TESTIMONY OF THE STAFF OF THE JOINT COMMITTEE ON TAXATION 

BEFORE THE SENATE COMMITTEE ON FINANCE HEARING 

ON NAVIGATING BUSINESS TAX REFORM1

APRIL 26, 2016 

My name is Thomas Barthold. I am the Chief of Staff of the Joint Committee on 

Taxation. The purpose of today’s hearing is to discuss issues arising in attempting to reform the 

Federal tax system. For today’s hearing, Chairman Hatch and Ranking Member Wyden have 

asked me to briefly review some of the business tax reform issues raised by the Committee’s 

bipartisan Business Income Tax Working Group.2 Some business tax reform proposals maintain 

the basic structure of income taxation, while others offer a structural change in income taxation. 

In addition, some proposals may be more accurately characterized as consumption-based taxes. 

My written testimony provides additional details and includes further information.3

 Members 

have separately been provided with several charts and tables to which I will refer during my oral 

testimony. 

In assessing any tax system or reform, policymakers make their assessment across four 

dimensions. 

1. Does the tax system promote economic efficiency? That is, is the tax system neutral 

or does it create biases in favor of or against certain economic activities when 

compared to choices taxpayers would make in the absence of taxes? 

 1

 This document may be cited as follows: Joint Committee on Taxation, Testimony of the Staff of the Joint 

Committee on Taxation Before the Senate Committee on Finance Hearing on Navigating Business Tax Reform 

(JCX-36-16), April 26, 2016. This document can also be found on the Joint Committee on Taxation website at 

http://www.jct.gov. 

2

 The Business Income Tax Working Group report is available at 

http://www.finance.senate.gov/download/?id=B4AEDDC8-9E94-4380-9AF4-9388953FB347. 

3

 For additional background information and brief description of a number of the business tax reform 

proposals reviewed by the working group see, Joint Committee on Taxation, Background on Business Tax Reform

(JCX-35-16), April 22, 2016.

JOINT COMMITTEE ON TAXATION 

April 26, 2016 

JCX-36-16 
2 

2. Does the tax system promote economic growth? How does the tax system affect the 

potential for citizens to be better off in the future than they are today? 

3. Is the tax system fair? Are similarly situated taxpayers treated similarly? Are tax 

burdens assessed recognizing that different taxpayers have different abilities to pay? 

4. Is the tax system administrable for both the taxpayer and the Internal Revenue 

Service? Does the tax system minimize compliance costs for taxpayers and 

administrative costs of the tax administrator? 

There may, of course, be other important policy considerations. 

How one addresses these questions shapes the reform. It is invariably the case that these 

different policy goals are in conflict. Policy design to promote economic neutrality may conflict 

with goals of fairness. Policy design to promote fairness may lead to complexity and increased 

compliance costs. Additional constraints that may also shape reform include: maintaining 

budget neutrality as conventionally estimated, maintaining the current distribution of tax burdens 

across income groups, and not achieving low tax rates on C corporate business income at the 

expense of higher taxes on passthrough business income. There are always tradeoffs. Many 

business tax reform proposals are the result of such tradeoffs. 

Base broadening to lower rates

Some proposals undertake comprehensive tax reform by broadening the tax base and 

lowering tax rates. Lowering tax rates in an economy as large as that of the United States results 

in substantial revenue losses as conventionally estimated. The Joint Committee staff estimates 

that relative to the current baseline forecast reducing the highest statutory income tax rate of the 

corporate income tax by one percentage point would result in a $44 billion revenue loss over the 

first five years of the budget period and a 10-year revenue loss of $100 billion. 

Joint Committee Staff Estimate of Revenue Effect of One Percentage Point 

Decrease in Top Statutory Corporate Income Tax Rate 

Source: Joint Committee on Taxation staff estimate. 

Note: This option would take effect for tax years beginning after December 31, 2016. Estimates are relative to CBO’s January 2016 baseline 

projections. 

By comparison, among the Joint Committee staff five-year estimates of corporate tax 

expenditures, only a modest handful exceed $50 billion.4 

 4

 A tax expenditure calculation is not the same as a revenue estimate for the repeal of the tax expenditure 

provision. First, unlike revenue estimates, tax expenditure calculations do not incorporate the effects of the 

behavioral changes that are anticipated to occur in response to the repeal of a tax expenditure provision. Second, tax 

expenditure calculations are concerned with changes in the reported tax liabilities of taxpayers and may not reflect 

Billions of dollars 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2017-2026

Change in Revenues -6.1 -8.7 -9.1 -9.8 -10.3 -10.5 -10.9 -11.3 -11.7 -12.2 -100.7
3 

Largest U.S. Corporate Tax Expenditures 2015-2019 

Source: Joint Committee on Taxation, Estimates of Federal Tax Expenditures for Fiscal Years 2015-2019 

(JCX-141R-15), December 7, 2015. 

Former House Ways and Means Committee Chairman Dave Camp took the approach of 

broadening the tax base to achieve a lower statutory tax rate on corporate income. 

 Tax Reform Act of 20145

a. Introduced in December 2014 by Mr. Camp (the then House Ways and Means 

Committee Chairman). 

b. Reduces corporate income tax rate to 25 percent. 

c. Changes depreciation rules. 

 

timing of tax payments. Third, the tax expenditure estimate includes only income tax effects and not interactions 

between income tax provisions and other Federal taxes. Fourth, the tax expenditure estimates reported here reflect 

provisions in Federal tax law enacted through September 30, 2015, and are based on the January 2015 Congressional 

Budget Office (“CBO”) revenue baseline, while the revenue estimates reflect present law and the current CBO 

revenue baseline. Nevertheless the orders of magnitude of revenue loss are represented fairly. 

5

 H.R. 1 (113th Cong.), introduced December 10, 2014, by then Chairman Dave Camp. Additional Joint 

Committee on Taxation staff analysis of H.R. 1 can be found in Technical Explanation, Estimated Revenue Effects, 

Distribution Analysis, and Macroeconomic Analysis of the Tax Reform Act of 2014, A Discussion Draft of the 

Chairman of the House Committee on Ways and Means to Reform the Internal Revenue Code (JCS-1-14), 

September 2014. This document can also be found on the Joint Committee on Taxation website at 

http://www.jct.gov. 

Corporate Tax Expenditure

Total Amount 

(Billions of Dollars)

Deferral of active income of controlled foreign corporations 563.6

Deduction for income attributable to domestic production activities 61.5

Deferral of gain on like-kind exchanges 57.4

Exclusion of interest on public purpose State and local government 

bonds

50.5

Credit for low-income housing 41.2

Expensing of research and experimental expenditures 27.6

MEMORANDUM

Depreciation of equipment in excess of alternative depreciation 

system

-20.9
4 

i. Expands expensing permitted under section 179. 

ii. Allows bonus depreciation to expire. 

iii. Requires straight-line method of cost recovery over applicable recovery 

period. 

iv. Makes available election to index basis to chained consumer price index for 

all urban consumers (“CPI-U”). 

d. Requires amortization of 50 percent of advertising expenditures over 10 years. 

e. Requires amortization of research and experimentation expenditures over five 

years. 

f. Repeals last-in, first-out (“LIFO”) and lower of cost or market (“LCM”) methods 

of accounting. 

g. Phases out section 199 domestic production activities deduction. 

h. Proposes other base-broadening measures. 

H.R. 1 illustrates tradeoffs in tax policy. In the context of business income tax reform, 

lower tax rates at the expense of lengthening capital cost recovery periods is an important 

tradeoff. For example, if to achieve a revenue neutral tax change, the corporate tax rate were 

reduced at the same time that tax depreciation were made less generous, these two changes 

would have offsetting effects on the user cost of capital. The net impact could increase, 

decrease, or have no net effect on the user cost of capital. Economists on the Joint Committee 

staff have studied the issue and have published a study simulating the macroeconomic effects of 

a number of hypothetical proposals that would reduce the top statutory corporate tax rate from 35 

percent to 30 percent.6

 One of the proposals involved financing a revenue neutral reduction in 

the corporate tax rate with a partial repeal of the Modified Accelerated Cost Recovery System 

(“MACRS”).7 The study found that the proposal would lower the economy’s long-run capital 

stock by between 0.2 and 0.4 percentage points. These simulation results suggest that slowing 

down cost recovery methods could reduce investment even if the corporate tax rate is reduced at 

the same time. 

Maintaining parity between corporate and passthrough entities

More so than in a number of other countries, substantial business income in the United 

States is not subject to a separate entity level tax such as our corporate income tax but rather is 

passed through to an individual’s income tax return and taxed as part of the business owner’s 

individual income.8

 For example, in 2012, more than 40 percent of all business income reported 

 6

 See Nicholas Bull, Timothy A. Dowd, and Pamela Moomau, “Corporate Tax Reform: A Macroeconomic 

Perspective,” National Tax Journal, vol. 64, no. 4, December 2011, pp. 923-941. 

7

 Ibid.

8

 In a study analyzing corporate and individual shares of net income from business activities in five 

countries, it was observed that “[t]he corporate share of net income from business operations was 81.9 percent in 

Australia, 74.5 percent in Canada, and 67.5 percent in the United Kingdom in 2009, while it was 34.1 percent in 
5 

in the United States was earned by S corporations, partnerships, and nonfarm sole 

proprietorships.9

Net Income by Business Form in 2012 

Source: Internal Revenue Service, Statistics of Income, published and unpublished data and Joint Committee on 

Taxation staff calculations. 

Some business tax reform options have been proposed with the intent of maintaining 

parity between corporate and passthrough entities; for example, by attempting to equalize the top 

corporate tax rate with the top individual tax rate. However, it is not clear what parity should 

mean. 

Owners of C corporations generally bear two levels of tax that in total can exceed 50 

percent. However, if the earnings of the C corporation are not distributed the current tax burden 

of those earnings is 35 percent or less. On the other hand, owners of passthrough entities 

 

Germany in 2007 and 43.8 percent in the United States in 2009. In 2010, roughly equal shares of business income 

were earned by corporations and individuals in Japan.” Joint Committee on Taxation, Foreign Passthrough Entity 

Use in Five Selected Countries, October 2013, p. 11. This document is available on the Joint Committee on 

Taxation website at www.jct.gov. 

9

 The partnership data reported here, as compiled by the Statistics of Income Division of the Internal 

Revenue Service, include partnerships whose partners are C corporations. In 2012, approximately two-thirds of the 

income reported on partnership returns was ultimately reported on individual returns. Therefore, there may be some 

double counting of partnership income that flows to partners that are C corporations. 

15%

16%

12%

2%

55%

S Corporations Partnerships Nonfarm Sole Proprietorships

C Corporations <$50M C Corporations >$50M
6 

generally do not bear a tax rate greater than 44 percent, but that rate of tax may apply regardless 

of whether the earnings of the entity are distributed or retained. 

The top marginal 2016 Federal tax rate on income of business entities depends on three 

principal factors. The first is the tax classification of the business: C corporation, S corporation, 

or partnership. C corporations have a top marginal rate of 35 percent, though distributed income 

– generally in the form of a dividend – is also taxed in the hands of shareholders. By contrast, S 

corporations and partnerships are passthrough entities generally not taxed at the entity level, only 

at the shareholder or partner level, whether or not the income is distributed to shareholder or 

partner. Limited liability companies (“LLCs”) can be treated as partnerships for tax purposes. 

The second factor, applicable only to C corporations, is whether the income is distributed 

to equity holders or not, and if distributed, whether it is a qualified dividend or an ordinary 

dividend in an individual equity holder's hands. An individual is taxed on a qualified dividend at 

top rate of 23.8 percent, which is the sum of the income tax rate of 20 percent, plus the 3.8-

percent net investment income (“NII”) tax. An individual is taxed on an ordinary dividend at the 

top rate of 43.4 percent, which is the sum of the income tax rate of 39.6 percent, plus the 3.8-

percent NII tax.10 Taking into account the top corporate rate of 35 percent, the “all-in” Federal 

tax rate on distributed corporate income of an individual is either 50.47 percent (for qualified 

dividends) or 63.21 percent (for ordinary dividends). Undistributed corporate income is taxed 

only at the corporate level at the "all-in" rate of 35 percent. 

The third factor, applicable to individual owners of S corporations and partnerships, is 

whether the individual is active (or performs services) in the entity’s business, or is a passive 

investor. This factor determines whether the 3.8-percent NII tax applies (or, in the case of a 

limited partner, the Medicare hospital insurance (“HI”) component of the self-employment tax 

applies, also at 3.8 percent). Neither the self-employment tax nor the NII tax generally applies to 

active S corporation shareholders: the “all-in” top rate on S corporation business income is 39.6 

percent. This is the top individual marginal income tax rate. The “all-in” rate on individuals 

who are passive shareholders of an S corporation is 43.4 percent, the sum of the 39.6-percent 

income tax rate and the 3.8-percent NII tax rate. The “all-in” rate on partners who are 

individuals is generally 43.4 percent, the sum of the 39.6 percent income tax rate and the 3.8-

percent NII tax (or the 3.8-percent HI component of the self-employment tax). The S 

corporation or partnership itself is not taxed, and the S corporation shareholders or partners are 

taxed whether or not the income is distributed to them. 

On distributed income, the partners and S corporation shareholders have an “all-in” 

Federal tax rate of either 39.6 or 43.4 percent. Distributed income of a C corporation has an “allin” Federal tax rate of either 50.47 percent or 63.21 percent. 

 10 However, dividends received from C corporations by individuals are more commonly qualified 

dividends.
7 

On undistributed income, the partners and S corporation shareholders again have an “allin” Federal tax rate of either 39.6 or 43.4 percent. Undistributed income of a C corporation has 

an “all-in” Federal tax rate of 35 percent. 

Top Marginal 2016 Tax Rates on Distributed and Undistributed Net Income 

of C Corporations, S Corporations, and Partnerships 

Corporate integration

Recognition of the two levels of tax applicable to the income of C corporations has led 

some to propose what is called corporate integration as a business tax reform. There are two 

broad categories of integration: (1) complete integration and (2) partial integration in the form of 

dividend relief. 

Complete (or “full”) integration eliminates double taxation of both dividends and retained 

corporate earnings by including in shareholder income both distributed and undistributed 

earnings. S corporations are taxed under a regime of complete integration since earnings of an 

S corporation, whether retained or distributed, are treated as income of the shareholders for tax 

purposes. 

Dividend relief, unlike complete integration, reduces the double taxation on distributed 

earnings, with no change in the taxation of retained earnings. Dividend relief may be 

accomplished by reducing tax at either the corporate or shareholder level. At the corporate level, 

the tax burden on distributed earnings may be alleviated by means of a dividends paid deduction 

or a lower corporate income tax on distributed versus retained income. At the shareholder level, 

the tax burden on dividends may be reduced by allowing shareholders to exclude from gross 

Income C Corporations S Corporations Partnerships 

Qualified dividend received by 

individual 

35% + (20% + 3.8% (NII) on after-tax 

distribution) (15.47%) = 

50.47%

Ordinary dividend received by 

individual 

35% + (39.6% + 3.8% (NII) on after-tax 

distribution) (28.21%) = 

63.21%

Undistributed corporate income 35% 

Share of business income of 

individual active S shareholder 

39.6% 

Share of business income of 

individual passive S shareholder 

39.6% + 

3.8% (NII) =

43.4 %

Share of most business income of 

individual partners 

39.6% + 

3.8% (HI) = 

43.4%

Share of business income of 

individual limited partner not 

performing services 

39.6% + 

3.8% (NII) =

43.4 %
8 

income, or deduct, dividends received, or by providing shareholders with a credit equal to all or a 

portion of the corporate-level tax paid by the corporation. 

Innovation

Outside of the United States, a number of countries have established intellectual property 

regimes (or “patent boxes”), which offer preferential tax treatment on income attributable to 

intellectual property. Policymakers have adopted “patent boxes” or “innovation boxes” to 

increase domestic investment in research and development and to encourage companies to locate 

intellectual property in their countries. Federal income tax rules provide incentives for research 

activities by providing a deduction for research expenditures in the year incurred, as well as a 

credit for certain qualified research expenditures. However, there are currently no Federal 

income tax provisions that provide for preferential rates, deductions, or credits for profits derived 

from the sale or license of intellectual property or products using or incorporating intellectual 

property. 

Adopting a U.S. innovation or patent box presents unique policy and administrative 

issues, including the types of intellectual property that would qualify (for example, limiting to 

patents or expanding to include a broader range of intellectual property, such as trade secrets); 

whether a nexus requirement should be adopted to require development of the intellectual 

property to take place in the United States; how the intellectual property income would be taxed; 

and identifying what types of intellectual property income will receive preferential treatment. A 

primary question related to this last issue is whether qualifying income should include income 

from foreign-use of the intellectual property in question. European Union countries cannot limit 

their innovation box regimes to income from domestic use due to European Union treaty 

obligations. The United States, however, could design an innovation box that requires domestic 

use. While the Working Group focused more on the policy effects of these types of provisions, 

the resolutions of these issues would affect the efficacy and cost of any innovation or patent box 

proposal. 

Other business income tax reform proposals

The Working Group also reviewed a number of other business income tax reform 

proposals, which are included and summarized on pages 7 through 11 of the accompanying 

materials. 
Prepared by the Staff of the Joint Committee on Tax

April 26, 2016
Joint Committee Staff Estimate of Revenue E

of One Percentage Point Decrease in

Top Statutory Corporate Income Tax Rat

2

Billions of dollars 2017 2018 2019 2020 2021 2022 2023 2024 2025 Change in Revenues -6.1 -8.7 -9.1 -9.8 -10.3 -10.5 -10.9 -11.3 -11.7 

Source: Joint Committee on Taxation staff estimate.Note: This option would take effect for tax years beginning after December 31, 2016. Estimates are relative to CBO’s January 2016 b
Largest U.S. Corporate Tax Expenditur

2015 

– 2019

3

T 

Corporate Tax Expenditure

To

(Billio

Deferral of active income of controlled foreign corporations Deduction for income attributable to domestic production activities Deferral of gain on like-kind exchanges Exclusion of interest on public purpose State and local government bondsCredit for low-income housing Expensing of research and experimental expenditures MEMORANDUMDepreciation of equipment in excess of alternative depreciation system

Source: Joint Committee on Taxation, Estimates of Federal Tax Expenditures for Fiscal Years 2015-2019 (JCX-141R-15), 
Net Income by Business Form in 2012

4

15%

16%

55%

12%

2% S Corporations Partnerships Nonfarm Sole Prop

C Corporations <$50M C Corporations >$50M

Source: Internal Revenue Service, Statistics of Income, published and unpublished data and Joint Committee on Taxation staff calculat
Top Marginal 2016 Tax Rates on Distributed a

Undistributed Net Income of 

C Corporations, S Corporations, and Partnersh

Income C Corporations S Corporations Qualified dividend received b

y 35% + (20% + 3.8% (NII) on after-tax 

individual 

( ()

distribution) (15.47%) = 50.47%

Ordinary dividend received by individual 

35% + (39.6% + 3.8% (NII) on after-tax distribution) (28.21%) distribution) (28.21%) =63.21%

Undistributed corporate income 35% Sh f b i i f Share

of business income

of 39 6% 

individual active S shareholder 

39.6% 

Share of business income of individual passive S shareholder 

39.6% + 3.8% (NII) =

43 4 %.

Share of most business income of individual partners Share of business income of individual limited partner not performing services 
Corporate Integration Approache

6

 Some alternative app g 

roaches to inte

gration of cor

and individual levels of tax on corporate income

 “Full integration”- shareholder allocation method (trea

i lik h h i ) income lik

e passt

hrough income)

 Partial integration approaches (“dividend relief”)

 Corporation deducts dividends paid to shareholders Tax on corporate income applies partially at shareholder le

corporation withholds tax on distributions

 Reduced tax rate for shareholders on dividends received an

stock sale/exchange

 Shareholders exclude from income (or deduct) dividends rec Shareholders 

g p et a tax credit for some cor

porate-level tax 

distributed amounts
Features of Selected Tax Reform Prop

7

 Tax Reform Act of 2014, introduced Dec. 10, 2014 

( th Camp H.R. 1, 113 Congress

)

 Corporate tax rate reduced to 25 percent Repeals numerous present-law business tax provisions International business: moves to dividend exemption a Individual tax rate structure reduced to 10, 25, 35 pe 40-

p ,p 

ercent deduction for individuals’ dividends, ca

pita

 Five largest non-international business revenue ra

(over 10 years)

 Depreciation changes ($269.5 billion) Amortize R&E expenditures ($192.6 billion) Amortize advertising expenditures ($169.0 billion) Phase out section 199 manufacturing deduction ($115 

Phase out section 199 manufacturing deduction ($115

 Repeal LIFO accounting ($79.1 billion)

Source: Joint Committee on Taxation, Estimated Revenue Effects of the “Tax Reform Act of 2014” (JCX-20-14), Febru
Consumption Tax Proposals –

Progressive Consumption Tax Act of 2014, introduce

2014 b S t C di (S 3005 113th C 2014 b

y Sena

tor Cardi

n (S. 3005, 113th Congr

8

 Adds credit-invoice VAT at 10 percent rate

 Exports zero-rated Exemption provided for 

 Specified financial products and services Residential housing Residential rent De minimis supplies

 Reduces top corporate income tax rate to 17 percent Reduces top individual income tax rate to 28 percent Provides income tax exemption of $100,000 for joint filers ($5

single) to provide progressivity

 R b VAT i i d d l l d i 

R

e

bates VAT i

n

a manner inten

d

ed to replace repealed income 

(EITC, CTC, ACTC) 

 Rebates excess VAT if revenues from it exceed 10 percent of G

calendar 

year
Consumption Tax Proposals –

FAIR Tax Act of 2015, introduced Jan. 13, 201

Senators Moran Perdue and Isakson (S 155 114th Senators Moran, Perdue, and Isakson (S. 155, 114th 

9

 Repeals individual and corporate income tax, self-employment and p

estate and gift tax

 Imposes sales tax on use or consumption in the U.S. of taxable proper

services

 Rate is 23 percent for 2017

 Thereafter, rate is 14.91 percent general revenue rate increased by OASD

 Credit against tax for

 Exports and intermediate sales for a business purpose Business use of purchased property Bad debts, insurance proceeds, sales that are refunded

 Family consumption allowance (rebate) based on poverty level and fa Authorit

yp j rovided for States to collect tax in conjunction with State sa

 Repealed if 16th Amendment (income tax) not repealed within seven 

enactment
Cost Recovery and Tax Accounting

–

Bipartisan Tax Fairness and Simplification Act of 2011, introdu

2011 by Senators Wyden Coats and Begich (S 727 112th 2011, by Senators Wyden, Coats and Begich (S. 727, 112th 

10

 Unlimited expensing of depreciable assets 

inventories for small businesses

 Avera

g g p$ e annual 

gross recei

pts of 

$1M or less

 Eliminates depreciation on tangible propert

excess of ADS for businesses other than smabusinesses

 Re

peals LCM
Cost Recovery and Tax Accounting –

Economic Growth and Family Fairness Tax Reform Pla

Senators Rubio and Lee published March 2015 Senators Rubio and Lee, published March 2015 

11

 Full expensing of capital purchases for all 

businesses

 Immediate ex

p g q

ensin

g of all investment in e

qui

structures, inventories and land

 No depreciation

 Businesses pay taxes on earnings after ded

all expenses from taxable income