [continuing]. To work together in a bipartisan 

way. 

Mr. REICHERT [continuing]. Can I get you to reaffirm that you 

will work with us to—— 

Secretary LEW. Yeah. I have said that we will—— 

Mr. REICHERT. Okay. 

Secretary LEW [continuing]. Work together on it. 

Mr. REICHERT. Great. 

So tomorrow, as Mr. Rangel and I think Mr. Levin referred to, 

seven bills will be marked up in the area of S corporations and 

making some of those tax extenders permanent. I don’t want to 

talk about the permanency issue; I just want to talk about the policy. 


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So you said you agreed with the policy. Can you give me an example of how these small-business measures and legislation could 

be expanded? Because that was your statement a little bit earlier; 

you said they should be expanded. Can you give me an example of 

how you might expand S corporation—— Secretary LEW. Well, we have taken up to $1 million the amount 

that could be expensed in a single year. For most small businesses, 

that is an enormous benefit. It would put all of the—— 

Mr. REICHERT. But could you give me an example of how—— 

Secretary LEW. I just gave you an example. 

Mr. REICHERT. Further. 

Secretary LEW. Yes. 

Mr. REICHERT. You have already said that. Give me a little bit 

more. 

Secretary LEW. I am here to present our budget. You are asking 

me to present things that we will work on in the future. Obviously—— 

Mr. REICHERT. I thought you might have some ideas. 

Okay. My last question would be: You know, recently, this year, 

we adopted a rules package that requires CBO and JCT to perform 

a macroeconomic analysis of major legislation. Does Treasury have 

a dynamic model? 

Secretary LEW. You know, both Treasury and JCT take account 

of economic factors that—— 

Mr. REICHERT. Does Treasury have a dynamic model? Do you 

have one? 

Secretary LEW. I mean, our—yes. 

Mr. REICHERT. Yes. Okay. Thank you. Good. That was easy. 

I yield back. 

Chairman RYAN. Keeping it easy, that is nice. 

Mr. Lewis is recognized. 

Mr. LEWIS. Thank you, Mr. Chairman. 

Thank you, Mr. Secretary, for being here today, and thank you 

for all of your great and good work over the years. 

Mr. Secretary, I want you to make it plain and crystal-clear. If 

the Republicans today repeal the Affordable Care Act and later the 

Senate repealed the Act, the President is saying he is going to veto 

it, but maybe he has changed his mind and will not veto it, maybe 

he just says, I am not going to veto it—— 

Secretary LEW. He has not changed his mind. 

Mr. LEWIS. Okay. What would happen—what would happen to 

the hundreds, thousands, and millions of people who have the Affordable Care Act now? 

Secretary LEW. Well, Congressman Lewis, because of the Affordable Care Act, we have millions of people, almost 10 million people, 

who have health insurance coverage that they didn’t have. And the 

challenge of providing the kind of security that a family only knows 

when it has health insurance has taken us decades to accomplish. 

We would take a step back to the time when those families do not 

have that kind of access to health insurance and the kind of security that flows from it. 

So I think it would be a very bad situation. It is why the President would veto a measure that would repeal the Affordable Care 

Act. 


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Mr. LEWIS. Well, thank you very much, Mr. Secretary. 

Can you explain, what does the President’s budget do to help 

more Americans prepare and save for their retirement? 

Secretary LEW. I am sorry. I couldn’t hear your question, Congressman. 

Mr. LEWIS. What is in the budget—can you explain what is in 

the budget that would help more Americans save and prepare for 

their retirement? 

Secretary LEW. So, Mr. Lewis, one of the things we have done 

in our budget is created incentives for employers to cover their 

workers in 401(k) plans, made it easier for them by giving them 

tax benefits for the administrative cost of setting up a plan, for 

matching contributions that employees make. 

You know, we have built that on top of the proposal that we 

started last year, when we started the myRA program, where individuals will be able to start with a very safe, easy, starter retirement account. 

We, for years now, had proposals to go from a system where employees opt into retirement to one where they have to opt out. We 

know from behavioral economics that that would work to get many, 

many more people covered. 

So I think we have a quite robust set of proposals. And I think 

it is something that, if we could work together on a bipartisan 

basis, would make an enormous difference as we look ahead to a 

generation that is going to need retirement savings for a sound future. 

Mr. LEWIS. Well, are we saving more or saving less? 

Secretary LEW. Well, you know, I think as a country we are 

obviously—our savings rate is improving as our economy has improved, but we need to see middle-class workers saving more for 

their retirement. I think if you look at the distribution of retirement savings, the average amounts that most middle-class workers 

have is not really enough for them to rely on. You have to kind of 

strip out of the averages what the very large retirement accounts 

do to the averages. 

And we are concerned about what working families are doing to 

take care of their own future. And we have tried to put in place 

the kind of tax incentives to move that process forward. 

Mr. LEWIS. Well, thank you, Mr. Secretary. 

I yield back, Mr. Chairman. 

Chairman RYAN. Thank you. 

Mr. Boustany. 

Mr. BOUSTANY. Thank you, Mr. Chairman. 

Welcome, Secretary Lew. 

You know, there has been a lot of talk about helping middleclass, working families, small businesses, affordable health care, 

and so forth. But I have a real concern about an action that Treasury took in September of 2013 when you issued a regulation penalizing the use of health reimbursement arrangements by employers 

as a means of financially assisting their employees to purchase 

health insurance plans on the individual market. 

I mean, why would Treasury institute this kind of a draconian 

penalty on small businesses that are struggling, as we have heard 

earlier? 


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Secretary LEW. So, Congressman, we have obviously moved 

through the Affordable Care Act into a system where there is an 

established way for plans to be put forward and for workers to 

have access to coverage. And we are working hard to implement it, 

to make sure that it is easy for small businesses to take advantage 

of and for workers to participate in. I—— 

Mr. BOUSTANY. But there are complications with this, and the 

penalty amounts to 10 times the fines that would be imposed on 

larger businesses. In other words, a large business under the employer mandate will be subject to a $3,000 annual fine per employee, but yet, if you totaled up the penalty of $100 per day per 

employee for these small businesses, we are talking about $36,500 

per employee for a small business. That seems to belie the sentiment that you are trying to help small businesses and working 

families. 

Secretary LEW. Well, Congressman, our objective and the objective of the Affordable Care Act is to make sure that affordable 

health care is available to all, and I believe that the provisions that 

you are referring to are not consistent with that. I would be happy 

to follow up with you. 

Mr. BOUSTANY. Why, thank you. This deserves serious attention, because I am hearing from small businesses that are seeing 

very high premium increases, up to 40 percent over last year’s premium increases, in my district, and yet we have this. So we really 

need to work on this. 

If I can get back to the budget for a moment, the budget revives 

the Federal unemployment surtax. And in case Members don’t recall, this was a temporary tax created in the 1970s, and it has outlived its purpose in the 1980s, and that was to recover the cost of 

UI extended benefits paid in the 1970s. 

This program, this tax, stuck around for a long time. We finally 

ended it in 2011. And yet the Administration now wants to revive 

this temporary tax in the—it is in the budget. Why? What is it 

going to be used for? 

Secretary LEW. Congressman, for a number of years now, we 

have been putting forward proposals to try to make sure that the 

unemployment system is on sounder financial footing. We have put 

forward our ideas of how to accomplish that. We think it is an important objective. And we would look forward to working together 

in a bipartisan way to know that the unemployment system is on 

sound financial footing going forward. 

Mr. BOUSTANY. Well, we will work with you on that, and I 

hope we can get to some resolution. 

And, finally, with the remaining time I have, you won’t be able 

to answer the question I have for you, but it relates to Treasury’s 

role in developing the model BIT with regard to our—and specifically with regard to our negotiations with China. This has to be a 

top priority. 

I would be very interested in getting a full understanding of 

what Treasury is doing with regard to that development and our 

negotiations with China and, likewise, with India. Because the 

President just announced with Prime Minister Modi that we will 

resume negotiations on a high-standard bilateral investment treaty. 


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And we seem to be miles apart from India, even on basic definitions of ‘‘investment.’’ 

So there is not much time left. Do you want to talk about it? But 

I would like a detailed answer in writing. 

Secretary LEW. I am happy to get back to you in more detail, 

but in the minute that I have let me just take a quick shot at it. 

I have been deeply involved in the discussions with China 

through our strategic and economic dialogues. It is a very important conversation because, if it concludes successfully, China will 

raise itself to standards that will help in a lot of ways in normalizing and improving trade balances and—— 

Mr. BOUSTANY. Well, it empowers their reformers. 

Secretary LEW. It empowers their reformers to make the 

changes internally, and it stops them from doing things in international markets that cause—— 

Mr. BOUSTANY. Right. 

Secretary LEW [continuing]. Unfair advantage. 

Mr. BOUSTANY. I understand the rationale, but what I would 

like is a detailed summary of where we are with this. 

Secretary LEW. Right. And they are just taking the very first 

step, very shortly, putting out their first cut at what is the list of 

industries that would not be open to foreign investment. 

Mr. BOUSTANY. The negative list, yes. 

Secretary LEW. The negative list. That will be an important indication of the seriousness. And we look forward to seeing it and 

taking a step forward from there. 

Mr. BOUSTANY. Well, I am following this very, very closely, and 

I would like to stay in contact as to the progress. 

Secretary LEW. I would be happy to. 

Mr. BOUSTANY. Thank you. 

I yield back. 

Chairman RYAN. Thank you. 

Mr. Neal. 

Mr. NEAL. Thank you, Mr. Chairman. 

Mr. Secretary, a word of congratulations on your EITC proposal. 

Mr. Ryan and I have spent some conversations already about this. 

And a reminder that much of the fraud that is determined in 

EITC has much to do with the lack of professional standards for 

tax preparers. We have had extensive conversations in the past 

with Mr. Camp’s staff, and there seems to be at least some consensus on that, as well. And if we are to apply the logic of not paying for things based upon what we are to do tomorrow with 179, 

perhaps we should just expand EITC and not have it paid for. 

Thanks again, as you acknowledged the auto-IRA that Mr. Tiberi 

and I have worked on. I thought we were close in the last session. 

We almost got there. And I hope, when we consider that half the 

people that get up and go to work in America every single day are 

not in a retirement plan, that we could consider more opportunities 

to expand retirement savings. 

A word of congratulations on the New Markets Tax Credit program and expanding that. That is an inducement to sound investment in urban areas across the country. And Alan Krueger was a 

terrific advocate of that, along with Build America Bonds, which 

worked quite well during those years. There was not an airport 


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that was expanded, for Members of this Committee who have one, 

that did not use Build America Bonds for that very purpose. 

Now, after pointing out that there are many avenues of agreement here and plaudits that the Administration deserves, given 

your history in Massachusetts and having worked for Tip and 

cheering for the New England Patriots, I think that we could also 

acknowledge that the proposal that the Administration has offered, 

Jack, on graduate medical education is a huge deal for us in Massachusetts. 

You do, I think, deserve some credit in the Administration for 

the lowest inflation rate as it relates to health care in the past 50 

years. And ACA has to receive some acknowledgement for that. 

You obviously are attempting to preserve and improve Medicare for 

future retirees as well as those who are receiving it now. 

But I would carefully suggest on graduate medical education, 

that that is a huge plus for America. It helps to set us aside. The 

Pacific Northwest has Boeing and Microsoft. Those of us in Massachusetts, we have graduate medical education. And I hope the Administration will treat it with the same regard that they do other 

initiatives that have been proposed. I think $16 billion, in terms of a cutback, is a bit over the top, 

and I hope that you will have due consideration for the proposal 

that you are offering and review it and really set it aside. It is a 

big economic plus for those of us in New England. 

And I will give you the next 2 minutes to talk about the proposals as I have outlined them. 

Secretary LEW. Well, Congressman, let me start with the points 

you made about the New Markets Tax Credit and the Build America Bonds. 

We obviously agree very much that they have made a huge difference. We have a new form of Build America Bonds that we are 

proposing to take them forward to the next level. And we, obviously, would propose continuing the New Markets Tax Credit, 

which I will point out was also a bipartisan creation—— 

Mr. NEAL. Exactly. 

Secretary LEW [continuing]. At the end of the Clinton Administration with Speaker Hastert. So we can do things together on a 

bipartisan basis to create real opportunity in this country. 

Obviously, the issues regarding Medicare savings are always difficult. Our budget has repeated the proposals from past budgets, 

where we have $400 billion of savings in Medicare. They are all 

hard, and, as always, we look forward to working with Congress to, 

you know, develop a path forward. 

You know, we put it in as part of a comprehensive approach to 

deal with our fiscal challenges. And I think that, you know, we 

would view the kind of entirety of the package as the way to see 

what we are putting forward. 

This is an issue that I know is of particular concern in Boston 

and Massachusetts and in New York, and we would look forward 

to continuing the conversation. 

Mr. NEAL. Thank you, Mr. Secretary. 

Thank you, Mr. Chairman. 

Chairman RYAN. Thank you. 

Mr. Roskam. 


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Mr. ROSKAM. Thank you, Mr. Chairman. 

Mr. Secretary, thanks for your time today. 

You are here commenting on the President’s budget, and the 

agency that will collect the money to enact our next budget is the 

Internal Revenue Service. They are tasked with collecting over $3 

trillion, as you know. 

You made an argument that one of the things they need is more 

resources, and let’s set that aside for a moment. The other thing 

they need is a reputation. They need a reputation as calling balls 

and strikes. They need a reputation as being a fair agency. So resources and reputation are at the foundation for any tax collection 

that is going to have integrity. 

I thought it was interesting that in your remarks and in your 

written testimony you didn’t talk about the reputation of the Internal Revenue Service and the damage that has happened in the past 

couple of years. 

Back in the summer of 2013, when you were asked on national 

television, you dismissed it—that is my word, but you were fairly 

dismissive, in that you characterized it as a ‘‘phony scandal.’’ 

Now, this Committee made a referral to the Attorney General 

last year, and I assume you have read the referral letter and the 

supporting documents, haven’t you? 

Secretary LEW. I have seen it. 

Mr. ROSKAM. And, in light of that, you wouldn’t characterize 

this as a phony scandal, would you? 

Secretary LEW. Congressman, I am happy to discuss the reputation of the IRS and these issues. 

I think the IRS is doing an extraordinarily effective job under 

very difficult circumstances, where they have been underfunded 

and not given the resources to do one of the most important jobs 

that any government does: running its revenue service. 

I have acknowledged from the beginning that the actions that 

took place with regard to the issues that are of concern there were 

very bad. And they involved a small number of people at the IRS. 

We took immediate action to discipline the people involved, to 

make sure that the supervisors who were responsible are no longer 

there. 

And I think if you look at the way the IRS is managed under 

very difficult circumstances, we are, with less resources, processing 

tax returns efficiently. We are using the online tools as much as 

possible to fill in for where we don’t have people to answer the 

phones. And we are processing refunds in a timely way. I—— 

Mr. ROSKAM. But, Secretary, to dismiss this down to, you know, 

just, ‘‘There were some bad actors’’—here is my question: What 

have you done to prevent a Lois Lerner 2.0 situation? 

Think about it. Lois Lerner was the person who put together a 

panel of three senior career employees that had to be the threshold 

before an audit could happen. Lois Lerner was then the person that 

went around that very safeguard that she structured. She said in 

an email, where she really was quite aggressive with one of her 

employees—and this is after two times this three-person panel had 

said, ‘‘Look, we are not going to pursue it.’’ 

She writes then, ‘‘I reviewed the information and thought the allegations in the documents were really damning, so I wondered 


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why we hadn’t done something with the org. As I’ve told you before, I don’t think your guys get it.’’ 

Mr. Secretary, what is it that you have done—other than calling 

this a phony scandal on national television, what have you done to 

make sure that Lois Lerner 2.0 is not possible? 

Because to simply say, well, it is just a small group of rogue employees, or, frankly, in your other interview, when you said, well, 

no political employees were behind this, that is just hiding behind 

an adjective. You know that there are only two political appointments at the Internal Revenue Service. One is the Director, and 

one is the GC. 

Secretary LEW. Congressman, I think if you look at the Inspector General report that came out, we followed all the recommendations of the Inspector General report. We have made clear that the 

behavior at issue there was unacceptable, it cannot happen again. 

We have a new Commissioner, new senior officials, who are very 

much aware of the fact that it is their responsibility to make sure 

things like that don’t happen. 

So I actually take issue with the notion that we have dismissed 

it. We haven’t dismissed it. It is one thing to take actions in response to what happens with a small number of people in a large 

agency. It is another thing to condemn the whole agency, which is 

what I believe many are doing, and that is wrong. 

Mr. ROSKAM. Well, I don’t think there is a condemnation of the 

entire agency, Mr. Secretary, but I think that when the Administration essentially comes before this Committee for years and says 

there is no problem and then senior Members of the Administration are dismissive, don’t you understand how that is—— 

Secretary LEW. Yes. I don’t—— 

Mr. ROSKAM [continuing]. Corrosive and insidious? 

Secretary LEW [continuing]. Believe we are being dismissive. I 

disagree with that. 

Mr. ROSKAM. Oh, when it is characterized as a phony scandal, 

that is dismissive. 

Secretary LEW. I think it is—— 

Mr. ROSKAM. That is: Off with you, be lively, we have this 

under control, we don’t want to hear it anymore. There is nothing 

more dismissive than calling it phony. 

I yield back. 

Chairman RYAN. Thank you. 

Mr. Becerra is recognized. 

Mr. BECERRA. Thank you, Mr. Chairman. 

Mr. Secretary, it is great to have you with us. Thank you very 

much. 

And can I start by just saying, again, thank you. You have heard 

it already. The Earned Income Tax Credit, I think that many of us 

see that, right now, while the middle class and what I call the aspiring class, those that want to get to the middle class, as they continue to get squeezed, they see everything working well in the 

economy for corporate profits and at Wall Street, but they haven’t 

yet seen their paychecks grow the way they would like. 

Thank you for speaking to those families in the middle who have 

been working hard. They have been more productive than American workers in the past. They just want to see their paychecks 


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grow. And so the Earned Income Tax Credit for those working families is going to be helpful. 

Your proposal, the President’s proposal, for an expanded child 

credit for working families who have kids, who aspire to see them 

go to college, that is going to help. 

And can I just applaud you and the President and the team for 

focusing on child care. I am fortunate. My three daughters—two of 

them are already in college, one on the way—we are there. But I 

know there are a whole lot of families back home who are wondering how they are going to get there. They have to make sure 

their kids are first taken care of. So the dependent care credit for 

those who have kids and want good daycare, good ability to take 

care of their kids while they are working, that is critical. And so 

thank you for the work that you are doing there in that regard. 

How many families does the President estimate will be helped by 

these credits that are going to middle-class and aspiring families 

in America? I’m talking about the Child Tax Credit and the Earned 

Income Tax Credit. Are we talking thousands? Are we talking—— 

Secretary LEW. No, millions. I don’t have the exact number, 

Congressman, but it is many, many millions. 

Mr. BECERRA. Yes. And I think what we are saying to those 

millions of Americans who are striving to stay in the middle class 

and ultimately go beyond the middle class is, this is going to help 

you launch because you will get good child care if the two of you 

are going to work, you will have an opportunity to get some support if you are working but not making a whole lot of money but 

you are still working. You are doing it the way we want people to 

do it. 

I want to touch just briefly on something that was raised earlier 

with regard to Social Security because it concerns me. Today, there 

are about 160 million Americans who are paying into Social Security. They have what we call the FICA deduction, right, the Federal 

Income Contribution Allocation, that is deducted. It is part of another acronym, OASDI, the Old-Age, Survivors, and Disability Insurance. 

That is what Social Security is. It is all lumped together. If you 

work and you reach retirement age, you get Social Security. If you 

work, become disabled on the job, if you paid into Social Security, 

you get Social Security even though you are disabled, or your family does. You die, but you have paid into Social Security? Your survivors get Social Security. It is insurance for the family. 

I don’t think any American works and pays into Social Security 

and says, ah, I only want my money to go into retirement, or, hey, 

I know I am in a risky job, I only want my money for Social Security to go into disability. In fact, 11 times this Congress—not this 

Congress today, but Congress over the years, with the Administrations, whatever Administration it has been, we have worked to 

make sure that we always have the money allocated for the disability side of Social Security, the survivor side of insurance for Social Security, or the retirement side of Social Security. 

But all of a sudden, we see this crisis being manufactured by 

those who say that, of the $3 trillion that Social Security has in 

its Trust Fund, none of it can be made available for Americans who 

worked hard but became disabled or for their families. Eleven 


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times over the years, Congress, with the Administration, has 

worked to make sure the money that is out there in the Trust 

Fund, it goes out to those Americans who worked and paid into the 

OSDI fund. 

And so I hope we don’t tell the 59 million Americans who today 

are receiving Social Security, 11 million of them disability insurance under Social Security, that they are in jeopardy of losing their 

money because someone wants to manufacture a crisis and say, of 

the $3 trillion the Trust Fund has, that we can’t make that available to Americans because some technical glitch here in Washington is preventing us from moving forward to do what we have 

done in the past 11 times on a bipartisan basis, to make sure 

Americans get their Social Security, whether it is retirement Social 

Security, whether it is disability Social Security, or whether it is 

because you died and now your survivors need their Social Security. I hope we don’t play that game. 

And, finally, with the last moment I have, I just want to mention, Mr. Secretary, I hope this Administration, as we move forward in trade, don’t leave out currency manipulation as something 

we attack. The last thing we need to do is send a signal that we 

are going to allow governments to cheat by manipulating their currency. If we are trying to get the companies in those countries to 

not cheat, the last thing—— 

Chairman RYAN. The time of the gentleman has expired. 

Mr. BECERRA [continuing]. You can do is allow countries to 

cheat by manipulating their currency. 

Chairman RYAN. The time of the gentleman has expired. 

Mr. BECERRA. With that, I yield back. Thank you, Mr. Chairman. 

Chairman RYAN. Maybe with somebody else’s questioning you 

can get into those issues, but in the interest of everyone’s time, Mr. 

Buchanan is recognized. 

Mr. BUCHANAN. Thank you, Mr. Chairman. 

And I want to thank the Secretary for being here today. 

As I mentioned to you a little earlier, Mr. Secretary, the numberone issue in our district and I would say a lot of Florida is the idea 

of dysfunctionality. When we serve a lot of our constituents, that 

is the biggest thing they are passionate about and concerned about. 

So, that is one of the things I am hopeful in the next 6 months, 

this year, we can work together on in a bipartisan way for the importance of the American people. 

I am concerned with the budget where we are looking at raising 

taxes another $2 trillion, more debt of another $8.5 trillion, and a 

budget basically that never balances. We are an aspirational society. You know, if you work hard and play by the rules, anything 

is possible in America. I don’t want to punish one group over another group. I will also mention that President Kennedy stated, ‘‘A 

rising tide lifts all boats.’’ 

And one of the questions I would have for you: When you talk 

to various experts, they talk about, if we could focus on growing the 

economy, instead of 2 percent, 21⁄2, growing it 4 or 5 percent— 

China is at 8 to 10 percent. But if we can get back to what we did 

in the 1990s, we could fix a lot of the challenges that we have in 

America, a lot of the problems we are talking about go away. 


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Why can’t we, or shouldn’t we be asking ourselves, on any of 

these proposals, any of these policies we are putting forward, does 

this grow the economy? How would you respond? 

Secretary LEW. Congressman, I think that is the right question. 

First, on your point about working together in a bipartisan way, 

I couldn’t agree more that it would be a good thing for the country 

and the American people would feel a lot better about Washington 

and the future of the U.S. economy if they could see us working 

well together. It has a lot to do with confidence. 

I saw it in the 1980s when we had a divided government. I saw 

it in the 1990s when we had a divided government. And you talk 

about the growth in the 1990s. We were making important policy 

decisions in a bipartisan way for much of that period of time. 

So I think that to focus on each of the individual items is important, but, ultimately, our goal has to be growth. Because if it becomes a question of, how do we cut our way to prosperity, there is 

no answer to cut our way to prosperity. There is no answer for any 

society. How do you cut the way to prosperity? 

Mr. BUCHANAN. Let me ask to be clear. You are committed and 

the Administration is committed to working with us this year to 

get tax and trade ideally done? 

Secretary LEW. Correct. 

Mr. BUCHANAN. Okay. 

The second thing I wanted to mention, because it was in your 

comments, about people need to pay—some people need to pay 

more of their fair share. The taxes now for medium or small businesses, many of them, when you add State and Federal together, 

it is almost 50 percent. I have seen it was 49.6 percent, lower in 

Florida, but in California it is higher. Then you have additional 

taxes on there. 

Where is your sense of fair share? We are looking to take the cooperate rate, ideally, from 35 to 28 or 25 percent. But yet many of 

these businesses—that is the world that I have lived in—these are 

the folks that are growing the jobs. They might have 100 jobs, but 

you can’t take 50 percent of what they earn because they would 

have nothing left because the balance of their money stays in to 

grow their inventory, to add employees, and to make additional investments. 

So what is your sense of what is fair? 

Secretary LEW. Well, you know, Congressman, one of the reasons we take up to $1 million, the amount that a small business 

can deduct in depreciation, right, when they make an investment, 

is exactly to encourage that kind of behavior, having it be advantageous to invest in your business, to invest in your workers. 

I think that—— 

Mr. BUCHANAN. But if you have a business—let me just say, 

let’s take it at the $1 million to $2 million range, with around 150 

employees—we have a lot of those all over Florida—are you saying 

that government should take half of the next million? Is that what 

you are saying? 

Secretary LEW. Well, look, it is hard to respond to a hypothetical. I don’t know what the effective tax rate in the—— 

Mr. BUCHANAN. Well, that is the tax rate. It is 49.6 across the 

country, I think. 


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Secretary LEW. The effective tax rate for most businesses is 

lower than their marginal rate, and you have to look at the entire 

numbers—— 

Mr. BUCHANAN. If you look at the number of businesses, you 

are right. But there are a lot of businesses that create a lot of jobs 

in the country that might have 300 employees, 200 employees. I 

don’t look at them as even a medium-sized business; they are still 

categorized as a small business. But to take half of their money is 

not right. 

Secretary LEW. To the extent that companies make the choice 

how to organize, either as a passthrough or as a C corp, you know, 

if it is economically advantageous to organize as a corporation, that 

is an option that is available. Companies that are choosing to be 

on the individual side obviously see benefit in being organized as 

an individual company. And we have to kind of look at—— 

Mr. BUCHANAN. My point is I think—— 

Secretary LEW [continuing]. What all the factors are. 

Mr. BUCHANAN [continuing]. We need to work on a bipartisan 

basis together—— 

Secretary LEW. We do. 

Mr. BUCHANAN [continuing]. To address that. 

Secretary LEW. Yes. I fundamentally agree with the point that 

we want the burden on small businesses to be easier and lower. 

And, you know, we think we have put some ideas forward that advance that, and we are open to working together on this issue. 

Chairman RYAN. Thank you. 

Mr. Doggett. 

Mr. DOGGETT. Thank you, Mr. Chairman. 

And thank you, Mr. Secretary. 

Am I correct that, while the Administration strongly supports a 

one-time mandatory tax of 14 percent on profits that corporations 

claim to have earned offshore only as a part of comprehensive corporate and business tax reform, the Administration continues to 

strongly oppose any stand-alone measure similar to the voluntary 

repatriation that was approved back in 2004? 

Secretary LEW. We don’t believe that the 2004 voluntary repatriation worked. It ended up costing a lot of money, it didn’t increase 

investment, and it put in place an incentive to store income overseas, waiting for the next tax holiday. 

We think we have proposed the right way to deal with this and 

think that we are now in a conversation where we can maybe do 

this the right way. 

Mr. DOGGETT. So a one-time repatriation of the type some have 

talked about really doesn’t provide a good source for transportation 

or anything else. It is a revenue-loser, not a revenue-gainer, unless 

you do it, as you recommend, as a part of comprehensive business 

tax reform. 

Secretary LEW. Yes. I think if you have estimates that show that 

a provision loses revenue, it is hard to call it a revenue-raiser. 

Mr. DOGGETT. Exactly. 

And your written testimony refers to some of the manipulation 

that some of these multinationals have engaged in. Indeed, as you 

know, there are a number of studies that have been made of that. 

One in tax year 2008 suggested that, while five tax havens had 


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half a percent of the world’s population, almost half of American 

corporate earnings claimed to have been earned offshore were 

claimed for those five countries. 

Another in 2013 suggested that somewhere between $55 billion and $133 billion of profits earned in the United States had been 

shifted abroad and that over half of these claimed offshore profits 

were located in six tax havens. 

Isn’t it true that a substantial amount of these alleged offshore 

earnings were actually earnings of operations that occurred here 

within the United States? 

Secretary LEW. Well, Congressman, it is hard for me to comment 

on individual circumstances like that, but let me take it up one 

level and say that, globally, the issue of legal tax avoidance has led 

to the erosion of the tax base. And it is an enormous concern, not 

just to the United States but worldwide. 

I mean, it is wrong for countries to have a race to the bottom, 

with, you know, zero or close-to-zero tax rates to be a magnet for 

these kinds of activities. It is also wrong for us to have a tax system that has the highest statutory rate in the world that drives 

businesses to look for these havens. 

We need to reform our broken system to make it work, to end 

inversions, to end the push. Other countries need to change their 

system and raise their standards. It is hard for us to get other 

countries to do what they need to do if we don’t do what we need 

to do. 

And I think the business-tax-reform discussion we have is something that will empower us on the world stage to try to get other 

countries to do the right thing, as well. 

Mr. DOGGETT. I hope that it will if all elements are actually 

adopted and strong anti-abuse provisions are included, as you suggest. 

Now, your selection of this 14-percent rate, I know that is considered onerous by some of those multinationals that don’t believe 

they need to pay the Treasury any more than they pay their CEO 

or their lobbyist to ensure that the laws remain like they are and 

don’t feel they have any real responsibility to pay for the cost of 

our national security from which they benefit so much. 

But it seems to me that telling corporations they pay less than 

a nickel and a dime on a dollar of profits that have really been 

earned in the United States is rather generous. It is better than 

the nickel that was done in 2004, a little higher than the 9 cents 

that Dave Camp recommended last year, but it ought not to be the 

opening bid. It ought to be the floor in looking at this whole issue. 

And, of course, all these corporations, if they really pay taxes 

abroad, under your proposal they are entitled to a credit for that. 

Secretary LEW. Right. 

Mr. DOGGETT. The stateless income to which you refer—— 

Secretary LEW. Correct. 

Mr. DOGGETT [continuing]. That has been hidden from taxes 

everywhere, that is an example of corporate tax avoidance that we 

need to put a stop to and not reward. 

Secretary LEW. Congressman, I totally agree that we need to 

make sure we end up with a toll charge that is set at a reasonable 

level. We have proposed 14 percent. I know it is a little higher than 


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some other proposals, but I think the credit for taxes overseas 

brings the effective rate down considerably. 

You know, we have proposed a pro rata credit because it is at 

such a reduced rate, so it would be roughly 40 percent of the taxes 

paid. If you use the example of a firm that has a billion dollars in 

accumulated earnings and has paid $100 million in foreign tax, you 

know, they would get $40 million credit and they would end up 

paying $100 million, or 10 percent. So even the 14 percent exaggerates the impact on most firms. 

Mr. DOGGETT. Thank you. 

Chairman RYAN. Mr. Smith. 

Mr. SMITH OF NEBRASKA. Thank you, Mr. Chairman. 

Thank you, Secretary Lew, for being here with us today. 

Let me begin with a very quick question. Do you believe that the 

estate tax is double taxation? 

Secretary LEW. No. 

Mr. SMITH OF NEBRASKA. No. Okay. 

Back in April of 2013, you and I had a constructive and, I think, 

a thoughtful exchange on business tax reform versus comprehensive tax reform. And, at the time, you said, ‘‘We want to work 

together on tax reform on the individual side, as well, to make it 

simpler. The thing that I think we have universal agreement on is 

that it is just too complicated.’’ 

In light of what you said 2 years ago, I certainly want to raise 

for you some concerns I hear regularly from constituents about the 

stepped-up basis and the estate tax. 

It is obviously no secret that we have fundamental disagreement 

on the level of the estate tax. I believe it is a double taxation, and 

you disagree with that. That is fine. A lot of us would prefer zero 

estate tax, and we know the Administration would actually, I 

think, probably prefer a higher estate tax. 

But one thing I am consistently finding and certainly being told 

by farmers and ranchers and small-business owners is that, while 

dealing with the estate tax is certainly challenging, it isn’t anywhere near the administrative nightmare removing the allowance 

for stepped-up basis would cause. 

And so, as an example, when a family passing on the agricultured land which has been held for decades has to calculate capital 

gains, the family could face multiple challenges, which only begin 

with finding the value of land bought so long ago, determining purchase values for multiple tracts purchased in different times, and 

determining whether any land was sold off prior to inheritance. 

And so such a proposal is certainly the opposite of tax reform. 

In fact, it only makes compliance more difficult. 

Have you or anyone at the IRS looked into what the added compliance time and costs of this provision would be? 

Secretary LEW. Congressman, I am happy to get back to you on 

what the estimates on the compliance would be. But I think that 

the design of the provision that we have put in our budget was 

really very much to make it easier for taxpayers, not harder for 

taxpayers, to comply with. There are exemptions that are quite 

generous. There are 15 years to make the tax payments that are 

due so that it would not result in a forced sale. And we think that 

for the vast majority of assets which, you know, are subject to 


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stepped-up basis, things like stocks and bonds, those questions are 

a little bit simpler to answer. 

On real estate, obviously, we currently have a system where ultimately you have to know what your basis is in real estate. I don’t 

know why it would be more complicated in stepped-up basis than 

it is in other contexts, but I am happy to follow up with you. 

Mr. SMITH OF NEBRASKA. Okay. Well, I appreciate that. And 

the feedback I get from constituents is that it would certainly add 

to the complexity. 

I would also like to touch on another provision in the President’s 

budget, the financial fee on certain banking institutions. Has the 

Treasury or any other department in the Administration studied 

the effect that this proposed fee would have on the availability and 

cost of credit for families and businesses in the marketplace? 

Secretary LEW. Congressman, we have looked at what it would 

mean in terms of its percentage impact. It is obviously a fairly 

small fee, just in terms of the size of it on their total basis. 

And it is designed to have an effect that would be complementary 

with many of the reforms that we have made that make our system 

safer and sounder. Right now, we have a system that is heavily 

weighted toward leveraged exposure. This would make it a bit 

more costly to have leverage, but it would not make it prohibitively 

costly. And we think that will lead to a safer financial system. 

We also think that when you look in the context overall of tax 

reform, there are other benefits that would go to financial firms, 

and, net, it is a fair and a good policy. 

Mr. SMITH OF NEBRASKA. Shifting gears just a little bit, I 

have a question on extenders. The temporary extenders that have 

taken place extended roughly 2 years at a time unpaid for in the 

past. Is that accurate? 

Secretary LEW. It has sometimes paid for, sometimes not. Often 

not. 

Mr. SMITH OF NEBRASKA. Often not. That’s correct. I agree 

with that. 

And could it be, I think, a good idea, as well, to extend those on 

a permanent basis? Would that not be more intellectually honest 

to take a few of those and make them permanent rather than just 

continually extend unpaid for on a so-called temporary basis? 

Secretary LEW. That is exactly what we propose. 

I mean, as somebody who has worked in tax policy in various 

ways for 35, 40 years, it is hard to defend provisions that come and 

go and that have deadlines that pass, and it makes it hard for businesses to know what to expect and how to plan. You end up enacting things retroactively that can’t possibly affect the behavior that 

was made in a rational way. 

We do that, we pick and choose, and we pay for it in the context 

of tax reform. 

Mr. SMITH OF NEBRASKA. Okay. 

Secretary LEW. And that is what I think should be the basis of 

our bipartisan conversation. 

Mr. SMITH OF NEBRASKA. Thank you, Mr. Chairman. 

Chairman RYAN. Thank you. 

Mr. Thompson. 

Mr. THOMPSON. Thank you, Mr. Chairman. 


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Mr. Secretary, thank you very much for being here. 

And I, too, want to add my appreciation to you and the President 

for submitting a budget that attempts to really focus on the middle 

class. While I agree with my friend from Florida that businesses 

across this great country are very, very important, they do a great 

service, they provide great products, the truth of the matter is it 

is those consumers, largely in the middle class, who are the job 

creators in this country. If there is no middle class, then there is 

nobody to buy all the great things that our businesses sell and 

manufacture. All the business stuff just goes out the door. So it is 

important that we do focus on the middle class. 

And there is no better place to do that than through investment 

in infrastructure. So we may disagree with how we get there. You 

have taken a very important first step in recognizing the need to 

invest in the critical infrastructure that keeps everything going 

across the country. 

I have a couple of questions I would like to ask, a little more specific stuff. One is on something that has come to my attention 

called a cash-rich split-off. And you are smiling, so I am assuming 

you know what it is that I am talking about. I think it came to 

light when Yahoo was going to buy Alibaba. It is where they take 

a low-basis asset and stock and exchange that for a line of business 

in cash to avoid any gain in appreciation. 

And that sounds a lot like that legal tax avoidance that you were 

talking about, or, using another term, a great, big, huge loophole. 

Is this something that you are looking at? Does it need legislation 

to close that loophole, or is it something that can be done administratively? 

Secretary LEW. Well, Congressman, I obviously can’t comment 

on what a specific company may or may not do with regard to its 

tax planning or transactions. But, under current law, a company 

can split off component parts on a tax-free basis as long as there 

is an active business in each part. But if there is such a spin-off, 

the firm would be liable for capital gains if the firm sold the shares 

involved. 

So I would have to know more about the transaction. I don’t 

know off the top of my head whether there is any administrative 

issue here, but I am happy to follow up. 

Mr. THOMPSON. Well, it is something I plan on looking into, 

and I would appreciate it if we could get your shop to help us better understand it and figure out how we in fact close that loophole. 

Also, I agree with my friend from Massachusetts that the New 

Markets Tax Credit is extremely important. And I would like to 

know if you have given any thought about including the BRAC status as a criterion in the 2015 applications? 

I think it is important to recognize that BRAC has been responsible for a lot of areas experiencing severe economic downturn. And 

there have been some examples of closed military bases that have 

really added to positive economic growth through creative means. 

And I would think that the New Markets Tax Credit would be a 

great place to go. So I would like to get you guys to look at that, 

as well. 


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Secretary LEW. Congressman, I am not aware of any discussion 

regarding BRAC eligibility, but I am happy to take it back and look 

at it. 

Mr. THOMPSON. Thank you so much. 

And then, also, LIFO—and we have had this discussion before— 

last in, first out. The proposal in the budget is a little disheartening, not only because it is a LIFO, which is very, very disruptive 

in general, but, specifically, in this proposal, you have a retroactive 

provision in there, if I understand it correctly. So, if enacted, it 

would go back decades and take back money that was generated 

through a tax policy that was on the books and legal. 

This would devastate not only small family businesses but the 

employees that they employ today. This has shut businesses down, 

some of those in my district that you are very well aware of. 

And is there a reason for the retroactivity? I can understand a 

LIFO forward, but going back just seems terribly unfair and destructive. 

Secretary LEW. Congressman, there has been a discussion about 

the proper accounting standards for a long time. And, obviously, 

the attempt is to, as part of tax reform, come up with a better, 

more fair, efficient approach. I am happy to look at the impact of 

the retroactivity on the firms that you are concerned about, but the 

goal was to fix what is broken in our Tax Code. It is obviously not 

to cause undue burden. 

Mr. THOMPSON. Okay. Well, I look forward to working with 

you on it. 

Thank you. 

Chairman RYAN. Thank you. 

Ms. Jenkins. 

Ms. JENKINS. Thank you, Mr. Chairman. 

Mr. Secretary, thank you for coming over today to testify on the 

President’s budget. 

I would like to draw your attention to the proposal on page 53 

of the budget, where the President proposed—— 

Secretary LEW. I don’t have the budget in front of me, so if you 

could tell me what is on page 53? 

Ms. JENKINS. I would be happy to. It is where the President 

proposes a tax on future 529 college savings account distributions. 

When the President proposed this tax 2 weeks ago, I was 

shocked to see him target these very popular plans. I was equally 

relieved when he withdrew his proposal last Tuesday, but, apparently, he changed course too late to remove it from the budget proposal. 

Then, the next day, the Administration spokesman made a confusing statement that inferred that the President was only withdrawing the 529 tax provision due to political pressure and that he 

still stands behind the tax as good policy. 

So, Mr. Secretary, can you please clarify for our Committee, first, 

does the President still support the concept of a tax on 529 plans, 

and does he believe that this tax would be good policy? And, second, can Congress expect to see the President try to revive this 529 

tax again? 


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Secretary LEW. So, Congresswoman, just to be clear, the White 

House indicated quite clearly that the President is not going to be 

pushing for this provision. It was obviously already in the budget. 

And I think the comment on policy is not saying that—it is something they were pushing, that was causing a lot of distraction. 

There is an important discussion to be had here on many tax 

issues, some of them regarding education, that would provide real 

opportunity for middle-class families. Clearly, it wouldn’t have gone 

in the budget if there wasn’t a solid policy reason for it. And I 

think the comment was to say that it is something that really does, 

you know, largely benefit more affluent people. And it is something 

that, in the context of a plan to make middle-class college education affordable, there is a basis for. 

He is not pushing it. We are not pushing it. It was never a 

key part of our plan. It is not a huge dollar impact on the whole 

budget. And I don’t think there should be any confusion on the 

issue. 

Ms. JENKINS. Okay. So he still thinks it is good policy, but for 

political reasons he is going to withdraw—— 

Secretary LEW. No—— 

Ms. JENKINS [continuing]. The proposal. 

Secretary LEW. There is a lot of things that one can justify on 

policy grounds that don’t go forward. 

Ms. JENKINS. Okay. Thank you for somewhat of a clarification 

on that confusion. 

Now I would like to just briefly discuss H.R. 529, which I introduced on a bipartisan basis with Congressman Ron Kind from Wisconsin last week. 

And I have been a champion of 529 plans for a very long time, 

since I was a State treasurer back in Kansas. And this is the third 

Congress that we have introduced this legislation. It strengthens 

529 plans in order to make them more attractive to middle-class 

folks across the country who simply want to save for their kids’ college education. 

And this bill, in particular, makes some commonsense enhancements to 529 plans that will allow students to purchase a computer 

with their 529 plans. It allows funds to be redeposited without penalty if a student withdraws from school for any reason. And it removes some outdated administrative paperwork requirements. 

So, Mr. Secretary, what is your take on this legislation? Do you 

agree with us that these 529 plan improvements will help middleclass folks save for their college expenses? And will the Administration support the bill? 

Secretary LEW. Congresswoman, I am happy to look at the proposal and get back to you. Obviously, with 529s on the books, we 

would look forward to making sure that they work as effectively as 

possible. I am not familiar with the details of the legislative proposal but would be happy to look at it and get back to you. 

Ms. JENKINS. Okay. Well, I look forward to working with you. 

Thank you. 

I yield back. 

Chairman RYAN. Thank you. Mr. Larson. 

Mr. LARSON. Well, thank you, Mr. Chairman, and thank you, 

Mr. Lew, for your service to the country, and thank you, Mr. ChairVerDate Sep 11 2014 06:01 Apr 10, 2017 Jkt 022331 PO 00000 Frm 00063 Fmt 6633 Sfmt 6602 I:\WAYS\WAYSPS\22331\22331.XXX 22331

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man, for this very productive hearing. On a spontaneous note in 

observing my colleagues that meet today on this Committee, and 

we all know that Congress operates at about a 9-to-11 percent approval rating, we have one of the icon figures in American industry, the most ambitious gentleman. I propose in the spirit of what 

Mr. Camp did last year and, Mr. Chairman, your initiatives in 

keeping with keeping this Committee open and on pace that we 

continually have Johnson and Lewis forums where not only are 

they there for the Committee, but we invite other Members of Congress who would be interested as a way to restore what we all 

know individually is the great strength of this Committee and the 

opportunity for us to work across the aisle with one another. 

We had several issues that were explored today, and in rapid 

order, I think first with respect to infrastructure, Mr. Chairman, 

we had several letters that were sent last year with respect to 

making sure that we had hearings on infrastructure and discussed 

the tax aspects of this as well. Separately, Mr. Blumenauer also 

sent a letter, and I know that that is at the core of putting people 

back to work in this economy. I hope we can continue down that 

line. Maybe that could be the start of a Johnson/Lewis discussion 

and forum on infrastructure. 

Also, on Social Security, as was brought up by Mr. Johnson, 

there is a proposal out there that provides a tax cut and tax relief 

for seniors that is paid for. I hope all Members will consider this 

proposal as a way in which we can solve this problem into the next 

century. 

Third, on the Affordable Care Act, you know, with respect to 

whatever is going to come on the floor tomorrow, I think it is long 

overdue that we recognize a proposal put forward by the Heritage 

Foundation and adopted successfully by Governor Romney as something that we all can work together on for the benefit of the American people. 

And, of course, with respect to currency and trade, I know that 

the Administration will adhere some of the concerns that were 

raised there. 

Lastly, Mr. Lew, I believe you were asked a question earlier 

about dynamic scoring and didn’t have an opportunity to fully answer the question. I wanted to provide you with a few moments if 

you could to expand upon your thoughts on dynamic scoring. 

Secretary LEW. Thank you very much, Mr. Larson. You know, 

the question of how we score legislation is obviously inherently a 

technical and complicated one. We have established practices that 

are meant to be as accurate as possible, and the risk of going from 

something that is known to be the most accurate to something that 

has all kinds of uncertainty in it is something we worry greatly 

about because I think there is a shared concern that we not blow 

a hole in our budget because our estimates are wrong. 

So there is some element—I was asked if there is any dynamic 

scoring in the Office of Tax Policy and Joint Tax Committee scoring 

today. There is some, but if one goes further and uses assumptions 

that drive the numbers in a way that may not turn out to be correct, we will all regret it after the bills actually get added up, and 

I didn’t want there to be—I don’t want there to be any misunderstanding of what our position is on—we agree with current scoring 


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rules. We have always been open to alternative measures and to 

understanding what the kind of up side and down side risks are, 

but to use those to make decisions that have real consequences is 

very different. 

Mr. LARSON. Well, thank you, Mr. Chairman. I know that Mr. 

Neal also makes the point on several different occasions where we 

apply dynamic scoring, and if we are going to look at dynamic scoring, we have to make sure that we are willing to apply that, and 

it may be that it is a very sound practice. I am not an economist, 

but what do we apply it to? And I think it can be applied equally 

across the board to have the same effective results. And, lastly, to 

the Chairman as well, the last couple of weeks have been painful 

with Green Bay and everything else, but I wanted you to know 

that I didn’t take it personally, you know, and I wanted to—we got 

this picture that we wanted to provide to you, and I will give it to 

you, Mr. Chairman. It is a—— 

Chairman RYAN. I can’t see it from here. Describe it. 

Mr. LARSON. It is a picture of Tom Brady, and I think once 

we—— 

Chairman RYAN. With objection, it shall not be included in the 

record, so at least the Seahawks now know how Packer fans feel. 

Mr. LARSON. But we will pass this up. 

Mr. LEVIN. I think his time has expired. 

Chairman RYAN. Yes, his time has expired. 

Mr. Schock is recognized. 

Mr. SCHOCK. Thank you, Mr. Secretary. Thank you for being 

here. 

As you know, the Federal debt limit will expire on March 15th. 

Do you know roughly what our debt limit will be on or about 

March 15th when our debt limit is set to expire? 

Secretary LEW. Well, I don’t have an exact estimate right now. 

Obviously, we are several—two months’ of data away. I think that 

the challenge of funding our government is one that we fundamentally make when we make decisions on what our tax and spending 

policy is. 

Mr. SCHOCK. Do you know roughly—— 

Secretary LEW. Not when the debt limit is—— 

Mr. SCHOCK. Sure. When March 15th rolls around, have you 

and your staff begun looking at how long you will be able to use 

extraordinary measures beyond that point? 

Secretary LEW. Yes, we have obviously started looking, but I 

won’t be able to answer that question with clarity until we get 

through tax season and we know what our cash balances are in tax 

season. 

Mr. SCHOCK. Well, that is going to be a problem, because 

March 15th is the deadline. Tax season is April 15th. 

Secretary LEW. Yes, I—there is—you know, all—— 

Mr. SCHOCK. Are you saying you are not going to know until 

April or March? 

Secretary LEW. All the public estimates, you know, CBO’s estimates, show that we have some period of time. You asked me how 

long it goes? I don’t think we have any kind of a crisis on March 

15th. I can’t tell you exactly how long it goes, and that is what I 

thought you were asking. 


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Mr. SCHOCK. Okay. Yes. 

Secretary LEW. It is the outer limit, not the initial period where 

the question comes in. 

Mr. SCHOCK. Okay. Can you get back to us with a rough estimate? 

Secretary LEW. Yes. We will, as we always do, stay closely in 

touch with the Committee as our understanding develops of what 

the projections look like. We think it is important for Congress to 

have clarity on this and we will remain—— 

Mr. SCHOCK. Likewise. Thank you. 

Following up on a letter that I sent to you last January, it was 

co-signed by 17 Members of the Ways and Means Committee, dealing with FATCA, I am still having trouble understanding why 

Treasury wants FATCA to regulate non-financial, non-cash value 

insurance. Can you update Members of the Committee, at least the 

17 of us here that signed that letter, on the status of your agency’s 

deliberations regarding the relationship between non-financial products and FATCA? 

Secretary LEW. You know, Congressman, our goal in FATCA, 

and really now an international goal, because FATCA has been 

adopted pretty much as an international norm, is to make sure 

that there is the kind of transparency that permits tax authorities 

to see where there is behavior that is evading tax systems and to 

get accurate reporting on offshore accounts. 

You know, we believe that the proposals we have made, the law 

and the proposal we have made advance that. I would be happy to 

follow up with you on the specific issues with regard to the entities 

you have described. 

Mr. SCHOCK. Okay. I look forward to doing that. 

Finally, year in and year out the Administration comes forward 

with a budget, and part of the framework is always the desire to 

make our corporate tax reform more competitive. You have laid out 

a benchmark of I think 28 percent, ideally 25 percent for manufacturing. But I will tell you when I am back in my district, the frustration is not just among employers with the Tax Code and the 

complications—complexity of the Tax Code, it is really with individuals, and if there is one message I heard from my constituents 

after the Camp draft came out last year, it was that they, as individual taxpayers, were excited at the prospect that 9 out of 10 of 

them would be able to do their own tax return on a single piece 

of paper, take a standard deduction, and be done. 

Why is the Administration not equally energized, motivated, and 

deliberative about ensuring that not just our Tax Code is simplified 

and made easier for corporations and manufacturers, but also for 

individuals? Is the Administration willing to work with us on creating a competitive individual tax reform? 

Secretary LEW. We very much agree with the goal of simplifying 

the Tax Code. A number of our proposals were designed to take 

provisions like the education provisions and simplify them. There 

is always a tension between things being simple and them not 

being reflective of the complexity of the different situations that 

the provisions apply in. You don’t want to have cliffs in the Tax 

Code. The way you avoid cliffs is through provisions that tend to 

be more complicated. So there are good reasons for some of the proVerDate Sep 11 2014 06:01 Apr 10, 2017 Jkt 022331 PO 00000 Frm 00066 Fmt 6633 Sfmt 6602 I:\WAYS\WAYSPS\22331\22331.XXX 22331

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visions not being totally simple, but the goal of simplifying as much 

as we can is one that we share. 

Mr. SCHOCK. Okay. I look forward to that. 

I would just offer up as we both share the goal of helping those 

who have been left out of an economic recovery, the Administration 

continues to talk the minimum wage, and I would just point to the 

President’s home State, where I am a Congressman, we have now 

raised the minimum wage four times in the last 10 years. Each 

year we have raised the minimum wage the percent of people living 

in poverty has gone up. The percent of people unemployed has gone 

up, and Illinois now leads the Midwest in percent of people in poverty and percent of unemployment, and I think we need to look at 

a different strategy here at the Federal level, and I would harken 

back to the days of JFK when he cut taxes and the percent of people living in poverty went down and the percent of people making 

a living wage went up, and I hope that we can embrace a JFK 

strategy with this Congress and this President. 

Thank you. 

Chairman RYAN. Thank you. 

Mr. Blumenauer. 

Mr. BLUMENAUER. Thank you, Mr. Chairman. 

Mr. Lew, thank you for being here. I appreciate your reference 

to Congress not hollowing out the IRS so that we can actually administer programs and save taxpayer money and give them better 

service. I think that is something we need to focus a little attention 

on. 

I also appreciate the fact that you are here as somebody who 

knows what a balanced budget looks like. If memory serves, you 

were at OMB when we had three consecutive years of budget surpluses. So you have some unique authority as an Administration 

spokesperson in being able to help guide these conversations and 

give some perspective. 

I think you were also on the staff of Speaker O’Neill back at a 

time when there were some interesting policy initiatives where you 

played a key role where we were able to come together, look for 

some long-term perspective, and make a difference, even bridging 

the gap between President Reagan and Speaker O’Neill famously 

working together. 

I have appreciated your offering up some, I think, complex and 

timely series of proposals, many of which I find appealing and look 

forward to a deeper dive, and I appreciate that the Administration 

continues to call for infrastructure investment. 

Based on my limited contact with the President and watching, I 

sincerely believe he is investing intellectually, politically in rebuilding and renewing America. 

Some of the policies that have come forward to try to support 

that have been difficult to achieve. I was struck—actually I read 

an op ed by my colleague from Ohio, Mr. Renacci, that really talked 

about approaching this in a comprehensive fashion. Something that 

needs to be sustainable. It needs to be adequate to cover the job. 

It needs to revisit the user pay principle. That has been something 

that is—that provides us with sustainability. 

Now, President Reagan in 1982 called out a challenge to Americans in his Thanksgiving Day address calling on Congress to come 


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back and actually more than double the gas tax, because we hadn’t 

raised the gas tax in 23 years. The President pointed out that this 

was a user fee that would be able to deal with deteriorating American infrastructure and move us forward in the future. It is a 

speech I think almost any of us could give today. Members of Congress, the President, I wish we—only it is 22 years since we have 

raised the gas tax instead of 23. 

I was curious if, based on your experience with Speaker O’Neill 

and Ronald Reagan, who were able to come forward to deal with 

the serious problem with American infrastructure on a bipartisan 

basis and raise the user fee, if, by any chance your proposal is not 

embraced unanimously by Congress and it moves forward and is 

enacted into law, if you have some thoughts about what we might 

be able to do moving forward to support the coalition that ranges 

from business to labor, truckers to AAA, environmentalists, local 

government, contractors, who all agree, as expressed in The Washington Post editorial again today, amidst the crying need and falling gas prices, if there isn’t something that could be done to deal 

with a user fee adjustment? 

Secretary LEW. Congressman Blumenauer, I know that you and 

I have discussed infrastructure for many years, and you have a 

passion for rebuilding this country that we share. I think if you 

look back at the 1980s, we found a pathway for bipartisan agreements on important issues; 1983 Social Security reform, 1986 tax 

reform. And it was also during the Clinton Administration in 1997 

we had the balanced budget agreement, bipartisan balanced budget 

agreement. 

I think that what we have put forward in our plan to use the 

one-time savings from tax reform to fund infrastructure has all of 

the ingredients about being something that could become a basis 

for a bipartisan agreement. We deliberately came up with an approach that we thought would provide that opportunity. 

Obviously, if Congress has other ideas, we will look at ideas that 

come forward, and we will work with Congress to find a way. What 

we have to do is meet our needs to invest in infrastructure in this 

country, because it is doing a disservice to future generations to 

leave behind a crumbling infrastructure. The way to build a better 

future is to think ahead and build it today. 

Mr. BLUMENAUER. Great. I hope you will consider that as a 

fallback in case your proposal—— 

Chairman RYAN. Thank you. The time of the gentleman has expired. 

We are not going to do two to one. So for the people on the Republican side of the aisle, we will do Paulsen, Marchant, then we 

will go over to Mr. Pascrell. 

So Mr. Paulsen is recognized. 

Sorry. He is gone. No, he is not. 

Mr. Marchant is recognized. 

Mr. MARCHANT. Thank you, Mr. Chairman. 

Secretary, I would like to discuss a couple of issues with you that 

I hear about every time I go back home and have a town hall meeting. 

In reading the Congressional Budget Office projection of The 

Budget and Economic Outlook: 2014 to 2024, it appears that we 


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will end up this 2014 with about a $492 billion deficit, and then 

about a $469 billion deficit, a little less than that, in 2015, but in 

2022 through 2024, we will be back to $1 trillion a year deficits, 

and this is very upsetting to the people that I represent. It is very 

upsetting to all of us on this panel. 

Does this budget that the President has prepared and presented 

to us change the trajectory of that debt? Does it change the trajectory of the size of government? Does it do anything to return us 

to a balanced budget, or does it end up in 10 years being back at 

a trillion dollars a year? 

Secretary LEW. Congressman, if you look at the deficit as a percentage of our economy, it is a percentage of GDP, we maintain it 

through the period 2025 in the mid 2s. At 21⁄2 percent is where it 

ends up. 

Obviously, our economy is growing and 21⁄2 percent of a larger 

number is a larger number, but the measure of whether we are 

making progress and maintaining the progress, I believe, is looking 

at the deficit as a percentage of GDP. 

Mr. MARCHANT. So the goal of the Administration and the 

Treasury is to not balance the budget or diminish the debt that we 

already have, but to maintain a percentage of GDP? 

Secretary LEW. No. Look, I think our goal is to grow the economy and to find the right balance between fiscal policies that keep 

us on a sustainable path and give us the ability to invest in the 

future and make sure that we have a growing economy. The real 

answer is to have a growing economy. 

I believe we have presented a plan, a framework, for doing that. 

I think that if you look at when we hit what is called primary balance when the only deficit is related to servicing past debt, it happens, you know, in this period, and then there is still need to focus 

on the future. I am not saying that this is the end of the discussion 

on fiscal policy. 

I think if you look over the last few years, we have done a tremendous amount to reduce the deficit as a percentage of GDP. It 

is a fraction—it is a quarter of what it was. 

Mr. MARCHANT. Define primary balance for the people that are 

out there listening to this. 

Secretary LEW. The question is what is driving whatever deficit 

you have, and if the only deficit is interest on past debt, that is different than if you are building up new expenses by buying new 

things or paying for new things, and we hit that point in this window where the only deficits we have are attributable to servicing 

prior debts. 

I am—that is not the same as balance. I would not suggest that 

it is balance, but it is something that is used as a test of fiscal sustainability because the situation is under control if you are in primary balance. 

Mr. MARCHANT. The other thing I want to discuss with you, as 

you know, I am from Texas, and we in Texas and in the entire 

West believe that the oil and gas industry was one of the most critical things in industries that took us out of this last recession, provided good jobs, and now we open this budget up and find out that 

the oil and gas industry, which admittedly has had some setbacks 


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in the last 2 months, is going to have a $91⁄2 billion—a $95 billion 

additional tax bill in this budget. 

Can you give me an explanation for why the Administration 

would feel like that would be a great reward for this industry for 

its performance in this economy, and how it could possibly handle 

that kind of additional tax burden in the current scenario? 

Secretary LEW. Congressman, the energy revolution has done a 

tremendous amount to drive our economy forward, and energy 

prices go up and down and there will be, you know, natural 

tendencies for the industry to grow in some periods more than in 

others. 

We don’t believe that the Tax Code should be driving activity in 

a way that makes investment in energy as specially treated as it 

is right now under current law. We don’t think that it is necessary 

for there to be profitable businesses in the energy area. Obviously, 

this is a moment where lower energy prices are creating special 

pressures which we are very sensitive to. There is going to be a regional impact, but over time we have seen that, you know, letting 

the market forces work is better than having a Tax Code that 

drives investment. 

Chairman RYAN. That is very enlightening. Thank you. 

Mrs. Black. 

Mr. MARCHANT. You probably misspoke. 

Chairman RYAN. Yes. Did you mean you don’t think there ought 

to be profitable businesses in this area? 

Secretary LEW. No. I said I don’t think that we need to change 

current tax provisions for there to be profitable businesses. 

Chairman RYAN. Okay. I think you did misspeak. 

Secretary LEW. If I misspoke, let me correct that. I was speaking 

to the tax provisions not to—we support—— 

Chairman RYAN. It didn’t come out the right way. 

Secretary LEW. We support a strong and thriving energy industry, and we wish them to be profitable. 

Chairman RYAN. Mrs. Black. 

Mrs. BLACK. Thank you, Mr. Chairman, and thank you, Mr. 

Lew, for being here, and we always have to watch when we say 

something and get a little tongue twisted, because we will obviously have that come back to us. 

Secretary LEW. I appreciate the opportunity to clarify. 

Mrs. BLACK. I want to come back to 2 years ago when you were 

before this Committee and we were talking about the budget and 

about the balance, and I want to go back to a couple of things that 

were said in here, my colleague from Texas talking about balancing 

the budget. As a matter of fact, we see in this budget that we are 

going to increase our spending by $2.4 trillion over the next 10 

years. We are going to add $8.5 trillion in debt to our current debt, 

and I know that you cannot tell us what that might look like here 

as we look at the debt limit, but I will be very interested to see 

what that is going to turn out to be, and then we are going to increase Federal spending by $240 billion in just this next year. 

You talk about in both your written comments and your verbal 

comments that you gave us, you talk about this being a balanced 

fiscal approach. In my life with my parents teaching me that a balanced fiscal approach is not to have a lot of debt, and when I look 


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at what we are leaving for the future of our children, not having 

a lot of debt is also very important. 

So I am very concerned about us not getting to balance, and that 

was a big part of the conversation we had 2 years ago is that the 

President’s budget did not ever come to a balance, and you mentioned about growing the economy, but if we see the debt that we 

owe and there is an increase in interest rates, we are not going to 

be able to sustain, no matter how much growth we have, in paying 

back our debt. So I am very concerned about that. 

I want to go to one other thing that you said in your opening 

comments about the economy increasing job creation, and I want 

to do like Paul Harvey says, the rest of the story, because the rest 

of the story is more than just looking at unemployment. 

I want to read to you a clip that is out of MarketWatch which 

was published on January 9th, and it says, ‘‘The U.S. added 

252,000 jobs, which is absolutely great that we are adding jobs in 

December, and the unemployment rate fell to 5.6 from 5.8, but the 

hourly wages declined and more Americans dropped out of the 

workforce.’’ So when we talk about unemployment rate, that really 

is not the true number that we should be looking at. As a matter 

of fact, they end their article by saying, ‘‘Yet the labor workforce 

participation rate dropped by .2 percent in December to 62.7 percent, matching the post recession rate and the lowest level that we 

have seen since 1978.’’ 

So when we talk about having a good economy, and as you report, I think we do have to be very careful about how we use numbers, because these policies that are being set forward don’t show 

us that we are having an increase in the middle-class value of their 

life by having decreased wages, a third of the people who could 

potentially be working not in the workforce, and this is very disturbing. 

There are policies that are set by this Administration that do affect this, and I think we have to be careful as you chronicle what 

is happening and what sounds to be such a cheery thing to really 

say what the truth is. 

Now I am going to get to my final question here, and I know I 

am not leaving you a lot of time, but there is so much to talk about, 

and that is what I hear in the frustration of the people back in my 

district. In particular, in their savings for their children’s future in 

education and also their retirement. And, as you know, we had an 

opportunity to work across the aisle. Congressman Davis and myself worked on the tax breaks—the loophole—or, excuse me, the 

complicated Tax Code having to do with education taxes, 15 different education tax breaks in the Code, 90 pages in the IRS manual for the instructions. We put out a plan that was passed here 

in the House. It did not move forward in the Senate, and in the 

very little time that I am leaving you to respond, will you assure 

us that the President will work with us in this particular area, because education is becoming much more expensive, and we would 

love to have a conversation to have him consider the proposals that 

we put forward that we think are very commonsense and very good 

proposals that allow the middle class to actually use the Tax Code 

to help them in educating their children. I am leaving you with 30 

seconds. I apologize. 


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Secretary LEW. I am not sure how to address all those issues in 

30 seconds, but I will talk fast. 

We have tried to be very prudent in our assumptions about interest rates in our budget. We are assuming that between 2020 and 

2025, interest rates will be, you know, roughly 41⁄2 percent. They 

are now much lower than that. So we have built into our forecast 

the assumption that interest rates will go up over this period of 

time. 

The challenge of paying down our debt is one that is going to 

take a long time. As long as we are maintaining the current deficit 

projections and we can invest in a growing future economy, we 

think we have the best chance of having that kind of strong future. 

And then the Chairman is telling me I am out of time so I can’t 

get into the other issues. 

Mrs. BLACK. Could Mr. Chairman just have him acknowledge 

that he will work with us on this education tax? 

Secretary LEW. Yes. 

Mrs. BLACK. I would appreciate it. 

Secretary LEW. We obviously have a robust set of proposals in 

here in education. 

Mrs. BLACK. Thank you. 

Secretary LEW. We hope you will work with us and we will work 

with you. 

Chairman RYAN. I am doing this for your 1 o’clock. 

Mr. Pascrell. 

Mr. PASCRELL. Thank you, Mr. Chairman, and thank you, Secretary, for your service. 

As you know, the budget does talk about a lot of investments. It 

is a proposal. The investments I am talking about like the Child 

Care Tax Credit, we have introduced legislation along those lines, 

as well as the new Second Earner Tax Credit, improvements in our 

education tax incentives. 

So you propose paying for these middle-class investments by closing tax loopholes and—which primarily benefit the more wealthy 

Americans who have been doing pretty well for themselves. 

Now, just during this current recovery, not just during this current recovery, but over the past 30 years, while the average Americans wages have been stagnant, think of where it would have been 

if we didn’t have a stimulus package or the ACA as an example. 

Now, my friends on the other side, and I don’t use that as 

being a wise guy, despite their recent newfound commitment to the 

problem of income inequality, have predictably cried class warfare. 

They are up to it again. 

Our Chairman, Mr. Ryan, who we are counting on to bring us 

together in this Committee, said this Sunday on Meet the Press regarding the Administration’s budget, ‘‘What I think the President 

is trying to do here is to again exploit envy economics. This top 

down redistribution doesn’t work. We have been doing it for 6 

years. Look, it may make for good politics. It doesn’t make for good 

economic growth.’’ 

Now, Secretary Lew, you served in the Clinton Administration 

back in the early ’90s. Do you remember that big fight over the tax 

increase? We have had some big fights over that policy. Ultimately 

taxes on the wealthy were increased. Meanwhile, at the beginning 


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of the Bush Administration, we tried trickle down through huge 

tax cuts for the folks at the very top of the income spectrum. 

Can you compare the economic growth in the performance of our 

country in those time periods following the implementation of the 

respective tax policies? And what I am specifically talking about is 

the GDP between 1993 and 2002 in which the average was 3.68 

percent—— 

Secretary LEW. That was the longest period of uninterrupted 

growth in American history. 

Mr. PASCRELL. Thank you. And between 2003 and 2007 in 

which the average was 2.79 percent. Would you just give us a quick 

synopsis? 

Secretary LEW. Yes. Congressman, I think we have seen through 

experiments testing these policy theories and we saw in the 1990s 

that the tax policies that were put in place with the, you know, 

charges that it would destroy the economy had the opposite effect. 

We saw the economy boom. 

In early 2000 we saw—2001, 2004 we saw huge tax cuts that 

were promised to have the benefit of driving economic growth. We 

ended up on the edge of an economic—in an economic disaster with 

those tax policies in place. 

Mr. PASCRELL. And the party of austerity didn’t pay for any of 

this. Did it? 

Secretary LEW. It didn’t pay for it. 

Mr. PASCRELL. Okay. Let me ask you a second question. 

Secretary LEW. I was going to say we had one more experiment, 

and it was January 2013. We agreed to go back to the tax rates 

that were in effect in 1990, and our economy is growing now. 

Mr. PASCRELL. Do you believe the Administration’s policies 

over the past 6 years have exacerbated income inequality in this 

country, or would income inequality be worse if it were not for the 

policies like the Affordable Care Act and the Recovery Act and the 

stimulus package, et cetera? 

Secretary LEW. I think that the problems of income inequality 

have been developing for decades. If you look at the actions taken 

since 2009, if our economy was still in recession, it would be way 

worse for working people. We have a recovery that has created 10 

million jobs. That is good for working people. We have seen the Tax 

Code revised so that some of the inequity in terms of the top rates 

has been fixed. We have seen benefits extended to working families 

through things like the Earned Income Tax Credit and the Child 

Care Credit. So I think we have taken important steps, but with 

that said, we still have a very deep underlying set of challenges to 

deal with, which is why the President’s budget this year embraces 

these issues and comes forward with a program that won’t solve all 

the problems. It will put things in the right direction, and I think 

it is a very important time for us to make decisions to—— 

Chairman RYAN. Thank you. Thank you. 

Mr. Reed. 

Mr. REED. Thank you, Mr. Chairman, and thank you, Mr. Secretary, for being here. 

And to open up I want to recognize the work that we have done 

together in regards to revitalizing the American Manufacturing Innovation Act that was signed into law at the end of the year. We 


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worked in a bipartisan manner to get that done, and I did that 

working with the other side and with you in the White House, because there are millions of hard-working families that are going to 

benefit from that legislation. 

So I offer my line of questioning along that vein, and I think my 

colleague from California, Mr. Becerra, articulated something that 

I have a lot of trouble with. When he talks about the Social Security Disability Trust Fund, something you and I talked about a 

year ago, and he says that we are trying to contrive a manufactured crisis to split Americans apart in regards to this crisis that 

truly is a crisis, the bankruptcy of the Disability Trust Fund, I find 

that offensive. 

I also find his comments to be representative of the old guard, 

the old school mentality, that there is $3 trillion of Social Security 

money that is supposedly the Federal Government’s to raid, to bail 

out a failing Disability Trust Fund. I think that is wrong, because 

you are taking from Social Security retirees the money that they 

put into the Social Security Trust Fund that is to go to them, and 

I think you and I both agree, reading your budget, as you said in 

your budget, ‘‘The Administration will oppose any measures that 

weaken the Social Security system.’’ 

How does taking Social Security retiree money from one trust 

fund that is already distressed and bailing out the Disability Trust 

Fund somehow strengthen the overall Social Security retiree trust 

fund? Does that not weaken it? Yes or no. 

Secretary LEW. Well, Congressman, over the years there have 

been many transfers. I remember in the 1980s when old age—— 

Mr. REED. Mr. Secretary, over the years, that is old school. 

There is a new generation of leaders down here in Washington, 

D.C. that say we cannot do old school, because you have already 

raided the trust funds. You have already taken from the trust 

funds, and you have put them in the position where they are on 

the path to bankruptcy. We need to do better than that, and I 

think you are committed to it. I will give you the benefit of the 

doubt. When I read your budget and you are talking reforms in regards to getting the disability community back to work, when you 

talk about continuing disability reviews to make sure that those 

that are truly catastrophically disabled get the benefits that the 

Disability Trust Fund is designed to go to, I think there is sincerity 

here that you want to get to a solution. Is there not? 

Secretary LEW. No, it is very sincere, but, Congressman, if I 

could just answer your question, there are no policies that could 

take effect fast enough to deal with the disability insurance shortfall other than an interfund transfer, and it is the way we made 

sure that Social Security’s old age fund didn’t go bankrupt when 

we were working on Social Security—— 

Mr. REED. I so appreciate that. So you are putting on the table, 

if I am hearing you correctly, that there are other pots of money 

other than Social Security retirees’ money that is in the Social Security Trust Fund that are available through an interfund transfer 

that could be utilized to take care of the Disability Trust Fund—— 

Secretary LEW. Well, you have the Old-Age, Survivors, and Disability Insurance Trust Funds. Those are kind of your options. 


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Mr. REED. So the White House is not aware of any other funds 

that are out there that could be tapped into in order to bail out the 

Disability Trust Fund? 

Secretary LEW. Well, if you are just going to reallocate the tax 

rate, that is where the allocation—— 

Mr. REED. I understand that is the payroll tax rate reallocation, 

and that is the status quo. That is the old school. Are there not 

new ideas that could be put on the table—— 

Secretary LEW. Look, I think there are new ideas in our budget 

in terms of making sure that the review process is done properly, 

making sure that we have program integrity. I do believe that we 

have to look at the short-term needs of the Disability Trust Fund 

and have a short-term solution and not expect things that will have 

perhaps long-term benefit that could solve the problem that is 

much closer. 

Mr. REED. Well, I appreciate it. Is one of those solutions that 

you talk about getting the disabled community in a position maybe 

to potentially get back in the workforce? It is in your budget. I 

think we share that commitment. Is that fair to say? 

Secretary LEW. Yes, but we also have to accept that there is a 

large number of people who are disabled who are not able to work, 

and we have to have a system that is there for those people 

that—— 

Mr. REED. And I think we would agree for the catastrophically 

permanently disabled, the Trust Fund, that is what the intention 

is, and I would agree with that sentiment on it. 

So when we talk about potentially getting the disabled community in a position to harmonize the goals of getting people back into 

Main Street, back to work, I am interested also in your budget proposal that says, ‘‘Using evidence and evaluations to drive innovation and outcomes.’’ So on that workforce development component 

of getting people from the Disability Trust Fund that are capable 

of working back to work, Mr. Secretary, what would you propose 

as the evidence and evaluation criteria we could utilize to achieve 

what is a mutual goal of working together to achieve that outcome? 

Secretary LEW. I think that we need to have the system set up 

to encourage people to go back to work. We also have to have a system that is there for people who are not able to go back to work, 

and I would look forward to following up with you. In 2 seconds 

I can’t do much more than that. 

Mr. REED. All right. I look forward to that. I would be interested 

in your criteria in judging that type of reform. 

Chairman RYAN. Thank you. 

Mr. Davis. 

Mr. DAVIS. Thank you, Mr. Chairman. 

Mr. Secretary, let me thank you for being here. 

Chairman RYAN. Danny, turn your mic on. 

Mr. DAVIS. All right. I applaud the President’s budget for its 

focus on supporting working families through the expansion of the 

Earned Income Tax Credit, improvements to the EITC, and substantial assistance to cover costs of caring for children. 

When I cochaired the Education and Family Tax Working Group 

with Representative Black, both conservative and progressive policy experts agreed that the EITC has strong evidence of encourVerDate Sep 11 2014 06:01 Apr 10, 2017 Jkt 022331 PO 00000 Frm 00075 Fmt 6633 Sfmt 6602 I:\WAYS\WAYSPS\22331\22331.XXX 22331

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aging work and alleviating poverty. The central recommendation 

from stakeholders for improving the EITC was to address the limited utility of the credit for childless workers and noncustodial parents which I promoted strongly through my fatherhood deal. These 

programs helped Chicagoans, Illinoians, and Americans. 

I also commend the budget for strengthening depressed communities by permanently reauthorizing the New Markets Tax Credit, 

and exemplar of public/private partnership, as well as by investing 

in promise zones and critical infrastructure efforts. 

A vital element of the budget is the restoration of a small 

amount of the sequester cuts which experts predict will strengthen 

our economy through hundreds and thousands of jobs. 

I also want to take a moment to support the increased funding 

for the Internal Revenue Service. Republicans have insisted on cutting its funding by about a billion dollars in the last few years. 

However, these funds are needed to provide services to taxpayers 

such as critical tax help to low-income families and to ensure that 

tax cheaters pay their fair share. 

As many of us are, I am seriously concerned about protecting and 

strengthening the middle class, but I am also concerned about another category of individuals called the poor, the working poor. 

These are individuals whose economic boats are perennially stuck 

at the bottom, and for generations in their family they remain. 

Can you tell us what this budget will do to help lift those individuals out of poverty and into the coveted middle class that we all 

value so greatly. 

Secretary LEW. Congressman, we entirely share the goal of making sure that the ideal of the middle class remains available to all 

and becomes available to all, and it is not one policy. It is a combination of things, obviously starting with the minimum wage. 

Raising the minimum wage is very important, but making sure 

that families have access to things like the child credit, to the 

Earned Income Tax Credit is equally important, and making sure 

that there is access to education so that young people grow up with 

the tools to have the kind of opportunity that can get them the 

kind of middle-class jobs in the future. 

So I don’t think there is one simple solution. We put together a 

variety of proposals that together we think will make a big difference. We have proposed a way to pay for it in a way that is consistent with a responsible fiscal policy, and we think that the time 

is now for debate on these issues. 

Mr. DAVIS. I seriously agree with much of what I find in this 

budget, and, again, I commend you and your colleagues and the 

President for working on it, and, Mr. Chairman, I yield back. 

Chairman RYAN. All right. Thank you. 

Mr. Kelly. 

Mr. KELLY. Thank you, Mr. Chairman. Mr. Secretary, thanks 

for being here. 

What I want to address, and I know we have been talking about 

different aspects of the budget, but let’s talk about a budget in general. You have done a lot of budgets. Did you have—— 

Secretary LEW. More than I care to count. 

Mr. KELLY. And I understand that. In the private sector we always have to put budgets together every year, but it is increase— 


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it really—there is a lot of weight on us to make sure they balance, 

and that somehow we have revenue to cover what our intended expenses are. 

When you are—have discussions with the President, and I am 

not suggesting that the President has a lot of fingerprints on this 

budget, have you ever discussed with him the growing deficit? 

Secretary LEW. Well, first of all, the President is deeply involved 

in the development of this budget and in all budgets, and I think 

that is appropriate. It is his policy. You know, he has I think over 

the years shown a determination to fix a very broken fiscal path. 

We have an enormous amount of progress that we have made, and 

we are making more progress in the 10-year window of this budget. 

I think that the—— 

Mr. KELLY. But in your position, the deficit, we—you talked 

today about how we have been able to cut the deficit. 

Secretary LEW. Yes. 

Mr. KELLY. This year the President is projecting a $4 trillion 

spend. Right? And in revenues they are going to come in somewhere around $3 trillion. Now, back home where I come from, you 

start to use figures like that, the zeros go off the chart. So I tell 

them, listen. It is like somebody who makes $30,000 a year spending $40,000 a year, going home and saying: ‘‘Honey, no problem. Go 

out and spend 40 grand this year because I am going to make 30 

grand.’’ And she says: ‘‘Well, gee, you told me last year to go ahead 

and spend more than you were bringing in and it would be all 

right.’’ 

The annual deficit is adding to our long-term debt at a rate that 

is totally unsustainable. As a person that has done budgets all your 

life, you can’t look at this and think of this as a really—as a real 

budget. This is a Christmas wish list that nobody could possibly 

fill. 

Secretary LEW. Well, Congressman, I actually don’t agree. I 

mean, I—— 

Mr. KELLY. Well, Mr. Lew, listen. I am not going to get into a 

debate whether you agree or not. There is no way in—there is no 

way in heck anybody can sit back and say that deficit spending 

year after year after year makes sense. There is just no way. No. 

There is no way you can defend that. Nobody that ever looked— 

took an economy course or economics course would say: ‘‘Yeah, just 

keep spending money you don’t have and somehow it is going to 

be all right.’’ 

Do you know that by 2025 just the interest on our debt is going 

to be $785 billion. That is billion with a B. There is no way anybody would look at this model and say: ‘‘Makes sense to me.’’ 

Now, we talk about how well we are doing as a country. We are 

the healthiest person in the sick ward. There is nobody in the 

world that can look at the way we have been spending money, I 

am talking collectively, globally, and say: You know what? We are 

on the right path, and I don’t care if you are Greece or you are in 

the United States. The only difference is the number of zeros in 

deficit spending that add to long-term debt that make us unsustainable. There is just no argument for that, sir. 

My question is, when you talk to the President with your 

background, and certainly with his acumen, and I don’t know how 


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74 

much business acumen is there because nobody would present this 

budget with a straight face, and say: This is the path forward. That 

just can’t be done. 

Have you had that discussion? 

Secretary LEW. So, Congressman, I think if you look at the improvement in our fiscal position over the last 6 years, it is tremendous. 

Mr. KELLY. When compared to the rest of the places around the 

world. I understand that. 

Secretary LEW. No. Compared to ourselves. 

Mr. KELLY. No, it is not. It is not. Listen. You and I both know 

that if it wasn’t for the energy—— 

Chairman RYAN. Order. Order. I would encourage the gentleman to let the Treasury Secretary answer the question. 

Mr. KELLY. Listen. I would like to have order, Mr. Chairman, 

but let me tell you this. We continue to have this ring-around-therosie conversation that somehow things will get better if we just 

keep spending more money and have no way to actually raise the 

revenue to pay it. We can’t even get to the point we can pay down 

the principal. All we are doing is making interest payments. There 

is just no logic to doing that. It is totally illogical, sir. 

Secretary LEW. I am happy to try to offer an answer if you—— 

Mr. KELLY. I would appreciate it because I have been sitting 

here for 5 years and—— 

Chairman RYAN. And you have a minute and 16 seconds to do 

it. 

Secretary LEW. Having presented three balanced budgets with 

surpluses actually in my time as OMB Director, no one is going 

to—I am not going to take second seat to anyone in terms of caring 

about responsible fiscal policy. I think if you look at where our 

budget was, where our economy was when this President took office, it was in terrible shape, and it is now in healthy shape. I 

think that we have to look now at what do we do to build a foundation for future economic growth, and I agree there is a need to 

continue—— 

Mr. KELLY. Okay. I just want to point something out. 

Secretary LEW. But we now have a—— 

Mr. KELLY. Excuse me. Listen. I want to point something out. 

Since the President took office, household incomes—now, please, 

we should stop using the term ‘‘middle class’’ because it kind of reflects that we have a higher class and a lower class. Middle-income 

families have taken—they are making $2,380 less than when the 

recovery started. That is a drop of 4.4 percent. When you get into 

the Hispanics, the Blacks, the female-headed families, and families 

with three or more children, they fare far worse under the Obama 

plan than anybody else. Black households’ median income has 

plunged 11 percent since the recovery. Hispanic households are off 

4.5 percent. For single moms, median household incomes have 

dropped 7.5 percent. For those households with three or more children, it fell even more to 9.2 percent. We keep using this talking 

to point to how we are going to help the middle class. Let’s talk 

the real thing. It is middle-income people. They have to have more 

money. We cannot continue to drive this debt higher and think that 

somehow there is a rosy picture at the end. 


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75 

I thank you for your time. I appreciate your service, but honest 

to God, we have to get this thing fixed. 

Chairman RYAN. Thank you. 

Mr. Renacci. 

Mr. RENACCI. Thank you, Mr. Chairman, and thank you, Secretary Lew, for being here. 

You know, I was thinking, when my colleagues were talking 

about you working with Tip O’Neill and that timeframe, I was actually thinking about the facts of my life. I had just graduated from 

college. I was from a blue collar, union family, and I decided that 

as someone in the middle class I was going to work toward upward 

mobility, and I started my own company at a very young age. 

The one thing I can tell you back then that was very important 

is that I realized if you worked hard and did the right thing you 

could achieve the American dream, but I also realized back then 

the government wouldn’t get in your way, and I look back at the 

days when Tip O’Neill and the President were working together to 

get some things accomplished, and I hope at some point in time we 

can do that going forward, because I do want to look at that 24- 

year-old some day and say: You can do the same thing. You can 

work toward upward mobility, because we talk so much about it, 

but factually we get in the way too often, and that is one of the 

problems I have with some of the budgets. 

Now, I will say there are some things in the budget that I am 

glad to see there, and I am hoping that we can work together, but 

we talk so much about middle class—middle-class economics, and 

the President uses that term to describe his approach to tax policy 

changes. You know, the idea, of course, is that his proposal was designed to benefit hard-working middle-class Americans, which I always look back and say that was me at one point in time. The idea 

behind this approach I really believe is a good one. 

As the Committee has addressed just a few weeks ago, many 

middle-class Americans are still struggling. While the economy has 

shown some signs of recovery, too many continue to find that their 

paychecks are shrinking while costs are rising. Considering the 

focus the President claims to put on reducing taxes for the middle 

class, I was surprised by a study on the distributional effects of the 

President’s proposal published by the Tax Policy Center. 

Mr. Chairman, I ask that the study titled Distributional Effects 

of the President’s New Tax Proposals published by the Tax Policy 

Center be included for the record. 

Mr. Lew, according to the Tax Policy Center analysis—— 

Chairman RYAN. Without objection. 

[The submission of The Honorable Jim Renacci follows:] 


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dkrause on DSKHT7XVN1PROD with LOCATORS22331A.022

DISTRIBUTIONAL EFFECTS OF THE PRESIDENT'S 

NEWT AX PROPOSALS 

Leon~rd Burrnan and Ngan Phung 

JJnu.lr y 30. 2015 

ABSTRACT 

The White House announ<:ed a package of tax proposals as part of what President 

Obama called "Middle Class Economics" in the State of the Union Address. This 

paper summarizes and discusses TPC's distributional estimates. focusing on the 

distribution of all income tax cuts, the major tax cut provisions., and the largest tax 

increase provisions including the new fee on financial institutions. The tax cuts 

primarily benefit low· income single workers and working age households with 

children. The income tax increases primarily affect those with very high incomes 

and those with a substantial amount of capital assets. 

We thank Chye·Ching Huang. Biff Gale. Howard Gfed<tn<ln. Elaine Moos Jeff Rohafy. Joe 

Rosenf:>erg. Kim Ruef:>en. and Rof:>erron Williams for helpful oomments. Jeff Roholyoversow the 

model ~ 

Viewse"J)fesse<#ore rh<>leof rheoorhorsond should not beottribtlted to the Tox Policy Center. 

the Urbon lmrlrute. its boord or tunders. 
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INTRODUCTION 

The White House announced a package of tax proposals 1 as part of what President Obama called 

·Middle Class Economics• in the State of the Union Address. For the most part, the proposals 

would continue the President's pattern of raising taxes on high·incomc households and cutting 

them for those with lower incomes. 

The Treasury Department estimates that the proposals would raise $210 billion over ten 

years by increasing the top tax rate on long-term capital gains from 24.2 percent to 28 percent 

and taxing unrealized capital gains at death. A new financial fee would raise another $110 billion. 

Part of that revenue would finance a package of middle-class tax cuts ($175 billion) and 

retargeted education tax benefits would cost about $50 billion.2 1n addition, some of the revenue 

would finance new spending initiatives for early childhood education and community college, 

which are not considered here. 

Based on the White House Fact Sheet,3 the President's tax proposals would: 

• allow married couples to claim a 5-percent nonrefundable credit for the first $10,000 of 

earnings of the lower-earning spouse (a maximum credit of $500); 

• double the Earned Income Tax Credit (EITC) for workers without custodial children and 

raise the income level at which the credit phases out, increasing the maximum credit to 

about $1,000; 

• increase the Child and Dependent Care Tax Credit (CDCTC) for middle-income families, 

especially those with young children: maximum expenses used to calculate the credit would 

rise from $3,000 per child to $6.000 per child for children under ageS, the credit rate for 

young children would rise to 50 percent, and middle·income families would be eligible for 

the maximum credit rate of 35 percent rather than the 20-percent rate that applies to such 

families undercurrent law; 

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• repeal dependent care flexible spending accounts under which employers may allow 

employees to exclude from taxable income up to $5,000 (regardless of number of children) 

to pay for childcare expenses that allow a parent to work; 

• make permanent and expand the American Opportunity Tax Credit (AOTC)-up to $2,500 

per year for up to five years of study and available for less than half-time attendance- and 

repeal the Lifetime Learning Tax Credit (LLTC), the deductibility of student loan interest (for 

new student loans) 4, and the tax exclusion for qualifying withdrawals from Section 529 

education savings plans (the last proposal has since been withdrawn in response to 

bipartisan protest); 

• enact an "auto-IRA" proposal that would require employers with more than 10 employees 

who do not offer a retirement plan to allow employees to designate a portion of pay to 

deposit into an IRA: 

• limit the size of accumulated balances in IRA and employer-sponsored retirement plans: 

• permanently extend the lower income threshold for refundability of the Child Tax Credit 

and the expanded EITC provisions that are set to expire after 2017; 

• raise the top income tax rate on long-term capital gains and qualified dividends from 20 

percent to 24.2 percent (for a top effective rate of 28 percent including the 3.8·percent 

Affordable Care Act (ACA) net investment income tax on high-income taxpayers); 

• include as income on a decedent's final individual income tax unrealized capital gains, net of 

a $100,000 exclusion for singles and $200,000 for couples; and 

• impose a tax on large financial institutions. 

If all of the major individual income tax provisions (excluding the financial fee) were fully 

phased in, the package would raise taxes by an average of $164 per household in 2016. 5 (See 

Table 1.) Winners would outnumber losers by more than seven to one with the tax increases 

concentrated among the one percent of tax units with the highest incomes. The vast majority of 

households in the bottom four quintiles who would face an income tax change would pay lower 

taxes (or receive larger refunds) as a result of the policy proposals. At the top, however, the 

increase in tax rates on long-term capital gains and dividends as well as the taxation of capital 

gains at death would loom large. Average taxes among the top one percent would rise by about 

$27,000 or 1.8 percent of after· tax income; the richest 0.1 percent would see an average tax 

increase of $156,000, cutting their after-tax income by an average of 2.4 percent. Average tax 

changes would be small for every other income group except the bottom 20 percent-no more 

than 0.1 percent of income. The average tax change for the middle three quintiles is less than 

4 Some of this savings viii I be offset by exempting from tax any student Joan forgiveness under income-based repayment. We don't 

includethe Jxex~ionof orgivenloan.Jmoonts nourP.s-timates. 

5 Note that TPC 's simulations do not include the effect of elimtnating dependfmt ~ flexible spending accounts. They Jlsoexelude 

the 529 provision, but the Administr.ltion has wirhdr ~wn that Pf'oposal. Theeslim.ltes 3$Sllme that the polities .)re fully phased ini.e., the estiMates assume that taxatton o' capital ga1ns at OC.ath and elimination of the student loan interest deduction had al'tr.~ys 

been the l>w. The actual burde<\on household$ eve< the budset period would be lower (fo<exafnl)le. because ""<hSiudcot lo.>n 

interest will contif'lJC' to be ck."dutttblc: only lfl en~st on new debt woold be affected by the proposal). Finally. following standard 

ronvention. thedistritx•tioo31 tables ignore beh.wiOf.Jf responses tothetrucch.Ylges. The Tables Jlsodo not reflect chceffcct of 

extending the refundable talCcrecftts lfter 2017 as they would not change tax liability Of .credits i.n 2016. 

TAX POLICY CENTER URIJAN IN) I II VI£ & IJROOKINQ. INS11TUTI0N 
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$100. The lowest income households would see their average after-tax income rise by 1.2 

percent, primarily because of the proposed increases in the refundable EITC and AOTC. 

TABLE 1. MAJOR INDIVIDUALINCOMETAX PROVISIONS IN PRESIDENT 

OBAMA'S 2015 STATE OF THE UNION: DISTRIBUTION OFT AX 

Tax Units with Tax lncreas.,orCut Percent Avf!ragc 

Expanded Cas~ ~With Tax Increase Change In Frdrral Tax 

Income Percent tic Pet ofT ax Avg Tax Pet of Tax Avg Tax After-Tax Change($) 

Units Cut Units Increase Income 

lowest Quintile 30.4 -617 0.8 1,295 1.2 · 177 

Second Quintlle 18.4 -452 3.7 1,549 0.1 ·26 

Middle Quintile 24.7 -557 6.1 2,076 0.0 · 12 

Fowti>Quinlile 43.6 ·668 41 ,,901 0.1 ·91 TapQuintile 43.0 -533 6.9 26,308 -D.6 1,590 

AU 30. .. -580 3.9 8,730 -o.2 164 

Addtncbn 

80·90 58.9 -584 3.7 4,222 0.1 ·186 

90·95 46.4 -353 0.8 40,005 -o.1 164 

95-99 9.2 -731 4.3 33,248 -o.4 1,362 

Tap I Percent 3.2 ·1,707 77.8 34,488 -1.8 26,777 

Top0.1 Percent 1.0 ·1,818 93.3 167.234 · 2.4 156.014 

Sovrct: Tox Policy Center, Tobie T15-D004. hltp:IIIDxpollcyctnttr.orjlll5·0004 1 OlstribvHon of Ft<ferol Tox Choll)le bv Exoondt<f Cosh Income Percttt!ilt. 2016; 8osclir"': Curr""t low 2Vuyptelimlnory, bost<fon White Hou~Foctsh<<L 1/17/15. 

NEW, REFORMED, AND EXPANDED TAX EXPENDITURES 

Looking at the tax cut prollisions alone shows a much more uniform distribution of tax benefits. 

(See Table 2.) There is a significant tax cut for the bottom quintile, as seen in Table 1. and a sharp 

drop-off for the second quintile since they are less likely to benefit from the expansion in the 

refundable EITC but they still have incomes too low to receive much benefit from nonrefundable 

tax credits. 6 The average lax benefits rise all the way up to the 9111 decile. Sixty percent of 

households in this income group benefit from at least one of the tax cut provisions. Overall, 

households In this Income group receive average tax cuts worth $354 (before considering 

offsetting revenue increases). These families arc most likely to benefit from the expansion of the 

AOTC and the introduction of the two-earner credit. The credits phase out at higher income 

levels. However, a few high-income households have workers whose employers do not currently 

offer retirement plans and would thus benefit from the auto-IRA provision. Even among those 

• Some of these fatihes \'t'Ou<i beoefit after 2017 frOfT'I tne OCt M.lne"'t otcns on of tht> tM'IpOI' ¥V incre-.:aseo In r~~ t31tcrfd 1s. 

butt. ~tdoc:o1not ~upintNstablesi~ 1 rt>'ersrota~eve;~~7016. 
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with very high incomes-the top 0.1 percent-about 4 percent qualify for at least one tax benefit. 

yielding an average tax cut of $81 (before considering the effect of offsetting tax increases).7 

TABLE 2. MAJOR TAX REDUCTIONS IN PRES I DENT OBAMA'S 2015 

STATE OF THE UNION: DISTRIBUTION OF TAX CHANGES1•

2 

Tax Units with Tax Increase or Cut Percen~ Average 

Expanded Cas~ With Tax Cut With Tax Increase Change rn Federal Tax 

Income Percentile Pet ofT ax Avg Tax Pet of Tax Avg Tax After· Tax Change($) 

Units Cut Units lncreas~ Income 

Lowest~ntlle 30.4 ·618 0.5 472 

Se<:ond ~ntile 18.6 ·452 1.5 836 

Middl e~ntile 25.0 ·561 1.7 819 

Fourth Quintile 43.9 ·680 1.7 799 

TopQuintilc 43.8 -545 0.4 594 

All 30.7 · 586 1.1 765 

Addendum 

80·90 60.1 ·597 0.9 597 

90-95 46.5 · 356 

95·99 9.3 ·731 0.0 0 

Top 1 Percent 5.3 ·1.686 0.0 0 

TopO.t Percent 4.1 ·1,997 0.0 0 

Source: Tox Policy Center. Table T15-Q010. http://toxpolk;yeenter.orsfr15-Q010 1 OistribuVon of Federal ToxChoAAe bv Exoonded Cosh Income Percentile. 2016: Baseline: Current low 2Very preliminary, bosed on White House Foctsheet 1/17/15. 

· less then 0.05 

.. lnsuffici<nt dotD 

CAPITAL GAINS TAX INCREASES 

1.2 ·186 

0 .. 2 ·71 

0.2 ·126 

0.3 ·285 

0.1 ·236 

0.2 · 171 

0.3 ·354 

0.1 · 165 

0.0 ·68 

0.0 -89 

0.0 ·81 

The President proposed two significant tax increases on capital gains. He would raise the top tax 

rate on long-term capital gains and qualifying dividends from 20 percent to 24.2 percent. 

Including the effect of the 3.8 percent ACA net investment income tax, that would make a top tax 

rate of 28 percent. That top rate is well within the range of historical experience; and was the top 

rate as recently as 1997. However. the proposal also would for the first time tax capital gains at 

death, subject to a $100,000 exclusion.

8 Capital gains on gifts would also be subject to immediate 

7 Note thar Table 2 shows somelamir;.. as payong higher taxcsOO<avserCI)<!atofthe LLTC iS analyzed together with the AOTC 

e-xpans.ion in cheset ot t..'IX cuts. M.ll'\y househokls w II bec'lefit bysw:tching from the LLTC to the AOTC. but a sm.:all fraction wov!d no 

~., bcctogoole tor any a C<Jlt unc:le< thopro:x>sat. 8 1n 2010. the estate t.:1x was eliminated and a~ c.:arf\-over ~s~ regime- in which cJpitJI gains nbove a certain exemption\ .. -ere 

postponed but not forgiven on inherited assets-was implemented. Ultimately. estates were alkM.'f'd to choose between an estate tax 

with J I.Jrge exemPtion and c;,rryover basis subject to a somewhat lower exemption in thJt year Carryover basis h.:ld atsobccn 

enacted in 197 6.but postponed and vltirn.atetv repealed be for(' it l"VCf took effect. For a dis::.ussionof some of the economic issues 

TAX POLICY CENTER UROA'I INSTITUTE &. BROOK NGSI~STITUTION 
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taxation. (Currently, recipients of gifts assume the donor's basis and gains are not taxed until the 

asset is sold.) Individuals could still postpone realizing a capital gain on assets transferred from a 

spouse at death, and any portion of the S 100,000 exclusion that is not used by the first spouse to 

die would transfer to the surviving spouse (which effectively makes the combined exclusion for a 

couple $200,000). Long-term capital gains on a primary residence held at death would benefit 

from the ordinary income tax exclusion of up to $500,000 for couples ($250,000 for singles), 

again with carry-over to a surviving spouse. In addition, special rules would postpone recognition 

of gain on transfers of small businesses 

Not surprisingly, the fully phased in tax change resulting from the capital gains and 

dividends provisions would be heavily concentrated at the top of the income distribution (Table 

3). The top quintilewould bear 78 percent of the tax increase and 58 percent would fall on the 

highest-income 1 percent. The effects of the tax rate increase are heavily concentrated atthe 

top because the increase only applies at very high income levels. While the proposal would raise 

taxes on less than 1 percent of tax units, almost 80 percent in the top 1 percent and 93 percent of 

the top 0.1 percent would pay higher taxes. More surprising, however, is the fact that 0.1 to 0.2 

percent of households in the middle three quintiles would be affected. And those with negative 

incomes-largely arising from business losses-would also bear a significant share (2.5 percent) 

of the tax change. 

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TABLE 3.CAPITAL GAINS AND DIVIDEND PROVISIONS IN PRESIDENT 

OBAMA'S 2015 STATE OF THE UNION: DISTRIBUTION OFT AX CHANGES1·

2 

Tax Units w1th Tax Increase or Cut Percent Aver.-age 

Expanded Cash With Tax Cut With Tax Increase Change in Pet ofT ax Feder.~l 

lncomePercentile Pctof AvgTax ~ After-Tax Increase Tax 

Tax Umts Cut Tax Units Increase Income Change (S) 

lowest Quintile o.o 0 .(),1 0.6 

Second Quintlle 0.0 0 0.1 47,172 -o.1 3.0 43 

Middle Qulntlle 0.0 0 0.2 63,970 .().2 6.S 10S 

N>urth Quintile 0.0 0 0.2 80,824 -o.2 9.4 184 

Top Qulntlle 0.0 0 5.1 34,091 .(),7 78.0 1,750 

All 0.0 0 0.8 38,421 .().4 100.0 319 

Addendum 

80·90 0.0 0 0.2 63,476 ·0.1 3.3 148 

90·95 o.o 0 0.4 88,398 ·0.2 3.6 327 

95·99 0.0 0 4.3 33,352 ·O.S 12.7 1,427 

Top 1 Percent 0.0 0 79.5 32.177 ·1.7 58.4 25.581 

TopO.t Percent 0.0 0 93.3 160,428 ·2.3 35.0 149,633 

Source: fox Alltcy Center, foWe T1S.0006, http://foxpoiJc)"Cenler.orsftlS•0006 

1 D;srribtmon ot Ftdtrol Tax Chan.Re by ExPanded Cash Income Peruntite, 2016: BostJine: Current law 1Verypr-tliminorv. boscdon WhJte HouSC' Foctsheet 1117/ 15. 

'l"" th<>nO.OS 

''lnwffldc.nt clcta 

The proposal to tax unrealized gains at death would raise taxes on a small but significant 

share of people who, despite seemingly modest incomes. have enough capital gains to exceed the 

exclusion thresholds. Data from the Federal Reserve Board's Survey of Consumer Finances (SCF) 

indicates that the bottom 80 percent of the income distribution had one quarter of accrued 

capital gains in 2013. (See Table 4.) After applying the exclusions on gains for owner-occupied 

housing and a $100,000 exclusion for singles and $200,000 for married couples, the share held 

by the bottom four quintiles falls to about 10 percent. We estimate that a higher share of the tax 

will be borne by the lower-income groups because the decedents who are affected by the tax 

tend to be older than the population at large and our model imputations are based on data from 

an earlier SCF. Our estimates appear to be broadly consistent with the Congressional Budget 

Office's (CBO) estimate that 35 percent of the tax benefit from not taxing capital gains at death 

in 2013 benefits the bottom 80 percent of the income distribution. (Note that CBO's estimates 

did not allow for the exclusions in President Obama's proposals.) 

TAX POliCY CEI>ITER IIJRI!AN IN<;TITLJTF & RROQKI'IC',<; IN >Till JTION 
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TABLE 4. DISTRIBUTION OF ACCRUEDCAPITALGAINS, BEFORE AND AFTER 

EXCLUSIONS, BY INCOME PERCENTILE, 2013 

Before Exclusions Afl•r Hou~i.nc Exclu~ion AfteSrH OOo.OOOusin/gS~uOOOslonEondl Cf!'nernl 

Income --------- 1 """"" xc U510n 

Percentne' NurnbtPt l\lnou1t ~ol N~~r Amount Peruntot ~ber ~r«Nol' Amtu'lt PC'rccntol 

tthouur.dd (SbJI!IOM) Toal {tl'lou~ai1Ci\} (Sbi"lltOM) Toe.al (thovwnlhl Urlib i$btll!~) Tout 

t~nlile 10,203 700.1 3.9 2.880 270.3 2.0 34S 1 •• 219.0 1.8 

s.toncf()Antll• 14.043 834·.' ... 4,212: 233-8 L7 SS2 2.2 103.2 0.9 

Mlddle()Jncile 15,341 9SS.8 53 6.<436 400.3 2.9 838 3.4 213.1 1.8 

FourthQI,intile 20,373 2.0$8.3 11.4 9,632 1.091.6 7Jl 1.616 ... ?12.9 S.9 

8().90 10.895 l.S7S.O 8.7 6,285 l,OS9.1 7.6 1,105 9.4 805.2 6.7 

90-95 S,74S t.S99.9 8.9 4,110 1.215.3 ... 1.355 22.6 918.6 7.6 

95·99 ~.7S3 '-626.7 2S.6 ~. 127 4,070.7 29.3 2,183 -45,1 3,609.7 29.9 

Top t~mnt 1.218 5,719.4 31.1 1.19S S.S60.3 40.0 941 77.0 5.'495.9 45.S 

All 82.570 18.069.6 100.0 38.987 13.891.6 100.0 8,93S 7.3 12,077.5 100.0 

Sourct: 2013 SW'wyo/Co#IMIMC't Fht!ICCS 

£xc~.sprirnc;rr~n~41niCJ ~f1<817tiw comr. 

The appendix further discusses issues related to the measurement of t he distribution of 

capital gains tax liability. 

EFFECTS OF INCLUDING THE FEE ON FINANCIAL INSTITUTIONS 

Table 1 excluded one of the biggest tax increases in the package: the 7 basis point (0.07 percent) 

tax on the liabilities of U.S. financial firms with assets over $50 billion. The Administration 

estimates that this would affect ·roughly 100firms." The burden of taxes is ultimately borne by 

people, not firms. Table 5 shows the distribution of all the major elements of President Obama's 

proposals, including the financial fee, assuming that the financial tax is ultimately borne by 

investors in the form of lower after-tax rates of return and workers in the form of lower wages. 9 

Under that assumption, part of the burden of the tax ultimately falls on relatively modest-income 

retirees who have pensions or 401(k) plans. Those households do not benefit from the tax cuts, 

which are focused on workers and families with children. Including the effects of t he f inancial 

fee, the average tax increase rises from $164 to $209. The highest-income 10 percent of 

households would face average t ax increases, while the other groups would see their taxes go 

down (other than the middle 20 percent, whose taxes would be virtually unchanged). Overall, 

however, losers would slightly outnumber winners: one-third of tax units would pay higher taxes, 

including (indirectly) the financial fee, while about 30 percent would get a net tax cut. (See Table 

5.) Only in the bottom quintile would winners outnumber losers. However, the biggest tax 

increases remain concentrated at the very top. About 9B percent of households in the top one 

percent would face higher taxes. On average their taxes would rise by about $39,000 (2 percent 

9TPC distflt)!Jtcd the tax the same way it distributes the economic ·ncidenceof tht>corpor-'!te i~tax: 20 perceot of the burden 

falls on labor. 20 percent on the normal r~um to C\11 capital. and 60pcrcent on the retorns to corporate equity (shaceholdNs). See 

Jim Nurw.. •How TPC Oi$,tribvtes the Corpot ate Income Tax: September 13, 2012. Ava1lable at 

btto·/fw.wltaxQO!is:Y(enterocg/lJolosld«'P0~14126S ·lax·MMel·Cocoorate·Tax -tncjdenceodf, 

TAX POLICY CENTER I URMN INSTITUTE & BROOKINGS INSTITUTION 
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of after-tax income); the richest 0.1 percent would pay about $168,000 more (2.4 percent of 

income). 

TABLE 5. MAJORT AX PROVISIONS IN PRESIDENT OBAMA'S 2015 

STATE OF THE UN ION: DISTRIBUTION OFT AX CHANGES 1·

2 

Tax Units with Tax Increase or Cut Percen! Average 

Expanded Cas~ With Tax Cut With Tax Increase Change on Federal Tax 

Income Percentole Pet of Tax Avg Tax Pet ofT ax Avg Tax ~Iter-Tax Change($) 

Units Cut Units Increase ncome 

Lowest ~nti e 30.3 ·616 4.8 237 1.2 · 174 

Secord Qu;ntile 18.3 ·447 20.3 305 0 .1 ·17 

Middle Quintile 24.4 ·549 48.2 289 0.0 7 

Fourth Qu:inti le 42.8 ·649 53.9 420 0 .1 ·51 

Top Quintile 38.9 ·507 59.9 3,362 ·0.7 1,818 

All 29.6 ·569 33.0 1.140 -0 .3 209 

Addendum 

80·90 57.1 -543 42.0 462 0.1 ·116 

90·95 36.1 · 330 61.4 660 ·0 .2 286 

95-99 6.4 ·843 93.3 1.782 ·0.5 1.608 

Top 1 Petctnt 2.3 ·1,713 97.6 29,743 ·2.0 28,983 

Top0.1 Peroent 0.4 •1,786 99.6 168.661 · 2.6 168,006 

Sourco: To• Po!icyCenW. Table T!5.0002. hi1J):/Itaxpo!icycenttr.arglt15.0002 1 Oiso-ibuoion of Federal To• Chanil" by Expanded Carh !rocom< Pucentil<. 2016; BowiM; Current !ow 

~Very preliminary, bo~d on Vv11itt House FocfSht!!,tt. 1117 !15. 

Note that different assumptions about the incidence of the tax and the distribution of the 

returns to capital could significantly affect the distribution of tax changes and the share of tax 

units with gains or losses from the proposal. For example, financial sector executives and 

investors might have benefited disproportionately from excessive risk-taking. To the extent that 

the tax discouraged such risk-taking, the costs of the policy would be borne primarily by very 

high-income financial sector participants (and the rest of society would benefit because there 

would be less risk of anotherfinancial sector collapse and resulting recession). In this case, the 

effect on low- and middle-income households would look more like the results displayed in Table 

1. 

CONCLUSION 

The President's tax plan includes new or expanded tax benefits that are targeted at low- and 

middle-income households, while the offsetting income tax revenue is targeted at higher-income 

households. Winners outnumber losers by more than seven to one. About 30 percent of tax units 

would pay lower income taxes while about 4 percent would pay more. The tax cuts benefit lowTAXPOUCYCENTER I VRBANIN~IIIUI.&BROOKINGSt>ISfOIU IOON 
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income single workers and working age households with children. The income tax increases 

primarily affect those with very high incomes and those with a substantial amount of capital 

assets. Not surprisingly, a revenue increasing package with tax increases targeted at a sliver of 

the population imposes some substantial tax increases on those with very high incomes. The top 

0.1 percent would pay $156,000 more in income taxes under the proposal, and $168,000 

including the effect of the new tax on large financial institutions. 

Despite the careful targeting of the proposal, the Administration has already faced 

withering-and effective-criticism for a provision that would have scaled back the tax benefits 

of 529 college savings plans. That proposal would have overwhelmingly affected higher·income 

households that do not need assistance paying for college and helped to finance a far more 

generous expansion of aid for higher education through the AOTC.In the face of the resulting 

uproar. the Administration withdrew the 529 proposal. 

Given that any fiscally responsible tax reform would create both winners and losers, that 

experience does not bode well for the prospects for a major overhaul of our broken tax system 

any time soon. 

TAXPOUCVCENTER I UI\OANIN>I 1Url SllllOO~ING~IN)I Ufi()N 10 
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APPENDIX 

I 

~ - -~ 

Our analysis of the distributional effect of taxing capital gains at death differs significantly from 

the Treasury Department's. 10 There is an issue about whether income is being properly 

measured for households with modest incomes but gains over $100,000. Our income qualifier is 

a measure we call expanded cash income (ECI), which is adjusted gross income (AGI) plus certain 

other income items that are excluded from AGI such as nontaxable fringe benefits, tax-exempt 

interest, and tax-free transfer payments. 11 Capital gains are included in ECI when realized-i.e., 

when people have sold the asset and received the cash proceeds. This may cause an 

overstatement of "economic income" when gains are realized and an understatement when they 

are deferred, but it comports with what most people think of as income. 

Treasury Deputy Assistant Secretary, Adam Looney. argues that capital gains should be 

added to income to assess the distribution of tax burden from taxing gains at death. 

Importantly, in examining the effect of this proposal on taxpayers at different 

income levels, it is necessary to take into account the capital gains income that is 

currently excluded from tax by the loophole. To do otherwise would count the 

taxes paid by individuals without counting the income, which would be misleading. 

Using this metric, Looney estimates that 99 percent of the tax is borne by the less than 1 

percent of households whose AGI plus gains taxed at death exceeds $500,000. 

This position seems to argue that taxing capital gains at death has the instant effect of 

raising the affected decedents' incomes, possibly by hundreds of thousands or even millions of 

dollars. Of course, the unrealized income was often accrued over many years. The right solution 

to this puzzle would be to include accrued unrealized capital gains in income and include accrued 

capital gains tax liability in total taxes every year rather than realized capital gains and the 

associated tax liability. This measure would increase households' incomes in years when they do 

not realize capital gains and reduce measured income in years when they realize an unusually 

large gain. Overall, it is likely that such a measure would show a somewhat smaller share of 

capital gains and tax liability accruing to very high income taxpayers than a measure based on 

realizations. 12 And the President's proposal to tax capital gains at death would still impact 

10 Adam Looney. "The Pr.,ident"s Proposals to Cut Taxes fo< Over 44 Million Families; Trto54JryNotes (!Jjog). Joooary 29. 2015. 

AvaiiJblc Jt 

http·!lwww treas• 1ry goy/,.oonectJh!oo/PavesfTbe%2QPreOOem9f.F22frR0%99£!2QPrgjX)91S'f!l2()to%20Q•J$20Ta'Kts%20by%7QA 

~c-!KOgi)?20Nc:;arty2620)6(')()$1f.20fp %200ygr%2044%20tljiiJoo?620Famitios.vspJS . 

FOr 3 full expl303tionot TPC"s income~Mawe. seo Joseph Rosenbe<g. ·Me~suringlllOOII\e tor Oistr butio~l An;Jiysis:r.,. Policy Cettt~. July 25, 2013. Avail<l~ at btto:J!www ta?CMHcycent¢r orgNo!oadedPOF/412871·mwurint•incomg.odf, 

'' Using panel data. I compared the distribution of lO·year <Neragecapltal gains versos ¥-Jefage incomew:th cYinua! snapshot views 

oJ re\)!i7edcapital &ains ilnd t~nnuol income (inckldi'"l& c;.pitalgaiflS) between 1979 and 1988. The t~nnual distributions showed a 

smaller share of gains reaUzed by taxpayers 1n the highest income groups in f!Veryyear. lO·year average gains oce much closer to 
87 


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moderate-income families by increasing accrued capital gains tax liabilities, although by less than 

shown in Table 3, since adding accrued unrealized capital gains would tend to push taxpayers 

with substantial assets into higher income groups, but by less than suggested by Looney. 

Note that there are other reasons why our estimates might differ from the Treasury 

Department's-most notably because Treasury analysts have access to administrative tax data 

from estate tax returns and other sources that the TPC does not possess. Treasury reports that 

the Survey of Consumer Finances-the data source our estimates are based on-underreports 

asset values for very wealthy individuals.

13 We would likely estimate a different distribution of 

tax burdens if we had access to those data. The bottom line is that our estimates have a range of 

uncertainty (as do governmental offices' estimates) and seemingly significant differences may 

reflect differences in data sources and methodology . 

...._..owwl1. S...l<'onardE llurrr..>O. ThelDI>,<iml>dQJptD!CM!s T<UW.cy:AGu.d<l« ll><l'otplrud(Was>q!<lf\DC 

SroolcrBS 'nst~U'.,Prest. 1999lp. 100. 

,. U.S. Tr~.surv. ·Tax E)IIX'ndi:urto ~ Elldus.ondCao*Lllc.ins at ~:h.· Available a: h,:rr.JtwwwuUMYrgy/mo rt~"­

r~ vfta':C=po!jcy!OsrJeli=n·vAmYs s-;rd-Rn•MCh In faq::Qd r t(::5'tp-tttt6.11ij·2()1~ ocr 

TAXPOLICYCEtn"ER IJI<I)A'I,"ST rUlt&BIIOO<t"-C.> r-.>1 Ul U.. 12 
88 

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The Tax Policy Center is a joint venture of the 

Urban Institute and Brookings Institution. 

::·URBAN 

BROOKINGS 

For more Information. visit taxpollcycenter.org 

or email info@taxpol icycenter.org 

Copyrighl C 2015. Ur~n lnst.ltute. Perml$Sion is gr~nted for reprodoolon of this fite, with ;<~tt ribotlon to ~ UrNn·8rooklngs T;,-x PolicyCtnttr. 
89 

Mr. RENACCI [continuing]. The middle quintile of the earners 

with a household income of about $60,000 would actually face an 

average Federal tax increase of about $7. In fact, the middle 60 

percent of earners would see almost no effect on their Federal taxes 

as a result of the President’s middle-class economics. 

Considering the results of this independent study, can you explain the claim that these policies are really aimed at providing relief to the middle class? 

Secretary LEW. Well, Congressman, you know, I look at the 

work of the Tax Policy Center frequently. I think that over time, 

they have done a lot of good work. I think in this case, their analysis is just not based on the best data available, and I think the 

analysis that we have done at Treasury is better. 

I think that they are looking at a few provisions like the financial services fee and stepped-up basis incorrectly in terms of tracing 

how it is going to flow through to families that are middle-class 

families. I think technically it is not correct, and I think in terms 

of the data, we have data that shows that it is not correct. 

Mr. RENACCI. So you are disagreeing with—— 

Secretary LEW. I disagree with the analysis here. Obviously, 

when you put policies in that have demonstrable benefit to middleclass families, that is what reflects what you are trying to accomplish. I don’t think the financial service fee or stepped-up basis is 

going to end up flowing down and hurting those middle-class families the way that analysis suggests. 

Mr. RENACCI. Okay. I know my time is limited. I want to 

switch over to something that is important. 

Treasury issued anti-inversion rules in the fall. As a result, 

Medtronic announced that instead of using foreign cash to acquire 

Covidien, it would borrow and take on more debt to finance the acquisitions, meaning more leverage and more interest deductions in 

the United States and actually less profits. Chiquita Brands had to 

scrap their planned inversion and instead got acquired by Brazilian 

investors, closing down their North Carolina headquarters and 

eliminating hundreds of U.S. jobs. 

These are consequences of an ill-conceived inversion—the illconceived inversion rules, and now this budget doubles down with 

even more inversion proposals that will just make the U.S. companies less competitive and more attractive acquisition targets for foreign companies and competitors. 

Is this what you intended to happen and did you consider these 

success stories of the new rules? 

Secretary LEW. You know, Congressman, I think the real answer 

is tax reform. We have a broken Tax Code that is driving companies to do things that we think may be legal but they are wrong. 

It is wrong to change your address just to avoid paying taxes while 

you get all the benefits of doing business in the United States. 

We made clear at the time that we did not have administrative 

capacity to completely address the inversion issue. It would require 

tax reform to take away the incentive and also anti-inversion provisions. We look forward to working with Congress to accomplish tax 

reform to really address this. 


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Mr. RENACCI. I appreciate that. I know, I am running out of 

time, and I do agree tax reform would correct this, but are you saying that the anti-inversion rules are not working? 

Secretary LEW. No. I think the anti-inversion rules we put in 

are working partially, which is what we knew they would do. They 

don’t completely solve the problem. 

Chairman RYAN. Thank you. 

Mr. Meehan. 

Mr. MEEHAN. Thank you, Mr. Chairman, and, Mr. Secretary, 

thank you for being here, and I also want to express my appreciation for the Administration’s attention to graduate medical education. I think it is not just a question of what it may do for regional economies, but the idea of us being able to train this next 

generation of medical professionals. 

We are talking about the cost of education here, and it is just— it is mind-boggling to think about people graduating $3 and 

$400,000 in debt, and it goes back to another issue, and I think 

this is something that I am seeing when I am talking to people in 

my district consistently, and you talk about increasing the ability 

for people to be able to pay for education, and we keep trying to 

find ways to redistribute dollars to do this, but let me ask you a 

question, because there is a significant investment in education by 

the Federal Government and by the policies of the Federal Government, nonprofit institutions for the most part, tax incentives of various sorts. So with such a critical role, what is it that you are doing 

to hold down the increasing cost of education? 

Secretary LEW. You know, Congressman, most of that is not in 

my purview as Treasury Secretary, but I do have a deep interest 

in this and have worked across the Administration. So I can tell 

you that there are things that we are doing to make it clear to families and to students what the cost of education will be, what their 

choices are, what the track record of schools is in terms of giving 

the kind of education that is likely to lead to the kind of options 

that we all want for our children to have, and I think it is very 

important that we not just deal with the student loan piece of it, 

but we also deal with the structure of how education is marketed 

and made available to students. Students should see what their 

choices are. They should understand what the benefit of different 

options is, and they should also understand the cost of getting deep 

in debt. We have too many schools that are enrolling students and 

not keeping them in even to finish their degree, and those students 

end up in debt with no degree. 

Mr. MEEHAN. Yes, but we have a great deal of schools which 

are stretching families who appreciate the very great difficulty 

which you identified in almost a market-based economy in which 

people are trying to get the best education they can for their children. I mean, you know yourself, you are a Harvard University 

graduate. It could be about $225, $230,000 for a family, and that 

is pretax income. So I go back again. Here is one of the problems. 

Those very same institutions, you are talking to me about the responsibility on the parents and the families to be looking at these 

and making decisions. I am asking about what responsibilities you 

are putting on the institutions themselves. I was trying to look 

for factors that may be influencing the cost of education, and, you 


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91 

know, the cost for a private university has more than doubled since 

the 1970s when I went there, and I suspect somewhere around the 

time you may have attended college. For public universities proportionately, it has tripled. 

Now, at the same time, and I was just looking at a statistic, the 

amount of staffing has grown exponentially. In 1975, there were 

446,000 college professors and 268,000 administrators of all types. 

In the middle of the last decade, there were 675,000 professors and 

750,000 administrators of their various types. We have seen a dramatic explosion in this educational complex in which this bureaucracy has become a food frenzy, and the American families are paying for it. The very same people who you are looking at right now 

about—who are making those investments oftentimes they are the 

ones that are dipping into their retirements to meet these exorbitant fees. 

So what are we doing with the leverage that we have to begin 

to compel these institutions which already benefit as nonprofit institutions to say that there is—if you want to have the benefit of 

government-subsidized tuition and other kinds of things, then you 

must demonstrate the capacity—you are doing it in health care. 

Why aren’t you doing it in education? 

Secretary LEW. Well, Congressman, by starting with transparency and empowering families, individuals, to make decisions, that 

actually puts pressure on the university system to take that very 

seriously. 

I agree with you, costs have been rising too rapidly. I think that 

it is not an easy thing to address because there is a kind of irreducible minimum of the number of people it takes to teach groups 

of 20 and 30 people, and even with the move toward, you know, 

high technology, ultimately the contact with teachers still matters. 

Universities have become more complicated places. They have a 

complicated variety of things they do. It is not my area, obviously, 

of current expertise. The Department of Education is looking hard 

at these issues, and I am sure they would be happy to follow up. 

Mr. MEEHAN. Thank you. 

Chairman RYAN. Thank you. 

Mr. Smith. 

Mr. SMITH OF MISSOURI. Thank you, Mr. Chairman. 

Mr. Secretary, as I have been sitting here listening to your presentation and also a lot of questions, I am reminded of a Congressman from Missouri, of a speech he gave in 1899. It was Congressman Willard Vandiver, and he said, ‘‘I come from a State that 

grows corn and cotton, cockleburs and Democrats. You’re frothy 

eloquence neither convinces me nor satisfies me. I am from the 

Show Me State and you have to show me.’’ 

And I am asking in this budget that you presented to us how the 

policies that are implemented in this budget help rural America? 

Whenever you look at the statistics of rural America, where less 

than—well, 97.9 percent of all the counties in the United States 

have not rebounded from the recession, and you are seeing that 60 

percent of rural counties have decreased in population in the last 

year, what policies in your budget help rural America rebound from 

this economy? 


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92 

Secretary LEW. Well, Congressman, obviously agricultural policy 

is not primarily my responsibility, but our Department of Agriculture has been working with Congress to put in place programs 

that we think are very beneficial to rural America. I know that the 

efforts that the Department of Agriculture has made to bring investment into rural America have been very successful. I have collaborated with the Department on some of their business efforts. 

You know, I actually think if you look at the economic performance 

of rural areas, they have done considerably better than your description. Again, it is not my core area, but I would be happy to 

follow up with you and look at the data that you are looking at and 

the data that I have seen, because it has been, I think, for a lot 

of rural communities a better period than you just described. 

Mr. SMITH OF MISSOURI. I would love to compare that. But 

let’s talk about a policy that has been discussed, one that you have 

proposed and that is increasing the estate tax and the death tax. 

This is something that is extremely detrimental to the farmers and 

small businessowners, at least in my congressional district. 

If you look at the Bootheel of the State of Missouri, those seven 

counties are the—have some of the best farmland in the entire 

State of Missouri and in the country. Those seven counties produce 

more than a third of all agriculture production for our State. The 

average per acre of a farm there is roughly $8,000. The average 

family farm is 441 acres. 

Do you realize that underneath the policies that you are proposing that every one of those average family farms in the Bootheel 

of Missouri would be devastated by your proposal of the estate tax 

that would almost—almost count to about 57 percent of a tax on 

their inheritance, which as you—maybe you don’t know this, but 

almost 85 percent of all the values of farms is within their equipment and their farmland. They don’t have a lot of—a lot of liquid 

assets. So, if they have a 57 percent tax increase, they are going 

to have to sell their farm, which is eliminating a small business, 

which is destroying heritage. Would you explain that to me? 

Secretary LEW. Well, Congressman, as we have looked at the estate tax over the years, we have agreed to have high thresholds so 

that real family farms would be large—many would be exempt. 

Mr. SMITH OF MISSOURI. So the average family farm, I said, 

is 441 acres. Now, 441 acres times $8,000 would go over your $3.5 

million exemption. So I am saying that an average family farm 

does not even qualify underneath your proposal right now. 

Secretary LEW. So, Congressman, I think that the goal of both 

our estate tax and our stepped-up basis proposals are to make sure 

that we don’t have large appreciation of assets that essentially go 

untaxed for all time. 

Mr. SMITH OF MISSOURI. So they need to pay taxes double 

and triple and basically—— 

Secretary LEW. No. Not double and triple. 

Mr. SMITH OF MISSOURI. This is why the statistic I said earlier about 60 percent of counties in rural America are decreasing 

in population, because they experience a Tax Code that promotes 

them to sell their family farm to move to the city. And I believe 

this is so unfortunate. These policies have to be stopped. This is a 

war on rural Americans. It is a war on the middle class. 


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Secretary LEW. I would be happy to follow up with you, Congressman, and look at some of the numbers you have described and 

numbers that we have—— 

Mr. SMITH OF MISSOURI. I would love that. 

Secretary LEW [continuing]. Reviewed. I actually don’t think the 

impact is as broad as you have described it. I am happy to follow 

up. 

Mr. SMITH OF MISSOURI. Let’s get together. Thank you, Secretary. 

Chairman RYAN. Thank you. 

Mr. Holding. 

Mr. HOLDING. Thank you, Mr. Chairman. 

Mr. Secretary, America is a great country because of our people. 

Our people are aspirational, entrepreneurial, and intuitive. And I 

am sure we could agree on that. 

Secretary LEW. I think we can. 

Mr. HOLDING. But when the American people see a budget which proposes more than $2 trillion in spending, more than $2 

trillion in additional tax, more than $8 trillion in additional debt, 

a budget that never balances and, at the end of the day, you end 

up with bigger government and bigger debt, I don’t think the intuition of the American people says that that is a success. And I don’t 

think they look upon it as, you know, this is the way forward to 

ensuring that America is the greatest Nation for our next generation. 

I believe I am the last person, so I am going to follow up on a 

couple of other Members’ queries. First, following up on Dr. Boustany’s query, the question to you about the theft of intellectual 

property in China. I know that you have been involved and take 

an interest in this, and you raised it with the Chinese. Obviously 

strong intellectual property rights are incredibly important to our 

economy. It is perhaps one of our largest and most productive assets as Americans. 

If you could just take a brief moment and talk about what the 

Administration is doing to address theft of our intellectual property 

by the Chinese. I was in China recently, and I can tell you that 

I was singularly unimpressed with their efforts to prevent theft of 

intellectual property. 

Secretary LEW. Congressman, I have raised this issue at the 

highest levels of the Chinese government. I think they understand 

that they need to take more action in this area. They have certainly indicated that they understand it is an issue. You know, the 

reality is they, for a long time, denied that they had a problem. 

And, you know, now they have a system that is, at least, starting 

to deal with it. We have to be relentless in pushing our view forward on this. We have to make clear that if China wants to be the 

world leader that it aspires to be, it has to play by the basic rules 

that the rest of the world plays by. And it is not limited to intellectual property. I make the case to China on currency. I make the 

case to China on market access. I make the case to China on competitiveness. 

I think it is in our interest for there to be a healthy China, and 

it is in China’s interest for there to be a healthy United States, but 

it has to be on fair terms. It can’t be—— 


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94 

Mr. HOLDING. Right. 

Secretary LEW. This pertains to the question on the bid that 

came up. One of the places for us to pursue these issues is in the 

context of the bid discussion. Because if they can’t get to meet the 

world standard, they can’t get a bid. 

Mr. HOLDING. All right. And you would also agree that, you 

know, the United States—our intellectual property laws are probably the gold standard—— 

Secretary LEW. Yes. 

Mr. HOLDING [continuing]. Around the world and that is why 

innovation is such an important part of our economy—— 

Secretary LEW. Absolutely. 

Mr. HOLDING [continuing]. The companies, what we innovate 

here. 

Secretary LEW. And, in fact, if I could interrupt, Congressman, 

I have said to them, if you want your economy to do well in the 

future, you need to encourage innovation and you can’t do that unless you respect intellectual property rights. 

Mr. HOLDING. Right. So you would also agree that, in the current TPP negotiations, and as we consider TPA, we should be very 

mindful of addressing intellectual property protections when we negotiate with other countries and don’t dumb-down our own standards here in the United States to meet standards of countries 

where innovation and advancement in things like biologics, you 

know, are nowhere in comparison to the standards—the innovation 

that we have in this country. Correct? 

Secretary LEW. Congressman, I think we have to pursue a highstandard discussion in a number of areas, intellectual property is 

one. But worker standards is another. Environmental standards is 

another. 

And I heard a number of questions earlier about currency. And 

let me just say we take the issues of currency very, very seriously. 

We do it in the G–7, in the G–20, in our bilateral discussions. And 

we look forward to working with Congress to figure out how to talk 

about it in the context of—— 

Mr. HOLDING. Good. I have a few other quick hits. 

Congressman Smith of Nebraska asked you if you thought that 

inheritance tax was a double taxation, and you said that you didn’t 

think it was. So I assume that you agree with me that it is actually 

a triple taxation. Would I be correct in that assumption? 

Secretary LEW. No, sir. 

Mr. HOLDING. Okay. For the record, I am going to send you a 

followup question or two on FATCA, the—— 

Secretary LEW. I would be happy to look at that. 

Mr. HOLDING. With the renunciation rates going through the 

roof, really at the highest levels we have ever seen, I believe it is 

abhorrent that the American government is pursuing regulations 

and policies that would encourage Americans to renounce their citizenship. So I want—I will submit a followup question. 

Secretary LEW. Thank you. 

Mr. HOLDING. Thank you. 

Chairman RYAN. Well—— 

Secretary LEW. Mr. Chairman, you run a tight ship. 

Chairman RYAN. We really try. It is 12:57. 


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Does anybody want to talk for a few minutes? 

Mr. LEVIN. No, thank you, Mr. Chairman. We have to eat lunch. 

Chairman RYAN. We have to eat lunch. 

Thank you, Secretary Lew, for appearing with us today. 

I want Members to be advised that they may submit written 

questions to be answered later in writing and that they will also 

be reflective and included in the record for this hearing. We kept 

a tight ship. We got you out on time. The hearing is adjourned. 

[Whereupon, at 1:00 p.m., the Committee was adjourned.] 

[Submissions for the Record follow:] 


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FBETC 

FAMILY BUSINESS ESTATETAXCOAUllON 

www.estatetaxrelief.org 

SUBMISSION FOR THE RECORD 

Committee on Ways and Means 

February 17, 2015 

Hearing on the President's Budget for Fiscal Year 2016 with U.S. Department of the Treasury 

Secretary Jacob J. lew 
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Chairman Ryan, Ranking Member Levin, thank you for opportunity to submit a statement for 

the record regarding the President's fiscal year 2016 budget proposal with Secretary of the 

Treasury Jacob Lew. 

The Family Business Estate Tax Coalition (FBETC) is a grassroots coalition of over 60 

organizations representing family-owned businesses. The goal of the FBETC has always been 

ful l repeal of the estate tax, and the coalition still believes this is the best solution to protect all 

family-owned businesses from the estate tax. However, the FBETC supported the compromise 

reached in 2010 between Congress and the President, with a $5 million exemption and the 

maximum rate of 35 percent, as a bridge to full repeal. The FBETC also strongly supports 

permanently indexing the exemption level to inflation, providing for spousal transfer, and 

maintaining stepped-up basis. 

The FBETC has serious concerns about a number of proposals in President Obama's fiscal year 

2016 budget. Specifically, the FBETC strongly opposes the proposal to reduce the estate tax 

exemption to $3.5 million, remove the inflation adjustment, and raise the top marginal rate to 

45 percent. The FBETC also strongly opposes the proposed repeal of stepped-up basis. The 

combined effect of these proposals would be the creation of two taxes at death, and would 

push the combined top tax rate at death to over 60 percent- a level not seen in over three 

decades. To the contrary, these proposals would instead take a major step backwards in the 

decades-long movement to provide estate tax relief to family-owned businesses and farms. 

Proposed lower estate tax exemption and higher estate tax rote 

Since 2001,when the estate tax was put on a glide path to full repeal with the passage of the 

Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), reducing the burden of 

the estate tax on family-owned businesses and farms has been a Congressional priority. There 

are many reasons for this. 
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The estate tax hurts capital formation and job growth. Prior to 2001, the estate tax 

reduced capital formation in the economy by an estimated $850 billion.1 

• Estate tax compl iance is time-consuming and expensive. For every $1 of tax revenue 

raised from the estate tax, $1 is wasted in compliance. For example, in 2006, it is 

estimated that family businesses spent $27.8 billion just to comply with the law. 2 

• The estate tax forces family businesses to sell their highly illiquid business assets, 

thereby jeopardizing the health of the business. In addition, the business may be 

j eopardized when family members leave in anticipation that the business would not 

survive a death in the fami ly. 

The total cost of the estate tax not only comes from the cost of the tax, but also from the cost 

of estate tax planning. Family-owned business owners make decisions based on thinking that 

they may incur the estate tax regardless of whether they ever do. As a result, a large portion of 

them make unnecessary, even wasteful, expenditures on products and services -such as 

financial planning and insurance - that they may never require, depriving the business of 

investment capital that could more productively be used for other purposes, including business 

growth. Even with a $5 million exemption level, 34 percent of small businesses have incurred 

expenses in the last five years in order to protect themselves and their heirs from estate tax 

liability, and another 15 percent expect to do so in the future. 3 Additionally, less than 10 

percent of small businesses understand the estate tax, which means they will have to pay for 

lawyers and accountants to help them understand the law. 4 

1 Joint Economic Committee, United States Congress, Costs and Consequences of the Federal Estate Tax, May 2006. 

'Ibid. 3 Taxes and Spending: Small Business Owner Opinions-NFIB Member Poll, NFIB Research Foundation, See also, 

testimony of Neil D. Katl, Managing Partner, Katz, Berstein & Katl, UP, from Committee on Small Business 

Hearing: Planning for the Death Tax: Con Small Business Survive?, May31,2012: · so while there may only be 3,000 

or 4,000 small business owners who dieduringthe year who are impacted by the estate tax, itis impacting a lot of 

people ... If there are thousands of lawyers learningaboutthis, there are hundreds of thousands of people that 

are dealing with this every day." 

• National Federation of Independent Business, Notional Small Business Poll Tox Complexity and the IRS, Volume 6, 

lssue6, 2006 
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Furthermore, because the value of many family-owned businesses is tied to illiquid assets, such 

as land, buildings, or equipment, this can cause famil ies to lose the viability of their businesses 

altogether. For example, since 84 percent of a farmer's assets are land based, farmers may be 

forced to sell their land to pay for the estate tax.5 Additionally, when a business owner is 

placed in a situation where they are forced to sell business assets to pay the tax, the result can 

be assets sold at "fire sale prices," which further hurts the prospects that surviving family 

members will be able to carry on the business. Protecting these fami ly businesses from the 

estate tax is important in order to keep these businesses operating for future generations. 

With the President's fiscal year 2016 budget proposal call ing for a reduction in the estate tax 

exemption to $3.5 million (not indexed to inflation), and an increase in the top rate to 45 

percent, more family-owned businesses would face additional costs associated with tax 

compliance, and the next generation would face increased risk of having to sell their businesses 

to pay for the tax. 

Creating a New Capital Gains Tax at Death and Repealing Stepped-Up Basis 

In addition to the increase in the estate tax, the President's fiscal year 2016 budget also 

proposes to both repeal stepped-up basis, and create a new capital gains tax at death. The 

FBETC strongly opposes both of these proposals. 

Virtually all of the same difficulties that family-owned businesses and farms face when dealing 

with the estate tax would be repeated and magnified under the proposed new capital gains tax. 

It would harm capital formation and economic growth. It would force companies to conduct 

even more costly estate planning. It would force businesses and farms to sell off illiquid assets 

to pay the tax, leading to a "mushroom effect" - creating fresh taxes on property sold to pay 

other taxes. And it would place an unimaginable burden on families, who would be forced to 

sort through countless records whi le trying to find an original receipt, bill of sale, or property 

s American Farm Bureau Federation, Estate Tax Reform, January 2011. 
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deed-or worse yet, to face the tax on the entire value of an asset because of the inability to 

locate documents for property purchased years in the past. 

Furthermore, when combined with the proposed increase in the estate tax, the two taxes at 

death would push the top marginal tax rate to over 60 percent, which is substantially higher 

than the 55 percent rate in place prior to 2001. 

Histori cally, the tax code has always allowed for a basis adjustment for inherited property for 

the purposes of calculating capital gains taxes.6 This means that if inherited property is sold by 

an heir, capital gains taxes are due on the increase in value since the property was inherited. It 

is important to note that the basis adjustment moves up as well as down, and if the value of an 

asset on the date of death is lower than the decedent's basis, the asset's basis is stepped down. 

With the passage of the Tax Reform Act of 1976, Congress attempted to switch from steppedup basis to carryover basis for inherited property. In the process, the law also created a 

$60,000 minimum basis adjustment, which served as a de facto capital gains tax exemption. 

The proposal was never allowed to go into effect, however. In response to withering criticism, 

the proposal was postponed for three years with the passage of the Revenue Act of 1978. In 

1979, as Congress debated whether to repeal the provision or modify it, the Joint Committee 

on Taxation prepared a background report on carryover basis. The report states: 

"The carryover basis provisions have been criticized as being extremely complex and 

administratively unworkable. Administrators of estates have testified that compliance 

with the provisions caused a tremendous increase in the time required to administer an 

estate and resulted in raising the cost of administration."7 

Shortly afterwards, carryover basis was repealed entirely with the passage of the Crude Oil 

Windfall Profit Tax Act of 1980. 

Additionally, in 2010, when the estate tax was repealed for one year, stepped-up basis was 

limited to $1.3 million plus an additional $3 million for property passed between spouses. For 

6 Joint Committee on Taxation, Background ond Issues Relating to Carryover Bosis, JCS·6·79, March 9, 1979. 

7 1bid. 
101 

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all other inherited property, carryover basis applied. Once the estate tax was reinstated in 

2011, with a $5 million exemption and 35 percent rate, stepped-up basis was reinstated. 

With the carryover basis proposal outlined in the fiscal year 2016 budget, the Administration 

has actually proposed a far more damaging tax regime than was enacted, and ultimately 

repealed during the Carter Administration. As mentioned earlier, the carryover basis proposal 

enacted in the Tax Reform Act of 1976 contained a $60,000 basis adjustment, which, when 

adjusted for inflation amounts to $249,634 in 2014 dollars.8 After the tax was delayed for the 

years during the 95'h Congress (1977-1979), the Treasury Department proposed raising this 

basis adjustment to $175,000,9 which would translate to $570,644 in 2014 dollars.IO 

The proposal put forth by the Obama Administration would allow for a $100,000 per-person 

capital gains tax exclusion ($200,000 per couple). When adjusted for inflation, this would affect 

substantially more family-owned businesses than was originally enacted in the Tax Reform Act 

of 1976, and more than double the number of families affected under the proposal from the 

Treasury Department in the 95'h Congress. Any discussion about this proposal should begin 

with an explanation as to why, if a plan that was so unworkable that it was never allowed to go 

into effect in 1976, it should be applied to even more businesses in 2015. 

Conclusion 

The Administration's proposals related to the estate tax and stepped-up basis are unreasonable 

and unworkable. They would turn back the clock on decades of progress providing relief to 

family-owned businesses and farms, force new and repeated trips to the attorney's office, 

create countless administrative problerns, and act as a brake on economic growth and job 

creation. Congress should reject these proposals and instead build on the bipartisan progress 

made in recent years to repeal the estate tax once and for all. 

s Calculated using Consumer Price Index Inflation calculator, Bureau of Labor Statis tics, U.S. Oepartment of Labor, 

ava i I able at http://data .bls.gov/cgi-bi n/cpicalc.pl 

• Joint Committee on Ta xation, Background ond Issues Relating to Carryover Basis, JCS-6-79, March 9, 1979. 

1

° Calculated using Consumer Price Index Inflation calculator, Bureau of Labor Statistics, U.S. Department of Labor, 

ava i I able at http:/ /data .bls .gov/cgi-bin/cpicalc.pl 
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PueRro 

INDUSTRIAL

RICO 

ES l- MA.''UrN:rultl\ • SD\'ICo • CQ.\tPC1T1'JIII• 

Statement of the Puerto Rico Manufacturers Association 

By Mr. Cams Rivera Velez, PhD, PE, President 

Forthe Hearing Reconl 

of the 

C ommitlee on Ways and Means 

U.S. House ofRepresentatives 

Hearing on 

The President's Fiscal Year 2016 Budget Proposal with U.S. Department of the 

Treasury S ecretaryJ acob J. Lew 

February 3, 2015 

Thank you Chairman Ryan, Ranking Member Levin and distinguished Members of the Committee. 

It is my pleasure to present this statement as President of the Puerto Rico Manufacturers 

Association (PRMA). The PRMA is a private, voluntary, non·profitorganization established in 

1928 to serve as the voice of manufacturing in the U.S.'s largest and most important Te rritory. 

As Congress considers moving forward on the issues of reforming the tax code we wish to provide 

some background on the Federal Tax Code's uniq ue treatment of U.S. companies operating in 

Puerto Rico as well as the importance of manufacturing to our ove rall economy. We a lso ask for 

your consideration and inclusion of our concerns during yo ur deliberations over Tax Reform. 

Puerto Rico has been partofthe U.S. since 1898 and today is the home for 3.7 million U.S. Citizens. 

No jurisdiction of the U.S. is more dependent on manufacturing than Puerto Rico. In fact, 

manufacturing is currently the leading private sector employer and represents ahnostone·half of 

Puerto Rico's economy, far more than any State. 

It's important to r emember that manufacturing jobs in Puerto Rico are U.S. jobs employing U.S. 

citizens. Our goal for Tax Reform is simply to "do no harm". 

SUMMARY OF KEY POINTS FOR YOUR CONSIDERATION: 

PRMA has taken no official position with respect to the President's Tax Reform measures as 

described in the Treasury Green Book for FY 2016. 
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PUERTO INDUSTRIARICO LES l'- NA."'ll..rACTl.JftA . SD\'IC10 . C0\4.P£TfTMIW>. 

• However, on a personal level, I believe that Treasury's recommended internatio nal 

provisions will harm Puerto Rico and will result in the loss of U.S. f Puerto Rico 

manufacnoringjobs. Puerto Rico is part of the United States and the loss of Puerto Rico jobs 

directly impacts American Citizens as well as stateside suppliers. 

Historically, Federal tax law has fostered manufacturing and continues to play a pivota l 

role in attracting and keeping U.S. companies and U.S. jobs in Puerto Rico. 

• We urge that Tax Reform should "do no harm" to Puerto Rico's economy by discouraging 

investment in Puerto Rico. 

• Puerto Rico needs a seat at the table during deliberations on Tax Reform. 

• Most subsidiaries of U.S. companies operating in Puerto Rico a re organized as Controlled 

Foreign Corporations (CFCs) under the current tax code. However, they are treated as 

domestic in every other way. 

Puerto Rico is nota tax haven. We believe Puerto Rico is the only jurisdiction in the United 

States where CFCs employ U.S. Citizens, operating under a hybrid application of U.S. law 

and on U.S. soil. 

TAX POLICY'S HISTORICAL ROLE IN PUERTO RICO'S ECONOMY: 

Federal tax policy has traditionally recognized the unique relationship of Puerto Rico to t11e United 

States. Initially the provisions adopted as part of the Revenue Act of1921 and later th rough tl1e 

activities of the 1948 Operation Bootstrap (of which PRMA was a major participant) and the 

crea tion ofiRC Section 936 as part of the Tax Refonn Act of 1976, the U.S. Congress has 

traditionally adopted targeted policies, particularly tax policies, towards Pue rto Rico tl1at were 

"pro-growth" and spurred the conversion of Puerto Rico from an agrarian economy to one based 

on manufacturing. 

Although initially a largely agrarian economy, the decades after World War II saw manufacturing 

replace agriculture as the drivh1g force of the economy of Puerto Rico. In the 1940's employment 

by the manufacturing sector was approximately 56,000. That number dramatically increased in 

the late 1980s after the enactment ofiRC Section 936 to approximately 106,000 and to a high of 

155,000 by 1995. It was primarily due to the jobs offered by the manufacturing sector that living 

standards, wages and educational levels rose dramatica lly. Today more than 40% of the 

population has at least 13 years of education. Thanks to Congressionally driven tax policy, the 

economic miracle that is Puerto Rican manufacturing has grown from labor intensive basic 

manufacturing to a capital intensive industrialized sector to now a knowledge based advanced 

manufacturing model. 
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MANUFACTURING GROWfH AND TRANSITION: 

Because of these tax policies and in spite of the recent economic recession impacting our island for 

the past nine years, Puerto Rico's manufacturing sector has shifted from one based on labor such 

as the manufacturing offood, tobacco, leather and apparel to the more capital-intensive industries 

of pharmaceuticals, chemicals, machinery and electronics operating nearly 2,000 plants on our 

island. 

Puerto Rico ranks the fifth in the world for pharmaceutical manufacturing with more than 70 

plants. As of2014, Puerto Rico based plants produced 16 of the top 20 best selling drugs on the 

U.S. mainland. 

Puerto Rico is also the world's third largest biotech manufacturer with more than two million 

square feet of dedicated plant space and is the seventh largest medical device producer 

hosting more than 50 plants on the island. Manufacturing accounts for 48. 6% of Puerto Rico's 

Gross Domestic Product (GOP) and directly employs 8% of the work force or about74,000 people. 

We estimate an additional 80,000 Puerto Rico residents are indirectly employed by our sector. 

We also estimate an additional 80,000 Stateside jobs supported by Puerto Rico's manufacturing 

companies (CFCs). Therefore, our manufacturing sector has the multiplier effect of contributing 

234,000 jobs (direct, indirect and induced) to the US and Puerto Rico economies. For example, 

one of our member companies reports that it annually transports over $140 million worth of 

product from Puerto Rico just through the Port of jacksonville, Florida. 

Manufacturing companies paid $1.4 billion in income taxes in 2009 or 57.9% of all corporate 

income tax collected. The role of CFCs in Puerto Rico's economy is of such importance tl1at during 

the current fiscal year, seven (7) of these companies doing business in Puerto Rico represent 20% 

of tl1e revenues of tl1e Government of Puerto Rico's budget or $2 billion. 

Manufacturing offers better wages for U.S. Citizens in Puerto Rico. Unfortunately, while 

approximately 42% of our population lives below the "poverty line" and tl1e current 

unemployment rate is at 14%, workers in the manufacturing sector earn an average wage of 

$39,000, which is actua lly 30% higher than the per capita average. We are also proud to report 

that in an economy in which fully 40% of the workers earn minimum wage, manufacturing wages 

are a major factor in improving the standard of living for all of Puerto Rico's residents. 
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IRC SECTION 936 FOSTERED MANUFACTURING: 

In spite of these positive numbers, the overall economic picture for Puerto Rico generally and for 

manufacturing specifically must be balanced by the "hard" facts that manufacturing has lost a 

significant nlllnber of jobs particularly since the repeal of IRC Section 936 in 1996. 

In it's 1993 Report to the Chairman of the Senate Finance Committee, the General Accounting 

Office (GAO) summarized the I RC Section 936 credit as follows: Under section 936, the tax credit 

equals the full amount of the U.S. income tax liability on possessions source income. Firms qualify for 

the credit if, over a three year period preceding a taxable year, 80 percent or more of their income 

was derived from sources within a possession and 75 percent or more of their income was derived 

from the active conduct of a trade or business within a possession. This provision effectively exempts 

all possessions source income from U.S. taxation. Dividends repatriated from a U.S. subsidiary to a 

mainland parent qualify for a dividends-received deduction, thus allowing tax-free repatriation of 

possessions income. In addition, the provision exempts from U.S. taxation the income earned on 

qualified investments made by section 936 firms from their profits earned in the possessions. This 

income is called qualified possessions source investment income, or QPS/1. Puerto Rico established 

rules to ensure that QPS/1 funds invested through the island's financial intermediaries meet the act's 

requirements. 

The enactment ofiRC Section 936 had a positive and direct impact on Puerto Rico's economy. In 

1989, the GAO noted that 13 years after enactment of IRC Section 936, manufacturing firms in 

Puerto Rico employed 105,500 individuals directly comprising 11% of the 

tota l employment of952,000. By 1997, that number stood at 155,000 Americans directly 

employed by the Puerto Rico manufacturing sector. 

However today, the number of U.S. citizens employed directly by manufacturing has been reduced 

to approximately 74,000. It's fa ir to say that this drastic reduction is mostly due to the elimination 

of IRC Section 936 more than any other single factor. In fact, a number of corporate decision 

makers cited the loss of IRC Section 936 as the primary reason for either the closure or relocation 

of facilities to Mexico, China and the Dominican Republic. 

Unfortunately, as manufacturing jobs have disappeared few other local employment opportunities 

r emain. This has caused a sizeable "brain drain" as tens of thousands of skilled workers have left 

Puerto Rico in search of new employment. Over the past decade, an estimated 3 00,000 US 

citizens representing approximately 7% of the total population (mostly the young and those with 
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higher educational levels) left the island for better opportunities on the mainland. This troubling 

trend suggests greater social consequences if the shrinking manufacturing sector were to 

continue. Economic circumstances a re driving this "brain drain" leaving many of our talented 

citizens with little choice but to immigrate to the mainland or remain on the island becoming 

dependent on social programs. 

Even in the context of IRC Section 936repeal, the U.S. Congress recognized the consequences of 

this repeal and its impact on Puerto Rico and provided for a ten-yea r transition period. 

Subsidiaries of U.S. companies we re given the opportunity to re-organize as Controlled Foreign 

Corporations. Although not as generous as IRC Section 936, the CFC mechanism provides a 

special tax incentive offering a potent financial reason for U.S. companies to remain or expand 

operations in Puerto Rico. 

We believe Puerto Rico is the only jurisdiction in the United States where CFCs employ U.S. 

Citizens, operating under U.S. law and on U.S. soil. This is truly a unique situation to consider 

during Congress' deliberations on Tax Reform. 

TAX REFORM 2015: 

Considering Congress' historical use of the Federal tax code as a tool to foster and support 

economic growth in the U.S. Territory of Puerto Rico, we urge full consideration of the impact of 

future Tax Reform on Puerto Rico's economy and job base. We believe Congress shares a bi· 

partisan goa l of fostering manufacturing and encouraging investment in American jobs. Again, we 

note that Puerto Rico jobs are American jobs. 

The GAO's 1993 Report a lso reviewed the factors that U.S. corporations consider when they 

contemplate establishing a plant or similar facility in a foreign location. The GAO identified six 

primary considerations including ene rgy costs, transportation costs, labor costs, stability, 

infrastructure, and tax structure. 

Thankfully, Puerto Rico has a stable government and excellent infrastrucnare given the millions of 

dollars invested in recent years on infrastructure improvements. We have world -class seaports, 

airports and a modern ground transportation network 

Conversely, the Island has a highly skilled and educated workforce but labor costs are the highest 

in the Ca ribbean. In addition, local and federal labor laws make Puerto Rico one of the most 
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PUERTO INDUSTRIARICO LES l MA.'VfAC'tlJAA eSOMOO. OOMPE1'Tf'IVI~· 

heavily regulated jurisdictions in the U.S. and certainly much higher than others in the Caribbean 

basin a rea. 

Puerto Rico is an island and highly dependent on imports of raw materials, food and oil; increasing 

costs for manufacturing and business operations. While there is a planned conversion over to 

liquefied natural gas (LNG), currently, energy is generated using imported oil resulting in higher 

energy costs. A recent comparison with Florida found that energy costs in Puerto Rico are three 

times that of Florida: on average 27 cents per kilowatt-hour in Puerto Rico versus 9 cents in 

Florida. The average for the United States is 11 cents per kilowatt-hour. 

The bottom line is that we have several facto rs that must be considered when we compete to 

foster investment in manufacturing operations in Puerto Rico. Our neighbors in the region as well 

as our global competitors are aggressively pursuing our manufacturing to re-locate their U.S. 

operations from Puerto Rico by offering cheaper labor costs, cheaper energy costs, less restrictive 

regulation and access to the U.S. market 

Ther efore, the ability of Puerto Rico to remain economically competitive internationally may well 

depend on how the U.S. Congress treats U.S. companies operating subsidiaries in Puerto Rico 

under reforms to the tax code. 

We shar e your goal of giving U.S. manufacturing a competitive edge when Tax Reform is enacted. 

We also ask for the opportunity to work with you on this task while ensuring no harm to 

manufacturing jobs in Puerto Rico. Puerto Rico is a vital element of the U.S. manufacturing sector 

and we wish to continue fostering opportunity fo r U.S. citizens on our island as well as Stateside. 

In conclusion, I would like to thank tl1e Committee for your consideration and ask that we be 

invited to appear before you r Committee during any upcoming hearings on tax reform. I'm 

looking forward to working with you as Congress deliberates the funtre of the Federal Tax Code. 
108 

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